The oil market has had a great year. US oil prices have risen from $45 a year ago to over $70 recently. Big oil producers have successfully worked together to constrain output in an effort to boost prices. However, that condition may be set to change. OPEC has already warned that it may have to increase supply for its member producers, and now the country has a meeting in Vienna next week where that eventuality will likely be decided. One portfolio manager put it this way, saying “OPEC countries will be contemplating production levels that could potentially tip the supply/demand balance currently in place, leaving crude oil pricing susceptible to oversupply”.
FINSUM: We do not think the global cooperation with producers will last, as each wants to boost production as a way of increasing revenue.
Oil is an enticing commodity right now. Global cooperation on constraining output has led to strongly rising prices, which coupled with margin improvements during the downturn, means the sector looks ripe for great profits. But where is the best place to put money? Barron’s has tapped a top fund manager for his picks, and they are interesting. Both picks are exploration and production companies, and are Kosmos Energy and Apache. The former is a South American E&P that focuses on offshore drilling, while Apache is Houston-based and focuses more on gas.
FINSUM: These are pretty contrarian bets on small E&P companies. These seem quite high risk/high reward.
Oil has been doing very well of late. All of our readers have probably noticed it at the pump. Brent crude is currently trading around the $80 per barrel market, and all parts of the oil sector are excited after a multi-year slump. However, the market has two big problems on its hands. The first is China’s secretive oil reserves, which could be used to push prices down if the Chinese start pushing their oil into the market. Secondly, The US oil industry wants to increase output significantly and has asked OPEC for a 1mbd hike, which would once again lead to an oversupplied market.
FINSUM: We acknowledge that oil is doing well, but we are worried it will be hard to maintain current pricing because it basically relies on an oligopoly structure (cooperation on price) which we don’t think is ultimately tenable.
It might be a great time to buy gold, or at least that is what one of the top gold funds on the street is saying. VanEck International Investors Gold fund, which has routinely outperformed peers, says Gold is finally likely to break out its narrow trading range. Gold suffered a terrible bear market from 2011 to 2015, and prices are low and there is little selling pressure. This, coupled with heightened geopolitical risk and inflation, mean that gold seems likely to find a catalyst for strong performance.
FINSUM: We do agree that prices are low and there is little selling pressure, but there have been plenty of other times there were geopolitical catalysts, so it is hard for us to get behind that notion.
Oil has come a long way over the last year, and light years from two years ago. Brent crude is now trading around $80. That has some worried that this big rally might be running out of steam. However, some say it is only in its 2nd or 3rd inning. With that in mind, Barron’s has put out 8 stocks to ride the boom. The big winners seem likely to be the refiners, says Morgan Stanley, who sees oil entering a “golden age”. Some stocks to look at include: Marathon, Phillips 66, Valero Energy, Thai Oil, Repsol SA and more.
FINSUM: Morgan Stanley has done some good analysis of the market, especially looking at future oil supply versus demand, and seems bullish on prices.
Oil prices have risen spectacularly over the last year, with Brent crude now trading above $80 per barrel. However, the question for investors is what to do about the rise. Have they already missed the gains? Additionally, oil has the complication of being difficult to invest in directly because of the cost of rolling over futures positions. Therefore, the best way to take a position in oil markets is through several ETFs. The tickers to look at span from those covering major oil companies to those more weighted towards E&P companies. Here are some of the funds: VDE, XLE, IXC, IYE, XOP, OIH, and USO.
FINSUM: We suspect that exploration and production companies will gain the most from recent price rises as their businesses will be most directly impacted by gains (just like they were most hurt in the downturn).