Why oil is still a long-term buy

Sometimes, says Merryn Somerset-Webb, it pays to ignore volatility in markets, especially when it comes to oil. Find out why you should ignore the noise and buy into commodities.

I've just come back from a two-week holiday during which I read no newspapers, watched no television, listened to no radio and had absolutely no conversations whatsoever about the world's financial markets. It was an absolute delight.

When I got back and turned on my computer I began to wish I'd kept in touch just a little: it was clogged with hundreds of e-mails telling me about all the things that happened while I was away.

In just a couple of weeks, the gold price had fallen back to $600; oil was down to $60 a barrel more than 20 per cent below its high back in July; all the resource stocks had dropped; and the Amaranth hedge fund had managed to lose an extraordinary $6 billion (£3.2 billion) in a week on a few bad bets in the natural-gas market.

Away from commodities, the American stock market has regained all-time highs, there's been a coup in Thailand, and in Britain Nationwide has announced that, in defiance of the interest-rate rise, and indeed of all known logic, UK house prices rose 1.3 per cent in September. What a lot, I thought as I trawled through my e-mail, I have missed.

Then I realised that I have actually missed absolutely nothing.

Oil price: only the mega-trend matters

Take the case of oil. The recent fall in crude prices is apparently due to a wide variety of things: to hopes that sanctions against Iran will now be avoided as the country's government seems to be backing off from its immediate nuclear ambitions slightly; hopes that BP will get its closed Alaskan field back on stream sooner than first thought; the fact that the shooting has stopped in Lebanon; and the end of the so-called "driving season" in the US.

None of these factors has really changed anything, though in the great scheme of things they are pretty trivial.

Iran may have delayed a bit of testing, but its government remains the same, as do its intentions. That the guns are quiet in Lebanon hardly means peace has come to the Middle East. The BP closure only affects the overall supply of oil in the short to medium term and the driving season will roll around again in a few months.

I'm not a trader (it's far too much work), I'm a long-term investor, so none of this short-term stuff should really make much difference to my portfolio.

What matters to me is the long-term mega trend in the oil market the ongoing demand from emerging Asia, from China and India in particular. Regardless of the politicking in Iran and the bother at BP, that mega trend remains intact, as does the case for my investments in the big oil companies.

Mining stocks: the commodity bull is still running

The same goes for the miners: again there is a lot of distraction in the metals markets because of worries about US growth, but the basic trend remains. The average commodity bull market lasts over 20 years, giving this one another 15-odd to go.

Commodity markets are famously volatile (20 per cent is not an unusual amount for either the oil or the gold price to move in a matter of weeks) so there will be ups and downs along the way some lasting weeks, some a few years but the odds are that those who ignore the noise and buy into the market will be pretty pleased with themselves in a decade. You can buy in either directly via exchange-traded commodities or via the big mining companies, which have cheap valuations and strong balance sheets.

It's hard to ignore detail when you are investing. We are hit with huge amounts of new information every day and we tend to think that the more we absorb the better we will invest, but this just isn't true. There is a great deal of research about (to say nothing of common sense) that suggests taking in too much information actually makes decisions harder to get right.

Behavioural finance expert James Montier points to four academic studies in his splendid paper The Seven Sins of Fund Management, all of which categorically conclude that having more information does not help us make better decisions. Instead, in many cases, the confusion it generates pushes us into making rather worse ones.

Next time I go on holiday for two weeks I'm going to stick with the rather nice idea of existing in an information vacuum while away, and on my return I am going to delete the 800 e-mails waiting for me unread.

First published in The Sunday Times 1/10/06

Recommended

The charts that matter: inflation gives markets a scare
Global Economy

The charts that matter: inflation gives markets a scare

Markets took fright this week as it looked like inflation was picking up in the US. Here’s what happened to the charts that matter most to the global …
15 May 2021
Is the world at the start of a commodities supercycle?
Commodities

Is the world at the start of a commodities supercycle?

Surging global demand has driven both copper and iron-ore prices to all-time highs.
14 May 2021
Is it time to top up on gold? Or should you wait for a better opportunity?
Gold

Is it time to top up on gold? Or should you wait for a better opportunity?

Fears of inflation, money-printing and a global pandemic are all conditions that should drive the gold price higher. But it has been struggling. Domin…
12 May 2021
Here is why inflation will send gold soaring
Gold

Here is why inflation will send gold soaring

Gold prices have been rising over the past month as fears of US inflation resurface. Saloni Sardana explains whether this could usher in a new bullish…
11 May 2021

Most Popular

US stocks look expensive – here’s what to own instead
Investment strategy

US stocks look expensive – here’s what to own instead

Right now, US stocks are among the most expensive in the world. So if you want a decent return on your investments, you should look into diversifying …
17 May 2021
How will Joe Biden’s capital gains tax rise affect crypto prices?
Bitcoin & crypto

How will Joe Biden’s capital gains tax rise affect crypto prices?

The US president wants to increase capital gains tax – and that’s going to hit a lot of American cryptocurrency speculators. Saloni Sardana looks at h…
14 May 2021
Inheritance tax planning: the rules around gifting
Inheritance tax

Inheritance tax planning: the rules around gifting

There are plenty of legal ways to minimise an inheritance tax bill. Perhaps the simplest is to give away assets to reduce the size of your estate. Dav…
11 May 2021