We Won't Kick Our Oil Habit Overnight
Oil prices take a dip... We won't kick our oil habit overnight... It's all about supply and demand... How to invest in energy stocks right now... What the best companies do... Try Doc Eifrig's Retirement Millionaire for just $49 today...
Oil prices recently traded down for seven days in a row...
It was the first such streak in more than two years... so it got some attention in the mainstream financial news.
The headlines blamed the price slip on uncertainties around the Delta variant of COVID-19... That might be true, but we can't know for sure.
As we often say, the price movement of any asset rarely can be attributed to just one thing... though it makes sense that some traders might've been concerned about lower oil demand in the short term.
As we also often say, though, Mr. Market doesn't necessarily care what we think... Instead, it's about what everyone thinks.
The point is... oil prices slipped 9% last week, the second negative-performing week out of the past three. West Texas Intermediate ("WTI") crude oil, the key benchmark here in the U.S., peaked at about $75 per barrel in July. It traded for less than $62 per barrel briefly earlier this week – a 17% decline.
And energy stocks have dipped with the price of oil, too... As our colleagues and DailyWealth Trader editors Ben Morris and Drew McConnell pointed out in their daily issue on Wednesday, a big group of energy stocks dropped 27% from June 25 to August 19.
Is this the start of a bigger trend?
In short, as I (Corey McLaughlin) will explain today, the answer is "no."
That's according to our colleague and Retirement Millionaire editor Dr. David "Doc" Eifrig...
As Doc's subscribers should know based on a couple of pieces of research he has published in his Retirement Millionaire newsletter (here) and his Advanced Options service (here) in recent weeks, he is bullish on oil prices in the months and years ahead.
Yes, years... That might surprise some people.
Why?
First, Doc says oil is one of those assets that will rise in an era of inflation – like gold and real estate... And he believes we will experience more inflation than many others think we will over the next three to five years.
Second, while the popular play today is to bet on alternative-energy investments – and for good reason, with the government throwing all kinds of financial support behind electric vehicles, for example – the truth is... the world's oil habit is going to be a hard one to kick.
It will happen much slower than many folks might expect.
Doc explained why in this month's issue of Retirement Millionaire...
Take the idea that "electric cars are the future," for instance... It's a common narrative you hear today. Doc isn't arguing that electric cars won't have a place in the future, but his big point is one that people don't want to admit, or simply don't know...
We all still need oil until the future arrives.
Here's how Doc put it in this month's Retirement Millionaire, talking about cars...
The number varies, but the U.S. vehicle fleet turns over about 7% per year. That means it would take about 15 years to replace all the vehicles on the road today. So even if every car owner swapped out his or her gas-burner for an electric model, we've got at least that long.
And electric cars are nowhere close to 100% of new cars sold. Currently, they account for only about 2%. At that rate, it would take about 700 years to replace all gasoline vehicles.
Electric vehicles' market share will increase, of course. One set of projections puts electric vehicle sales at about 50% of the market by 2040. But even at a 50% market share, it would take 30 years to get us off oil. And that's just the usage from passenger cars sold in the U.S.
This statement made me think...
Think of how long it might take the same "turnover" from fossil fuels to alternative energy to happen across other industries, like homebuilding... or in the making of materials that are used in so many people's everyday lives.
Oil is used to make plastic and other common materials. And as much as some people might not use plastic straws anymore, we still use a lot of plastic for other items. As I sit at my desk right now writing today's Digest, I see many...
Basically everything allowing me to write this essay is connected to plastic... parts of the computer... much of the screens in front of me... pens... my phone...
Plastics make it possible, as the TV commercials in the 1990s used to say. They still do.
And there are economic forces in oil's favor, too...
Doc says oil demand is likely to outrun supply in the years ahead...
With COVID-19 cases rising again, you might think that the "reopening trade" – higher oil prices included – is a thing of the past... But that's not necessarily the case, especially worldwide.
When it comes to figuring out the future of oil prices, let's first look at demand. As Doc shows, demand for oil has picked up since the start of the pandemic, but it still has a significant amount of room to run...
You can measure oil consumption by looking at how much crude is getting sucked into refineries. We can see that we've boosted energy use from the shutdown, but we've still got another million barrels per day to go before we get to pre-pandemic levels.
Related, one of the most memorable days in the markets over the past 18 months or so was April 22, 2020... when futures prices of oil went negative. And they went deeply negative, falling to roughly minus-$37 per barrel.
We're far from that point today. Despite the recent pullback, the price of WTI crude oil has steadily risen over the past nine months... And it has been in a range of roughly $57.50 per barrel to $75 per barrel since February.
Meanwhile, supply is lagging below pre-pandemic levels as well...
More from Doc in the latest issue of Retirement Millionaire...
While we now know the economy bounced back from the pandemic quickly, there was a time when it looked like we were facing a massive global recession. Oil drillers reacted by shutting down everything they could.
And they've barely started up again. Crude rig counts – the number of drilling rigs in operation – have started to rise, but they have a long way to go to get to pre-pandemic levels. And with that, production is still down from where it was before the pandemic.
Taken together, inventory is short, and that matches with rising prices. If we stopped producing today, the country would only have 26 days of oil on hand.
Investing doesn't have to be complicated. It doesn't take an economics degree to see that greater demand than supply leads to higher prices.
It will be hard to find someone to tell you that this is what's happening, though... Most of the talking heads on TV would rather paint the picture that the world is buying a bunch of Teslas and that we're moving fast toward our alternative-energy future.
Sometimes it's just hard to find – or at least, acknowledge – the truth.
If you're convinced of this basic equation, what can you do to make money from this idea?
Putting money into the oil industry isn't exactly popular today. It's one of the most "hated" sectors out there. If it's not for you, that's your prerogative... But if you're interested in taking advantage of Doc's research, what can you do?
First, you can look at oil stocks... These companies are working their way back from the depths of 2020, but shares are still remarkably cheap today. That's a big deal in a world where everything is expensive.
According to a valuation measure that Doc and his research team used, the entire energy sector is trading for a 50% discount to the broader S&P 500 Index today... The 10-year average registers a 28% discount, and this valuation is the lowest it has been since 2008.
In the short term, it looks like the leading oil stocks might've recently bottomed...
As Ben and Drew wrote in DailyWealth Trader on Wednesday, the SPDR S&P Oil & Gas Exploration & Production Fund (XOP) – which has roughly $2.9 billion in assets under management – climbed above its 200-day moving average ("DMA") earlier this week...
As readers may know, the 200-DMA often serves as strong "support" price level, technically speaking. If you want to get exposure to this sector, XOP holds a basket of 54 oil and gas companies, including ExxonMobil (XOM) and ConocoPhillips (COP).
As Ben and Drew said...
In the chart below, you can see that XOP dropped hard in July and the first part of August... Then it snapped back higher – climbing above its 200-DMA – yesterday.
XOP just had a big pullback within an even bigger uptrend. This is a sign that shares are ready for at least a short-term rally... And they may be about to resume their long-term uptrend.
If you want to go deeper and perhaps find more targeted value...
You want to own shares of companies in the best position to profit from higher oil prices. Different companies have different business models that are better suited for lower or higher prices.
As we've written in the past, certain overleveraged oil companies are banking on higher prices simply to stay in business. You don't want to touch these stocks... because even if prices go higher, these are not the strongest companies to own.
The ideal company to find today would be one that's set up to earn the biggest return on its capital. Doc recently recommended one that is ramping up its massive production operation again... But it can afford to curtail any new exploration for a bit, too.
As he explained in this month's issue of Retirement Millionaire, from an investor's perspective, that's an ideal scenario for earning big returns on capital. From Doc...
We're not oilmen, and we don't fully understand the skills that tell you where to sink your wellhead.
But we think there's a more important quality of a successful oil business. It's not just about where to point your drill... You need to know where to point your capital. Running drilling rigs costs money – the scarcest resource of all.
The strategy this company is using is a boon for free cash flow ("FCF")... Longtime readers know that's something we love around Stansberry Research. More FCF enables any kind of company to keep improving and rewarding its shareholders.
In this case, the higher oil prices go, the bigger return Doc sees in owning shares.
In fairness to Doc's paying subscribers, we can't reveal the name and ticker symbol of this company in this Digest. But we can offer you a special deal to join those folks today...
A subscription to Doc's excellent Retirement Millionaire service is a must-have for any investor as far as we're concerned. For only $49 a year, you'll get 12 issues featuring monthly recommendations to protect and boost your portfolio and valuable health advice from Doc, who – as his nickname implies – is also a doctor.
His tips in this month's issue about how to beat anxiety, for instance, might be worth the yearly cost alone... Get started with a Retirement Millionaire subscription today. (And existing subscribers and Stansberry Alliance members can check out Doc's latest issue right here.)
Is a Correction Coming Sooner Than We Think?
For the most part, the stock market has been on a one-way ticket higher since it bottomed in March 2020. But with volatility back recently, our editor-at-large Daniela Cambone asks Scott Wren, senior global market strategist for Wells Fargo Investment Institute, if a near-term market correction is coming sooner than we think...
Click here to watch this video right now. For more free video content, subscribe to our Stansberry Research YouTube channel... and don't forget to follow us on Facebook, Instagram, LinkedIn, and Twitter.
New 52-week highs (as of 8/25/21): AbbVie (ABBV), Brown & Brown (BRO), Eagle Materials (EXP), Formula One Group (FWONA), Alphabet (GOOGL), Intuit (INTU), IQVIA (IQV), Liberty SiriusXM Group (LSXMA), Lonza (LZAGY), Motorola Solutions (MSI), Palo Alto Networks (PANW), ProShares Ultra Technology Fund (ROM), ProShares Ultra S&P 500 Fund (SSO), TFI International (TFII), Travelers (TRV), Vanguard S&P 500 Fund (VOO), and Zebra Technologies (ZBRA).
In today's mailbag, a simple yet compelling compliment for Ten Stock Trader editor Greg Diamond. Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.
"Hi, Greg – [Monday's Weekly Market Outlook] was ANOTHER winner! You always make sense to me. Thanks for your work – it's truly exceptional." – Paid-up subscriber Dan B.
Corey McLaughlin comment: For those who already subscribe to Greg's Ten Stock Trader, you can see the post that Dan B. is referring to here. It's about the relationship between interest rates and stocks.
For anyone else, click here to learn more about Greg's trading service.
All the best,
Corey McLaughlin
Baltimore, Maryland
August 26, 2021