The year’s not quite over, but I think it’s safe to say that oil prices will be one of 2014’s biggest losers. Year to date crude oil prices are down close to 50%. It’s hard to believe that even just months ago many people assumed we’d never see oil prices below $100 per barrel again!
The consensus explanation is that the US has been steadily increasing oil supply while global demand (and growth) has either waned or remained constant. Meanwhile, foreign suppliers (like OPEC members) are refusing to reduce production. This is causing a global supply glut and falling prices.
Is it really really as simple as a supply and demand imbalance? Are there structural changes to the global economy causing a change in oil’s value as a resource? Did oil prices simply shoot up too high and too fast — in which case this is just a necessary correction? Will oil prices go back above $100?
These are hard questions, and I don’t know the answers. In addition, I don’t know of any investment manager, strategist, or analyst who predicted oil prices would fall 50% in the last six months of 2014. One thing I do know is that anyone with concentrated bets on oil got a nasty surprise last year.
This is just another poignant reminder of why it’s so important to maintain a properly balanced and diversified portfolio. Sure, that basically ensures you won’t be the biggest winner. Of course, by definition, that also ensures you won’t be the biggest loser — and that’a trade-off that most prudent investors are willing to take.
Victor K. Lai, CFA
This blog is for informational purposes only. Nothing on this blog represents advice. Investing is inherently risky and involves the potential for loss. Victor Lai does not own any of the securities referenced in this posting. Clients of Bellwether Capital Management LLC may own shares of the securities referenced in this posting.