Were you the buffoon who bought shares in BP?
Were you tempted to take a punt on Premier Oil?
Do you feel like a sucker because you put your money into Soco International?
Don’t worry – you’re in extremely good company.
All the experts in oil were just as confounded.
Consider yourself an expert!
Black gold swan
As recently as last summer, almost nobody seemed to believe that oil could fall below $100 a barrel for any sustained period.
In fact, the price of a barrel of Brent crude oil has more than halved in the six short months since then. As I type, it is currently below $50 a barrel.
In June 2014, the highly paid minds at Barclays were predicting oil would be around $109 a barrel at the end of 2014.
Oops!
Even after prices started sliding, experts were wrong-footed.
Goldman Sachs shook the market in October – after prices had already fallen by 25% – when it further slashed forecasts for Brent crude to predict it would trade at $85 a barrel by… well, now.
Oops! (Reminder: it’s currently trading for less than $50 a barrel.)
And these were hardly investment bankers quietly missing the momentous turmoil while playing with spreadsheets in their ivory towers on Wall Street and in the City of London.
The companies themselves – the true experts with dirty hands – were just as misguided.
The head of Russian giant Rosneft was reported as saying last Autumn that oil prices “could not go” below $90 a barrel.
Perhaps something was lost in translation(!)
I could hit the internet for a half-a-dozen similar recent quotes from top executives that now look horribly clueless in the midst of the oil rout, but the fact is you don’t need to hear what they were saying then.
You just have to look at how they were spending money.
Costly complacency
Deep-water drilling, prospecting in the Arctic, tapping into Canada’s expensive-to-exploit (and environmentally ruinous) tar sands –it made no sense to spend billions of pounds getting most of these projects off the ground with oil at $70 a barrel, let alone at $50.
No, they were given the go-ahead in a world where $100 looked like a floor, and $150 a barrel seemed like reasonable upside.
This is why we now hear, for instance, that some US shale producers will be crippled by debt repayments in a regime of lower oil prices.
And it’s why Venezuela and Russia cannot balance their books.
Even the politicians believed that $100 oil was here to stay.
Not a barrel of laughs
Now, none of this is meant to imply that I knew better about the oil price than an analyst at Goldman Sachs, let alone the head of a major integrated oil company.
On the contrary, I knew then I did not and I’m twice as sure now.
Rather, it’s to draw attention to the dangers of certainty and consensus in any area of investing.
Across the internet, I’ve been reading bulletin board posts from despairing private investors who’ve lost large amounts of money by having most or even all of their money in small-cap oil exploration and production companies.
In the worst cases, they were even using spread bets or other forms of borrowing to gear up into the falling market.
Obviously, as someone who spends my days trying to educate people about how to invest sensibly, I do feel for most of these posters.
It’s all too easy to get carried away when investing, or to be hit by a truck you didn’t see coming. There but for the grace of God, as the old expression goes.
That said, I have less sympathy with those who start blaming the Saudis or the US government or shadowy market makers for their predicament.
The fact is they took a huge risk by putting all of their money into one sector of the market, and they wouldn’t have complained if the price had gone to $200 instead of $50.
In fact, many of them did make huge gains in the middle of the past decade from small-cap oil stocks, which perhaps was what underwrote their overconfidence.
It’s a bit steep to now complain that the AIM market is rigged or run by liars or similar, just because the same bet has gone against you.
Déjà vu all over again
The fact remains, it’s very often what you don’t see coming that most upsets the apple cart when investing.
Just last week, we saw the Swiss National Bank scrap its policy of trying to keep a lid on the country’s currency.
The Swiss franc soared as much as 30% higher against the euro in the immediate gyrations caused by the move, while the bluest of blue-chip Swiss stocks such as Nestlé and Novartis fell by more than 10% in a matter of hours.
Clearly, a lot of currency experts didn’t see that currency swing coming!
I could go on and on.
Everyone knew that low government bond yields “couldn’t” go any lower in 2014.
So, of course, they plummeted.
People gasped with amazement or derision when old hands warned in 2007 that FTSE 100 bank stocks could plunge below book value in a financial crisis.
As it turned out, some of those banks went bust.
Crude guesswork
Okay, you say, lesson learned.
Enough of the sermon.
Just tell me what will happen to oil prices and energy stocks next.
Well, as is doubtlessly obvious, I have no firm conviction. I can say that the market seems to me to be in disarray – which suggests that people are being forced to liquidate or that they’re capitulating.
Also, the oil futures market seems to be saying prices will rise from here. So again that might suggest we’re metaphorically in a flash monsoon rather than a prolonged rainy season.
But I don’t know for sure. (Hey, call me an expert!)
What I would say is that energy companies have not suddenly become uninvestable.
On the contrary, prices are much lower than they were and everyone is now pessimistic about their prospects – and yet the long-term picture has hardly changed.
The developing world is still developing. We’re still burning oil that we can never get back.
And on the demerit side, the globe is still heating up due to runaway CO2 emissions, which may eventually cap how much of this oil we can actually extract and exploit.
This was all true six months ago and it’s still true now.
On balance, now is probably the time to look for potential bargains, albeit tentatively. Ironically, that’s probably doubly true if you know a lot about the sector and yet all you want to do right now is go hide in a cupboard and weep.
But please don’t miss the message for the takeaway.
Which is: anything reasonable that you can think of can happen to a portfolio, and at some point it probably will.
Be diversified, be extremely careful about using leverage, and let’s stay humble out there.
