Should I Invest in Oil in 2016?

The past decade has seen the oil markets going in all different directions, from steadily climbing during booming economic times to crashing and burning. 2015 has seen prices fall to below $50 per barrel, down from a high of $107 last summer.  Looking at a five-year chart of crude oil prices puts this drastic drop in perspective. What is in store for the Oil Industry in 2016?

Oil Is Not Going Anywhere Soon

Look outside and all around the world, oil is a necessity for developed countries and developing ones everywhere. It’s a safe bet to say that the oil industry is going to be around for a while. Now the important question should be how fast is the industry going to rebound from the recent round of petro-political dealings and drastic price drops?

Aside from the naysayers opinions, it’s a given that the return to a normal price point is certain to happen. This is simply intrinsic to the nature of the oil industry, there are always going to be boom and bust cycles.

What others fail to notice time and time again is what causes this drastic price drop. It’s quite simple really; an overabundance of supply brings lower oil prices, thus causing less investments ushering in a snowball effect of less drilling activity. This in turn begins to push up crude prices again, which then leads to investments in the industry starting up again. It wouldn’t be foolish to think that right now could be the turning point of prices bouncing back up – especially in 2016.

Pundits and analysts are thinking that 2016 could be a year of oil prices dropping under $30 a barrel or remaining at current levels in the $50 range.  Most forecasts by analysts have a pessimistic outlook on the oil industry and think that what has happened in 2015 will continue over to 2016.

Though, something of note is that there are a myriad of factors that are contributing to the current price valuation.

Factors Impacting the Price of Oil

Discussing the oil industry without bringing up OPEC is akin to ignoring one of the largest factors involved in the industry. Even with the current rise of oil production from North America, this organization still is relevant and a central force.  The oil-cartel was producing around 32 million barrels per day in October 2015. This makes up around a third of the entire world’s oil supply.

December 4th will see OPEC and other participating members meet in Vienna. This will be a great opportunity for members to confront Saudi Arabia, who for the past almost year and half has been flooding the market with their oil.

One could hope that the Saudis will be willing to end this price war and begin the process of stabilizing crude oil prices.

Another factor to think about is the U.S becoming an even bigger contributor to the global oil scene.  U.S oil production has been off the charts lately as the U.S. produces nearly 9 million barrels a day, an increase of 1 million since 2014. The International Energy Agency believes that the United States could become one of the biggest net exporters in the coming decades. This is thanks to hydraulic fracturing – colloquially known as “fracking”, and deepwater drilling.

So far the major parties involved and making moves are OPEC, Saudi Arabia, and the United States. This is a small amount of players in the grand scheme of things. Another major factor that shouldn’t be ignored is Russia.

Russia is not an OPEC member, and has a lot to lose from the current price drops. They will be putting on the pressure to get the prices back up as they heavily depend on oil for their economy. They will find new allies with much of OPEC and developing countries like Nigeria.

Two Separate Camps Converging

Another way to look at the price factors behind the current oil price is to split the competing countries into two. One group is heavily reliant on a high oil price for their economy, such as Russia and most OPEC members. They are large exporters and this is taking a toll on their economies.

Saudi Arabia is in a similar boat, but they were originally partly responsible for the downturn as they were flooding the market in an attempt to eliminate competition. But as stated earlier they have more to lose by keeping up these efforts and need prices to go back up.

Internationally, it looks like most national interests point towards a higher price point, but where does this leave investors?

Potential for Investors

The past year has seen oil stocks down roughly 29%. This is according to S&P Capital IQ data.

Many analysts are thinking that they are entering a bull market in terms of the oil and gas industry. In a recent statement by Eldar Saetre, CEO of major oil company Statoil states:

It takes time to replace capacity, we all know the lead time in our business, prices may increase, and the longer the downturn lasts, the bigger is the risk of a more powerful and quicker price hike.

Here are some of the options for investors to get into the game.

One of the main ways people speculate on the price of oil is through CFD trading. CFD stands for “Contract for Differences”, they provide investors with the benefits and risks of owning a commodity or a security without technically owning it.

This allows you to speculate on the movement of oil prices without taking physical delivery of oil barrels.

plus500A good example of a stock that can benefit from oil price movements is Exxon Mobil (NYSE: XOM). An industry leader that can survive these types of market downturns, they may even profit in the long run as they acquire smaller companies and oil industry competitors.

Also some ETF’s (exchange traded funds) to look out for are The United States Oil Fund (NYSE:USO). When Oil barrels were trending at $100 they were trading at $40 now they range at about $12.50, closed out on December 1st, 2015.

Closing Thoughts

Overall, with investor sentiment and major countries and organizations like OPEC pushing for higher prices these are all signs pointing towards a rebound in the oil market and potential for investors.  Their best bet would be to invest in established oil companies as they can profit from these oil busts.

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Elizabeth Goldman is the editor of AlternativeInvestmentCoach.com. She has written for Investing.com, Bullbearings.com and many others.