Most economists will agree that commodities are subject to ‘boom and bust’ cycles – their prices can hit unfathomable peaks or bottom out at heart-wrenching lows, and these divergences are inevitable – the question is just ‘when?’. This is a question that oil traders have been asking themselves for months now, as the price of oil has plummeted below $50 per barrel (more than a 50% drop from its peak in summer 2014), and there is widespread concern that we haven’t yet reached bottom. But can there still be investment opportunities in the oil industry?
The Bulls vs. the Bears
Bearish analysts are worried that we haven’t yet hit the lows. Gary Shilling, president of A. Gary Shilling & Co, a New Jersey-based consultancy predicts that oil could go down to $10-$20/barrel at its lows because OPEC is playing chicken by not cutting production when supply is already outstripping global demand. In fact, Saudi Prince Alwaleed, chairman of Kingdom Holdings admitted just that when he boasted that “oil will never see $100 again.” On a practical level, oil production currently exceeds demand by roughly 2 million barrels a day – a number that certainly gives the bears something to run with. If OPEC continues its stubborn stance, this could continue to flood the markets, and keep costs low. Perhaps this is why the tycoons of Big Oil in America, the Rockerfeller family, was quoted in Rolling Stone magazine as saying that they were unloading their ‘risky’ oil investments. .
But there is a potential upside. Oil bulls are hoping that production in the United States will decline over the coming year, a move which will help close the supply and demand gap. Likewise, as prices stay low, the demand is expected to grow, which could bring a much needed move to the upside in the oil industry. Further, the bulls point to the charts that indicate that the energy sector tends to become a leader during the end of bull market cycles in the equity market. And since we’re currently experiencing with what may be the end of a bullish run since March 2009, this may signal that it’s time for the energy sector, and oil in particular, to bounce back.
What does it All Mean?
There’s no question that in the United States alone, oil consumption was 8% higher in June 2015 than it was in June 2014. Consumers are taking advantage of the low prices, which is benefitting related industries such as refineries and the automobile industry. This cycle may help bring the prices higher, especially as global producers (OPEC aside) curb production. Even Warren Buffett has dipped his toe in, investing heavily in Phillips 66, an oil refinery that also has a big chemicals division. In an interview with CNBC Buffett was quick to point out that “we’re not buying it as a refiner we’re not certainly not buying it as an integrated oil company”. Beneath that sentiment, however, lies the fact that refineries actually benefit from low oil prices, as they can increase their margins, and that investing in oil-related industries, without investing in the commodity itself may be a genius investing play. 
Likewise, there may be opportunity in the oil industry itself, as one could argue that these low prices aren’t sustainable for the long term. “ will go to $60-$80 a barrel,” said Robert Thummel, an energy expert at Tortoise Capital Advisors, though he adds that “we may be stuck in a $50-$60 band for a while.” If you’re looking for opportunities in the oil markets, volatility may make swings of 20% in hours or days, rather than in the long term. Be prepared to take big profits (or weather significant losses during this time), and not to stay in oil for the long term until the market becomes more stable. Most importantly, keep in mind that investing in the oil market at this time is a wise decision only for those who are truly familiar with the markets and the primary influencing factors on both the news and technical levels. If you meet these criteria, the potential for earnings in the short term most certainly exists.