An exciting and new commodity cycle and lengthy bull market for commodity stocks is about to start. While our company is focused on the energy sector, we believe base and precious metals will also be very rewarding.

By the end of June, I see the Dow Jones Industrials Index breaking below the 26,000 level. We should then see a turbulent market during May to July, providing another low risk buying window.

Investors should become as informed as possible prior to this coming opportunity and be ready to purchase securities in these areas when they become bargains. Once or twice a year they go on sale so get your buy lists ready so you can pounce when stocks are being sold off irrationally.

The reason for a new commodity cycle is basically the lack of capital investment to replace declines. In energy it is a shrinking Reserve Life Index and a new entrant’s increasing demand that makes for a powerful cycle. In Chart #1 one can see that Japan affected the 1970’s cycle, China the 1999-2008 cycle and it is India impacting the 2016-2024+ cycle.

There have been only two major energy cycles in my 40+ year career so far, and the third one started in February  2016 when crude bottomed at US$26/b (Chart #2).

In the last cycle we saw WTI crude oil lift from US$10.65/b in late 1998 to US$147.27/b in mid-2008. In this cycle we see WTI moving from the low in early 2016 of US$26.05/b to a new all time high above US$150/b during the Euphoria Phase. Strong demand, low inventories and supply problems usually occur at the commodity cycle peak.

Stocks should move alongside the move in energy prices. In the last cycle the S&P/TSX Energy Index rose from 90 to 470 in eight years (Chart #3).

Stocks like Canadian Natural Resources (CNQ) rose from $1.81 in 1998 to $45.27 over the following 10 years. It was not an easy first phase. During the 1999-2003 bottoming period (Chart #4) or what we call the Skepticism period the stock was a Yo-Yo having six moves of 28-56% until finally breaking out in 2003.

This is the same scenario we see energy stocks doing now and we recommend buying during the shakeouts with a multi-year investment horizon. There should be many 5-10 baggers in the energy and energy service stocks this new Energy Bull Cycle.

We are currently in the Skepticism Phase of the new Energy Bull Market.  During this phase it will be bumpy with large market swings. Focus on natural gas and light liquids producers; but stay away from heavy oil, oil sands and thermal stocks for now. Hold some cash and use this next period of market weakness, likely this June, to raise your portfolios to your comfort zone.

Josef Schachter is a 40-year veteran in the investment business, a frequent guest on Money Talks and keynote speaker at the World Outlook Financial Conference and a regular commentator on BNN/Bloomberg’s Market Call.  The Schachter Energy Report provides comprehensive coverage on 32 Energy and Energy Service Companies as well as overall Market and Energy Sector Overviews. You can Subscribe at schachterenergyreport.ca  or go online to review sample copies of our Research and Market Update Tweets.