Oil Bull Market: It's Not Too Late to Profit!
Commodities / Crude Oil Jun 12, 2008 - 06:57 AM GMT
Larry Edelson writes: Being bullish (or bearish) on a market should not mean being blind. For instance, I've been forecasting sharply higher oil prices ever since I turned bullish way back in 2001. And I am still bullish. But I also keep my eyes wide open for anything that might get in the way of oil's bull market.
I often step back in order to make sure I'm not overly influenced by greed and fear, which are the dominant emotions on Wall Street. This is critically important when a market gets as euphoric as oil is today.
As oil busted out to new record highs again, soaring more than $16 in just two days last week, I questioned every indicator at my disposal. I wanted to figure out where oil prices would go next, objectively and without emotion.
And here's my conclusion ...
Oil's Next Major Stop Will Be $150 a Barrel!
That's my near-term target, and has been for quite some time. Here are five reasons why ...
First, oil prices are rising even though the U.S. economy is tanking. That's a very bullish sign.
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| A new oil refinery has not been built in the United States since 1976. |
Second, U.S. refineries are operating at levels considerably less than their capacity.In fact, refineries in the U.S. are running at less than 90% of capacity. The culprits: Poor maintenance, reduced productivity of workers, no new technology, and more.
Third, nearly all of the same, powerful, supply-and-demand forces that have driven oil from $13 to $138 are still firmly in place today:
- Supply: The world is no closer to resolving the disruptions and bottlenecks in the oil market now at $134 oil, than it was at $30, $40 or $50 oil.
The same trouble spots are in the news. The same names keep cropping up on the trading floors: The Gulf of Mexico ... the North Sea ... Venezuela ... Nigeria ... Russia ... Iraq ... Iran.
- Demand: China is still modernizing at a rapid pace. India is still in a massive growth spurt. The rest of Asia's economies are still surging. Nothing has changed.
Never forget that between Russia, India and China; more than three billion new capitalists have appeared on the world markets.
What's that got to do with oil and gas prices? EVERYTHING! Consider this: Although the U.S. is the #1 consumer of oil, the U.S. represents only 4.8% of the world's population.
That means that more than 95% of the world's population can dramatically impact oil inventories!
Moreover, at least 50% of the world's population (in Asia) lives in countries where the economic growth is as much as 14 times greater than it is in the U.S.
So while demand may be or will soon slump in the U.S., demand overseas is more than adequate to offset the decline, and indeed, is probably growing at rates higher than is being reported.
Fourth, although oil has exploded higher, it's not yet "off the charts." Quite to the contrary, the charts show it still has plenty of upside potential left on this move — to my longer-term target of about $200 per barrel.
And even if I'm dead wrong, I would not bet on oil and gas prices coming down much at all. Even in the worst case scenario for oil bulls, the most I could see oil correcting is back to the $100 level. And I don't think that's going to happen. But if it does, welcome it as a buying opportunity!
Fifth, several sources I talk to in Asia tell me China is now buying oil like crazy!
The reasons ...
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| The opening ceremony of the Olympic Games is August 8 in Beijing, China. |
- The Olympics are just around the corner and Beijing does not want an estimated 10 million tourists and athletes from all over the world to put up with brownouts.
- The recent earthquake. In no way does Beijing want its citizens to suffer from high oil and gas prices or brownouts this summer, especially in the aftermath of the earthquake that sadly took nearly 70,000 lives, and displaced five million people.
The rural countryside is already angry with Beijing on the lax building code enforcement and building cronyism. The last thing Beijing wants is an uprising on energy prices.
- China's strategic oil reserves are now being filled, with an aim toward storing at least 30 days worth of oil imports, or roughly 292 million barrels of oil.
The key question: How does China get the oil to fill up these huge storage tanks?
By going into the open market and bidding for oil aggressively. I suspect that's the hidden force that's been helping to propel oil sharply higher ... and will continue to do so.
End Result: Gasoline Prices Will Continue To Explode!
A gallon of self-serve unleaded gas just hit a national average of $4 a gallon this past Sunday. While oil is grabbing all the headlines, gas prices continue climbing higher, with much more upside still to come.
With crude oil soaring ... the summer driving season about to go into full swing ... and hurricane season having officially begun June 1st in the U.S. — don't be shocked to see gas prices at the pump soon surge to $5 per gallon, and perhaps even higher.
To most of you, that may sound high. But consider yourself lucky because gas prices here are much cheaper than overseas. In London, you'll pay about $8.56 a gallon; in Amsterdam and France almost $10. That's mostly because of high taxes. But it shows you what is possible, and ultimately, what people will tolerate.
Plus, never forget the more subtle, but equally powerful force behind the bull market in oil and gas. There's no avoiding it ...
The U.S. Dollar Is in Trouble Again!
Why is the U.S. dollar starting to fall again, sliding 1.4% last week, even after rare supportive statements from Fed Chairman Ben Bernanke?
Simple: Investors and traders see the slumping U.S. economy ... the negative real interest rates in this country ... and they don't buy Bernanke's BS one bit!
Don't get me wrong. There will be occasional rallies in the value of the U.S. dollar. Some will even seem strong, last longer than expected, and give the appearance that the bear market in the dollar is over.
But don't be fooled by those bounces, or any comments from anyone in Washington.
Fact: The only way this country's economy can survive the mountains of debt and credit going bad is through inflation, and lots of it, via a systematic DEVALUATION OF THE DOLLAR.
No one in Washington will admit this. Most citizens don't want to hear it, either. But that is what's happening. Your money is being devalued by Washington with the hope that it will create enough inflation in asset prices to offset the debt loads that exist on balance sheets from Main Street to Pennsylvania Ave. to Wall Street.
My view: That means higher prices to come for oil ... gas ... gold ... food ... you name it, nearly every natural resource and hard asset under the sun.
My Suggestions for Late-Comers To the Energy Bull Market
If you're not already on board with investments that are soaring in this market right now, it's not too late. So consider following these four steps:
1.) Decide how much you are comfortable allocating to the energy sector as an investment.
2.) Then split that figure in half.
3.) Put one half in natural resource investments such as the ones I've been mentioning here in Money and Markets . Those include Fidelity Select Energy Fund (FSENX), United States Oil Fund ETF (USO), Profunds UltraSector Oil & Gas (ENPIX), and the U.S. Global Resources Fund (PSPFX) .
4.) Keep the other half of your allocation in cash, saving it as ammo for the next correction — which may be a very short pullback or even a bit deeper. Either way, it should be a great opportunity to peel off some of this cash and use it to add to your long-term natural resource positions.
Best wishes,
Larry
P.S. If you want my precise buy and sell recommendations on stocks in the natural resource sector — including oil and energy — subscribe to my Real Wealth Report . Real Wealth Report was independently ranked by Hulbert Financial Digest as one of the best performing financial newsletters in the U.S. And a subscription is just $99 a year .
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