Things couldn't get much worse for fossil fuels...
The clean-energy revolution is reducing demand for oil and natural gas in the long term. Meanwhile, fears of a global recession are higher than ever... weighing on demand in the short term.
Put it all together, and it's a tough time to invest in energy. It's the worst-performing sector in 2024 so far. And oil prices just hit their lowest point since 2021.
Now, everyone has given up on oil. Sentiment just fell to one of its lowest levels in recent history. But don't let that fool you... If history is any guide, a major rally is about to begin.
Let me explain...
Commodity prices move based on supply and demand. But it's not just today's environment that counts – it's also the expected supply and demand in the future.
The market is usually pretty good at guessing these things. But expectations can be wildly wrong at extremes. And when they are, you can set yourself up for profits as an investor.
That's where the oil market is now. Folks have good reasons to be pessimistic. But today's level of pessimism is simply overkill when you compare it with history...
We can see it by looking at the Commitment of Traders ("COT") report for oil. This weekly report shows us what futures traders are doing with their money. And when these folks are all betting in one direction, it's a strong contrarian signal.
That's the exact situation we have today. Futures traders are near the most bearish we've seen in the past 15 years. Take a look...
Futures traders are the most bearish they've been on oil since June 2023. And before then, we hadn't seen this kind of sentiment since 2010.
Importantly, the chart shows that similar COT lows have a history of happening at bottoms for oil. And once the sentiment bottom is in, oil tends to soar.
You can see what happened after the circled sentiment lows in the table below...
The relationship here is clear... When futures traders give up on oil, a major rally begins. The only question is whether it will be a quick move higher or a multiyear surge.
We've seen two rallies that each lasted more than 12 months. Those led to average gains of 96% for oil. The other three all lasted less than a year and led to average gains of 39%.
Regardless, we know one thing for certain... Today's low oil prices and bearish sentiment won't last for long. And despite how crazy it seems today, history suggests we'll likely see $100 oil at some point in the next year.
Few investors think that's possible today. But as a contrarian, you'd be smart to bet against the crowd... and bet on much higher oil prices.
Good investing,
Brett Eversole
Further Reading
"You want to buy when the trend is in your favor," Brett explains, "before the crowd catches on to the opportunity." For most of the year, one safe-haven asset has flown under the radar while outperforming the market. But the story is out now. And that means a slowdown could be around the corner... Learn more here.
"If you buy the wrong bonds at the wrong time, you can still lose your shirt," Brett writes. A popular bond fund that tracks long-term government bonds recently broke out to its first new 52-week high in years. But history shows that it's not a trend we can expect to last... Read more here.
