While no one knows exactly what oil prices will do in the future, what is for certain is that the commodity is much cheaper than it used to be. But that doesn’t mean retail investors have to sit on the sidelines.
After hitting a record high greater than $140 a barrel in 2008, the global benchmark oil price is now around $50, and there is a school of thought that prices will remain lower for some time.
Dennis Gartman, publisher of the The Gartman Letter, a market commentary publication, sees oil in the $40-to-$70 range for years. “The era of manifestly high oil prices is behind us,” he says.
Many think oil prices will remain depressed because of a lack of a demand catalyst, says Will Rhind, CEO of GraniteShares, an exchange-traded fund company planning to issue multi-asset funds that include exposure to commodities. That’s against a backdrop of high U.S. oil inventories and more production coming online from shale formations, he says.
[See: The Best Energy Stocks to Buy for 2017.]
“We have plenty of oil being supplied into the market,” he says.
Oil prices are driven by supply. A lack of an immediate extra demand source that would move prices meaningfully higher is in contrast to recent years when Asian demand driven by China, coupled with tight supply, helped push oil to its record. Chinese oil demand growth has slowed as it transitions from a manufacturing-driven economy toward one fueled by consumer demand.
At the same time, oil from shale formations — where a process called hydraulic fracturing, or fracking, is combined with horizontal drilling — has supercharged U.S. production and given domestic producers increased sway over global oil prices. This shale production is also much cheaper than oil produced from deep-sea fields.
Now that U.S. drilling companies have gotten good at fracking and horizontal drilling, international companies will be catching up overseas, potentially adding even more supply to the market, Gartman says.
Any change in oil prices is likely to come from the supply side, says Jeremy Bryan, portfolio manager at Gradient Investments in Minnesota. He sees the commodity ranging from $40 to $60 per barrel for the foreseeable future. Adjustments in producer capital expenditures or cuts in production from OPEC nations could push that range to $50 to $70, he says.
U.S. frackers that can break even at a lower oil price and bring new production on quickly will help keep a lid on prices, while OPEC members that need higher oil prices will keep a floor in place, says Chris Bertelsen, chief investment officer of Aviance Capital Management in Sarasota, Florida.
Of course, new tension in the Middle East would be the wild card for prices, he says. “I think it’s going to be lower, longer.”
Different ways to invest in oil. There are several common ways investors can get exposure to the oil market. They can invest in public oil-related companies directly. Or they can buy shares in ETFs that invest in those companies or that invest in oil through the futures market.
An ETF that invests in oil companies, such as the Energy Select Sector SPDR Fund (ticker: XLE), can be a good way to express the view that oil prices will rise, Bryan says. That fund pays a dividend and offers exposure to the fundamentals of quality companies such as Exxon Mobil Corp. ( XOM) and Chevron Corp. ( CVX). And it benefits when oil prices rise, he says. The XLE has $16.4 billion in assets under management and carries an expense ratio of 0.14 percent, or $14 annually per $10,000 invested.
[See: XLE: This Energy ETF Is a King-Sized Winner.]
Bertelsen notes that the fund has lots of liquidity. But because of the mix of companies held, it isn’t yielding as much as some single companies. It also contains companies that can be more volatile, he says.
A look at companies. Energy stocks rallied after the presidential election, but there has since been a pullback. This offers investors a chance to start looking at companies that could potentially be bargains, Bryan says.
Investors should take advantage of those companies when oil prices are in the $40s, he says. But when oil rises to the higher end of its range, it may be time to sell out of some names.
One company that could be a bargain is explorer and producer PDC Energy ( PDCE), Bryan says, noting its guidance on production and its reduction of production costs.
He also likes oil field services giant Schlumberger ( SLB), pointing to its 2.7 percent dividend yield and the company’s management. After falling more than 11 percent this year, SLB shares could have room to move higher, he says.
“It’s a good, solid growth company,” Bryan says.
Bertelsen says that the dividends paid by high-yielding multinational oil companies Exxon, Chevron, Royal Dutch Shell ( RDS.A) and BP ( BP) can provide an important revenue stream for retail investors, he says.
[See: 20 Awesome Dividend Stocks for Guaranteed Income.]
With these dividends, investors get paid regardless of what oil or share prices do, he says.
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The Lower-For-Longer Prognosis for Oil Stocks originally appeared on usnews.com
