High Rates of Return and a Hedge Against Inflation Oil Reserve Receipts Ivan Cavric

Recently Oil Reserve Receipts were brought to my attention.  It was presented as being an inflation hedge while providing a regular monthly return.  And a very attractive rate of return I might add.  In fact the monthly return was so attractive that I decided to find out just what these instruments are and how they work.  At this point, before I go any further, I MUST STATE THAT I AM NOT A REGISTERED INVESTMENT ADVISOR NOR DO I INTEND TO GIVE ANY INVESTMENT ADVICE OR PROVIDE ANY SPECIFIC COMPANY NAMES DIRECTLY OR INDIRECTLY.  THIS IS MEANT FOR INFORMATION PURPOSES ONLY.  It is left up to you, the reader, to do your own due diligence and rely on your trusted investment advisors.

           

            As I have stated earlier this article is meant to merely explain how such instruments operate and how and why they are such an attractive investment alternative.  With this being said let us look more closely at an Oil Reserve Receipt (ORR for short).

            To explain it is the simplest form without using the usual financial jargon and Oil Reserve Receipt (ORR) is a direct investment in a fixed number of barrels of oil.  The investment is for a fixed number of years and will payout a net income to the investor each month from the sale receipt of his oil to the refinery.  I know, a further illustration is required.

            The particular ORR participant that I was evaluating allowed investors to purchase a minimum of 1,000 barrels of oil for a total investment of $18,300.00, there was no maximum amount however subsequent purchase thereafter were in increments of 500 barrels of oil.  The term of the reserve receipt was set for 120 months or 10 years.  What this means is that each month the company would sell to the refinery 8.13 barrels of oil at current market prices from your reserve and on your behalf.  Then it would mail out the net proceeds to you.  This process would happen every month for the next 120 months.

            As of this writing the market price of Oklahoma Sweet Crude was set at $67.50 per barrel.  By the way, this oil company participant is located in Oklahoma.  Hence the difference in the quoted oil price.  The most commonly quoted Oil is West Texas Sweet Crude, a higher grade of oil.  Now lets get back to the Oil Reserve Receipts and what it means to the investor.

            As an investor in this instrument you will receive $548.77 per month ($67.50 x 8.13barrels) or $6,585.30 per annum for the next ten years.  This is based on the assumption that the price of oil will remain unchanged for a decade, and unlikely scenario.  With global governments printing money at unprecedented levels there is a good argument that inflation will return and commodity prices will be higher in the future.  And yes, oil is a commodity.  I am merely repeating what several financial pundits have been saying for months.  If this is the case then your monthly payments from this investment vehicle will increase.  That is why it is a hedge against inflation.

            Breaking it down further lets look at your actual rate of return per year with oil prices at current levels for Oklahoma Sweet Crude.  Remember your initial investment was $18,300 which is equivalent to $18.30 per barrel.  You receive $67.50 current price - $18.30 your actual cost = $49.20 per barrel.  By selling 8.13 barrels per month the net income to you is $399.99 or $4,799.95 per annum.  This translates to an annual rate of return of approximately 26%.  Wow! 

            With these kinds of high returns you definitely need to do your own due diligence.  I did not write this to provide you with investment advice or for that fact endorse the investment instrument.  They are out there and people are asking questions and talking about them.  Now at least you should have an idea as to what is meant when you hear terms such as Oil Reserve Receipts, Oil Revenue Partnerships, Oil Revenue Payment Programs and other variations.

            It was my intention to illustrate why such instruments can be enticing as a hedge against inflation while providing a high yield.  It also illustrates the need for you to carefully evaluate all such opportunities.  Hope you received some insight and have a better understanding than you did before.  A good rule of thumb that I use is that if I can’t understand what it is I don’t buy it.  It’s not advice its common sense.

Ivan Cavric