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It was quickly becoming OPEC's worst nightmare. By the mid-1980s, oil prices had begun to collapse.
What's more, renegade cartel members were selling more oil than their monthly quotas allowed, which merely made a bad situation even worse.
Ordinarily, that was a point when the Saudis usually would step in and cut their own exports.
But by then, the pricing situation had become untenable. Instead, the Saudis embarked on a bold new strategy.
First, they opened up their own spigots and flooded the market with crude. This taught those recalcitrant OPEC members a big lesson about lost revenues.
Second, they also introduced a "netback" pricing strategy that proved to be far more important – both for them and today's energy investors.
This new strategy considered the entire pricing sequence, using refinery margins (the difference in cost between processing and prices on the wholesale level) as a measure of prices upstream and downstream.
Now, 28 years later, the same netback strategy has made a comeback that has handed us a clear path to energy profits – even during periods of high volatility.
Here's how this strategy works…
Don't Believe the Doom-and-Gloomers
For instance, take the bout of volatility we are experiencing right now.
The last three trading sessions have illustrated how global concerns can impact investment prospects just about anywhere in the market. The sell-off in U.S. equities was prompted largely by concerns over Chinese credit markets and the weakness in emerging market stocks.
Unfortunately, energy sector stocks were hardly immune to the rush of lemmings off the cliff. But we have seen a noticeable difference in the way in which certain energy components have responded to the rising volatility.
What you need to know is that the current situation will stabilize in short order. There are simply no triggering factors that would create a prolonged market sell-off. Some are calling this the first wave in a significant market correction. But it isn't.
Meanwhile, others are suggesting this could bring about another credit-induced shortfall. Don't fall for it.
As you know, I always have misgivings about the true intention of talking heads who tout the latest doomsday scenario. They usually give their spiel on TV and rush out to short something they just delivered a eulogy for.
In fact, as many of you remember, this is one of my pet peeves.
As I well know from my many TV appearances, guests are required to disclose whether they own any of the stocks talked about or have any relationship with the company issuing them. However, nobody ever has to disclose whether or not they may be shorting or running derivatives accomplishing the same objective on these stocks.
Often these harbingers of bad tidings are actually hoping you will get on the bandwagon and make them some money by driving the shares down.
But today, I want to focus on what these past few days have actually told us about investing in energy.
About the Author
Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle.