This past week I have been inundated with questions regarding the dive in crude oil prices and the energy sector in general. Is this a fantastic buying opportunity, or is the beginning of something bigger? The answer depends on your time frame.

For a speculative trader looking for a short-term opportunity, as shown in the chart below, oil is now 4-standard deviations oversold and a fairly strong bounce is likely.

However, longer-term investors may want to use whatever bounce comes to rebalance energy weightings in portfolios as it is quite likely that the dynamics of the oil/energy market have now markedly changed going forward.  As I discussed recently in “No, It's Not Time To Buy Oil Stocks Yet,” the longer-term investment opportunity in energy has occurred after the initial bounce.  To wit:

“As you will notice, each time there is a sharp correction in the NYEI, the subsequent bounce has been an opportunity to sell positions that are underperforming, experiencing credit related issues or were just poor investments to begin with. Strongly rising markets mask many investment errors made by investors that are quickly, and brutally, revealed during market declines. These bounces give investors opportunities to clear those mistakes.

The subsequent decline provided an ideal opportunity to reallocate portfolios to better quality and performing issues within the portfolio. The current sell-off is likely the first leg of a similar pattern that investors should use to clean up portfolios in energy related investments.”

This weekend's reading list is a collection of articles discussing the good, the bad and the ugly of the dive in crude oil prices. It will likely be some time before we know how this particular story ends, but it is a story that is particularly important to Houstonians that have enjoyed oil-driven economic boom for the last five-years.

1) 10 Reasons Why A Severe Drop In Oil Prices Is A Problem by Gail Tverberg via Our Finite World