Oil: Where’s It Going Next?
What a year for oil…
Maybe you remember, crude kicked off 2011 with a bang.
Social unrest in North Africa sent ‘Texas tea’ surging to $113 a barrel seemingly overnight. At the time, violent anti-government protests overcame dictatorships in Tunisia, Egypt, and Libya.
Fears of unrest spreading to Middle Eastern oil giant Saudi Arabia had the oil market working itself into a tizzy. For a while, it looked like we were in for a 2008 repeat.
Remember when oil exploded to $147 a barrel a few years back? Yikes!
Thankfully, prices simmered down once investors realized Saudi Arabia wasn’t the next domino to fall. By early July, crude was once again trading for a more manageable $95 a barrel.
And then the wheels started falling off Europe’s banking system…
Of course, global markets panicked at the mere possibility of a 2008 style financial meltdown. Before you knew it, oil was trading below $80 a barrel. In fact, oil traded as low as $76 a barrel last week… a 33% drop from the 2011 highs.
What a ride…
Add it up and you’ll find oil’s trading in a $38 range this year. Of course, oil and gas stocks are mimicking the wild moves in the crude market.
Since testing the 2011 highs in July, the Energy Select Sector SPDR (XLE) has fallen as much as 30%. XLE holds top tier oil explorers like Exxon Mobil (XOM), Chevron (CVX), and ConocoPhillips (COP). Obviously, these stocks are highly correlated to the price of oil.
So now the question is- where’s crude heading next? Is oil more likely to hit $50 or $100 in coming months?
Unfortunately, when oil hits either of those targets, it is bad news for the US economy.
Why?
Well, if oil hits $50 in the near future, it will most likely be due to bad news from across the Atlantic. I don’t see any way crude can trade that low unless there’s a negative shock to the global economy.
You know, something like a Greek default and ensuing banking crisis.
Obviously, such a scenario would be very unhealthy for European and US economies. Hopefully we steer clear of that nasty outcome.
On the other hand…
Europe may be able to plug the holes and bail water from its sinking ship. And according to Federal Reserve data, the US economy may avoid slipping into a recession.
If that’s the case- look out for $100 oil once again.
I know, I know, I don’t like it anymore than you do. Gas prices will shoot higher and we’ll all feel more pain at the pump. Clearly, that’s not very healthy for the US economy either.
But until the US finds a way to drastically reduce its reliance on OPEC oil, we’re subject to the whims of the global oil market.
Is there a way to profit from $100 oil?
You could just buy the stocks I mentioned above. As oil prices rise, these best-in-class oil producers will no doubt see their share price go along for the ride.
But the most convenient way to give your portfolio an oil fueled boost is through XLE.
This ETF currently holds 42 of the world’s top producers and oil service companies. So not only do you expose your portfolio to potential profits from rising oil prices, you get a bit of industry diversification as well.
So don’t be shocked to see high oil prices in the not-so-distant future. But now that you know how to take advantage of it, hopefully the pain at the pump won’t feel so bad.
Category: Commodities
