Barron's Magazine has a great interview (subscription required) with Charles Maxwell, Senior Energy Analyst, Weeden & Co.
How high do you think the price of oil will go from here?
We will see $300 a barrel -- or roughly $250 in today's dollars -- because oil supply will be so short. If you want that oil, that's what you will have to pay for it. That will be in 2015, after the peak of oil [supply]. But even earlier, around 2010, more than 50% of the non-OPEC world will have peaked in its production of oil so the dependence on OPEC will become extreme. That will give OPEC a chance, I'm afraid, to lift prices rather more quickly on us than they are doing today.
I have been and remain an oil bull. Obviously, with the recent drubbing of oil prices, my portfolio has taken some huge body blows. In the graph above, you can see how stock prices for ExxonMobil Corporation (XOM), Suncor Energy Inc. (SU), ConocoPhillips Company (COP), and BP p.l.c. (BP) have moved relative to West Texas Intermediate oil prices over the past two years. Although recent weeks have not been kind to my portfolio, my overweighted commodities exposure has protected me from the market's negative returns so far this year.
Please note the following two items: one, the left axis, Stock Prices, does not begin at zero; and two, if you click on the graph, you will be taken to a larger version.
The above graph is somewhat difficult to interpret because it is hard to see the relative movement between stock prices and oil prices. Notice, however, that on 16 August 2007, Exxon was at $79.25 per share while the oil was at $70.99, and a little more than one year later on 5 September 2008, Exxon was at $75.62 per share while the oil was at $109.38. Even though oil prices moved up about 50%, Exxon's stock price was actually lower. I find that interesting. The next graph shows normalized prices, which more easily shows relative price movements.
During the past two years, the companies' stock prices did not enjoy the same rise as oil prices. Suncor trended along with oil prices but did not reach the same peak. And BP's stock price has actually fallen—both on an absolute basis and on a relative basis to oil prices over the past two years.
In hindsight, I should have lightened up on my oil exposure, especially after the tremendous run we have enjoyed. As I tell my friends, I have no idea where oil companies' stock or oil prices will go in the short term, but in the longer term, I am bullish. Still, that is no excuse for not having taken some profits. Even though I remain bullish, I should have lightened my position and waited for an opportunity to reload.
Eric Bolling in a recent TheStreet.com article Bolling: Avoid Urge to Get Even wrote the following:
I believe that the dollar is still the world's safest currency, contrary to many pessimists that write investment newsletters - many of whom can't pull the trigger on their bad energy calls. Many of them followed Goldman Sachs' $200 oil call like sheep to the slaughterhouse. Many of them bury their bad call on oil in the form of, "We said long term oil bull." Lame!
At one extreme, you have aggressive traders, such as Eric Bolling, who are going to trade in and out of the markets. At the other extreme, you have successful investors, such as Jim Rogers, who are not aggressive traders and who believe that commodities bull market still have several more years. I am not an aggressive trader, though I could certainly benefit from being more aggressive than I am now. All that said, I am still pleased with my performance considering how difficult the markets have been.
Oil is a difficult commodity because it does not trade on pure fundamentals alone. Oil production is not determined solely by the marginal cost of production. Rather, it is heavily influenced by geopolitical forces. That can be either a positive or a negative. It might be positive in that some countries will arbitrarily take production off the market to prop up oil prices. These countries might believe that $100 per barrel is a reasonable price for oil. Other countries might be inclined to increase production to accomplish at least two aims: one, to make up lost price through increased volumes; and two, to drive prices downward to increase price volatility, which in turn discourages new sources of high cost production such as the oil sands in Alberta. So even though oil prices have come down substantially, the future is still hard to predict.
The challenge now is to decide how to act going forward. Obviously, I missed a great opportunity to lighten up. Some believe that oil prices might continue to plummet further and getting out now is a good idea. While that might be true, I am inclined to stay with my current positions, even if it is lame. And should stock prices fall precipitously, then I will add to my positions. These additions will be shorter term rentals rather than longer term holds.
Update
The online Wall Street Journal has an excellent article OPEC Debate: To Cut or Not to Cut (subscription required) that discusses OPEC's dilemma.
Meeting for the first time since March, OPEC ministers on Tuesday face a quandary: With the world economy still on the ropes, do they really want to be seen slashing oil production in an effort to keep prices above $100 a barrel?
To cut or not to cut -- and if so, when -- will dominate debate when the cartel's 13 ministers huddle in Vienna. After pleading helplessness for months as crude prices soared, officials from Venezuela, Iran and Libya say they would like the group to start trimming production to halt the steep fall in prices since late July. Big producers like Saudi Arabia, Iraq and Nigeria have been either mute or in favor of maintaining the status quo.
Few doubt that the Organization of Petroleum Exporting Countries has the clout to prop prices up. While often feeble when called upon to boost supplies, the group has largely succeeded over the past decade in protecting its interests when prices slide. The question is whether it would be wise to act now, with the U.S. and some European nations still hovering near recession.
Disclosure: I am long Suncor, ExxonMobil, and TheStreet.com.
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