History Of The Current Oil Price Crash And Where To Invest

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Summary

We are currently in an oversupplied oil market but things aren't always what they seem.

Investing in the oil market is simple if you follow a couple of key principles.

2016 is going to be a much better year than 2015, despite what you may see on television.

Why OPEC has failed to act to shore up production and fix this issue.

Introduction

If you are a new or experienced oil investor in a popular oil Exchange Traded Fund (ETF) like (NYSEARCA:USO) or (NYSEARCA:OIL), it can be difficult to understand how the price of oil reached its current level and subsequently where to invest. From time to time, an article is published that provides a history lesson for those that have just tuned into what's going on with the price of oil and oil-related investments. I thought it was about time we had another such article.

Price is truth?

Over the past year, I've been long oil via Linn Energy (NASDAQ:LINE) (NASDAQ:LNCO), BreitBurn Energy Partners (NASDAQ:BBEP), Transocean (NYSE:RIG), First Solar (NASDAQ:FSLR), Legacy Reserves (NASDAQ:LGCY), and Mid-Con Energy Partners LP (NASDAQ:MCEP).

If you look at the volatility represented in the chart below, you could be mistaken for thinking it's a chart of a hot technology stock, not the price of WTI Crude oil for the last 18 months.

To provide some perspective on exactly how big the recent moves in the price of oil have been, this next chart shows the previous 3 years, you can clearly see the difference.

For anyone following financial markets back in 2008, you'll remember crude hitting $140 a barrel. At that time many were calling for even higher prices. Goldman Sachs made their now famous $200 oil claim, and some were even calling for $300.

The chart below shows the price action from 2008 to 2011 with the red lines highlighting the peaks and troughs.

During 2008, there was a significant drop in world oil demand due to the global financial crisis. OPEC subsequently agreed to cut production by 4.2 million barrels at their meeting in December 2008 and oil producers lived happily afterward with prices trading in the $80 to $100 range until late 2014. However, during the years following 2008, U.S. consumers felt very threatened by $4 gas and what a reliance on overseas oil meant. With the U.S. Presidential election campaigns in full swing, chants of "drill, baby, drill" and "drill, drill, drill" became staples of U.S. Republican Presidential candidates. Even though U.S. President Obama didn't feel like the U.S. could fix the issue alone, he pledged to end the "tyranny of oil" in early 2009.

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