Oil Bottom Is In

Written By Briton Ryle

Posted June 8, 2015

Yep. That’s it. Oil prices are done falling.

I’m making the call right here and now that it’s time to own oil stocks again for long-term potential, not just short-term trading volatility. 

As you should know, I’ve been leading my Real Income Trader subscribers to 40% trading gains on Bakken oil producer Oasis Petroleum (NYSE: OAS). We’ve owned the stock since February at $14.35 a share. We’ve taken $3 a share in cash with a low-risk strategy of selling covered call options against our stock when it rallies. And the shares are up roughly $2 from our $14.35 entry price.

But now and for the foreseeable future, we’re going to sit back and let our Oasis shares run. 

Oasis was a $55 stock when oil prices were around $100. Today, it is a little below $17. In the next month or two, the price of a barrel of West Texas Intermediate crude is going to run into the $70s, 15% higher than it is right now. And shares of Oasis are about to jump into the $20s.

That’s an easy 30% gain, and by the end of the summer, I won’t be at all surprised if Oasis is trading near $30. By the end of the year, you could be close to a triple-digit gain on Oasis or any other quality mid-sized oil stock that’s been crushed by falling oil prices. 

Low Risk is Good

I don’t like risk so much these days. But when I was younger, I didn’t give it much thought.

In my early 20s, I played in several rock bands, making no money, taking to the road, and rocking out till the wee hours in different cities on the East Coast. 

It wasn’t a momentous decision to give up on my dreams of being a rock star. I had decided to move out West and go skiing for a couple years. I’d never been to Colorado before, and I got dropped off at the first ski town I came to in the Rockies: Winter Park. Skiing waist-deep powder, rocketing down chutes with a 40% grade, and catching air off 20-foot rocks was all in a day’s fun. 

After I blew my knee out skiing moguls on a run called Short Haul, I decided maybe it was time to go to college and get a real job. After graduation, in my early 30s, I moved to Baltimore, and with a new marriage and a baby on the way, I took a $10-an-hour internship to see if I could make it in the newsletter biz. 

My bio is one risk after another. But these days, with a couple kids looking at college in a few years, I don’t take the same cavalier attitude toward risk that was second nature in my youth. That’s why I look for the easy profits in the stock market.

And right now, oil is the most obvious upside play I can find. Here’s why…

Don’t Believe the Hype

On Friday, Saudi Arabia and the rest of the OPEC oil mafia said they were going to keep oil production steady. Oil prices fell on the news, and analysts came out of the woodwork to say that oil prices will likely head lower. 

One oil analyst in London told Reuters: “The OPEC decision is bearish for oil… It means we will have an oversupplied market for the rest of the year.”

Barclay’s said: “This means that global oil stocks, already at record highs, will continue to climb, resulting in further downward pressure on prices…”

And of course, wherever there is misdirection going on, you know Goldman Sachs has to have its say: “We forecast that Saudi and other low-cost producers will continue to increase output…”

Now, here’s the thing: U.S. oil inventories have been falling for five weeks. 1.9 million barrels came out of storage last week, 2.8 million barrels the prior week, and 2.7 million barrels the week before that…

And remember, that’s oil out of storage and onto the market, in addition to current production that went straight to market.

There are a few reasons U.S. oil inventories falling. Much of it has to do with the fact that there are 60% fewer oil rigs drilling new wells in the U.S. Analysts think U.S. production will be steady — or even fall — in the third quarter. 

So the world still has more oil than it can use right now. But the fact that new oil supply will be lower than expected just a month or two ago is good for prices. And I’ll tell you right now: Oil prices will launch at the first sign that U.S. production is falling. 

The big question is: Why are inventories falling? 

Refiners are COOKING

As you know, the U.S. does not export oil. But we do export refined products like gasoline, diesel fuel, etc. And right now, U.S. oil refiners are processing 16 million barrels a day.

Yeah, that’s a huge amount. It’s all of U.S. daily production, plus 7 million barrels of imports. 

When the price for something is low, it’s expected that people will use more. And that’s what’s happening with gasoline. Inventories of refined oil products (gasoline, diesel, etc.) are barely above their long-term averages, while oil inventory is at 80-year highs. This tells us people around the world are using more gasoline.

Gasoline usage is notoriously slow to be reported. All we have to date are February numbers, and motorists are using 4% more gas. That’s a significant number. Globally, demand for fuel is currently running around 1.5 million barrels a day higher than last year. If it continues, that will put a pretty big dent in the oil oversupply.  

And there are reasons to think it will continue. Employment growth certainly helps. So does the increased economic activity in Europe. Latin America is even contributing to the increased demand for gasoline. 

Manipulation is a Short-Term Strategy

You can only manipulate a market for so long. At some point, market participants will adjust for current price trends and offset the impact of the manipulation. That’s what’s happening in oil right now.

Saudi Arabia has been manipulating oil prices by oversupplying the market. U.S. oil producers have adjusted by lowering spending and investment in new production. And consumers around the world have adjusted to lower prices by driving more.

That’s exactly what’s supposed to happen. Saudi Arabia’s ability to manipulate oil prices is waning. 

And that means U.S. oil stocks are a good low-risk investment right now. 

I know the market is screaming, “oil prices will fall” and “it’s a bear market for oil.” But the simple fact is, the fundamentals are saying something very different. 

So buy some oil stocks. Oasis Petroleum is a good one. So is Laredo (NYSE: LPI).

And don’t be surprised if you see lower oil prices this week. All that doomsaying can have an effect. Just understand that for the rest of the year, the trend for oil prices is up.

Until next time,

Until next time,

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Briton Ryle

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.

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