This Key Indicator Will Tell Us When Oil Is Peaking

The surprising winner of the past year... These traders now expect $100 oil by the end of 2022... A turning point in the market – but not a peak... This key indicator will tell us when oil is peaking... A 'one click' way to profit from higher oil prices...

Let's play a game to start today's Digest...

We'll go back 12 months in the market to June 2020. And you can pick to invest in the S&P 500... real estate stocks... the technology sector... semiconductors... or oil.

But there's a catch...

You can only invest in one of these assets. And you can do it going off only what's in your head right now – no looking up any data.

Could you pick the best performer? The right answer might surprise you...

You see, the best performer is not the technology sector, which is up 48% over the past year. And it's not high-flying semiconductor stocks, which are up 71% in that span.

No, the winner crushed these two sectors... by a lot.

This asset also more than doubled the S&P 500 and real estate stocks – as measured by the Dow Jones Equity REIT Index. They weren't bad performers, either... returning 42% and 34%, respectively.

It's now obvious that I (Chris Igou) am talking about oil...

The commodity is up an incredible 95% over the past 12 months... It hit $70 per barrel earlier this month.

That hasn't happened since 2018, when oil hit its most recent high of $76 per barrel. Take a look...

Most investors might not realize that oil was one of the best performers of the past year. But I can guarantee that it won't stay under the radar for long...

You see, performance like this never goes unnoticed for long. The "crowd" eventually catches wind of the big gains... and then these investors expect those gains to continue indefinitely.

Extreme optimism can be dangerous when most investors are on board with it. That's because the crowd always shows up last to the party – right before the peak.

And as you'll read in today's Digest, we're already seeing that the word on oil is getting around.

But let me be clear before we get started...

We have not reached that level in the oil market yet. You'll soon see that there's still plenty of upside potential before an ultimate peak sets in. And before we wrap up today, I'll even share a one-click way for you to profit from this kind of opportunity in the months ahead.

Before I get to that, though, let's cover the major shift happening right now...

Signs of optimism are starting to pop up in the oil market for the first time in years. And as you'll see, one key indicator can help us know when that optimism has reached a critical limit.

For starters, options traders are betting on $100 oil by the end of 2022...

The world hasn't seen $100-per-barrel oil since the summer of 2014. President Barack Obama was still in office back then.

Now, nearly seven years later, options traders expect oil to break that level again within the next 18 months. The number of options contracts betting on $100 oil are through the roof...

Currently, there are roughly 88,000 December 2022 oil contracts with a strike price of $100. That's just a fancy way of saying if oil rises above $100 per barrel before the end of 2022, these options traders will make big money. The number of contracts for $100 oil is up significantly from less than 30,000 back in February.

In other words, in just four months, the number of bets on $100 oil has almost tripled.

A recent Wall Street Journal article shows just how optimistic these options traders are. Here's a little glimpse of what one trader told the newspaper...

"Everyone's been looking at it," Adam Webb, chief investment officer of trading firm Blue Creek Capital Management LLC, said of $100 call options for oil delivered in December 2022. "It's a no-brainer."

Amazingly, this short quote brings up two red flags...

"Everyone's been looking at it" is the first. Once everyone is aware of a trading trend, the upside potential becomes limited.

And calling it a "no-brainer" – the second red flag – is even more alarming... When everyone is aware of a trade and so optimistic to call it a no-brainer move, a reversal is likely right around the corner.

But is this quote enough to signal a peak in the oil market?

Well, no... That's because not "everyone" is actually in on this trade today. And as I'll show you below, one important group of speculators in particular hasn't arrived to the party yet.

This is simply the first wave of optimism.

And this new excitement marks a turning point in the oil market...

You see, as regular Digest readers know, two factors normally drive commodities like oil...

1. Supply
2. Demand

When supply overwhelms demand, prices tend to fall. And when demand is greater than supply, prices rise. It's pretty basic...

This is how commodity markets work in normal times. But there's another factor that can influence prices when things start to get out of whack...

That's when people are optimistic regardless of supply and demand. They buy in hopes that oil will climb even higher... and don't even consider supply and demand at all.

It's when investors start acting irrationally.

Remember, options traders have nearly tripled the number of oil contracts since February.

This massive increase tells us that the mood about oil is changing. Hype is starting to come back... Folks are starting to become irrationally optimistic about the commodity.

But the thing is, right now, this optimism is still isolated to the options market. And before we see an ultimate peak in oil, that optimism must spread to speculators across the board...

So if bullish options traders aren't a sign of the top, then what is?

Fortunately, a gauge exists to know when a boom in oil is running out of steam. This indicator lit up before the past two major peaks in oil – back in 2014 and 2018.

I'm talking about the Commitment of Traders ("COT") report for oil.

Longtime Digest readers might recall that the COT report tells us exactly what futures traders are doing with their money right now. These are the speculators... They represent the crowd that we expect to pile into the market when a rally is almost over.

When this group of futures traders is all betting in one direction, the opposite result is likely to occur. That makes it a great contrarian indicator.

But today, these traders aren't extremely bullish at all. Take a look...

As you can see, these folks are more in the middle of the road when it comes to oil today... They aren't betting on it in record numbers. And they aren't betting against it in a big way either.

When the chart above is back at all-time highs like we saw in 2014 and 2018, that's when we'll know extreme optimism has arrived. That hasn't happened yet...

But when things change and these speculating futures traders go all in on oil...

It will be a sign that the end of the oil rally is near.

Let's look at 2014, for example...

Oil prices went on a tear in 2012 and 2013. From the end of June 2012 through September 2013, oil soared 42%.

That rally caught the attention of these traders. In 2014, they started making extremely bullish bets on higher oil prices.

By mid-2014, those bullish bets on oil were at all-time highs. These futures traders believed oil would be a quick ticket to big gains. But then, oil fell... and fell... and fell...

The price of oil dropped 53% in one year starting in July 2014. And it slid as much as 75% before finally bottoming in 2016. It was a massive bust for speculators. Take a look...

Anyone caught in this multiyear downturn took heavy losses. But it wasn't the only case where speculating futures traders bet on higher oil prices at exactly the wrong time...

We saw another example of extreme optimism turn into poor results in 2018. After bottoming in February 2016, oil went on a two-year bull run... The commodity was up 180% by June 2018.

And yet again, speculators couldn't pass up on the fun any longer. They wanted to get in on the massive rally...

By 2018, based on the COT report, speculators were the most bullish they had ever been on oil – even more than in 2014. And then, the bottom fell out again...

Oil peaked in early October 2018 before plunging roughly 45% by Christmas Eve. That's right... The price of oil dropped nearly in half in less than three months. That's a beating no speculator wants to suffer.

That's the risk investors face when the crowd is all in on a trade. When speculation reaches that level again in the oil market, the peak is likely near...

The good news is we aren't there yet...

And as a result, you can still profit from today's boom in oil...

The easiest way to do that is by investing in companies that profit directly from rising oil prices. We're talking about oil producers, oilfield-services companies, and more.

Fortunately, there's an easy, "one click" way to own roughly 20 of these companies... It's called the Energy Select Sector SPDR Fund (XLE).

This exchange-traded fund holds a basket of all the biggest names in the oil sector – including ExxonMobil (XOM), Chevron (CVX), EOG Resources (EOG), Schlumberger (SLB), and ConocoPhillips (COP).

The speculators who arrive before an ultimate peak in oil are still on the sidelines. That means there's plenty of upside potential ahead. And XLE is one of the easiest ways to make the trade. Check it out today.

New 52-week highs (as of 6/11/21): Analog Devices (ADI), American Homes 4 Rent (AMH), Asana (ASAN), Blackstone Mortgage Trust (BXMT), SPDR Euro STOXX 50 Fund (FEZ), Intuit (INTU), IQVIA (IQV), Nuveen Preferred Securities Income Fund (JPS), Lonza (LZAGY), Cloudflare (NET), Invesco S&P 500 BuyWrite Fund (PBP), ProShares Ultra Technology Fund (ROM), VanEck Vectors Russia Fund (RSX), ProShares Ultra S&P 500 Fund (SSO), and Vanguard S&P 500 Fund (VOO).

In today's mailbag, we're sharing feedback related to the Friday Digest from our colleague C. Scott Garliss about the "winter storm" that is already brewing. As always, we welcome your thoughts, comments, and observations at feedback@stansberryresearch.com.

"Just an unbelievable written piece, an eye-opening educational doctrine that all should read. Thank you Scott Garliss And Corey McLaughlin." – Paid-up subscriber Gerald B.

"Regarding Scott's Friday Digest. I think he is over-analyzing, which I admit is what is needed for short-term, trading analysis (I read him EVERY day). Medium-to-Long term the analysis is simple:

1. We live in a debt-based system and more debt will/must be produced to service the existing debt. That is exactly what the Fed and Govt will do until it doesn't work anymore.

2. Inflation won't matter. The Fed will come up with all kinds of excuses for NOT reacting to inflation, because we can't afford to raise interest rates and see #1.

"So, assets and prices are going to go up until they crash. Who knows when the crash will occur. In addition, we could see multiple melt-ups and melt-downs.

"Therefore, hold lots of real/scarce assets (gold, bitcoin, farm land, real estate, collectables), plenty of cash (in case it survives much longer than expected), some Forever Stocks, and a bit of your favorite Stansberry newsletter. When we get a crash, then use your cash to buy more Forever Stocks and/or corporate bonds (Stansberry's Credit Opportunities). Am I wrong?" – Paid-up subscriber Jon W.

Good investing,

Chris Igou
Jacksonville, Florida
June 14, 2021