I’m very bullish on oil. I think higher oil prices are here to stay. Of course what does one consider high ? A decade ago America would have been in a panic over $70 oil, now oil is at $90 and there really isn’t that much noise being made about it.
I’ve been trying to create a portfolio that gives me a lot of exposure to oil reserves and some upside from higher oil prices. Very few of the oil companies (if any) that I look at have $90 oil priced into their stock price.
My main worry is actually that oil goes up too quickly and pushes us into another recession, which would temporarily reduce oil demand and thereby temporarily collapse the price of oil again. I envision the next twenty years being a series of cycles in oil prices with the new highs getting higher every time.
You have all heard the bullish argument for future oil prices many times. I might be slightly different from many of the “peak oil” folks in that I believe that there is still a decent amount of spare capacity in the world. So if we needed more oil it is possible for the next few years that we could keep the market fairly well supplied.
The problem is of course that ALL of that spare capacity rests with one country. Saudi Arabia. We saw in 2009 that they were willing to seriously cut back on production to get the price of oil back higher levels. In late 2009 OPEC (read Saudi Arabia) took about 4 million barrels off the market. Oil prices which were at $30 were back to $70 by June of the next year as excess supply was worked off.
Now that we are getting to the point where supply is getting tight the question is whether the Saudis will increase production enough to ease the upward pressure on prices. Now I don’t think that they can do this forever. Another year or two of oil demand growth out of Asia and the world is going to have a big problem as there really will be no more spare capacity. But I do think the Saudis can do something today.
For the last year or so the message out of OPEC was that $75 was the proper price for oil. Good for the producer and good for the consumer. Then we blew through $75 and the message became that the proper price for oil is $75 to $90. Now as we do start to approach $100 again I’ve been wondering what will Saudi Arabia / OPEC do ?
We got a message today from OPEC:
http://www.cnbc.com/id/41130635
“World oil markets have more than enough supply and factors including speculation and a weak U.S. dollar have played a part in boosting oil prices, OPEC's secretary general said on Tuesday.”
Oh boy. Maybe OPEC thinks that getting $100 per barrel isn’t such a bad thing for the producers after all.
"Oil prices have recently been driven by technical matters such as events in Alaska and the NorthSea. Also, the weak dollar and speculation have added to this, pushing oil prices higher, especially Brent," Abdullah al-Badri said in a statement on OPEC's website.
"At the moment, fundamentals show there is more than enough oil on the market."
I don’t know if you noticed, but even the IEA is sounding alarm bells about a tight oil market. They have historically been very optimistic (perhaps because they were told to be) that there is plenty of oil to go around.
Both OPEC and the IEA have raised their demand forecasts this week - the IEA in a report on Tuesday said OPEC would need to pump 400,000 barrels per day (bpd) more than expected this year to balance the market.
I’m currently very long a few North American oil producers that I think are already very undervalued. If oil keeps rising either they will become more undervalued or their stock prices will rise. If I get both a move in the stock price towards the intrinsic value of their assets and a rise in oil prices I’m going to have a very good year.
To be honest, my biggest concern right now is how to know when it is time to leave the party. I don’t want this kind of exposure to oil prices when they do break through the point where they push us into a recession and collapse. Is that price $110 ? $150 ? I don’t know. I suppose the best way to manage this is to sell slowly as prices rise (assuming they do).
You can check out which oil producers that I'm interested in here and let me know what you think:
http://valueinvestorcanada.blogspot.com/
I’ve been trying to create a portfolio that gives me a lot of exposure to oil reserves and some upside from higher oil prices. Very few of the oil companies (if any) that I look at have $90 oil priced into their stock price.
My main worry is actually that oil goes up too quickly and pushes us into another recession, which would temporarily reduce oil demand and thereby temporarily collapse the price of oil again. I envision the next twenty years being a series of cycles in oil prices with the new highs getting higher every time.
You have all heard the bullish argument for future oil prices many times. I might be slightly different from many of the “peak oil” folks in that I believe that there is still a decent amount of spare capacity in the world. So if we needed more oil it is possible for the next few years that we could keep the market fairly well supplied.
The problem is of course that ALL of that spare capacity rests with one country. Saudi Arabia. We saw in 2009 that they were willing to seriously cut back on production to get the price of oil back higher levels. In late 2009 OPEC (read Saudi Arabia) took about 4 million barrels off the market. Oil prices which were at $30 were back to $70 by June of the next year as excess supply was worked off.
Now that we are getting to the point where supply is getting tight the question is whether the Saudis will increase production enough to ease the upward pressure on prices. Now I don’t think that they can do this forever. Another year or two of oil demand growth out of Asia and the world is going to have a big problem as there really will be no more spare capacity. But I do think the Saudis can do something today.
For the last year or so the message out of OPEC was that $75 was the proper price for oil. Good for the producer and good for the consumer. Then we blew through $75 and the message became that the proper price for oil is $75 to $90. Now as we do start to approach $100 again I’ve been wondering what will Saudi Arabia / OPEC do ?
We got a message today from OPEC:
http://www.cnbc.com/id/41130635
“World oil markets have more than enough supply and factors including speculation and a weak U.S. dollar have played a part in boosting oil prices, OPEC's secretary general said on Tuesday.”
Oh boy. Maybe OPEC thinks that getting $100 per barrel isn’t such a bad thing for the producers after all.
"Oil prices have recently been driven by technical matters such as events in Alaska and the NorthSea. Also, the weak dollar and speculation have added to this, pushing oil prices higher, especially Brent," Abdullah al-Badri said in a statement on OPEC's website.
"At the moment, fundamentals show there is more than enough oil on the market."
I don’t know if you noticed, but even the IEA is sounding alarm bells about a tight oil market. They have historically been very optimistic (perhaps because they were told to be) that there is plenty of oil to go around.
Both OPEC and the IEA have raised their demand forecasts this week - the IEA in a report on Tuesday said OPEC would need to pump 400,000 barrels per day (bpd) more than expected this year to balance the market.
I’m currently very long a few North American oil producers that I think are already very undervalued. If oil keeps rising either they will become more undervalued or their stock prices will rise. If I get both a move in the stock price towards the intrinsic value of their assets and a rise in oil prices I’m going to have a very good year.
To be honest, my biggest concern right now is how to know when it is time to leave the party. I don’t want this kind of exposure to oil prices when they do break through the point where they push us into a recession and collapse. Is that price $110 ? $150 ? I don’t know. I suppose the best way to manage this is to sell slowly as prices rise (assuming they do).
You can check out which oil producers that I'm interested in here and let me know what you think:
http://valueinvestorcanada.blogspot.com/
