On October 10, 2013, I wrote an article entitled “$2.50 Gasoline? $75 Oil?”
Many people mocked this idea and perpetuated the return of $150 oil.
But I am getting closer to vindication. As oil continues to fall, you need to position yourself to make money.
Yesterday, crude oil prices fell as news came of a solid build in U.S. crude oil stocks.
The American Petroleum Institute showed a 5.1 million-barrel gain in oil supplies in the past week — much higher than the 2 million barrels expected. Gasoline stocks jumped 2.5 million barrels. Distillates, which can now be exported, declined by 1 million barrels.
Global Shrinkage
Thursday morning, WTI printed at $87.22 and Brent at $90.96. Brent has fallen for three days in a row, adding to the more than 20% decline this year.
Part of the reason for the fall has to do with a slowing global economy. The IMF cut its global growth forecast for this year and next. Europe is soft as Germany is slouching towards a recession, Japan hasn’t recovered despite record spending, and Chinese growth has peaked.
The IMF now sees 2014 global growth at 3.3% and 2015 growth of 3.8%, a decline of 0.1% for 2014 and 0.2% for 2015 from forecasts made in July.
Though the market takes these numbers into account, keep in mind that the IMF has a long track record as a procrastinator and is always on the optimistic side.
Swimming in Oil
According to Bloomberg, we are hitting record oil production:
U.S. oil production increased to 8.88 million barrels a day in the week ended Oct. 3, the most since March 1986. Crude inventories expanded to 361.7 million, compared with a five-year average of 355 million.
The Organization of Petroleum Exporting Countries, which supplies about 40 percent of the world’s crude, pumped 30.935 million barrels a day in September. That’s the highest level in 13 months.
We have solid evidence that there is a lot of growth in oil production coupling with a slowdown of the global economy. This leads to falling oil prices.
Reach of the Oil Bear
West Texas closed below $88.42 yesterday and is now officially in a bear market decline (20%) after peaking 397 days ago.
The average bear market in oil shows a drop of 33.73% going back to 1983. That would put the price of oil at $73.25. The median decline for oil during a bear market is 31.31%, which would put the price of oil at $75.92.
Of course, the surplus of oil has to do with the fracking boom in North America.
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Keith Nailed It
Our own Keith Kohl has been all over this trend for more than eight years…
His readers have locked down gains of 574%, 478%, and 170%, just to name a few.
As much as I like the producers of energy, the next phase of the market is those companies that can profit from the low cost of energy. After all, natural gas prices have been falling for years.
And downstream companies you wouldn’t think about will create jobs due to low-cost fuel input. These range from glassmakers and trucking companies like USA Truck (NASDAQ: USAK) to airlines and cruise ships like Carnival (NYSE: CCL).
Lower Costs
Alcoa (NYSE: AA) beat earnings yesterday on strong sales of aluminum, but it also uses a tremendous amount of energy to produce metals. It will see increased margins from lower fuel cost.
Global multi-nationals are now building factories in the United States due to lower fuel costs. In Texas, wages from manufacturing grew 6.3% last year and now average $21.08 an hour. Temporary-help welders are making $37 an hour.
If you consider lower energy prices to be a stimulus to business — essentially, a de facto tax cut — it will boost the growth in earnings, GDP, and the stock market.
This party is just getting started…
There is money to be made.
Lock and load,
Chris DeHaemer
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