“Those deer are going into a rut,” my friend Cactus told me as we drove along the fence line of his ranch on our way in from the airport.
“A rut, ooh, is that bad? Are the deer going to need our help?” I asked.
Cactus started laughing uncontrollably. “They’re not falling into a hole, Steve – the rut is deer-mating season! I sure hope they don’t need your help! Ha ha ha!”
And so it went, right from the get-go… I was an easy target, the butt of all the Texas jokes for the next few days. Here’s one more… no kidding…
“Wool production, Cactus? You guys have sheep here?” I said.
“Ha ha ha. Now that’s funny!” Cactus said. “OOOL production, Steve. No ‘W.’ Or as you say, ‘OY-EL.’”
Cactus Schroeder is a longtime West Texas oil man, and a longtime friend of Porter Stansberry’s. Cactus has been drilling oil for more than 30 years. He knows everyone, and they all call him for advice. He has been inviting me out to visit him in West Texas for probably 15 years.
But what the heck is there for me in West Texas? I do love hanging with Cactus and learning. But… West Texas? Why would I go out there, right now?
For 15 years, nothing has compelled me to take Cactus up on his offer. But in the last year, a crazy confluence of events has shaken the energy market like it’s never been shaken before.
It has truly caused the worst bust, ever… And that bust is giving us an incredible opportunity. So I shocked my wife, telling her I had to head to West Texas.
“Do you really need to get on a plane right now?” she said.
I realize that heading to West Texas of all places – during COVID-19 – sure doesn’t seem like the best move. But here’s the thing…
The story of the best investing opportunity on earth right now – for the next two years – starts in West Texas.
The biggest opportunities start where nobody is looking – where everybody has given up. And, well, nobody is looking at this West Texas investment right now – everybody has given up.
I often say the biggest gains come when you can find an investment that’s 1) cheap, 2) hated, and 3) in the start of an uptrend.
During our current Melt Up – where everything from tech stocks to house prices is soaring – it’s hard to find all three of these elements. So many assets have soared that it’s hard to find something that’s genuinely cheap and hated.
We have all three of these traits in place in the energy sector right now. The story starts in West Texas, where the bust of recent years is worse than you could possibly imagine…
What the ‘Worst Energy Bust Ever’ Looks and Feels Like
“Is this the worst energy bust you have ever seen?” I asked Cactus.
“I’ve been through seven oil busts, Steve,” he said. “1986 was the worst – until now.”
Cactus explained that three events have come together to create a disaster for the oil market…
1. The money dried up… Wall Street gave up on shale and left.
2. The Saudis (and Russians) flooded the market with oil.
3. COVID-19 led to economic shutdowns, causing gasoline consumption to fall 50%.
All three of these individual oil stories are destructive on their own. Their end result has been the worst devastation of all time in the energy sector.
Keep in mind, in my world, you hear “the worst ever” or “the best ever” thrown around a lot. But in this case, it’s 100% true…
From their peak in 2014 to their bottom in early 2020, energy stocks – as measured by the main energy-stock exchange-traded fund – fell by more than 70%. This basket includes the household names in energy, like ExxonMobil and Chevron.
I looked at the history of energy stocks going back to 1973. There’s never been a fall this big – ever.
By late October of last year, my friend Jason Goepfert of SentimenTrader.com ran a headline that read: “Drawdown in energy stocks is the worst of any sector, ever.”
Jason prides himself on never delivering the hype – just the analysis. So I couldn’t believe he wrote that headline. And he backed it up with data:
The current drawdown in energy is now about 60% more than the S&P’s, by far the worst of any sector in history. It exceeds the relative losses in tech after the internet bubble burst and devastation in financials following the Great Financial Crisis.
Wow. In short, investors have given up on energy – and they’ve deserted it more than any other sector in the near-100-year history of the S&P Indexes. (Read that sentence again, if you would!)
Even today, Wall Street is still completely out of energy stocks. According to the latest Bank of America Global Fund Manager Survey, energy is by far the most “underweight” sector in fund manager portfolios relative to history.
In short, it’s not debatable – energy stocks are as cheap and hated as they have been in either of the last two market busts.
You might view this as a negative… But I view it as an incredible opportunity.
Why Big Energy Could Soar Hundreds of Percent
“Steve, why on earth would I want to invest in oil? It’s been a poor performer for years.”
Look, I hear you. Oil has lost almost half its value since peaking in 2018. And it’s been absolutely clobbered in the past year.
States in the U.S. are still on lockdown. And the travel market is down dramatically as folks stay at home to fight the pandemic.
While the economy is starting to recover, the U.S. is still in a recession. So why am I so excited about investing in the energy market today?
Recommended Reading: Prepare for a ‘Cash Panic’
We’re at the very beginning of a mass financial panic – but not the kind most people expect. The words “mania,” “euphoria,” and “frenzy” are all over the press… while fund managers are STAMPEDING out of cash at record levels – and pumping billions of dollars into a specific corner of the markets. A dramatic financial event over 20 years in the making has finally begun. Here’s what it means for YOUR money.
It’s because buying energy stocks during a crisis can lead to life-changing gains.
I’m not kidding… Buying this sector when the economy is in shambles can lead to hundreds-of-percent gains very quickly. It has happened time and time again.
Let’s look at the early 2000s, for example. Following the dot-com bust, the U.S. economy went into recession. Oil prices fell 30% from May 2001 to late September of that year. The unemployment rate jumped from 3.8% in April 2000 to 5.8% by mid-2002.
In short, these were tough times all around. Yet buying energy stocks in mid-2002 – in the thick of the crisis – was one of the greatest opportunities of the last two decades. We can see it through the energy fund I mentioned above…
The Energy Select Sector SPDR Fund (XLE) holds the bluest of blue chips in the energy space. I’m talking about companies like Exxon, Chevron, and ConocoPhillips.
It can be hard to move the needle with these big companies. And yet, XLE soared 390% from mid-2002 to its eventual peak in 2008. Take a look…
Again, buying XLE in 2002 was a bold move. The U.S. was at war. The unemployment rate was up. And oil prices had fallen more than 50% from their 2000 peak to their early 2002 lows.
It was a massive contrarian bet… one that few had the guts to make. Yet it was exactly the right call. Energy stocks rallied hundreds of percent over the next six years.
This wasn’t the only time this scenario has played out. We saw a similar opportunity during the 2008 financial crisis…
That was the worst economic crisis since the Great Depression. The U.S. banking system was on the brink of collapse. The unemployment rate ultimately skyrocketed to 10%. And the mortgage default rate hit 28% in July 2008. Importantly, oil prices also crashed in late 2008, falling 78% in a little over five months.
Each of those reasons on their own would have been enough to keep you out of the energy market. It was bad out there. But if you stepped up to buy energy stocks during the crisis, you could have done darn well over the next few years.
XLE rallied 192% from early March 2009 to its peak in June 2014. Check out the chart below…
This is what’s possible when you buy during a crisis. The biggest gains don’t happen after a bad situation is already better… They happen when a market looks terrible, but is actually starting to improve.
That’s the classic “bad to less bad” setup I love to find… when expectations are so low that any positive news can drive prices higher. And when it happens in the energy market, life-changing gains can follow.
In a lot of ways, today’s oil crisis is even worse than what it was in 2008. It’s been a multiyear gutting, topped off by the devastation in 2020. So our upside potential could be even larger than what we’ve seen in the past.
But we still have to consider a couple of lingering questions…
Is the oil market really going to survive this? Or is this bust different?
Let’s take a look at the oil market as a whole. As you’ll see, oil ain’t dead yet…
Today’s Energy Bust Won’t Last Forever
Are you familiar with the Baker Hughes Rig Count?
It’s a rather obscure-sounding monthly data point. Specifically, it’s the number of active oil rigs in use. In America, it’s broken out by state.
In late 2014, the number of active oil rigs in Texas was more than 900. On August 14, 2020, the number of active oil rigs in Texas fell to just 100. To reiterate, Texas went from having more than 900 rigs to exactly 100 rigs, in just six years.
It isn’t just Texas, either. The total U.S. rig count – including gas rigs – has seen a similar decline in recent years.
In fact, the measure hit an all-time low earlier last year. Take a look…
The data goes back to the 1970s. But levels have never been as low as we saw earlier last year. And we’ve only seen the U.S. oil and gas rig count get close a handful of times.
Each instance happened when oil prices were so depressed that companies couldn’t make money… just like today. And in each case, sentiment toward the oil market was fantastically negative… just like today.
That’s where things get interesting…
When the number of oil and gas rigs hits a multiyear low, oil prices tend to bottom. And instead of falling further, like everyone expects, prices tend to jump over the next two years.
The potential gains aren’t small either, as the table below shows…
These were the last four times that oil and gas rigs hit a multiyear low. As you can see, a record-low oil and gas rig count is a sign that the oil market has probably already hit bottom.
The rig count bottomed earlier in 2020… But lately, it has started rising again. Similarly, oil prices bottomed earlier last year… And now they’ve started to move higher. Take a look…
History shows that the recent rally in oil prices could just be the beginning. The last four times that the rig count hit bottom all led to 30%-plus rallies over two years. And the largest rally was more than 120%.
No one really believes that a double in oil prices is possible today. After all, COVID-19 continues to run rampant. With fewer folks driving cars and catching flights as restrictions and shutdowns continue, demand for oil is down dramatically.
But COVID-19 is temporary…
We already have two prime vaccine candidates authorized for emergency use. The data isn’t complete, but it’s hugely positive. And given the trajectory we’re on, life could be just about back to normal by this time next year.
That means the short-term pressure on oil could be mostly gone. And the long-term negatives? Well, they’re incredibly long term.
In the long term, battery technology and clean energy will hurt the oil industry. But that’s a next-decade trend, not a next-year trend.
Electric vehicle sales were around 350,000 in the U.S. last year. That’s around 2% of the total U.S. vehicle sales. Said another way, electric vehicle sales would need to grow 500% to 1,000% next year alone to put a real dent in oil demand.
I’m sure they’ll grow that much eventually. But it’s not happening anytime soon.
The reality is this… Oil sentiment is darn negative. Prices are depressed. And the energy sector is facing problems, both in the short term (COVID-19) and the long term (electric vehicles and renewable energy).
But if you’re making an intermediate bet… over the next two to three years… then you can land in the sweet spot… buying cheap, when no one believes, and selling before the long-term tailwinds really take over.
Cactus was right – this is the worst energy bust of our lifetimes. And today’s oil upside potential could be even larger than what we’ve seen in the past.
To me, this is the biggest contrarian bet you can make today. If you’ve got the guts to make the trade, it could lead to massive upside from here.
Dr. Steve Sjuggerud holds an MBA and a PhD in finance. He’s worked as a stockbroker, vice president of a global mutual fund, and a hedge-fund manager. His track record has landed him on various television networks including stints on Fox Business News, Bloomberg’s Taking Stock, and CNBC, among others.