As the fool who ten years ago told a roomful of analysts and portfolio managers that though our fiduciary and legal duties were being met by our diligence in assessing Y2K risks, a much more crucial factor to the success of the companies we followed was the savviness of their web strategies, I feel historically qualified (like the racehorse with "back class") to prognosticate on the peak price of oil.
Yes, we're talking peak oil, but perhaps not in the crisis way many imagine. I am suggesting that it is probable that the oil price in this cycle will peak in spring / summer 2008. If there are any further spikes, related to perceived shortages or Middle Eastern violence, start selling a few days later and begin the process of underweighting the sector.
Events could cause things to reverse sooner, but if the upward spike trend continues, anything in the 140 to 150 range is poison-tipped and seemingly unsustainable. If oil falls to $60 and then rebounds to 90 before settling in to a trading range around 70 to 80, alternative energy stocks will also take it on the chin and begin one of the wildest rides in the history of stock trading. The leading solar companies already foreshadowed this in 2008, when some names that had been hit hard rallied back a few weeks later, rising 30% to 40% in one day. Still, even if oil were to drop from 125-130 down to 80 or 90, many solar, wind, biofuel and geothermal energy stocks will take hits of 20 to 60%, creating short to medium term pricing and liquidity problems, but clear longer-term opportunity.
It is likely that some renewable power stocks will continue to fall even after oil has corrected,but the names with better fundamentals will likely recover based on their internal, fundamental growth prospects. For a medium risk investor, one may want to start dollar cost averaging investments into alternative energy funds after any oil correction, and if a severe one ensues, increase the amount being invested as the fund values decline. The vast majority of quality clean energy investments are actually more directly related to preventing global warming than they are to the price of oil, yet near term trading will be highly affected by crude oil pricing.
Why do I feel oil is topping? It comes down to a gut feeling that either China, the USA and many more world economies all collapse, or the price of oil goes down. I'd bet on the latter. This means that those heavily overweighted in any type of energy investments may be in for a wild ride, and as the coming weeks are offering profit-taking options, the autumn and winter may bring some value back into play.
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