Just a month ago oil surged to its highest price in three years, and some investors were wondering if crude was again on its way to $100 a barrel.
Instead, the price has tumbled. Reports say OPEC plans to support an increase in production at this week’s meeting, revamping an agreement that had capped production since late 2016. Trade tensions have also played a part in the slide, as investors feel that escalating rounds of tariffs and disputes could impede global economic growth. U.S. crude is now 8 percent below the $72 a barrel it reached in mid-May, although it’s still far higher than it was a year ago. Mark Hackett, chief of investment research at financial services firm Nationwide, says the worst of that volatility might be over, but that investors should watch out for rough periods for oil and other commodities in the months ahead.
Q: Oil prices are somewhat volatile anyway. Has the recent period been worse?
A: The oil markets are always much more volatile than the equity markets. There are so many moving parts right now that I’m not particularly surprised by the volatility. I was more surprised that we saw the jump earlier this year than the reaction down. Three of the major incremental players in the market right now are Saudi Arabia, Iran and Russia. If you think about the relationships between those countries and their relationships with other countries, it’s relatively tenuous and it’s not surprising you’ll see some degree of breakdown.
Q: What do you expect to happen next?
A: It seems unlikely (the production) agreement can persist indefinitely. So many countries need prices to go higher. In terms of the balance between upside and downside risk, we think most of the risks fall on the downside. That being said, $65 a barrel is still a pretty good number. Oil companies are doing just fine at $65, they would be doing fine at $60. We think a lot of the real volatility is going to take a step back at this point. We’d like to see a stable high-$50s to high-$60s number. At that level we think oil companies and companies using oil both do reasonably well.
Of all the risks, up and down side, there are heavier risks on the downside.
Q: What are some good ways for investors who want to be involved in commodities to hedge their exposure?
A: The natural hedge to that is owning consumer companies. They would benefit if oil prices go down. If oil prices go down, the consumer spends money on everything else. Consumer discretionary companies benefit twice in that a lot of them are hotels, casinos, entertainment companies that do much better when oil prices go down. An airline does much better financially. Because prices start coming down, people travel more.
Q: What is your broader outlook for commodities?
A: There’s a lot of differentiation in commodities. You can’t treat it as one entity. I think a lot of this trade war stuff is going to end up resolving itself, and that’s going to lead to a lot of US commodities being exported to China. So that’s going to be liquefied natural gas, oil perhaps, buy also soybeans and other agricultural commodities. I think the trade war stuff will be a possibility. It’ll be messy getting there, but over the next six to 12 months it’s going to be a positive for global trade. That’s going to help agricultural commodities by and large.
Most agricultural and exportable commodities have upside pressure because of both the likelihood of trade but also the expense of transportation, but some of these commodities that have been held hostage have downside pressure.