Britannia Radio

Dear Daily Crux reader, This week, we've got an interview that's sure to raise a few eyebrows. Our colleague Matt Badiali – S&A's resident resource expert – recently made an incredible prediction. Despite a growing risk of turmoil in the Middle East and alarmists' calls that the world is running out of oil, Matt believes the price of oil is set to "crater."  To see why he's so worried, how far he thinks prices could fall, and his best advice for investors now, be sure to read on. Good investing, Justin Brill Managing Editor, The Daily Crux  www.thedailycrux.com

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The Daily Crux Sunday Interview Why oil prices could fall farther than almost anyone believes… The Daily Crux: Matt, you recently made a surprising call we haven't heard anywhere else… While much of the financial world is worried about soaring oil prices, you told readers of your S&A Resource Report that the price of oil could collapse. Why is that?  Matt Badiali: First, I'd like to point out that despite all the recent worries – and despite increasing turmoil in the Middle East – the price of oil has already fallen significantly this year.  Oil fell from nearly $110 a barrel early this year to below $80 last month before recovering to near $90. That's a 20%-30% fall from its highs. And I believe there are three big reasons to believe the decline is just beginning. The first is the situation in the Middle East… Crux: You believe the situation in the Middle East will cause the price of oil to fall?  Badiali: Yes, but probably not in the way you think… Investors are clearly concerned about the growing tensions between Iran and its neighbors and the ongoing war in Syria… and for good reason. Iran is a major oil producer – the fourth-largest in the world, in fact – and is located right on the Strait of Hormuz, the "super-highway" for oil between the Middle East and the rest of the world. If war breaks out, it's likely Iran will damage the Strait and cut off the world's supply of Middle Eastern oil, which could cause the price of oil to skyrocket. Syria is a much smaller producer. But because it's located so close to the major producers like Saudi Arabia, Iran, and Iraq, instability there could potentially spread to its neighbors. But I think these scenarios are unlikely.  Iran especially has huge incentives to avoid actual conflict. The country relies heavily on the proceeds of oil exporting, and shutting down the Strait of Hormuz would hurt it as well. And after the wars in Afghanistan and Iraq, both Iran and Syria know the U.S. and Israel won't hesitate to strike first if necessary.  So I believe these situations will resolve without widespread conflict, and this could have a huge effect on the price of oil. Consider this… Despite increasing tensions over the past few months, the price of oil is still well below where it was earlier this year.  If these situations begin to fizzle out, the price of oil could crash. Crux: What's keeping a lid on prices right now?  Badiali: It's simple… In a commodity like oil, when you remove the "risk" premium, you're left with the fundamentals – simple supply and demand. And the supply and demand picture is downright lousy today. Let's start with supply… Most Americans are familiar with the boom in U.S. oil and gas production… but few people understand what a game-changer this really is and just how high production could go. U.S. production is already up 34% since the boom started, and it could more than triple in just the next 10 years. Some recent estimates show production could more than quintuple in that time. This increase would be enough to replace all the oil the U.S. currently imports from the Middle East… and more than enough extra supply to dramatically reduce prices. This trend has already started, and it's accelerating.  Crux: What's happening to global oil demand?  Badiali: Oil demand is an economic question…  Strong economic growth around the world demands more and more oil. However, we're in a period of slowing economies, and I would argue that we're seeing recession in Europe. The U.S. accounts for 22% of global oil demand. Our economy is not officially in recession now, but you sure wouldn't know it looking at what's happened to our demand for oil. Here in the U.S., we use about 42% of our oil in the form of gasoline. The stronger our economy, the more we use… But today, gasoline demand has fallen all the way down to 1997 levels. But it's not just the U.S. that's worrisome. ----------Advertisement--------- What’s the REAL problem with America today?  Conservatives blame the Leftist media for America’s ills. Liberals blame the greedy Right. The 99% blames the 1%. The 1% says, "don't look at us," Congress makes the rules. Arizonans blame Mexicans. Christians blame Muslims… and gays. But that's all just smoke and mirrors… No one has the guts to talk about America's REAL true problem. Get the facts, and the answer, here… --------------------------------- Europe is the world's second-largest oil consumer, and I don't need to tell you how bad many of the economies are over there. If the euro crisis grinds on – which appears likely – this huge drag on demand will continue or worsen. But China is why I'm really worried. Its oil demand soared over the last decade. It now consumes 7% of the world’s oil production… third-most after the U.S. and Europe. The latest data show China is now slowing significantly for the first time in years. A major recession there could cause oil prices to crater. So we have a situation where demand is falling at exactly the same time production is rising. As I wrote in my issue, that's a recipe for a collapse in the price of any commodity, including oil. Crux: How far could prices fall?  Badiali: This may shock some people, but I believe oil could easily fall to $60 again… and possibly much farther. It's impossible to know exactly how far, because there are so many variables. If the "worst case" scenarios develop in Europe or China, $50 or below is possible. And should we get a "perfect storm"-type scenario, even $40 a barrel isn't out of the question. I don't expect prices to fall that far, but it is possible. Crux: What's your advice for resource investors?  Badiali: Over the short term, my advice is simple: Avoid most oil investments. Take profits if you have them or losses if you must, but get out. If oil falls as much as I expect, most of these stocks will get crushed. Of course, every investor's situation is different. If you have long-term holdings in a stock like ExxonMobil, you may prefer to hold on. But in general, I believe you'll be better off avoiding them now. It's also important to remember that this is to be expected in the resource sector. Commodities continually go through big booms followed by busts. Sure, the busts can be scary for investors who are unprepared, but they can also create incredible value and huge opportunities for those who are prepared. So get prepared for lower prices, but start getting your shopping list ready. An oil price collapse could see another huge buying opportunity like we saw in early 2009.  Crux: Thanks for talking with us, Matt. Badiali: My pleasure. Thanks for inviting me.

Editor's Note: While Matt is currently bearish on oil, he still sees some incredible opportunities in the resource sector. Click here for the details on one of his favorite ideas right now… a strategy so powerful even President Obama has used it to more than double his monthly income.