Isnt it interesting how, whenever theres any news, we tend to jump on the negative side rather than the positive? As a commuter, I drive many thousands of miles every year. Thats why its great for me that the oil price is falling. And alongside the hundreds of pounds Im saving on my daily commute, Ill save a pretty penny on my heating bills over the next few years. Cheap fuel allows theglobal economy to run more cheaply, and that benefits consumers around the world.
The oil price could soon reach $20 a barrel
Thats why personally, Id be absolutely delighted ifcrude fell to $20 a barrel. And with the oil price falls seeming to gather momentum, instead of slowing, theres a strong likelihood thatit could reach that level some time fairly soon.
Ive already written about why this is taking place. Booming exploration and production, from the Gulf to the Arctic, and shale oil mean that the market is flooded with cheap petroleum. And with nobody taking the first step in cutting back production, the oil price just keeps falling.
I sold out of my oil, gas and minerals investments years ago, as it became apparent that the commodities boom that was fuelled by a resurgent China was ending. Some people might suggest that itsa contrarian play to buyback into oil companies. I would choose to disagree.
Just how far could the share price of BP (LSE: BP) and Royal Dutch Shell (LSE: RDSB) fall if oil fell to $20 a barrel? Well, lets look back to what happened in the last commodities bear market. This was in the 1990s. Back in 1992, the oil price traded between $18-$20 a barrel.
The share prices of these giants could halve
Now the highest point the BP share price reached was 676p in 2006. It currently stands at 352p. How low did it fall in 1992? To 93p. Let me say that again 93p!!!
That was the low point, but generally in the 1990sBP traded at around 150p.
It was a similar story for Shell, which also plumbed the depths in the 1990s. Admittedly, the picture is clouded by the fact that BP merged with Amoco and Arco in the late 1990s. But I think the big picture is clear: you can expect the valuations of the oil majors to drift lower for at least the next decade.
Just how low will they fall? Well, my guess is 150p for BP and 600p for Royal Dutch Shell (as opposed to 1388p now). That means that, over the course of the next 10-15 years, these energy giants will more than halve in price.
If that prospect doesnt frighten you as an investor, it certainly should. My investment advice for both companies is unequivocal. STEER. WELL. CLEAR.
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Prabhat Sakya has no position in any shares mentioned. The Motley Fool UK has recommended Royal Dutch Shell B. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.