Trading in oil can be pretty boring most of the time — at least until it’s suddenly, terrifyingly not. You’ll be surfing the crest of a growing global economy one day, then whammo! Fanatics fly jetliners into the World Trade Center, or tanks roll across the Kuwaiti border. Over the past 35 years, Andrew Hecht, an experienced commodity trader and author, has seen it all. And if he knows one thing, it’s that there’s a ton of money to be made if you bet right on the viscous black stuff.
Indeed, there’s a reason they call it black gold. Just when it would seem crazy to bet on oil — hello, have you heard about fracking and natural gas lately? Or climate change? — the oil bulls are playing the market in a way that would make J.R. Ewing proud. In the first quarter alone, as prices hit lows not seen since the Great Recession, they poured almost $2 billion into one of the world’s biggest oil funds, nearly tripling its assets. Some of that investment has since flowed out again, but the smart money seems to be holding back, waiting for an even bigger score. “The downside is limited, and the upside is explosive,” says Hecht.
For better or worse, oil never really seems to lose out in the long run. You’d think the case against it would be easy to make: It’s last century’s go-to energy source and a nightmare for the environment. There are also those nagging concerns about peak oil and even peak car, given that millennials seem way less interested in their own wheels than their elders were at that age. But oil is still by far the biggest traded commodity in the world. It’s uniquely useful, and so far irreplaceable, as a cheap, liquid fuel — after all, you can’t run a car on coal or fly a plane on solar, and while there are alternatives ranging from electric batteries to natural gas, none are as convenient or deliver the same energy-dense punch as plain old petroleum products. All the fracking in the world hasn’t yet diminished the sense that the days of Texas Tea are far from over.
By contrast, the way oil is bought, sold and used has changed almost beyond recognition in less than a year. For the first time in generations, oil is being driven by markets rather than giant cartels. OPEC, long the bogeyman of the oil market, has been neutered by a huge surge in U.S. production; at the same time, low gas prices don’t seem to be encouraging people to drive longer or buy more gas guzzlers the way they have in the past. “This time it is not business as usual,” said Maria van der Hoeven, executive director of the Paris-based International Energy Agency, in a recent speech.
The most jaw-dropping change by far: OPEC’s effective capitulation in its decades-old game of rigging oil prices. Last November, Saudi Arabia opened its oil taps in what experts considered an attempt to kill off “high cost” U.S. shale-oil production. But it turned out that U.S. operations haven’t been so high cost after all; oil expert Daniel Yergin, vice chair of the research and consulting company IHS, notes that U.S. prospectors improved their efficiency by 65 percent in just a year. U.S. oil production is up to stay, he says — and that means oil prices are likely to stay low. Bad for the bulls, right?
Maybe not — oil always seems to bubble upward. Paul Horsnell, head of commodity research at Standard Chartered Bank in London, tells OZY that U.S. production is “falling relatively quickly.” As a result, he says, a sharp price increase is in the cards, perhaps to near $75, compared with prices in the $50 range today. Philip Verleger, president of the consulting firm PKVerleger, also sees oil rising in the near term; he says U.S. companies have been laggards about reporting their cutbacks, and that government statistics overstate oil production as a result.
Some forecasters believe oil’s great run won’t end for decades — most of us still love our cars, and demand for them continues to grow in the developing world. But there’s also the threat that governments worried about global warming and pollution might finally cap the gusher. Says Verleger: “The oil industry has no friends.”