Is oil really going back to $100?

One of the world’s most knowledgeable and connected oil analysts thinks so.

The most read article on Bloomberg today was Oil Guru Who Called 2014 Slump Sees a Return to $100 Crude.

The article features the analysis of Gary Ross, founder of PIRA Energy Group.

Ross has seen it all. He was there for the collapse of the oil market in the early 80s. The bull market that began a decade ago.

He said, “Current [oil] prices are unsustainable. It’s hard not to see oil hitting $100 a barrel at some point in the next five years.

He’s right too. Oil prices will go higher.

However, he’s missing one critical point that will be the difference between making 100% and 500% or more on oil’s return to $100 a barrel.

The Last Shoe is Dropping

Before we get into the fine, yet wildly important details, let’s get a quick review of what has happened in oil over the last year.

Oil prices have been sliding since last summer. In real time it seems like oil is rising from time to time. But if you take a step back and look at a one year oil price chart, you’ll see it’s pretty much a long downward trend with a few short-lived bumps along the way.

Crude_Oil_WTF

Throughout the downturn investors have bought in big consistently through the downturn.

Back in November we noted the mistake investors were making when they plowed a record $344 million into oil ETFs.

They were too early.

In December we told you how oil insiders, those who theoretically know oil best, were aggressively buying up their own company shares.

They were too early.

In January we said again when the time to buy oil stocks was near, but it just wasn’t there yet.

Even though oil prices were bouncing, we suspected it was still too early because the last shoe -- the one that really mattered -- was yet to drop.

The World’s “Safest” Oil Stocks

Back in January we talked about a small sub-sector of stocks which has held up well during all the past oil price corrections.

I’m talking about a special type of investment called a Master Limited Partnerships (also known as “MLPs”).

The most common MLPs are oil and gas pipeline companies.

When an MLP is formed on a pipeline, the ownership of the pipeline is split in partnership shares.

The income from the pipeline, usually a royalty on the volume of oil or gas that passes through it, is then split among the MLP holders.

MLPs are really simple investments to make too. They trade like regular stocks on all the major exchanges. Although they’re technically shares in a partnership, to most investors, there is no real difference compared to a share of equity and a partnership share in an MLP.

MLPs have grown over the years into one of the most stable and consistent dividend payers in the world.

At the time even Reuters picked up on the trend in Investors turn to MLP funds as U.S. energy bet while oil slides:

Master limited partnerships typically invest in energy infrastructure such as oil and gas pipelines and storage facilities. That makes them less affected by the decline in oil because such assets are more sensitive to volume of flows than commodity prices and usually have long-term contracts with producers.

They also offer high yields in a low rate environment. The Yorkville MLP Universe Index, which tracks all MLPs, yielded 5.4 percent at the end of November, double that of 10-year Treasury bonds.

Again, we suspected it was too early and in The Best Way to Know The Oil Rout is Over we said the MLPs would be last shoe to drop in the oil downturn.

Because when the safest assets are always the last to drop in any bear market.

In oil and energy, MLPs were considered the safest oil stocks you can buy.

We identified two prominent MLPs which were canaries of the proverbial coal mine too.

They were Linn Energy (LINE) and Breitburn Energy Partners (BBEP).

They were down a little more than 50% when we said to watch for them to drop.

Today they down a total of 80% and 86%, respectively, from their highs last summer before the oil collapse really got started.

Now that they’ve dropped, it’s time to look for one more thing to know oil is ready to go.

When to Buy Oil

In the end, this is a situation your editor has been through many times before.

Oil is a commodity. Commodities are highly cyclical. They are the ultimate boom and bust assets and their cycles tend to last years.

Right now we’re still in the “bust” period. Oil prices are down and still dropping. There have been a number of bounces. None of them lasted.

That means there’s still hope and investors ready to buy them. They too will feel the pain and pay the price for being early.

The time to buy commodities is when all hope is lost. At that point you’ll see a number of high profile bankruptcies and reorganizations and when a prominent oil analyst says that oil’s going back up no one will care.

All signs say we’re still not there just yet.
Right now oil may be a good opportunity now. But great investors make their fortunes waiting for great opportunities.

1 Comment

Leave a Reply

Your email address will not be published. Required fields are marked *

Post comment