Unless you’ve been living in a cave for the past year, you know that the price of crude oil has plummeted. At under $50 per barrel (WTI Crude), gas prices are lower, it’s cheaper to transport goods, and there are a host of other benefits. However, lower oil has also created a few problems. In this article, we’ll explore some of each and discuss a great investment opportunity emerging as a result.
Oil 101
Oil, fossil fuel, crude, whatever moniker you prefer, is highly ingrained in the fabric of our society. Until such time as a less expensive, more efficient, and abundant energy source is identified, oil should continue its dominance. It’s interesting to watch as “experts” forecast its price, much of which is driven by a profit motive. What do I mean? One expert confidently asserts that its price will go higher. Do they own a significant amount of crude? At the same time, another states the price will definitely fall. Have they “shorted” the commodity? At times I wonder if the “expert” opinions are merely a PR campaign attempting to influence the price. If the first person is more convincing, the majority will buy and the price may rise. If the second expert is more persuasive, investors may sell and its price will fall. The side wins the PR battle will make the greatest profit. And so it goes. Personally, I have no position in oil and, with no dog in the hunt, my comments are based purely on my opinion of the market.
Oil: The Downside
Oil is both plentiful and widely used. As a financial asset, the total stock market cap (total outstanding shares times price per share) of all U.S. energy companies is $3.878 trillion. That’s equates to 7.7% of total U.S. market cap. Because the price of oil has declined so drastically, business has slowed and the companies engaged in the energy sector (about 971) are much less profitable. As a result, these companies are competing in a smaller business pool. Therefore, if the price remains low for an extended period, or perhaps more importantly if it falls further, some of the smaller companies in this sector will either be forced into bankruptcy or swallowed up by their larger brethren. The downside includes bankruptcies and layoffs but there is also an upside to consider, especially for investors.
Oil: The Upside
Beyond the benefits previously mentioned, there may be a pot of gold at the end of the investment rainbow. Since the price of oil has declined, energy stocks have also fallen. At some point, when the price of oil stabilizes and the global economy resumes a more normal growth pattern, demand will rise and these stocks will rebound. This presents an excellent opportunity for the investor. It’s very much like the crash of 2008 except that it is confined to the energy sector.
Yes, there will be a great opportunity to buy energy company stocks at depressed prices at some point, hopefully in the not-too-distant future. However, I believe the price of crude has not yet reached its bottom. In a future article, I’ll list some specific stocks and ETFs to consider adding to your portfolio.
Until then, stay tuned!
