The story of the past 2 years in macroeconomic trends has been the price of oil. Overproduction, led by OPEC policy and supported by technological improvements in oil shale extraction, has kept oil from experiencing much of its typical winter cooling or summer travel bumps. While this has been a blessing for motorists everywhere, one group is lamenting the decline: commodities investors.
Week-end data from the Department of Energy showed a slowdown in consumer demand, reflected by a higher-than-expected inventory of unrefined oil, which gave investors some hope. The price of oil experienced a brief 3% increase. However, most experts agree the rally is temporary.
Such projection surprises usually tend to excite speculative, short-term investors. They see the brief dip in demand as a market signal to buy slightly more, on the expectation of a short-term increase in price. Long-term investors and those with a larger stake in the oil and natural gas industry see no reason to be excited by the brief jump. The larger picture, that crude oil is being produced beyond market demand, will continue to dampen the price of oil over the long-term.
This oversupply is largely the product of geopolitics. Large, stable oil producing nations like Saudi Arabia can afford to keep the price low to starve out emerging oil markets like those in the Midwestern United States. The US and China are also working with oil-producing allies to stagnate the heavily oil dependent Russian economy. Until emerging oil producing nations lose the capital necessary to sustain their drilling operations, and until tempers cool somewhat between Russia and other major players, the price of oil will likely remain low.
Over the long term, consumer demand will likely continue to be sluggish with oil. Sustainability and environmental concerns continue to cloud the future for fossil fuel dependent energy production. As technology makes solar and wind power increasingly feasible, fossil fuels will play a diminishing role in global economics. Oil will always be valuable for its portability and reliability, but cleaner energy sources are already supplanting oil and coal as the chief sources of energy in developed nations.
Rather than crying over spilt milk, investors should see the silver lining to low oil prices. Cheap energy is fueling growth in construction, manufacturing, transportation, and many other sectors of the economy. The surge in GDP and the faster-than-expected growth of the whole market can be attributed to available, inexpensive energy. Both of these trends are good news for investors who have smartly-constructed, safely diversified portfolios.