Oil Prices: Ready to Rebound?

Now would hardly seem the time to be investing in oil. Since June of 2014, oil prices have fallen from more than $100 per barrel to less than $50. American fracking companies risk defaulting on their loans while countries like Russia and Venezuela, whose economies depend on oil exports, face economic collapse. Dependence on oil never looked more foolish.

Yet as absurd as it may seem to buy stock in oil, investors throughout the United States are doing just that. Private equity firms, billionaires, and small-time retail investors have wagered more than a hundred billion dollars on oil over the past few months. Investors hope to make a profit when the oil market recovers, but some experts question their decision, arguing that the fall in oil prices has only begun.

Awaiting the Ascent

The basic strategy behind these investments is simple: buy low, sell high. Many investors believe that oil prices will rebound in the coming years. By buying as much cheap oil as they can now, they can take advantage of the rising prices, generating handsome profits in the long run.

Investors are not buying oil shares indiscriminately. Rather, they look for businesses that have suffered from low oil prices and a negative perception of the oil industry despite being well-managed. Many companies have a strong foundation and the potential to make high profits, but have nonetheless lost money simply by association with poorly managed oil companies. By buying shares in these companies, investors provide them with much needed capital, which banks and junk bond markets have ceased to offer.

Private equity firms have led this development, though retail investors have also played an important role, buying up both shares in oil companies and oil commodities as part of an alternative investment strategy. The Blackstone Group recently created a $4.5 billion fund to invest in energy futures, while the Carlyle Group set aside $9 billion. These firms see oil as the key for generating high returns for their investors, which include pension funds, foundations, insurance companies, and endowments.

Waiting in Vain?

As lucrative as an impending oil rebound could be, however, many investors aren’t holding out hope. Analysts such as Edward Morse point out that oil prices have by no means finished dropping, and could fall another 70% before they begin to rebound. More bases his analysis on current production trends: global oil refineries produce 2 million more barrels of oil each day than is needed to meet demand. That excess oil will be stored until demand increases, making a rise in oil prices unlikely for years to come. It is little wonder, then, that even wealthy investors like Warren Buffet and George Soros, who have the resources to wait for a rebound, are dumping their oil assets.

Instead of buying oil, these experts have emphasized socially responsible investments, defined as investments in products that are not addictive or environmentally destructive. As government regulations and social movements put more pressure on fossil fuels, tobacco, and gambling, investors can earn high returns putting their money in renewable energy and other socially beneficial industries. These experts also encourage investors to buy stock in airlines, trucking, and other industries that benefit from cheap oil. International airlines look particularly lucrative: American Airlines posted a 12.5% price-to-earnings ratio last month, with United Airlines, Delta, and JetBlue showing similar profits.

Small Investment Significance?

Even if there is potential profit in oil investments, this does not mean that small investors should choose oil. It may take years for oil to return to its previous prices, and in the short run, price fluctuations will sap investors’ money. While private equity firms like the Carlyle Group and billionaires like Leon Black can afford to wait for long-term profits, “mom-and-pop” retail investors cannot.

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Source: CNN