Oil stocks are down. They may look quite tempting, especially for a contrarian who believes in reversion to the mean. The danger is the reversion may take a long time or may not happen at all.
Crude oil has fallen steeply from about $120 per barrel a few years back to about $32. Media is awash with both bullish & bearish forecasts, which are nothing more than amusing reads, considering nobody foresaw the precipitous fall in oil price a few years back. Stories & reasons abound for both scenarios. Oil prices should drop further because of a supply glut, slowing economies & demand, increasing attractiveness of alternative energy sources, and so on. The other camp argues oil prices should increase because of political tensions & diminishing oil revenues in the middle east, rising differences within OPEC, higher costs of production which cannot sustain low prices for long, and so on.
A good way to think about oil prices was put forth by Howard Marks of Oaktree Capital in a note titled ‘The Lessons of Oil”, sometime back. Forecasts are useless, more so for a commodity like oil in an extremely complex & volatile global political economy.
Some savvy value hunters have started taking positions in oil exploration & production companies, based on factors like estimates of proven reserves, management capability, & strength of balance sheet
So what can the trigger-happy contrarian do?
Perhaps allocate a small amount, which has to be written off as lost capital from day one, to buy a few such stocks to learn (not earn from) the lessons of oil. Skin in the game is a good way to learn.