In late summer 2015, the price of crude oil had fallen in half to around $50 per barrel1. The oil industry had retrenched, cut budgets, and laid off people. Companies knew projects that would make a lot of money at $100 per barrel could bankrupt them at $50 per barrel.
We wrote then that low prices would boost demand and cut supply, planting the seeds of the next shortage and the return of high prices. Sure enough, sales of large vehicles and total miles driven are setting records and exploration for new oil has crashed.
No one knew how low prices would go—we never do. It was frustrating to invest too soon in the sector and watch our holdings shrink in value. The price of oil fell by half again! We stayed the course and kept buying perceived bargains. It is gratifying to ultimately get it right.
Now Bloomberg reports that new oil discoveries are at the lowest level since 1947. Supplies that should be coming on the market eight or ten years from now will not show up. Low prices are doing what they always do: choking off supply.
We can’t know the future. But we know how this works. If you have questions or comments about your situation or holdings, please email or call us.
1Federal Reserve Bank of St. Louis, Federal Reserve Economic Data (FRED)
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.