In investing, sometimes you are drawn to companies which are based on commodity prices, when prices reach a particular level all activity after the price is very profitable. The issue is if the price goes down past the breakeven level, the act of bringing the commodity from the grown is unprofitable, what do you do if you own shares. The first issue is to know what the breakeven point is for your investment. If analysts project higher prices, wait till the prices come because the stock will be very profitable.
In the world of oil, in an article by Dhara Ranasinghe of Reuters, oil prices may be headed towards $100 a barrel (oil prices are determine by a barrel of oil). If oil prices go to $100 a barrel, inflation will result.
At the start of the pandemic, governments around the world locked down their countries for health concerns, this had the effect of lessening the demand for oil. Low demand for oil meant prices fell. As the world has opened up again, Brent crude futures, which were up 50% in 2021) are up 14% in 2022 to $89. Where will the price of oil go? Goldman Sachs is predicting $100 by mid 2022; JPMorgan predicts oil this year at $125 a barrel and increasing to $150 by 2023.
If oil prices go up, policy makers in the Euro will have a difficult time as they had assumed Brent crude prices will be $77.50 in 2022 and declining to $69.40 by 2024.
If oil prices start hurting consumption and slows down economic growth, energy demand tends to self-correct. If you want another viewpoint, Massimiliano Castelli, head of strategy, Global Sovereign Markets at UBS Asset Management expects oil to stay in a range of $60 and $80 a barrel.
Link to dividend paying stocks, for all commodity based companies, the defining element is the price of the commodity. Do your research for all companies tell you what will be the effect if the price of the commodity moves to a particular level, find it or ask the company. If the price of the commodity is high enough to be profitable and you like the outlook for the commodity, then you can buy and and hold for as long as the price keeps the company profitable. If the price falls, you can easily look for alternatives. Often times when commodity companies are very profitable they quickly look to returning money to shareholders in special dividends, stock buybacks or dividend increases.
There are more questions than answers, till the next time – to raising questions.