What is the future of the oil industry?
Oil has always had up/down cycles, but the current down cycle is getting old. Will oil ever come back, or is this a permanent shift?
We have certainly come a long way from the days where the discussion was about "peak oil" and how many years until we run out of the resource. A lot of things have changed! New technology in extraction have, in effect, discovered much more supply of the resource than previously thought. The world now is awash in oil. It wasn't too long ago and the United States was importing the majority of the oil required. Not today!
Add in the alternative energy sources of wind and solar the prospect for oil is very different. Yet, it will take some time for the alternative sources of energy to gain widespread acceptance and the market for oil continues. Considering the supply that is available today, it is hard to see how the price will get back to triple digits in the foreseeable future. Many experts believe that the trading range for oil is now $40 to $60 a barrel. Looking for more than that may be the proverbial "hope over reality" scenario.
Having had my entire 30+ years of work experience in the oil area of Texas, I can assure you the price is never permanent. It is a commodity and like all commodities it fluctuates with the world supply and demand. Right now there is an abundance of supply, but I can guarantee (or as we say down here "Guaran' Damn Tee") demand will catch up with the supply. You and everyone else wants to know "when?". And that is the question no one knows. If someone tells you they know when, beware of a scam. This is why having natural resources in your portfolio should be limited to a rather small amount of your total portfolio.
Right now, people I know in the oil business say they can be profitable at $40 to $45 per barrel. So as long as producers are making money everyone is happy.
There are of course no certainties in life but these low prices may be here to stay for the foreseeable future. OPEC's, the oil cartel Organization of the Petroleum Exporting Countries, attempts at manipulating prices higher recently have had little affect because they are no longer the world's 'swing producers'. Thanks to advancements in technology the U.S. has become that producer. Hydraulic fracturing and directional drilling have allowed U.S. producers to extract more oil at lower costs so as OPEC producers and friends cut production in an attempt to squeeze supplies and increase the price of oil U.S. producers step in and increase production to fill the gap. Now that the U.S. is able to export oil again our poducers are able to impact markets on a global scale.
There is always the possibility of geopolitical crisis in some of the OPEC countries, i.e. wars that disrupt supply, but short of a catastrophe it appears that oil is range bound in the $40 to $60 a barrel range for the time being.
According to OPEC monthly oil reports demand and supply for oil continues to increase and hasn’t had a decrease since the Great Recession in 2008/09. The rate of growth in demand seems to be growing around the same rate as inflation, or around 2%. However we do believe there has been a fundamental shift in the energy industry over the past decade. We’ve seen technology do to this industry as we’ve seen with other high margin industries in history. Technology has stabilized the supply of energy by improving the methods of extraction, particularly here in the U.S. with fracking. In addition we’ve seen supplemental sources of energy come on-board such as natural gas, solar, wind, etc. Going forward, all these new alternative energy sources limits the amount of excess profit that the oil industry can achieve for any meaningful amount of time. The oil sector is around 9% of the S&P 500 and we expect that to decline gradually over time as it only increases at the rate of inflation like other commodity businesses. However, like most sectors it can become hot and cold for long periods of time and defy logic.
Investors always emotionally conclude that cyclical patterns are linear when they are most likely to reverse. You are absolutely correct that after having rebounded strongly from the second week of February 2016 to the second week of June 2016, energy commodities and the shares of their producers have gone strongly out of favor. There has been heavy insider buying of many components of energy producers along with huge investor outflows, indicating that just as the least-knowledgeable people are selling the smartest ones have been buying.
Therefore, energy shares are likely to be among the biggest winners of the next 9 to 15 months. Funds I like in this sector include FCG (natural gas producers), URA (uranium miners), and OIH (oil service companies). TAN (solar energy) might be good as a speculative choice.