In my opinion, while fears of a hard landing in China and overall weakness in global growth are likely to keep prices down in the near term, crude should rebound in the longer term for three reasons:
1.) Marginal supply is increasingly coming from unconventional sources, such as the tar sands in Canada, where production costs are higher.
2.) Many of the largest oil producing countries – notably Saudi Arabia and Russia – now require a much higher price for crude in order to balance their budgets.
3.) OPEC currently has very little spare capacity. Today, OPEC space capacity is less than 4 million barrels a day, or about 11% of overall production, the lowest level since 2008. With spare capacity this tight, any supply disruptions are likely to push crude up sharply.
How should investors consider playing this? For most investors, it’s both unnecessary and unpractical to hold a direct position in crude oil. One more practical idea is to capture the potential benefits of higher oil prices through an overweight to energy stocks. Currently, US large cap energy companies are trading for roughly 1.5x book value, well below the market average and the sector’s historical values.
I particularly like global energy companies, which are even cheaper than US large cap energy companies and currently offer a healthy dividend yield. Investors can access these stocks through the iShares S&P Global Energy Sector Index Fund (NYSEARCA:IXC).
Russ Koesterich, CFA, is the iShares Global Chief Investment Strategist as well as the Global Head of Investment Strategy for BlackRock Scientific Active Equities. Russ initially joined the firm (originally Barclays Global Investors) in 2005 as a Senior Portfolio Manager in the US Market Neutral Group. Prior to joining BGI, Russ managed several research groups focused on quantitative and top down strategy. Russ began his career at Instinet in New York, where he occupied several positions in research, including Director of Investment Strategy for both US and European research. In addition, Russ served as Chief North American Strategist for State Street Bank in Boston.
Russ holds a JD from Boston College Law School, an MBA from Columbia Business School, and is a holder of the CFA designation. He is also a frequent contributor to the Wall Street Journal, New York Times, Associated Press, as well as CNBC and Bloomberg Television. In 2008, Russ published “The ETF Strategist”(Portfolio Books) focusing on using exchange traded funds to manage risk and return within a portfolio.