Read through the promotional material for a good number of financial products and you will find a wealth warning telling you that past performance is not a guide to future returns. Some investors focused on items like oil and gas prices might disagree with that observation.
Investment companies are understandably keen not to make any rash promises. After all, they want you to put your money with them based on their expertise. However, any private investor is free to do their due diligence. Someone who can look at past events and apply that knowledge to the future can come out ahead.
This seems to be the case with some savvy oil and gas investors. This group often believe that vital clues could be gleaned and trends followed, as a route to profits. Here is a look at what aspects of past performance some experienced investors are looking at in order to determine their current investment strategy.
Following the cycles
The oil and gas industry is very cyclical. Time and time again, we see scenarios repeated and oil and gas price cycles responding in a similar way now to how they have done in the past. It is not that simple of course because geopolitical risks change and the shale oil boom in the U.S has definitely been a factor that has had an influence on crude oil prices.
Markets seem to react much the same way even if the news cycle and circumstances are slightly different each time.
Basically, oil and gas prices tend to head north when supplies fall short of current demand levels, before falling back down again after a brief spell at the top of the current cycle, when new supply sources are announced and growth demand falters.
If you look at charts for the last 50 years or so you can see global oil consumption has steadily risen at a steady trajectory, but crude oil prices have demonstrated a number of peaks and troughs within that same period.
Moments in time
If further proof were needed that oil and gas prices are cyclical you only have to look at certain events in time or periods where prices clearly respond in a positive or negative way to events and market conditions, as well as supply and demand factors.
Oil prices fell off the ledge around 1986, for example. That decline coupled with price volatility stuck with us throughout the 1990’s.
By the time we got to 1998, low crude oil prices were really starting to bite. We witnessed a flurry of major oil company mergers on a grand scale. The result of this consolidation in the industry was that these new mega-companies were financially leaner. This meant they were spending less capital overall and were able to prosper from an upturn in prices.
Learning from the past
There are numerous different ways to play oil available to investors these days. If you want to time your investments with the price cycles, the past provides a clear trend. This might just help predict with what will happen in the future and when it might happen.
The last six major oil price cycles have all tended to last for about 24 months max. If the same cycles are going to be repeated again going forward, having some idea of where we are in the current cycle could make a substantial difference. A strategy like this could come into play if you are shorting oil futures, for instance.
The impact of renewable energy
There have clearly been price cycles that have repeated themselves with a great deal of regularity in the past. Still, nothing stays the same forever. You could argue that the future of oil and gas production is under pressure and set to change when you consider the continued growth in renewable energy.
Oil and gas are likely to continue to remain important commodities for the next couple of decades at least. With this in mind, investors want to know if history will repeat itself for the foreseeable future?
The answer to that question depends on how much faith you have in the predictable price cycles we have witnessed in the past.
Editor note: This was provided by Thomas Kent. Thomas is an avid stock market and money watcher. He loves to share what he has learned by posting online. Look for his articles on a number of personal finance and investment blogs.