Monday, January 18, 2016

Oil price

My predictions:

Prediction #1. For the year, it will be in $25 to $40 per barrel. Personally I do not wait for $25 as it may never materialize.

 - Global economies have not  recovered.
 - Iran's oil will add more supply.
 - OPEC cannot trim supply.

Prediction #2. For years later, it will return to $50 and on its way to $120.

 - Global economies will recover (they always do). Do not know when.
 - OPEC will trim supply.
 - Supply will be reduced due to the current cutting down on drilling and exploration.
 - Global population growth.
 - Inflation (about 3% per year).
 - Historical price. In this decade we had oil price below $30 and then it went up to $120. Adjusted for inflation, the current price is down from the then $30.
 - As a rough estimate (depending on individual oil fields), it takes about $50 to extract, market and exploration one barrel of oil (i.e. the cost of goods). It is better to shut down the oil field at today's $30 range. OPEC cannot cut due to the payments to loans on many on-going ventures.

It is a supply and demand play.

It could also be a case of commodity dumping and the U.S. may try to protect its own energy industry – you hear it here first.

The Loser: OPEC. They tried to cut the price to bankrupt the shale energy ventures. You do not want to shake a baby too hard or drop a big stone on your own toe. Some countries may be able to profit from $10 per barrel. It is like spending all your money today with nothing left for your old age and your next generation. They are stupid but cannot be that stupid.  Many lose the jobs in energy fields.

The Winner: Investors who buy at low price now and wait patiently for the long term.

We may benefit from low gas prices. Airlines benefit too if they have not hedged on fuels or are forced to buy at fixed prices from foreign countries. However, the stocks tank with the fall of oil price, so the saving in driving for most is not worth it.

Some still argue that oil price will go to $10. If it does, I will keep on buying. As from today's $28 to $10, you lose about $18 or about 65%. However, it has the potential to go back to $120 that would be more than 400% return from $28 and 1,200% return from $10. If it happens, thank me for that. I'm buying OIL, an ETF (ETN if you want to be accurate) that is supposed to float with oil price.  Ignore the weekly fluctuations due to speculations by traders and look for the long term.

Update as of 2/8/2016: Barron’s predicts the price will fall to $20 by April, 2016 and return to $55 by year-end of 2016. Buy OIL when it falls again and do not panic to sell. If the prediction is right, one can make over 100% in 6 months.

Usually falling oil price would benefit the market in general. However, falling too much as today is not good for the economy. Usually the market is opposite to the oil price. Today it is an exception due to the oil producing countries including Saudis and Russia dumping foreign equities to meet their obligations. China cannot build storage fast enough. They need the oil as they're blessed with polluting coal but not with oil even oil is about 5% for generating electricity). I recommend China to buy the future of n years at y price. This will resolve the current fluctuation and bring back the market not to correlate with the oil price.

For more of my reasoning, check out the book described next. It has 800 pages (6*9) for $9.99. It could be the best $10 you ever spend. If you had acted on last Monday when this post was available, you many have gained 14% in 5 days. Partly luck and partly sound research.

For more of my reasoning, check out the book described next. It has 800 pages (6*9) for $9.99. It could be the best $10 you ever spend.

The above is an abstract from my book "Complete the Art of Investing" which is available from Amazon.

I challenged to have the best-performed article in Seeking Alpha history, an investing site, for recommending 5 or more stocks in one year after the publish date. The concepts for that article are discussed in this book. 


  1. Thank you Mr. Pow! I am confused when you say "Personally I do not wait for $25 as it may never materialize."

    So oil is a good sector for me to dig deep into for analyzing and then hold?

    1. You wrote... "I'm buying OIL, an ETF that floats with oil price" I just look for an ETF that has oil in it?

  2. Hi JB. You just treat OIL as a stock. Buy low and sell high. It may still go further down. Today the price of the ETF oil is about $30. You may want to buy it at today's price and place another order when it falls further. No one can predict the bottom - I believe it would be $25 and some predict all the way to $10. After you buy it, just ignore it for at least one year. In the short term, the price will respond to news.

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  4. It looks like OIL is actually an ETN, not an ETF. I'm no expert but aren't there maturities that effect ETN's long term?

    1. Yes, OIL is an ETN. For simplicity, just treat it as an ETF.