In an October 2008 op-ed in the New York Times, Warren Buffett famously advised: ‘Be fearful when others are greedy, and be greedy when others are fearful.’
Whereas most investors during that time of financial panic were dumping their freefalling U. S. equities, Buffett was snatching them up at such great volume that he imagined his personal, non-Berkshire Hathaway portfolio would soon be composed only of domestic stocks.
‘I haven’t the faintest idea as to whether stocks will be higher or lower a month – or a year – from now,’ he continued. ‘What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up.’
The same is true for oil prices. I can’t say when oil will begin to recover or by how much. What I can say is this: For far too many investors, by the time they gain back the confidence to put money into oil stocks again, the rally might have already taken off, making it challenging to capture the full benefit of the upswing.
Think of it this way. Every Black Friday, merchandise is discounted to such an extent that thousands of bargain shoppers are willing to camp overnight in parking lots to be the first inside. When the doors open, people literally get pushed, shoved, elbowed and trampled on.
But too often, the stock market works in a curiously opposite way. When certain stocks drop in price, investors scramble for the exit instead of picking up the bargains.
Oil Extremely Oversold
Oil tycoon T. Boone Pickens recently told Mad Money’s Jim Cramer that oil would return to $100 within 12 to 18 months. Again, there’s no guarantee that this will happen – and keep in mind that it’s in Pickens’ self-interest that oil reach these figures again – but if it does, the most opportune time to participate in the oil trade could be now when stocks are at a discount.
Pickens’ prediction aside, there are sound reasons to believe that oil prices will be normalizing sooner rather than later.
For one, oil prices are currently below many countries’ breakeven prices. This could finally encourage the Organization of the Petroleum Exporting Countries (OPEC) to cut production, so long as Saudi Arabia gets assurances from fellow members that they would comply with the cuts. Where they are right now, prices simply aren’t sustainable. According to Business Insider, oil rigs in the Permian Basin have fallen by nine; those in Williston by seven; and those in Marcellus by one.
This post was published at GoldSeek on 22 December 2014.