To me, investment analysis is similar to peeling an onion. First you have to get beneath the surface. And then you peel off layer after layer, until you finally get the real picture.
The debate over the oil price is rather like that. People talk about this share price movement and that share price movement. They talk about this trend and that trend.
So I should buy-in to oil companies? Wait a moment, so you’re now telling me to sell? You can forgive investors for being a little puzzled and confused by the whole thing.
Investors must do their own research
But many canny small investors understand this. They say “always do your own research”, and this is the best bit of advice you can give to any newcomer to stocks and shares. You need to see through the day-to-day news flow and noise, and dig below the surface. Never invest in a company because of a headline, but keep researching until you get the big picture.
That’s why, when you hear that the oil price has risen to $50 a barrel, that should be the cue to do some research. Check a graph of the oil price and you’ll see it trending steadily higher, from a low of $28 a barrel in February 2016.
But how long will this trend last? Well, let’s zoom further out. Instead of checking the six-month graph, let’s examine the five-year graph. Now we see that the oil price used to be consistently over $100 a barrel. And this move up to $50 a barrel is little more than short-term noise. Unless we see a sustained break upwards to $70 per barrel and more, I suspect that oil prices will continue to bump along the bottom, and I would continue to steer clear of oil companies like BP and Royal Dutch Shell.
Okay, so what if we zoom out to the 30-year graph? Now we’re starting to see the big picture. There has been a 17-year bull market in oil prices that has just come to an end. And before this boom, oil prices were stuck in the doldrums for a whole 17 years.
Never bet against the commodities supercycle
So, there are cycles, thin years and fat years, if you like. And we’ve just come to the end of one thin year/fat year cycle, with a new one just beginning. Industry insiders call this the commodities supercycle and you should never bet against it.
Check the 30-year graph for the share price of BP and Royal Dutch Shell and you’ll see the valuations of these companies track the oil price fairly closely. Unsurprisingly, a low oil price means low share prices for crude producers, and a high oil price means high share prices for the oil majors.
This is big picture investing, and if you want to make money in the markets, then it should be a crucial part of your tool kit.