By E.B. Tucker, editor, The Casey Report
Donald Trump is flipping one of the most important U.S. industries on its head.
If you understand what's happening, you can save your portfolio from huge losses in the coming years. You can even profit from this new trend.
I’m talking about the massive transformation happening in the oil industry right now.
Let me explain…
Trump Is Good for the Oil Business…but Bad for the Oil Price
Obama was just the opposite. He and the Environmental Protection Agency (EPA) barely let the ink dry on regulations before churning out the next batch. In fact, under Obama, the EPA created 3,900 regulations.
That and other factors meant U.S. crude oil traded for over $100 per barrel in four of Obama’s eight years running the country. In late 2014, the price started falling. Today, two-and-a-half years later, a barrel costs $47.
There’s an old saying in the commodity business: “The cure for high prices is high prices.” It means that when the price of a commodity keeps rising, companies rush out looking for more. The profit incentive is sky-high.
Before long, fresh new supplies of the commodity hit the market. Eventually, too much supply hits the market. That’s when prices fall.
And that’s the case with oil today.
The supply of oil increased much faster than the demand for it. And it all happened during Obama’s time in office.
We’re likely to see less regulation for energy companies over the next four years—not more.
We’ll see the government pave the way for U.S. energy production instead of standing in its way.
All of That Means More Supply…and Lower Prices
Trump installed the former CEO of Exxon to run the State Department. He placed Rick Perry, the governor of Texas, as energy secretary. His EPA administrator has environmentalists seething. It’s obvious that Donald Trump’s agenda is good for U.S. energy producers and consumers.
Energy analytics firm Rystad agrees with our take. Recently it came out and said $35 per barrel is the new breakeven price for U.S. shale production (that means, even with low production prices, U.S. energy companies can profit handsomely). That’s down from $80 per barrel in 2013.
With oil trading at $47 today, producers have plenty of incentive to keep pumping. If energy companies can make money producing oil as cheap as $35 per barrel, the price isn’t going up anytime soon.
In fact, we bet the oil market will get flooded and stay that way for a few years.
Doug Casey: I agree, and am neutral to bearish on oil. Two reasons.
First, technology is constantly working to make its use more efficient, so it takes less to accomplish a given amount of work. And finding ways to produce more at lower real costs. But also, after a couple generations of hope and improvement, various types of “green” energy (primarily solar, but also wind, and others) are finally economic. They’re going to make big dents in oil use, more every year.
Second, the looming Greater Depression will significantly reduce most people’s standard of living. And oil usage along with it.
On the other hand, much higher oil prices will materialize overnight if there’s a revolution in Saudi Arabia (inevitable, and growing imminent) or a serious war (not just some sport wars, as at present) in the Mid-East. This is why commodity trading is not easy… every market has bulls and bears for good reasons.
The Coming Flood of Oil Has to Go Somewhere
Trump knows how to take advantage of incentives. We think he’ll instruct his energy-friendly cabinet to extend tax incentives for the U.S. energy business. That’s on top of lower regulation, lower taxes, and a generally more business-friendly environment.
All of that is going to be bad for the price of oil…but good for the top energy infrastructure companies in the country.
This is a massive shift from what we've seen over the past few years.
To profit from this trend, you can consider shorting (betting against) oil using the United States Oil Fund (USO), which tracks the daily price movements of oil.
But the best way to profit from this transformation is to invest in the leading energy infrastructure firms. The leader in this space is Kinder Morgan (KMI). Kinder is a traditional operating company that can take full advantage of a Trump energy infrastructure stimulus program. We expect shares to do very well in the coming years.
Editor, The Casey Report
P.S. We recently recommended Kinder Morgan in my Casey Report newsletter. But there's another energy company with even more upside potential right now. And you can even use this company to earn an “energy rebate” check every month, starting June 15.
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