How to Successfully Trade at the Bottom of the Barrel
How low can oil go?
After watching WTI crude tumble another 10% this morning, all bets are off on when we’re going to see the bottom.
In fact, we haven’t seen a barrel of black gold cost so little since September of 2003.
A double-edged sword is slicing through the fundamentals in the oil sector, and nobody is given quarter in this price crash.
When prices crashed under $30 per barrel, the smart money saw this for what it was… opportunity.
Is this all a massive overreaction to COVID-19?
Last week, I mentioned that the IEA radically cut down on its consumption projections by suggesting that global oil demand will contract this year for the first time in over a decade.
Sitting here at home, peering out the window at a virtually empty city street and knowing the measures we’re taking to prevent the situation from worsening, it’s not hard to see the IEA coming out on the right side of history this time.
I know it’s easy to hit the panic button and call it a day.
But take comfort because we’ve been through this before.
I’ll bet some of my veteran readers may remember the last time oil prices were this low.
Back in the late 1990s, OPEC decided to open the floodgates by adding nearly 3 million barrels per day onto the market. Add in lower consumption levels to this dynamic, and it wasn’t long before prices plummeted.
It took several “voluntary cuts” to stabilize prices in 1999.
At the turn of the century, crude had finally climbed back above $30 per barrel.
Oil’s outlook at the time was far from bullish.
In 2003, the Energy Information Administration’s high price case only had crude rising to $32.59 per barrel — by 2025!
Keep in mind that the EIA also believed at the time that global consumption would rise to 112 million barrels per day in 2020. Even without COVID-19 effectively shutting down global consumption, we still aren’t even close to that prediction.
Is crude destined to fall below $20 a barrel?
Like I said, there’s a double-edged sword slashing crude prices down today.
Couple this potentially catastrophic demand destruction with the new feud that has sprung up between Russia and Saudi Arabia, and it’s not hard to make a case for crude falling into the teens.
All you have to do is know how to trade the bottom of the barrel.
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Contango Tango: Trading the Bottom of the Barrel
A week ago, I told you that refiners like Valero were a good place to start your search. The fact that these companies will have access to ultra-cheap domestic feedstock will lead to their higher profitability.
Today, I want you to focus on another hidden gem in the oil sector during a period of cheap oil.
Whenever a flood of oil hits the global market, one of the beneficiaries has always been tanker stocks.
This time around, it’s no different.
In fact, demand for Very Large Crude Carriers (VLCCs) has been soaring ever since the Saudis announced they were boosting output and production capacity.
It’s also sending day rates on these tankers through the roof.
Just a few weeks ago, it would’ve cost you roughly $20,000 per day to ship your crude in the Middle East to India.
This week, that same trip will run you around $200,000 per day.
But there’s more going on here than simply more oil to ship.
Because crude prices are so cheap right now, the market is in contango. This simply means that the future price of oil is higher than the current spot price.
In other words, it’s more profitable for you to store your oil today and sell it later on down the road.
That’s where my readers and I are looking to find the hidden gems in the oil sector.
Whether or not the COVID-19 pandemic drags oil prices into the gutter over the short term, producers will decide to simply store their crude in those tankers offshore.
And right now, those tanker stocks are hauling in huge profits from higher charter rates.
Until next time, Keith Kohl A true insider in the energy markets, Keith is one of few financial reporters to have visited the Alberta oil sands. His research has helped thousands of investors capitalize from the rapidly changing face of energy. Keith connects with hundreds of thousands of readers as the Managing Editor of Energy & Capital as well as Investment Director of Angel Publishing's Energy Investor. For years, Keith has been providing in-depth coverage of the Bakken, the Haynesville Shale, and the Marcellus natural gas formations — all ahead of the mainstream media. For more on Keith, go to his editor's page.
Until next time,
A true insider in the energy markets, Keith is one of few financial reporters to have visited the Alberta oil sands. His research has helped thousands of investors capitalize from the rapidly changing face of energy. Keith connects with hundreds of thousands of readers as the Managing Editor of Energy & Capital as well as Investment Director of Angel Publishing's Energy Investor. For years, Keith has been providing in-depth coverage of the Bakken, the Haynesville Shale, and the Marcellus natural gas formations — all ahead of the mainstream media. For more on Keith, go to his editor's page.
Energy Demand will Increase 58% Over the Next 25 Years
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