When should you not buy commodity stocks? When you feel like you must own them. I remember when investors felt they must own oil stocks when oil prices shot past $100 per barrel and everyone was convinced, they were going to $200. Today, oil stocks are universally hated, and arguably for the right reasons - the future is knocking on our door and it has electric, not gasoline, vehicles in it.
Today, half of oil is used for transportation, so the long-term picture is not bright for oil. But this long term is years and years away. On the supply side, shale oil production has increased supply and turned the US into the largest oil producer in the world.
We are the first to admit that we are anything but experts on oil markets - very few people are. But we have friends who are. They tell us that the combination of geopolitical tensions in the Middle East (we wrote this in December) and a steep decline in shale oil production should lead to much higher oil prices in the near term. (Unlike conventional oil wells, shale wells at first have very high production and then it follows the Thelma and Louise trajectory, falling off a cliff.)
Looking past the short term, though, we may not know all the nuances of oil markets, we are quite familiar with capital cycles. When prices are high capital rushes into the market and despite the "this time is different" cover stories - "Oil prices are going to the moon" - supply ends up exceeding demand and oil prices eventually do the unthinkable: they decline. The opposite happens when oil prices stay low for a long time. The best cure for low commodity prices is low commodity prices.
Low prices make wells that were
