The recent rally had investors of all sizes ecstatic at the prospect of oil rising when in reality it had more to do with short seller contracts coming due. For better or worse oil isn’t going back into the $100 a barrel range or anywhere close unless something drastic happens to cut supply.
A stable and climbing market won’t be sustained based upon rumors or even confirmations that Iran will or won't attend next month’s OPEC meeting in Algeria. Saudi Arabia is still pumping oil at record volumes over OPEC’s protests, and now the Chinese want to export oil products as well. The Saudi’s have increased production, fighting for market share with Iran, Russia and U.S. shale.
The Chinese government will further dampen oil demand, and temper prices, as they are curtailing oil production at hundreds of facilities ahead of the G20 Summit in September, in Hangzhou, to move towards clean air and skies while they are front and center on the world stage.
Further factors weighing against oil rising are potential increased production coming from Iraq, Libya, Canadian oil sands, and a possible ceasefire with rebels in Nigeria that could bring hundreds of thousands of new barrels of oil to an already oversupplied market. Meanwhile, the global economy is not exactly growing at an impressive pace.
With oil flirting with $50, numerous shale drillers have indicated returning to the market. If these heavyweights are willing to drill at much lower prices than seemingly they could a year or two ago, that could lead to downward pressure on crude prices. There isn’t enough demand to chase all the oil the world currently has. Simply put, we could be seeing a replay of 2014 all over again.
But there is a bright side to the negative news. When noted distressed debt buyers are spending hundreds of millions of dollars buying oil assets that is great news for investors with long-term outlooks. Once the U.S. Presidential situation is resolved and other federal and state elections that will also bring stability to shaky markets. Related: Can Fire Ice Replace Both Oil And Renewables?
But here’s where this gets tricky – there are disputed interpretations of the current state of the oil market. Merrill Lynch believes oil will rise significantly the next ten to twelve months, but Goldman Sachs believes the exact opposite. What can savvy, common sense investors attempt to glean from contradictory news? A few ideas to consider when purchasing any oil assets.
Look past the headlines and into companies where there are opportunities to purchase debt into equity ownership. Oil and gas markets have been down this road before, and eventually oil will rise again. Populations continue rising in places such as India and Africa, and while their economies develop, they will continue needing oil and natural gas for long-term economic growth. Energy and growth have direct causation on countries moving in positive directions.
Oil is still an incredible growth opportunity based upon the fact that investment management firms have amassed over $100 billion to purchase energy assets. Banks are no longer allowing energy firms extended credit, or loans to keep companies afloat. Prospects abound.
There is a reason $100 billion has been raised, and now is the time to find companies with solid energy assets that supposedly no one wants or considers investment grade worthy. Wise oil investors won’t pay attention to whether or not Iran is attending an OPEC conference, and instead look for developed or undeveloped fields with mature to spectacular potential on the cheap.
By Todd Royal for Oilprice.com
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