Saturday, January 17, 2015

Has Oil finally bottomed?

Okay, I admit, that I phrased that title a little provocatively, in the sense that even I have to admit that oil could fall a bit more before finally rebounding. But, seriously, we may have seen a near-term bottom, although maybe we could have a significant dead-cat recovery that leads to the final sell-off to the low $40's before oil really starts to stabilize and then rebound to something that more closely relates to actual supply and actual demand rather than the vast levels of speculation that we still see even after all these years since oil first rose out of the $20's.

Indeed, I can't be certain that the bottom is in, but at least I can be certain that we will see tremendous volatility as the competing bear and bull camps struggle mightily to assert their dominance. Just last week alone we saw several 5% moves in both directions in a very short period of time. To me, that's more a sign of bottoming than a one-way trend. Nonetheless, with so much speculation underway, all bets are off as to near-term trend.

Personally, I will continue to buy Oil (OIL) on any 5% dips. But I may also continue to take profits on 5% bounces as well. I may consider playing 3% swings as well, depending on how the market plays out.

As far as the impact on the U.S. economy, the lower price of oil will have a mixed impact. Consumers and chemical and transportation companies will enjoy the lower price of oil, but unfortunately chemical and transportation companies hedge the price of oil by buying long-term oil futures, which means they have already paid a higher price for oil they will use in the months ahead or a year or more, so the positive impact for them will be somewhat muted.

The lower price of oil will certainly negatively impact the oil producers and the wide range of companies that service them, and although this could put a fair number of them out of business and cause them to dramatically cut their investment spending, as well as put highly-paid workers out of work, it will also serve to rationalize the oil sector, so that the survivors will be much better positioned and have the future potential for even greater profitability. Of course, picking winners and losers is a fool's errand. Investment in the oil sector will likely decline, but not likely in a nice, straight, predictable line.

Overall, over time, I see the economic impact of lower price of oil to be mixed and maybe even a net wash, even though it may be an uneven and bumpy path to that net wash, with consumer spending dominating in some periods even as lower oil sector investment dominates in other periods.

The good news is that anxiety over the impact of the lower price of oil will give us stock investors lower entry prices for a wide range of stocks.

As far as the price of oil itself, I wouldn't be surprised to see $40 or even $38 oil, but I wouldn't bet the farm on that prospect. We might indeed see $42 oil, but maybe not before we see $52 oil first. Enjoy the roller-coaster ride.

-- Jack Krupansky

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