Here’s Why There’s a Huge Opportunity in Oil Prices

A pumpjack brings oil to the surface in the Monterey Shale
A pumpjack brings oil to the surface in the Monterey Shale, California, April 29, 2013. The vast Monterey shale formation is estimated by the U.S. Energy Information Administration to hold 15 billion barrels of technically recoverable oil, or four times that of the Bakken formation centered on North Dakota. Most of that oil is not economically retrievable except by hydraulic fracturing, or fracking, a production-boosting technique in which large amounts of water, sand and chemicals are injected into shale formations to force hydrocarbon fuels to the surface. Picture taken April 29, 2013. REUTERS/Lucy Nicholson (UNITED STATES - Tags: BUSINESS ENERGY) - RTXZ5IU
Photograph by Lucy Nicholson — Reuters

“There is no bid for oil.” Those were the first words I heard recently from Bloomberg’s Tom Keene when I turned on the television a little before five.

The media follows mood, and Mr. Keene was expressing the sentiment of crude oil traders around the globe—saturating hopelessness. No one buying. Only selling.


As a socionomist and a researcher who studies how changes in confidence alter our preferences, decisions, and actions, l’d like to propose a different response. Markets bottom on saturating hopeless. That means now might not be the time to sell, but instead to get ready to invest–and not just in crude oil, but across the commodity space.

That crude investors feel hopeless makes sense, especially when you consider the backdrop of many recent news stories. With the U.S. now awash in crude, Congress voted to reverse its peak-in-the-price ban on oil exports. Due to collapsing oil prices, the Russian ruble is in freefall. And reports coming out of the Paris climate change talks suggested that last week’s pact marked the “beginning of the end of fossil fuels.”

Remarkably, after a 65% decline, many are projecting another 50% decline in oil prices, with the cost of crude expected to remain low for years to come. Goldman Sachs (GS), for example, is forecasting $20 a barrel crude prices ahead. Even more, investors now believe that OPEC is completely unwilling and unable to do anything to change the downward trajectory for the price oil. The once all-powerful cartel has been upended by bitter infighting, intense national self-interest and global oversupply.

But the bad news for crude doesn’t stop there. From the unusually warm weather in the US to the Federal Reserve’s decision to raise interest rates to slowing global growth ahead, everything is seen as a demand headwind for crude. Meanwhile, crude oil overcapacity and oversupply reigns. There is so much crude out there we’ve now run out of places to put it. As one headline put it recently, “Oil Tankers Are Filling Up As Global Storage Space Runs Low.”


As I see it, investors now have every reason to sell and absolutely no reason to buy. Not only are current conditions horrific, but they’re forecast to just get worse.

But please appreciate that the same can be said for many other sectors of the commodity space, especially the metals. Gold was recently analogized to a “pet rock.” Mining companies are slashing capital expenditures and jobs. The currencies of commodity-driven countries like Brazil and South Africa are in freefall, with both countries announcing new finance ministers–and in the case of South Africa, two finance ministers, as the naming of the first replacement did nothing to stem the country’s currency collapse.

Then there was this from a new report from the International Energy Agency last week: “The golden age of coal seems to be over . . . Given the dramatic fall in the cost of solar and wind generation and the stronger climate policies that are anticipated, the question is whether coal prices will ever recover.”

Just pause to think about that. Experts are now saying coal is dead and will never come back. Talk about expressing hopelessness.

Everyone from commodity investors to foreign exchange investors to stock and bond investors to public policymakers to purchasers to suppliers to even the voters in commodity-driven countries feels—and more importantly is expressing—a sense of extreme of hopelessness. But based on what I see, with or without one final scare-the-lights-out of you whoosh lower, we’re within moments of a multi-month, if not multi-year low in crude oil and other commodity prices.

I realize that to buy under these conditions would be laughable, but that’s precisely why the opportunity is great. The best time to buy is when investors have to relive their loneliest and most awkward middle school lunchroom moments. To buy commodities now means to go against the entire and very vocal cool crowd.

While few will be willing, history suggests that today’s saturating hopelessness makes this is a great time to buy.

Peter Atwater is the president of Financial Insyghts LLC and the author of Moods and Markets. He is a frequent writer and speaker on the role of confidence in decision making.


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