We know, we know, you don’t want to hear about oil. No one seems interested in the all-important commodity at the moment, but that is exactly why you might want to pay attention. Oil stocks have had a terrible decade—down 10% while the S&P 500 rose almost 300%, hence the derision they face from investors. Prices are so low that oil now composes just 4.5% of the S&P 500, very near to the lowest ever (in 1999). The big question investors need to be asking themselves is “is this peak pessimism”?
FINSUM: We think oil stocks offer some value right now, but what will be the catalyst to make them rise? A big economic boom seems unlikely at present. Oil missed this cycle and it is still oversupplied. We would stay away.
This wide-ranging Financial Times piece on oil argues that the commodity is going to have a harder time rising from here than it has getting to its current $50 mark. Oil started the year terribly, only to see a huge recovery that has boosted everything from oil stocks to junk bonds. However, the piece cites UBS in saying that 70% of oil’s recovery has been due to temporary supply disruptions, 20% down to a weaker Dollar, and only 10% from higher demand. As such, the piece indicates that should supply pick back up, as it is expected to, there is little reason to expect prices to rise. The article also points out the economic risks, as a potentially rising oil price would likely hurt the fragile consumer spending gains seen in the US recently.
FINSUM: This is a broad and not particularly focused article, but it takes a wide view of the oil market and leans towards a bearish position on further gains.
Source: Financial Times