Kirk Spano was tabbed "The World's Next Great Investing Columnist" by MarketWatch of the Wall Street Journal network in 2011. He has been syndicated extensively since then and made various media appearances. Read his columns at MarketWatch.com.
Mr. Spano is the founder of Bluemound Asset Management a fee-only Registered Investment Advisor.
On June 5th in MarketWatch I suggested that a developing Peak Oil Plateau would lead to range bound oil and natural gas prices for a long time, with only occasional drops or spikes outside of that range. I also said that by the end of 2014 we would see oil prices drop substantially:
"I believe there is a high probability that we do move to the low end of the oil-price range later this year..."
Since then, the price of oil has not only dropped to the low end of the range, but it has embarked on one of it's rare collapses below its sustainable range. In early June, the price of Brent crude was about $108 per barrel. Today the price of Brent is hovering near $58 per barrel, far below the $80 to $120 range that I identified.
With oil and oil stocks crashing right now, our decision to be light oil stocks since summer time has proven to be very important. A month ago when I talked about asset allocation was also good for us, as hopefully everybody moved to at least 25% cash holdings. Now we need to focus on the dominoes that could still tumble with oil.
With the addition of some algorithmic analysis to our approach we can look for better entries. Subscribers will see on our current "much own" stocks update that only a few companies are good buys right now despite the lower prices from just a month ago.
In coming weeks and months, I believe it is very likely that we get financial crisis pricing on many of the oil & gas and oil & gas service stocks we have targeted.
On Thanksgiving, the news that I said would come to pass, came to pass. OPEC, the Organization of Petroleum Exporting Countries, agreed to not cut oil production. The result on Friday was a crash in oil prices and oil company stocks. The ongoing impact will be significant and lasting.
This Thursday isn't just Thanksgiving, it is OPEC meeting day. On November 27th, between touchdowns and turkey sandwiches, keep an eye on news out of Vienna where OPEC will be meeting. This meeting will push oil prices either higher or lower, depending on what members decide to do with production.
Key to OPEC's decision making process is how do they react to America's continued resurgence in oil production.
While markets might rally or fall quickly on Friday and the next following week, the real story is what I wrote about on MarketWatch regarding the Peak Oil Plateau. As I discussed in June, there is a developing equilibrium between oil supply and oil demand that will likely last a very long time, albeit crisis periods and mismanagement. This equilibrium will lead to a tighter price range for oil and oil products than many just a few years ago anticipated.
There is a lot of speculation about the decline in oil prices and the effect on oil companies. In the short-term there is really only one thing we should be thinking - "how big is the opportunity in oil stocks going to get?"
The use of oil is slowly drifting upward and will for at least another decade. While supply is at the high-end of the range right now, it is also clear that is a temporary situation.
As you can see from the chart below from the most recent Short-term Energy Outlook from the EIA, supply and demand are moving roughly in tandem for now. Over the past few years, with the slow economy and increased production in North America, we are seeing slight price destruction.