Historically, investing in oil and energy-related stocks has been a cyclical call. As the economy expands, oil prices rise; as it contracts, prices fall as is currently the situation. In lock-step sympathy with the U.S. economy, oil prices (West Texas Intermediate as a U.S.-centric proxy and Brent Crude as an international proxy) have historically fluctuated between $20 per barrel and $40 per barrel of oil. In the last ten years, however, oil prices (both domestic and international) have broken out of this historic range, driven increasingly higher by a consistently tight relationship in aggregate supply relative to aggregate demand. We see this relationship illustrated at the top of the following page, where the average spread is only 100,000 barrels of oil per day. Even during the Great Recession of 2008 excess supply increased to 400,000 barrels per day which is still a relatively small margin given that in 2014, supply and demand are estimated to be almost equal at approximately 93 million barrels a day. As a result, West Texas Intermediate and Brent fluctuate between $50 per barrel and $100 per barrel of oil.
Today oil prices are trending toward the lower end of the range based on various recent concerns. One of the latest concerns is the possiblity of oversupply associated with growing United States production in conjunction with OPEC not moderating their production. Other concerns include the economic turmoil in the European Union and a slowing Chinese economy. Our long-term worldwide view, however, is that aggregate incremental demand may be greater than aggregate incremental supply; or, at least, the aggregate supply/demand relationship will remain tight relationship for the foreseeable future as the trend has been for the last 10 years (see graph at the top of Page 2). Either way, we believe energy prices should trend higher long-term (economic cyclicality notwithstanding).