Oil is a volatile business. It can move violently, but it remains a valuable commodity.
The simple secret to make money from oil is to buy low and sell high. And yet because investors are human, the vast majority of investors do the opposite.
Right now, WTI oil is trading at $44.72 a barrel. Brent is trading at $48. Gold is $1,106/oz. Silver is $14.71/oz. The S&P 500 is still dancing around 2,000, as it has been since the end of QE two years ago.
Oil has been one of the worst, if not the worst, investments over the last year. We got a dead cat bounce, and now we are looking to test the 10-year lows.
Invest Like a Five-Year-Old
If you tell a five-year-old to buy low and sell high and show him the graph above, he would say that it is currently a low and you should buy. It is only as knowledgeable adults that we talk ourselves out of such logic.
By definition, the vast majority of investors won’t buy here. Humans fear losing money more than they lust for making it.
This is called loss aversion, and it refers to people’s tendency to strongly prefer avoiding losses to acquiring gains. Most studies suggest that psychologically, losses are twice as powerful as gains.
This fact coupled with the phenomenon that markets always overshoot — on the downside as well as the upside — means there are bargains to be had in the oil patch.
In fact, the global oil market is doing much better than you would think.
Morgan Stanley is saying that the physical oil market is much better than the financial one. China has put a floor on the market as it continues to buy 500,000 barrels a day to fill its oil reserves. China is adding two new storage facilities that can hold a combined 50 million barrels of crude.
As reported by Bloomberg:
“While oil fundamentals aren’t strong, physical markets do not corroborate the substantial weakness in flat price,” New York-based Morgan Stanley analyst Adam Longson said in a report Monday. The “latest oil pricing pressure appears more financial than physical.”
You can see evidence of this in the spread between today’s prices and prices a year out. The spread was $11 and is now $7. This suggests that the fear has peaked.
United States Burning More Gasoline
Since oil fell by half last year, gasoline demand in the U.S. has surged to an eight-year high, as drivers see per-gallon prices fall below US$3 and are on the road again.
Warren Buffett’s Berkshire Hathaway is an expert at avoiding the loss aversion trap and capitalizing on bargains.
It was a big buyer in financials when the stock market crashed in 2009, a move that paid off handsomely. Today, it announced that it has bought $4.5 billion worth of Phillips 66. Phillips 66 is a refiner that has seen margins increase on low oil prices and gasoline prices that haven’t fallen as fast.
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Cheap Oil Creates Demand
It is a truism in the commodity space that low prices create demand and thus higher prices. My friend and colleague, Keith Kohl, has been working in the U.S. shale segment for 10 years now and has made his readers a great deal of money. When he tells me it is time to start adding to my portfolio, I listen.
He writes:
Despite the glut or even the fact that oil prices are struggling to find support above $40 per barrel, there’s a reason I’m buying into the Bakken’s future…
While ultra-low oil prices are taking their toll on the industry, North Dakota drillers are waiting to turn on the taps. The state had approximately 848 wells that were waiting to be fracture stimulated at the end of June.
To put a little perspective on that number, consider that approximately 9,470 Bakken wells have been drilled up through December of 2014.
Yet it’s not the amount of oil supply that Bakken companies can bring online once crude prices recover that will kick-start the third round of Bakken profits…
It’s technology…
Over the last six years, the new-well oil production per rig has jumped around 250%!
Well, not only are Bakken drillers boosting production rates, but they’re also significantly cutting costs. The North Dakota Department of Mineral Resources House Appropriations Committee released a report last January that showed the breakeven prices by county.
The top three counties — McKenzie, Mountrail, and Williams — each had a breakeven price between $30 and $41 per barrel… Even Dunn County (which actually slightly edged out Williams County for oil production in June) boasts a breakeven price of $29 per barrel…
When the report was released at the time, it more than doubled the amount of undiscovered, technically recoverable oil in the two formations to an estimated 7.4 billion barrels.
Thing is, I still believe the USGS is lowballing the real amount and that it’s only a matter of time before USGS geologists head back to North Dakota to update their numbers.
Back in 2013, North Dakota officials were confident that the USGS’ high estimate of 11 billion barrels was a reasonable target — if technology and exploration keeps advancing.
Yet we already know drillers in the sweet spots are making huge strides!
The bottom line is that individual investors like us can still capitalize on the low oil price environment.
Consider today the start of the third round of Bakken profits. It’s like getting in on the ground floor all over again, and we both know how that worked out for investors that bought the bottom in early 2009.
Unfortunately, we’re more than 12 months into the most recent collapse in crude prices, and time is running out. Trust me; the last place you want to be is on the sidelines when these Bakken stocks double over the next 12 months.
When the tide turns and oil prices jump, the real money will be made by those who are in before the news is out.
All the best,
Christian DeHaemer
Check us out on YouTube!Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor’s page.
