Oil is the New Gold
Aug 25th, 11
Since OPEC has set $85/bbl on oil as the new benchmark they use to price their oil, investors should pay attention to owning oil as a commodity in the ground and ride the ever-spiking upward trend of pricing over the next 10 years. The new post-meltdown of the global economy has given rise to crude oil as "the new gold". Since 1859 oil has enabled and defined our economic, social and political landscape. Throughout this time, abundant supply ensured low, stable prices and the inner working of the oil industry remained relatively obscure. Following a century and a half of relative calm, oil prices have become much more volatile as the sustainability and growth of reliable supply sources have been brought into question. Prices are no longer determined by supply and demand, but rather by daily global wholesale oil markets. Oil prices cannot stabilize without the dramatic action on the part of both government and business. Changes have taken place in the oil markets during the past twenty years, and particularly the last five, as investment banks, energy hedge funds, and managed futures funds have come to dominate energy trading and wreak havoc on global oil prices. The world has moved towards an oil environment defined by volatility. Traditional pricing mechanisms will no longer govern the oil market. The new international oil environment of increasing consolidation and decreasing competition allows investors to navigate price volatility and accept the market price of crude is only headed in one direction---upwards.
Larry Milnes, Eno Petroleum Corporation
Oil Is the New Gold
Daniel Dicker, Senior Contributor
08/17/11 - 07:00 AM EDT
NEW YORK (TheStreet) -- Oil has become the new gold, the latest storehouse of safety, taking investor money in a turbulent market. How else can we explain $110 a barrel prices today?
It is "Oil's Endless Bid" on steroids, a reference to my book on oil prices being continually moved higher by financial influences and ignoring the fundamental realities of global economies that have been reporting disappointing manufacturing, retail and housing numbers.
So what the heck is keeping oil prices this high for this long? Why are we suffering from a $3.65 national average price for gas, if growth continues to lag and inventories remain high?
My book goes into depth about how oil has become an asset class worthy of equivalent investment interest as stocks and bonds. Money continues to seek out hard assets but particularly oil as a diversifier, using dedicated hedge funds, commodity funds and ETFs.
But with oil fundamentals showing weakness, it has been even more stunning to see oil's continued price strength -- particularly the European Brent benchmark. German GDP reported Tuesday at an anemic 0.1% for the second quarter so we'd definitely expect Brent oil to go down -- and yet it continues to trade close to $110 a barrel. Something is wrong with this picture.
What's happening is oil is becoming the new gold -- the commodity that trades less and less like a commodity and travels instead mostly in one direction only -- up. Although uncertainty and high volatility have been scaring commercial and retail investors away from stocks in the last few weeks, alternatives have been difficult to find: How can you want to buy gold at a nose-bleed inducing $1,800? How compelling are U.S. Treasuries at 2%?
Maybe it does act like a bubble, but a high oil price, whether it is fundamentally or financially driven, equally benefits oil stocks: Exxon(XOM) and Chevron(CVX) don't deliver a discount to its customers even if the benchmark prices for their production hasn't been fundamentally arrived at. No, they charge today's going Brent market rate, significantly higher than last year's rate and guaranteed to generate far above average profits.
That high and very sticky oil price will continue to make energy stocks the sector of choice: Dividend paying mega-caps like Exxon and Chevron will look good if you're more risk averse, while mid-cap exploration and production companies like Apache(APA) and Chesapeake(CHK) will appeal if you have more tolerance to volatility.
It's the sector of choice, that is, oil has become the new gold.