Are Low Oil Prices the New Normal?
How to Avoid the Risks of Volatility
Pundits were pleased this morning.
After three straight days of falling oil prices, fortunes reversed and prices started to climb.
And when I say climb, what I really mean is that prices started the slow, painful hike up the mountain.
See, these market commentators were ecstatic over a measly 1% jump in Brent crude futures this morning. That number wasn't even enough to erase the losses from last week, let alone make up for the near 50% slide in prices since June.
Sure, it may be encouraging that prices reversed course, but the reason makes the news much less welcoming: Libya.
A couple of weeks ago, Libya was forced to shut down the Es Sider and Ras Lanuf export terminals as militants advanced on them.
The two ports are the first- and third-largest in the country, with a combined capacity of 560,000 barrels per day.
And over the Christmas holiday, the Es Sider was under full-fledged attack by militant factions. Early this morning, it was reported that fires on three of six tankers that were set aflame had been extinguished.
On news that such chaos could cut supply, we saw that 1% bump. But it's hardly reassuring...
If anything, the cutoff in Libya and the analysis of it in the financial press shows that we have reached a new normal in the energy market.
Crude prices are low, natural gas is also experiencing a glut, everyone hates coal, and OPEC is on the verge of collapse.
And now, whenever something happens in a war-torn oil-producing country like Libya, Iraq, or Syria, the market will react on the news as if these $60-per-barrel oil prices are normal.
The simple reason for this is that the market at large has absorbed the shock of the bear market and now accepts that it will take time and the right factors for oil prices to rebound to investor-friendly levels.
Think about it: Back in May and early June, nobody expected the massive spike in oil prices or the ISIS attack in Iraq that caused it.
And yet when our $100 oil price was interrupted, every analyst claimed that oil could go to $150 or crash below $20.
None of these predictions have proven true so far, and they likely won't. In fact, trying to predict where energy will go is like trying to pinpoint when you will die: You can look at history, health, and all other important circumstances, but getting it exactly right is impossible.
What I'm driving at is that energy is volatile, so we need to be able to hedge against these risks and understand that what is "normal" — especially for oil, which is so tightly connected to uncontrollable circumstances — is always going to be changing.
We don't expect it to change until June, if it does at all.
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OPEC Sets the Pace of Supply
In June, OPEC will meet again as it did on Thanksgiving, and the group will debate production targets and oil prices.
If the members with real clout decide that low oil prices are still beneficial, the market will remain subject to the new normal we have now. If they decide enough revenue has been lost, OPEC can cut its output and balance the market.
Let me say that this is the most predictable course of events you and I can look to. There could, however, be other far more drastic moves before June from other major producers...
Russia's economy could fall deeper into recession, which would make oil production less feasible and thereby shutter overall global supply.
Libya could continue to see fighting hamper oil exports and production, while Iraq and Syria are still trying to regain control of oil-rich territory from ISIS.
Add to that Venezuela's crippled economy, Nigeria's lost market share, and less profitability from U.S. shale, and we could see enough supply cuts to push demand and prices higher during the coming year.
Still, timing when these factors will translate to gains on the market is impossible, so the best we can do is hunker down and be ready for whatever comes.
The Boom and Bust
The volatility in the oil market will bring some investors gains and many others losses as they try to trade ahead of the rest of us.
Truth is, if you invest with the volatility, you're going to lose money. However, if you focus on returns and growing your wealth, the opportunities are abundant.
For one, low oil prices offer a great discount on valuable companies. As we've been saying at Energy and Capital since the bear market began, if you buy now, you will eventually make money.
It just depends on how you buy...
I personally look for high-yielding companies that have a stable supply of income no matter what the market does. MLPs, ETFs, and other high-dividend energy stocks will be the last to see prices collapse and the first to rise when the market changes.
And if the market takes too long to change, you'll still receive dividend checks.
Some people are so preoccupied with getting rich quick that they forget the biggest fortunes are made slowly and steadily. So if this is the new normal, it's time to build a position with consistent income and high payouts.
Luckily for you, in the next week or two, my colleague Keith Kohl will be unveiling a portfolio of stocks that does just this. Keep your eye out, and get ready to profit like you never have before.
With an eye squarely focused on the long-term, Alex Martinelli takes the art of income investing to a higher level within the energy sector. His research has helped hundreds of thousands of individual investors identify well established companies that have a long history of paying out dividends to their shareholders. For more info on Alex, check out his editor's page.
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