Of all the recent global events, oil headlines are trumping the media this week.
And while most agree- including myself- that you’d be crazy to invest in oil stocks right now, they can’t seem to agree on what the price of oil will be when it hits bottom.
Some called it at $35 per barrel…before it dropped to $30 for the first time in 13 years. And as I’m writing this, the news networks are forecasting oil to reach $10 before hitting bottom.
But I’m not going to tell you what the price of oil will be.
My view on oil is that there is just too much supply and too little demand for it. And too much oil right now is a bad thing for the markets.
What I want to talk to you about today is something the pundits AREN’T talking about…
I’ve identified something that they’re not seeing…
And it’s something that’s telling me to ignore everything they’re saying about oil right now.
So forget everything you’ve heard about oil and energy stocks.
Here’s why I won’t buy oil or energy until AFTER Valentine’s Day…
The Bulls Are Coming – And They’re Bringing Big Dollar Opportunities With Them
I am a rules-based pattern trader. And as a one, I am always looking for patterns that happen a strong percentage of the time… patterns that no one else can see.
I don’t discriminate either… I look for ANY pattern, whether it’s a three-day pattern or a six-month pattern. It doesn’t matter.
What matters is that the pattern has been back tested and proven to work more often than not. And when I find one, I build it into my trading stable of strategies.
Many of the patterns I’ve studied and use are what I call “seasonal patterns,” meaning they happen during specific periods at specific times of the year.
And I’ve found one that’s got me bullish on oil: the seasonal energy pattern.
Last year, I released my 2015 Energy Opportunities Report and reiterated what many consider to be a fact: oil is a boom or bust industry.
Back then, oil was trading at $50 per barrel, which was lower than anyone could have imagined at the time.
Fast forward one year, and we’re flirting with oil prices closing below $30 per barrel.
Take a look at the chart of United States Oil (NYSE: USO) – it’s already down 20% in little more than one week!
As you can see, there’s been a severe depreciation in the price of oil. But beyond that, many of the world’s best companies with the best balance sheets are dropping right along with oil prices.
And so are the markets…
I credit many factors for the low oil prices, but the biggest one is oversupply.
While the cost of producing a barrel of oil is just $35 in the U.S., it is much higher in other countries – especially in Russia. And then there’s Saudi Arabia, whose cost to produce oil is MUCH less than almost any other country.
Some people believe that Saudi Arabia has intentionally maintained its oil production and has not slowed down at all in an effort to force other oil companies out of business. The claim here is that these other companies will lose so much on their operations that production cuts will need to be made, rigs will need to be taken offline, and employees will need to be laid off as a result.
Regardless of these factors and popular belief, my focus is on what the patterns tell me. And the seasonal pattern I found tells me that an oil and energy upswing runs mid-February through mid-July and calls for a 10% higher move on average over that time frame.
Now it’s one thing to find a pattern in a commodity like oil… It’s another to have the right asset to trade it. And I believe the best asset is a basket of oil stocks.
Let’s take a look at the chart below on Market Vectors Oil Services ETF (NYSE:OIH), which is an ETF that tracks an index of 25 of the largest US-listed, publicly traded oil services companies.
It is the ETF that I favor when trading options using this pattern. There are other ETFs you can look at, like United States Oil Fund LP (NYSE: USO), and Energy Select Sector SPDR (NYSE: XLE), but OIH is the one I prefer.
My initial assessment of OIH was a bit too conservative, as it it’s currently trading at $22.50. And while I don’t know where it will be by mid-February, I am suggesting a 10-15% increase by then.
As far as oil goes… I’ll look to initiate bullish trades – at least on the USO- come mid-February because my seasonal pattern tells me that crude oil makes gains between mid-February and mid-July.
It also tells me that a bullish move of just under 10% has occurred during this time frame over 75% of the time during the last 15 years.
And these are percentages I can get behind.
STRATEGY: Buying Oil at the Right Time
|The news headlines are being dominated by oil, and the main focus is the price at which oil will hit bottom. But knowing how low oil will drop before hitting bottom is far less important than knowing when oil will start to rise. Here’s what you really need to know:
- Oil follows a seasonal energy pattern (during specific periods of specific times of the year)
- The seasonal energy pattern for oil runs between mid-February and mid-July
- Oil has shown a bullish trend over 75% of the time over the last 15 years during this time frame
Until next time…