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Oil Price: From Sub-Zero to $100 Again

Wednesday, 2/17/2021 09:01
Or so traders seem to think...
 
NOT SO very long ago, the oil price went negative, writes John Stepek at MoneyWeek.
 
But in the last three months alone it's risen by 50%. And while it may take the odd breather here and there, there's no doubt it's heading higher.
 
First, we'll be using oil for some time to come yet. And my favourite oil stock has almost trebled since 2016 – but I'm hanging on to it.
 
I find markets endlessly fascinating. One minute, an asset is dead in the dirt. No one wants it. If you hold it, you're a fool. It's practically radioactive. The price might be low, but it's not cheap. It's yesterday's asset.
 
Next minute, it's shot up and suddenly everyone wants a piece of it. The price might be high, but it's only going higher. I'm not talking about bitcoin (though the story applies equally). I'm talking about oil.
 
I've told this story a lot in recent months so I won't belabour it today. But oil has been on a serious tear in recent weeks.
 
At the start of November – so just over three months ago – you could buy a barrel of Brent crude for less than $40 (for simplicity's sake, let's not worry about how you'd store it). This morning, it'll cost you more than $60. That's a 50% increase in just a few months.
 
I mean, sure, it's no GameStop. But it's pretty good going for a boring old fossil fuel that had been written off as yesterday's old dinosaur gunk.
 
Oil companies have been queueing up to disavow the stuff. Investors have been competing with one another to see who can condemn stranded assets and laud the rise of electrification the loudest. And the Covid-19 lockdowns have created a false sense of collapsing demand and accelerated transition.
 
This last point is hard to wrap your brain around, but it's absolutely vital to understand if you want to be an active investor (ie, you want to try to beat the market by taking advantage of temporary mis-valuation opportunities created by people's behavioural tics or other non-fundamental factors).
 
No rational person would believe that the current drop in oil demand is because we all now drive Teslas. Everyone understands – in their head – that this is because the global economy has been shut down by a virus. Everyone understands – in their heads – that planes will one day fly again, and that it will take a bit longer before the economy is fully weaned off fossil fuels. However, as human beings, we're terribly prone to an immediacy bias. We can't help but extrapolate our present situation way out into the future.
 
Think about it: how well do you remember life before the pandemic? We've been doing this for a year now. I watched Die Hard with my kids at Christmas (it's a Christmas film, after all). There's a scene near the start where Bruce Willis gets off a plane and goes into the airport. One of us said: "Wow – it looks weird to see no one wearing masks!" It's not that we won't go back to normal – I can't wait. But it's just hard to remember, when you're in the thick of it, what it's like to be in a different situation. And the same bias goes for investors.
 
Of course now, as people wake up to the idea that oil is rising in price again, the story is starting to shift again. This is "reflexivity" in action. George Soros writes well about it, but it's not really complicated. It just means that investor perceptions affect markets, but markets affect investor perceptions, so it's all a big feedback loop.
 
Anyway, so now we're hearing bigger calls and talk of a commodities supercycle. Apparently, on a conference call last week, J.P.Morgan's head of oil and gas told the investment bank's clients that "we could see oil overshoot towards, or even above, $100 a barrel", reports the FT's energy editor.
 
To be clear, when you start hearing analysts make calls like this, it usually means the market is due a breather. Again, it's all down to psychology: the analyst works in the sector; the sector has been boring and neglected for a while – that's not a nice place to be. Then suddenly – with no real warning – you're in the hot seat again. Suddenly your little patch of the market is the hottest thing in the market, rivalling the likes of bitcoin and meme stocks for popularity. You get excited – more excited than everyone else in the room. You make a big round-number call...and that marks the point at which it all calms down a bit again.
 
However, I'd emphasise that we're just talking about a breather here. When an asset moves this far and this fast you'd expect a bit of exuberance followed by a catch-up pause. But overall, oil is not especially expensive (you only have to go back to 2018 for prices above $80).
 
Moreover, we have plenty of supporting factors behind the oil price surge. Firstly, the Biden administration in the US has been rather less accommodating of Iran in terms of sanctions than some had expected. Secondly, the stimulus measures are now in focus given that all the theatre of the Trump impeachment is over. Throw in that $1.9trn on top of an economy that's already going to be one of the most rapidly vaccinated (the Americans are a bit like us – not great at the containment side but doing a good job of the vaccination bit), and you have a recipe for a very strong rebound.
 
In short, hang on to your oil plays. And for more on inflation, stimulus, investment, oil prices, and plenty more, make sure to subscribe to MoneyWeek.
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Launched alongside the UK's highly popular The Week digest of global and national news in 2001, MoneyWeek magazine mixes a concise reading of the latest financial events with expert comment and investment ideas.

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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