Wednesday, September 7, 2011
Let me paint you a picture...
No U.S. job growth in August, massive debt in Europe, China's growth slowing to a crawl... and a growing surplus of oil waiting for delivery at the main market hub in Cushing, Oklahoma.
That tells me we're on the brink of another leg down for oil prices. And I think that will set up a fantastic opportunity for energy investors later this year. Let me explain...
Oil prices generally move up and down based on supply and demand factors.
When the economy is humming along, oil prices go up. When the economy is growing stronger AND we have major wars in oil-producing countries, oil prices spike. However, when the entire global economy contracts... oil prices fall. When peace returns to major oil producers, oil prices crash.
We saw that kind "spike and crash" action in 1990, when Iraq invaded Kuwait. Oil prices jumped during the war. Once the war was over, the world was in the midst of a recession. Oil prices fell from $39.45 per barrel in September 1990 to $14.08 per barrel in March 1994 – a 64% decline.
While I don't think it will be that bad today, we are primed for a fall.
GDP growth was 1% from the first quarter of 2011. That means the first two quarters of 2011 represent the lowest GDP growth since the recession in 2008-2009. We have to go all the way back to 2006 to find a more sluggish economy that wasn't actually going backwards.
We also have a more peaceful Middle East than we did a few months ago. The "Arab Spring" culminated in a bloody revolution in Libya. We're now in the last throes of regime change there. Once that ends, the 2 million-plus barrels per day of crude will come back online.
And as I said, we have a glut of the stuff right now. The Energy Information Administration pointed out that U.S. inventories are above the average range.
It's all bad news for oil prices. But how bad?
We can do a bit of "common sense technical analysis" to get an idea of where oil could go. Let's look at oil's price history over the past few years...
Below is a three-year chart of crude oil. As you can see, oil enjoyed a big "rebound" rally off its early-2009 lows. This rally took oil from $35 per barrel to $80 per barrel in less than a year. It then fluctuated between $70 and $85 per barrel for most of 2010. At that time, economic growth was sluggish, and many investors were worried about another recession. And that's exactly where we are right now.
Looking at this chart – and considering how shaky the economic "recovery" is right now – I think it's a no-brainer to conclude oil could fall down to $70 per barrel.
That's why, if you're an oil investor, you should remember to use trailing stops to protect your profits (and prevent big losses).
You should also keep a list of the best oil and gas companies on hand. (You can read about a couple of our favorites here.)
If there is a big selloff later this year, it will likely produce some great bargains.
Steve believes this downtrend in oil has created the perfect opportunity to buy gold stocks…
"Because the price of gold is up and the price of oil is down, gold mining companies should set all kinds of quarterly earnings records in the third quarter of 2011," he says. And record earnings in gold mining companies should mean record share prices.
Check out two of his favorite ways to play the trend here: Gold Up, Oil Down... It's Time to Buy Gold Stocks.
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