Why oil price history suggests long-term opportunity

Portfolio manager says patience can bear fruit for investors and that current situation is not sustainable

Why oil price history suggests long-term opportunity

For short-term opportunities, oil is not the place to be right now. International benchmark Brent crude was trading at $26.46 a barrel yesterday, down 2.5%, while WTI stood at $23.47, more than 2.2% lower.

Of course, winners are hard to find anywhere as the markets grapple with coronavirus-triggered selloffs that have wiped out about 30% of wealth creation in bonds, credit and stocks.

However, for those investors willing to take a longer view of the oil market, Nick Piquard, portfolio manager at Horizons ETFs, believes there is some good risk-reward out there.

To illustrate his argument, Piquard got out the history book of oil pullbacks over the past 30-40 years and they are all of similar magnitude. Whether it’s the mid-80s when Saudi Arabia, much like this time, decided to ramp up production because they believed they were doing all the sacrificing, or the Asian financial crisis, which was more of a demand recession, when the price again went down two-thirds. In 2008-09, there was a slightly bigger drop of about 75%, while five years ago the price sunk two-thirds because of the shale revolution. In 2020, here we are again – down about 70-75%.

Piquard said: “If you look at history, this is not a bad time to be looking at a buying opportunity in the sector, and in each of those five instances, it also probably didn't feel that good.”

But how do you make investors feel ok with putting money into a sector that feels beaten up and under siege? It comes down to how sustainable this low price is. The answer, according to Piquard, is not very – and for many reasons.

One of the main ones is that Saudi Arabia, while wanting to teach Russia and America a lesson, need $70 a barrel to balance its budget. While the country is still making money, there is obviously less reinvestment in their business, which suggests this is short term in nature.

Then there’s Saudi Arabia’s strategic plan, if you believe some, to make sure American shale doesn’t grow as much as it has. These prices will ensure that compounding the fact there was little growth elsewhere globally. For a longer-term investor, demand will go down this year but, if China’s apparent recovery from the virus’ impact is to be believed, it may not be affected as much as people fear. Therefore, a V-shaped recovery could be more likely.

Piquard said investors should have at least a one-year outlook in terms of the market fixing itself.

“It’s not something you'll see happening over the next month or even over the next quarter. I think it's going to be something that plays out over the next year to two or three. In fact, if look at how long the oil price took to recover from all those previous moves lower, it always took about three to four years for the price to recover back to where it was.

“So, if the price recovers to where it was even just, you know, six months ago, you're going to make two to three times your money on oil. That’s not a bad thing.”


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