After an 80% rally, many investors would be looking for a reversal, possibly even for an opportunity to short the asset.
This is not a time to do that. In fact, this is not a rally you want to short at all, but one you want to buy. Even though this commodity has surged more than 80% after bottoming in February of this year, it could easily surge another 100% from here. Of course, I'm talking about crude oil.
After bottoming earlier this year, crude has now surpassed the $51-per-barrel mark for the first time since July 2015. This recent jump is just the beginning of a much longer, and much higher, climb in crude prices. Several recent pieces of data support rising prices, not falling ones.
One in particular that caught my eye is that oil companies slashed exploration budgets by $250 billion in 2015, and are expected to cut another $300 billion this year. Very soon, supply will no longer be an issue when it comes to price, as existing wells start to slow and new wells aren't lined up to start producing.
The next data point to watch now is demand. That tells us oil will rally, and it's why we want to own related stocks.
A recent report by BP (NYSE:BP) on various statistics in the energy markets, titled BP Statistical Review, gives us one piece of important data. Based on its statistics, 2015 was the first time since 1999 that oil gained market share. That's huge! It means that not only was demand robust, but it actually was being used in place of other energy resources more for the first time in 16 years.
Demand rose at nearly double its recent historical average, at a pace of 1.9%. Remember, this data covers 2015, when crude plunged another 30% after 2014's 44% drop. The mainstream media outlets led you to believe that global demand was waning, and oil was set for a new sustainable low level. But that's not the case.
The International Energy Agency also showed in the first quarter of this year that oil consumption is growing faster than analysts had expected. The forecast was for 1.2 million barrels of oil per day, but actual demand was 16% higher at 1.4 million barrels of oil per day. Clearly, demand is robust, and we already know supply is set to shrink because of the cuts to new discoveries.
But just this past week, we received further confirmation from the world's biggest crude exporter, Saudi Arabia. The state-owned Saudi Arabian Oil announced it was raising the price of oil that it sells to Asia for the second consecutive month amid increased demand in the region. Demand is rising, and you want to own this rally.
A Rising Oil Tide
Today, crude sits at just above $50, which is 80% off the lows it hit earlier this year. But with demand remaining robust, oil has plenty of room to run higher. Now is the time to grab almost any related stock because this rally isn't an isolated event.
A surge in the price of crude lifts everything from a tiny exploration stock to a giant like BP with it. As oil continues to soar from here, these stocks will rise in similar fashion, handing you possible triple-digit gains.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: Chad is an investment analyst for The Sovereign Society and is also the editor of Pure Income, a newsletter that taps into the best off-the-radar opportunities for generating safe, steady monthly income. His research and insight allow subscribers to earn a guaranteed annual yield of at least 11%.