Trading Today's Oil Glut

“It’s 1986 all over again,” my colleague blurted out this morning. His voice carried over even though it was barely a whisper.

I knew he was talking to himself, but I also knew he was wrong.

Granted, I was a little distracted back in 1986. The Mets had taken the Red Sox in seven games to take the World Series; the Challenger tragically exploded in the skies above Cape Canaveral; the Iran-Contra affair was revealed to the world that November.

There was also a pretty serious oil glut taking place.

Don’t get me wrong; there are certainly some similarities.

When the Saudis turned on the oil taps in 1986, the price of crude oil plummeted to around $10 per barrel (or about $22 per barrel in today’s money). We recently saw WTI prices dip as low as $26.21 per barrel a month ago.

Also remember that non-OPEC production was on a roll back then…

The Soviet Union was the world’s largest oil producer at the time. Output in the North Sea was slightly more than 3 million barrels per day and would increase to more than 6 million barrels per day within the next decade.

And with a little help from Alaska’s Prudhoe Bay Oil Field, U.S. crude output was once again on the rise, after peaking at just over 10 million barrels per day in November of 1970. More than 2 million barrels of crude oil was being extracted from Alaska’s North Slope in 1988, accounting for roughly one-quarter of all U.S. domestic oil production.

Today, non-OPEC countries are expected to provide most of the supply growth from now until 2035.

OPEC in the 1980s, meanwhile, was reeling from its price war during the previous decade and locked in a bitter battle against non-OPEC oil supply.

Members were fighting amongst themselves over what action to take — to cut or not to cut production?

Sound familiar?

There is, however, one slight difference… and it’s the reason you may want to take advantage of the bottoming oil market right now.

Consumption Junction

Keep in mind that the supply glut in the 1980s also coincided with a period of weak demand.

Here in the United States, demand for crude oil and petroleum products averaged 16.2 million barrels per day in 1986. Despite being a slight 3.5% increase over the previous two years, it was still a considerable drop compared to the 1970s (U.S. oil consumption topped more than 18.8 million barrels per day in 1978).

Today, gasoline demand is at near-record levels:

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In fact, demand for oil and petroleum products is not only heading higher, but could reach over 20 million barrels per day in short order.

Of course, let’s also not forget that oil consumption within OPEC could quickly get out of hand.

Saudi Arabia’s oil demand is projected to rise to over 8 million barrels per day by 2030. Even giving Saudi Aramco the benefit of the doubt and assuming the NOC is extracting 12 million barrels per day effectively puts a severe strain on future oil exports.

You don’t think it’s a coincidence that the Saudis are pouring billions into solar power projects, do you?

Go Long on Oil or Get Out of the Way

Let’s be clear here: despite the similarities, this is not 1986.

Perhaps the most glaring point is that OPEC (and Saudi Arabia, for that matter) has been unable to agree on a production cut thus far. And it’s unfortunate that the members that are desperate to lower output, like Venezuela, don’t have the power to sway the Saudis.

Don’t be blinded by the 45% increase in crude oil prices over the last seven weeks.

It’s going to come down to the Doha meeting on April 17^th.

Don’t expect much to happen until there’s some resolution. If those talks end up in a stalemate, with no production cuts to speak of, grab some popcorn and watch the more emotional investors in the market stampede their way toward an exit.

But even though things can easily get worse before they get better, especially given the fact that money is getting incredibly tight for companies drilling in the Lower 48, you just need to be in the right position.

Sometimes those incredibly valued energy stocks can simply fall in your lap.

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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