Oil Stocks: What I Got Right (and Wrong) About the Oil Market in 2018

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It's that time of year again where market watchers are giving their best guess at what might transpire in the coming year. Many will make bold calls on everything from where the S&P 500 will end up to how low oil will go. These predictions don't usually cost the one giving them all that much because few will ever even look back a year later to see what became of their predictions.

I, however, believe that looking back at how my predictions performed can be far more valuable than guessing what might transpire in the future because it's not only an exercise in humility, but can make me a better investor. That's why I'm reviewing my three bold oil market predictions from 2018 to see what I got right, as well as what I missed, to glean insights that will hopefully make us all better investors in the long run.

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Bold prediction No. 1: "OPEC gets hooked on higher high oil prices and decides to keep cooperating"

OPEC coordinated a production cut in late 2016 with several non-member nations, including Russia. They extended that agreement twice in 2017, including committing to stick with their plan for all of 2018. Some analysts, however, believed that OPEC would abandon that agreement at some point during 2018, adding some supplies back to the market. I, on the other hand, made the bold prediction that OPEC would not only keep a lid on supplies in 2018 but would "extend their cooperation into 2019," stating that "while it might not be at the same rate, I don't see them walking away from what's working."

I got this one right -- sort of. While OPEC did hike its output in late June due to red-hot oil prices at the time as a result of the Trump administration's promise to impose powerful sanctions on Iran, the group reversed course a few months later after the U.S. granted waivers so that most of Iran's key customers could continue buying its oil. That policy shift caused oil prices to crash from the mid-$80s in early October to the low-$50s by late December, forcing OPEC to do an about-face to boost prices once again.

One of the key lessons investors should learn from this quick look back is how much impact geopolitics has on the oil market. The combination of the rapid change in policies by both the Trump administration and OPEC caused significant oil price volatility.

Bold prediction No. 2: "Shale drillers go on a buying binge, but not on what you'd expect"

With oil prices on the rise heading into 2018, shale drillers in the U.S. were on pace to generate a significant amount of cash flow. Many analysts anticipated that they would use this money to ramp up their drilling activities and boost production. I, on the other hand, thought that they would return most of it to shareholders through increased dividends and share-buyback programs.

I got this one mostly correct as oil producers generated a gusher of cash flow in 2018, the bulk of which they returned to shareholders. Anadarko Petroleum (NYSE: APC) and ConocoPhillips (NYSE: COP) were among the leaders. ConocoPhillips started the year by announcing a $2 billion repurchase program for 2018 and a 7.5% dividend increase. ConocoPhillips would go on to expand that repurchase program to $3 billion for the year while boosting its dividend again toward the end of 2018, this time by another 7%.

Anadarko, meanwhile, followed a similar pattern, raising its dividend fivefold, while adding $500 million to its repurchase program in early 2018. Anadarko would tack on another $2 billion to its repurchase authorization before year-end while increasing its dividend a further 20%.

However, both companies also would increase their drilling budgets during the year, which was the case for many peers. In addition to that, a wave of merger and acquisition activity also hit the sector, highlighted by a gusher of deal announcements in the fourth quarter.

The lesson here is that temptation to spend the cash flow from higher oil prices continues to prove too tempting for oil companies to resist. That burned the companies that went on acquisition binges toward the end of the year as they announced deals right as prices were crashing, which really hurt their investors.

Bold prediction No. 3: "Crude confounds expectations and touches $80 a barrel"

Many analysts didn't think 2018 would be a great year for oil prices, with several projecting that crude would be in the mid-$50s all year. I, on the other hand, thought that some catalyst would "drive oil to $80 this year." That's exactly what happened as the global oil benchmark Brent surged to more than $85 a barrel in early October due to the anticipated impact that the Trump administration's sanctions would have on Iranian oil exports at a time where the market was experiencing supply issues in places like Venezuela, Nigeria, and Libya.

However, crude prices quickly crashed after the administration granted waivers to most of Iran's key oil buyers, which enabled it to continue exporting oil. As a result, the oil market went from worrying about tightening supplies to fearing a new glut almost overnight. That caused oil prices to crash back into the $50s, taking oil stocks with them.

The lesson here is that, even if the oil market thesis plays out as expected, something unanticipated could cause it to implode without warning. That's why investors should avoid oil stocks that need higher oil prices to thrive and focus on holding those that can prosper at a lower price point.

The oil market can change quickly

While I technically was right on all my oil market predictions for 2018, they still didn't pay off as well as I'd hoped. That's because the market viciously corrected at the end of the year, which wiped out any gains investors would have made.

However, that doesn't mean investors should avoid the oil market. Instead, they need to focus on owning oil stocks built to weather this volatility since they'll be able to withstand its challenges, putting them in the position to prosper when market conditions improve.

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Matthew DiLallo owns shares of ConocoPhillips. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.