Please ensure Javascript is enabled for purposes of website accessibility

Should Long Term Investors Pay Attention to Oil Market Calls?

By Motley Fool Staff - Apr 4, 2016 at 5:00PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Things can’t stay like this forever. Here's what you need to know about the near-certainty of the oil market rebound.

We try not to make big macro-calls at The Motley Fool, but it's not exactly stretching to say that the climate of the oil industry today is not at all sustainable.

In this segment from the Industry Focus: Energy podcast, Tyler Crowe and Sean O'Reilly go over some recently emerging theories about the massive rebound we might see in the oil market when it recovers. Then, they look at why it's really, really not in any long-term investor's best interest to try and time the market, even with something as seemingly inevitable as this.

A transcript follows the video.

This podcast was recorded on March 31, 2016.

Sean O'Reilly: We've been saying a while how, we're Fools, we're not macro-people, we don't make macro calls, but we know economics, and we know that current oil prices are not incentivizing anybody to find more oil, which relates to our first story today. But, something's going to have to happen to change the current status quo. Recently, Bloomberg put out an article that, in so many words basically said that, when the market rebounds, it could rebound big. Why did they say that?

Tyler Crowe: We always talk about supply and demand. It's kind of the overarching theory when we talk about oil, is too much or not enough supply. And the theory is that there is massive under-investment in the oil and gas industry right now to maintain current production levels. You have the natural decline of oil reservoirs wherever you go. It can be very high in places like shale, where it's up to 60%-70% annually, or it can be very low, it can be... I think, on average, globally, natural decline rates of oil reserves, without any maintenance or repair or trying to bump the numbers, is about 9%.

O'Reilly: Which, the world currently produces, stop me, 93-94 million barrels a day. So, if everybody stopped spending this year, it would drop to the high 80s next year.

Crowe: Right, even less. You're looking at, basically, on any given year, we have to find and replace somewhere in the range of 5-7 million barrels per day, of just wells drying up, just to keep pace. And at the current investment rate, we're under-investing in that level. If you look at the amount that's being spent on exploration, the amount that's being spent on production and development, not only are we seeing a production decline, but if you kind of use that gauge of the under-investment all the way across the value change, we're looking at several years of under-investment that could lead to production declines. So, if that were to happen, once the overhang of oil starts to clear--

O'Reilly: The inventories.

Crowe: The inventories, the excess production, today, bringing Iran back into the fold, and all of these things that people have been terrified about in the market, of, "Oh, it's going to kill oil prices and bring it down to $10 a barrel!" Once all of those things are reintegrated and renormalized and brought into the fold, then we're going to be looking at the situation and saying, "Holy crap, we haven't been spending enough in this industry!" And our production's going to look a little low, supply is going to look short, and then, obviously, prices follow that, and then we start to get the natural cycle of things recycling itself.

O'Reilly: And not only that, but we all know that markets tend to over-shoot, and they probably overshot to the downside, and in order to get more oil on the market, if and when we find ourselves short of supply, it just doesn't seem inconceivable to me that, I don't know, speculators on the New York Mercantile Exchange floor buying all these futures and stuff would overshoot a little.

Crowe: And, again, one of the things that's always been an issue for a long-term investor in this space is being able to sift out the noise when it comes to these sorts of things. You're looking at futures trading 6-12 months, and everybody tries to make these projections years out in advance in those things. But when you look at what you call the forward curve of oil, it's never right. There's way too many factors that go into the daily price of oil. There's thousands of factors, and on any given day, those can change. And normally, what happens with that is that you can take that forward curve and light it on fire and start again tomorrow.

O'Reilly: Really quickly, before we wrap up this section, one of the executives we met when we were in Houston, and I keep mentioning that trip on this show, for some reason, was, they had a chart of the four futures curves at various points in oil history in the past 10 or 15 years, and it was hilarious and laughable how wrong it was. It was staggering.

Crowe: Yeah. The 2008 forward curve said that oil was going to be at $220 a barrel today.

O'Reilly: Then the financial crisis happened. It's just hilarious.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/23/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.