Blog : Oil - Do the Opposite of What You're Thinking

by Peter Leeds on December 8th, 2015

The most lucrative time to buy anything (which can't go to zero) is when nobody wants it any more.  Typically when a stock or commodity or investment reaches that "capitulation" point, wise and forward-looking people pick up a position in it.

(See Capitulation in Penny Stocks)

Important:  The reason we say "which can't go to zero" is that our theory and comments here do not apply to anything which could drop to worthlessness, like a company which drops into penny stock territory, then eventually goes bankrupt.  Commodities, such as gold, oil, cotton, platinum, corn, and coffee, will always have a value.  They will increase or decrease over time, but never trade for nothing.

Therefore, depending on your time outlook, you may have plenty of runway to pick up some inexpensive investments when no one else wants them.  Then just let supplies diminish, demand hold up, and prices return to historically more realistic valuations a few years out.

Oil prices will eventually recover from these levels, especially as you see the diminishing global supply as posted on the official Oil Depletion Clock.  Of course, anything can happen in the short term, and there may be lower prices to come.  

(See the Official Oil Depletion Clock)

Disclosure:  We have been incorrect on oil prices in the past, and did not expect Saudi Arabia and OPEC to maintain loose supplies.  We expected production to be curtailed, and it has not been.  Therefore, look at the data and make your own decisions (which is what you already should be doing with any investment)!

However, we disagree with just about every analyst out there on future prices, because we believe we are in a short term bottom, and have reached a point of capitulation.  We expect oil prices to maintain, or not fall extremely lower from here, based upon:

• Sentiment:  Sentiment among analysts, commodities traders, and retail investors is highly negative.  Since sentiment is a contrarian indicator, the worse the outlook, the greater chance that we are at a bottom.

• Wells Are Being Plugged:  Lower prices are putting massive pressures on producers, which in turn is resulting in the total operational rig count declining.

• Financial Feasibility:  Like any free market vehicle, lower prices cause reactions which curtails supply, eventually putting upward pressure through a decreased supply.  That is just a fancy way of saying that many oil producers stop production when they aren't making a profit.

• Capitulation:  Capitulation is typically characterized by a Gap Down, or severe price drop off, the ladder of which we saw yesterday.

• Mass Market  Media:  Stories related to oil across major media are decidedly negative.  The peak of pessimistic coverage almost always matches up with a price bottom.

Long story short, don't get spooked by all the widespread negative bias and common-knowledge fears surrounding oil prices right now.  

(See How Mass Media is Poisoning Your Trades)

Rather, understand that it is BECAUSE of that negative bias and these common fears that this unloved commodity is available at potentially attractive levels.

The beauty is that there is no rush to get involved with the "oil recovery" trade, and in fact as mentioned earlier, there may even be further downside in the short term.  However, if you have a long outlook, prices for this commodity will eventually trade higher than current levels.