By Michael Osteen
Everyone who drives has a good feel for what a gallon of gasoline cost these days, and most are aware that the price for a barrel of crude oil was selling for over $100 before it suddenly sank back in July of 2015 to under $37 a barrel.
Now most of us are very pleased with this and welcome the lower prices at the pump. However, if you are an investor you might want to do some additional research into this.
Historically speaking, we see that crude oil, from 1946 to 2016 ranged from the highest price of $145.31 a barrel to the lowest of $1.17 a barrel, which is quite a range over 70 years.
That should give you some idea as to how difficult it is to predict its future price, not to mention the sudden drop from the over $100 price that ran from 2011 to 2015.
So what type of items impact the price of crude oil anyway?
Turns out there are quite a few.
According to the U.S. Energy Information Administration (EIA) in a July 12, 2016, report, titled “What drives crude oil prices?” there are several factors that influence oil markets. They entail: a variety of geopolitical and economic events, movement together due to arbitrage, petroleum product prices, economic growth on oil consumption, changes in expectations of economic growth, Organization for Economic Co-operation and Development (OECD) countries actions, global oil consumption growth, changes in non-OPEC production, changes in Saudi Arabia crude oil production, unplanned supply disruptions tighten world oil markets, inventory levels, and the like.
Here are a few EIA estimates.
On a quarterly basis, EIA forecasts:
• Q4/2016 of $48.10 USD/BBL
• Q1/2017 of $47.60 USD/BBL
• Q2/2017 of $47.10 USD/BBL
• Q3/2017 of $46.40 USD/BBL
On a yearly basis, for WTI Crude Oil, EIA is forecasting:
• 2017, $52.50 USD/BBL
• 2018, $55.18 USD/BBL
On a yearly basis, for Brent Crude Oil, EIA is forecasting:
• 2017, $53.50 USD/BBL
• 2018 of $56.18 USD/BBL
Recently, the prices were $52.77 for WTI and $54.80 for Brent.
You get the picture; it’s complicated to say the least, right? Plus bear in mind how involved it is to make predictions into the future. Just think about trying to figure out what you are going to have for supper two weeks hence.
Therefore, our suggestion would be not to even try and you don’t have to if you are thinking in terms of possible investments.
As Warren Buffett said, “Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future.”
If you are a value investor like Warren Buffett and Port Wren Capital LLC, simply realize that a decline in the price of crude oil means a decline in the revenue stream of those companies within the oil and gas industry, which correlates to many of those companies being undervalued.
That’s the easy part.
The real trick is to figure out which of the some 680 companies with the energy sector are temporally out of favor, can sustain themselves until the revenue streams returns and offer a Margin of Safety (MOS) to an investor. And finding undervalued companies offers the potential for earning above-average returns over the long-term, provided they are priced below their intrinsic value.
As Benjamin Graham, the father of value investing, and who taught Warren Buffett said, “Price is what you pay, value is what you get.” After the drop in crude oil prices, we conducted our own exclusive and independent security analysis and discovered a few hidden gems.
Michael Osteen, is chief investment strategist with Port Wren Capital LLC, serving the greater Beaufort County area. Email him at email@example.com.