“We’ll never see $100/barrel oil again!” and “The surge in productivity and slump in demand could drive oil down to $20/barrel.” These are two of many new-norm declarations I’ve run across in recent weeks.
My, how times change. In February 2014, $100/barrel oil was the new normal. Oil priced at $40/barrel, $30/barrel, or even $20/barrel seamed as improbable as the Seattle Seahawks forgoing Marshawn Lynch in a goal-line situation.
Every time a new normal arises, it frequently morphs into the permanent normal. How do I know? A muck of agenda-driven op-ed scribblers oozes to the surface to exploit the new perception.
When gasoline prices fall, the cacophony to increase gasoline taxes rises. Reasons range from repairing roads to maintaining the electric-car chimera to combating global warming. God forbid that consumers should actually reap the benefits of lower gasoline prices. Better for the organized minority to mulct the dispersed majority.
But, alas for the scribblers, nothing is quite as ephemeral as the permanent normal.
The road to $20/barrel oil has taken a detour. Since Jan. 28, oil prices are up 13%. Brent Crude trades over $56/barrel and West Texas Intermediate Crude trades above $51/barrel. What happened?
A couple weeks ago, I presented my case for oil-price skepticism in a missive titled “Why Everyone Gets Oil Prices Wrong.” My skepticism was moored to two basic premises: 1) the simplistic desire to extrapolate the future indefinitely and 2) basic economics.
On premise No. 2 – basic economics – at least a few journalists are starting to get it, even those at reality-blind BusinessInsider. One BI journalist even wrote, “There have also been suggestions that low [oil] prices could have an impact on future [oil] supply.”
To be sure, the BI journalist writes in the mealy and equivocating tones of the financial-market dilettante, but at least he hints at the truth. Permit me to restate his sentiments with the confidence of someone who remained awake through the half hour of the first day of Macroeconomics 101: Low prices do impact future supply. In a recent research note, Royal Bank of Canada highlighted this fact, opining that deep capital spending cuts are laying the groundwork for a price recovery.
Concurrently, low prices do increase demand. The U.S. Energy Information Administration reports that gasoline demand in December was the highest it has been in five years. I expect January demand to exceed December demand.
Fewer barrels of oil hitting the market combined with more demand for gasoline at the pump equals rising oil prices. It’s that simple.
Of course, the dynamics of supply and demand aren’t writ in stone. It’s possible the spigot could be turned up as oil prices rise. That would lead to yet lower prices. (Keep in mind that demand falls with rising prices.)
As for now, oil prices remain low compared to recent history. Value – and deep value at that – is still found in many oil and energy stocks.
Over the past two months, I’ve added high-yield discounted oil-stock investments to both the High Yield Wealth and Personal Wealth Advisor portfolios. If prices remain in the $50-range or below, I expect to add even more. Initial returns are encouraging.
Cheap Oil Here to Stay – For Now
Crude hasn’t been this cheap since March 11, 2009. And it’s likely to stay low for a while. OPEC refuses to cut production. And US production is expected to increase – not decrease – an additional 600,000 more barrels a day. The Saudis have played this one wrong – and you could profit from their blunder. Top analyst Tyler Laundon’s found what he considers the best way to play this new, cheap oil boom. Click here for all the details.