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$10,000 Oil

Maynard Paton

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Maynard Paton

My latest blog

Turbulent markets

1

12 October 2008

Published in Investing Strategy on 23 May 2008

The price just keeps going up... and it's split the stock market in two.

I don't know about you, but I've been amazed at how the price of oil just keeps going up. A barrel of crude now costs about $135 -- double the price seen this time last year, triple the price experienced in 2004 and about fifteen times the price witnessed at the low of 1998!

Three years ago I recall dismissing predictions of $100 a barrel when the price was 'just' $50. Nowadays I can read about $200 oil and I'm sure it won't be long before we're told even greater demand and even less supply could take the price to $1,000. Anyone even for $10,000 oil? You read it here first.....

The oil-price explosion has had a dramatic effect on the stock market. To have outperformed the FTSE during the past few years, you'd have almost certainly required a selection of oil shares in your portfolio. For example, names such as Wellstream (LSE: WSM) , Tullow Oil (LSE: TLW) and Cairn Energy (LSE: CNE) have dominated the market's leaderboard during the past twelve months and have left banks, house builders and everything else damaged by the credit crunch for dust.

What's more, several well-respected Fools on our discussion boards have made big profits from another oil explorer, Soco International (LSE: SIA) .

Despite the obvious momentum, I continue to find it very difficult to like the oil sector. Similar to most other investors I guess, I never foresaw the sudden boom in commodity prices and getting involved now would feel more like bandwagon chasing than traditional value investing.

In fact, I'm starting to sense some eerie parallels with the dotcom bubble of the late Nineties. Back then, tech shares trounced everything for five years and the boom culminated in some mega-merger activity. Oil shares have now been popular for at least four years now, while takeover proposals involving titans such as BHP Billiton (LSE: BHP) and Rio Tinto (LSE: RIO) suggest organic growth for commodity earnings is getting harder to come by.

For now at least, I'm sure the two-tier stock market will continue and, personally, I'd welcome the hot money stampeding off to chase oil shares even higher. Hopefully the speculators can leave the rest of us good investment opportunities elsewhere. Although my favoured laggards could remain unloved for some time to come, I'm confident the less exciting tier of today's market is more likely to throw up the longer-term bargains. Oh, and if oil does hit $1,000 or even $10,000, I'll still be happy avoiding the sector. As far as I know, nothing in history that has risen so far so fast -- including property, dotcoms and tulips -- has been immune to a severe downturn!

Maynard writes Champion Shares, the Fool's share-tipping service. This 30-day free and no-obligation trial to the Champion Shares community gives you complete access to Maynard's favourite shares.

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Comments

The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

cnebbia 23 May 2008, 12:20pm

Is this a SALE for BHP?

beastofbodmin 27 May 2008, 6:57am

I think oil will be at $200 before it goes to $120.

Head over to http://theoildrum.com/ to find out what is going on.

magicblonde 27 May 2008, 8:30am

Property has never had a "severe" downturn.

Paulxo 27 May 2008, 8:45am

Some people did foresee the boom in commodity prices (Jim Rogers, Hot Commodities 2004 & Mark Shipman, The Next Investment Boom 2006) and they were ridiculed and ignored. I don't know how you couldn't foresee it really, China booming, huge population... 40-50 ships having to queue up to unload coal at their ports... Then, you point out that it will be a 'bubble', so don't bother? That's crazy! If the fundamentals are there - supply/demand...there's only one place prices can go, and because everyone's diving in, prices are being pushed further...

ffoxxey 27 May 2008, 9:02am

As an oil trader with a strong streak of realism, the current pricing is the result of many factors, but two factor stand out.
i) oil producers have in the past two years initially seen the rise in oil prices based on Far East demand and the fall in the Dollar's value.
ii) as a the Dollar has fallen, especially against the Euro, the hedge funds, mainly US based, have moved in oil and the futures market - the price drivers - and are now seen to be buying into physical. This is also reflected in grains, metals and bullion.
Again it is the speculators, but not the end users, that are driving prices. To a trader such as my company so long as there is physical oil we will trade it regardless of what the market price is (and prices are primarily set by futures - in reality paper trades). If the speculators came out of the market it would subside, but with so much computer trading it is unlikely to happen in the near term.
And while we talk of the $200 barrel, the $150 barrel has been flagged for the last 12 months. It is the next major resistance point.
Diesel at £1.65 and petrol at £1.55 a litre will be with us within 8 weeks. The resultant inflation will follow as certainly as night follows day.

Jbat001 27 May 2008, 9:12am

At 08:30 on May 27 2008, magicblonde said:

Property has never had a "severe" downturn.

So the titanic real-estate crash in (densely populated) Japan, with property prices still falling 16 years later is not a severe downturn? How bad does it have to get?!

spripple 27 May 2008, 10:19am

Can you say "peak oil" the dynamics have never been this way, for in an depth look check 'the end of suburbia' and 'transition towns handbook' by Rob Hopkins... oil 400 by 2012

gordonbanks42 27 May 2008, 5:39pm

There's only a finite amount of oil in the world, so it's going to start to run out. What happens to the price as that happens will depend on what happens to demand along the way. If we find lots of substitutes and demand falls away, the price might not climb inexorably. If we don't, then it will. Which will it be?

If the development of oil-independent technology is left to the market (which is largely what's happened so far), that development will only happen at a rate dictated by commercial incentives i.e. the amount of discomfort caused by trends in oil prices. So we can expect large (above-inflation) and sustained oil price rises to drive the development of substitutes, rather than for the development of substitutes to provide a soft landing for the price of oil and the cost of oil-based products.

No rocket science here...I think.

Any time we see "bubble-like" behaviour in this part of the commodities market we have to ask whether this is just the usual cyclical stuff that we see with all major asset classes from time to time or the beginning of the end for the world's dependency on oil. I don't claim to know which it is this time round, but no-one can be sure that this isn't the start of an indefinite climb in oil prices as the stuff runs out. A bubble is only a bubble when the price rises don't mirror the fundamentals.

Speculators are forcing up the oil price at the moment. They would only be taking those forward positions if they were reasonably sure they weren't going to lose their shirts on an oil price fall in a few months' time. So might they not merely be bringing forward rises which are inevitable?

And might that not be such a bad thing, on the grounds that the sooner we accept that we can't afford it, the sooner we'll put a serious effort into doing OK without it?

BTW: ffoxxey's references to grains etc. in his post remind me of Malthus. The verdict of history seems to be that his prediction never happened and therefore that his analysis must have been faulty somehow. But, as with any good fortune-teller, he never put a date on his prediction, so if he were alive now he could claim that it may just be a case of "hasn't happened yet". High prices for grains and other foodstuffs (bearing in mind the fundamentals underpinning those price trends) look spookily like the beginning of a return to respectability for Mr M after all. All the more so if the major oil-consuming countries, seeing agri-petrol as the easiest substitute for fossil petrol, create a demand environment in which it is more profitable to grow petrol for rich people than to grow food for poor ones.

I'm buying emerging markets for my retirement and commodities for my son.

PaulOz 27 May 2008, 10:15pm

Surely no-one actually knows how much oil is left... especially considering its continually created by nature. And we're a long long way from known supplies running out in any case. So is production actually being outstripped by demand?

Teemo100 28 May 2008, 12:42pm

If "At 09:02 on May 27 2008, ffoxxey said" is correct then isn't it about time governments stepped in to stop these so called traders from pushing up the price of oil. They are trading on the misery of others, pushing up the price of everything that involves transportation or the use of this basic commodity. I am all for making a decent living but what these organisations are doing is immoral, and what are our elected politicians doing about it ...ABSOLUTELY JACK S%*T. Be an oil speclulator and ruin society !!!!!

Beej40 01 Jun 2008, 5:25pm

"....we're a long long way from known supplies running out in any case. So is production actually being outstripped by demand?"

World production is keeping nicely in step with demand just now as OPEC control the taps and therefore the crude oil supply curve!

The OPEC countries are not minded to increase supplies just now as they are delighted to be taking in vast revenues at such record prices. They are probably also happy to be sticking the knife in the US / UK economies due to the part played by those countries in the Iraq conflict!

There remain abundant supplies of crude oil across the world, most of it still in the Middle East. And as the price continues long-term at levels in excess of $50 per barrel, more and more of the stuff will be found in territories that were previously deemed by oil companies to be too uneconomic to explore and develop.

AlysonThomson 05 Jun 2008, 10:47am

I take it Magic Blonde is young?
Property ownership in the UK is largely a post-second-World-War phenomenon ie post 1945.
Hardly an enormously long history to base a statement like yours on. Never say "Never"!

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