Oil Stock Tips from Davos

It’s that time of year again…

This is the week of the oft-discussed World Economic Forum in Davos, Switzerland, where world leaders, CEOs, and other market movers meet to discuss how global economics is changing and what they can do to benefit.

Now, I don’t normally care too much about the annual summit in Davos, seeing as it is more like an opportunity for financial publications to find juicy quotes and generate clickbait.

But with oil in its biggest bear market since the recession and OPEC in attendance, I’ve been keeping up with some of the commodities news, especially when OPEC gets mentioned.

From what I’ve seen out of this year’s meeting, I can tell you one thing: No matter how sure they sound, nobody knows what’s going to happen with oil.

Not even OPEC.

Oil CEOs and OPEC Ambassadors Clash

So far, various parties in Davos are floating two very different predictions about oil prices…

Here’s the first: Oil is going to skyrocket above $200 as non-OPEC drillers cut production investment in 2015.

Although it may not sound convincing, consider that if OPEC doesn’t cut production and prices continue to fall, producers who can’t afford to drill are going to have to take on debt or close up shop. At the very least, the producers with higher costs will need to slow down production.

And with U.S. shale producers paying a lot more to drill for oil, it looks like they will be the first ones to do so. If this happens enough, the argument goes, prices will creep back up without the extra supply, and eventually the loss of all that production will shoot prices beyond $200.

Here’s a similar take on it from Patrick Pouyanne, CEO of Total (NYSE: TOT):

There is a natural decline of five percent a year from existing fields around the world. That means by 2030 more than half of the existing global oil production will disappear. There is an enormous amount of money that needs to be invested to get another 50 million barrels per day of new production.

Essentially, what he’s saying is that if investment is cut now, it’s going to take a lot more cash to re-start production, and by flooding the market with cheap oil, OPEC is creating a vacuum where new production won’t get off the ground until it’s too late.

This takes us to OPEC’s position on the matter. According to the cartel’s Secretary General, Abdullah al-Badri, “Prices will rebound. I saw this 3-4 times in my life.”

He goes on to plead his case, saying, “Let’s produce the lower cost oil first and then produce the higher cost.”

This signals that OPEC will not be cutting production anytime soon, perhaps not even in June at its next meeting. And if this is the case, the cartel will instead allow prices to dive below $40 per barrel as supply increases.

This all means one thing for you and I…

Play it Safe When Markets are Murky

Clearly the back and forth between oil companies and OPEC at Davos has given us no legitimate guidance on where oil will go. According to the two, it will either surge above $200 or dip below $40 per barrel.

I’ll say it again: No one knows what’s going to happen. That’s the only certainty for oil investors right now. These two drastically different positions show us how volatile and unpredictable oil is going to be.

If you think about it, even if the CEOs are right and oil breaches the (frankly ridiculous) $200-per-barrel price, tight oil drillers in the U.S. are going to start pumping again at full speed ahead.

And if they do and the world becomes oversupplied again, the same cycle of boom and bust will happen all over.

It’s enough to give any investor indigestion.

So instead of trying to predict what will happen, it makes sense to play energy defensively right now. Your best bet is going to be with companies with structures that allow them to stay profitable even during times of low prices.

Or you could hedge your portfolio with companies that offer nice dividends and promise strong growth whenever oil does rebound.

Until next time,

Keith Kohl

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A true insider in the technology and energy markets, Keith’s research has helped everyday investors capitalize from the rapid adoption of new technology trends and energy transitions. Keith connects with hundreds of thousands of readers as the Managing Editor of Energy & Capital, as well as the investment director of Angel Publishing’s Energy Investor and Technology and Opportunity.

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