Dave Gilbert here, Editor of Smart Money.
It wasn’t the usual suspects this time.
Tuesday’s Consumer Price Index (CPI) rocked the market – the worst day in more than two years – as inflation came in hotter than expected. This forced investors to reevaluate how aggressive the Federal Reserve might be in raising interest rates to fight rising costs.
After growing more comfortable with previous expectations, the new fear is that the Fed might need to raise interest rates faster and longer.
One of the biggest drivers of inflation has been energy prices. Not this time. Energy prices actually fell 5% in August, including a 10.6% drop in gasoline prices.
Gas is now down more than 25% from its record high in mid-June. Oil is also down 25% from its spike to $130 a barrel in March after Russia invaded Ukraine.
If you own oil stocks and feel a little conflicted right now, I don’t blame you. On the one hand, filling up your vehicle is much less painful than it was just a few months ago. But on the other, oil stocks are down from their highs from a few months ago.
This is one of those “which is it?” moments: Are lower energy and stock prices a buying opportunity in a bigger trend? Or, as Eric Fry might put it, has the curtain come down on energy’s “swan song”?
These are important questions for investors heading into the end of the year and looking ahead to where they want to be in 2023. After all, energy is by far the leading S&P 500 sector this year, up more than 45% – which is 7X more than the only other positive sector, Utilities.
Finding the answer to this important question goes much deeper than prices, and it means not following the herd…
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The Ongoing Potential of Oil Stocks
But let’s stick with the prices for a moment anyway, as we do see something interesting.
Oil stocks have outperformed oil prices in 2022. The SPDR S&P Oil & Gas Exploration & Production ETF (XOP), represented by the purple line, is up more than double oil prices (orange line)…
When stocks outperform the underlying commodity, there must be some investors who see an ongoing opportunity.
That’s where we get into other layers of analysis, including supply and demand. Regular Smart Money readers know the research Eric Fry has done into the growing demand for oil at a time when companies are investing less in exploration and production. That’s a recipe for higher prices.
In addition, Eric shares a fascinating analysis in the current issue of Fry’s Investment Report looking at how the “pros” are investing in oil. There’s a bit of a plot twist…
According to Commitments of Traders (COT) reports, professional money managers have reduced their bullish bets on crude to the lowest levels in nearly a decade. In other words, these folks are turning their backs on the oil market.
Ironically, that’s a positive sign for oil prices. Whenever this particular group of investors is leaning hard to one side of a particular trade, it usually pays to take the other side of that trade.
As a group, these investors are not exactly the “dumb money,” but they are certainly not the “smart money.” I call them the “flock money” because they tend to act like sheep, especially at the extremes of a particular market.
They flock toward the identical trade at the identical time. When that happens, the trade becomes “crowded,” and there are very few investors left to buy into the trade and push its price higher. That’s when a reversal usually takes place.
So it may be noteworthy that this “flock money” is fleeing the oil market. Coincidentally, on June 16, money managers placed their largest bullish bet on crude in three years – the precise moment when the crude price topped out and began its recent correction.
These folks were wrong at the recent peak of the crude market, so might they also be wrong now?
Meanwhile, global crude consumption remains firm, despite all the scary headlines about recessions and “falling” Chinese demand. For example, while it is true that China’s crude imports dropped in August, it is also true that China’s crude oil consumption has been hitting all-time highs that are 8% to 9% above pre-pandemic levels.
Furthermore, the U.S. Energy Information Administration (EIA) expects global demand to rise to 2 million barrels a day over the coming months. And let’s not forget that the 1 million BPD of “emergency” supplies coming from the U.S. Strategic Petroleum Reserve will stop completely next month.
This 3-million-barrel swing alone would be enough to light a fire under crude prices.
Nevertheless, crude prices have returned to the $80-a-barrel level, thereby erasing the entire “Ukraine bounce.” It is as if nothing of importance has happened in the crude market.
But that’s not true. Global demand is running about 2 million BPD higher than it was before the conflict started, while global supplies have become somewhat less reliable than before the conflict.
Those dual trends do not guarantee a return to $100 oil, but they point in that direction, which is one of the reasons I added a new energy play to the Fry’s Investment Report portfolio.
That play is actually a “double play” on both old energy and new energy, which is why it fits so well with Eric’s bullishness on all of energy, including the transition from fossil fuels to renewable sources. This company operates in every major facet of the energy industry – from oil and gas to solar, wind, and green hydrogen.
(We can’t give away the name of the company, but you can click here to learn more about joining Fry’s Investment Report and receive immediate access to this and all of Eric’s recommendations.)
The underlying fundamentals of oil supply and demand continue to point to elevated prices and investment opportunities for some time to come, whether inflation remains hot or not, and whether the Fed aggressively raises rates or not.
Regards,
Dave
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Since 2000, Apple has applied for a whopping 248 car-related patents, and 66 of those occurred back in 2017… After which, the number of patent applications tapered through 2018… 2019… and 2020. But evidence suggests that in 2021, patent applications exceeded 2017’s record total!
It all points to one conclusion: Apple is SERIOUSLY ramping up their EV efforts right now…
An Apple EV is coming, and it could change transportation as we know it, and while I don’t think it’s a bad idea to swipe up some Apple stocks right now…
There’s a better opportunity lying under Wall Street’s radar… a $5 stock that my research indicates has the potential to multiply 40X once the Apple Car goes live. Details here.
On the date of publication, Eric Fry did not have (either directly or indirectly) any positions in the securities mentioned in this article.
