Is Warren Buffett betting on an oil price recovery?

Warren Buffett, the legendary investor and billionaire has been adding to his large stake in oil refiner Phillips 66, despite crude oil prices fall to 12-year lows.

Over the past week or so, the billionaire’s investment company Berkshire Hathaway has paid around US$390 million buying up more than 5 million shares, according to filings with the US Securities and Exchange Commission.

Berkshire now owns more close to 66 million shares, around 12% of Phillips 66 – worth more than US$5 billion. Interestingly, Berkshire began acquiring its stake early last year as oil prices plunged from above US$100 a barrel in 2014. Despite the crash in oil prices, Phillips 66 share price has gained 17.8% over the past 12 months to trade at US$79.25 on January 14, 2016.

Brent Crude and West Texas Intermediate (WTI) oil both trade around US$30 a barrel currently, thanks to a global oversupply of oil. So far, none of the big producers have shown any sign of cutting back on production in an effort to push prices higher, and it seems a big game of chicken is being played out. On one side are the high-cost producers – particularly those sourced from unconventional shale oil plays in the US – against the low-cost producers including members of the Organisation for Petroleum Exporting Countries (OPEC), including Saudi Arabia, Iran and Iraq.

OPEC appears to be hoping that the higher cost producers will be forced out of the market, allowing oil supplies to lessen and oil prices to recover. So far, that hasn’t happened, but smaller, higher cost oil producers can only keep operating at a loss for so long.

The other problem forcing oil prices lower is that demand is also falling. The International Energy Agency forecast global oil demand growth to fall from 1.8 million barrels a day in 2015 to 1.2 million barrels a day in 2016.

But Buffett appears to be betting that at some stage oil prices will swing higher – or is he?

Foolish takeaway

It may look like Buffett is betting on oil – but Phillips 66 is not an oil producer, instead gathering, transporting and processing oil, natural gas and gas liquids. The company buys and refines crude oil into other petroleum products, suggesting that cheaper input costs could mean higher profits for Phillips 66. In that sense, Phillips 66 is much more like our own Caltex Australia Limited (ASX: CTX) than oil producers Santos Ltd (ASX: STO) or Woodside Petroleum Limited (ASX: WPL).

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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