The price of oil broke below $40 a barrel this week, a six year low.
The drop is still tempting a lot of investors.
Reuters recently reported on how the “pros” are playing it all.
For example, the manager of the Mount Lucas US Focused Equity (BMLEX) is a making a ballsy move that’s a particularly great example of what not to do.
The fund has bought the dip...big time.
According to Lipper data, 7.3% of the funds’ assets were invested in the energy sector last year. Today energy stocks make up more than 30% of assets.
That’s a quadrupling of a the bet and is a classic mistake we’ve warned against repeatedly here in the Profit Alert.
We realize it’s so tempting to buy oil. It was last October. It was last December. And it was tempting all this year too.
But if you want to know why it’s still too early to buy oil, take a look at this simple explanation of the future of oil prices.
The Future of Oil Explained in One Chart
This chart below is of the oil price from 2000 through today:
It’s easy to see a pattern. Oil dips then goes up.
Of course, this is a case of a pattern that’s not really a pattern.
The only time oil has dipped significantly was in 2008. That was liquidity-induced drop. It was a blip in an otherwise 13-year bull market in oil prices.
The current drop is far different. The price of oil is being driven down by so many factors. All of them a mix of rising supplies and falling demand. An awful combination for any commodity.
This is why we expect to oil prices to stay low for the foreseeable future. Probably years.
This is not a hunch or a feeling. It’s something we’ve seen multiple times before in the energy markets.
Take oil’s last bull market. A multi-year boom in the 70s preceded a 20-year bear market.
Another more recent and strikingly similar example of the future of oil comes from the natural gas market.
Natural gas went through it’s “shale revolution” a few years ahead of oil.
Since then natural gas supplies have soared. Prices have dropped, bounced around a bit, and generally stayed low.
The chart below is of natural gas prices over the past eight years:
See the trend?
That’s the future of oil right there.
The Final Shoes to Drop
As we’ve talked about for months, oil is in all likelihood a bear market.
At best it’s dead money for years to come.
Commodities go through cycles. They take years to build up, get overheated, implode, do nothing for years, and then begin again.
Oil is imploding and will likely make so significant moves for years.
The market is finally realizing this and the “safe” oil stocks which have largely missed out on the downturn are getting hit hard.
This week Exxon Mobil, Chevron, and ConocoPhillips all hit new 52-week lows.
Those Master Limited Partnerships (MLPs) which have done so well for income investors for years are doing even worse.
The MLPs we talked about specifically are nose-diving. And the Alerian MLP Index posted it’s worst week in six years this week too.
I’ll leave you with a description I told a colleague earlier this week who had the itch to buy some oil stocks.
Basically, there’s a battle going on in the oil market. There will be many more casualties. Just wait until it’s all over. Then pick through the rubble when it’s all done.
I continue to recommend the same to you.