Investing in Energy sector !

Oil price collapse is a temptation to invest in it, assuming  it’ll be a good investment at this low price levels. But there are some risks associated like, how low it’ll go, how long it’s going to be at this low levels, the investors appetite etc. The US oil Production has increased significantly over the past 6 years with fracking contributing to the incremental barrels. OPEC, the cartel of the oil exporting countries in a bid to drive the small and marginal players out of business is not yielding to any production cuts. Each of these producers need a certain price level to balance their national budgets and maintain welfare programs. The so called swing producer, Saudi has ramped up production this time with the intention to not lose any market share to others. The small players obviously are the ones to fold first, but it’s going to hurt every one. No one is better positioned to withstand a prolonged down cycle. The magnitude of the  price collapse over the past year has caught off guard anyone exposed to the energy sector - oil producers big and small , oil field service companies, energy trading firms, investment banks, investors. Big Wall St firms with lot of vested interest in the energy sector got it flat out wrong. Exxon’s acquisition of XTO energy few years, then hailed a smart move by big oil proved to be ill timed in hind sight with natural gas price dropping over the years. If these top players with direct exposure to the industry and lot of brain power cannot understand this, we should realize how good our predictions can be. With this backdrop, if you still wanted to invest in the black gold, going with modest assumptions for the average price of oil over the next few years will give some margin of safety. One of the age old quotes is very apt in this regard, “ Markets can remain irrational longer than we can remain solvent “.