Eric Fry sees oil’s weakness as just a correction within a bull market … but will a recession kill demand? … the “secretly insolvent” companies over in crypto suggest more pain is coming

Last week, we closed the books on the worst half-year performance for stocks since the 1970s.

Only one sector registered a positive return — energy.

But if we zero in on sector performance over the past month, energy has gone from “first” to “worst.”

Energy is down 16%, marking the worst one-month return out of all 11 S&P sectors — and that doesn’t include its 9% drop today as I write Tuesday mid-afternoon.

In the past two Digests, we’ve featured analysis from Luke Lango and Louis Navellier centered around the oil and gas sector.

In short, Luke sees oil prices falling substantially, even from here. Meanwhile, Louis believes the stock prices of top-tier oil companies haven’t yet peaked.

Let’s begin today’s Digest by adding one more opinion into the mix, this one from our macro expert, Eric Fry.

Over Eric’s multi-decade career, he’s dug up 40 different 1,000%+ returning investments. Most investors never get one. And it turns out, the oil patch has produced an abundance of winners for Eric as he’s ridden the boom/bust cycles over the years.

So, what are decades of experience telling Eric about the status of the oil trade today?

From last week’s Speculator update:

[Oil stocks] tend to gyrate wildly en route to producing major gains [during a bull market phase].

For example, from 2000 to 2007, the shares of oil refiner Valero Energy soared more than 1,600%. And yet, during that timeframe the stock suffered three major corrections.

One of those corrections slashed 54% off the stock’s price, just before it soared 600%.

In other words, wicked corrections often punctuate bull markets in the natural resources sector…

Perhaps this steep selloff is signaling the end of the bull market in crude oil… but I doubt it.

Instead, what I believe we are seeing is a typical — albeit painful — correction in an ongoing bull market.

Now, much of the reason why oil stocks have been down in recent weeks is due to fear.

Specifically, investors are worried about a slowing global economy which threatens to kneecap oil demand.

That fear is on full display this morning, with one analyst describing the oil market as “struggling to break out from its current recessionary malaise as the market pivots away from inflation to economic despair.”

***The potential for lower demand from a recession is a critical variable to watch, but we also need to consider what’s happening over on the supply side of the equation

Last week, French president Emmanuel Macron told President Biden about a recent conversation he had with UAE leader Sheikh Mohammed bin Zayed al-Nahyan.

From Macron:

He told me two things. I’m at a maximum, maximum [production capacity]. This is what he claims.

And then he said [the] Saudis can increase by 150 [thousand barrels per day]. Maybe a little bit more, but they don’t have huge capacities before six months’ time.

Here’s Eric’s take on this:

Prior to this bombshell revelation, most energy sector experts had estimated that the two countries combined could produce an additional two million barrels per day… if they so desired.

Apparently, that assumption is false. Meanwhile, most other OPEC producers are struggling to maintain production at current levels, much less boost it.

In other words, bountiful new crude supplies will not likely come to the rescue of the oil market and drive prices lower.

That means prices will likely remain elevated, unless and until demand starts to erode.

But Eric’s comment circles us back to our earlier concern — what about a recession? Won’t that cause the demand erosion that oil investors are fearing?

Well, yes, but to what extent, we don’t know. Recessions come in different varieties, from mild and short to brutal and seemingly endless.

In the meantime, here’s UBS with why they believe demand will remain strong:

We expect oil demand to improve further, benefiting from the reopening of China, summer travel in the northern hemisphere and the weather getting warmer in the Middle East.

With supply growth lagging demand growth over the coming months, we continue to expect higher oil prices.

After analyzing all these variables, here’s Eric’s bottom line:

My takeaway: Don’t panic; buy more. Oil stocks remain a strong buy. Add to positions on weakness.

***Speaking of “weakness,” it’s more important than ever to protect your wealth over in the crypto sector

Less than a month ago, we featured the following warning from one of our crypto experts, Charlie Shrem:

…We believe 98% of the cryptos in the world today are about to go to zero.

And this includes many of the most popular cryptos in the world today…

Cryptos that are widely held by millions of people.

Well, the market has been imploding as predicted.

The latest drama is nothing short of terrifying, suggesting another shoe is likely to soon drop.

Last week, a meltdown with crypto platform BlockFi sent ripples through the sector.

Here’s what happened, from Axios:

BlockFi got unexpectedly hammered by the liquidation of crypto hedge fund Three Arrows Capital, to which it was a counterparty via an overcollateralized margin loan.

It appears that BlockFi was immediately able to offload the related Bitcoin but couldn’t trade underlying Grayscale Bitcoin Trust (GBTC) shares because the markets were closed.

The latest twist from over the weekend is that 30-year-old crypto billionaire Sam Bankman-Fried, owner of FTX, is going to buy BlockFi for up to $240 million.

This is an astonishing price, given that BlockFi was valued at $5 billion just last year.

(For more details on the BlockFi drama, last week, our crypto expert Ashley Cassell provided great explanatory write-up here in her free newsletter, New Digital World.)

The crypto sector is breathing a sigh of relief as the deal provides a $400 million revolving credit facility, which ensures that client funds won’t be wiped out.

From CNBC:

The so-called crypto winter isn’t over yet — and a number of cryptocurrency exchanges have already run out of cash, billionaire and founder of crypto exchange FTX Sam Bankman-Fried said on Tuesday.

There are “some third-tier exchanges that are already secretly insolvent,” Bankman-Fried told Forbes…

“There are companies that are basically too far gone and it’s not practical to backstop them for reasons like a substantial hole in the balance sheet, regulatory issues or that there is not much of a business left to be saved,” he said Tuesday, without naming any specific companies.

Translation — wipeouts are coming. Protect yourself.

This brings to mind the warning from Luke Lango, who is Charlie’s partner in Ultimate Crypto:

This is not the time to be taking a lot of shots in the crypto market.

Most of the cryptos out there in the market today will fail in the long run. That’s a simple reality.

The market became overcrowded with unsubstantiated froth. That froth needs to be killed off, and you need to avoid it.

Luke and Charlie’s advice for today is simple — if you’re going to stay invested, limit your holdings only to the strongest, most highly-capitalized cryptos.

If you’re doing that, then Luke and Charlie believe the crypto bull market on the other side of this carnage will be explosive. They’re looking for a new sector boom to begin in early 2023 in the run-up to the next bitcoin halving.

But for now, protection is the name of the game as the market squeezes out the froth.

We’ll keep you updated.

Have a good evening,

Jeff Remsburg