There are several market indicators that suggest now is the time to invest in oil. For the past five years, oil has maintained an average of $100 a barrel. Because of the high oil prices, companies have been able to search for the harder to reach crude oil. This has resulted in an overall increase in the global oil supply. As the increase in global oil supplies has created a surplus, there has also been less demand for oil in Europe and Asia. Additionally, higher efficiency cars and better gas mileage has resulted in less demand for oil. As a result, supply and demand has caused oil prices to fall.
Normally, the Organization of the Petroleum Exporting Countries (OPEC) steps in when oil prices start to go too low. Typical measures involving cutting the supply to artificially inflate oil prices. The exact reason for this is disputed, but a recent Q&A by Moneysense suggests it may be a way to “squeeze U.S. producers extracting high cost shale oil as well as Canada’s oil sands companies.” For the experienced investor, now is a good time to invest in oil.
Inline Services and other companies that specialize in pipeline pigging have seen a resurgence in demand for supplies. This indicates that oil companies are preparing their equipment for an increase in sales. As the energy sector continues to experience falling oil prices, it’s important for investors to get in early to secure enough earnings to earn money off their investments. The time to buy is when oil prices fall, not when they hit bottom. The moment that oil prices hit bottom, the stocks will immediately skyrocket and those without a firm foothold in the market stand to lose money. The best time to purchase stocks is approximately two to three months before they hit bottom.
Energy prices are going to eventually rise because of their valuation. When you look at the price-to-book ratio of stocks, the stocks are being sold fairly cheaply. Shrewd investors who invest need to be prepared for a long wait, since oil prices could take 12 to 18 months or longer to rise. Adam Parker told CNBC that energy stocks tend to go through a cycle. Historically, stocks have been this low seven times in the past. Every time, the stocks have gone outperformed less than six months after hitting rock bottom.
Nobody should invest in stocks without some basic understanding of how investments work. Obviously, you want to buy low and sell high. However, this is exactly the opposite of what most investors end up doing. They purchase stocks high and then are forced to sell them when they start to go too low for their comfort levels. Predicting the market is an extremely difficult task, but it’s less problematic when working in the energy industry since there is a long and fairly reliable history surrounding oil. Eventually, no matter how low the prices go, oil prices will eventually go up.
The best approach to investing is to avoid making decisions based on emotions. Get a solid asset allocation and keep your target exposure consistent. For example, a target exposure to stock rate at 50 percent should be rebalanced and adjusted to keep the rate at a fixed 50 percent regardless of the market. You should also do this is your stocks rise in price and become a larger portion of your portfolio. With oil, the trick is to look at your current exposure to determine if you’re underexposed. If you are, then now is the perfect time to invest in oil. Now is a good time to invest, but using a longterm strategy where you deal strictly with exposure levels is a more maintainable and less erratic way of managing your portfolio.
Every investor is privy to the same information about the current oil stock price situation. Investors know that stock prices have fallen, but you don’t see a run to purchase stock. For the investor that wants to increase their exposure, now is the perfect time as the cost of oil is low enough to ensure a certain return on your investment. So, the real question is not whether right now is the time to invest in oil, but whether your portfolio is ready to absorb additional exposure. For most investors, the answer is going to be a resounding yes. In those situations, now is the perfect time to invest.