Look to Oil for the Long Term

Source:

It took nothing less than a Depression-like global financial crisis to humble the energy bull but when the global economy recovers, energy will come roaring back.

Oil may be headed to $25, but will it go lower? What conditions would allow it to stay there? If I think a stock is worth $x, then I try to visualize what conditions would exist to allow it to get there. Consider the opposite—if you think a stock is worth $x, try to visualize it dropping 50% in value and what conditions might cause it to do so.

It took nothing less than a Depression-like global financial crisis to humble the energy bull, not the deflation of a speculative mania. After all, commodities are hardly alone in falling in price; every other asset save Treasury’s and gold has suffered as much.

When the global economy recovers, energy will come roaring back because quite simply, pretty much everything requires energy. How do you build an American 21st century energy grid without energy? How do you bring hundreds of millions of rural Chinese out of subsistence living without energy? How will you solve the water and agriculture issues without energy? You can't even build alternative energy without massive supplies of "old" energy. But the current low prices guarantee that when the recovery happens, less energy will be available.

When energy prices recover, who knows? It could take years or it could bounce back next summer. But for those who don't normally invest in energy stock, consider buying a blue-chip dividend paying energy stock as a hedge against energy prices. Enjoy the low gas prices while they last. Once gas prices start rising again, your portfolio will benefit while your wallet suffers.

Related Articles

Get Our Streetwise Reports Newsletter Free

A valid email address is required to subscribe