There’s a reason why oil is called black gold.
Like bullion, it’s difficult to find in large quantities, hard to get out of the ground, and — relative to all the people who want or need it — there never seems to be enough to go around.
There’s one key difference though: Bullion can be sliced, diced, melted, cooled and reused again.
ADW Capital’s 2020 letter: Long CDON, the future Amazon of the Nordics
ADW Capital Partners was up 119.2% for 2020, compared to a 13.77% gain for the S&P 500, an 11.17% increase for the Russell 2000, and an 8.62% return for the Russell 2000 Value Index. The fund reports an annualized return of 24.63% since its inception in 2005. Q4 2020 hedge fund letters, conferences and more Read More
Oil? We just keep burning more of the stuff every day.
All of which means — given the fearful headlines about a new “bear market in oil” — this is a second chance to buy into petroleum stocks or the commodity itself … and be well rewarded.
Oil’s Zigs and Zags
In case we’ve all forgotten, oil basically doubled in price — climbing to $51 a barrel — in just four months’ time earlier this year. Did we think further advances were going to come without a pullback (or three)?
The oil market is justifiably famous for its volatility, especially when rocketing out of its periodic bear-market cycles.
It happened in 1986 when oil jumped 70% in a month’s time. A vicious pullback retraced nearly the entire gain, only to have the commodity double in price over the following year.
It happened in 1994.
And then again in 1999, 2001, 2003, 2006 … well, you get the point. Twenty-percent pullbacks (and worse) go with the territory when the smell of a bear market still lingers in the air.
The key thing to remember is that the fundamentals for higher prices remain quite good. Right now, you’ll read plenty about worries of oversupply in the oil market. Yeah, sure — for a handful of months. In the meantime…
We just keep burning more of the stuff every day.
Hitting the (Clogged) Open Roads
A few weeks ago, the Energy Information Administration said Americans are on track to break a nine-year record for gasoline consumption. Our cars are guzzling down, on average, more than 9 million barrels a day.
The same agency expects U.S. crude oil production to keep declining through next year, stating that: “The expectation of reduced cash flows has prompted many companies to scale back investment programs, deferring major new undertakings until a sustained price recovery occurs.”
Nor has the rest of the world lost its taste for hydrocarbons, despite all the ongoing investment in wind- and solar-powered energy.
China is a good case in question. We all know the story about a slowing economy there. Yet Platts China Oil noted in June that its measurements of “apparent oil demand” (owing to the opaque nature of China’s official energy data) fell just 1.3% in the first four months of this year.
Buried inside its data is an interesting change in trend. Industrial oil demand is pretty much flat. On the other hand, gasoline use is hitting all kinds of records. It’s already up 8% in the first four months of the year.
As you can see, the industrial side of its economy is on idle, but that’s not stopping millions of Chinese from buying cars and taking to the roads and highways. Passenger vehicle sales rose more than 6% (with a particular buyer preference for gas-guzzling SUVs, which saw a 46% spike in sales).
India is a similar story. Auto sales are up 8%, and gasoline demand is up 14% on a year-over-year basis. India’s decades-long focus on service-based industries is widening to include more manufacturing, too. Oil experts believe the nation of 1.2 billion people now burns through 4.2 million barrels of oil each day, making it the third-largest consumer of crude in the world behind the U.S. and China.
No Help From Oil’s Wide-Open Spigot
On the supply side, what about all the talk of “market share,” “gluts,” Saudi Arabia and the rest of OPEC?
As The Wall Street Journal and others note, the cartel’s power is slipping away. The group’s ability to pump extra amounts of oil — what experts call “spare capacity” — is at its lowest level since 2008.
Nor is Saudi Arabia, historically the “swing producer” for oil, much help.
One big factor: hotter summers. It means more and more electrical demand for air conditioning. And unlike the U.S., where natural gas fuels a majority of power-generating capacity, Saudi Arabia burns oil to keep its citizens’ A/C units reliably set on “max cool” mode.
In 2015, the Kingdom’s used up a quarter of its reserves serving its own domestic needs. For a record eight-month decline, between October last year and May, the country’s overall crude inventories dropped 12% to a little less than 300 million barrels.
We’ve been warning for some time about the rising opportunities available in the oil industry. (Jeff Opdyke has three energy-related recommendations in his Total Wealth Insider right now, all doing just fine, thank you very much.)
So don’t let the recent headlines in the past month about “plunging oil prices” keep you from taking advantage of this second chance at getting in on black gold.