Blog : State of the Oil Market (6 Penny Stock Oil Picks)

by Peter Leeds on February 17th, 2016

Scroll down for Oil Penny Stocks to Avoid, and to see Peter's Top Oil Penny Stock Picks

Oil had a big rally Friday, leaping over 12%.  Three days ago, we sent an alert to you which said:

"Special Oil Alert:  It will soon be time to look into oil and related stocks for investment.  The sentiment could not be worse, which is typically the most profitable time to get involved."

So it would seem our penny stock outlook has proven out so far, but hold the phone - before oil comes back for good, it will have to fall again.  

Here's why:

The pop in oil prices was almost exclusively driven by rumors that Iran was ready to "play ball," in terms of negotiations to reduce global output.  The nation was the last holdout among the top 5 OPEC producers (Kuwait, UAE, Iraq, Saudi Arabia), so any moves by Iran might mean there would finally be an agreement to curtail production.

The comments which drove the rally came from the UAE minister.  He states (we are paraphrasing) that the United Arab Emirates are open to a deal where they would cut oil, as long as the other OPEC members agreed, and instituted cuts of their own.

This is nothing new, but the market leapt onto the words as if they were some surprising revelation.  Oil prices will eventually rise, but we do not think this was the moment where the momentum has shifted.  

We believe much of the sudden strength were short sellers covering their positions (which they do by buying), and investors on the sidelines trying to bottom-fish weak oil prices.  In other words, the move was overdone and unjustified, and prices will fall back down over the next week.

Something does need to happen soon, because many nations are struggling significantly with such weak prices for oil.  Venezuela is dealing with 700% inflation, and a potential humanitarian crisis.  

Saudi Arabia, Russia, and Iraq, among others, are seeing massive budget shortfalls.  There is also a significant degree of pressure on exporting countries, like Canada, Oman, and Nigeria.

Now Here is the Important Part for Penny Stock Investors:

The wildcard influence is Russia.  They can "guide" Iran come to an agreement, which would lift oil prices and be positive for the Russian economy.

While Iran and Saudi Arabia are at odds, Russia could be the influence which would see these nations work together.  Until now, both nations seem eager to sell oil and drive the prices lower, thus hurting the other, even while hurting themselves.

Russia has a meeting with Saudi Arabia next month.  But look at the political posturing which is leading up to it:

• Russia is very active in the Syrian conflict

• Saudi Arabia has suggested they may send in ground forces

• This would disrupt Russia's gains, escalate the conflict, and potentially swing the balance of power back to the American-supported rebels (we call them ISIS, government officials call them "moderate rebels").

In our opinion, Saudi Arabia has no intention of sending ground forces into Syria.  They do, however, intend to maximize their bargaining power with Russia when they meet next month.  

All of this feels more like political posturing than legitimate military strategy.

So here is how we see this all playing out, in our opinion:

• Oil prices will fall back down this week

• Expect major progress on an OPEC-wide production cut deal, only AFTER Russia meets Saudi Arabia in March

• If a deal is not reached soon, many nations will devolve into absolute chaos

• Look for oil prices to bottom a few weeks prior to that deal, probably around Monday, February 29th

• Prices will climb ahead of the Russia/SA meeting, based on expectations

• One year from now, oil prices will be closer to $50+ than $10 (right now they are at $30)

We think the theory of low oil demand has been overdone.  Yes, there are electric cars and solar power and oil fracking... but the gas station near our office was still rammed the other day.  You had to wait for a spot to open up to get your fuel - the vast majority have no choice but to use oil.

Oil is not going anywhere.  However, many of the companies which explore for it and sell it will disappear.  The ones which survive will be the highly capitalized producers, with plenty of cash in the bank and few debts.

The penny stock companies which would survive, even with $15 oil, are the ones which will be around to enjoy the massive recovery.  We found 6 penny stock companies like that, and they represent the best picks we've found from the entire industry.

Here is Peter's own shortlist of top penny stocks:

• these are all penny stocks
• these are well-funded producers
• excellent locations of operations (stable nations)
• low debt
• financial positions to last for many years

You can see all these picks by subscribing here.  

Peter also looked into several other companies, but each had issues or warning signs which called for caution.  In Peter's opinion, you should AVOID these oil penny stocks:  AVOID  =  LCI, WLSE, PES, SDRL, ERF, CPE, CRN, PTRC, CHK, WLL  (AVOID!  AVOID!  AVOID!)

Instead, stick to the 6 oil penny stocks Peter found, and details to subscribers here.