Supply or Demand: Which Is the Culprit?

Recent morning headlines include: “Stocks are Higher and Oil is Lower.”

Which begs the question: So what the heck is an investor to do?

Commentary on the price of oil has flowed… err, gushed… since West Texas Intermediate (WTI) prices peaked last summer and began spiraling lower in October. And most of the analysis you’ll read on Yahoo! Finance, and the like, is fraught with information that is flat-out confusing investors.

Last fall, I decided to wait — patiently and quietly — before making any bold predictions or recommendations in the oil/energy complex. The most I shared on the topic was in a November 4 note to Cycle 9 subscribers, in which I outlined my rationale for avoiding the sector and also urged to resist the temptation to, as I said then: “buy this falling knife.”

That ended up being a good call. Since then, oil (USO) prices have lost a further 35%. And the energy (XLE) sector was down a further 13% before bouncing a bit higher in the last two weeks.

Just yesterday, though… I told Cycle 9 subscribers that it’s time to make a play!

Energy markets are still volatile, as they seek “new normal” equilibrium prices. And while I shared last week my reasons for maintaining a bullish bias, there isn’t a crystal-clear uptrend in stocks yet. As such, it’s important to be tactically cautious in how you implement an energy sector trade.

But I’m pretty sure I’ve found the perfect way to play it. 

There are two potential culprits for oil’s epic decline: excess supply or weak demand.

Of course, both factors are in play. But the brunt of the blame must be assigned to one factor or the other if we’re to figure out just how low oil prices can go… and what affect oil prices will have on other, non-crude commodity markets.

My sense is that a glut of supply is to blame.

Yes, global growth is waning. And so we aren’t guzzling quite as many gallons of gas as we were when China’s economy was growing at a rate in excess of 10% a year. But that’s a relatively long-term trend that most investors have long ago priced in.

Meanwhile, U.S. oil production has gone gangbusters in the last decade. Take a look…

Which begs the question: So what the heck is an investor to do?

Commentary on the price of oil has flowed… err, gushed… since West Texas Intermediate (WTI) prices peaked last summer and began spiraling lower in October. And most of the analysis you’ll read on Yahoo! Finance, and the like, is fraught with information that is flat-out confusing investors.

Last fall, I decided to wait — patiently and quietly — before making any bold predictions or recommendations in the oil/energy complex. The most I shared on the topic was in a November 4 note to Cycle 9 subscribers, in which I outlined my rationale for avoiding the sector and also urged to resist the temptation to, as I said then: “buy this falling knife.”

That ended up being a good call. Since then, oil (USO) prices have lost a further 35%. And the energy (XLE) sector was down a further 13% before bouncing a bit higher in the last two weeks.

Just yesterday, though… I told Cycle 9 subscribers that it’s time to make a play!

Energy markets are still volatile, as they seek “new normal” equilibrium prices. And while I shared last week my reasons for maintaining a bullish bias, there isn’t a crystal-clear uptrend in stocks yet. As such, it’s important to be tactically cautious in how you implement an energy sector trade.

But I’m pretty sure I’ve found the perfect way to play it. 

There are two potential culprits for oil’s epic decline: excess supply or weak demand.

Of course, both factors are in play. But the brunt of the blame must be assigned to one factor or the other if we’re to figure out just how low oil prices can go… and what affect oil prices will have on other, non-crude commodity markets.

My sense is that a glut of supply is to blame.

Yes, global growth is waning. And so we aren’t guzzling quite as many gallons of gas as we were when China’s economy was growing at a rate in excess of 10% a year. But that’s a relatively long-term trend that most investors have long ago priced in.

Meanwhile, U.S. oil production has gone gangbusters in the last decade. Take a look…

US Oil Production Since 2004

So while global demand is slowing, it isn’t slowing as much as U.S. oil production is growing. And that means there’s a glut of oil on the global market.

There’s still time to get into the trade I recommended to Cycle 9 subscribers yesterday… you can check it out here.

Best,
Adam-ODell2
Adam

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Categories: Commodities

About Author

Adam O'Dell has one purpose in mind: to find and bring to subscribers investment opportunities that return the maximum profit with the minimum risk. Adam has worked as a Prop Trader for a spot Forex firm. While there, he learned the fundamentals of trading in the world’s largest market. He excelled at trading the volatile currency markets by seeking out low-risk entry points for trades with high profit potential. An MBA graduate and Affiliate Member of the Market Technicians Association, Adam is a lifelong student of the markets. He is editor of our hugely successful trading service, Cycle 9 Alert.