Time to invest in oil?

Ray,IN · December 23, 2015

Last week congress passed the budget bill, which included eliminating the ban on exporting oil. Keeping in mind European fuel prices, it make sense oil companies will choose to sell where the price is higher. This, to me, equates to less "in-country" oil supply and higher fuel prices. I expect fuel prices to rise to European levels in the next several years.

Is it time to invest in oil?

Lou Schneider · December 23, 2015

European fuel prices are high due to government taxes, not higher crude or production costs. As long as we are importing oil, domestic crude oil costs will follow the world benchmark prices.

If anything, allowing crude exports should help keep oil prices more stable as it adds another major producer (us) to the global mix.

A good part of our expanded production are heavier crudes that are hard to refine into the environmentally clean fuels we use here. So opening up additional markets for the heavier grades while continuing to import lighter grade crude that's more efficient to refine into the fuels we use is a good thing.

Transportation to overseas markets shouldn't be a problem, either. Tankers that bring us lighter crude can backhaul our heavy crude to overseas markets instead of returning empty.

Ray,IN · December 24, 2015

That is logical, thanks Lou. What do you think about my question? Is it time to invest?

RV_ · December 26, 2015

Check this out Ray,

Excerpt:

"Low oil prices are intensifying competition between OPEC members.

With swelling crude oil inventories and rising global oil production, oil prices have now fallen below 11-year lows. On Monday December 21, 2015, Brent was trading at $36.04 per barrel while the WTI benchmark was trading at $34.74 a barrel.

While investment bankers from Goldman Sachs are predicting oil prices to fall to $20 per barrel, there will likely be no respite from cheap oil in the near-term. Amid all this, some interesting developments are emerging within OPEC. Ever since the cartel dismissed all speculations of reducing its production levels on its December 4th meeting in Vienna, OPEC members like Saudi Arabia, Iran and Iraq, in a struggle to obtain greater market share, are becoming increasingly competitive with each other.

Saudi Arabia had earlier offered similar discounts (that Iran is now offering) on its medium and heavy grade crude to Asian countries that included India. “The oil market is driven by fear. We have a ‘pump and dump’ war between Saudi Arabia and Iran. It’s possible the Saudis will try to match the Iranians with an extra 500,000 barrels per day in an exhaustion game. Anything could happen, U.S. inventories are already at record highs, yet we are going into a seasonal period when they normally rise further,” said Ole Hanson from Saxo Bank

Conclusion

It is pretty clear that investors world over are surprised by OPEC’s recent decisions of going all out for higher market share and OPEC’s inability to stand ‘united’ over the issue of its production levels. With a strategy aimed at gaining maximum market share and driving other weaker players out of the market, Saudi Arabia, Iran and Iraq have no choice but to compete with each other. After all, they produce an almost similar grade of crude, have the same target markets and use similar trading routes. In the end, it would all come down to the crude pricing and the payment terms that they can offer their customers. The one who would be able to sustain this strategy amid low oil prices would emerge as the clear winner."

The entire "Business Insider" article with details about all the major the players is here: http://www.businessinsider.com/low-oil-prices-intensifying-competition-opec-members-2015-12

Ron · December 26, 2015

I don't know if *now* is the the time to invest in oil stocks. We'd have to know how long the Saudi's intend to continue to make sure the market is over-supplied. The demand for oil is increasing steadily but inventories build as the supply increases even faster. I suspect that at some point the oil exporting countries will find the pain inflicted by these low prices to be more than their economies can endure. Nearly all of them depend on oil prices being much higher to balance their budgets. The linked chart was published before prices fell nearly as low as they are now so it would seem that the pain of low prices must be getting pretty serious for most of the exporting countries.

I suspect that prolonged low oil prices will lead to various forms of political unrest and conflicts that will then lead to higher prices. In the longer run it's not the *cost* of the oil that will determine the price but rather the price the swing producers are willing to accept - driven by the economic needs of the country and the needs of the leaders of those countries to maintain political control. It seems to me that (in inflation adjusted dollars) the price of gasoline is about as low as it has ever been in my lifetime.

So my GUESS is that this isn't a bad time to invest in quality oil company stocks if you are patient and can avoid panic selling if prices go still lower. Investments in stocks of high quality companies that are in highly cyclical industries can be a gift to patient investors.

---ron

Five Wood · December 27, 2015

When the price of crude started dropping, there was no one cheering louder than me. I felt this was a great thing for the American economy and the American consumer. Now I'm not so sure. The problem is that it fell too far, too fast, and it seems to have found a "home" at a level that is far outside the norm.

Statistically, pretty much anything such as stocks, bonds, and even commodities "revert to the norm". But in the present oil markets there are factors that have changed what the "norm" is. American technology has changed the oil industry with the advancements in fracking (which I don't like, but that's a different topic). Advancements in renewable energy (which I love), solar advancements, and many others which are great for the world as a whole.

The reason I'm not happy with this is that it causes disruption. I would prefer a slower level of norm to revert to. As an example. . . look at Saudi Arabia. No one really knows, but it is thought that their "all in costs" for a barrel of crude is less than 15 US dollars per barrel. The problem is that oil revenues are what support their country. Unlike America they don't have other major sources of income. Again, no one really knows, but it is believed that they need to have a price of 70 US dollars per barrel to meet the expenses of their country. So at this level. . . at this new norm. . . they are depleting their funds at an alarming rate.

I have no love for the Saudi's, but what do you think will happen when they can no longer control their population with oil revenue income?

The world will always "revert to the norm". We will survive. . . but this time I think it may just hurt a bit.

Jim

Ray,IN · December 27, 2015

Thank you everyone for your insight and opinions. The situation is looking more and more like something I should avoid. Now if I were a young man I might be willing to risk my future investing in the oil industry, but at 73, I don't have the necessary time to experience an extended trough while waiting on the next boom.