Oil has taken a bit of a hit recently, on a wave of negative sentiment fueled by recession fears. When markets opened Friday, WTI (West Texas Intermediate) was sitting around $107, down from its 2022 highs around $120.
The headlines were, frankly, pretty melodramatic. "The collapse of oil," some outlets said. "It's a recession red flag." "A critical situation." Big doom and gloom across the board.
But I'm going to let you in on a secret.
Oil demand doesn't go down much during typical recessions. So the latest drop is based on a fake narrative - namely that the coming recession, if it isn't already here, will tank oil prices.
It simply isn't true. This is actually a massive "buy the dip" opportunity, like I mentioned last week.
But now I'm going a bit further because unlike some of the other swings we've seen in the market this year, this one's going to last a while.
So this week, my recommendation is to buy any dip, whether it's oil futures, oil stocks, oil ETFs - they all have a good chance of making profits for investors.
Let's dive a little deeper into what's really driving oil prices, and why I still believe WTI (West Texas Intermediate) will be trading at $150 a barrel by the end of this summer...
The Road from $16 to $150 per Barrel
The price of oil (and for domestic purposes, I'm talking about the American benchmark WTI) has been rising steadily since its April 2020 lows, on the heels of the instant and ugly pandemic-related recession.
WTI closed on Dec. 30, 2019, just north of $61. On April 20, 2020, it had sunk to $16.94. That's what the COVID-19 recession did to oil. But that recession wasn't typical. The price of oil collapsed on evaporating demand, on account of the fact that the world stopped turning when COVID-19 appeared as a threat to our very existence.
The Financial Crisis of '08 saw oil demand tank on account of money-center banks not being able to lend to businesses, or finance oil shipments, because they were almost all insolvent. That recession wasn't typical either.
In typical recessions, oil demand usually doesn't fall. Prices may go down for a few quarters, but then they typically bounce back and make higher highs.
Demand didn't fall in the recession of the early 2000s (March 2001 - November 2001), though the rate of growth slowed, with the price of WTI falling from $43.62 in March 2001 down to $32.04 in November 2001.
A year later, in March 2002, WTI was back up to $43. In March 2003 it was almost $50. In 2004 it was $55.79, in 2005 it was $83.76, and 2006 saw oil at $97.48. WTI peaked in June 2008 at a whopping $187.04 a barrel.
Demand in the early 1990s (July 1990 - March 1991) fell during two quarters of that eight-month recession, though the price of WTI only fell $3.89 a barrel, dropping from $46.39 in July 1990 to $42.50 in March 1991.
After the Gulf War and the freeing up of oil production in the Middle East, OPEC members began a decade-long fight, breaking production quotas they'd agreed to time and time again, knocking prices down throughout the remainder of the 1990s.
And while this recession, the one here or coming depending on your perspective, is more "typical" as opposed to being triggered by an existential threat, oil demand still isn't going to fall much, unless you buy into main street and financial media narratives that recessions always dampen oil demand and cause oil prices to tank.
This current recession horizon has in its foreground the Russia-Ukraine war, as well as Chinese zero-COVID policy lockdowns of some of its biggest and most important manufacturing cities and regions. In the background, we have the reality that the drive toward renewables and the vilification of fossil fuel producers isn't going to spur a sudden increase in capital expenditures by majors or even mid-tier oil and gas producers. They're enjoying what might be their last windfall profits in a someday dying business.
With war raging on its borders and vitriolic condemnation of Russia by European Union nations, the EU just adopted a sixth package of sanctions on Russia, including an agreement among its member nations to phase out all imports of Russian crude over the next six months and the phasing out of all "other Russian oil products" over the next eight months. The International Energy Agency, IEA, says that will cause Russia to have to cut daily production of crude by 3 million barrels a day by the end of 2022. Russia already cut daily production by 1 million barrels a day in April due to sanctions.
Russian crude accounted for 14% of global production in 2021, according to the IEA, so a loss of 3 million barrels a day won't go unnoticed and will help keep prices high as buyers scramble to find sources elsewhere.
OPEC says it will increase daily production by 648,000 barrels a day, 200,000 barrels a day more than it had planned at its last meeting, to help offset the loss of Russian supplies.
However, it doesn't take a math genius to figure out OPEC's additional supply won't offset Russia's shortfall.
Maybe that's because OPEC, like Russia, wants prices to go a lot higher.
And so do all oil and gas producers, because this rally in prices may be their last great grab of cash before the inevitable EV and everything renewable future that's been front and center for the past 10 years drives the last nails in fossil fuels' coffins.
Back in the near ground, whatever demand decline is expected has already happened. Chinese lockdowns reduced demand significantly, though the price of oil didn't fall much at all as those lockdowns were ongoing, and started rising, until that is, the recession narrative took hold and oil prices came down on that economic expectation.
Now China's starting to unlock itself after reeling economically from lockdowns. So that lull in demand is about to be filled in like a swimming pool in summer.
And speaking of summer, it's driving time. Despite record gas prices, gasoline consumption in May was down only 5% from a year ago; that's with prices up by more than 50%.
Yes, oil is prone to commodity-like price swings sometimes.
This time, this dip, isn't one of those cyclical swings. It's a dip based on a fake narrative.
That makes oil a buy - not just on this dip, but any dip for the foreseeable future.
We're playing that, beautifully I might add, in my subscriber newsletter. We own USO a lot lower and are raking it in on that WTI oil-tracking ETF, on top of just ringing the register to the tune of a 100% gain on our short-term trade selling puts on USO. And we're buying this dip, in more ways than one.
If you want to make money on rising oil prices, buy this dip and every other one you can.
I know that investors like you are looking for the information and strategies that will prepare you to meet the challenges of this "new world order" we're looking at. The recession is here, and anyone who doesn't already have $1 million in their retirement account is going to be left holding the bag... unless you act fast.
That's why my colleague, Tim Melvin, and I have developed a survival strategy that will not only get you through the crush of inflation and supply chain chaos, but also has the potential to quadruple your money over the next five years.
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.