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Big Opportunities in Oil

Posted December 5, 2016

It looks like old-school European socialism is on the way out. The Italians voted "no" to constitutional reforms that would have put more power into the hands of the Prime Minister, Matteo Renzi.

Renzi tendered his resignation this morning. This has given a boost to the Five Star Party, an anti-EU populist party run by a former comedian.

It sets the stage for more nationalist governments sweeping across the world.

Here is your short list of left-wing establishment who have been rejected recently: Cameron, UK; Sarkozy, France; Hollande, France; Hillary, U.S.; Renzi, Italy. Merkel of Germany won't last long.

Interestingly, the Italian stock market was up all week and is up again today. The great gnashing of teeth and rending of cloth failed again to send the markets down. It's almost as if shareholders don't like central planning, price controls, and all the other regulations that come with anti-capitalist policies.

Oil is Up Again

WTI is trading at $52.04, Brent is at $55, and natural gas is up 5.36% to $3.62. Gasoline is at $1.55.

As you know, last week OPEC signed a deal to cut oil output to 32.5 million barrels per day.

Saudi Arabia will cut the most — about 40% of the total — which comes to 500,000 bpd, with Iraq and Russia adjusting down by 210,000 bpd and 300,000 bpd, respectively.

The deal will begin January 1 and will run for six months.

There is no doubt there will be cheating. Historically, it runs at about 30%.

Regardless, the price of oil jumped about 15% last week and has moved up more this morning.

Oil Doesn't Fit the Program

That's the thing about the price of oil. Analysts on Wall Street will add up the supply, subtract the demand, weigh the dollar, and spit out a price target based on their models.

This works when the inputs are stable, but they are seldom stable.

Oil trades on events. Check out this chart from Business Insider:

gs_smallClick Image to Enlarge

This chart doesn't show it, but the last bottom in oil was at $28 this year. Now it is heading back up. The way to trade oil is to buy the multi-year lows despite the headlines saying “this time it's different.”

It used to be you buy when gasoline is under $1 and sell over $2. Now, due to inflation, you buy under $2 and sell over $3.50 or $4. This is because low oil prices set the stage for high oil prices due to higher use.

After five years of lower gasoline use, the U.S. is back to record consumption. We burned 405 million gallons a day in June.

Furthermore, there will be a lag time between the startup of new American producers and the drawdown that will spike oil prices. Given all of the current knowns and unknowns, and without some sort of geopolitical market shock, oil prices should move up to the $75 range by next spring.

The way to play it is to buy the stocks that are the most beaten down and yet have enough cash on hand to survive.

These would be the oilfield service stocks. These stocks have been absolutely crushed — I mean down 98% or so... Many have gone to the great oilfield in the sky. In October alone, eight oilfield service providers filed chapter 11.

But as we all know, bull markets are built on the corpses of failed companies.

The Baker Hughes rig count continues to increase. It now stands at 477 rigs — a 10-month high and up 25 of the past 27 weeks, with most of these in the Permian basin.

Furthermore, spending on exploration activities in the final quarter of 2016 will be approximately $1 billion higher than previously expected.

Some names in oilfield services that pay dividends are Schlumberger Ltd., (NYSE: SLB), Oceaneering International (NYSE: OII), Core Labs (NYSE: CLB), and North American Energy Partners (NYSE: NOA).

I'm looking at a few companies in this sector that have a little more risk and tremendous upside. I'll be recommending them to my Crisis and Opportunity readers this week. One is up 40% in the last two days!

All the best,

Christian DeHaemer Signature

Christian DeHaemer

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Since 1995, Christian DeHaemer has specialized in frontier market opportunities. He has traveled extensively and invested in places as varied as Cuba, Mongolia, and Kenya. Chris believes the best way to make money is to get there first with the most. Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor's page.

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