The Oil Crash and the Most Important Lesson to Learn for Investors

"This is the end, beautiful friend," I thought to myself.

I remember that morning very clearly. The sun was slowly creeping across my desk as I just stared blankly at my screen.

Yet, it wasn't much of a shock that Jim's voice was floating through my mind.

It was in the early days of 2009 and oil prices had been crashing for the last six months. That morning, I watched as the price for a barrel of WTI crude fell under $30.

The blood had flowed freely in the streets during that price crash. Some veteran members of our investment community here at Energy and Capital can recall the panic that had set in after the summer of 2008.

Oil kept tumbling that morning.

Not much time passed before prices sank further, dropping as low as $26 a barrel.

All hope was drained from the market, and the bears were squarely in the driver's seat.

But if there's one takeaway from that crash, it's this...

Now is the time to make money in oil.

History Is Doomed to Repeat Itself

You know just as well as I do what happened next.

Prices rallied back over $100 per barrel over the course of the next few years. The shale revolution that took place in the U.S. oil industry changed the game forever as companies scrambled to put their drill bits into the ground.

Billions of gallons of water were injected into the tight rock formations and the United States' domestic production soared to more than 13 million barrels per day by 2019.

Then all of a sudden, those feelings of crisis that had built to a crescendo over the prior six months quickly morphed into a yearning for an opportunity.

Those companies that were beaten to within an inch of bankruptcy -- and many did not survive the 2008 crash -- delivered an inestimable amount of wealth into the hands of investors that recognized the bottom had come one morning in February.

It was as if a switch was flipped back then.

Well, all this has happened before, and it'll happen again.

The memory of that morning was a stark reminder of where we've come from today.

I've seen a lot of bear markets firsthand and it's not too late to take advantage of last month's bottom in crude.

You see, things are a little different this time around.

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The global pandemic that has kept us all locked down for months and effectively shut down oil consumption isn't going to last forever.

At least, the market is treating it that way.

I can't blame them and China is one bullish reason why we've passed the bottom.

During the second quarter, China's oil demand is expected to recover to around 13 million barrels per day. With China's economy starting to hum again, demand should be where it was a year ago.

China is a test case for what could take place once the United States opens up once again.

There are two parts to this oil recovery and the story is more than just recovering demand.

Tomorrow, OPEC and Russia are supposed to sit down and entertain the notion of extending its huge output cut of 9.7 million bbls/d by a few more months. That kind of commitment would ensure that this crude rally will continue.

Given the tensions that arose the last time Russia and Saudi Arabia quarreled over cuts, I'll believe it when I see it.

I know things look grim as oil treads water around $36 per barrel right now. But there's a very important lesson to remember in this chaos.

Oil markets by nature are cyclical.

Never forget the old adage that the best cure for low oil prices IS low oil prices.

But it's true.

And the ride back up will be much sharper than a decade ago.

That's the point you realize this isn't the end, it's the beginning.

However, the next step is up to you.

Until next time,

Keith Kohl

@KeithKohl1 on Twitter

A true insider in the energy markets, Keith is one of few financial reporters to have visited the Alberta oil sands. His research has helped thousands of investors capitalize from the rapidly changing face of energy. Keith connects with hundreds of thousands of readers as the Managing Editor of Energy & Capital as well as Investment Director of Angel Publishing's Energy Investor. For years, Keith has been providing in-depth coverage of the Bakken, the Haynesville Shale, and the Marcellus natural gas formations - all ahead of the mainstream media. For more on Keith, go to his editor's page.