If Crude Falls to $50 a Barrel, Buy B...
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Jul
21
Jonathan Yates
If Crude Falls to $50 a Barrel, Buy Big Oil!
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In a recent interview, Gulf Oil Chief Executive Officer Joe Petrowski predicted a substantial drop in the price of oil.

Should that happen, buy Big Oil stocks!  The basic reason for that is, as detailed in another article on this site, “When was the last time you saw a major oil company go bankrupt?”  In addition, there will be very high dividends paid to maintain the shareholder base should oil prices fall that low.

Last week, Petrowski stated that the anticipated fall in price was a matter of fundamental economics: “Demand is weak internationally.  But domestically demand is even slightly weaker. Traveling (by car) is picking up, but we’re using much less oil. It is simply more fuel efficient cars and switching to alternate fuels.”  On the sell side of the equation, he stated that, North America is “producing record amounts of oil and natural gas.”

As the chart below shows, at present, these factors have not resulted in a fall in the price of oil (NYSE: USO) or natural gas (NYSE: UNG).

 

In addition, major oil companies have soared, despite the weak fundamentals espoused by Petrowski.  Chevron (NYSE: CVX) is up about 20% for 2013. Over the same period, ConocoPhillips (NYSE: COP) has jumped by almost 18%.  The world’s largest oil company, ExxonMobil (NYSE: XOM), is trading higher by more than 11% since the first of the year.

While the macro picture may be weak now for oil, it will only improve.  The world’s most populous nations, China and India, will eventually recover.  That alone will drive the demand for oil up greatly.  From that, there will be a concomitant price rise.

The same will happen from the burgeoning middle class around the globe.

The McKinsey Global Institute, the research arm of Mckinsey & Co., the global consulting firm, predicts that the global consumer class will increase by one billion in the decades ahead.  That will result in a tremendous demand for oil and natural gas.  Along with the growing populaces and increasing affluence, nations are turning away from coal and nuclear power.   That, too, will increase the need for oil and natural gas.

Should the price of crude fall and drag down oil company stock prices with it, these factors will eventually take it higher in the long term, resulting in appreciable total gains along with the dividend income.

 

 

 



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