Oil seems to be on every investor’s mind these days, several of whom seem to desire higher oil prices. There is even this strange notion going round that a low oil price is bad; it is bad for the economy, it is bad for growth, it is bad for markets. Do not be misled; high oil prices are as good to economic health as those creams on TV are good for growing back your hair.

Let me clarify an important point first. A country whose yearly budget depends 80% on oil sales will not be happy with low oil prices. But for the rest of the world, including our tiny island, that have to import every drop, low oil prices are a welcome gift.

So currently the world is split into two camps. The commodity producers, mainly emerging market economies that have failed to capitalize on years of ultra-high prices demonstrating a lack of foresight in the past.

And energy importers that have spent years shifting the cost of higher energy prices onto consumers, and now are shifting the welcome gains into their bloated budgets showing a lack of foresight into the future.

But now the stage is shifting at a fast pace. Counter to current perceptions, demand for oil continuous to increase. The low oil price is a result of massive oversupply as a result of overinvestment when the price was comfortably over $100 per barrel. In addition, previous restrictions in supply are also coming back. Iran is ready to start pumping amidst record production from Saudi Arabia. 

In the meantime, alternative energy appears to have caught a foothold for the first time in history. Electric cars are here to stay, LED light is the new standard and solar panels are a new fad. Previous restrictions in supply are also coming back. Iran is ready to start pumping amidst record production from Saudi Arabia.

This debate would be superfluous if oil wasn’t the dominant energy source powering the world. However, the direction of the commodity will probably set the stage for the winners and losers in 2016.

My preferred stance would be to avoid the commodity altogether. The risk of getting it wrong resulting in massive losses is considerable. There are too many vested interests and too many unknown.

If I was forced to choose, I would probably short oil. I see the current environment as a proxy war on several fronts. Between the US and Russia, Saudi Arabia and Iran, Shale producers and OPEC; I expect an escalation up to an eventual capitulation. On that day a new world order will be established, and the current oil war is just the start. Until that day the oil price has only one direction to go… down.

This article was issued by Antoine Briffa, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.