The oil price just keeps falling: is it time to buy?

published 12 January 2016

150116-oil-price — The oil price has fallen by more than 15% this year alone

Today, I wanted to take another look at what's going on with the oil price.

It's been a terrible start to the year for anyone who sells oil, and a rather better one for anyone who uses a fair bit of the stuff. The price has fallen by more than 15% this year alone, down to near $30 a barrel.

And analysts who not so long ago believed that oil could never go below $100 a barrel again are now lining up to predict oil at $20 a barrel.

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So is now the time for a contrarian punt?

We haven't yet seen the worst for the oil sector

The price of Brent crude slid to below $32 a barrel yesterday. Morgan Stanley suggested that it could fall into the $20s which when you think about it, is hardly radical given that $29 is only a couple of bucks away.

It's far from being the only investment bank to call for $20 oil. And hedge funds who are rarely as "smart" as their investors wish they were now have near-record levels of short bets against the oil price. BP and Shell are at their lowest levels since pretty much the 2008 financial crisis.

And there are any number of things that could turn the oil price around. Oil cartel Opec could decide to stop pumping. "Tension" in the Middle East could turn into something even worse than normal. It wouldn't be the first time that oil has seen a "V-shaped" recovery.

Yet the horrible reality is that this doesn't yet "feel" like a sector that's seen the worst.

We need to see a biggie go bust. We need to see some proper capitulation-level carnage going on. At the very least some dividend cuts.

I'll be keeping a close eye on the sector, but I don't think it's time to pile in yet. My colleague David C Stevenson wrote about the one energy investment trust he'd consider buying right now in the most recent issue of MoneyWeek magazine. You can see the piece here.

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John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.