Are You Making This Mistake with Oil Stocks? (Justin Spittler)

Originally Published by Casey Research

Yesterday, oil hit an 11-year low.

The price of Brent crude oil fell to $35.78, its lowest level since 2004. Brent oil has now fallen 68% since its June 2014 peak. (Brent oil is found in the North Sea region.)

If you’ve been reading the Dispatch recently, you know the world has a massive oil surplus. In September, oil stockpiles of developed nations hit an all-time high of nearly 3 billion barrels, according to the International Energy Agency (IEA).

• Yet major oil producers keep pumping oil…

In April, U.S. monthly oil production hit its highest level since the 1970s. Since then, the price of oil has dropped 40%. However, U.S. oil output has remained high.

The Organization of Petroleum Exporting Countries (OPEC) is also pumping near record amounts of oil. OPEC is a cartel of 12 oil-producing nations. It produces 40% of the world’s oil.

Investment bank Goldman Sachs (GS) expects OPEC to pump 32 million barrels per day in 2016, according to Bloomberg Business. That would be a new record.

• Low oil prices have hammered major oil stocks…

ExxonMobil (XOM), the largest U.S. oil producer, has dropped 24% since oil peaked in June 2014. It’s trading at its lowest level since 2011. Chevron (CVX), the second-largest U.S. producer, has dropped 32%. It’s trading at its lowest level since 2010.

Low oil prices have also crushed the stocks of oil services companies. These companies sell “picks and shovels” to the oil industry. Halliburton (HAL), the largest U.S. oil services company, has plummeted 52% since June 2014.

• However, U.S. oil stocks are still expensive…

Although oil stocks have fallen, they haven’t fallen as much as the price of oil itself. Last week, we showed you that energy stocks are extremely expensive compared to the price of oil. By taking the ratio of XLE (an ETF that tracks major U.S. oil and gas companies) to the price of oil, we can see that energy stocks haven’t been this expensive relative to oil since 1999…

According to this ratio, U.S. energy stocks are 83% more expensive than their historic average.

Eventually, this cycle will end with absurdly low prices for oil stocks. We’ll get an amazing opportunity to buy oil stocks at fire sale prices. But right now, oil stocks are expensive and in a downtrend…the opposite of what we look for in a good investment. We’re staying away.

• Switching gears, your car may soon drive itself…

Self-driving cars might sound like science fiction. But it’s closer to happening than you might think. And Chris Wood, editor of Extraordinary Technology, says self-driving car technology is creating some of the most exciting investing opportunities he’s seen in years…

As Chris explained this month, self-driving cars could prevent at least 90% of car accidents, cutting accident costs by $450 billion per year. Here’s Chris:

Because drivers cause most wrecks, self-driving cars have the potential to prevent a lot of these accidents and save thousands, if not millions, of lives.

Driver error causes about 90% of the 5.5 million car accidents in the U.S. each year. More than 32,000 people die in these wrecks.

Virtually all analysts agree that the widespread use of AVs [autonomous vehicles] would mean far fewer accidents and fatalities. The Eno Center for Transportation estimates that if 90% of cars in the U.S. were self-driving, every year it would save 21,700 lives, result in 4.22 million fewer car crashes, and cut total vehicle accident costs by 54%, or $450 billion.

Self-driving cars could also add tens of billions of dollars in lost productivity to the economy. The average American spends almost an hour per day commuting. If your car drove itself, you could use that hour to do work…eat a full meal...or take a snooze on your way home from the office. How much would you pay for an extra hour a day?

Companies are racing to develop self-driving car technology. Google, Japanese carmaker Toyota (TM), and electric carmaker Tesla (TSLA) are some of the big names. Recently, Google decided to spin its self-driving car division off into a new, separate company. And in November, Toyota announced plans to build a $1 billion plant in the United States to develop self-driving car technology. The company plans to have self-driving cars on the road by 2020.

Self-driving cars will soon be a multibillion-dollar market. Here’s Chris again:

These companies are going after a massive pie. Consulting firm Deloitte reports that the U.S. automotive industry generates $760 billion in annual revenue. That’s 4.5% of annual U.S. GDP.

Meanwhile, the global ADAS [advanced driver assistance systems] market is expected to grow at a compound annual growth rate of 23% over the next five years, according to Allied Market Research. At that rate, it will reach $60.14 billion by 2020.

• When will self-driving cars hit the mainstream?

Chris answered that question in new issue of Extraordinary Technology. He also profiled eight companies that could make big profits as the momentum in this trend builds.

You can learn all about this mega trend, including how to invest in it, by taking a risk-free trial to Extraordinary Technology. Click here to learn more.

Chart of the Day

Things are getting worse in the junk bond market…

The junk bond market is where companies in poor financial shape borrow money. When the economy slows, these companies are often the first to miss a loan payment. Problems in the junk bond market can serve as an “early warning” of bigger problems in the stock market and economy.

Dispatch readers know the junk bond market has been flashing danger signs for months. In recent weeks, these warnings have gotten louder…

Last Monday, iShares iBoxx $ High Yield Corporate Bond ETF (HYG), the largest U.S. junk bond ETF, fell to its lowest level since 2008. Meanwhile, three large junk bond funds have shut down this month. Two of those funds have blocked investors from pulling out their money.

Today’s chart shows the yield on “distressed” bonds. Think of distressed bonds as the junkiest of junk bonds. They are the bonds of companies in horrible financial shape.

As you can see, the average yield on distressed bonds rose above 18% last week. The last time distressed bond yields were this high was during the 2008/9 financial crisis.

The number of distressed bonds is also growing rapidly. Last week, Bloomberg Business reported that there are more distressed bonds today than at any time since 2009.

The article Are You Making This Mistake with Oil Stocks? was originally published at caseyresearch.com.

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Are You Making This Mistake with Oil Stocks? (Justin Spittler)