Buy This Dip (and Every Dip) In Oil Prices
Psst, wanna know a secret?
Oil demand doesn’t go down much during typical recessions, so the latest drop in oil prices based on the prevailing fake narrative that the coming recession, if it isn’t already here, will tank oil prices, is in actuality a massive buy the dip opportunity.
And there’s more, as in a lot more reasons to buy oil and energy stocks on any dips.
That’s why, in today’s Total Wealth, I’m going to tell you what’s really driving oil prices and why I stand by the call I made on oil last summer when I said WTI (West Texas Intermediate) would be trading at $150 a barrel by the end of the summer of 2022.
The Road from $16 to $150 per Barrel
The price of oil (and for domestic purposes I’m talking about the American benchmark WTI) has been rising steadily since its April 2020 lows, on the heels of the instant and ugly, though extremely short-lived COVID-19 related recession.
WTI closed on December 30, 2019, just north of $61. On April 20, 2020, it had sunk to $16.94. That’s what the COVID recession did to oil. But that recession wasn’t typical. The price of oil collapsed on evaporating demand on account of the fact the world stopped turning when COVID-19 appeared as an existential threat to our very existence.
The Financial Crisis of ’08 saw oil demand tank on account of money-center banks not being able to lend to businesses, or finance oil shipments, because they were almost all insolvent. That recession wasn’t typical either. The price of oil collapsed on evaporating demand on account of the subprime meltdown’s existential threat to global financial systems.
But oil demand doesn’t typically fall in typical recessions, though prices may fall for a few quarters, they typically bounce back and make higher highs.
Demand didn’t fall in the recession of the early 2000s (March 2001 – November 2001), though the rate of growth slowed, with the price of WTI falling from $43.62 in March 2001 down to $32.04 in November 2001.
A year later in March 2002 WTI was back up to $43. A year later in March 2003 it was almost $50. In March 2004 it was $55.79; March 2005 it was $83.76; and March 2006 saw oil at $97.48. WTI peaked in June 2008 at a whopping $187.04 a barrel.
Demand in the early 1990s recession (July 1990 – March 1991) fell during two quarters of that 8-month recession, though the price of WTI only fell $3.89 a barrel, dropping from $46.39 in July 1990 to $42.50 in March 1991.
After the Gulf War and the freeing up of oil production in the Middle East, OPEC members began a decade long fight, breaking production quotas they’d agreed to time and time again, knocking prices down throughout the remainder of the 1990s.
And while this recession, the one here or coming depending on your perspective, is more “typical” as opposed to being triggered by an existential threat, oil demand still isn’t going to fall much, unless you buy into main street and financial media narratives that recessions always dampen oil demand and cause oil prices to tank.
This current recession horizon has in its foreground the Russia-Ukraine war, and Chinese zero-Covid policy lockdowns of some of its biggest and most important manufacturing cities and regions, and in the background the reality that the drive towards renewables and the vilification of fossil fuel producers isn’t going to spur a sudden increase in capital expenditures by majors or even mid-tier oil and gas producers; they’re enjoying what might be their last windfall profits in a someday dying business.
With war raging on its borders and vitriolic condemnation of Russia by European Union nations, the EU just adopted a sixth package of sanctions on Russia, including agreement among its member nations to phase out all imports of Russian crude over the next 6 months and the phasing out of all “other Russian oil products” over the next 8 months. The International Energy Agency, IEA, says that will cause Russia to have to cut daily production of crude by 3 million barrels a day by the end of 2022. Russia already cut daily production by 1 million barrels a day in April due to sanctions.
Russian crude accounted for 14% of global production in 2021, according to the IEA, so a loss of 3 million barrels a day won’t go unnoticed and will help keep prices high as buyers scramble to find sources elsewhere.
OPEC says it will increase daily production by 648,000 barrels a day, 200,000 barrels a day more than it had planned at its last meeting, to help offset the loss of Russian supplies.
However, it doesn’t take a math genius to figure out OPEC’s additional supply won’t offset Russia’s shortfall.
Maybe that’s because OPEC, like Russia, wants prices to go a lot higher.
And so do all oil and gas producers, because this rally in prices may be their last great grab of cash before the inevitable EV and everything renewable future that’s been front and center for the past 10 years drives the last nails in fossil fuels’ coffins.
Back in the near ground, whatever demand decline is expected has already happened. Chinese lockdowns reduced demand significantly, though the price of oil didn’t fall much at all as those lockdowns were ongoing, and started rising, until that is, the recession narrative took hold and oil prices came down on that economic expectation.
Now China’s starting to unlock itself after reeling economically from lockdowns. So that lull in demand is about to be filled in like a swimming pool in summer.
And speaking of summer, it’s driving time. In spite of record gas prices in the U.S. gasoline consumption in May was down only 5% from a year ago; that with prices up by more than 50%.
Some lull in demand that is.
Oil is a commodity, it is the ultimate commodity, which means it’s prone to commodity like price swings, sometimes.
This time, this dip, isn’t one of those cyclical swings. It’s a dip based on a fake narrative.
Oil’s a buy on this dip and any dip for the foreseeable future.
We’re playing that, beautifully I might add, in my subscriber newsletter. We own USO a lot lower and are raking it in on that WTI oil-tracking ETF, on top of just ringing the register to the tune of a 100% gain on our short-term trade selling puts on USO. And we’re buying this dip, in more ways than one.
If you want to make money on rising oil prices, buy this dip and every other one you can.