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The word "supercycle" has been coming up in headlines more and more lately, particularly when it comes to crude oil. A supercycle is like an extended, mega-bullish run that can take years to run its course.
The profits can blow the doors off; the last big oil supercycle, for instance, started in the early 2000s and ran until the summer of 2008. The Energy Select Sector SPDR Fund (NYSEArca: XLE), which is a decent benchmark for the performance of the oil and gas sectors, notched around 300% gains at the time.
When you get down to the nitty gritty and look at gains in specific oil and gas stocks, the profits were even bigger, and people who used options to boost those gains absolutely cleaned up.
So, now that we're hearing increasing chatter – including from several big banks – about another supercycle, coupled with signs of a big, powerful expansion of the economy… well, it's got my attention.
Only nowadays, we've got maybe 20 million brand-new investors who've come in from the sidelines, who've never seen firsthand how a supercycle acts. I've got you covered.
And if you've been through a supercycle or two before, stick with me; I'm going to walk you through everything, make my predictions, and best of all, name some stocks to buy and trade to cash in on what's coming around the corner…
Conditions Are Very Bullish for Energy
It wasn't even a year ago that front-month crude oil futures contracts fell through the floor into negative territory. The price for a barrel of West Texas Intermediate (WTI) for May delivery fell to -$37.63 a barrel. You literally couldn't give the stuff away.
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Of course, the world economy was still very much on the terrifying downhill slope of the pandemic at that point; there was no end in sight.
Back then, if you'd tried to tell people that by April 2021, we'd have a handful of effective vaccines already in hundreds of millions of arms, with crude oil trading in the mid-$60s, the S&P 500 this close to 4,000, and a GDP print well north of 6% expected this year, you'd be laughed out of the room – not that anyone felt much like laughing.
But 11 months later, here we are…
The truth is, the economy, commodities – especially oil – cyclicals, and so forth, have all been showing signs of strong recovery since around the third quarter of 2020, give or take. And lately, with so much capital rotating out of the pandemic stocks and into recovery stocks and commodities, at a time when big social and technological changes, like electric vehicles, for one, are reshaping the economy, it's easy to think that we're on the cusp of something massive.
What's more, lots of well-respected analysts have made the case for an oil and commodities supercycle over the past two or three months. Big banks like Barclays, JPMorgan Chase, and Goldman Sachs have all increasingly boosted their economic outlooks and, right alongside them, their commodities forecasts. They're all pointing in the direction of a supercycle.
And most of these folks make a pretty convincing argument.
With all that said, there's a bucket of cold water out there – a big one: The International Energy Agency. It's announced, contrary to what the banks, analysts, and talking heads have said, it's not expecting a classic supercycle. In fact, the IEA has said it's not even expecting an "extended period on which prices rise well above the long-term trend."
In simpler terms, it's saying, yes, we're in for a bullish run of some kind, but not necessarily a supercycle.
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Why the less-than-thrilling outlook? The IEA claims the supply of oil out there on the market and in reserve is adequate to meet even the growing demand we'll see for at least the next year; the hallmark of a supercycle is a situation where demand absolutely swamps supply.
The IEA right now is forecasting a growth in demand of around 5.4 million barrels per day throughout 2021. It says demand should hit 96.4 million barrels a day by the end of this year.
As of today, global output is 93.6 million barrels per day, and the producers aren't going full tilt yet. The IEA expects producers will be able to make up for whatever supply shortfalls there may be this year. And of course, it's in producers' best interests to keep supply just shy of demand.
Is that bullish? Most definitely. Is that supercycle fuel? I'm afraid I have to agree with the IEA and say, "Not quite." There's just no denying the supply out there.
But at the end of the day, we should absolutely be preparing for a bullish run, particularly in oil, which is consolidating right now.
With some help from my S.C.A.N. algorithm, banking big gains from a strong oil bull could be a piece of cake…
How to Profit from a Not-Quite-Supercycle
One of the really cool things about S.C.A.N. is its ability to zero in on the kinds of unusual options activity that can come before massive moves in stocks; it's like being a fly on the wall in a room full of the "smart money."
I've seen unusually high, unusually bullish call options bought in Halliburton Co. (NYSE: HAL), Occidental Petroleum Corp. (NYSE: OXY), Schlumberger NV (NYSE: SLB), and APA Corp. (NASDAQ: APA), the holding company for Apache.
Every last one of these companies is in petroleum exploration and production and oilfield services. If nothing else, buy these companies on any pullback whatsoever.
But, you should know, those bullish options mean some very clued-in folks are expecting these companies to pay big. I think it'll pay to join them, so we should look at bullish call options plays expiring at least a month out. That will give these stocks time to consolidate and then move higher. If the oil bull turns out to have even stronger legs, or becomes a textbook supercycle, I expect we'll revisit those and roll them over.
S.C.A.N. can be great for finding all kinds of profit potential in stocks. I've tweaked it to identify what I think are the two biggest indicators of a potentially explosive squeeze. I've been using it to help me make research recommendations for my Short Squeeze Profits readers. People following along are getting a crack at making what might be the markets hottest trade right now, looking for moves that have the same kind of "DNA" as the famous GameStop squeeze from a few weeks back. You can learn how to get all that research, including my "Super Squeeze" candidates watchlist, right here.
About the Author
Andrew Keene, editor of the 1450 Club, Super Options, and Project 303 at Money Map Press, is a globally known trader and a renowned expert on all things options.