Story Highlights
- Crude oil investments generated more than 90% gains the last time the Fed began a rate cut cycle in September 2007.
- On July 31, the Fed cut interest rates for the first time since 2008 to aid economic growth … but it didn’t commit to more cuts.
- Worried by this, investors drove the market down. And crude oil fell by 12%.
- The market decline creates a buying opportunity — here’s an easy way to profit from a rebound in oil prices.
The last time the Federal Reserve began a cycle of rate cuts — in September 2007 — an investment in crude oil generated more than 90% gains in 10 months’ time.
But that didn’t occur during an incredible bull market in oil stocks.
The Fed was responding to economic worries that kept oil stocks subdued. Oil companies had to navigate economic worries. But oil prices were free to run.
You can see what happened to oil in the chart below:
The little red arrows point to interest rate cuts. You can see the oil price per barrel rising after each rate cut.
Here’s the thing: The Federal Reserve cut interest rates two weeks ago. That’s the first time in more than 10 years.
And it will spur another rally in crude oil.
Sure, the crude oil market was different back then. The price of crude oil won’t reach $100 per barrel again anytime soon.
But it doesn’t have to. Large double-digit returns are always possible when you catch a move in crude oil.
Now’s your time to bet on a chance to make 28% on oil by October … or even 50% by the start of 2020.
Why Crude Oil Is Volatile After a Fed Rate Cut
The Fed uses low interest rates to stimulate the economy when it is struggling to grow. Since economic activity affects the crude oil market, rate cuts are good for the price of oil.
Think of an interest rate as the cost of money.
A lower rate is a lower cost to borrow money. A higher rate means a higher cost.
The Fed believes consumers and businesses will borrow more when it costs them less.
But even though it cut rates two weeks ago, it disappointed investors.
You see, investors were expecting more rate cuts this year. They wanted reassurance the Fed would do whatever it takes to aid economic expansion.
Their disappointment drove the S&P 500 Index down by as much as 7% in seven trading days.
Crude oil lost more than 12% in just five trading days.
The price action — the up-and-down movement of stock prices — ignores the fact that the Fed will likely cut rates again this year. In doing so, it’s guarding against a stronger U.S. dollar, absorbing trade war pressures and alleviating investors’ fear.
Which means this market decline is a buying opportunity for investors like us.
A Simple Crude Oil Exchange-Traded Fund for Massive Gains
History shows the energy sector is among the leaders once the Fed starts to cut rates.
The energy sector rose 6.87% on average in the six months after the start of each of the last six rate cut cycles.
Of course, we can do much better than 6.87%!
On July 3, I told you the United States Oil Fund (NYSE: USO) is due for a seasonal rally once we get into the month of August.
USO is an exchange-traded fund (ETF) that lets investors profit from changes in the price of oil.
Buying USO is like buying a stock — it’s an easy way to profit from a rebound in oil prices.
It jumped more than 90% beginning in September 2007, the last time the Fed started cutting rates.
Even if we catch a fraction of a move like that, we can make a bunch of money with USO.
Matt Badiali and I recently launched Apex Profit Alert. Our service will help you earn big gains on oil ETFs, oil stocks and a long list of natural resources stocks.
We’d like to help you make monster gains in this sector. Click here to learn more and sign up.
And stay tuned for my article next week with more on how to profit from the Fed’s coming rate cuts.
I’m going to discuss why the current unemployment rate in the U.S. will motivate the Fed to support the markets — and the economy — with more rate cuts.
Good investing,
John Ross,
Editor, Apex Profit Alert