Most economists will agree that commodities are subject to ‘boom and bust' cycles – their prices can hit unfathomable peaks or bottom out at heart-wrenching lows, and these divergences are inevitable – the question is just ‘when?'. This is a question that oil traders have been asking themselves for months now, as the price of oil has plummeted below $50 per barrel (more than a 50% drop from its peak in summer 2014), and there is widespread concern that we haven't yet reached bottom. But can there still be investment opportunities in the oil industry?
The Bulls vs. the Bears
Bearish analysts are worried that we haven't yet hit the lows. Gary Shilling, president of A. Gary Shilling & Co, a New Jersey-based consultancy predicts that oil could go down to $10-$20/barrel at its lows because OPEC is playing chicken by not cutting production when supply is already outstripping global demand. In fact, Saudi Prince Alwaleed, chairman of Kingdom Holdings admitted just that when he boasted that “oil will never see $100 again.” On a practical level, oil production currently exceeds demand by roughly 2 million barrels a day – a number that certainly gives the bears something to run with. If OPEC continues its stubborn stance, this could continue to flood the markets, and keep costs low. Perhaps this is why the tycoons of Big Oil in America, the Rockerfeller family, was quoted in Rolling Stone magazine as saying that they were unloading their ‘risky' oil investments. .
But there is a potential upside. Oil bulls are hoping that production in the United States will decline over the coming year, a move which will help close the supply and demand gap. Likewise, as prices stay low, the demand is expected to grow, which could bring a much needed move to the upside in the oil industry. Further, the bulls point to the charts that indicate that the energy sector tends to become a leader during the end of bull market cycles in the equity market. And since we're currently experiencing with what may be the end of a bullish run since March 2009, this may signal that it's time for the energy sector, and oil in particular, to bounce back.
