Just Bet on Oil

I am sure everyone has seen the markets lately. It’s an American tradition to stare at our portfolios watching them go (gleefully) up and (painfully) down. I’m sure today most of us were pleasantly surprised when the markets finished up 6% today. My portfolio returns however were dismal, why? Because of oil. Sure the broader market was up but oil fell around 8% today. I believe these depressed oil prices are temporary. Saudi Arabia is undercutting all other producers and is ramping up production from 9 million barrels to their maximum capacity of 13 million barrels a day. The increased supply from both Saudi Arabia and Russia amidst lower global demand -because of the Coronavirus – are pushing oil prices to impossible low prices. Oil is trading at below $30 a barrel. Saudi Aramco can profitably sell oil above $9 a barrel, however, to fund their government without dipping into their cash reserves they must sell oil at $80 a barrel. These two price points offer us some clue as to how far oil prices can drop. Also, Russia is producing around 11 million barrels per day at an average cost of around $20 a barrel. Thus, while both nations are still profitable at these depressed prices Russia is unlikely to continue producing at these massive quantities if oil drops below $20 a barrel. So I believe it is safe to assume that $20 is a floor for the price of oil.

What about the companies that produce oil? I believe that the large globally integrated oil and gas players like Chevron, Royal Dutch Shell, and Exxon are very well positioned to weather this crisis. All of these companies are well-capitalized and can easily handle a depression in oil prices. If anything the sell-off of all energy stocks probably represents a good buying opportunity for these securities. Additionally, refiners such as Valero will probably do better. Considering the high volumes of crude oil being produced, Valero will probably experience more business than usual. Donald Trump has also spoken about continued American energy dominance. His affinity for the industry is probably indicative of fiscal support if American companies have to deal with depressed oil prices for a prolonged period.

In all honesty, I am not well versed in the oil industry. It would probably behoove me to educate myself on its workings and I probably will over the coming weeks. However, given how unprecedented these low oil prices are, I believe it is still prudent to bet on oil.

In other news. There is a rumor of an $800 billion fiscal package coming soon. Supposedly this package will include, among other things, direct cash payments to American Adults. I believe this fiscal stimulus will probably be more beneficial to economic growth than purchasing distressed financial instruments like in ’08. Most of the cash is supposed to be given to low-income Americans. This sort of cash injection will lead to more discretionary spending as low-income Americans tend to spend more as a proportion of their income than higher-income Americans. Considering that consumer spending has driven American GDP growth for the past decade, this policy will more likely increase economic activity than the asset inflation that resulted from the fiscal stimulus package distributed during the great recession.