If you like rollercoasters but don’t want to trek to Dollywood, just watch the oil market.
Earlier this year prices dipped below $60 a barrel. Then came U.S. military action in Iran, and they spiked to $115. A quick drop to 3around $90 followed—until a quickly deleted tweet from the Energy Secretary sent prices on a one-day, $22 joyride: down from $91 to $78, then back up to $87, all within a couple of hours.
These wild swings are nothing new for oil. Over the past decade, oil prices have been more than twice as volatile as the U.S. stock market. (For the data nerds: annual standard deviation of 38.8% for oil versus 17.9% for the S&P 500.)
Years ago I adopted a simple rule: I would never buy stock in a company whose true, intrinsic value could be so wildly manipulated by the actions of some madman in the desert. (It’s much harder to avoid companies whose values can be whipsawed by madmen sitting in Washington offices.) I’ve certainly missed a few profitable trades because of it—but I’m okay with that.
Fueled by Covid lockdowns (“No one is ever going to use oil again!”) and made worse by storage limitations and the quirky mechanics of the oil futures market, prices famously dropped to negative $40 a barrel mid-afternoon on April 20, 2020. Sellers were essentially paying buyers to take the stuff away. The May 2020 futures contract closed that day at –$37 a barrel. The next day—after it expired—it settled at $10 a barrel. That offered one of the most bizarre 30-hour trading opportunities of my lifetime.
A very smart friend of mine was practically jumping up and down about it. I passed. Covid presented plenty of other unique investment opportunities in April 2020—although the ones I chose took a bit longer than 30 hours to pan out.
Unlike that Covid-era rollercoaster, most intense oil price volatility comes from the supply side of the supply/demand equation. The International Energy Agency announces a plan to release reserves: expected supply rises, prices fall. Iran threatens to close the Strait of Hormuz: expected supply shrinks, prices surge.
The world uses—and produces—about 100 million barrels of oil a day. It doesn’t take much of a shift in supply (in either direction) to trigger a big price move.
Humans will almost certainly evolve away from depending on oil to power our lives—just as we’ve always moved from less efficient to more efficient fuel sources: biomass to coal, coal to petroleum-based oils.
But oil prices will continue to be hyper-volatile at least until a more efficient fuel source finally replaces it.
David Moon is president of Moon Capital Management. A version of this piece originally appeared in the USA TODAY NETWORK.