Is Oil headed to $300?

On a recent weekend trip outside Toronto, my wife asked me casually about the burning subject of increasing gas prices. 

“How much further is Oil headed?”

My fast response was that it was headed to $50 before turning back up to $300. She jumped out of her seat and before even taking a breath said…

“If prices are going to increase, who would want to travel, it will be exorbitant.” 

And we started playing all the scenarios in our heads. It did not matter to her that in the short term Oil could come to $50, she was a long-term investor and was more interested in what was happening to Oil in the longer term. Since she was more open to the what-if scenarios, the discussion continued regarding…

– Demand Supply Shocks

– Price Elasticity at $300 Oil

– Natural Gas Price Increase

– Paying higher for electricity even with a Tesla

– Family size, parents, more seats

– How to keep ahead of inflation etc.

The idea of $300 Oil is a great “what if?” scenario because it prepares us for an eventuality that we may not want to believe and just because we don’t want to believe, is why such scenarios prepare us for the unpredictable.

Of course, as it normally happens, my thoughts lingered on and I started wondering, what would we do with our personal portfolios if $300 Oil happened in the next few years?

1 – Since commodities is a mean reverting and volatile asset, large retracements are natural. So before I worry about $300 Oil, I would be excited about looking at buying Oil after a large drawdown.

2 – At $50, one would wonder about zero or negative oil and another pandemic. I won’t worry about that. I am fine owning USO at $50 or near $50 for more than a few years in a diversified portfolio.

3- If $300 Oil was an eventuality, Alternative Energy assets should discount that news faster, and hence TAN, FAN, and ICLN et al. should all be rushing higher, anticipating there day in the sun. Alternative energy will finally after all fits and starts, become mainstream. The $300 Oil is also the death of the Oil scenario i.e. the beginning of the end of the Oil, fossil fuel, carbon era. Humans may not be courageous enough to dump an inefficient energy source but when it comes to Oil, it is very elastic at a certain price.

4- We are at the start of the Natural Gas era, which means more demand for Natural Gas and consequently an increase in electricity prices. One after all can live without Oil, but only some saints can live without electricity. I can bet on generation Z’s stickiness with their iPads.

5 – So I would also be a UNG buyer after a what if 50% reversion happens from current levels.

6 – An Oil correction should also influence the whole commodity complex, which means potentially a great tactical opportunity to buy into a commodity momentum crash in potentially a few months plus a few weeks [who knows].

7 – This should jiggle Gold out of its slumber, bringing the much-needed awakening for the giant.

8 – And if Gold moves, other precious and base metals would move too and finally potentially get cheaper and get ready for a larger commodity secular upside.

9 – As you can’t expect Gold to be in a bear market, while Oil goes to $300, any drawdowns to $50 in Oil should have a healthy bearish effect on precious metals.

While I was musing all this in my head, I had somehow forgotten that I am no forecaster, no more. No one can forecast. In my world, only machines know the best way to create sustained wealth using automated smart beta portfolios, or portfolio of portfolios. Which meant I should be thinking differently. For the June 30th AlphaBlock launch [which is getting likely by the day] when our ship will finally see the ocean, we should have the following DIY portfolios ready.

Exceptional & Rich Agro

Exceptional & Rich Commodity

Exceptional & Rich Global Electricity

Exceptional & Rich Alternative Energy

I am hopeful that the global investing community has some well-earned scar tissues now [owing to the pullback] and this has created more openness for machine investing solutions.

All I have to do now is patiently wait for AlphaBlock’s amazing data science team to adapt the Exceptional & Rich method to commodities, generating 3-5% risk-weighted excess on these portfolios and we could have the luckiest 2022 summer ahead of us with cool non-correlated DIY portfolios, which eventually should keep our early adopters ahead of inflation and $300 Oil.

AlphaBlock Team

PS: The Agro 10 and Commodity 22 are good to go. Watch out for updates on how E&R buried the S&P GSCI [DBC] and S&P GSAG [DBA].

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