Investor Points of Few – Gone Fishin’ for Oil

 

By Alan Steel

A scribbler by the name of Chas Boinske on the Independent Thought blog very neatly nets out the problem investors encounter while waiting for so-called “perfect conditions.” Chas compares it to the misconception that great weather and fishing go hand in hand, when he writes: 

“Investing is similar to fishing in many ways. When the economic weather conditions are good, investors willingly pay higher prices for securities and will accept lower expected returns (i.e. a more modest catch). When the economic weather conditions are bad and securities prices are low, many investors stand passively on the banks of the capital market stream waiting for better conditions to emerge. Unfortunately, ‘waiting it out’ is often when you forego the best opportunities to haul in low-priced securities with their associated higher expected returns.”

It’s a question of perspective and emotions more than anything else – the short-term weather looks bad so I’ll stay in doors or seek shelter. 

But few could argue that those who were brave enough to either stay with or return to the major stock markets back in 2009 have seen 14,000 points alone added to the Dow Jones Index, to cite just one.

And it’s equally easy to get the consensus “hook of opinion” caught in your mouth when industry sector-wide events significantly impact prices.    

Take oil as an example.

When oil prices swooned a few years ago, folks like our good friend Mike Williams were quick to jump OFF the doomsayers bandwagon of Armageddon messaging about the end of oil, and tell us that we’re more than likely taking a round-trip on energy – not one that would end up back at the $150 per barrel highs of the Noughties, but would level off over the next few years into the $40 to $60 per barrel range; once OPEC backed off its output levels.

Eventually they would have to or face financial ruin. It was a game they (OPEC) couldn’t win against the onset of fracking technology. 

Now, making that “energy round-trip” argument back in 2014, in amongst all the negative noise, was not an easy game; particularly when the oil price per barrel fell more than 70% at one point.

And it’s certainly not been pretty for the oil industry, as roughly two-thirds of rigs have been decommissioned, an estimated quarter of a million oil workers have lost their jobs and a shed-load of companies in the sector, exploration and support services alike, have gone to the wall.

That’s the price of innovation and the industry sector disruption that often follows. In fact, it works a bit like how the Greeks once invaded other countries (before broken biscuits became their national currency) – they would burn their own boats when they got to the shores: There’s simply no going back.

Now there’s motivation for you!

During all the dour reporting that “Oil is dead. Long live oil” what people quickly forgot is that the oil price per barrel has, for 100 of the last 150 years or so, meandered around about the $40 per barrel mark.

But what the media and analysts were using as fodder in 2014 was something like this picture:

It’s what you might call a convenient, short-term, negative news waterfall decline perspective that set the expert commentator cats amongst the investor pigeons. 

The far truer representation of long-term oil prices actually looks like this over the last 70 years:

And if we look back 150 years here’s what we see:

As noted above, there’s no strong indication (following the arrival of fracking and renewable technologies) that oil prices will ever rebound to $150 per barrel levels.

Too much on the technological and supply chain front has changed, and OPEC agreed to curtail output by 1.2 million barrels per day at its meeting in Vienna in late November last year in an attempt to end the global supply glut, as did several non-OPEC producers. So, the $40 to $80 per barrel fluctuation for the next few years to come seems far more likely.

However, the lesson in all this far clearer. Don’t always think that bad weather is a reason not to go fishing.

And when you, make sure your not fishing where everyone else is.

Get someone to show you where the best opportunities are.   

Alan Steel, Chairman, Alan Steel Asset Management

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