Several years ago, I bought an oil stock that ended up a gusher and pumped up my portfolio nicely. Later, I sold it at its peak which made me and the IRS happy. Since that time, the company has lost value because there’s an oil glut around the world. In fact, the United States is running out of places to store its excess – evidence that, for good or ill, fracking has transformed us from a nation of oil guzzlers into a major oil producer. In fact, the U.S. Energy Information Administration reports oil storage is almost at capacity, the highest it’s been in 80 years: 417 million barrels (“Oil’s New Math,” by Brian O’Keefe, Fortune Magazine, March 2015, pg.62.)
OPEC has refused to reduce supplying oil to the market and the increased number of hybrid cars being sold, together with increased industrial efficiencies, means the glut won’t disappear anytime soon. Imagine my surprise, then, when my stockbroker called to suggest I buy oil stocks. At the time, I wondered if he’d taken a 3 martini lunch.
Or, maybe he’d read Brian O’Keefe article in Fortune Magazine which points out that the price of oil futures is on the rise (bids to buy oil for a set cost at a later date), even though buying oil today would be cheaper. What’s going on? O’Keefe thinks it “suggests a belief that prices will rebound at least somewhat.” (Ibid pg. 66.) Convinced of this, oil producers are storing their oil in the hope of greater profits down the road. The glut doesn’t mean consumption is drown. It means sellers are playing a waiting game.
Are the sellers right? Is there any reason to believe oil demand will pick up again? Well, the International Energy Agency predicts a slow increase in demand over the next five years. (Ibid pg. 66) China’s growth, though sluggish, won’t stay sluggish forever; the European economy is showing signs of recovery and the third world isn’t going to be content to remain unindustrialized forever. Jeremy Grantham, an investment strategist, also believes oil prices will go higher because, “outside of shale, finding new oil is getting harder. And there won’t be enough shale production to cover the declines of existing supplies and meet future demand for growth.” (Ibid pg. 68.) He adds that new finds are smaller, a fact agreed to by other experts who point out that oil discoveries have fallen sharply from 2010 to 2014. (Ibid pg. 68.)
So what’s a girl like me to do if she wants to live out her life in comfort? While I’m not making predictions or recommendations to my readers, I am going to take the advice of J. Paul Getty. “The formula for success: rise early, work hard, strike oil.”