You may remember back in 2008 there was a debate about whether financial market participants (“speculators”) and the billions of dollars they moved around every day were impacting prices to such an extent that it severely widened the gap between what was “real” in the world and what the markets were supposedly telling us. Efficient market believers want us to think that the market always reflects reality and things rarely get off track. As we saw in 2008, however, market prices often did not accurately gauge the underlying fundamentals of the financial industry. Many companies were in trouble, no doubt, but when pretty much every single asset is mis-priced at the same time, there are clearly instances where the short-term traders have overcome the system regardless of what the underlying fundamentals truly are.
I am not saying that today’s oil market is anywhere near as mis-priced today, but when the price of a barrel of oil fetches $100 in late July and then in December drops to $58, when very little in the world has changed during the interim, investors need to ask themselves if the daily ebb and flow of the capital markets, and the computers that largely control that flow these days, is materially impacting the price action we are seeing in the oil market.
Is the U.S. energy production boom helping contribute to a temporary glut of oil? Yes. Has the supply-demand picture shifted so much that $58 oil reflects the true balance between supply and demand in the end markets for crude oil? I suspect probably not. Now, if $100 per barrel was the “wrong” price based on supply and demand then you can certainly argue that prices should have come down quite a bit. But when prices drop so quickly and then the fall accelerates lately as it has, I have to think financial “speculators” and short-term hedge fund traders are controlling the near-term price quotes.
CRUDE OIL PRICES HAVE DROPPED BY 43% IN LESS THAN 6 MONTHS
If you think we will look back a year or two from now and think $58 oil was a bargain, as I do, then now is the time to think about increasing exposure to the sector. Below are some of the names I like along with their current quotes (long all except EOG as of this writing).
Mega-cap integrated dividend payer: BP PLC (BP) $36
Large cap E&P growth: EOG Resources (EOG) $86
Small cap E&P growth: Halcon Resources (HK) $1.95
Pipeline infrastructure: Enlink Midstream (ENLC/ENLK) $29/$25