When should you buy the sort of shares whose certificates you can put in a drawer and forget about them for decades? On the rare occasions that they are totally out of favour and therefore relatively cheap.
Step forward the major oil companies – the ilk of ConocoPhillips, BP, Shell and Exxon. The only time you should ever be buying these stocks is when the oil price is on the floor, and many commentators say it is never coming back up. Recent experience suggests otherwise, especially at a time when central bankers have their feet on the money-printing pedal.
In my time in the Middle East I’ve seen the oil price shot to pieces three times – 1998-99, 2008-09 and the past 15 months or so. Each time, siren voices suggested that the Middle East would have to go back to farming dates and camels. Let’s examine why that did not happen.
The 1998-99 oil price crash was at the tail end of the Asian Financial Crisis, when Opec oil producers rather unnecessarily refused to cut their quotas and crashed the market, with oil prices very memorably dropping below US$10 per barrel.
Then came the dot-com crash and some cheap money from the Fed, and a bit more sense about output among the oil producers, and quite quickly oil was trading in a far more agreeable $22-28 price band.
In 2008-09 prices only ever got down to $33 in December 2008 before the rebound. Again, the Fed dropped its key interest rate and the Chinese joined in with the largest stimulus in economic history. That was a 100,000-volt shock to the oil market and prices headed above $100 for several years, giving the UAE and the other oil states a rapid recovery from the Great Recession.
So what could we reasonably anticipate happening this time around with oil prices on the floor, albeit already coming off the $37 double-bottom reached in August?
The Chinese and European central banks are talking about big stimulus packages for next year and looser monetary policy. Japan will have no alternative but to follow, and as for the Fed we will see. Washington does not usually tighten domestic economic policy in a presidential election year.
Could this be about to put another rocket under the oil price? Stranger things have been known to happen. Commodities move in cycles, and only flatline absent money printing or central banks bent on preventing deflation.
Also, we do know the precise cause of the latest collapse in oil prices. It’s no secret that Saudi Arabia decided to crush the infant US fracking revolution before it stole market share. The frackers have proven a little bit more resilient than expected, actually raising their output and making things worse before bowing to the inevitable that the lowest-cost producer always wins in a price war, and the highly leveraged go bankrupt.
I fully agreed with Ecstrat’s Emad Mostaque about why oil prices are heading toward $130 per barrel in 2017. In brief, more demand and less supply will bring prices back up, even without an inflationary money supply shock.
Incidentally, he is very bullish about the outlook for the Arabian Gulf stock markets given this reversal of oil price misfortunes. I suppose the same will be true for real estate in the UAE, which has been under pressure for almost two years in Dubai and a shorter period in Abu Dhabi.
Still, the time to play this prospective rebound in oil prices is now, while all hope has been lost. It is a recognised quirk of human nature and financial markets that sentiment swings in a pendulum from one extreme to the other.
Making money as an investor, big or small, is all about being contrarian and going against the crowd mentality. It’s easier said than done. Most of your friends will say you are mad. That’s often an excellent sign that you are on the right track.
With oil at the moment you can sense bipolar sentiment in a market that runs in cycles. Why not just go for it?
Peter Cooper has been a senior business journalist in the Gulf for the past 20 years.
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