Energy stocks discount world wide recession with falling oil prices.
it must be said that this scenario, or at least one that involves significantly lower oil prices, is possible, even if one is an energy bull. i think it is worth reviewing the comments of Jeremy Grantham from an interview earlier this year in Barron's. his comments are to my mind much more interesting than hackneyed observations about the "energy bubble".
Q: How is oil affecting your view?
A: Going back a hundred years, with inflation taken out, you can see how beautifully oil reverts to the mean. For around 100 years, the mean price was $16 a barrel in today's dollars. Now we're seeing a paradigm shift, the first of my career. Indeed, it's the first and only paradigm shift that we can see in an important asset class ever.
Q: Are you in the camp that oil goes to triple digits?
A: This is my problem. If our exhibit is to be believed, and I think it is believable, oil prices have shifted into a new range. It wouldn't amaze me at all that the new trend was $45, in which case you could expect the price to drop to $25, or you could also expect it to go to $100.
If the new range is around $45 a barrel, it can spend a lot of time in the 70s, and that would be no big deal. It can still break down to $25 a barrel, and that would be perfectly consistent with a new higher level. What it is unlikely to do is what it did in 1999, and that is go back to $10 or $12, or $13 to $15 in today's currency. Oil has clearly broken out of its old 100-year range, and it is going to stay broken out and probably trade on average higher. It is not a particularly good short sale even at current prices.
we don't really know what the new "trend price" for oil is. it might be $45 as Grantham guesses, or it might be considerably higher or lower. but in any case, it is MUCH higher than the traditional $16 level which held for one hundred years. hence, a paradigm shift!
since nobody knows the long-term trend price, it is just a guessing game. the prices of oil stocks guess the trend is lower, as they have throughout the entire bull run. |
