Years of low oil prices have been great for the consumer. The average price of gasoline has dropped some 30% since 2014.
Some thought the era of high oil prices was over and even began buying gas-guzzling trucks and SUVs again. It was party time.
But low oil prices have resulted in a sharp decline of capital expenditure from exploration and production companies.
And as a result, the price of oil could be headed back to $150 per barrel and gasoline prices back over $4 a gallon. In short, the era of low oil prices may very well be the cause of higher prices in the future.
Get Ready for $150 Oil… Again
After the fall of oil prices in 2014, the oil and gas industry began to cut capital spending. There was simply no good reason for energy companies to invest. And pressure from investors to reign in capex didn’t help.
Since that time, oil and gas producers worldwide have slashed their capital expenditures by almost 50%. This meant fewer new discoveries being made and falling proven reserves.
In fact, the number of new conventional oil discoveries outside of North America has fallen to the lowest level since the early 1950s.
Cutting capex helped oil and gas producers sustain revenue throughout the low oil price environment. But capital spending is now below levels required to offset depletion.
By some estimates, the oil and gas industry will have to invest a minimum of $3 trillion per year to ensure long-term sustainability.
And that’s no easy task.
Although oil prices have recently recovered to nearly $75 per barrel, the industry’s capex cycle will take time to stabilize. It takes a lot of time to explore and discover new oil resources. And in the meantime, the industry could face supply problems.
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According to analysts at Sanford C. Bernstein & Co., “Any shortfall in supply will result in a super-spike in prices, potentially much larger than the $150 a barrel spike witnessed in 2008. ”
What does all this mean for you as an investor?
Simple: Buy oil stocks
A run-up in oil prices even close to $100 per barrel will create enough excitement for a new bull market in crude. But the time to buy is now.
Warren Buffett famously said, “Be fearful when others are greedy. Be greedy when others are fearful.”
Right now is the best time to get greedy… right ahead of the fear.
The oil and gas industry’s lack of capex over the past few years will no doubt drive oil prices higher. Then add in all the geopolitical concerns like trade wars and sanctions against OPEC importers, and it seems that oil prices can only head higher from here.
Don’t be left behind. Now is the time to buy oil.
Until next time,
Luke Burgess
As an editor at Energy and Capital, Luke’s analysis and market research reach hundreds of thousands of investors every day. Luke is also a contributing editor of Angel Publishing’s Bull and Bust Report newsletter. There, he helps investors in leveraging the future supply-demand imbalance that he believes could be key to a cyclical upswing in the hard asset markets. For more on Luke, go to his editor’s page.
