Oil prices recovered from a 6-year low in March to just over $60 per barrel on May 5 in response to falling U.S. inventories, which had reached the highest level in 85 years. Is this a sign that prices are due for a long-term recovery, or is it simply a swing of the pendulum? To try to answer that question requires looking into crystal balls that are scattered around the globe and into the minds of governments and cartels that are notoriously unpredictable.
“The Wal-Mart of Oil” Strategy
Take, for instance, the Saudis. Why would a country so dependent on oil revenues have an interest in lower prices? According to industry expert Philip Verleger, quoted in The Wall Street Journal, “They want to be the Wal-Mart of oil.” By this reasoning, the Saudis are willing to endure short-term losses to make production in places like the U.S. unprofitable and drive out competition. And to a certain extent, it’s working. U.S. production, which had displaced Saudi Arabia as the world’s highest last year, has been cut back in the face of disappearing profits.
But that strategy overlooks one important fact. While drilling has indeed been cut back, the U.S. has thousands of wells that are already drilled and continue to produce. Plus continued advances in technology may make exploration and production even less expensive and oil profitable at lower prices.
Across the Gulf, changes in relationships with Iran could result in even more oil reaching western markets, further depressing prices. If conditions ever allow production to resume in Iraq, that would add more downward pressure, too, although that doesn’t seem likely anytime soon.
Global Economy Effects
The global economy also affects oil prices, and it has slowed, resulting in less demand. On the other hand, lower gasoline prices have caused consumers to look more favorably on larger, less fuel-efficient vehicles, increasing demand, if only slightly. Lower heating fuel costs put money in consumers’ pockets, and that could give a boost to buyer confidence that pushes up demand as a side-effect. Of course, renewables and improvements in electric cars could offset demand for oil, so hard long-term predictions are risky at best.
For investors, this uncertainty means the best play is finding companies that are nimble enough to adapt to changes before they wreck their bottom line.
BWAB’s Edge
The oil and gas experts at BWAB track industry trends, identifying hidden opportunities in oil and gas properties that offer excellent values for both institutions and individual investors. While others are preoccupied with negatives, we’re busy finding companies positioned to thrive in today’s volatile markets.
We invite you to visit our website, BWAB.com, to learn more about our investment strategy, philosophy, and proven record in maximizing investor returns by building value through capital reinvestment, operational improvements and enhanced recovery and cost control.
