The following is a post by MPFJ staff writer, Kevin Mercadante, who is a professional personal finance blogger, and the owner of his own personal finance blog, OutOfYourRut.com. He has backgrounds in both accounting and the mortgage industry.
Oil prices have been collapsing since the middle of 2014. There have been front page stories, and widespread speculations, that the price is heading still lower. But in an ironic twist, that applies to oil in particular โ and energy in general โ the sector may be worthy of buying into. It really is time to take a serious look at energy stocks.
The Time to Buy is When the โBlood is Running in the Streetsโ
That saying has been credited to Baron Rothschild (of the Rothschild family financial dynasty), and it has been a mantra on Wall Street since he was first believed to have said it back in 1871. As gruesome as it sounds, it makes perfect sense. Itโs a crude version of another popular investment saying, buy when everyone else is selling, and sell what everyone else is buying. Or more simply buy low, sell high.
Right now the energy sector has entered a low phase when the rest of the stock market has pushed forward into still higher record territory. There are few sectors in the market where a buying opportunity has become more obvious than is the case right now with energy.
After a gradual multi-year increase in the price of oil, the price has collapsed since June of last year. That has largely flushed the speculators out of the energy sector, leaving prices based on the fundamentals of the underlying companies. If you are a value investor, this is exactly the type of investments youโll be looking for.
An industry-wide purge like what energy is now seeing presents a sector-wide buying opportunity that comes along no more than once in a decade.
Oil Has Always been Volatile
This is an excellent time to remember that the price of oil has always been volatile. This
Crude Oil Price History Chart proves the point. The trend lines on this chart look like the teeth of a very jagged saw. There are times of price spikes, followed by a steep declines, which are then followed by a more steady recovery in price, sometimes to new record highs.
The most recent spike pattern took place in 2008, which isnโt that long ago. In June of that year, the price of oil people up over $133 a barrel. But by December of the same year, it was down to $41. But then notice that by May of 2011 โ less than 2.5 years later – the price of oil climbed back to over $110. From there it traded in a narrow range of between $88 and $106 a barrel until June of 2014. It has since fallen to the $50 range and even lower.
If we look at the historic performance of oil, itโs clear that it is currently trading near a major multi-year low. Yes, it can certainly continue falling from where it is right now. But the likelihood of some sort of significant price recovery โ one of several years in duration โ is much more likely.
The Industry has been Purged – There are Deals Everywhere
As measured by the Dow Jones Industrial Average, general stock prices are up roughly 5% since the middle of 2014. However, in looking at the performance of the Vanguard Energy Index Fund (VENAX), energy related investments are down about 20% in the same space of time.
The entire energy investment spectrum has been purged by the dramatic fall in oil prices. This has created investment opportunities of the sort that come along only about once in a decade.
With the rest of the market being richly priced, energy is one of the few major sectors that represents a buying opportunity in the current market environment. And since we know that oil prices will bounce back – sooner or later โ itโs one step short of guaranteed play, at least for the long-term investor.
The World Still Canโt Live Without Oil
Thereโs always the possibility that oil prices could fall even more than they have so far. A deep global recession can depress the demand for oil, that will cause prices to continue falling. Thereโs also the possibility that one or more cash dependent oil producing nations could ramp up production in an attempt to gain greater market share.
But thereโs also at least an equal possibility that political instability in one or more oil rich countries could take most or even all of that countryโs production off-line. If that were to happen, the price of oil would spike immediately. And an improvement in the global economy would have a similar effect, though it would happen more slowly.
The bottom line is that the world still cannot live without oil. All of the technological changes that have occurred in the past 40 years have not altered that fact. Oil is a basic economic and industrial commodity and itโs here to stay. Anytime the price of a base commodity tanks, thatโs a sign to begin looking for investment opportunities in that sector.
Energy May be An Excellent Diversification Against a General Market Decline
Commodities have often been viewed as a counter play on stocks. Though precious metals โ gold in particular โ get most of the attention in this area, energy is probably even more significant.
Commodities are seen as more valuable at times when paper assets are losing their value. That certainly would be the case in a general decline in the stock markets. Market disruptions cause money to move from one asset class to another. And in general, money tends to move into underperforming assets during such a decline.
Given that energy is an underperforming asset during an otherwise strong market, it could become part of a general flight to safety in a major market decline. That can make it an excellent diversification against a disruption in the stock market.
That doesnโt mean that itโs time to go headlong into energy-related investments. But this is clearly a time to begin investigating the possibilities in the sector. The speculation has largely been driven out of energy investments, providing a clearer picture of the strength of the underlying companies. Itโs likely that there are some investment candidates out there that will give you continued bullish returns even when the overall market turns bearish.
How about you all? Do you currently invest in energy stocks/ETFs/mutual funds? Why or why not?
Share your experiences by commenting below!ย
