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Crude oil… It’s hot!  |  InvestorPlace

For most people, oil stocks belong in the company of iconic American memorabilia like Hula Hoops, drive-in theaters and television commercials for the cigarette brands doctors prefer most.

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They each enjoyed their time in the sun, but those days are long gone.

Oil stocks, like Hula Hoops, still exist of course, but none enjoy the widespread popularity of bygone eras.

Everywhere you look, the world is turning away from fossil fuels and toward renewable energy technologies. Because of this powerful megatrend, many people assume that oil stocks (and the returns they can generate) are a thing of the past.

But oil stocks may not be as outdated as most people think. Like the Rolling Stones, they probably have a few solid performances left.

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To put it simply, the road to an oil price of $10 a barrel could go through $150, or even $200, along the way. Because this kind of scenario could play out over the next two years, one of my power trends for 2022 is Energy’s Swan Song.

Here’s a snippet of what I mentioned back in January…

“No matter how ‘doomed’ crude oil may be in the long run, it could offer dramatic short-term gains.

“In the here and now, demand for oil over the past few months has rebounded strongly. As it continues to rebound, it could reach around 104 million barrels per day (MBPD), about two MBPD more than what world oil producers have ever supplied to the market…”

I understand that many investors have little interest in energy stocks. I understand; I don’t have much interest in recommend energy values.

But the short-term bullish backdrop has become too compelling to ignore.

oil is still beating

According to Energy Rystadglobal investment in oil and gas E&P has fallen about 65% since peaking in 2014.

Crude oil… It’s hot!  |  InvestorPlace

This non-spending creates two bullish tailwinds for oil company stocks:

  1. This will reduce future crude production, which could lead to a spike in oil prices.
  2. This will turn the oil industry into a sort of publicly traded garage sale – an industry that simply sells what it already has.

You see, as oil companies reduce exploration and development spending, their free cash flow will increase. Instead of continually investing that money in future projects, oil companies can deposit most of it on their balance sheets like dollar bills in a shoebox at a garage sale.

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Returning to the Energy Rystad data, global oil companies spend half a trillion dollars less per year on E&P than they were in 2014. That’s a big change, and as that cash accumulates, reported earnings will increase, as will the ability to “return capital” to shareholders.

These positive liquidity trends are already underway. Because demand for crude has exceeded supply over the past 15 months, oil prices have soared. This supply imbalance persists despite OPEC’s incremental production increases and promises to continue increasing production.

The table below gives an overview of the current supply imbalance. It shows the level of crude oil inventories in the United States, expressed in days of consumption in the United States. At the height of the pandemic, that reading topped 33 days of consumption — the highest reading in three decades.

Crude oil… It’s hot!  |  InvestorPlace

But recently, that reading has fallen below 21 days, which is close to the lowest stock levels in six years. This low reading does not mean that the United States is short of oil, but it does mean that the growth in demand exceeds the growth in supply, which is why the price of oil had increased until the Omicron variant knock his knees down.

Crude oil futures markets also indicate robust demand. The price structure of crude futures is in what traders call “backward”.

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The typical crude futures price is called “contango”. This is when the nearest futures contract is cheaper than contracts further back in time. But when contango prices swing or fall, the market is in decline.

This relatively rare phenomenon is a sign that buyers want their oil now – not six or nine months from now. It is therefore not surprising that periods of backwardation generally coincide with periods of rising crude prices. And this exact situation is unfolding right now.

Crude oil… It’s hot!  |  InvestorPlace

Certainly, none of the current supply and demand statistics prove that the price of oil must rise higher; they simply highlight this potential. Neat and orderly projections of current supply and demand trends sometimes get very messy and different in the real world.

However, just as I discussed in The January Power Trend issue of smart money

“Most people assume that OPEC and others could easily increase production to meet any significant increase in demand. But that assumption rests on a shaky statistical basis.

“The United States has provided almost all of the growth in global crude production over the past decade, not OPEC. Pulling this rabbit out of the hat a second time won’t be easy, as U.S. shale production peaked two years ago.

“Furthermore, oil and gas companies have been cutting exploration budgets for many years…Global investment in oil and gas exploration and production has fallen by around 65% since 2014.

“Net-net: Abundant New Crude Oil Supplies Seem Highly Unlikely.

“A tightening oil market, coupled with an upward inflationary trend, gives strong reason to expect oil stocks to outperform the market in 2022.”

Eric Fry

PS At the moment there is a massive overhaul of the US economy unfolds… And the effects could well play out well into the 2030s. Those who find out first will have the best chance of securing their financial freedom. While the rest of Americans could leave their economies vulnerable to government missteps and false promises. You can start on the right path today learning the names of my 25 shares for sale now. Click here to find out how to get them now.

At the date of publication, Eric Fry held (neither directly nor indirectly) any position in the securities mentioned in this article.

Eric Fry is a award-winning stock picker with many “10-bagger” calls – in good AND bad markets. How? ‘Or’ What? By finding powerful global megatrends…before they take off. In fact, Eric has recommended 41 different scholarship winners over 1000% over his career. Additionally, he beat 650 of the world’s most famous investors (including Bill Ackman and David Einhorn) in a competition. And today he reveals his next potential 1000% winner. for free, here.


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