Get ready for higher prices at the pump … the challenges facing U.S. oil production … is the recent bounce in the broad market real or a bearish pump-fake?

 

If you think prices at the pump are high now, wait till you see where they’re going to be next week.

That comes from legendary investor, Louis Navellier, in last Friday’s Accelerated Profits Flash Alert podcast.

As you’re likely well aware, gas prices are skyrocketing. Here are details from CNBC last Friday:

Gas prices rose to the highest level in more than seven years Friday, on the heels of the U.S. oil benchmark topping $90 per barrel for the first time since 2014.

The national average for a gallon of gas stood at $3.423 on Friday, according to AAA, slightly surpassing the prior high-water mark of $3.422 from Nov. 8.

Friday’s price means consumers are now paying the most at the pump since Sept. 10, 2014, AAA data shows. The national average stood at $2.44 a year ago.

Returning to Louis, he points out that gasoline demand is seasonal. So, despite today’s high prices, there will be even more upward pressure as people want to get out when the weather turns nicer in the spring.

***But Louis notes that the more pressing influence on lofty oil prices is the ongoing Russia/Ukraine crisis

Over the weekend, we learned that Russia has amassed roughly 70% of the military capability required for a full-scale invasion of Ukraine.

From BBC News:

The ground is expected to freeze and harden from mid-February, enabling Moscow to bring in more heavy equipment, the unnamed officials said.

Russia is said to have more than 100,000 troops near Ukraine’s borders but denies planning to attack.

Russia is the world’s third-largest oil producer. So, this geopolitical tension is leading to fears of global supply disruptions.

On Friday, Reuters reported that crude oil prices are likely to rise above $100 per barrel, pointing toward a potential war between Russia and Ukraine as one of their top concerns for markets in 2022.

***Why can’t the U.S. increase domestic oil production to offset any potential supply shortage from a Russia/Ukraine conflict?

For the answer, let’s return to Louis’ podcast:

There’s an article in the Wall Street Journal (last Friday) talking about how the fracking boom is over. Not so much because of the Biden Administration and EPA’s aggressive nature on fracking wastewater and things like that, but more because fields have a lifecycle.

The Eagle Ford Shale field doesn’t produce what it used to because it’s been depleted. And the Permian Basin is starting to drop off because there’s only so much you can get out of it.

So, this means the U.S. return to energy independence is going to be very, very difficult. And this means that Russia and other oil producers are in the catbird seat.

The quote below comes from the Wall Street Journal article that Louis references. It adds a bit more detail on the scope of the U.S. supply drop-off:

Less than 3½ years after the shale revolution made the U.S. the world’s largest oil producer, companies in the oil fields of Texas, New Mexico and North Dakota have tapped many of their best wells.

If the largest shale drillers kept their output roughly flat, as they have during the pandemic, many could continue drilling profitable wells for a decade or two, according to a Wall Street Journal review of inventory data and analyses.

If they boosted production 30% a year—the pre-pandemic growth rate in the Permian Basin, the country’s biggest oil field—they would run out of prime drilling locations in just a few years.

***There’s a simple takeaway from all this

This supply challenge means that quality energy companies have a strong tailwind.

Back to Louis:

In an inflationary environment, we know where to go – obviously, we’re going to pick up more energy stocks.

Naturally, they’re going to show up on all our screens.

This echoes the same conclusion reached by our macro expert, Eric Fry. We featured some of Eric’s research on this opportunity in oil in our January 19th Digest. And in our January 27th Digest, we updated readers on the status of our oil trades. If you missed that issue, click here.

Bottom-line, oil’s supply/demand equilibrium is on shaky ground. That suggests even higher prices are coming, though we expect volatility.

To sign up for Louis’ Accelerated Profits

 service and get whatever fundamentally-superior energy plays his quant-based market approach identifies, click here.

***Switching gears, the stock market has enjoyed a bounce in recent trading sessions – is it real or just a dead-cat bounce?

As you can see below, since late last month, the major indexes have all pushed higher. The Nasdaq leads the way, up 6%.

But bullish surges within a broader market decline are common. So, is this bounce the beginning of a sustained climb or a bear trap?

For more on this, let’s turn to our technical experts, John Jagerson and Wade Hansen, from Strategic Trader.

From last week’s update:

Seeing the rally in the S&P 500 this week – after having collapsed during the previous two weeks – has many on Wall Street wondering if we’re living through a dead-cat bounce right now. We don’t think so.

We think the S&P 500 is going to have a difficult time breaking above 4600 in the near-term, but we don’t think the index is going to turn around and break below 4300 either.

Instead, we’re looking at this 300-point range as a potential consolidation range for the S&P 500 in February.

As I write Monday morning, the S&P is trading at 4,508, right in the middle of John and Wade’s consolidation range.

Back to John and Wade:

The fact that we continue to see companies reporting solid earnings, the CBOE Volatility Index (VIX) pulling back from its recent highs and the 10-year Treasury yield (TNX) remaining stable below 2% tells us Wall Street isn’t panicking.

For more color on the “solid earnings” note, let’s turn to FactSet, which is the go-to data analytics company used by the pros.

From last Friday’s Earnings Insight update:

Earnings Scorecard: For Q4 2021 (with 56% of S&P 500 companies reporting actual results), 76% of S&P 500 companies have reported a positive EPS surprise and 77% of S&P 500 companies have reported a positive revenue surprise.

Earnings Growth: For Q4 2021, the blended earnings growth rate for the S&P 500 is 29.2%. If 29.2% is the actual growth rate for the quarter, it will mark the fourth straight quarter of earnings growth above 25%.

As to the VIX, below you can see it pulling back to the low-20s after having spiked in January.

The current reading just under 23 suggests traders are still nervous, but it’s clearly not the panicked levels we saw late last month.

And let’s keep watching the 10-year Treasury yield.

While it remains below the 2% level John and Wade highlighted, it’s been pushing higher since their update.

As you can see below, it’s at 1.93% as I write Monday morning. This is the highest level since 2019.

Let’s return to John and Wade for the bottom-line on what to expect in the short-term:

Take heart. We can enjoy the current bounce in the S&P 500 without having to worry about it being a dead-cat bounce.

We expect traders to continue rotating out of riskier assets – like small-cap stocks and high-yield bonds – but the large-cap stocks in the S&P 500 should continue to hold their own for a while.

Have a good evening,

Jeff Remsburg