BP16 Feb 2021 14:51
Not so very long ago, the oil price went negative. But in the last three months alone it’s risen by 50%. And while it may take the odd breather here and there, there’s no doubt it’s heading higher, says John Stepek.facebook twitter Money MorningIs the oil price heading for $100 again?I find markets endlessly fascinating. One minute, an asset is dead in the dirt. No one wants it. If you hold it, you’re a fool. It’s practically radioactive. The price might be low, but it’s not cheap. It’s yesterday’s asset.Next minute, it’s shot up and suddenly everyone wants a piece of it. The price might be high, but it’s only going higher.I’m not talking about bitcoin (though the story applies equally). I’m talking about oil.John Stepek,Executive editor, MoneyWeek@john_stepekAdvertisementExtrapolation can be a handy source of contrarian investment ideasI’ve told this story a lot in recent months so I won’t belabour it today. But oil has been on a serious tear in recent weeks.At the start of November – so just over three months ago – you could buy a barrel of Brent crude for less than $40 (for simplicity’s sake, let’s not worry about how you’d store it). This morning, it’ll cost you more than $60. That’s a 50% increase in just a few months. I mean, sure, it’s no GameStop. But it’s pretty good going for a boring old fossil fuel that had been written off as yesterday’s old dinosaur gunk.Oil companies have been queueing up to disavow the stuff. Investors have been competing with one another to see who can condemn stranded assets and laud the rise of electrification the loudest. And the Covid-19 lockdowns have created a false sense of collapsing demand and accelerated transition.This last point is hard to wrap your brain around, but it’s absolutely vital to understand if you want to be an active investor (ie, you want to try to beat the market by taking advantage of temporary mis-valuation opportunities created by people’s behavioural tics or other non-fundamental factors).No rational person would believe that the current drop in oil demand is because we all now drive Teslas. Everyone understands – in their head – that this is because the global economy has been shut down by a virus. Everyone understands – in their heads – that planes will one day fly again, and that it will take a bit longer before the economy is fully weaned off fossil fuels.However, as human beings, we’re terribly prone to an immediacy bias. We can’t help but extrapolate our present situation way out into the future.I mean, think about it: how well do you remember life before the pandemic? We’ve been doing this for a year now.I watched Die Hard with my kids at Christmas (it’s a Christmas film, after all). There’s a scene near the start where Bruce Willis gets off a plane and goes into the airport. One of us said: “
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