Tuesday, August 9, 2022

This Oil Price Story Stinks

By Marc Chaikin (View Archive)

Editor's note: Regular Empire Financial Daily readers are familiar with our friend and colleague Marc Chaikin...

Marc is the founder of our corporate affiliate Chaikin Analytics. With decades of experience on Wall Street, he developed computerized stock selection models and technical indicators that have become industry standards, and he pioneered the first real-time analytics workstation for portfolio managers and stock traders. With Chaikin Analytics, Marc uses his Power Gauge system to deliver these analytics to everyday investors and traders.

In today's essay, we're turning things over to Marc to share his take on the movements we've seen in oil prices and what it means for investors...

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I don't like being the bearer of bad news...

After more than 50 years of analyzing the markets, I've learned that opportunities always exist somewhere.

But we're facing an especially tough market this year. And that means some opportunities come at a cost. That's especially true in the energy sector...

I recently shared a message with my paid subscribers in Power Gauge Investor publication. I titled it, "You Haven't Missed the Energy Boom."

And today, I'd like to share a bit of that message with you...

Frankly, it stinks. But the reality we're facing is that $100-per-barrel oil (or higher) could be a fact of life for years to come.

After all, it has happened before. Do you remember oil prices after the housing bust?

Most folks have moved on from the minutiae of the economy from those years. After all, the housing bust itself and ensuing global financial crisis fill most people's memories.

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But something serious was happening in the energy market back then. And the thing is, we're seeing similar behavior today...

Take a look at oil prices in the early years of the recovery after the global financial crisis...

West Texas Intermediate crude oil traded between $80 and roughly $110 per barrel from 2010 into 2014. That's roughly four years of oil prices not too far from their current levels.

Now, this is the important part...

Those sustained high prices happened well into the shale oil revolution. In fact, horizontal drilling – the kind used in "fracking" – started outpacing the more traditional vertical drilling by 2006.

So maybe the idea of $200-per-barrel oil feels a little too "out there" for you. But that doesn't mean oil can't or won't trade between $120 and $150 per barrel for the next few years.

And there's more to this story, too...

You see, the Baker Hughes oil rig count is currently 764. As its name implies, this data measures the number of functioning oil rigs in the U.S. at any given time.

The oil rig count is up a lot over the past couple of years. It bottomed at 176 in August 2020. So that means it's up nearly 335% from its bottom.

That sounds like a heck of a lot. But when you look at history, the perspective changes...

From late 2011 through 2015, the U.S. oil rig count fluctuated between 1,300 and 1,600. And in much of 2018 and 2019, it was higher than 800.

In other words, U.S. rig counts are up significantly from their COVID-19 pandemic bottom. But they still aren't anywhere close to where they should be during an oil and gas boom.

For more proof that the energy rally isn't over yet, we can check supply and demand...

The U.S. Energy Information Administration predicts that the global oil surplus will decline from 3.05 million barrels per day this year to 2.92 million barrels per day in 2023.

The experts expect this already-surging energy market to get even tighter! And as you may have recently heard in the news, Russia has turned off some of its gas supply to Germany.

Put simply, the energy sector is going to remain tight for the foreseeable future...

Despite that, the sector recently blew off a little steam. Nothing goes up in a straight line forever. Pullbacks like the one this sector just experienced are normal in a healthy uptrend.

Our Power Gauge system recently flipped to "very bullish" on the Energy Select Sector SPDR Fund (XLE). And I see further opportunity for investors in this sector.


Marc Chaikin
August 9, 2022

Editor's note: While Marc is bullish on oil prices, he's warning about another major event in 2022. As he says, a strange day is coming to America... a massive and surprising new transition that could determine the next group of millionaires. Get the details here while there's still time.