Short term, oil prices are a threat to your wealth. Medium term, it’s much less likely. And long term is indeterminate.
Global production is running greater than demand currently. And if China and/or western economies tip into recession, $40.00 or $35.00 oil for West Texas Intermediate (WTI) is a very real potential outcome.
However, it’s not unusual to experience significant price volatility with commodities. Resource-related investing is always inherently risky because of this. An investor in this sector not only has the traditional business risk associated with producing and selling a good or service, but the price of that good is essentially unpredictable. As a result, hedging is a near-term aid.
From an equity market perspective, downtrodden sectors are always worthy of perusal. And this is especially the case with a stock market trading near its all-time record high.
What to Play with Oil Prices Cut in Half
There’s still quite a bit of conspiracy theory regarding the dramatic and sudden plunge in oil prices. While it was well known that domestic supply was surging, WTI have still maintained a solid $100.00 per barrel average for quite some time.
Then the bottom fell out of the market and the Middle East kept the tap turned so as not to lose global market share. All this was at a time when Russia was genuinely saber rattling the rest of the world. It certainly makes one wonder if economic warfare is now the new front line.
In any case, despite new technology, demand for oil and natural gas isn’t going away any time soon. This is why I view the best bang for investment buck now with dividend-paying large-cap oil.
Smaller producers have the growth potential, but this is only in the case of a rising commodity price environment, which is unlikely near-term.
There’s Value in Both Small- and Large-Cap Oil
Certainly there are some smaller domestic producers that are ripe for consolidation and/or a reacceleration on the stock market in a rising oil price environment.
Companies we’ve considered recently that fall into this category include Synergy Resources Corporation (NYSE/SYRG) and Triangle Petroleum Corporation (NYSE/TPLM). See “3 Micro-Cap Stocks to Watch Amidst Global Uncertainty.”
Kinder Morgan, Inc. (NYSE/KMI) is a large-cap pick I like in addition to ConocoPhillips (NYSE/COP), which is not expensively priced at all. Because of the correction in oil prices, both stocks are higher-yielding dividend payers and great options for longer-term investors interested in dividend reinvestment.
Near-term, both the herd mentality and supply/demand reality makes accelerating oil and natural gas prices unlikely.
Because spot oil prices are still vulnerable near-term, oil investments are a threat to your portfolio if you hold them. And this picture isn’t likely to change anytime soon.
But, with the fervor that accelerated the oil price decline, a new price cycle in oil can easily develop. Domestic capital expenditures on production and exploration are falling fast. It would likely take a Middle East catalyst and several more years.
But now is the time to be looking at the sector for those with a medium- to long-term time horizon.