Oil shouldn’t be rallying.
This month, the price of oil has jumped 12%. Yesterday, it closed at its highest price since early July.
While this is a big move, it's not uncommon for commodities. Remember, commodities are volatile. One day, they’re soaring. The next, they’re crashing. It's important not to get caught up in their day-to-day swings.
Still, this rally caught our eye…
You may remember that oil crashed in the summer of 2014. It’s since plunged 75%. In January, it hit its lowest level since 2003.
Oil tanked because there was simply too much of it.
High prices and innovative techniques like “fracking” triggered a huge boom in global oil production. Over the last decade, U.S. output nearly doubled to the highest level since the 1970s. Production in other major oil-producing countries hit record highs.
The global economy ended up with more oil than it needed. For the past two years, the global economy has been working through a giant oil surplus.
Progress has been slow.
According to International Energy Agency (IEA), the global economy is still oversupplied by more than 300,000 barrels per day (bpd).
Yet, oil’s rallying. Today, we’ll show you what’s pushing oil higher. As you’ll see, it won’t cure the industry’s biggest problems…
• Hopes of a production “freeze” caused oil prices to surge…
Earlier this month, the Organization of the Petroleum Exporting Countries (OPEC), a cartel of 14 oil-producing countries, said it plans to hold informal talks in Algeria next month.
The purpose of this meeting is to bring stability back to the oil market. Some analysts think OPEC could even freeze production at this meeting, meaning it would cap production at current levels.
We aren’t holding our breath…
• OPEC has already tried to cap output a couple times over the past year…
The most recent talk took place in Qatar in April. OPEC even invited non-members like Russia. It was the first time in 15 years OPEC met non-members to discuss fixing output.
Oil rallied ahead of the meeting on hopes that OPEC would reach an agreement.
The talks went nowhere. Iran, OPEC’s second-biggest producer, didn’t even show up.
• OPEC isn’t acting like a cartel…
Right now, it's every member for itself. And it’s not hard to see why…
Oil is the economic backbone of every OPEC nation. It makes up 80% of Saudi Arabia’s exports…66% of Kuwait’s exports…and 46% of the United Arab Emirates' exports.
If these countries stop producing oil, their economies could fall apart.
Last month, Saudi Arabia pumped a record 10.67 million bpd, which broke the monthly record set last June. The United Arab Emirates and Kuwait are also producing record amounts of oil.
If OPEC was serious about “stabilizing” the market, it wouldn’t keep flooding the world with oil.
• Even if OPEC agrees to freeze production, it won’t make much difference…
As we’ve said many times, the world needs oil companies to cut production, not cap it at record highs.
It’s true that production in some parts of world, including the U.S., has come down. But more cuts are needed.
According to the IEA, “the massive overhang of stocks is also keeping a lid on prices, with both newly produced and stored crude competing for market share.”
A huge surplus isn’t the only factor keeping oil prices low either.
• The global economy is slowing…
A few weeks ago, we told you oil demand was plummeting. According to the global investment bank Barclays (BCS), oil demand is growing about one-third as fast as it did a year ago.
Oil is the most important commodity on the planet. It literally powers the global economy. If demand for oil is weak, it’s because the global economy is headed in the wrong direction.
According to Forbes, China’s economy, which is growing at the slowest pace since 1990, is weighing on oil. The economies of Japan and South Korea, two major oil importers, are also showing signs of fatigue.
Meanwhile, U.S. gasoline demand is weak. According to the Energy Information Administration (EIA), U.S. gasoline stockpiles hit their highest seasonal level since 1990 last month.
Gasoline, a byproduct of oil, keeps our cars running. If folks are buying less of it, it’s because they’re driving less. That’s not a good sign for the economy. And it’s bad news for oil prices.
• Oil companies have two big problems right now…
The world still has too much oil. And households and businesses are consuming less oil.
This tells us oil prices could stay low for a long time.
Some folks might read that and think they should avoid all oil stocks. But Casey readers know one of the best ways to make huge gains investing is to buy beaten-down markets. That's because crisis investing, as we like to call it, often allows you to buy world-class businesses for dirt-cheap prices.
• For the past two years, the oil market has been a bloodbath…
Major oil companies like Chevron (CVX) and Exxon (XOM) have lost billions of dollars due to low oil prices.
More than a hundred smaller oil companies have gone out of business.
But, remember, the oil market is cyclical. It experiences big booms and busts. And since the world isn't about to stop using oil, oil stocks will boom again. During the 2009–2014 boom, the average U.S. oil producer gained 256%.
Right now, many oil stocks are trading at deep discounts. The SPDR S&P Oil & Gas Exploration & Production ETF (XOP), which tracks major U.S. oil producers, is trading 56% below its 2014 high.
• If you want to get back into oil stocks, stick with the best…
Oil prices could stay low for years. So make sure you only invest in companies that can make money at low prices.
We also like companies with quality assets, healthy profit margins, and little to no debt. In other words, we want companies that can “weather the storm” if oil prices fall again.
In March, Nick Giambruno, editor of Crisis Investing, recommended a company that checks all these boxes. According to Nick, this company can make money at as low as $35 oil.
Nick’s oil pick has returned 19% since March. But it’s not too late to invest in this elite business. The stock is trading 23% below its 2014 high.
• You can learn more about this world-class oil company by signing up for Crisis Investing…
To get started, watch this new presentation. It explains how to access Nick’s top investing ideas today.
It also talks about the biggest crisis investing opportunity you’ll ever come across. As you’ll see, it’s only a matter of time before this crisis hits. When this crisis makes landfall, it could put millions of Americans out of work. Even more people could see their life savings disappear.
This short video explains how to “flip” this crisis into an opportunity to make huge gains. If you stick to our plan, you could be part of a new class of millionaires that emerges from this crisis.
The best part is that you don’t even have to do anything exotic, like trade options. All you have to do is make simple investments at the right time. This FREE video explains exactly how to do this.
Chart of the Day
The retail sector just flashed another warning sign.
Today’s chart shows the performance of retail giant Target (TGT) since the start of August. You can see Target’s stock plunged 6.3% today. It’s headed for its second-worst day in five years.
Target’s stock nosedived after it reported a 10% decline in second-quarter profits. Management blamed the bad results on a “difficult retail environment.” It doesn’t expect business to pick up anytime soon. This morning, management said this year’s sales and profits would likely come in lower than expected.
Target isn’t the only major retailer bracing for tough times. Last week, Kohl’s (KSS) lowered its profit outlook for the year. And Macy’s (M) recently announced plans to shut down 14% of its stores by the end of the year.
This tells us something is very wrong with the economy…and that more trouble could be ahead.
You see, consumer spending makes up 70% of the U.S. economy. When the economy slows, folks will stop buying designer jeans and expensive cologne to make sure they don't miss a mortgage payment. They'll hold off on buying a new watch to save money for the essentials.
Today, Target and many other big American retailers are trading like we're in a recession. To learn the best way to protect your wealth—no matter what happens to the economy—click here.
Delray Beach, Florida
August 17, 2016
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