In the past few weeks, the price of crude has dropped like a sinking oil tanker.
Oil prices fell so sharply that it wiped out all the gains posted by crude since the start of the year. And now, at long last, the market pundits are telling you to get bearish on oil and energy stocks.
Follow that advice only if you like losing money.
In fact, stocks leveraged to the price of oil are poised for a nice rally here.
I’m not saying that oil will only go up from here. There are plenty of bearish forces in the market. But the action in stocks is telling us to put on our rally hats.
A New Oil Glut
First, let’s look at the bearish stuff.
U.S. oil production is soaring. Output rose by almost 850,000 barrels a day between August and November. And then it kept on climbing.
In the week ending February 2, U.S. crude oil production crossed 10 million barrels per day for the first time.
(Source: Bloomberg)
Now, America’s oil output has passed that of Saudi Arabia. Soon, we may pass Russia. Whoa!
This weighs on the market. And prices could tumble if projected global oil demand growth doesn’t materialize.
Meanwhile, estimates of oil demand keep rising. But not as fast as oil production. According to the International Energy Agency (IEA), demand in 2018 should hit 100.4 million barrels per day.
(Source)
Supply is likely to keep up due to surging production in America’s shale oil basins. In fact, the oil rig count rose by 26 to 791 for the week ending February 9.
And this has the IEA and others warning of a “new oil glut.” This convergence of forces is what pushed oil prices lower in the past couple weeks.
My Supercycle Investor subscribers rode that trend with shares of the ProShares UltraShort Oil & Gas ETF (NYSE: DUG). It’s an exchange-traded fund (ETF) that is double-short a basket of oil industry stocks.
But on Monday, I told my subscribers to bank nice gains on DUG. Why? Because even as the IEA and other analysts are preaching doom for oil, oil stocks are telling us another story.
Here’s a chart showing the price of West Texas Intermediate Crude (WTIC), the U.S. oil benchmark. Plotted against that is the Energy Select Sector SPDR ETF (NYSE: XLE) and the SPDR S&P Oil & Gas Equipment & Services ETF (NYSE: XES).
You can see that oil is continuing to lower. But both the broad XLE and the more focused XES have put in bottoms. Heck, they’ve put in double bottoms.
So, it’s fair to say the oil doom-meisters suck at throwing the chicken bones. Oil industry stocks are about to head higher. And stocks usually lead the underlying commodity.
Now, I’m not saying it’s THE bottom. But it’s certainly A bottom. A tradeable bottom.
And there are bullish forces out there for oil.
- The surplus in the Organization for Economic Co-operation and Development (OECD) oil inventories has shrunk to just 52 million barrels from 264 million barrels a year ago.
- The global economy grew at around 3.5% in 2017. Most of that was in Asia. This was the fastest pace in years. Estimates for 2018 vary, but they’re generally higher. RBC Capital, for example, recently put out a figure of 3.8% growth.
- The U.S. dollar is zigzagging lower. Oil, like other commodities, is priced in dollars. As the dollar goes down, commodities usually go up.
- Finally, black swans breed in oil fields. By that, I mean we see disasters in oil-producing places from time to time. If we see a big enough catastrophe in, say, the Middle East, that could send prices soaring again.
I believe you can ride either of the funds I mentioned — XLE and XES — higher in this rally.
If you like leverage and can stomach the risk that goes along with it, there is always the ProShares Ultra Oil & Gas (NYSE: DIG).
Just remember to take profits in a timely fashion.
Bulls and bears can make money. My Supercycle Investor subscribers have been showing that with both hands. But as the old saying goes, pigs get slaughtered.
All the best,
Sean Brodrick
Editor, Wealth Supercycle
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