Oil Investing Prospects for 2012 and Forward
Investing in oil has always been a blend of betting on corporate projection with a dash of a casino roulette thrown in. The problem is that oil is clearly not just business alone. International politics cause just as much influence on investments as supply and demand. Because of these elements and others, investors can see wild volatility in a company stock that should otherwise be stable if just based on business activity alone.
Regional Politics
When Iran recently decided to make a big stink, threatening to shut of the Straits of Hormuz on the west coast of the country, the statement alone caused oil stock prices as well as product prices to shoot through the roof. The actual supply didn’t change at all. However, just the possibility that Iran would begin causing problems for Arabic oil supply boating its way through the given waterway was enough to cause financial consternation.
For 2012 and going forward, however, the push to crude oil process will likely not be because any aggressive move. Instead, a concerted effort by OPEC, the regional cartel of oil-producing countries, to keep prices high and supply tight will have a more likely effect on market results. This condition will contribute to the higher fuel prices realized in the U.S. and Europe, which has begun hitting the toleration point in both markets. With a recession well in place in both zones, consumers are increasingly reducing fuel consumption when gas prices hit too high. That in turn will bite into oil companies’ profits and their prospects for short-term investment.
Basic Market Forces – Oil Supply
From 2008 through 2011 there was significant amount of chatter regarding the supply of crude oil remaining underneath the Arabian Peninsula and neighboring sources. Projections put the remaining source of Arabic oil supply at approximately 40 to 50 more years, especially with the increased consumption of China. However, this chatter has since died down and pretty much disappeared in 2012. Instead, Saudi Arabia has been spending it’s time stabilizing the oil price markets with a 2009 target price of $75 a barrel. The Arabic kingdom has achieved that goal in the beginning of 2012. Despite the reports, the Saudi kingdom continues to behave like the regional supply can last for quite a while longer. Further, new supply fields found both off the coast of Brazil as well as in Northern Alaska and Canada have made the Saudis realize they don’t have the only show in town anymore. So short-term supplies of crude oil don’t look like they will be depleted anytime soon.
Basic Market Forces – Oil Demand
The ongoing recession in most of the first world has not done oil producers any favors. With large numbers of people realizing reduced income, loss of jobs, and rising costs of living in the form of basic expenses such as food, utilities, and taxes, people have reduced their gas consumption. Further, odd-ball weather through the 2011 winter has created a glut of heating oil supplies that were fully unexpected. As a result, oil markets are flooded with supply that they need to flush out before pushing for more production. Both oil demand areas along with less consumer buying power have reduced profits in oil, despite the fact that major oil companies are still pulling down significant profits in even the hardest of recent times.
Dividend Players Seem Attractive
Because of the above problems, oil companies that continue to pay hefty dividends to their shareholders continue to remain attractive, especially as banks continue to pay almost nothing for savings. Big oil companies will continue to see investment growth because stock buyers are looking for a place to park money. Chevron, Exxon, Shell, and other major players have remained stable in terms of market valuation while paying out steady dividends for quarterly profit. With no other sources seemingly providing a better option, investors will likely continue to hold their positions in big oil through 2012.