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By Matthew Coffina, CFA and Jeremy Glaser | 12-09-2014 02:00 PM

Oil's Slide Is Causing Slick Investing Conditions

The sharp decline in oil prices reinforces the importance of purchasing stocks at a reasonable margin of safety, says Morningstar's Matt Coffina.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. A slide in oil prices has led to pressure on the energy sector. I'm here with Matt Coffina--he's the editor of Morningstar StockInvestor newsletter--to see what impact it's going to have on his portfolios. Matt, thanks for joining me today.

Matt Coffina: Thanks for having me, Jeremy.

Glaser: Let's start by looking at that slide in oil prices. What, in your mind, is really the biggest driver here? Is it just too much supply in the market?

Coffina: Well, it seems to be a combination of both supply and demand. So, certainly, the outlook for economic growth in much of the world has been weakening in recent months, particularly outside of the U.S. in Europe, China--and China really has some follow-on effects in other emerging markets. And then that has coincided with very robust supply, especially out of North America but also a return of production in Libya and surprisingly strong production in much of the Middle East. So, the combination of strong supply and relatively weak demand has really hammered oil prices here. As of right now, Brent crude oil is trading at about $67 a barrel, which is basically a five-year low and down from $115 as recently as June of this year.

Glaser: That's a pretty substantial slide. Is that within the realm of what you would expect from commodities? Or has this really caught you and the rest of the market off guard?

Coffina: Well, I think we were definitely taken by surprise in terms of the extent and the speed of the decline. I wouldn't say that this level of volatility is necessarily unusual or abnormal for commodity markets. In the last five years, the price of oil has ranged anywhere from $67 a barrel now to a high of about $128 a barrel. Over the past 10 years, the low was maybe $34 a barrel and the high was $144 a barrel. So, oil prices are very, very volatile and I think that's important for investors to keep in mind. If you are going to be an investor in energy, you need to be willing and able to weather these kinds of disruptions that will happen from time to time.

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