Grease Up Your Portfolio with Oil Stocks

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 is controlled by a cartel of less than politically stable governments.
• There is a worldwide reliance on oil as a fuel and chemical feedstock.
• Rapidly maturing developing nations and populations are hungry for modern conveniences.
• The likelihood of devaluation in the dollar as the global economy turns around is very high.

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 at 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.

Disclosure: None

Comments

[geolog:]

Hello,
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With new exploration technology (patented invention US 7,330,790) oil industry could make up to three times more oil and gas discoveries than when using conventional technology. And the fact that new technology won't need more investments is also very important. It can significantly increase company dividends.
The technology is designed and successfully tested in the Barents and the Black Seas as well as in the Gulf of Mexico (see: binaryseismoem.weebly....).

Jan 08 01:36 PM

[JJJ:]

geolog,

Can you add more details on this new technology other then just a teaser for another website?

Jan 08 06:34 PM

[SeekingTruth:]

Although I can't vouch for the cost of production numbers, I have to agree with the general thrust of the article on all points. Thanks for a rational and most likely prescient article.

Jan 09 08:36 PM

[The Curious...:]

Thanks for your comment, SeekingTruth. While the numbers on production seem shockingly low, I have a feeling they are possibly true. The higher numbers we see, for example $50/barrel for oil sands production, are typically cost of MARGINAL production numbers. However, for areas that are developed and the investment cost sunk, it's not unreasonable to believe the cost to maintain production levels is actually quite low.

For all readers, if you're interested in part 2 of this article which proposes some ways that you can add oil exposure to your portfolio without making a direct bet on oil, check out this link -thecuriousinvestor.com.../.

Jan 10 01:35 PM