Today we consider oil.
Where’s it going next – up or down? That’s the question we all want to know the answer to, or at least I do, and so that is the question I shall be asking myself today.
Let’s start with some background – and we shall use Brent as our benchmark.
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By the way, a little bit of insider info for you: whenever I write about crude oil, the number of hits my article gets plummets. This has been the case for years. House prices, bitcoin, gold – readers can’t get enough of them. But oil? Few seem to care.
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Perhaps that in itself is a bullish contrarian indicator. I have found it a reliable investment strategy over the years, especially with commodities, to find markets that nobody cares about. Boring markets. It means the hype is still to come.
My trade of the lustrum has delivered nicely
I come to this article with a slightly blinkered view. Generally speaking, I am an oil bull. In early 2016, when it slipped below $30, I declared oil “my trade of the lustrum”. A lustrum, for readers unfamiliar with the word, is a five-year period, so that trade is now maturing.
Our chosen vehicle was not BP or Shell, the first companies that spring to mind as ways to play the oil price. For some reason, unknown to me, both are useless as proxies, so we declared avoid and we are both pleased with and justified by that declaration.
The oil price has more than doubled, and BP and Shell are both down. “Never sell Shell” is the motto. Never buy it, is my advice.
No, our chosen vehicle was BHP Billiton (LSE: BHP) at 700p. Despite being known as a mining giant, oil is in fact its single largest product, and, unlike the ETFs, it acts as a much better proxy. It tracks the oil price and gives you a bit of fizz on top. Brent has roughly doubled since our lustrum declaration, going from $36 to $75. BHP has more than tripled.
We recommended it at 700p and now it is 2,316p.
The noughties was the oil decade. In 1999 oil went below $10/barrel. In early 2008 it was $147.50. A fifteen bagger, no less.
The 2010s began well with Brent trading constantly above $100. Then in mid-2014 two years of horrible bear market saw it drop from $115-odd to $27 by early 2016. That was when we started sniffing around.
It hasn’t been an easy lustrum, well though it began. In late 2018, three years after our declaration, oil was flirting with $87 and we looked mightily clever, as we sat stroking a white cat and telling anyone who would listen how clever we were. By 2020 the oil price has gone negative – negative! – and to this day we remain unsure what happened to the cat.
But we held. We HODLd for dear life like the most committed of bitcoin zealots, and the market rewarded us.
Oil wants to sell off right now, but demand will only increase
Now we are feeling a bit jumpy again. Oil looks like it wants to sell off. In fact, last week it did sell off – it lost ten bucks in barely the blink of an eye. But now it’s bounced back again with impressive vim. Then again, it does now seem to be in something of an intermediate-term downtrend.
The spat between Saudi Arabia and the UAE over oil production quotas seems to have abated, and now the Opec nations together with Russia have agreed to increase their output with the aim of reducing prices and easing pressure on the world economy. The supply boost starts in August.
Please don’t ask me to explain Opec or how that line of thinking works. Surely if you are selling something you want to get the most you can for it, not the least? If you are an oil producer you want a bull market. Especially if oil supplies really are running down – the pressure to get the biggest return intensifies. Surely? They’re not producing oil for the fun of it, or for charity.
It’s always baffled me, and no doubt there is some kind of geo-political shadiness behind the scenes that explains it all, but in the meantime I shake my head and carry on.
BHP, meanwhile, has “gone up a lot”, which shows you the kind of logic I get reduced to sometimes, and often when something “goes up a lot” that means it has to at least pause. Doesn’t it? (No, is the answer).
With some broad brush strokes, oil demand, green energy revolution or not, is set to increase. The Covid setback will look like a blip on a long-term chart of oil demand – falling by around 10% before bouncing straight back – and demand now looks set to hit 100 million barrels per day next year.
I keep banging the drum on this: the Green Energy Revolution is going to increase oil demand. Meanwhile social pressure and government pressure, through taxes and laws, will mean reduced expenditure on exploration and development. The result will be higher prices.
So my outlook is that we consolidate over the next few months, we back and fill. We might even go back and have another look at $50. But in the longer-term, oil goes higher – much higher – and oil at $100 in 2022 is not such a remote possibility.
