Lawrence Meyers: Crude oil prices are crumbling again. The black gold isn’t so shiny anymore, with prices falling to $37.69, and seven-year lows. This is wreaking havoc throughout the energy sector, particularly the companies struggling with high-interest debt. It’s also causing trouble for investors, who may be worrying about any of their investments in oil stocks and the energy sector.
What’s next for oil and what should investors do?
Back in January, I looked at previous big falls in oil prices. The 1970s oil embargo resulted in a 78% decline. The 2008 speculation spike resulted in a 70% retracement. We are now at a 70% decline. Based solely on previous big declines, we might expect oil to settle right around this price.
The alternative is to look at where 78% declines would bring oil. It would take us to $34 in the case of the 2008 high’s retracement, and to $24 based on the most recent high.
So the bad news is that oil is hurting. The good news is that I think we’re close to, or at, a bottom.
Why Oil Matters
What does this mean for your portfolio?
There’s one fact about energy that is only true of a limited number of other sectors and products. Energy is absolutely essential to the daily lives of human beings all over the world. There will always be demand, even if it fluctuates. There will always be wars over it. No matter which way you turn, oil is everywhere. It is in your cars, your homes, and all the products and items in your eyeline. Every product you see has been transported to its final location using oil.
Oil is never going to go away and therefore oil will always be a good investment. So, never sell into a panic, even a panic that lasts for months. It will take a while for oil and oil stocks to recover, but unless you in invested in shale stocks or smaller-cap energy companies, you are not going to be in pain for too long.
You should take a close look at the cash flows and balances sheets of all small-cap and mid-cap energy holdings. If there’s any question as to whether they can make interest payments, sell now.
As for the large-cap players in both producing/exploring and oil services, you should be in good shape. Their financials are all solid, with great cash flow, and infrastructure investments that are positioning all of them for the future.