Many oil investors will look back at this week and say something like, “Man, that was rough.”
And they’d be right… in one sense.
On news of the Greek referendum, a Chinese stock market crash, and a potential Iran nuclear deal, oil investors fled for the hills as prices collapsed nearly $10, stifling what had been a steady recovery from the bear market.
One look at the chart for West Texas Intermediate over the last two months, and you could easily agree with the pessimistic investors among us that see no hope for oil.
Every time there’s good news, some other catastrophe kills investment, prices, and any optimism we once held.
But this is just one perspective… and in my opinion, it kills your chance at real returns.
I look at a drop like we had this week — heck, even the one we had last fall — and I say, “It’s time to buy again.”
Sure, on the face of it, that’s a counterintuitive philosophy. I mean, who wants to buy something that’s losing value?
Someone who knows the value will always go up.
Plus, I also know that many other investors are fleeing oil, so in true capitalist fashion, I plan to buy up what they’ve left behind and sell it back to them when it’s worth double what it is now.
That’s how investors should play this drop. I mean, it’s not like Americans are going to stop buying gas-guzzling SUVs and trucks anytime soon.
Besides, China is in desperate need of a recovery in its markets, and the best way for it to achieve that is through economic development, which is impossible without oil.
So investors should be greedy now or lose their shirts later…
It’s Not All That Bad
While it’s easy to read something like, “Buy now because prices are low,” action is a whole different animal.
When you look at that red percentage on an oil driller’s stock ticker or see the chart above and the steep drop from this past week, releasing funds to invest in oil is anathema compared to our normal mode of operations.
But, again, this is all about perspective. Take a look at this chart instead:
Compared to the drop last fall, the one this week is negligible. It just decreases the risk on any investment we make.
And if you look at oil prices this time last year, you’ll see that WTI, shale stocks, and other oil companies in the U.S. have a lot of recovery left.
At this point, if you buy now, it’s all about time: You buy, you wait, and you collect your money when prices recover. You’ll end up collecting a whole lot of money if you wait for prices to return to early 2014 levels, too.
Shale oil drillers like Pioneer Natural Resources (NYSE: PXD) are already planning more rigs for later this year and the beginning of next year.
Pioneer said it will add eight new rigs in Texas in 2016, which would bring it back to the same level before the bear market.
Other companies are doing the same in the Bakken, Eagle Ford, Permian, and Niobrara.
Oil firms want to add more rigs now because they know they can get great prices on services, equipment, and labor while oil is down. These companies know investing low pays big dividends over time.
We should replicate this strategy, especially now that oil took a few lumps this week.
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Deals, Rigs, and Sales
Essentially, what I’m trying to say is that oil is on sale.
It’s like when you go to buy a car and the dealer wants to get rid of the older models before the new ones come in. You get a deal because the dealership is oversupplied with last year’s model.
Or when you go to a florist two days after Valentine’s Day… you get a deal on a dozen roses because the florist has to get rid of them or else they’ll be garbage.
Right now, oil stocks are on sale. The market is oversupplied, so stock sellers are willing to give away their shares for less for whatever reason: impatience, ineptitude, lack of fortitude, etc.
Now, I will issue a warning: This weekend, we could see a new Greece deal and a nuclear agreement between Iran and the United States. If so, oil prices could fall further, opening up another great buying opportunity…
This is a great time to invest in oil.
Until next time,
Keith Kohl
Check us out on YouTube!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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