In the late 90s Warren Buffett had invested in a number of commodities including silver and oil. The two were some of his more nontraditional investments and he describes his oil investment in the 1997 shareholder letter:
"We had three non-traditional positions at year end [1997]. The first was derivative contracts for 14.0 million barrels of oil, that being what was then left of a 45.7 million barrel position we established in 1994-95. Contracts for 31.7 million barrels were settled in 1995-97, and these supplied us with a pre-tax gain of about $61.9 million. Our remaining contracts expire during 1998 and 1999. In these, we had an unrealized gain of $11.6 million at year end. Accounting rules require that commodity positions be carried at market value. Therefore, both our annual and quarterly financial statements reflect any unrealized gain or loss in these contracts. When we established our contracts, oil for future delivery seemed modestly underpriced. Today, though, we have no opinion as to its attractiveness."
Below are the world consumption and production numbers for oil during the period and figures are in 000s of barrels per day.
Looking at the consumption and production figures we can see clearly both were steadily increasing in the early 90s. Consumption exceeded production in 3 of the 4 years between 1990-1994. By contrast, the price was decreasing until the years 1994-1995 when Buffett purchased the oil contracts. Another key factor I was unable to locate for the period was inventories. However, neglecting this variable and taking this cursory examination of the commodity it would appear the price had grown detached from the heating world economy as the graphs would indicate. Last month Buffett commented on the rising oil prices and was in general indifferent to the impact the price would have on business. The interview can be seen here:
http://finance.yahoo.com/video/cnbc-22844419/buffett-not-worried-about-oil-24385190
Josh Zachariah
"We had three non-traditional positions at year end [1997]. The first was derivative contracts for 14.0 million barrels of oil, that being what was then left of a 45.7 million barrel position we established in 1994-95. Contracts for 31.7 million barrels were settled in 1995-97, and these supplied us with a pre-tax gain of about $61.9 million. Our remaining contracts expire during 1998 and 1999. In these, we had an unrealized gain of $11.6 million at year end. Accounting rules require that commodity positions be carried at market value. Therefore, both our annual and quarterly financial statements reflect any unrealized gain or loss in these contracts. When we established our contracts, oil for future delivery seemed modestly underpriced. Today, though, we have no opinion as to its attractiveness."
Below are the world consumption and production numbers for oil during the period and figures are in 000s of barrels per day.
Looking at the consumption and production figures we can see clearly both were steadily increasing in the early 90s. Consumption exceeded production in 3 of the 4 years between 1990-1994. By contrast, the price was decreasing until the years 1994-1995 when Buffett purchased the oil contracts. Another key factor I was unable to locate for the period was inventories. However, neglecting this variable and taking this cursory examination of the commodity it would appear the price had grown detached from the heating world economy as the graphs would indicate. Last month Buffett commented on the rising oil prices and was in general indifferent to the impact the price would have on business. The interview can be seen here:
http://finance.yahoo.com/video/cnbc-22844419/buffett-not-worried-about-oil-24385190
Josh Zachariah
