08-20-2015, 08:10 PM
If one believes in $75-$85 crude over the next couple of years, then current prices reflect a no brainer. If on the other hand $35-$45 or lower crude is the reality for the next few years, then perhaps not. I'm maintaining my current 10%-11% weighting, but the 'no brainer' aspect is not nearly as clear to me. The recovery in the stocks could extend years into the future. Many like COP and CVX could have to cut their dividends. There is just no telling how long this will take to play out. According to one article I read, it has only been 17 years since crude was selling at $12 per barrel. The authors says, "and while full-cycle costs have been estimated at ~$40/boe, the marginal cost of bringing one barrel of oil equivalent to the surface is less than $14 today." There is still a lot of cheap production on line, and with the world economy in contraction or perhaps even in collapse, these low prices could persist for some time.
IMO we will soon see widespread business failure in the higher levered higher production cost companies. These failures will affect the backers and could cause destabilization in the banking industry. At the same time China is unraveling in a bad way, Europe is teetering, and the U.S. is stalling as well. I can't predict whether equities tumble 10% or 40% or more, but am flush with cash because I think that momentum is building to the downside with energy continuing to least the way at least through mid to late fall.
IMO we will soon see widespread business failure in the higher levered higher production cost companies. These failures will affect the backers and could cause destabilization in the banking industry. At the same time China is unraveling in a bad way, Europe is teetering, and the U.S. is stalling as well. I can't predict whether equities tumble 10% or 40% or more, but am flush with cash because I think that momentum is building to the downside with energy continuing to least the way at least through mid to late fall.
Alex