How to Play Oil's Bottom

Mark my words: By the end of 2015, oil prices are going higher.

Way higher.

And once they do, so too will the shares of companies throughout the energy sector.

Services firms, drillers, tankers, pipeline companies, and all the rest stand to gain from the rise in prices I expect to see by 2016.

In fact, I wouldn’t be surprised if we saw prices rise back to normal levels in the third quarter.

Don’t get me wrong; oil may not go back up to $110 per barrel like it was before the crash, but it could easily hit $80 or $90 per barrel by the end of the year.

And that’s the kind of rise that will move stock prices and bestow fortunes onto investors who buy in time.

Part of my rationale for this “bold” prediction involves the recent history of oil prices.

Take a look at this chart…

As you can see, in 2008 and 2009, oil saw an even bigger price swing than it has over the last seven months. It moved from $143 for a barrel of Brent crude all the way below $40 per barrel.

But after a closer examination of the chart, you can see that by the end of 2009, prices had already recovered in a big way.

Sure, oil was still well below $143 per barrel, but it doubled in price from its short stint at the bottom.

You’ll also notice that the chart in 2015 looks curiously similar to the chart in 2009. It’s a valuable signal for investors to heed: Oil will rise again, and in a big way by the end of this year.

Now, I know you and any pundits out there who would disagree with my thesis are probably thinking that economic factors today are vastly different than they were in 2008 and 2009.

You’d be right to think so. In 2009, we were in a terrible recession, whereas today the economy and stock market is in much better shape.

However, where oil is concerned, we are in the exact same place now as we were then.

Think about it: Right now, supply is high and demand is low. That’s the same as it was in 2009 — everybody lost their shirts and didn’t have as much money to spend, so demand was low while supply was high.

Soon enough, the economic wheels began to churn and oil prices went up, taking stock prices with them.

And this same cycle is set to repeat itself all over again…

OPEC Burns Through Cash

Oil prices will rise per my prediction because OPEC and other nations that rely almost entirely on commodities to fund their budgets are running out of cash.

When oil prices are high, nations like Saudi Arabia, Qatar, Kuwait, and Nigeria receive billions upon billions of petrodollars.

These petrodollars are used fund the government’s budget and then are saved in wealth funds or via other means for a rainy day.

With oil prices so low, that rainy day is here, and the big oil exporters of the world are burning through their stores of foreign currency (read: dollars) at a record pace.

In February alone, the Saudis spent $20.2 billion, the most in 15 years, while Angola, Algeria, and Nigeria spend about $20 billion per month combined.

According to Bloomberg, if Algeria continues to dip into its savings at its current rate, it will run out of reserves in 15 months.

With this in mind, OPEC leaders are already considering reversing their plans to bankrupt U.S. and Russian oil producers with cheap oil.

Of course, the only country in OPEC that seems to matter these days is Saudi Arabia. And the Saudis have a massive wealth fund…

As you can see above, when compared to their budget, the Saudis have enough money to last them three years — more if they can stretch it.

Still, the goal for the Saudis was never to deplete their currency reserves.

And as I mentioned last Friday, Saudi Arabia’s oil minister Ali al-Naimi has discussed raising prices if other producers (Russia and the United States) can agree on a limit.

I’m not sure such an agreement is possible, but oil is still going up thanks to the rest of OPEC.

Welcome to Your Payday

As we wait for OPEC to get cold feet on keeping oil prices low, it’s imperative that investors who want to make money do not ignore these signals.

Remember…

• The chart history tells us oil prices are going to move higher by the end of the year.
• OPEC member nations, including Saudi Arabia, are depleting their cash reserves by many billions per month.
• OPEC is bringing in $350 billion dollars less per year at current prices.

When you add all of this together, you can see it’s only a matter of time before the rest of OPEC forces Saudi Arabia’s hand to cut production.

Once it happens, oil prices will rise to a more profitable level, and U.S. oil companies will resume some of the drilling programs that were shuttered during the bear market.

That means investors who buy before the third quarter will see a massive payday thanks to oil stocks.

It’s that simple with oil investing: Oil always goes up, so buy when it’s low and sell when it’s high.

OPEC meets again in June, and although it’ll still be the second quarter, I suggest you buy before that time, as any bullish announcement will send shares higher and minimize gains for those who don’t get in ahead of time.

Until next time,

Keith Kohl

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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.

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