Black Swan or Black Gold: Are Oil Stocks Signaling a Market Crash?

Hilary Kramer

Hilary Kramer is an investment analyst and portfolio manager with 30 years of experience on Wall Street.

Energy was supposed to be the hot spot this year, with earnings in the sector rebounding as much as 30 percent on the back of strong oil prices. Instead, profits cratered, and the stocks don’t look great either.

When you live on petroleum sales, you suffer when oil reverses. And since the global economy runs on fossil fuel, investors get nervous about a recession when demand for oil declines.

I’m not one of those nervous investors. Despite all the tension and turmoil of the last few months, I don’t see the world economy going over any cliffs in the near term.

But even if this is not the “black swan” that foreshadows a broader crash, there’s still a reason crude oil is down 30 percent from its October peak. This is simply how energy markets work.

Updating Risk about China’s Economy and the Coronavirus

Start by bracketing the assumption that there’s an essential link between declining oil prices and decelerating economic activity.

Yes, oil is the fuel that drives everything from factories to farming. There’s a strong correlation between the rate at which we burn that fuel and the speed at which the economic world spins.

However, oil is still a commodity subject to market logic. When supply rises faster than demand, prices go down.

Demand is still edging up in some places like the United States and surging in places like China. However, global supply has risen faster.

It is really that simple. More oil to burn gives consumers a break. Sooner or later, they’ll burn the excess and prices will rise again, but getting to that equilibrium point will take time.

Exclusive  U.S. Manufacturing Hit Two-Year High in October

Right now, China is the big player on the demand side. The country has quarantined 50 million people, which takes just enough fire out of the world’s aviation and auto markets to temporarily depress consumption by 2 percent.

But even with that hiccup, the country is still tracking 17 percent higher consumption this year. That’s over 2 million barrels of oil a day, enough to absorb all OPEC spare production capacity and more.

When China comes back, petroleum prices will surge. In the meantime, other consumers are happy to stockpile fuel here. India is rapidly becoming a key energy importer and around the world barrels that would have once gone to China are being diverted to other destinations.

That’s not a recession signal. But until producers pull back, petroleum will remain under pressure.

Are Supply Disruptions a Thing of the Past?

The mood in the energy market reminds me more of 2014 than 2008. In both years, oil prices went over a cliff, but only one downswing was a sign of a global recession on the horizon.

Onshore shale has transformed the risk landscape. The days of having to cope with a major disruption in countries like Nigeria, Venezuela or the Middle East are over.

Look at the market’s reaction to the drone attacks on Saudi processing plants or the more recent missile exchanges with Iran. Traders who were caught short had to move fast to cover their positions, but the overall price trend still pointed up.

It is hard to get really nervous about a coup breaking out in Texas to knock oil wells offline for days, weeks or years. While there will always be hot spots, global energy risk has declined.

Exclusive  Betting On The Kings Of The High Seas

That’s a great thing. And if U.S. producers can make $60 a barrel work, they’ll do well for long-term shareholders.

After all, all the drillers have to do is drill the holes and then pump black gold out of the ground. The right geology is truly a license to print money.

The stocks are always a slightly different story. We want to buy companies that have better futures ahead of them, which means either coming in early or waiting for a big dip to reset valuations.

In the former scenario, I’ve been talking to a few start-ups for potential inclusion in my new IPO service.

The others make their way to Value Authority, where we’ve done well with Big Energy at moments like this.

Either way, 2014 wasn’t a bad year for my subscribers at all. We just didn’t invest in a sector that was obviously deteriorating. Wait for the falling knife to hit the floor.

Upcoming Appearance

Join me at the TradersExpo in New York on Monday, March 9, 8-8:45 a.m. EST, for my special presentation, Faster, Stronger, Richer: The Two-Day Trader. Register free at Kramer.TradersExpo.com and use my priority code of 049072. The event will take place at the New York Marriott at the Brooklyn Bridge. I hope to see you there!

Like This Article?
Now Get Mark's FREE Special Report:
3 Dividend Plays with Sky-High Returns

This newly-released report by a top-20 living economist details three investments that are your best bets for income and appreciation for the rest of the year and beyond.

Get Access to the Report, 100% FREE


img
previous article

Investing in master limited partnerships (MLPs) offers investors the tax benefits of limited partnerships, as well as the liquidity and trading ease of publicly traded securities. However, which MLP stocks have performed best most recently?

MLPs issue units that are publicly traded on security exchanges like stocks. MLPs have two types of partners. General partners own the company and manage the daily operations of the partnership. Limited partners buy partnersh

PREMIUM SERVICES FOR INVESTORS

Dr. Mark Skousen

Named one of the "Top 20 Living Economists," Dr. Skousen is a professional economist, investment expert, university professor, and author of more than 25 books.

Product Details

LEARN MORE HERE

Bryan Perry

A former Wall Street financial advisor with three decades' experience, Bryan Perry focuses his efforts on high-yield income investing and quick-hitting options plays.

Product Details

LEARN MORE HERE

Jim Woods

Jim Woods has over 20 years of experience in the markets from working as a stockbroker,
financial journalist, and money manager. As well as a book author and regular contributor to
numerous investment websites, Jim is the editor of:

Product Details

LEARN MORE HERE

Bob Carlson

Bob Carlson provides independent, objective research covering all the financial issues of retirement and retirement planning. In addition, Bob serves as Chairman of the Board of Trustees of the Fairfax County (VA) Employees’ Retirement System, which has over $2.8 billion in assets.

Product Details

LEARN MORE HERE

Hilary Kramer

Hilary Kramer is an investment analyst and portfolio manager with 30 years of experience on Wall Street. Since 2010, Hilary's financial publications have provided stock analysis and investment advice to her subscribers:

Product Details

LEARN MORE HERE

Jon Johnson

Jon Johnson's philosophy in investing and trading is to take what the market gives you regardless if that is to the upside or downside. For the past 21 years, Jon has helped thousands of clients gain success in the financial markets through his newsletters and education services:

Product Details

LEARN MORE HERE

DividendInvestor.com

Used by financial advisors and individual investors all over the world, DividendInvestor.com is the premier provider and one-stop shop for dividend information and research.

Product Details

Popular tools include our proprietary Dividend Calendar, Dividend Calculator, Dividend Score Card, and many more.

LEARN MORE HERE