There is a reason that oil is called black gold.
Like bullion, it is difficult to find in large quantities, difficult to get out of the ground, and relative to all the people who want or need it, there never seems to be enough for everyone.
However, there is one key difference: the ingots can be cut, diced, melted, chilled, and reused again.
Petroleum? We keep burning more stuff every day.
All of which means, given the fearful headlines about a new “oil bear market,” this is a second chance to buy oil stocks or the commodity itself … and be well rewarded.
Oil Zigs and Zags
In case we’ve all forgotten, the price of oil basically doubled, climbing to $ 51 a barrel, in just four months earlier this year. Do we think there would be more progress without one setback (or three)?
The oil market is justifiably notorious for its volatility, especially when it shoots out of its periodic bear market cycles.
It happened in 1986 when oil jumped 70% in one month. A violent pullback pushed back most of the profit, only for the commodity price to double over the following year.
It happened in 1994.
And then again in 1999, 2001, 2003, 2006 … well, you get it. Twenty percent (and worse) pullbacks go with the territory when the smell of a bear market still lingers in the air.
The key to remember is that higher price fundamentals are still pretty good. At this time, you will read a lot about concerns about oversupply in the oil market. Yes, sure, for a few months. In the meantime …
We keep burning more stuff every day.
Hitting the open (clogged) roads
A few weeks ago, the Energy Information Administration said that Americans are on track to break a nine-year record for gasoline consumption. Our cars consume, on average, more than 9 million barrels per day.
The same agency expects US crude oil production to continue to decline over the next year, stating that: “The expectation of reduced cash flows has led many companies to reduce investment programs, putting off major new projects until for a sustained recovery in prices to take place. “
The rest of the world has not lost its taste for hydrocarbons either, despite all the ongoing investment in wind and solar power.
China is a good case in point. We all know the story of a slowing economy there. However, Platts China Oil noted in June that its measurements of “apparent oil demand” (due to the opaque nature of China’s official energy data) fell just 1.3% in the first four months of this year.
Buried within your data is an interesting turnaround. The demand for industrial oil is quite flat. On the other hand, the use of gasoline is breaking records of all kinds. It has already risen 8% in the first four months of the year.
As you can see, the industrial side of your economy is down, but that doesn’t stop millions of Chinese from buying cars and taking to the roads and highways. Passenger vehicle sales increased more than 6% (with a particular buyer preference for gas-guzzling SUVs, which saw a 46% increase in sales).
India is a similar story. Auto sales increased 8% and demand for gasoline increased 14% year-over-year. India’s decades-long focus on service-based industries is expanding to include more manufacturing as well. Oil experts believe that the nation of 1.2 billion people burns 4.2 million barrels of oil every day, making it the third largest consumer of crude in the world behind the United States and China.
Without the help of the open oil tap
On the supply side, what about all the talk about “market share”, “excess”, Saudi Arabia and the rest of OPEC?
As others point out, the power of the cartel is fading. The group’s ability to pump additional amounts of oil – what experts call “reserve capacity” – is at its lowest level since 2008.
Saudi Arabia, historically the “alternative producer” of oil, is not much help either.
One important factor: hotter summers. It means more and more electrical demand for air conditioning. And unlike the US, where natural gas fuels most of its power generation capacity, Saudi Arabia burns oil to keep its citizens’ air conditioning units reliably set to “maximum cool” mode.
The result?
In 2015, the Kingdom used up a quarter of its reserves to meet its own internal needs. For a record eight-month drop between October last year and May, the country’s overall crude inventories fell 12% to just under 300 million barrels.
We have been warning for some time about the growing opportunities available in the oil industry.
So don’t let last month’s recent headlines about “falling oil prices” keep you from taking advantage of this second chance to get into black gold.
