The price of oil has been all over the news lately. Crude oil has taken a beating in 2015. Prices of crude have dropped 50 percent from a year ago. Investors like James Dondero says that is the nature of the crude black beast. His company, Dallas-based Highland Capital Management has more than $26 billion in assets under management, and a decent percentage of those assets are linked to the oil business in some way.
Dondero thinks investors shouldn’t retreat from oil just because there is weak consumer demand at the moment or because the U.S. is producing more oil than ever before. Yes, there is an oil glut, and the strong dollar and declining corporate profits have hit oil stocks like the plague. And if that news isn’t enough, Iran is chomping at the bit to enter the global oil business, and that could exacerbate the oil supply, according to Mr. Dondero.
But Dondero and other investors say the current oil situation could turn out to be a blessing in the long term for oil company stocks. Seasoned investors like Dondero know that commodities have boom cycles as well as bust cycles. This happens to be a bust cycle, so oil companies are stopping production and delaying and cancelling shipments due to the low prices. Oil companies are known to panic, and Mr. Dondero believes they will intentionally make the oil supply look lower than it is. In other words, another gas crisis may be brewing because demand for oil is going to increase and there will be a supply issue that forces prices up again. When that happens, and investors like Mr. Dondero think that will happen very soon, the boom cycle will begin again.
Investors like Warren Buffet have already made the move and bought an insane amount of oil stock. The old supply and demand saga is going to be a reality again, and investors like Buffet know that means hefty returns on their investment. Even though oil production exceeds demand by more than 2 million barrels now, investors believe that will change as the weather changes.
What all that means in plain terms is oil stocks are a great investment now. Oil stocks are trading at bargain-basement prices and all the big investors like Dondero, Pickens, Buffet and Icahn are buying oil stocks. Mr. Dondero says energy stocks have always been great in the late-stage bull markets. They perform better in the last year of a bull market, and the market is in the sixth year of the bull phase this year. Investors like James Dondero know that the world runs on energy and fossil fuel energy is the only kind of energy that can meet the demand at this point in time.