What the wise guys say about $20/barrel oil
Crude oil crested $50 per barrel this week, and the commodities markets have exploded in volatility. What are the institutional investment professionals saying — and more important, where is their money going?
The conventional wisdom had it half-right a year ago — most oil industry analysts figured the price of crude oil would sink to $50, but few predicted it could sink to as low as $40 or even $20 per barrel, as some experts are now saying - possibly right before the Christmas holidays.
T. Boone Pickens has an estimated net worth of $1.4 billion. To do that, you have to get plenty of predictions correct, which Pickens has done time and time again in the global energy markets.
But one recent prediction the chairman of BP Capital Management is looking more and more to have gotten wrong was his call for $70 per barrel oil by the end of 2015.
“I thought worldwide demand would go up — and it has,” Pickens said in an Oct. 8 interview with CNBC. “The latest from the International Energy Agency shows demand is already up about 1.7 million barrels a day. I thought supply from the United States would go down — and it has. Companies have been laying down rigs, and U.S. production has dropped by 500,000 barrels a day since June.”
Pickens blames OPEC, which has a “pedal-to-the-metal” mindset on oil production, boosting supply by one million barrels per day, even as oil prices have remained low throughout 2015.
Granted, 2015 still has a ways to go, but with crude oil currently at around $50 per barrel the real money on Wall Street is betting it will go in the opposite direction pegged by Pickens, possibly down to as low as $20 per barrel by Dec. 31.
“Oil prices are down as they trade off the psychological benchmark of $100 a barrel since the second half of 2014 following a few years of rather steady trading between 2010 and the first half of last year,” states Wall Street Analyst, in an Oct. 2 research note. “In a nutshell, oil prices are currently trading below $50 a barrel, impacted mainly by demand and supply extremes; oversupply versus low demand.”
The question in energy trading markets, and in Wall Street watering holes is a simple one today — how low can oil prices go?
Some industry insiders say $20 per barrel is a realistic target, despite a recent rally in oil markets that saw crude spike upwards by 7 percent. “This rally was reminiscent of the late August surge, and was likely again exacerbated by both positioning and technical,” notes Damien Courvalin, a commodity industry analyst at Goldman Sachs (NYSE:GS).
Technically, Courvalin calls for oil to settle at $40 per barrel over the next six months. But his “worst case” scenario says $20 per barrel is in play over the same time period.
“While not our base case, the potential for oil prices to fall to such levels, which we estimate near $20/bbl, is becoming greater as storage continues to fill,” he said in a September 2015 research note.
Gene Epstein, the chief economic analyst at Barron’s concurs with that worst-case assessment, also calling for $20 per barrel oil, although his call was made in August, one month ahead of Courvalin’s estimate.
Then there’s Citi, which has one-upped everyone, with repeated calls for $20 per barrel, once in February 2015, and again in August 2015.
In the meantime, look for energy plays that tend to outperform in bear oil markets. Start with global supertankers, which are in high demand for storage as industries load up on oil. Then there’s global biofuels and U.S. shale developers, both of which should step into the breach and prosper in a market environment that should remain soft over the next several years.
Most industrial stocks should also perk up in a low-cost oil market. The World Bank estimates that a 50 percent decline in oil prices “could be associated with a 0.7-0.8 percent increase in global GDP over the medium term.” If global GDP does rise, offsetting expectations of a potential global recession, the direction of the oil market may turn on a dime, setting up conditions for a possible squeeze, giving credence to Pickens’ original predictions.
In the meantime, even if Pickens is wrong in his call for higher oil prices, there is no reason investors shouldn’t try to position themselves for making money, in the short- and long-term, with oil prices tumbling at the low end throughout 2015 and beyond. Quite possibly, to as low as $20 per barrel.
Companies To Watch
Callon Petroleum (NYSE:CPEY) - Callon has posted two consecutive quarters of sequential revenue growth, and is expected to post sales of $40 million in its next earnings report (out in early November.) Thus, it’s a solid short-term play.
ProShares Ultra Oil & Gas ETF (NYSE:DIG) - DIG is one ETF that should perform well once oil prices rebound from some significant end-of-the year lows. The ETF is expected to produce twice the daily performance of the Dow Jones U.S. Oil & Gas Index. The ETF is up over 26 percent since the start of October, and represents a good “low ball” buy for energy investors.
DHT Holdings (NYSE:DHT) and Euronav (NYSE:EURN) - Supertanker ships rent out at around $71,000 per day , making them an interesting play for investors looking to take advantage of an high-demand oil storage market. To take advantage of higher shipment volumes globally, take a look at DHT Holdings and Euronav, both of which are well-positioned to profit from higher oil storage demand I the short-term.
Brian O’Connell is a a Doylestown, Pennsylvania-based freelance writer with 17 years experience covering business news and trends, particularly in the energy sector. A former Wall Street bond trader; O'Connell is an an author who’s placed two business books in "The Book of the Month Club" and is a business writer whose byline has appeared in dozens of top-tier national business publications, including CBS News, Bloomberg, Time, MSN Money, The Wall Street Journal, CNBC, The Street.com, Yahoo Finance, and Forbes.