The Commodity Investor Q&A
With Matt Badiali
February 18, 2009
Q: How long before you would expect crude to get back to highs of $100+ per barrel and what do you think will cause that trend? – D.K.
A: The recent economic implosion created a global "time out" in the oil business.
According to the International Energy Agency, oil consumption averaged around 86 million barrels per day in 2008. The agency estimates that number will be closer to 72 million barrels per day in the first quarter of 2009 – a 16% drop.
Reduced demand has pushed oil prices down to $30-$40 a barrel. Can the price of oil go lower? Absolutely. We need to look back just 10 years to see oil prices around $10 per barrel. In 2001, prices dropped below $20 per barrel.
If the world economy continues to slow, oil could certainly spike lower from here.
But oil will return to the $60 range in the next year or two. With oil under $60, lots of projects become "uneconomic," including Canada's tar sands and offshore fields in the North Sea and off the coasts of Africa and South America. Companies working in those areas can't sell oil for more than it costs them to drill it, so everyone's turning off the spigots...
That'll keep supply low, driving up prices back at least to "economic" levels when global business kicks back into gear. In the longer term, oil prices can and will hit $100 a barrel...
Traditional oil exporters are suffering production declines: Russia's oil exports fell 5% in 2008. Venezuela's output peaked in 1998 and is down 25% since then. Mexico's production fell 9% in 2008 and hit a 14-year low.
At the same time, Chinese oil demand is up 90% in the last 10 years and Indian oil demand grew 50%. Demand is growing but supply is not... that means prices must go up.
In the meantime, my personal strategy is to own the lowest-cost oil producers in the world.
Q: In your opinion, what are some of the pros and cons of owning the OIL ETF rather than investing in individual stocks? – E.T.
A: The U.S. Oil Trust exchange traded fund (USO) uses tracks the performance of "West Texas Intermediate" – a type of oil used as a benchmark for crude prices.
So USO is simply a bet on the direction of oil prices. It's easy. But it has limitations...
The average, year-over-year change in oil price for the last 10 years was 46%. So, bubbles being the obvious exception, you rarely make hundreds of percent on commodity prices.
Now, with oil company shares, you theoretically have much more risk. If you choose the wrong company, or if the market in general gets crushed, you can lose most or all of your investment. On the other hand, if you do your homework, you can make hundreds of percent on individual companies... and with dividends, get paid to own shares.
Good investing,
Matt
P.S. To submit questions for the Commodity Q&A, send me an e-mail and look for answers every Wednesday. Remember, I can't give personalized investment advice. |
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Huge commodity crash yesterday... benchmark CRB Index at lowest level since June 2002. |
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Construction machinery giant Caterpillar at new 52-week low. |
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America's largest apartment REIT, Equity Residential, leads the real estate market to new lows. |
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All banking indexes at new lows... terrible sign for equities. |
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|
Last |
Change |
52-Wk |
| S&P 500 |
789.17 |
-4.56% |
-41.54% |
| Oil (USO) |
23.46 |
-8.36% |
-69.10% |
| Gold (GLD) |
95.45 |
+3.13% |
+7.07% |
| Silver (SLV) |
13.99 |
+3.32% |
-17.47% |
| U.S. Dollar |
87.79 |
+2.04% |
+15.15% |
| Euro |
1.26 |
-1.48% |
-14.15% |
| VIX |
48.66 |
+13.35% |
+94.48% |
| HUI |
319.19 |
+2.58% |
-26.63% |
| 10-Year Yield |
2.66% |
-0.20 |
-0.79 |
|
| Company |
Sym |
Industry |
Odyssey Re |
ORH |
insurance |
AeroVironment |
AVAV |
aerospace |
Palm |
PALM |
cell phones |
Lancaster Colony |
LANC |
consumer goods |
|
| Company |
Sym |
Industry |
Advantage Energy |
AAV |
royalty trust |
Apartment Invest |
AIV |
REIT |
Selective Insurance |
SIGI |
insurance |
BB&T Corp |
BBT |
bank |
Intl. Bancshares |
IBOC |
bank |
Pacific Capital |
PCBC |
bank |
UDR |
UDR |
REIT |
Wilmington Trust |
WL |
bank |
Investors Bancorp |
ISBC |
bank |
MGM Mirage |
MGM |
casinos |
NTELOS Holdings |
NTLS |
wireless |
Popular |
BPOP |
bank |
Sappi |
SPP |
paper products |
Orix |
IX |
credit services |
PPG Industries |
PPG |
chemicals |
Provident Financial |
PFS |
bank |
Dow Chemical |
DOW |
chemicals |
New York Times |
NYT |
newspapers |
Gildan Activewear |
GIL |
athletic apparel |
Hill-Rom Holdings |
HRC |
medical equip |
KBW |
KBW |
bank |
Under Armour |
UA |
athletic apparel |
Winn-Dixie Stores |
WINN |
grocery stores |
Weight Watcher's |
WTW |
weight loss |
Hercules Offshore |
HERO |
oil drilling |
Gannett |
GCI |
newspapers |
|
|
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