Personal Finance

Are we in for another round of high oil prices?


Oil prices have a stealthy way of luring investors into the complacency of a trading range, before taking a dramatic turn on the cusp of a single geopolitical factor (often in the Middle East) or variety of coinciding factors.

Supply and demand

With any asset, it all comes back to the confluence of supply and demand that drives final pricing. The prior range of $45-55 was largely kept in check by the various supply and demand factors falling into balance. In normal conditions, demand is far more predictable than supply over the long-term, with steady growth being the norm in most nations as populations and industries grow, and the secular trend of emerging market demand growing at a faster rate than that of developed markets. Recessions and shifts to better energy efficiency can alter this pattern a bit, but growth remains the base case.

Supply remains the wildcard

We’ve been told we’re awash in domestic oil, thanks to new North American finds resulting from increasingly efficient extraction techniques, such as directional drilling, which is pulling more oil from nooks and crannies deeper in the ground (and ocean floor). Also, the advent and increased cost-effectiveness of shale oil production has allowed for the opening of large swaths of locked oil previously unusable. This potential volume has threatened global supply, traditionally managed by OPEC, and particularly the leader of the group, Saudi Arabia. The problem has stemmed from the Saudis and neighboring countries needing a certain price per barrel in order to maintain adequate incoming revenue to balance government budgets—these breakevens have generally been well over $75/barrel. In response, OPEC has implemented production cuts in order to artificially constrain supply and keep prices higher. In the past, this has been difficult, due to widespread ‘cheating’ (producing more than promised) by members, but in this case, with everyone needing more revenue, compliance seems to have improved. This last week’s pullout of the Iran nuclear deal by the U.S. and potential for re-imposed sanctions has created another problem for supply abroad (the Chinese tend to be heavier users of Iranian oil). Internal political tension in Venezuela, another large producer, has also threatened supplies.

U.S. infrastructure is an issue

Many of these issues appear manageable, however, one that has created problems for the safety valve of U.S. shale acting as the swing producer is infrastructure. While the oil is there, pipeline and rail capacity hasn’t kept up, due to a lack of upswing in capex spending in recent years. Oil companies and pipeline operators will typically tend to push more significant infrastructure investments if prices are expected to stay high and they have a better chance of recouping their initial fixed costs, so this tends to be a multi-year effort rather than a short-term remedy.

Crude could trade in the range of $60-70 over the next several years

Price movements, especially those due to fickle geopolitics, can be impossible to predict, but it appears consensus from a variety of sources is for crude to trade in the range of $60-70 over the next several years. Not surprisingly, estimates for future prices tend to anchor themselves around current prices. This is a bit higher than the expected range in the $50’s not that long ago, but certainly not exorbitant.


  1. LSA Portfolio Analytics

JULY: 3 Things To Do This Month To Help Keep Your Financial Life On Track

Like maintaining a healthy lifestyle, maintaining a healthy financial life requires ongoing maintenance. It’s much easier to stay on track if you break the necessary tasks down into smaller more manageable tasks. So, here are three quick personal finance tips to help you stay on track this month:

TIP #1

Run a Retirement Plan Projection

Run a retirement plan projection so that you know where you are and what you need to do to get closer to your goals. You should do this once a year to see if you are heading in the right direction. For a quick calculation of what you need to be saving for retirement you can use this calculator at CNNMoney. If you need a more thorough calculation you should consider work with a CERTIFIED FINANCIAL PLANNER™ (CFP®). They’ll have access to more sophisticated software and will look at your entire financial life. If you are already working with a CERTIFIED FINANCIAL PLANNER™ (CFP®) you will want to revisit their projections at your annual review to account for changes in your finances.

TIP #2

Increase Your 401(k) Plan Contributions

For most people, setting a goal to max out your 401(k) or 403(b) plan contributions should be key. At minimum, shoot for at least contributing enough to get your company match. If you’re saving in a 401(k) or 403(b) and aren’t already on track to max it out, increase your contributions by 1%. Re-evaluate in 6 months and increase your contributions by another 1% until you ultimately max it out.

TIP #3

Review Your Investment Strategy

Has anything changed over the last 6 months that would cause you to have to make changes? Births? deaths? New goals? If so, review your plan or speak to your CERTIFIED FINANCIAL PLANNER™ (CFP®) to help you make smart choices.