Yesterday, news from the U.S. Department of Energy showed that an excess supply of oil is quickly building up.
U.S. crude oil supplies rose to the highest level in 14 years. Last week alone, inventories rose 10.1 million barrels. That far exceeded expectations. Oil refineries also operated at just 85% of capacity, the lowest level since 2003. That’s yet another sign that the slowdown is very real.
Crude prices responded, falling as much as 3% yesterday.
Right now, many investors are bottom fishing in the oil market. They’re buying crude oil with the U.S. Oil Fund (NYSE: USO), energy stock ETFs including the Energy Select Sector SPDR (NYSE: XLE), and individual oil stocks like Exxon Mobil (NYSE: XOM).
I think that’s a mistake.
That’s because nobody knows where oil is heading from here. The last six months serve as good evidence of this fact.
Think back to the first six months of 2014. Do you recall anyone predicting a big correction for oil prices? Do you remember any predictions of $70 . . . $60 . . . or $50 crude? I don’t. Yet yesterday, West Texas Intermediate (WTI) crude closed at $47 a barrel.
My point it simply this: nobody predicted a big drop for oil. Today lots of “experts” are giving their forecast for oil prices. But nobody really knows what’s next. And these predictions are nothing more than “guesstimates.”
Even today, many investors express shock that oil dropped so far and so fast.
Yet, the same is true of most bear markets. When a crash happens, investors are caught off guard. As a result, massive selloffs occur very quickly.
Just think back to Internet stocks in early 2000. . .home prices in 2008. . .or gold in 2013.
Of course, the recent drop in oil isn’t unchartered territory. In 2008, the price of WTI crude plunged from $146 to $32 in just five months. That 78% drop happened in the wake of the Global Recession, at a time when consumption concerns were very real.
The 2008 decline in oil prices should remind us that oil could continue falling. A similar 78% drop from the July 2014 high would take crude oil down to $23 per barrel.
For most investors, $23 crude oil is unfathomable. While I don’t think that’s likely, it is within the realm of possibilities.
If I had to offer a prediction, it would be this: Crude oil could trade down to the $30s within the next three months, as investors throw in the towel.
That’s because right now most investors are optimistic about oil prices. They’re expecting a quick rebound to $60 or $70 per barrel. They may be right. But the widespread optimism is enough to spark the contrarian in me. It tells me to stay away, until we see some real capitulation from investors in the energy patch.
I want to see a real selloff. That means a mass exodus from crude oil ETFs, and a big selloff for oil stocks. I expect to see a big drop in the biggest and “safest” oil stocks, which will be a sign of a true bottom. With crude in the high $40s, I think there is more downside potential.
My view is supported by the very real actions of OPEC. Earlier this month, Iran Oil Minister Bijan Zanganeh said that the country could withstand much lower crude oil prices. “Even if the oil price goes down to $25 a barrel, the oil industry will not be threatened.”
It’s clear that OPEC isn’t planning to reduce production to boost crude prices.
Here in the U.S., oil exploration and production companies are already cutting back. Wells Fargo estimates that about 30% of U.S. oil rigs will be taken offline in the coming months.
The bottom line is that there are lots of unknowns when it comes to crude oil prices. I don’t believe anyone knows where crude oil is headed next. It could continue its downward trajectory below $30. Or it could rebound to $60.
I don’t know what’s next. Neither do you or anybody else. My advice for you is simple. Keep your hard-earned savings on the sidelines, and don’t jump into crude oil or oil stocks yet.
It’s far better to wait for a real bottom in crude oil prices rather than try to catch a falling barrel of crude oil. I’ll be sure to let you know when the time is right.
Cheap Oil Here to Stay – For Now
Crude hasn’t been this cheap since March 11, 2009. And it’s likely to stay low for a while. OPEC refuses to cut production. And US production is expected to increase – not decrease – an additional 600,000 more barrels a day. The Saudis have played this one wrong – and you could profit from their blunder.
Top analyst Tyler Laundon’s found what he considers the best way to play this new, cheap oil boom. Click here for all the details.