When is the right time to buy into oil? Or, since those barrels or so darned hard to store (and never really match the furniture anyway), to buy shares of oil-related public companies?
People who are bearish on oil will say: two years ago. That is because many of them expect crude oil prices to fall as production from Iraq steadily increases, Venezuela puts its difficulties behind it, and, longer term, that vast Canadian pool called the oil sands comes on-stream. (Yet when ministers from oil exporting countries meet this week, it is very likely they will decide not to change their collective oil output.)
But there is a bull's case for oil, and one of the best things about it is that it's a long-term case. That is, it's a story that unfolds over years, if not decades. Forget the level of crude oil inventories last week (which, confusingly, showed a record increase in U.S. oil imports.)
Instead, think of India. Think of all the people in India on bicycles. Now put them all in cars. Next, think of China. The developing world is the biggest driver of oil consumption, because one of the inflection points in development is the adoption of mechanized transportation.
This scenario is just one part of the story for long-time oil bull Henry Groppe, an oil market analyst with Texas-based Groppe Long & Littell. Speaking recently at giant oil and gas royalty trust Pengrowth's fall investor conference in Ottawa, Mr. Groppe laid out his case for $30-(U.S.)-a-barrel oil being the new standard. Granted, anyone looking for a downbeat view of oil as an investment opportunity probably shouldn't look for it at an oil company's investor conference, but Mr. Groppe has been singing this same tune for years now.
The case, brutally simplified, is compelling.
First, as an investment choice, oil is still a good one based on the size of the market. All the talk about new technologies and hybrid cars is drastically premature: Oil is still the largest industry in the world, Mr. Groppe says, twice as large as the next biggest, agriculture.
The central debate between those who think oil prices are set to fall sharply and those who think they will stay where they are or head higher has to do with supply. In a room full of reasonable people, it's entirely possible to hear that oil is so plentiful, the price could sink to $10 a barrel and, conversely, that recoverable oil is declining and the price could go through the roof.
But if you buy the premise that we pretty much know where the oil is -- given the advances in technology in recent years, even previously hard-to-reach reserves are now at hand, from deep-sea drilling to the oil sands in Alberta -- then it makes sense that the total reserve number will drop. That is simply because a new oil field produces most of the oil up front, and then dwindles -- at least with current technology -- as time goes on.
Meanwhile, one of the biggest consumers of oil, the United States, can't produce enough to meet its own needs. The same goes for natural gas. But natural gas reserve life in Canada and the United States is limited, so much so that U.S. Federal Reserve Bank chairman Alan Greenspan recently mused about the problem.
Ultimately, folks who consume natural gas and who can choose an alternative -- namely, industrial users -- turn to fuel oil as an alternative. That means the price of fuel oil creates a "floor" under the price of gas -- which in turn influences the price of crude oil.
Mr. Groppe thinks that oil prices at $30 and natural gas at $5 per thousand cubic feet will be the norm for the foreseeable future, since only at or above those levels is demand restrained.
Many investors view the major oil and gas companies warily, and consider that oil has had all the runup it is going to enjoy for now. But if they are in it for the long term, and feel like tossing their hat in the ring with one very smart analyst, oil might be worth a second look.
Amanda Lang is the host of AM Business on Report on Business Television and CTV. She can be reached at firstname.lastname@example.org.