Sunday, December 28, 2014

Crude Oil Prices

Six months ago the Brent crude oil price was about $110/barrel and the WTI (West Texas Intermediate) price was about $100/barrel.  The current prices are about $60 and $55 respectively.  So the price has fallen dramatically and unexpectedly.  As I have mentioned before I believe oil prices are likely to generally rise over time as the earth's supply is exhausted (peak oil).  The recent price action doesn't totally contradict this as there was no reason to believe the rise would be smooth and monotonic.  Because both oil supply and demand react slowly to price changes small mismatches between production and consumption can cause wild price swings.  Still the recent price action is at least a reminder that in investing being right in the long run doesn't mean you can't lose a lot in the short run.  

Given that one still expects rising crude oil prices in the long run what is an appropriate investment strategy at this point?  It is tempting to look for bargains among the oil stocks which have fallen the most.  But this is in effect a bet that crude oil prices will recover before the highly leveraged companies in question go bankrupt (as a stock which is going to zero is never cheap along the way). So this is not an appropriate way of investing based on a long run view.  It is better to look at those companies that are most likely to be around for the long run.  However such companies are currently only cheap relative to the market as a whole.  I bought some ExxonMobil (XOM)  and some ConocoPhillips (COP) a couple of years ago and while their stock prices have fallen substantially in recent months they are still above my basis (while the market as a whole is up about 50%).  So I don't see a compelling reason to add to my positions.  Perhaps this will change over time if the crude oil price remains depressed.

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