Yesterday, Brent crude oil rose to $74 a barrel.
That’s the global benchmark’s highest level since April 2019.
Meanwhile, U.S. oil hit $71.70 a barrel… its highest level since October 2018.
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As you can see, just this year, Brent crude is up 44%, while U.S. oil is up 49%.
And some of the world’s top oil traders say it’s just the start of a bigger rally that could take oil past $100 a barrel.
He’s the CEO of Trafigura. It’s one of the world’s largest independent oil trading firms.
Yesterday, Weir spoke at the FT Commodities Global Summit – a sort of Davos for the commodities world. And he told the industry insiders in attendance that he sees oil breaching $100 a barrel due to falling reserves and rising demand.
Alex Sanna, the top oil trader at commodities trading firm Glencore, also said $100 oil seems likely.
And Jeff Currie at Goldman Sachs (GS) chimed in. He said oil is heading into a decade-long bull market as government stimulus measures boost demand.
Those are bold calls. Oil hasn’t traded above $100 since 2014. That’s when a surge in shale-oil production brought the last bull market to an end.
But our Legacy experts have been spreading the word on this opportunity for months…
In January, Legacy cofounder Bill Bonner and his chief analyst, Dan Denning, put the rally on their readers’ radars.
In their monthly macro advisory, The Bonner-Denning Letter, they announced that betting on rising oil prices was their new Trade of the Decade.
I know that may sound strange with the mainstream so down on oil… and climate activists making it harder to get oil out of the ground…
But Bill and Dan believe oil will be one of the best places for your money over the next 10 years.
If you’re reading the Cut for the first time, it means you recently subscribed to one of the 19 investment advisories we publish at Legacy Research.
Legacy is the publishing alliance behind Bill, Dan, Tom Dyson, Teeka Tiwari, Jeff Brown, Jason Bodner, Dave Forest, Nick Giambruno, and Doug Casey.
Our mission is to help you achieve financial escape velocity through non-consensus investment ideas. Ideas the mainstream is too afraid… or too slow… to cover.
Every day, our team writes about opportunities to profit in commodities, stocks, cryptocurrencies, bleeding-edge tech, pre-IPO (initial public offering) deals, and other alternative investments you won’t find in mainstream sources.
We also pass on the knowledge… and secrets… about building and holding on to wealth that our analysts have amassed over their careers in the markets.
And the volume is staggering. We publish so many insights, it takes hours a day to get through everything.
So we created The Daily Cut to highlight the choicest “cuts.”
These are the biggest, most compelling ideas you should act on right now.
And Bill and Dan’s trade fits the bill perfectly.
He’s a free-market and sound-money advocate. In 1979, he started a small financial publishing company called The Agora in a row home in downtown Baltimore to spread the word on these ideas.
It’s now one of the largest independent financial publishers in the world… with offices in Britain, Australia, Brazil… and even Argentina.
Bill is also a deeply contrarian thinker who’s been connecting the dots on what’s going in the world for more than two decades – first at The Daily Reckoning and now at Bill Bonner’s Diary.
In 2007, I began working alongside Bill as an analyst. That’s when the first of these trades – sell U.S. stocks and buy gold – was still in play.
That worked out great.
From 2000 through 2009, gold was one of the top-performing asset classes, rising 288%.
And stocks lagged. Our regular stand-in for the U.S. stock market, the S&P 500, fell 23%.
The next Trade of the Decade started in 2010. This time, Bill urged his readers to sell Japanese government bonds and buy Japanese stocks.
It, too, proved right in the end, though less emphatically.
Japanese stocks, which had been left for dead, rose 150%. But Japanese government bonds rose 34%.
The key is to sell an investment the crowd adores and buy something that’s unpopular… even downright hated. As Bill explains it…
Our Trade of the Decade is designed to capture something that is out of whack. Things that are extraordinary tend to be less extraordinary as time goes by.
People return to their senses. Wars end. Bubbles pop. Depressions give way to new growth. Whatever is going on, a 10-year period gives you plenty of time to get back into whack.
Bill says the easy part of the current Trade of the Decade was deciding to sell the U.S. dollar. He and Dan believe it’s on the road to ruin thanks to government and Fed stimulus spending.
The harder part was figuring out what to buy to balance the trade. But eventually, they found a beaten-down candidate in oil.
From its peak in September 2018… to its trough in March 2020… a basket of leading oil stocks was down 85%.
Most investors got so burned, they don’t want to hear about oil anymore.
But that’s a fat pitch if you’re a contrarian. Dan…
Our logic was simple. After 10 years of dismal performance for the entire sector, energy couldn’t possibly do any worse. And the bullish case is strong.
We have a confluence of a mean reversion in the energy sector… plus a huge amount of fiscal and monetary stimulus. This will result not only in higher inflation, but also in higher inflation expectations. And that’s an important psychological driver of even more inflation.
(Mean reversion is the tendency of asset prices to move away from extremes and back to their long-term averages.)
As Dan wrote in the January issue, the best way to get exposure to rising oil prices is through oil exploration and production stocks.
And he recommended the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) as a “one click” play.
It’s an exchange-traded fund (ETF) that tracks an index of the same name.
Among its largest holdings are oil refiner Phillips 66 (PSX), oil-and-gas explorer Devon Energy (DVN), and fuel transporter Valero Energy (VLO)… as well as oil majors ExxonMobil (XOM), ConocoPhillips (COP), and Chevron (CVX).
Dan favors oil stocks partly because oil is hard to get exposure to as a regular investor (for technical reasons I won’t get into today). It’s also partly because oil stocks give you leverage – or extra oomph – over the oil price.
I’ve covered this phenomenon before in relation to gold and bitcoin mining stocks.
In the case of oil, when the price rises, oil companies’ costs stay the same. This fattens their margins… and causes profit-seeking investors to bid up share prices.
This next chart shows what’s happened since Dan and Bill recommended XOP on January 28.
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As you can see from the chart above, XOP is up 44% since then. That compares with a 36% gain for the cost of a barrel of U.S. oil.
What about the transition to clean energy we’ve spilled so much digital ink on at the Cut?
And what about the regulations and production cuts activist investors are slapping on oil companies?
Won’t that all cause the oil rally to fizzle out… even start to bomb?
And won’t that cause droves of investors to dump their oil stocks?
These are questions Bill and Dan – along with our go-to commodities expert, Dave Forest – have been working through.
Their answer may surprise you. More on that in tomorrow’s dispatch…
Regards,
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Chris Lowe
June 16, 2021
Barcelona, Spain