I wanted to write about snow today; I really did.
Unfortunately, I can’t.
Whether it was the nearly three feet of it piled up on my doorstep or the fact that my car is still buried on a Baltimore side street, there was no question it was on my mind for most of the weekend.
But the truth is, I simply couldn’t tear my eyes away from the oil price chart that’s been on my screen all morning.
To be fair, it was hard not to watch crude oil hit a new 52-week low last Wednesday, as it traded as low as $27.56 per barrel.
And even though prices have rallied nearly 12% since, and even though there’s a chance we still haven’t seen the bottom of this market, there’s only one thing left to do…
Buy the Bottom
Look, you don’t need to see the same overused Rothschild quote about blood in the streets to know that oil is at — or pretty damn near — the bottom.
I say “pretty damn near,” because things can still get ugly.
It took more than a year for low prices to take their toll on the U.S. tight oil boom. Remember, only seven tight oil-producing regions in the United States have accounted for 92% of production growth between 2011 and 2014. It wasn’t until last summer that we finally started to see monthly declines:
(Click Chart to Enlarge)
Don’t hold your breath on a quick rally, however. Even though rigs are being idled and projects delayed quicker than you can blink, there are still up to 4,000 shale wells out there that have been drilled but not completed.
Drillers are sitting on these wells until prices recover, which makes sense to a certain degree. Unfortunately, the looming completion of those wells will happen the second crude prices get a little momentum.
That, of course, leads us to the supply glut. Last week’s EIA petroleum report stated that the United States’ crude oil stocks stood at 486.5 million barrels — roughly 88.6 million barrels higher than a year ago.
To put that into a little perspective, U.S. crude inventories haven’t been this high in almost 90 years!
The last time our crude stockpiles were this high, Charles Lindbergh was being given the Medal of Honor for his first trans-Atlantic flight in 1928.
In other words, it’s going to take some time for the supply/demand equation to balance out.
There are a few other things to keep in mind, too.
Russian oil production hit its post-Soviet era record last year. Meanwhile, the Saudis have been stubbornly pushing back any decision by OPEC to cut production.
Whether both of these countries are finally ready to come to the table after oil fell below $30 per barrel is the question at hand. More importantly, you have to wonder if they don’t make a deal to cut production, at what point will they?
And that’s only two major producers. We still have to see how much Iran crude floods the market.
The point is this: The recovery won’t happen overnight, and things could get worse for the sector before they get better.
Which brings us to the one option left for us…
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The Best Way to Cash In on Cheap Oil
Listen very closely to this next part: Anyone can make money from low oil prices.
If you don’t believe it’s true, perhaps take a quick look at how U.S. refiners have performed last year.
Shares of Valero Energy (NYSE: VLO) are 30% higher than a year ago. Up until a harsh sell-off in December, Phillips 66 (NYSE: PSX) was up a solid 35%; Tesoro shareholders were up 45% prior to a similar experience.
Investors weren’t the only ones counting on the performance of refiners, either. Without its downstream earnings last year, ExxonMobil would be in much more trouble than it is today.
Globally, demand is expected to increase by about 1.3 million barrels this year. Even now, the U.S. is consuming nearly 20 million barrels of petroleum products per day; that isn’t going to anywhere anytime soon.
As it turns out, refining stocks were a great way to play energy in 2015, and they were a recurring theme here on the pages of Energy and Capital.
These are the stocks that will prove resilient during a low oil price environment.
However, hindsight is always 20/20, so it’s how you play it now that matters. And considering the bears are still in the driver’s seat, with more and more investors betting oil will slip further, the risk-reward factor makes oil the top trade to look at right now.
The blood is flowing freely in the oil sector. It’s time to buy the bottom or get out of the way.
Until next time,
Keith Kohl
Check us out on YouTube!A true insider in the technology and energy markets, Keith’s research has helped everyday investors capitalize from the rapid adoption of new technology trends and energy transitions. Keith connects with hundreds of thousands of readers as the Managing Editor of Energy & Capital, as well as the investment director of Angel Publishing’s Energy Investor and Technology and Opportunity.
For nearly two decades, Keith has been providing in-depth coverage of the hottest investment trends before they go mainstream — from the shale oil and gas boom in the United States to the red-hot EV revolution currently underway. Keith and his readers have banked hundreds of winning trades on the 5G rollout and on key advancements in robotics and AI technology.
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