Watch For Danger Signal From Oil
The big gains in oil prices in September have moderated somewhat. And that’s a relief because a sharp spike could push an already vulnerable market over the line. Specifically, oil prices had risen about 50% between June and September. This meant that had there been a further gain of just 15% or so would have likely triggered a sell signal from my oil signal. The recent pullback has given us a little more wriggle room.
Watching For Red Flag
In closely following the oil market over the years, I have found that a year-over-year price jump of about 80% tends to precede bear markets. This is because oil is the lifeblood of the economy. More expensive oil will be felt up and down supply chains and effectively function as a tax on households and businesses alike. If oil prices rise over time in a somewhat orderly fashion, companies can prepare and adjust accordingly, but when the spike is sudden and big, it can create havoc for companies because not only does it make running a business more costly, but it also makes budgeting more difficult.
Oil prices have fallen some from their recent peak, but with OPEC and Russia sticking with their production cuts through at least the end of the year, and the potential for the Israel-Palestine conflict to expand, there’s real danger of serious oil market disruption, which would be bearish for both for stocks and the economy.
Unfortunately, the current turbulence is unlikely to be resolved quickly. That’s because to segue from finite energy supplies, i.e., fossil fuels, to a suite of self-sustaining energies is a worldwide imperative that will be exceptionally difficult to achieve in a world as fractured as ours. The stakes could not be higher. If we start running short of fossil fuels, civilization would be in a perilous situation.
Hoping For Win-Win Cooperation
I strongly believe that the only viable solution would be for the U.S. to start cooperating with other world powers, even our adversaries, to work together toward securing sufficient critical resources, including oil, to build a sustainable and better world. As geopolitical tensions have only continued to rise, cooperation looks like a long shot at best now.
Possible hopeful signs are some “green shoots” being reported, with a summit between Biden and Xi expected to take place before yearend. You can’t ease tensions if you don’t talk. So the hope is that the leaders might ease the current Cold War-like relations between the two countries. If the two most powerful countries in the world can reach some common ground to strive for a win-win solution, it would be fantastic news for everyone. Chances are slim, but even some minor steps toward a solution would be great to see.
I think the U.S. has been most at fault, since China has made it clear that when it comes to getting the planet on a stable energy track, it would welcome a full-fledged cooperative effort. This is no
time for bluster, and the U.S. needs to wake up to what’s at stake. Changing course here would show strength, not weakness, demonstrating to the world that in a true crisis, it can still count on us.
In the meantime, for investors, I think it is important to have some oil stocks in the portfolio. Clearly, talks in recent years of oil being obsolete is quite premature. Look for companies with rich reserves and good cost profiles because such companies will likely be the most profitable. When oil prices are rising, a company that can up production and can keep costs reasonable can sell more at high prices and ensure as much of the top line flows down to the bottom line as possible.
Editor’s Note: For market-thumping gains with mitigated risk, I suggest you consider the advice of our colleague Jim Pearce, chief investment strategist of Personal Finance.
Personal Finance, founded in 1974, is our flagship publication and it has helped investors build wealth for nearly 50 years.
As Jim Pearce just explained, EVs are on the rise. However, fossil fuels won’t become obsolete just yet. Case in point: If you had taken the initial recommendation of Personal Finance to buy Chevron (NYSE: CVX), and held on, you’d be sitting on a whopping return of nearly 3,200% (that’s not a typo).
Want to get aboard “The Next Chevron?” Click here for details.