Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
CATHY WOOD ARK GARBAGE ARK Funds Heading for 90% STOCK CRASH! - 22nd Jan 22
Gold Is the Belle of the Ball. Will Its Dance Turn Bearish? - 22nd Jan 22
Best Neighborhoods to Buy Real Estate in San Diego - 22nd Jan 22
Stock Market January PANIC AI Tech Stocks Buying Opp - Trend Forecast 2022 - 21st Jan 21
How to Get Rich in the MetaVerse - 20th Jan 21
Should you Buy Payment Disruptor Stocks in 2022? - 20th Jan 21
2022 the Year of Smart devices, Electric Vehicles, and AI Startups - 20th Jan 21
Oil Markets More Animated by Geopolitics, Supply, and Demand - 20th Jan 21
WARNING - AI STOCK MARKET CRASH / BEAR SWITCH TRIGGERED! - 19th Jan 22
Fake It Till You Make It: Will Silver’s Motto Work on Gold? - 19th Jan 22
Crude Oil Smashing Stocks - 19th Jan 22
US Stagflation: The Global Risk of 2022 - 19th Jan 22
Stock Market Trend Forecast Early 2022 - Tech Growth Value Stocks Rotation - 18th Jan 22
Stock Market Sentiment Speaks: Are We Setting Up For A 'Mini-Crash'? - 18th Jan 22
Mobile Sports Betting is on a rise: Here’s why - 18th Jan 22
Exponential AI Stocks Mega-trend - 17th Jan 22
THE NEXT BITCOIN - 17th Jan 22
Gold Price Predictions for 2022 - 17th Jan 22
How Do Debt Relief Services Work To Reduce The Amount You Owe? - 17th Jan 22
RIVIAN IPO Illustrates We are in the Mother of all Stock Market Bubbles - 16th Jan 22
All Market Eyes on Copper - 16th Jan 22
The US Dollar Had a Slip-Up, but Gold Turned a Blind Eye to It - 16th Jan 22
A Stock Market Top for the Ages - 16th Jan 22
FREETRADE - Stock Investing Platform, the Good, Bad and Ugly Review, Free Shares, Cancelled Orders - 15th Jan 22
WD 14tb My Book External Drive Unboxing, Testing and Benchmark Performance Amazon Buy Review - 15th Jan 22
Toyland Ferris Wheel Birthday Fun at Gulliver's Rother Valley UK Theme Park 2022 - 15th Jan 22
What You Should Know About a TailoredPay High Risk Merchant Account - 15th Jan 22
Best Metaverse Tech Stocks Investing for 2022 and Beyond - 14th Jan 22
Gold Price Lagging Inflation - 14th Jan 22
Get Your Startup Idea Up And Running With These 7 Tips - 14th Jan 22
What Happens When Your Flight Gets Cancelled in the UK? - 14th Jan 22
How to Profit from 2022’s Biggest Trend Reversal - 11th Jan 22
Stock Market Sentiment Speaks: Are We Ready To Drop To 4400SPX? - 11th Jan 22
What's the Role of an Affiliate Marketer? - 11th Jan 22
Essential Things To Know Before You Set Up A Limited Liability Company - 11th Jan 22
NVIDIA THE KING OF THE METAVERSE! - 10th Jan 22
Fiscal and Monetary Cliffs Have Arrived - 10th Jan 22
The Meteoric Rise of Investing in Trading Cards - 10th Jan 22
IBM The REAL Quantum Metaverse STOCK! - 9th Jan 22
WARNING Failing NVME2 M2 SSD Drives Can Prevent Systems From Booting - Corsair MP600 - 9th Jan 22
The Fed’s inflated cake and a ‘quant’ of history - 9th Jan 22
NVME M2 SSD FAILURE WARNING Signs - Corsair MP600 1tb Drive - 9th Jan 22
Meadowhall Sheffield Christmas Lights 2021 Shopping - Before the Switch on - 9th Jan 22
How Does Insurance Work In Europe? Find Out Here - 9th Jan 22
MATTERPORT (MTTR) - DIGITIZING THE REAL WORLD - METAVERSE INVESTING 2022 - 7th Jan 22
Effect of Deflation On The Gold Price - 7th Jan 22
Stock Market 2022 Requires Different Strategies For Traders/Investors - 7th Jan 22
Old Man Winter Will Stimulate Natural Gas and Heating Oil Demand - 7th Jan 22
Is The Lazy Stock Market Bull Strategy Worth Considering? - 7th Jan 22
METAVERSE - NEW LIFE FOR SONY AGEING GAMING GIANT? - 6th Jan 2022
What Elliott Waves Show for Asia Pacific Stock and Financial Markets 2022 - 6th Jan 2022
Why You Should Register Your Company - 6th Jan 2022
4 Ways to Invest in Silver for 2022 - 6th Jan 2022
UNITY (U) - Metaverse Stock Analysis Investing for 2022 and Beyond - 5th Jan 2022
Stock Market Staving Off Risk-Off - 5th Jan 2022
Gold and Silver Still Hungover After New Year’s Eve - 5th Jan 2022
S&P 500 In an Uncharted Territory, But Is Sky the Limit? - 5th Jan 2022

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Crude Oil Price Slump is a Once in a Decade Opportunity to Make Money, Guaranteed

Commodities / Crude Oil Jul 23, 2015 - 12:51 PM GMT

By: Atlantic_Perspective

Commodities All investments carry risk. There are no safe investments in the sense that “you just can´t lose”. But risk can be greatly reduced, according to the entry point and the timespan of the investment.

The commodities cycle
The world is currently awashed in oil and natural gas. This is the reality of today. But as sure as day follows night, this glut will turn into production deficit over the next few years. All commodities traders know this and have seen gluts turn into deficits dozens of times, in different markets.  Why does this happen?


As the price of a given commodity rises, more and more players come into the market to produce it. This is true for agricultural products, metals, energy, etc. The growth in supply eventually puts an end to the price increase. Supply and demand reach an equilibrium. But this equilibrium may last only a fraction of time, sometimes measured in seconds. Why?

Producing oil and natural gas requires huge capital investments and a long list of permits. Between the decision to produce and the first actual oil/gas coming to surface, we are talking about months at best, but it usually takes years.

As the oil price goes up, more and more producers join the energy bandwagon. At some point, supply outpaces demand. But this doesn´t prevent more oil from coming to the market. When you invest millions/billions on something, you really need to get your money back. And the only way to achieve this goal is to keep producing. Last year, as oil prices crashed, oil producers kept producing. Actually, they had to produce even more to compensate for the price decline. And this is how we came to the current glut.

Inefficient oil producers will be put out of the market, once the oil price falls below the cost of production. Most producers can deal with negative returns for a few months, but definitely not for years. So, once the cash runs out, the operation closes. Now, multiply this by hundreds of operations. Then thousands. This process is usually quite fast. Within just a few months, millions of barrels of oil stop coming into the market. Eventually, the drop in price will lead to a production deficit and oil prices start to rise again. This means production starts to increase again, right?

No. Opening and closing oil operations costs millions and takes a lot of time. After a prolonged period of low oil prices, producers become weary of any price increase. An attitude of “let´s wait a bit more to see if this price rise really sticks” takes hold and prevents new investments from taking place. Thousands of operations remain on standby, waiting to see if the price rise really sticks.

Once it is clear that the price rise will stick, it will take months or even years to get new production into the market. In the meantime, oil prices explode.

Commodities and the stock market present different opportunities and risk. In the stock market, investors take the risk of losing money in case of corporate bankruptcy or a widespread crash. But in commodities, the big risk is a supply shock. Supply shocks lead to price explosions akin to a crash, but in the ascending way.

The case for oil

Nobody knows how low the oil price will go, or when the low will happen. Anyone claiming to know the oil price low or the specific timeframe of this occurrence, is either lying or delusional. Markets usually fool most participants by either moving too quickly or too slowly, or reaching unthinkable prices (high or low). All of this presents a huge financial risk. Is there a way to reduce the risk?

Yes. The answer lies in time. Investing in oil, directly through ETFs or indirectly via oil companies, will be more or less risky according to the investment timespan. Investing for the next 6 months - expecting that oil will become more expensive by the end of the year - is extremely risky. But if your investment horizon is 5 years, it is virtually impossible that over that time frame oil will not go up at some point. The commodities cycle always works.

Oil is not something we buy out of pleasure, it´s something we need. Over the next 5 years, supply will eventually crash as more and more producers are put out of business. And when the oil market reaches production deficit (which it eventually will), prices will sky rocket because no new production will come online for a meaningful period of time.

It is impossible to know or predict how low oil will go, and how much longer the slump will last. But we do know that the slump will not last forever and that it will end with a price bang to the upside. Five years seems like a very reasonable investing horizon to collect a high octane reward. This doesn´t mean that you should invest in oil for exactly 5 years, it means that you have to be prepared to wait at least five years before investing. The exact moment to leave the market will depend on the assessment of the situation as it unfolds.

The risk/reward ratio

At around $50 per barrel, oil presents an excellent buying opportunity. Some analysts say that it can go as low as $30. If that does happen, the supply deficit will be huge and prices are guaranteed to at least double from that low. If and when the oil price goes back to $60 (a very conservative estimate over a 5 year period), if you bought at $50 you will get a 20% gain in 5 years. That´s better than T-Bonds, and probably safer in today´s world...

What if oil goes back to $80? Once again, it´s not a crazy expectation, it has been much higher than that for years. In this case, you would get a 60% profit. The last time oil prices crashed (2009), oil more than tripled in value just 2 years after the low. The $80 oil forecast is therefore quite attainable and probably conservative.

The big bonus: if you decide to invest in oil via oil companies, there is a very good chance the shares will rise at a faster pace than the oil price increase (example: oil price goes up 30%, oil producers rise 50%). That is how shares of commodity producers usually behave (there is a mathematical reason for this that will not be explained in this article).

It is highly unlikely that oil will remain below $50 over the next 5 years. Only a worldwide wave of deflation would support such an anomaly, and in that case, most other investment options would present an even bigger risk of loss. The downside for oil from current levels is much smaller when compared with most other investment classes.

How to invest in the future oil price rise

1. You can either make your 5 year investment all at once, or divide it over a 6-12 month period by investing a fix amount every month, till you reach the whole investment allocated to oil. This will allow you to buy cheaper if the price of oil keeps going down, but you risk buying at a higher price if the low is reached in the meantime and prices start to rise again. This being a long term investment, we suggest that you buy over a 6-12 months period. If at some point the oil price goes above your “comfort price”, you just stop buying and enjoy the profits on what you already bought.

2. Diversify your investments. Buy oil ETFs and oil companies from different continents.

3. If you buy shares, choose well established companies that pay dividends. This is an investment in the overall oil market, not in company A, B or C. In this case, shares represent an indirect investment vehicle, they are not the investment itself. Don’t try to select companies based on their valuation potential, as that might carry additional risk. Play it safe.

4. Don´t use any funds you may need over the next 5 years. Think of this as an investment for your retirement.

You can find lists of oil ETFs and big oil companies here:

http://etfdb.com/type/commodity/energy/crude-oil/

http://www.investopedia.com/articles/personal-finance/010715/worlds-top-10-oil-companies.asp

We do not recommend any specific shares or ETFs, as this article serves the purpose of presenting the overall opportunity and doesn´t not promote any given company or investment vehicle.

The slump in oil prices represents the investing opportunity of a decade. Other sectors may present better performance prospects, but none with such a low degree of risk. The current risk/reward ratio of oil is just too good to pass on. That´s the Atlantic Perspective.

Atlantic Perspective.

Copyright © 2015 by The Atlantic Perspective.

The Atlantic Perspective is an opinion blog, aimed at explaining and providing solutions to some of the world´s most relevant issues.

www.atlanticperspective.com


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in