Expect the Unexpected: A Lesson From Oil Prices

March 21, 2022
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It wasn’t long ago that oil went negative.

I know, I know… hardly believable now, right? When was the last time you filled up your gas tank? Ouch.

How times have changed. At the beginning of the coronavirus pandemic, the world shut down. I can still remember driving around and hardly seeing anyone on the streets, as an eerie quiet permeated our little town.

In those days the contract futures price of West Texas Intermediate oil plunged far below zero one day in April of 2020. Imagine not getting paid to sell oil but having someone pay you to take it off their hands.

Unheard of. Darn near impossible. History is filled with seemingly impossible and unlikely events. This doesn’t just work on the downside. It works on the upside too.

Lesson: expect the unexpected.

Who would have thought in late 2021 that oil would be as high as it is now? The US Energy Information Administration (EIA) sure didn’t. According to the S&P Global Commodity Insights in December, the EIA was expecting the first few months of 2022 to have “limited upward price pressure in the coming months” and forecast “prices (of WTI) to fall further in 2022 to average $66.42/b, down $1.86/b from the prior month's estimate.”1 They were also forecasting something they called “relief at the pump.” Say again?

They were wrong. March has seen oil significantly over $100 bucks a barrel and gas prices at the highest ever in the US.

How did the EIA get it so wrong? There expectations got crushed by exogenous events. Events that led to costs much more disturbing than oil and gas, the lives of people due to war.

What is the financial takeaway here? Expect the unexpected through portfolio diversification. Diversification matters!

Prices can move fast. Up and down. Recent history has proved this in oil and in stocks. So don’t make rash decisions.

Prepare your portfolio for the worst and the best.

And buckle your seatbelt.

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Source:

1. "Global oil supply, demand to find balance in early 2022, ease pressure on prices: EIA" (Dec. 7, 2021). Accessed online: https://www.spglobal.com/commodity-insights/en/market-insights/latest-news/oil/120721-global-oil-supply-demand-to-find-balance-in-early-2022-ease-pressure-on-prices-eia