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Silver Linings in Oil’s Collapse

By Robert Frick on December 11, 2015

Just when you thought it could go no lower, the price of oil slipped again this week. On Tuesday it fell below $37 a barrel and Big Oil stocks felt even more pain, as did the Dow generally, off 245 points.

A host of bad economic news comes with oil’s plummet from $100 a barrel a year ago. Employment in the mining sector, which includes oil and gas development, is down 123,000 since its peak in December of last year. Many energy companies that added debt during the boom years are defaulting on that debt, including SAExploration, Halcon Resources and Goodrich Petroleum.

But there’s a silver lining—several actually.

Of course, lower gas prices help consumers, with the American Automobile Association estimating savings will top $100 billion this year. That’s more than $750 per household, according to IHS Global Insight. And if you’re like me, with a couple of kids going to college out of state, a lot of driving makes those savings much larger, and much appreciated when it comes to socking away more for tuition bills.

The problems in the oil patch haven’t affected the U.S. economy much, overall. Demand for oil is up both domestically and worldwide, causing several analysts to point out that the price drop is a case of oversupply, and not lack of demand.

OPEC’s Downfall

For those of us who remember being held hostage by OPEC, which caused scary price spikes and oil shortages in the 1970s, it’s nice to see OPEC’s stranglehold on the industry finally slipping—and maybe gone for good. The cartel has been hoist by its own petard. It increased production to try to drive producers in the United States, Canada and Russia out of business, but it’s unleashed a whirlwind it can’t control.

A Bloomberg headline on Monday put it best: “OPEC is dead: Cartel that once blackmailed nations now only able to bully themselves.” With prices low, OPEC members are scrambling to make as much money as they can to the point that production quotas, which controlled supply and therefore price, are ignored. It’s every country for itself.

Although demand for oil will continue rising, OPEC members must be concerned about the small but growing percentage of the world’s energy that renewables supply. With one quarter of global electrical needs expected to be met by renewables, according to the International Energy Agency, OPEC ministers’ nightmares must include growing fleets of electric cars.

Just as scary to these ministers is that estimates of the world’s oil supply keep growing. At one point OPEC could rest easy knowing we’d past “peak oil,” the theoretical point at which the maximum amount of oil was being pumped, making  their reserves increasingly more valuable.

Portfolio Affects

So the collapse of oil prices isn’t only a cyclical setback. The fundamentals of the sector have now changed with fracking, renewables and OPEC’s loss of control.

From a macro level, don’t expect oil’s decline to severely hurt your broad investments in U.S. stocks much more than they have already. At the depth of the financial collapse in 2009, the energy sector accounted for a 14% weighting of the S&P 500, but now it’s down to about 8%.  

Oil will come back, maybe not to $100 a barrel anytime soon, or even in our lifetimes. But a rise to the $60 to $70 range will spur a new round of investment and extraction, and oil company stock prices will surge. If you have a strong contrarian streak, as I do, you’ll make sure a portion of your portfolio is still in energy. I particularly recommend Investing Daily’s The Energy Strategist for bargain hunting. 

In our Personal Finance portfolios we have been judicious in our energy investments. We dropped our master limited partnership holdings in the Income Portfolio before the crash, and only have a few energy stocks in the Growth Portfolio. The stocks we do own should be among the first to surge when the oil outlook brightens.

We do have MLPs in our Maximum Income for Retirees Portfolio. As long as MLPs, such as our Genesis Energy (yield 7%), have plenty of cash flow to secure a generous dividend, they’re a lucrative source of income.

You know the expression about investing when there’s blood in the streets? Well, when walking around the Oil Patch you need galoshes now. But even with the carnage, you can still cash in with great yields through MLPs and also enjoy returns from energy and prepare for the rebound by holding the right energy stocks, such as those in our Personal Finance growth portfolio.

You can read more about Personal Finance energy holdings and OPEC’s woes from chief strategist Jim Pearce on page 4 in our next issue, which will be posted online a week from today.


You might also enjoy…

 

Obscure Tax Law Forces This Company to Pay Out 90% of its Profits

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