Just when it looked like bulls were gaining the upper hand, the markets fell off a cliff last Thursday. The major indices had their second worst day of the year. Some of the losses were gained back on Friday, but the damage may take some time to fully recover from.
One of the major catalysts for the selloff was the plunging price of crude oil.
Year to date, the price of oil has dropped 19%. However, the real damage has been done only since May began.
In fact, crude was trading for around $105 a barrel at the start of May. During last Thursday’s meltdown, black gold briefly fell beneath $78 a barrel. That’s a substantial drop no matter how you look at it.
So why do the markets care about oil?
It’s partly because it tends to be a leading indicator of economic demand. So, if the price of oil drops, it implies future demand will be less. And that means slower growth.
However, I think this view is shortsighted.
For one, lower oil prices should result in lower costs for just about any company with a physical product. And, companies involved in industries like transportation and shipping will see even bigger benefits.
And that’s not all…
A significant reason behind oil’s current selloff is related to supply fundamentals. Namely, domestic oil inventories are basically as high as they’ve ever been.
As the summer travel season approaches, oil supplies typically dwindle. So, the record inventory surplus is quite unexpected.
But here’s the thing…
Oil’s excess inventory is a short-term situation.
There are several reasons why stockpiles can’t remain this high for long. The most obvious is OPEC will simply cut production. This sort of thing happens all the time when oil prices get cheap.
What’s more, production companies will shut down their more expensive oil operations, such as pricey fracking locations. Keep in mind, this can be done relatively quickly.
Finally, demand from developing countries like China could pick up at any time. In fact, there are already signs that Chinese demand may be gaining steam.
Here’s the bottom line…
Crude oil may be trading at nine month lows, but don’t expect it to stay down here for long. The demand and supply fundamentals sparking oil’s drop are short-term in nature. It’s only a matter of time before the world’s most precious energy resource is back on the rise.
Right now, savvy investors can get cheap exposure to oil through penny stocks. There are plenty of first rate oil production and exploration companies trading at penny stock prices. Now’s a great time to add your favorites to your portfolio.
Yours in profit,
Category: Oil Stocks