There are good investments. And then there are legendary investments — those career-defining and life-changing ventures that make fortunes for all involved. Could oil offer a legendary opportunity like this today?
When Michael Burry bet against the subprime mortgage market in the mid-2000s, it was a legendary investment. Burry personally made $100 million.
In 1992, George Soros bet that Great Britain would devalue its currency fully short the pound. And that was a legendary investment. Soros pocketed more than $1 billion from that trade alone.
Paul Tudor Jones called the 1987 stock market crash — that was a legendary investment. Jones earned more than $100 million.
When Jim Chanos recognized Enron’s fraud and shorted the energy giant’s stock in 2000, that was a legendary investment. Chanos pocketed $500 million from the trade.
Legendary investments don’t just make money. They make fortunes.
And they all have one thing in common. They’re all courageous and ostensibly crazy contrarian calls.
It took a kind of nutty genius to bet that Enron, once dubbed the most innovative, was a complete fraud. And it took an equally kind of nutty genius to bet against what everyone was calling a rock-solid housing market in 2007.
But that’s what’s at the heart of legendary investment calls. You must be willing to see what’s right — not what’s popular — and make a bet on it.
We may be on the verge of one of these legendary investments.
It has to do with Wall Street’s most popular and favorite asset class right now: oil. Specifically, it has to do with making a bet against it.
A Repeat of 2008?
Before I go any further, let me state: I get it.
Oil is the only asset class that’s working right now. Prices are up big in 2022. Everything else — stocks, bonds, cryptos, etc. — is down big. Russian supply is coming offline. There’s been massive capital underinvestment in the fossil fuel sector for years. It takes a long time for new supply to come online. Therefore, you’re looking at potential supply constraints for years to come.
I get all that. That’s why oil prices have soared to 14-year highs.
But, folks, that’s already priced into the market. Instead of totally expected supply constraints causing a run toward $200, I think we’ll see unforeseen demand destruction causing a crash toward $40.
Here’s the story.
I’m seeing a lot of parallels between the 2007-08 and the 2021-22 oil bull market.
On price action alone, the two are identical. Take a look at the chart below. The current oil bull market (blue) is trending in step with the 2007-08 bull market (orange).
Both soared from $50 oil to $100-plus oil in about 300 days. Both took another 50 to 75 days to climb to $120-plus oil. And both started to show signs of weakness about 375 days in.
That’s where we are in the current oil bull market cycle. We’re about 385 days past $50 oil, and we’re down more than 10% from the highs. Around this time in the 2007-08 oil bull market, prices were about 15% off the highs. That’s pretty close to where we are today.
What happened next in the 2007-08 bull market? Over the next 100 days, oil prices collapsed from $125 per barrel to below $40 — a record 70% plunge.
I think history is about to repeat itself.
The Fundamental Outlook for Oil Is Bleak
Anyone can line up two squiggly lines next to each other and say, “look; they match!”
We’re not saying to short oil because of the above chart. Rather, we’re saying it’s very telling because fundamentally speaking, it does look like a repeat of 2008 for oil.
In the first half of 2008, oil prices soared about 50% on two ideas:
- Supply disruptions in Africa and the Middle East were creating a situation where traders expected supply constraints for years to come.
- Global demand was pretty healthy and resilient to a choppy stock market. (The S&P 500 was down about 15% through the first six months of 2008).
But ultimately, that bull thesis came undone. African and Middle East supply came back online rather quickly. And it was offset by increased output everywhere else in world, somewhat easing supply constraints. More importantly, demand was killed heading into 2009 as the global economy spilled into a recession.
Does it not feel like the exact same situation is playing out right now?
In the first half of 2022, oil prices have soared about 50% on two ideas:
- There are supply disruptions from the Russia-Ukraine war, which some fear will create a constrained market for years.
- Global demand has remained pretty healthy and resilient to the 20% year-to-date drop in stocks.
But the supply situation is healing. The U.S. is pulling out strategic reserves, and OPEC+ is finally agreeing to substantial production increases. Far more important, the global economy increasingly looks like it will fall into a recession in 2023 (if not sooner). And that will cause enormous demand destruction that simply is not priced into oil at $120.
Incoming Crash
In other words, supply constraints sparked the big oil rally in the first half of 2008. But recession-driven demand destruction caused its crash later in the year.
We have the same situation today. Supply constraints pushed oil prices up in the first half of 2022. Demand destruction will send them crashing lower next.
Remember: Oil never does well in recessions, regardless of supply!
Oil prices dropped 50% in the 1990-91 recession. In the 2000-01 recession, they dropped more than 40%. In 2008, they dropped almost 80%. And in 2020, they went negative.
Why wouldn’t they collapse in the 2022-23 recession?
Make no mistake. They will.
Now, short oil is a bold, brazen call to make right now.
To be clear, we’re not fully committing to that call yet. We’re still researching everything. But to date, all our exploration has implied that today’s oil bull market will fall victim to the same recession-driven demand destruction that crashed it in 2008 and spun oil prices 80% lower in a year.
Everyone’s talking about $200 oil right now. With a recession knocking on the door, we think $40 oil is far more likely.
This could prove to be one of those legendary investments that makes fortunes for all those involved. Short oil in 2022 has that same contrarian edge and nuttiness of short the markets in 1987. It’s the same as shorting the pound in 1992, shorting Enron stock in 2000, and shorting the subprime market in the mid-2000s.
Fortunes could be made from this idea.
The Final Word on Oil
To be sure, there are many ways to potentially play this “short oil” trend. But we think we’ve discovered the single best way.
You see, there’s this multi-trillion-dollar company out there by the name of Apple (AAPL). You may have heard of it. In any event, it’s gearing up to a launch a brand-new product, which is set to win big if oil goes out of style.
Any guesses?
Apple is making a car. Specifically, Apple is making an electric car.
If oil goes out of style, Apple’s new electric car, which should launch in 2024, will see enormous demand. And we’ve found a virtually unheard-of $3 stock positioned to supply Apple with the most vital tech for its car.
So, if you’re looking for the best way to bet against oil, look no further. We have the answer. It’s a $3 stock that could soar 40X-plus as oil prices potentially collapse over the next several quarters.
This could be one of those legendary fortune-making investments.
