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Why it could be the best time to invest in oil

17 Feb 2016, by Poppy Gallagher.

Investing is always a risk. There may be good times to invest and bad times to invest when looking back with the luxury of hindsight, though every investment you make in the present is a risk. Over the years there have been several investors who have commented on the best time to buy – Baron Rothschild famously once said “The time to buy is when there’s blood in the streets – even if the blood is your own”. More recently, Warren Buffet commented saying “Be fearful when others are greedy and greedy when others are fearful”.

Both of these investors followed similar routes to financial success, and their advice is still relevant in the modern day. In recent months we have seen a substantial dip in the price of oil, with a barrel of oil currently being the lowest value it has been since 2004 at roughly $28-31 per barrel at time of writing. Industry experts have said that it may be years before the price of oil rises to fairly recent norm of $100 per barrel – something which might encourage people to look towards Buffet’s advice. The reason for this drop in price is extremely complicated, and has been attributed to everything from the war in Syria and against the so-called Islamic State (ISIS), which might encourage people to look towards Rothschild’s advice from several centuries ago.

One of the major issues causing the drop in the price of oil is simply the lack of demand – the United States has all but doubled its domestic oil production in recent years, meaning that exports to the economic giant have stopped. The European economies are starting to lag a little causing a further drop in demand. The problem is that because everyone keeps pumping oil and supply is now outweighing demand.

When coupled with the fact that economies around the world are pushing to reduce their carbon footprint while motoring companies are pushing to produce the most innovative fuel-efficient technologies, it is certainly looking like a rough time for the oil industry. Until the oil production begins to slow, if demand doesn’t increase the price of oil is only going to drop further.

The other side to this coin is that there are signs of economic recovery in several companies around the world and demand for fuel is likely to increase as a result. Once production has slowed and the supply to demand ratio has evened out, the price of oil will begin to climb once more – whether or not it hits its previous high remains to be seen, and will of course depend on a number of different criteria.

One such criterion is our level of technological advancement in 12-24 months’ time. With constant work on carbon neutral and zero emission vehicles, the changes of oil demand reaching an all-time high look increasingly slim. Should we reach a point where a working, commercially viable prototype vehicle capable of zero emissions is revealed in the next few years, oil prices might take a knock from which they cannot recover. Another criterion is whether or not the known domestic US oil reserves continue to increase, causing an even higher supply to demand ratio than we have at the moment.

There is a lot to consider when looking to buy oil, and there is never going to be a time when you can say with absolute certainty that today is a better time to buy oil than tomorrow. If you’re looking to take the decision out of your own hands and leave it to the industry professionals, you could always turn to a discretionary investment management service which will keep a close and constant eye on the prices. At this point all that anyone can say with any certainty is that oil is the lowest price it has been in a while – whether it will stay that way is anybody’s guess.

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