Here’s Where It Gets Interesting for Oil

Sharply falling oil prices overnight put pressure on US stocks, resulting in slight falls for the Dow Jones and S&P 500. West Texas Intermediate fell 3.8%, to just over US$40 a barrel. Brent crude dropped 3%, to US$42.20 a barrel.

Since peaking back in June, oil prices have now corrected more than 20%. Apparently, this fulfils some people’s definition of a ‘bear market’. This is rubbish. On the contrary, the price action in oil over the next few months could provide you with a very lucrative buying opportunity.

The real bear market in oil took place from mid-2014 — when Brent crude traded at US$115 a barrel — to the start of 2016 when prices bottomed around US$27 a barrel.

From that point, prices rebounded a massive 90% in the space of six months. After such a strong rally, prices were always going to retrace some of those gains. I wrote as much to subscribers of Crisis & Opportunity in early June:

Such a strong move from the low tells me there is a good chance that January was the bottom for the oil price. But…there hasn’t been much of a correction since the rally started. And after an 86% run, I’m wary of recommending energy stocks right now.

Now that the correction is underway, I’m a little more interested in the sector. But I want to see evidence that the correction is over first. As you can see in the chart below, that’s not happening yet.


Source: Optuma
[Click to enlarge]

But it could be close. What often happens after a strong impulsive rally — like we’ve seen in oil over the first half of the year — is that the following correction gives up around half of those gains.

That means you should look for support around US$39 per barrel for Brent crude. If prices bottom around here, that would be a bullish long term development.

Not that I think the fundamentals for oil are crash hot. There is a lot of supply around, and demand remains weak. According to Bloomberg:

U.S. crude supplies rose by 1.67 million barrels to 521.1 million in the week ended July 22, according to U.S. Energy Information Administration data. Stockpiles reached 543.4 million barrels in the week ended April 29, the highest since 1929. Gasoline inventories expanded for a third week to 241.5 million barrels, the most since April.

But these are the sorts of fundamental conditions that exist at bottoms. Things don’t look bullish at the lows!

So keep an eye on oil and oil related stocks. There might be some good long term opportunities emerging over the next few months.


Greg Canavan,
For Markets and Money

Greg Canavan is a Contributing Editor at Markets & Money and Head of Research at Port Phillip Publishing. He advocates a counter-intuitive investment philosophy based on the old adage that ‘ignorance is bliss’. Greg says that investing in the ‘Information Age’ means you now have all the information you need. But is it really useful? Much of it is noise, and serves to confuse rather than inform investors. And, through the process of confirmation bias, you tend to sift the information that you agree with. As a result, you reinforce your biases. This gives you the impression that you know what is going on. But really, you don’t know. No one does. The world is far too complex to understand. When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases. Greg puts this philosophy into action as the Editor of Crisis & Opportunity. He sees opportunities in crises. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines charting analysis with more conventional valuation analysis. Charting is important because it contains no opinions or emotions. Combine that with traditional stock analysis, and you have a robust stock selection strategy. With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the same mistakes that most private investors do every time they buy a stock. To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Markets & Money here. And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here. Official websites and financial e-letters Greg writes for:

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