Grease up your portfolio
It’s probably safe to say now that the awe inspiring run we saw in oil earlier this year was likely a last gasp commodity bubble. Now, oil has fallen to levels that many of us thought were a part of history. So, what is the true value of a barrel of oil? It’s pretty easy to make a bull case for the price of oil.
- Supply controlled by a cartel of less than politically stable governments
- Worldwide reliance on oil as a fuel and chemical feed stock
- Rapidly maturing developing nations and populations hungry for modern conveniences
- Likelyhood of devaluation in the dollar as the global economy turns around
It’s also pretty easy to make a more bearish case (at least in the short to medium term). Despite posturing by OPEC and other oil producing companies, oil’s recent 25+% recovery seemed more a result of general market euphoria than any true fundamental support. After touching, $50 per barrel again, oil fell more than 8% as yet another flurry of bad economic news tanked hopes for quick a recovery in petroleum demand. In the end, a quota reduction by OPEC is unconvincing as excess capacity in a market where demand is falling is more than enough to counterbalance a reduction in physical supply. Furthermore, the cost of oil extraction, after investment in exploration and infrastructure has been sunk, is actually quite inexpensive (estimates peg Middle East oil extraction around $5/barrel and Canadian shale extraction around $15/barrel). In the end, there is still ample incentive to cheat on stated quotas even at these low price levels.
With all this uncertainty, it can be easy to dismiss the value of oil exposure in your portfolio. Given oil’s broad reaching influences in the market, it would be dangerous to write it off completely especially at historically low levels. As mentioned above, oil exposure can act as a counterbalance to dollar value deflation. Furthermore, it can act as a hedge for the increasing transportation and raw material costs that will ultimately hurt the profitability of most non-energy companies in your portfolio.
Tune in tomorrow for a few ways you can get oil exposure without having to make a long term bet on the price of oil itself.
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