How to Know if Oil Prices Have Hit Rock Bottom

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By Jacob Maslow

oil and stock market
Oil performance in the commodity market. 3d rendered Illustration.

When markets slump, analysts and investors behave in completely predictable patterns. First, people are shocked and awed by the development. Then a sense of desperation kicks in. Finally, a sense of optimism and new possibilities set in as people roll up their sleeves and try to turn what would otherwise be a disaster or disappointment into an opportunity. This happens like clockwork. It doesn’t matter if you’re looking at the 1987 crash, the Dot Com crash, the post-2011 crash, or the 2008 Financial Crisis crash, the same pattern takes place. And this is precisely what’s going on with oil‘s slump. It seems everyone has the same project: how to find out if oil prices are nearing bottom or hit bottom. Obviously, there’s going to be a lot of money to be made when calling a market’s bottom. Predictably, savvy investors and financial institutions can clean up by simply scooping up energy sector blue chips at bargain basement rates at the right time and unloading them during a recovery.

Unfortunately, calling oil pricing’s bottom is more complicated than it seems. One seemingly brilliant way to do this is to pay attention to the amount of gas and oil field permits issued in the US. Another approach looks at the number of oil rigs in operation. Both these indicators are only useful up to a certain point. While permits can give us an idea regarding the production expansion plans of drillers, it doesn’t really indicate actual production. Getting a permit to drill, after all, is different from actually investing tons of money to drill and getoil out of the ground. Oil rig numbers are more accurate. However, we only have reliable numbers from the US. Other countries can be quite opaque regarding this statistic. Also, oil rig trends in the US are local based on local supply. You can’t extrapolate this data to otheroil-producing countries. Since there is no clear bulletproof guide, would be oil sector investors either need to do dollar cost averaging or do momentum trades based on oil production announcements by OPEC and other major petroleum players.
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