The biggest economic story of the last year is the collapse in the price of oil, both in the U.S. and worldwide. Last summer oil was selling for $106/barrel and Goldman Sach’s foreccast was for $150. In 2008 it had been nearly $150. Today it was as low as $44 and change, a 60% drop in 6 months.
Some oil drillers and oil service stocks have dropped 50%-80%, though the major integrated oil companies like Exxon Mobil and Chevron are only down 10%-15%.
When should you buy back oil or oil companies? Take a look at a long-term chart of Brent Crude, the world benchmark:
It looks like buying ought to start coming in around $40. The risk is that it falls again to the high teens, as in 1999.
What’s happened is that supply has soared as the U.S. has discovered how to extract oil from shale (fracking) and has come up with new drilling methods like horizontal drilling. At the same time, worldwide demand has slowed and OPEC has decided not to cut back production like it used to when it wanted to keep the price of oil high. Some think OPEC is trying to put US drillers out of business.
China’s superheated appetite for commodities of all types has slowed from the crazy, politically-driven craze that had them building airports where they was no need, cities without inhabitants and other such goofiness. Yes, they are stilll growing much more quickly than Europe and the US. China imported 13% more oil in 2014 than the year before, but not that was unlike before. And, many of their Asian neighbors have slowed as China slowed, as have resource-exporting countries in South America and Africa. A good bit of Europe is still an over-regulated, over-taxed, deeply indebted bureaucratic mess that can’t seem to get going again.
I am putting together a list of companies that have low costs and not too much debt but have fallen a great deal. I’m not buying yet, but at this pace it won’t be too long. Let me know if you would me to include you in the list of people to call.