The Potentially Rising Cost Of Oil

Oil hasn't been the highest performing investment/commodity as of late.  For the past several years, oil has been at somewhat of a historically low price (all things considered; like inflation etc.).  There have undoubtedly been various currents flowing towards this end, among them OPEC members increasing outflow from their reserves, the rise of the "Bakken", etc,. and the energy commodities being produced in record amounts via fracking etc., technologies, and the push for lower carbon emissions, and the sort of various "Green" initiatives that have become almost commonplace in the past decade or so.  None the less, oil and petro-chemical related energy sources may remain "king" of the energy sector for quite some time, and perhaps the world may come to acknowledge this sort of glaringly present reality in the coming years, and in turn their may be price-increasing re-pricing of said petro-chemical commodities and the investment opportunities associated with them.

Various factors may sort of promulgate into forming the economic/political reality that may drive oil higher in price in various regards.  Amongst these reasons may involve/include, such factors as those that may be deemed geo-political factors, monetary policy related factors, macro-economic factors, and economic factors on a company by company level as-well. 

- Geopolitical factors

 As of late the Trump administration has been suggesting that it is, in so many words, not the biggest fan of the "Iran Deal" which sort of loosened various regulations on Iran, and in general sort of "lessened" the tension being placed on Iran in general.  Said sort of climate of sort of "bartering" with Iran was sort of put in place towards the last term of the previous administration per se.  However, now that those sort of conciliatory tones are perhaps diminishing, it may be likely to have a sort of heightened tension in the region, which is of course known for it's local oil production and energy transportation routes, and hence perhaps sort of allowing their to be an "opening" for notions of rising oil prices to sort of filter to the surface if one will.  Counter to this may be such items as China for example and its recent 2020 targeted "Green initiatives" etc.(, however, these of course may still be a long way from bearing fruit in a meaningful macro-economic way perhaps.

- Monetary policy related factors, macro-economic factors, and company factors (on an idiosyncratic level)

The "strong dollar" has perhaps been in a way been sort of keeping the oil price in check potentially.  As the US dollar became a sort of perceived "bastion" in the flight to safety that has sort of taken hold post the ~2007 etc., financial crisis, the US dollar and the US debt-securities there-associated have increased in "value" relatively speaking.  This isn't only true of the US Dollar, as various "developed" countries are considering offering, or already offer some form of negative interest rate bond(e.g. we'll almost guarantee return ~99% of your money(in present dollar or other currency values/prices), and you can pay us ~1% for the favor).  In any case, with "flight to safety" being a theme although less acutely so, relative to closer to the "crisis" its self perhaps, now that much of that flight has perhaps already taken place, we now have a situation in which the "price" of assets perceived to be "safe-havens" have been inflated, Capital Expenditures, by companies in general are down in general(apart from stock buy-back and M&A) (there is some increase albeit in recent years), and in turn we see less "expansion" and in turn less investment into perceivably risky assets like commodities and risky projects of various types in general perhaps.  This phenomenon in general leads to a sort of lack of interest in commodities and oil, and hence helps perhaps keep the prices stable, and in following the trend they were on, keeping a previously somewhat "low" price in oil etc., on the table relatively speaking perhaps.  To put this into an analogy it might be safe to compare this to saying that "it's harder to start flying without running first" etc., and perhaps a declining "flight to safety" mentality may help stimulate this interest/movement in energy and other less "safe" markets in general perhaps.  The reason this is apropos perhaps, is because the current Fed commissioner is supposedly not on the short list for candidates for the next fed chairman per se, and that this current US administration hasn't made it too clear if they will support the low-interest-rate policies that marked said stances' of the previous administration and in turn, its predecessor per se.  Hence, if these interest rates change, and the "flight to safety" mentality abates to some extent, we may see more investment into cap. ex, hence corporate expansion of operations on an individual company level perhaps, perhaps also in turn increased energy demand growth, and in turn perhaps increased demand for "traditional" energy sources, relatively speaking, like oil and natural gas per se, etc.  A counter argument to this might include the question/statement; "if green energy is the way of the future, then green energy will rise in output to meet said new needs".  While this may be a keen observation of recent rhetorical trends and to some extent some recent sort of superficial policy trends put forth from various large world governments etc., this may not reflect the reality per se, that a tiny proportion of the US and China's energy consumption portfolio is composed of renewable energy, and that hence any increase in energy demand will most likely perhaps be met by oil/natural gas demand/supply as opposed to the overnight erecting of fields of countless wind turbines etc.  For a pictograph of current US energy consumption sources for example one may refer to this link.

-Thoughts on oil related investments in general

Hence, one may ask oneself what is the point of reflecting upon all this relative to investments etc.  The answer to that question may lay in the potential opportunity to "snap up" oil and energy related stocks for less than they may otherwise go for per se.  As measured by their dividend rate oil companies are arguably trading at relatively low figures.  Though Exxon (XOM) and Chevron (CVX) will always be sought after major-movers in said sector, and hence perhaps have lower yields than the rest of their sector "brethren," quite a few major energy companies stocks are currently yielding ~5+% dividend yields, which for some of the quite well established companies in question is arguably quite a decent deal perhaps.  When one factors in a potential increase in oil price, and the potential this may have on the prices of these stocks in question regardless of dividend rates, then one may have the opportunity to buy the dividend of these stocks in question "low" and in turn also receive a fair amount of capital appreciation related value increase in one's portfolio of investments perhaps, as said investments prices go "high".  This is of course speculative perhaps, regarding the price increase potential, but this potential rise in the price of oil, may present quite the opportunity to investors, and particularly those who get in relatively "early" in general perhaps.

Whether one is an oil bull, or more solar power impassioned, I hope everyone's investing is going alright, and thank you for your time, and for reading.

Disclosure: None.

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Comments

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Dick Kaplan 4 years ago Member's comment

Any updates to this? By the way, your first image source no longer works.

David B. Johnson 6 years ago Member's comment

Snap up the #oil stocks now while they're cheap. But keep on an eye on developments in alternative energy which will eventually surplant oil completely.

Bill Johnson 6 years ago Member's comment

if it wasn't clear, I enjoyed this. Looking forward to more by you.

Angry Old Lady 6 years ago Member's comment

Yes, good stuff.

David Stafford 6 years ago Author's comment

Thank you :)

Bill Johnson 6 years ago Member's comment

Yes, I think we all feared the good days of cheap gasoline wouldn't be able to last forever.

Doug Morris 6 years ago Member's comment

Good read, thanks