Current Thoughts on Oil Prices - should you bet with the Saudis?

The large sudden decline in the price of oil is significant. In April 2011 I posted my view that I could not reliably predict the price of oil and gas (see "Current Thoughts on Oil Prices," April 2011). My view today remains the same due to the multitude of variables that influence the price of this commodity. In light of the significant downward move in oil prices I have surveyed current news flow and research in an effort to assess the current and future situation. Much  has been written about this subject so I will not replay information that is readily available. Frankly, it may not be worthwhile to spend time reading this particular post due to the volume of information currently being published.

 If you are still with me, my summary view is:

 1) The so called expert forecasters (i.e. the energy industry itself, Wall Street and big time money managers, economists, etc.) completely missed the boat as they did not forecast the current extraordinary move. So why should you rely on their forecasts now as they have been totally wrong based on their pre move $100+ per barrel of oil consensus view? (1)

2) The folks who have jumped in so far looking for a bottom have been wrong. (1)

3) There is not one key factor to focus on in terms of figuring out the future. However, the variable that I will focus on will be Saudi behavior. The Saudi's appear to be sacrificing short term price for long term market share and eventually a higher price as their current price move takes out production capacity (supply) and stimulates longer term demand. They are betting that this in turn, leads to sustained increases in longer term oil prices. In other words a driver buys Hummer today instead of Prius because of current low prices and consumes more fuel over the next 3 years (demand increase), alternative energy - pipeline, etc. projects become less economically viable at lower oil prices (supply decrease) which in turn leads to sustained oil dependence and higher oil prices over time, etc.

4) The Saudi's willingness to invest in price (a short-term investment) for a long term multi-year to decade gain in an effort to produce a high ROI over time (measured in years). Time will tell if their bet pays off. Should you bet with the Saudi's? This is an individual question. My view here is that one needs a horizon and a willingness to gamble on a situation where the payoff probability is very difficult to measure. Please note that I currently do not own any energy stocks but have owned Exxon during the past couple of years.

At the risk of being blinded by confirmation bias (i.e.searching for information that confirms one's own belief or hypothesis on this subject) one of the best current readily available articles I have found was written by Aswath Damodaran from NYU. See his blog titled Musing on the Markets, blog post "The Oil Price Shock: Primary, Secondary and Collateral Effects," December 22, 2014. In this post Damodaran discusses expert forecasting errors and the futility of predicting commodity prices, among other topics. This well written article is a very worthwhile read and is consistent with my view on this subject.

Time for a Sunday drive in my gas guzzling new truck.

(1) For additional information see "The Oil Price Shock: Primary, Secondary and Collateral Effects," Musings on the Markets, Aswath Damodaran, December 22, 2014.