The U.S. crude oil benchmark has enjoyed quite the rally — up nearly 495% from its intraday low on April 21 to its recent high, or 243% from the closing low. Now, oil is pulling back.
Goldman Sachs is actually looking for a 20% correction in crude. But I’d be more inclined to buy any pullback. That’s because we are looking at a potential gusher of profits in crude this year.
I’ll give you three reasons why.
Reason No. 1: Oil Production Cuts
OPEC nations, heavily influenced by Saudi Arabia, Russia and the U.S., have all cut production recently.
U.S. production recently dropped to 11.1 million barrels per day — well off its highs over 13 million barrels per day. Russia is gradually easing its own production to match the U.S. and Saudi Arabia choked its production down to 8.7 million bpd. In all, crude producing nations chopped oil production by nearly 12 million barrels a day.
It’s true that demand, hammered by the pandemic-linked shutdowns, fell faster. But these drastic cuts show the world’s oil producers mean business. And that’s given the market hope that the bottom is in sight.
Reason No. 2: Storage Is Coming Down
U.S. crude oil stockpiles are stubbornly high at 538 million barrels. Oil in storage around the world is high, too. Maybe a billion barrels above normal. But for a while, energy investors worried that the world literally might run out of storage!
Oil stored at sea was a last resort for many oil companies. About 180 vessels with over 200 million barrels of crude were used for storage globally as of May 29. That’s down from a peak of 290 million barrels in early May. That’s according to data from ship broker Clarkson. Another 170 tankers were storing 73.8 million barrels of oil products, down from 100 million barrels in early May.
That’s a lot of oil. But it’s coming down and as that storage comes off its peak, oil finds price support.
Reason No. 3: China Oil Demand Shifts into Higher Gear
China reports MORE people are driving now than before the lockdown.
According to TomTom International BV’s Traffic Index, virtually every major Chinese city’s traffic patterns are back to nearly normal. In fact, some have MORE traffic. Why? Probably because people don’t want to take public transport in the age of COVID-19. Until we have a vaccine, we’ll see more people choose to drive themselves, if they can.
What’s more, auto dealers in China report that foot traffic in showrooms was nearly back to normal in May.
Meanwhile, China smashed its record for oil imports in May. China imported 11.34 million barrels per day, according to data from the Chinese General Administration of Customs.
Aside from these three major reasons, there are others, but you get the picture. I’m not saying oil is going back to $90 a barrel. I’m saying it will float around at prices that the better companies can live with.
Some of those better companies pay hefty dividends. And you can buy them at a discount.
If you prefer to buy ETFs, you can look at the Alerian MLP ETF (NYSE: AMLP, Rated C-).
You can see this fund is well off its highs, but in a steady uptrend. It’s recovering. AND it pays a fat dividend, recently yielding 6.3%.
If you have the appetite for more risk and reward and are willing to roll up your sleeves and do the research, you can buy individual stocks.
It’s true that times are tough, but energy stocks got WAY oversold. The better ones are coming back strong. It’s a trend you can ride. The oil pullback can be bought.
If you want to see me make a longer, more detailed case for higher oil prices — as well as two hot picks to ride that wave — read my next issue of Wealth Megatrends. The next issue, which includes those two dynamite picks, is coming out soon. Find out more — and sign up for FREE reports — by clicking here.
All the best,