January 8, 2015
The collapse in oil prices since last summer showcases that crude was in a “classic bubble” that will take years to regain its peak.
That’s the conclusion of David Rosenberg, chief strategist and economist at Gluskin Sheff & Associates Inc. in Toronto, who compared oil’s rise and sudden fall to other asset bubbles.
“With perfect hindsight, oil was in a classic bubble: parabolic price moves, tremendous excitement, widespread participation by the investing public, a ton of leverage,” he said in a January 8 report obtained by MoneyNews. “The average bubble burst is just over 50 percent in terms of peak-to-trough impact, and at current levels, the oil price is pretty well there.”
The price of crude traded in New York plunged as much as 57 percent from last year’s June high of $107.73 to $46.83 a barrel on Wednesday. Demand weakened as China’s economic growth slowed and the fracking boom helped to boost U.S. production to the highest since 1983.
If bubbles in other assets such as U.S. home prices, Nasdaq stocks and gold are any indication, oil will not return to its June high for years, Rosenberg said.
“What happens next is that asset class in question spends years in purgatory, a new and lower range without ever getting back to a peak,” he said.
Looking back even further than the past six months, oil peaked at $145 a barrel in June 2008 and fell after President George W. Bush lifted a U.S. ban on offshore drilling.
Rosenberg said the remaining concern about oil’s collapse is its effect on the financial industry, especially if write-downs are needed on assets tied to crude prices.
One of the major causes of the financial crisis was the meltdown in housing prices that rippled throughout the economy.
Meanwhile, the drop in oil prices is creating opportunities for one star investor.
Legendary energy entrepreneur T. Boone Pickens is taking advantage of crude’s decline to buy stock in beaten-down energy companies.
He told Fox Business Network that oil will rebound to $100 a barrel in 12 to 18 months.
“Demand, with the lower price of oil, demand will come up,” Pickens said. So will merger and acquisition activity in the oil patch.
Pickens bought three new stocks in the energy sector in the third quarter: Western Refining (WNR), WPX Energy (WPX) and Gastar Exploration (GST), according to Guru Focus.