Your Second Chance to Invest in Oil

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 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 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.

Buried inside its data is an interesting change in trend. Industrial oil demand is pretty much flat. On the other hand, gasoline use is hitting all kinds of records. It’s already up 8% in the first four months of the year.

As you can see, the industrial side of its economy is on idle, but that’s not stopping millions of Chinese from buying cars and taking to the roads and highways. Passenger vehicle sales rose more than 6% (with a particular buyer preference for gas-guzzling SUVs, which saw a 46% spike in sales).

India is a similar story. Auto sales are up 8%, and gasoline demand is up 14% on a year-over-year basis. India’s decades-long focus on service-based industries is widening to include more manufacturing, too. Oil experts believe the nation of 1.2 billion people now burns through 4.2 million barrels of oil each day, making it the third-largest consumer of crude in the world behind the U.S. and China.

No Help From Oil’s Wide-Open Spigot

On the supply side, what about all the talk of “market share,” “gluts,” Saudi Arabia and the rest of OPEC?

As others note, the cartel’s power is slipping away. The group’s ability to pump extra amounts of oil – what experts call “spare capacity” – is at its lowest level since 2008.

Nor is Saudi Arabia, historically the “swing producer” for oil, much help.

One big factor: hotter summers. It means more and more electrical demand for air conditioning. And unlike the U.S., where natural gas fuels a majority of power-generating capacity, Saudi Arabia burns oil to keep its citizens’ A/C units reliably set on “max cool” mode.

The result?

In 2015, the Kingdom’s used up a quarter of its reserves serving its own domestic needs. For a record eight-month decline, between October last year and May, the country’s overall crude inventories dropped 12% to a little less than 300 million barrels.

We’ve been warning for some time about the rising opportunities available in the oil industry.

So don’t let the recent headlines in the past month about “plunging oil prices” keep you from taking advantage of this second chance at getting in on black gold.

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The Fascination With Fibonacci – Trader’s Advantage

Fibonacci, not so much the man but the math, is pretty fascinating on its own apart from trading.

To see how each number in the Fibonacci Sequence relates to each other in some set ratio (ie..618, 1.382, etc.) and then connect these ratios to objects of nature is absolutely fascinating. Within minutes of starting to learn about Fibonacci numbers, you are drawn into a world of plant proportions and architecture of pyramids and other monuments.

The connection of the Fibonacci numbers and all things nature is also found in the world of trading itself.

When I started trading the markets back in the mid-80’s, my focus was like that of many new traders. The analysis of choice was fundamentals. Listen to the news, recommendations from friends and talking heads, or glace at the supply/demand numbers. But then something wonderful happened at the start of the 1990’s. I discovered (for myself) Fibonacci and its basic application to price and time analysis. From then on I focused on Technical Analysis and never listened to another talking head (or friend) on what to buy or sell ever again.

The applications of Fibonacci to trading are many. Most traders who use Technical Analysis are familiar with the basic use of Fibonacci in chart analysis. Here are some basic examples:

Solving for Support or Resistance – After prices have trended for a number of days/weeks/months in a certain direction, from either a significant bottom to a top, or from a significant top to a bottom, it is called a “range”. The trader identifies the range, then multiplies that range by the Fibonacci ratios of .382 and 618 for example. The results are deducted from the top price (if the range is from bottom to top) or added to the bottom price (if the range is from top to bottom) in order to get support or resistance price levels, respectively. Often additional ratios are included in this calculation.

Solving for time – A basic but fascinating approach to using Fibonacci is to count the days/weeks/months between previous market tops and bottoms and multiply the count by the Fibonacci ratios. The result is counted from the last top or bottom forward in time where another top or bottom is then expected likely to occur.

Moving from the basics of Fibonacci and chart analysis are more advanced (or mostly unknown) applications for the ratios.

There are the use of Fibonacci spirals, for example, which produce both time and price results.

There are the combined use of Fibonacci ratios along with time/price squaring results.

The techniques and methods one can use to exploit the markets using Fibonacci are numerous!

Within my charting software I often use what are called Fibonacci Fan Lines. The application here is somewhat like that mentioned above under “Solving for Support or Resistance”, with the major difference being that the Fan Lines produce DYNAMIC support and resistance levels (the values change for each time interval on the chart, higher for ascending lines and lower for descending lines). They also require locating patterns two ranges (top to bottom to top, or bottom to top to bottom). You simply label the extreme of range as A, B and C. For example, ranges of top to bottom and back to top would be labeled “A” for the first top, “B” for the following bottom, and “C” for the final top. The range of “B to C” is divided by the Fibonacci ratios and then lines are drawn from “A” through the divisions of the range of “B to C” out into the future. These become your support/resistance levels.

Another fascinating approach to using Fibonacci for chart analysis is to simply add the Fibonacci series numbers to any significant top or bottom to get possible future tops and bottoms.

For example, the series starting at 3 would be 3, 5, 8, 13, 21, 34, 55, etc. Add any two consecutive numbers in the series to get the next number in the series. Now locate a top or bottom on your price chart and count from there 3 bars, 5 bars, 8 bars, etc. These are time periods to watch for possible market tops and bottoms.

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The Most Hated Asset Class

I’ve spent a lifetime pointing out potential risks – in our economy, in our real estate market and in our stock market. All too often, we pay only lip service to the safety of our assets while taking unnecessary chances.

But sometimes you have to consider the other side of the risk/reward coin, too. Every asset has a buyer – if the price is low enough.

And I think that’s where the market’s at with a large swath of commodities these days.

It’s all about risk/reward.

Real estate prices are sky-high. Even insiders at the Federal Reserve say there’s a bubble in commercial property. And you’ve heard plenty from us and others about concerns in the stock market.

When it comes to risk versus reward in those two sectors, well… the “reward” part, after more than six years’ worth of gains, is about as used up as a champagne bottle on the morning after New Year’s.

The Case for Commodities

Commodities are the other side of the asset coin. Sure, oil prices have doubled since the start of the year, and precious-metal prices are up around 20%, but neither is anywhere near its highs of even a few years ago. The rest of the commodities complex represents a similar mixed bag of results in 2016:

Copper: +1%
Soybeans: +8%
Wheat: -15%
Corn: -8%
Sugar: +50%
Nickel: +20%

And take a look at just about any commodities-tracking price index or exchange-traded fund, and you’ll see what I’m talking about. For instance, the Dow Jones Commodity Index is up only 23% since bottoming earlier this year (primarily due to the rise in energy prices). But it’s down by more than 30% since 2014.

It might seem odd to point to an underperforming asset class and say “put some money there,” but that’s exactly why it’s worth looking at the commodities sector right now.

It offers the chance to diversify a portion of your wealth out of stocks and property. And best of all, commodities aren’t correlated – meaning they don’t march to the same drummer, going up and down lockstep in price – as stocks and real estate are.

But there’s another way to think about all this. For instance, house flipping and day trading are both back in vogue. But say “I like corn. It’s at its cheapest price in a decade,” and all you’ll hear are sounds of silence (and maybe crickets).

Yet there’s a flip side to the old adage that “the best cure for high prices is high prices.” The best cure for low prices across the board in the commodities complex? Yup – low prices. And it’s leading growers, miners and other producers to pare back while waiting for demand to kick in again once again.

For instance, Texas farmers are on track to plant as much as 20% less wheat this fall (after cutting planting by 13% in the same period last year).

When it comes to risk versus reward, you can’t find an asset class that your neighbors and cocktail-party friends are more indifferent about than commodities. That’s a good thing. When an asset is unpopular, even hated, it means there’s a potential for profit. The same can’t be broadly said about stocks and real estate at current levels.

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