Wild swings have become the norm in the oil market…

We’ve seen big spikes and big drops in the past few weeks. It’s no surprise, given the geopolitical uncertainty surrounding the commodity. But the volatility itself also gives us a hint of where prices are headed.

You see, a rare event took place earlier this month. Oil spiked 8% in a single day.

That’s unusual. And it’s not white noise, either. History proves this is the kind of move that happens before further gains.

Simply put, the oil rally likely isn’t over yet. Let me explain…

You might think of oil as a volatile commodity. That’s true. But the moves we’ve seen recently are still far outside what’s typical.

We looked at all the times oil has spiked 8% or more in a day since 1983. These moves happened less than 1% of the time… We’ve had only 76 other cases, to be exact.

Generally, I ignore day-to-day swings in the market. But when such a rare event occurs, it’s worth looking into…

History shows that it pays to buy after a one-day oil spike like this. For nearly four decades, similar setups have led to higher oil prices 72% of the time over the year that followed.

We’re coming off one of those spikes now. Take a look…

You can see the recent wild swings in oil prices. And two weeks ago, oil jumped from $95 to nearly $103 in a single day.

There’s still plenty of upside left, though. First, let’s look at the whole history of these oil spikes since 1983. Below are the returns for a typical buy-and-hold strategy versus the results of buying oil after setups like these…

Both the six-month and one-year returns crush the typical move in oil. It’s not even close.

Oil is a commodity. So it has slowly increased in value since 1983… rising 3% per year. But buying after a big one-day spike has led to 12% gains in six months and a 31% gain over the next year.

There is one major caveat here, though… These results do include several cases from 2020, when the oil market got out of whack.

Remember, oil prices went negative at the start of the pandemic due to issues in the futures market. It was a glitch in the system that nobody saw coming.

After going negative, the commodity then rapidly spiked back up. That led to several daily moves of 8% or more, with outsized returns after these triggers. We’re talking about 200% – or even 400% – moves over the course of a year.

Since the 2020 glitch skews the data to the upside, we also ran the numbers excluding those examples. And while the results aren’t as impressive, they’re still worth noting. Check it out…

With the new data, the six-month return for both strategies is about even. But the one-year gain is still much higher than normal…

Investors could still see a 12% rise in oil over the next year, based on today’s setup. And that excludes the wonky data from 2020 that led to several massive gains.

In short, volatility is back in oil… And what we’ve seen this month is a signal of more gains ahead. That means it’s not time to bet against oil just yet.

Good investing,

— Chris Igou

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Source: Daily Wealth