The most severe oil collapse since the credit crisis has caused many energy stocks to crash to six-year lows and spurred countless "experts" to predict when the oil markets will bottom and where they might head next. In reality, no one can accurately predict the short- to medium-term price of oil -- nor should most investors try -- but that hasn't stopped legendary oil tycoon T. Boone Pickens from boldly predicting that oil will return to $100 per barrel within 12-18 months. On the other side of the argument, Saudi Prince Alwaleed bin Talal is even more confident in his counter claim "I'm sure we're never going to see $100 anymore."
However, now, OPEC's Secretary General Abdulla al-Badri has upped the speculative prediction stakes with the boldest prediction of all -- that oil prices have not only bottomed but may soon soar past $200 per barrel.
There are two reasons I think long-term investors shouldn't partake in the noise of short-term oil price predictions, and why the Secretary General of OPEC is most likely wrong about oil prices soon hitting record highs.
Large oil investments will be needed to meet global demand
Mr. al-Badri's main argument that oil could end up over $200 per barrel is that the recent oil price crash has caused oil companies to slash their investment budgets for the year, in some cases by as much as 50%.
Given the long-term forecast of rising global needs for oil, long-term underinvestment might indeed lead the world oil market to swing from a glut to a shortage that could send oil prices higher. Here's a glimpse into what level of production and additional investments will be required to match global demand.
Failure to meet this increasing demand, however, would require oil companies to underinvest by not billions, but trillions of dollars over a period of several years.
Given that the International Energy Agency estimates the world oil glut to currently be about 1 million barrels per day and demand likely to rise by year end to meet current global supply, I think it unlikely that long-term oil prices will remain low enough to warrant several years of massive underinvestment by oil companies.
In addition, the assets of those U.S. shale producers that are in deep financial distress won't just simply disappear. Rather they would likely be snapped up in a wave of mergers and acquisitions that would leave the better financed oil companies in a strong position to ramp up investment and production relatively quickly should oil prices recover to even a fraction of the level Mr. al-Badri is predicting.
Meanwhile, Saudi Arabia, which possesses 2.8 million barrels of daily spare capacity, is patiently waiting to steal market share from U.S. shale producers and is poised to help assure that the kind of supply shock that would send oil prices up almost 300% doesn't happen.
Oil price speculation is for the birds
As fun as it is to hear billionaires, oil tycoons, and OPEC oil authorities bat around crazy-sounding oil price predictions, long-term investors would be better served by maintaining focus on the fundamentals of great oil companies instead of price prognostications. The truth is that no one can predict the short- to medium-term price of crude with any consistent accuracy. Fixating on the price of oil, which as we've seen recently can swing wildly based on near-term capital investment changes and as a result of the possible geo-political-economic machinations of Saudi Arabia, isn't likely to make long-term investors much money. Rather focusing more on the tried and true fundamental approach -- a buy and hold strategy designed with attention to a company's dividend strength, sensible valuation, and businesses with strong balance sheets that can withstand oil price volatility -- is much more likely to help you beat the market in the long-term.