Saturday, February 13, 2016

Remember $2 Gas?

Enjoy the cheap $2 gasoline while you still can!

Due to the collapse in crude oil, gas prices have reached lows not seen since the depth of the Great Recession. But these extreme lows in oil and gas prices won't be here for long.

                                              Gas Prices

Crude oil and gasoline prices have moved largely in unison, both up and down:

Crude Oil vs. Gas

Oil prices are at lows not seen in years, decimated over the past 2 years and crashing by nearly 80 percent to $26/barrel since the ~$110/barrel highs in June 2014.

   Crude Oil Prices

Possible Reasons for the Bear Market in Oil & Commodities

1) Huge oversupply due to more effective drilling technology and domestic self-sufficiency.

2) Slowing economic growth around the world (Europe, China, Brazil, etc), leading to lower energy demand.

3) Deflation, where the prices of nearly all assets fall. Usually accompanied by economic recession and stronger US Dollar ($UUP).

4) Over-speculation in the Energy ($XLE) space, as is apparent by the exposure of energy companies in the Junk Bond market ($HYG) ($JNK).

What's Next?

The magnitude of oil's collapse was far greater than I had expected or even assumed possible. Though I clearly stated my expectations of oil dropping significantly due to the large deflationary forces and slowing global economic growth, I didn't think crude oil would fall by more than 50 percent. Oil was definitely not staying at $100/barrel, but $30/barrel? That's crazy cheap. 

Still, caution must be exercised, as a continued decline is not out of the question.
However, even though oil and energy can continue lower, the largest price drops are already behind us. Oil is a much better investment than most other assets because it has already been crushed, and the bad news is mostly or completely priced-in.

Oil is now "over-hated", as oil prices ($USO) and energy company valuations ($XLE) have been severely (and excessively) cut. Most investors are running away from Energy or are still too afraid to get in.

Contrary to most investors, oil and energy is a major bargain right here.
Now is the time to look at Energy investments.
Now is the time to pick up the scraps left in the wake of oil's collapse. 

There are definitely troubling times and even bankruptcies for some of the energy companies ($CHK, $UPL $LINN, etc.), but it's time to search for the viable companies selling for dirt cheap.
Even if some of your Energy investments get wiped out, some of these companies are golden opportunities for exponential returns (think 300-1000%+).

The outcome of the Oil Recovery and higher energy prices is both positive and negative:

On the positive side, investing in oil and energy is presenting a very rare opportunity to buy at the bottom near 20-year lows.
On the negative side, rising oil prices will result in higher fuel costs. You can probably forget about the extremely cheap $2/gallon Gas prices.

Even worse, those who neglect to invest in Oil and Energy now are likely to lose twice - once by missing the long-term bottom in oil, and once by having to pay more at the pump.

In a few years we will be talking about how low oil & gas prices were.
Oil prices are close to what they were in the 1980s and 1990s.
Now is the time to invest in oil.

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