By Porter Stansberry in the S&A Digest:

The time to buy oil (just like any other commodity) is when no one wants it. When you see oil and gas storage filling up, when you see drilling rigs shutting down, and – best of all – when you see magazine covers reporting that the world is "drowning" in oil, it's time to buy. You can see for yourself that storage is way above the normal range for this time of year. And the domestic drill-rig count is now down 57% from its peak last August.

 

I sponsored an in-depth statistical study on the influence of the rig count on oil prices two years ago. We found the rig count is not a leading indicator of oil prices – most of the time. (The number of working rigs lags the price of oil by about four months, on average.)

However, when the number of rigs declines by an extreme amount (more than 30% year over year), it's usually a very good time to buy oil. The last time rig counts declined by more than 50% year over year (1986), oil nearly doubled in price over the next 12 months. See the chart below…

 

The chart above doesn't show it, but the rig count in the U.S. is currently 920, down 52.3% since last year. It's a huge decline, signaling a great entry price for oil. However, I'm still bearish on natural gas, because the glut of supply is too large to overcome.

Crux note: The S&A Digest comes free with a subscription to Porter Stansberry's Investment Advisory. This month he is recommending a stock that he believes to be his best pick in three years. To learn more, click here...

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