The oil price is the most critical call on todays stock market. Its certainly one of the biggest gambles and short sellers who piled into oilin January willstill belicking their multiple wounds. WhenBrent crude hit $27 mid-month Standard Chartered bank wasnt the only analystchancing its reputation by sharing its bearish outlook, but it was the only one I recall claiming the price would fall as low as$10 a barrel. That doesnt look too clever today, asoil renewsitscharge towards $50.
Crude guesses
Crudeenjoyed another surge on Monday after Goldman Sachsbumped up its WTIforecast from $45 a barrel to $50 in the second half of 2016. It saidsupply has been disrupted by wildfires in Canada and militant attacks in theNiger Delta, but ishedging its bets every which way. Confusingly, it said:The physical rebalancing of the oil market has finally started [which] reflects our long-held view that expectation for long-term surpluses can create near-term shortages and leaves us cyclically bullish but long-term bearish. Clear?
Personally, Im cyclicallyconfused by conflicting data but long-term bullish. Oil companies havebeen in such a hurry to slash costsand production in a bid to survive the current shake-out that this will surelyfeedthroughto lower output atsomepoint, and possibly even a nasty supply shock. Demand is widely predictedto revive, unless we have a crash, and renewables cantyet pick up the slack.
Two-way bet
I also recognise thatUS shale producers are resilient and investment will floodback once oil tops $50 or $60. Saudi Arabia is rewriting its ownrules of engagement afterrecognising that being a swing producer means losing market share as rivals continue to drill flat-out. The US, Iran and Iraq are all set to add to global supply and if inventories start rising again, the oil price could just as quickly slide.
Only one thing is certain about oil right now: it isnt boring. Investors in explorers such as Premier Oil and Tullow Oil will testify to that, their share prices are up 142% and 70% respectively over the last three months alone, but down 60% and 42% over 12months. Given that markets of all descriptions are impossible to forecast correctly on a consistent basis, you have to accept that buying today is a gamble.
Major decision
You can hedge your bet by investing in a vertically-integrated major such as BP and Royal Dutch Shell, which are up 17% and 19%, respectively, over three months (but again, down around 20% on a year ago). Even their dividends area gamble as they could be slashedif the oil recovery stumbles, but this may be a bet worth placingattodays respective yields of 7.35% and 7.16%.
The relief rally has wiped out muchof your potential gains from smaller oil producersand also leaves new buyersvulnerable to a correction, so youve probably missed your moment. However, the price still looks right at dividend-payers BP and Shell, especially for investors who plan to hold for the long-term, to overcome short-term oil price madness.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended BP and 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.
