[Posted on February 24th, 2015 by Michael L. F. Slavin]
If you’ve been interested in the idea of oil investing and the sudden drop in oil prices surprised you, not only shouldn’t it be a surprise— but this is a strong time to buy. U.S and foreign companies at this very moment are in the midst of an international price-slashing war of attrition, and the price of oil, having sunk this week to as low as $50, has already reached unsustainable levels for weaker, undercapitalized producers.
This will eventually cause a reduction of the number of oil suppliers both nationally and internationally. While the Saudis are currently holding the reins to OPEC policy, other OPEC countries are starting to feel the pinch. Suppliers such as Iran and Russia are hard-pressed to begin reducing their output in because of a reduction in global demand caused by economic slowdowns in countries such as Japan. This is a great sign for those considering oil investing.
Meanwhile, in America, only the strongest producers are going to be able to survive, and a smart investor, seeing the battle in oil prices beginning now, knows the smart move is to invest in American oil based on the plays and refineries most likely to survive, and profit when prices inevitably rise due to fairly static demand.
Reading Up: Picking the Smart Plays
The first thing to keep in mind is that you are not looking simply for the highest oil-producing areas. All that will do is give you an idea of what spots might be tapped or what companies are being most successful in their areas. Looking for things such as adjacent production, and potential production from not simply proven reserves, but what is economically viable in the near-term.
Nor should you be looking for bells and whistles. While advances in extraction tech are made almost daily, the oil industry is deliberately slow to adopt them, because if they are unsuccessful, the cost will be catastrophic. The most successful oil producers already have the experience needed to hold out, and in some cases have clearly planned for OPEC’s inevitable attempt to underprice them out of the market.
Using A Trusted Partner: Joint Ventures
While there are obvious choices using such a strategy (picking the largest producers is a really easy way to invest, except most such companies usually have a higher market cap, meaning that while they are largely able to withstand economic attacks from a price war, their growth is also considerably more limited. Because of this, these make valuable portfolio acquisitions long term, but leave you without reaping the immediate benefits of the low oil price.
One thing to consider in oil investing is that due to the large number of refineries operating in the short-term, simple stock investment is not always the wisest strategy. The smartest move right now is to focus on specialists in joint ventures which have the experience to navigate the perilous waters of low-priced oil production. This gives you a greater return on oil production itself and position you for more and stronger long-term investment in the future. It also lets you leverage your knowledge of specific plays and make better financial forecasts on your investment.
The oil investing climate in America right now is a perfect storm, if you’re ready to steer the ship. Moving in the right time means financial smooth sailing in the long-term.