I haven't made much real money on the Peak Oil investing theme, but I'm on the lookout for a good opportunity. I think Peak Oil is real and significant, but that every time it starts to bite it takes out the whole world economy. So, the question is, how should one trade it?
If Peak Oil is real, then eventually high-cost oil producers (such as SU aka Suncor Energy) should out-perform the general stock market ($SPX). As you can see in the above chart that was definitely the case from around 1999 to mid-2008, but since then Suncor has lagged the general stock market.
The chart uses a 15% envelope around the 52-week (one year average) of the relative performance of SU to the SPX. As you can see, for the last year Suncor has been underperforming the SPX by more than 15%. This has occurred twice before (1999 and late 2008 green boxes) with two other cases where it almost underperformed by that much (2000 and 2007 gray boxes).
Here's a trading system:
- Enter on the first weekly uptick of the ratio from a touch or below the lower envelope and exit the trade on a touch or piercing of the upper envelope. You can enter either long SU or a pair trade long SU / short S&P 500.
- Exit on the weekly close of a touch or piercing of the upper envelope.
The four previous occasions for this yielded nicely positive results with trades of 6 months duration or less. The current situation had an enter signal around the end of Oct 2011. It looks like there is still time to enter this trade even though Suncor is around 16% off its lows.
I expect I'll watch this to see if Suncor dives into the "unexpected" zone (e.g. sub $25) and try to accumulate some down there.
Think I'll get a fill? Think this way of trading Peak Oil and finding underperforming energy stocks has any merit? Is it different this time? Is the current situation significantly different from all four preceding situations?
P.S., Here's my defense regarding the idea that I am crass and self-centered trying to figure out how "trade" something like Peak Oil:
- I'm just a feeble little guy beyond his prime. I don't expect I can change the world.
- Trading Peak Oil is one thing I can do to accumulate resources to help others when times get tougher.
- Putting more attention / resources on Peak Oil related enterprises should do something to increase the supply of liquid fuels. The current situation where SUNCOR is undervalued is depriving it and other enterprises of the capital needed to create solutions to mitigate Peak Oil.