Oil has taken investors for a ride lately.
It’s no secret that commodities are volatile. They experience booms and busts.
In a downturn, commodity prices can fall through the floor. During a boom, they can soar.
After falling for almost two straight years, oil began a new bull market earlier this year. But it hasn’t gone straight up over the last few months.
Just take a look at the chart below. You can see that oil has made five big moves since June. Again, this isn’t unheard of…but there’s a particular reason oil’s been trading wildly as of late.
• The Organization of the Petroleum Exporting Countries (OPEC) isn’t working together…
OPEC is a cartel of major oil-producing countries. It supplies about 40% of the world’s oil.
For decades, OPEC set production limits to keep oil prices high. But it stopped doing that last December when it abandoned its production limit of 30 million barrels per day (bpd).
Since then, it’s been every OPEC country for itself.
Last month, Saudi Arabia, OPEC’s biggest producer, pumped a record amount of oil. Meanwhile, Iran and Iraq are in the process of ramping up production.
In a way, pumping a lot of oil is good for these countries. It means they have more barrels of oil to sell. But OPEC is also flooding the global economy with oil. And that’s the main reason oil still trades for half of what it did two years ago.
• OPEC made a deal to cut oil production on September 30…
This helped the price of oil surge 20% in just four weeks.
But OPEC didn’t actually make any cuts at this meeting. It plans to do that on November 30.
There’s just one problem. Iraq, OPEC’s second-biggest producer, doesn’t want to cut production. As we explained in October, the entire agreement could fall apart if Iraq backs out.
Concerns about the upcoming OPEC deal triggered oil’s most recent pullback.
• Yesterday, investors got a reason to believe the OPEC deal will still happen…
The Wall Street Journal reported yesterday:
[T]he Organization of the Petroleum Exporting Countries reaffirmed its commitment to cutting output. OPEC Secretary-General Mohammed Barkindo said Monday that the cartel remains committed to the tentative accord the group reached in Algiers in September, and that Russia remains on board with the plan to limit output.
Russia, the world’s biggest oil producer, is not part of OPEC. But, like many OPEC countries, Russia wants higher oil prices. That’s why it will join OPEC in Vienna on November 30. According to Bloomberg, Russia said it will freeze production for six months or longer “if OPEC reached an agreement first.”
• The price of oil jumped 1.9% on the news…
Still, we aren’t holding our breath for an OPEC deal.
All year, OPEC’s been trying to either cap or cut its production. It’s done neither. Instead, it pumped a record amount of oil last month.
Frankly, we’re not surprised OPEC can’t get on the same page. After all, these countries revolve around oil. If they produce less oil, their economies could have big problems.
• No one knows what OPEC’s next move will be…
If it cuts or even caps output, oil could rally.
If it does nothing, the price of oil should stay where it’s at or head lower.
In short, we don’t think you should make bets on what OPEC may or may not do. That’s basically speculation at this point.
• But that doesn’t mean you should avoid oil stocks…
Like it or not, the global economy still runs on oil. That tells us oil will eventually rebound.
Also, many oil stocks are dirt-cheap today. Consider the SPDR S&P Oil & Gas Exploration & Production ETF (XOP), which tracks 60 U.S. oil companies. It’s trading 58% below its 2014 high…and that’s after rallying 51% since February.
If you’re going to invest in oil stocks, stick with the strongest companies.
We like companies with high-quality assets, strong balance sheets, and healthy profit margins.
In March, Crisis Investing editor Nick Giambruno recommended a company that checks all these boxes. Before we tell you about this company, you need to understand something about Nick.
He doesn’t invest like most investors.
He doesn’t chase high-flying stocks. He likes to invest in industries and countries most investors won’t go near.
According to Nick, this method can allow you to buy world-class businesses for bargain prices. Sometimes, you can even buy a dollar’s worth of assets for a dime or less.
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• Earlier this year, the oil industry was one of the most hated markets on the planet…
The price of oil was down more than 75% from its 2014 high. On February 11, the price of oil hit its lowest price since 2003.
At the time, most investors wanted nothing to do with oil stocks…but Nick saw an opportunity.
A month later, he recommended an oil stock to his readers. It was a bold investment…but it’s paid off.
Nick’s oil stock is up 24% since March. You can see it’s also done well despite oil’s recent pullback.
• Nick says this oil company has actually emerged from the oil downturn stronger…
Nick explains:
It’s no surprise at all that shares have remained resilient.
This company’s focus during the oil downturn has been to increase efficiencies so that it can thrive in periods of low oil prices. This includes well completion technology, precision targeting, and cost reductions.
According to Nick, these efforts have paid off big time:
The company recently announced that it had increased the resource potential in its “premium locations” by over 75%. These are areas where it can earn at least a 30% rate of return at a $40/barrel oil price. At current drilling rates, that’s enough resources in premium locations to last the company more than a decade.
In an industry that is struggling to survive, this company is a clear standout. It’s the best equipped to not only survive a prolonged period of lower oil prices, but deliver enormous profits when oil prices inevitably rebound.
• Nick isn’t just making money for his readers in the beaten-down oil industry…
His readers are also up 74% on a Ukrainian agricultural operator that he recommended in July.
And they’re up 19% on an African beer and beverage company he recommended in April.
You can learn more about these companies and Nick’s other crisis investments by signing up for Crisis Investing. But, before you do, check out this short presentation.
This video explains why crisis investing is one of the most powerful ways to build wealth. As you’ll see, legendary investors John Templeton, Warren Buffett, and Casey Research founder Doug Casey used this same approach to build their fortunes.
Click here to watch this FREE 15-minute video.
How to Make a Fortune as $300 Billion in Corporate Debt Explodes
Editor’s note: Central bankers have gone off the rails trying to stimulate the global economy.
They’ve cut interest rates more than 670 times and “printed” more than $12 trillion since 2008.
These stimulus measures haven’t helped the economy. But they did encourage Corporate America to borrow giant sums of money. According to many key measures, corporate leverage is now dangerously high.
Our friend Porter Stansberry, founder of Stansberry Research, thinks this is all going to end very badly. Most people won’t prepare for this. They’ll take heavy losses. But Porter and his team have put together a blockbuster trade that could turn this coming crisis into a huge money-making opportunity.
A few shrewd investors made a similar trade during the last housing bubble. When housing prices crashed, they made billions. Porter says we’re looking at the same kind of opportunity right now.
He explains why in the essay below. This essay originally ran on September 30, 2016, in The Stansberry Digest.
From Porter Stansberry, founder, Stansberry Research
***Recently, I told you a little about what I believe is the biggest and most important opportunity I’ve ever seen in my entire 20-year career.
If you haven’t noticed, a historic mania has developed in the world’s bond markets. Central banks have pushed so much new money into bonds (in an effort to manipulate interest rates lower) that corporate bonds have begun trading with negative yields, meaning that corporations are now being paid to borrow.
This, as you might realize, makes absolutely no sense. Sooner or later, it’s going to cause catastrophic problems with the world economy – perhaps even the collapse of the entire financial system.
I hope you’ll print out today’s Digest, read it carefully, and continue to monitor a few of the data points I’ll detail below. What I’ve written here is a guide to understanding how this incredible global mania will end… and when.
I’m also including a detailed description of what I’m calling the “Big Trade.” It’s a relatively simple way individual investors can create synthetic credit default swaps (CDS) on a few dozen of the world’s weakest corporate credits. Remember, CDS were the instruments that a few investors used to make billions of dollars when the mortgage bubble burst almost 10 years ago. And I think we’ll soon have another chance at those types of profits.
***This morning, the European banking system moved one step closer to the brink…
One of Europe’s largest banks, Deutsche Bank, is teetering on disaster… And German Chancellor Angela Merkel has said the country won’t provide a bailout. Meanwhile, Deutsche’s CEO John Cryan is blaming “speculators” – not shoddy lending and a stagnant economy – for the bank’s woes. He’s trying to reassure the bank’s 100,000 employees that Deutsche remains strong, despite its clients rushing to withdraw funds.
***Deutsche has roughly $2 trillion in assets. That’s almost 11% of U.S. GDP. By this metric, that’s slightly larger than U.S. banks Wells Fargo, which has $1.9 trillion in assets, and Citigroup, which has $1.8 trillion in assets.
But here’s the thing… Deutsche has a tangible common equity ratio of just 2.9%. That’s the bank’s tangible equity divided by its tangible assets. What this means is the bank can sustain losses of only 2.9% before its equity capital is wiped out. By comparison, Wells Fargo sits at 7.7%, while Citigroup shows 10.3%.
According to the International Monetary Fund, Deutsche is the riskiest financial institution in the world… the “most important net contributor to [global] systemic risks.” But the problems don’t stop with Deutsche. The likelihood of a “Lehman moment” in Europe gets closer each day.
***The European Central Bank estimates that European banks hold bad loans totaling nearly 1 trillion euros – that’s the equivalent of 9% of euro-area gross domestic product (GDP). Italy’s Banca Monte dei Paschi di Siena, the oldest bank in the world, needs to raise 5 billion euros of equity (on top of the 8 billion it has raised in the past few years) and dump 28 billion euros of bad debt. The bank is also considering encouraging its bondholders to swap debt for equity – essentially admitting default. Its shares are down 85% this year. Italy’s UniCredit is also doomed… As are banks like Banco Popular Español SA.
***We could soon see the equivalent of a 2008 crisis in Europe. Rest assured, the financial problems coming to roost abroad will spark a global selloff in equities. Nothing will be spared (save gold and silver).
Editor’s note: Porter is launching a brand-new service next week…
Stansberry’s Big Trade will show you how to protect yourself and profit as the Fed’s latest bubble inevitably pops.
In fact, Porter believes this is the single best opportunity for huge speculative gains he has ever seen in his career. He believes the gains could dwarf those subscribers made in the last crisis, when he famously predicted the demise of Fannie Mae and Freddie Mac, General Motors, and others.
Porter will be hosting a live presentation on Wednesday, November 16, at 8 p.m. ET to explain it all…including exactly what happens next, and what you need to do to prepare.
Access is free for readers, but this event is sure to fill up quickly. If you’re interested in attending, we urge you to sign up soon. Reserve your spot and make sure you receive important updates by clicking here.