Xun Energy, Inc. (fka XNRG)

[Carsmax177]

Interesting article on oil prices and commodities. This was the part that caught my eye:

Commodities and the stock market present different opportunities and risk. In the stock market, investors take the risk of losing money in case of corporate bankruptcy or a widespread crash. But in commodities, the big risk is a supply shock. Supply shocks lead to price explosions akin to a crash, but in the ascending way.

The case for oil

Nobody knows how low the oil price will go, or when the low will happen. Anyone claiming to know the oil price low or the specific timeframe of this occurrence, is either lying or delusional. Markets usually fool most participants by either moving too quickly or too slowly, or reaching unthinkable prices (high or low). All of this presents a huge financial risk. Is there a way to reduce the risk?

Yes. The answer lies in time. Investing in oil, directly through ETFs or indirectly via oil companies, will be more or less risky according to the investment timespan. Investing for the next 6 months - expecting that oil will become more expensive by the end of the year - is extremely risky. But if your investment horizon is 5 years, it is virtually impossible that over that time frame oil will not go up at some point. The commodities cycle always works.

Oil is not something we buy out of pleasure, it´s something we need. Over the next 5 years, supply will eventually crash as more and more producers are put out of business. And when the oil market reaches production deficit (which it eventually will), prices will sky rocket because no new production will come online for a meaningful period of time.

It is impossible to know or predict how low oil will go, and how much longer the slump will last. But we do know that the slump will not last forever and that it will end with a price bang to the upside. Five years seems like a very reasonable investing horizon to collect a high octane reward. This doesn´t mean that you should invest in oil for exactly 5 years, it means that you have to be prepared to wait at least five years before investing. The exact moment to leave the market will depend on the assessment of the situation as it unfolds.

The risk/reward ratio

At around $50 per barrel, oil presents an excellent buying opportunity. Some analysts say that it can go as low as $30. If that does happen, the supply deficit will be huge and prices are guaranteed to at least double from that low. If and when the oil price goes back to $60 (a very conservative estimate over a 5 year period), if you bought at $50 you will get a 20% gain in 5 years. That´s better than T-Bonds, and probably safer in today´s world...

What if oil goes back to $80? Once again, it´s not a crazy expectation, it has been much higher than that for years. In this case, you would get a 60% profit. The last time oil prices crashed (2009), oil more than tripled in value just 2 years after the low. The $80 oil forecast is therefore quite attainable and probably conservative.

The big bonus: if you decide to invest in oil via oil companies, there is a very good chance the shares will rise at a faster pace than the oil price increase (example: oil price goes up 30%, oil producers rise 50%). That is how shares of commodity producers usually behave (there is a mathematical reason for this that will not be explained in this article).

It is highly unlikely that oil will remain below $50 over the next 5 years. Only a worldwide wave of deflation would support such an anomaly, and in that case, most other investment options would present an even bigger risk of loss. The downside for oil from current levels is much smaller when compared with most other investment classes.

Full Article: http://marketoracle.co.uk/Article51564.html