Oil Volatility Opens Up Powerful Profit Opportunities – Here’s Exactly How to Play It
There’s no question that oil is volatile. It’s up one day and down another, it rises when demand increases and when OPEC + (which means the Organization of Petroleum Exporting Countries plus Russia) cuts production, and it falls when global growth slows or if OPEC + increases production.
Trying to track the fluctuations is another form of market “noise,” like what’s been happening in the options market lately. I’ve been talking about that a lot, and it’s important for you not to get distracted by it.
Instead, to make money on oil, you need to understand the long-term trend – where oil is going overall, and how it’s going to impact inflation, interest rates, markets, and your money.
And that trend? Up. The price of oil is still going to fluctuate, but it’s going to fluctuate in an elevated range and go higher, fluctuate in a higher range, and then go higher again.
The Volatility Curve
WTI (West Texas Intermediate), the American oil benchmark (Brent Crude is the rest of the world’s benchmark) has always been volatile, with Brent closely tracking it.
Through 2018 -2019, WTI averaged around $61 per barrel (a barrel holds 42 gallons).
During the Covid pandemic, with global growth at a standstill, WTI fell down to around $19 in early March 2020.
By January 2021, it recovered to $60 a barrel. By September 2021, it got to around $83. Then it fell to $66 in early October 2021. It then shot straight up, close to $115 by the end of February 2022.
All that volatility was due to demand fluctuations caused by a growing global economy, Covid lockdowns, and a recovery in global growth and demand.
This continued through the middle of 2022 – WTI fell from $115 to around $105 in early March, rose again to near $114 by the middle of March, then fell to around $98 by the end of March.
Then it rose again to just north of $120 by the end of May 2022.
Coinciding with most of the world’s central banks following the Federal Reserve’s first meaningful rate hike starting in March 2022, and proceeding to raise at every subsequent FOMC meeting, oil fell to below $79 by mid-September 2022. Not withstanding oil’s spike when Russia invaded Ukraine on February 24, 2022, when it shot up from $98 to $120, it’s managed to come down and now appears to be trading in a range between $85 and $92.
That range is well above where oil traded in 2018 and 2019. And it could trade lower, maybe to $78 if global growth continues to slip and demand falls. But any dip from here will be short-lived, as central banks will see signs of slowing inflation accompanying a slowdown of global growth and demand.
But even as central banks raise rates to dampen demand for goods and services, there’s another reason oil could continue to rise regardless.
China’s Lockdown Problem
We’ll see oil rise from these levels if China “reopens.” And it will reopen.
Why? Because China’s economy is sliding into an abyss, mostly thanks to overleveraged property mal-investment and Covid lockdowns, and the Chinese Communist party can’t let that happen.
Precisely because China’s economy is reeling and a crash of epic proportions is possible, a crash so huge the Communist Party itself would be threatened, they are going to have start easing Covid restrictions.
That will instantly translate into greater demand for oil.
But that’s not all that’s going to happen.
Chinese leader Xi Jinping is planning a visit to Saudi Arabia before the end of 2022. Why do you think he’s going to meet with Saudi Arabian royals?
Because the Chinese are going to make a deal with the Saudis to buy their oil at world market prices (not really, they’ll say they’re paying market prices but will engineer a discount), which are heading higher on account of OPEC + cutting production again, after they just cut by 2 million barrels a day last month.
Why is that going to happen? Because the Saudis have had an arrangement with the U.S. since 1945 whereby the Saudis sell oil to the U.S., get paid in dollars, then recycle those billions of dollars by buying U.S. Treasuries and American military hardware. It’s called the petrodollar regime.
Only it’s time for a change of regimes. The Saudis see China as friendlier towards their own autocratic government and are going to make a deal with China to sell them oil (at a discount to world prices) for Chinese yuan, buy military hardware from China, and create a bilateral treaty that will afford the kingdom Chinese military protection, as it needs it.
China wants to make that deal to see oil prices rise. That helps their other friend, Russia, pay for its war on Ukraine.
It will also, eventually, push the Chinese yuan closer towards reserve currency status to compete with the U.S. dollar which is currently the world’s only reserve currency.
Higher oil prices also means higher inflation, which the Chinese are happy to see the Western world suffer under. That means interest rates will have to go higher, which will cause more pain for Western economies.
Meanwhile, the strong dollar, thanks to America’s higher interest rates, means Chinese goods will be even cheaper and the U.S. will be eager to import them to help bring down domestic prices and inflation.
In sum: the world has changed. Geopolitics are about to get very dicey. And those changes include higher oil prices, embedded inflation, and higher rates for longer than we’re used to.
So how do you play this situation?
First: Buy oil companies with fat dividend yields.
Second: Buy defense company stocks to get exposure to the other side of the petrodollar regime.
Third: Buy inflation protection. We give suggestions for inflation-beating investments every Monday here on Total Wealth.
Fourth: Shorting “zombie companies” who are going down as the increased costs of refinancing their bloated debt levels will kill their stocks. We’re making a killing doing this in my subscription services – you can find all the details here.