There’s a reason why oil is called black gold.
Like bullion, it’s difficult to find in large quantities, hard to get out of the ground, and – relative to all the people who want or need it – there never seems to be enough to go around.
There’s one key difference though: Bullion can be sliced, diced, melted, cooled and reused again.
Oil? We just keep burning more of the stuff every day.
All of which means – given the fearful headlines about a new “bear market in oil” – this is a second chance to buy into petroleum stocks or the commodity itself… and be well rewarded.
Oil’s Zigs and Zags
In case we’ve all forgotten, oil basically doubled in price – climbing to $51 a barrel – in just four months’ time earlier this year. Did we think further advances were going to come without a pullback (or three)?
The oil market is justifiably famous for its volatility, especially when rocketing out of its periodic bear-market cycles.
It happened in 1986 when oil jumped 70% in a month’s time. A vicious pullback retraced nearly the entire gain, only to have the commodity double in price over the following year.
It happened in 1994.
And then again in 1999, 2001, 2003, 2006… well, you get the point. Twenty-percent pullbacks (and worse) go with the territory when the smell of a bear market still lingers in the air.
The key thing to remember is that the fundamentals for higher prices remain quite good. Right now, you’ll read plenty about worries of oversupply in the oil market. Yeah, sure – for a handful of months. In the meantime…
We just keep burning more of the stuff every day.
Hitting the (Clogged) Open Roads
A few weeks ago, the Energy Information Administration said Americans are on track to break a nine-year record for gasoline consumption. Our cars are guzzling down, on average, more than 9 million barrels a day.
The same agency expects U.S. crude oil production to keep declining through next year, stating that: “The expectation of reduced cash flows has prompted many companies to scale back oil well investment programs, deferring major new undertakings until a sustained price recovery occurs.”
Nor has the rest of the world lost its taste for hydrocarbons, despite all the ongoing oil well investment in wind- and solar-powered energy.
China is a good case in question. We all know the story about a slowing economy there. Yet Platts China Oil noted in June that its measurements of “apparent oil demand” (owing to the opaque nature of China’s official energy data) fell just 1.3% in the first four months of this year.