Most Popular
1. THE INFLATION MONSTER is Forecasting RECESSION - Nadeem_Walayat
2.Why APPLE Could CRASH the Stock Market! - Nadeem_Walayat
3.The Stocks Stealth BEAR Market - Nadeem_Walayat
4.Inflation, Commodities and Interest Rates : Paradigm Shifts in Macrotrends - Rambus_Chartology
5.Stock Market in the Eye of the Storm, Visualising AI Tech Stocks Buying Levels - Nadeem_Walayat
6.AI Tech Stocks Earnings BloodBath Buying Opportunity - Nadeem_Walayat
7.PPT HALTS STOCK MARKET CRASH ahead of Fed May Interest Rate Hike Meeting - Nadeem_Walayat
8.50 Small Cap Growth Stocks Analysis to CAPITALISE on the Stock Market Inflation -Nadeem_Walayat
10.Apple and Microsoft Nuts Are About to CRACK and Send Stock Market Sharply Lower - Nadeem_Walayat
Last 7 days
Why PEAK INFLATION is a RED HERRING! Prepare for a Decade Long Cost of Living Crisis - 9th Aug 22
FREETRADE Want to LEND My Shares to Short Sellers! - 8th Aug 22
Stock Market Unclosed Gap - 8th Aug 22
The End Game for Silver Shenanigans... - 8th Aug 22er
WARNING Corsair MP600 NVME2 M2 SSD Are Prone to Failure Can Prevent Systems From Booting - 8th Aug 22
Elliott Waves: Your "Rhyme & Reason" to Mainstream Stock Market Opinions - 6th Aug 22
COST OF LIVING CRISIS NIGHTMARE - Expect High INFLATION for whole of this DECADE! - 6th Aug 22
Recession Is Good for Gold, but a Crisis Would Be Even Better - 5th Aug 22
Stock Market Rallying On Slowly Thinning Air - 5th Aug 22
Stock Market Trend Pattren 2022 Forecast Current State - 4th Aug 22
Should We Be Prepared For An Aggressive U.S. Fed In The Future? - 4th Aug 22
Will the S&P 500 Stock Market Index Go the Way of Meme Stocks? - 4th Aug 22
Stock Market Another Upswing Attempt - 4th Aug 22
What is our Real Economic and Financial Prognosis? - 4th Aug 22
The REAL Stocks Bear Market of 2022 - 3rd Aug 22
The ‘Wishful Thinking’ Fed Is Anything But ‘Neutral’ - 3rd Aug 22
Don’t Be Misled by Gold’s Recent Upswing - 3rd Aug 22
Aluminum, Copper, Zinc: The 3 Horsemen of the Upcoming "Econocalypse" - 31st July 22
Gold Stocks’ Rally Autumn 2022 - 31st July 22
US Fed Is Battling Excess Global Capital – Which Is Creating Inflation - 31st July 22
What it's like at a Stocks Bear Market Bottom - 29th July 22
How to lock in a Guaranteed 9.6% return from Uncle Sam With I Bonds - 29th July 22
All You Need to Know About the Increase in Building Insurance Premiums for Flats - 29th July 22
The Challenges on the Horizon for UK Landlords - 29th July 22
The Psychology of Investing in a Stocks Bear Market - 26th July 22
Claiming and Calculating The Research and Development Tax Credit - 26th July 22
Stock Market Bearish Test - 26th July 22
Social Media Tips and Writing an Effective Call to Action - 26th July 22
Has Rishi Sunak Succeeded in Buying His Way Into No 10 - Fake Tory Leadership Contest - 26th July 22
The Psychology of Investing in a Stocks Bear Market - 26th July 22
Claiming and Calculating The Research and Development Tax Credit - 26th July 22
Stock Market Bearish Test - 26th July 22
Social Media Tips and Writing an Effective Call to Action - 26th July 22
Has Rishi Sunak Succeeded in Buying His Way Into No 10 - Fake Tory Leadership Contest - 26th July 22

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Crude Oil Pullback Is a Gift For Energy Investors!

Commodities / Oil Companies Feb 07, 2008 - 12:31 AM GMT

By: Money_and_Markets


Best Financial Markets Analysis ArticleSean Brodrick writes: Oil prices are pulling back right now — below $90 a barrel. Let me tell you, I think oil is very inexpensive at that price, especially when you consider how absolutely amazing oil really is — how our entire civilization runs on it.

Along with the 86 million barrels per day that the world uses for fuel, petroleum plays a starring role in agriculture, industry, plastics, and building materials. It heats our homes, grows our food, and provides us with entertainment.

When people say we're "addicted to oil," they don't know the half of it!

Oil is absolutely indispensable to modern Western life. Since it's in limited supply — the only oil we find nowadays is very expensive oil — any pullback in prices is a gift.

Super-investor Jim Rogers once defined successful investing as waiting for an opportunity to simply walk across the room and pick up money.

Today, let's talk about the major catalysts that have combined to create just such an opportunity for you ...

OPEC Ministers Determined To Push Oil Prices Higher

Despite the fact that oil recently surged to $100 and $90 seems to be the new floor for a barrel of crude, The Organization of Petroleum Exporting Countries (OPEC) decided to keep oil production targets unchanged at its meeting in Vienna last week.

What's more, OPEC says it will consider CUTTING production at its next meeting.

World Oil Demand

Even though OPEC ministers are refusing to pump more oil, they are ratcheting up their forecasts for oil demand. OPEC projects that the overall demand for crude oil could reach a level of 113 million bpd by 2020.The world only produces 87 million barrels per day now.

That trend is likely to continue when you consider ...

  • Surplus world oil capacity has been declining since 2001. Current surplus capacity is one million barrels a day — down from more than five million barrels a day.
  • Output from the world's existing oil fields is declining at a rate of about 5% per year. New production is coming online, but not fast enough to keep up with growing demand. Exploration can't keep up with production, either.
  • The U.K.-based Oil Depletion Analysis Centre recently reported that 60 of the world's 98 oil producing countries have already hit peak oil production.
  • The oil that is found is more expensive. In fact, onshore drilling costs in the U.S. have jumped nearly 20% in recent years. Offshore drilling costs have jumped nearly 38%, to $70 per barrel.

Think about that — if the cost of drilling a barrel of oil is $70, there's little profit margin in it unless oil is over $90 ... maybe even $100. And that means unless oil prices go higher, supply could start to dry up ... which would send oil prices even higher!

A very real supply/demand squeeze could come a lot sooner than most people realize. The International Energy Agency (IEA) says global energy demand rose 4.6% in 2007 and should increase another 2.3% in 2008 to 87.8 million barrels per day.

That means the world will start using oil at a rate of over 1,000 barrels per second!

Unless new supply comes online, we could very quickly see oil prices rise until some demand is squeezed out. And how high would oil prices be then? $100 per barrel? $120? $150?

Look, OPEC's foot-dragging on new production tells me that SUV-driving Americans aren't the ONLY ones addicted to high-priced oil ...

If The Dollar Continues Dropping, OPEC Will Deliberately Cut Production So That Oil Prices Increase Accordingly

You'd think that OPEC, which accounts for 40% of the world's oil production, would be rolling in dough. And sure, the U.S. Energy Dept. estimates that OPEC members earned $675 billion from oil exports in 2007, a 10% increase from the prior year.

But behind the scenes, OPEC is furious because the 15% drop in the U.S. dollar over the past year is denting their revenue stream.

Going forward, the Energy Information Administration estimates that OPEC could see $850 billion in net oil export revenue in 2008, a 26% increase from 2007.

You know what I think OPEC is thinking? What if the U.S. dollar drops another 15%? The easiest way to make up for the resulting currency exchange loss is to simply cut production so oil prices go UP 15%.

Such a move could lift oil to about $105 per barrel!

And since many OPEC oil princes like shopping in Europe, they might want to make sure they have some walking around money by cutting production enough that oil prices go up 30%. That puts the price of a barrel of crude at around $119.

"But, but," some say breathlessly, "that will cripple the global economy."

Yeah, yeah, say OPEC members, as they roll their eyes. They've been hearing this same sad song as oil rose above $50 ... $60 ... $70. But the global economy keeps on trucking, and Americans keep driving Lincoln Navigators!

America is the world's largest consumer of oil, guzzling more than 7.5 billion barrels per year. We import more than half the oil we use, and that amount is rising.

Oil Chart

It's also hard for OPEC to take us seriously when we do little to curb our own voracious thirst for oil.

In the Netherlands, it just became $28,000 more expensive to buy a HUMMER, thanks to that country's new "gas guzzler" tax.

Can you imagine the reaction if the U.S. government tried to do the same thing?

A snap-revolution would usher in chaos. Why, Capitol Hill would come under siege! The White House would be surrounded by tens-of-millions of demonstrators howling with outrage. America would dissolve into anarchy!

And There Are Other Reasons to Expect Higher Oil Prices, Too ...

The sad fact is that OPEC wouldn't even have to cut production to see oil prices rise this year.

Some of the reasons:

  • Mexico expects production at its giant Cantarell field to drop another 16% (200,000 barrels per day) this year, after falling 16% last year.
  • Over the past three years, production at Cantarell, Mexico's largest oil field and the third largest oil field in the world, has dropped by 40%! Within just a few years, Mexico may have to start IMPORTING oil.
  • We are seeing supply disruptions from the frozen oil sands of Canada to the strife-torn backwaters of Nigeria and beyond.
  • And millions of people in China and India are getting behind the wheel of gas-guzzling cars for the first time. They'll use every barrel of oil that we don't!

So why has oil pulled back recently? The U.S. uses 25% of the world's oil, and investors fear that the U.S. economy is in recession. Therefore, they think we'll use less oil.

But hold on ...

China's oil imports are expected to jump from 3.5 million barrels per day (bpd) in 2006 to a stunning 13 million bpd in 2030. Do you really think oil prices will stay down? Of course not!

How You Can Play the Coming Oil Boom

Obviously there is an oil storm brewing. So, it stands to reason you might want to invest in the companies that stand to profit from that storm.

For example, ExxonMobil just reported the highest quarterly and annual profits EVER for a U.S. company. Chevron just reported that fourth-quarter profits rose 29%. In Canada, Imperial Oil saw its earnings soar to a new record!

This is a great time to invest in oil companies!

If you want a broad stake, you can always buy the Energy Select SPDR (XLE) . It's a basket of energy stocks, and many of these stocks are priced as if oil is going back below $50 per barrel. Don't hold your breath for that.

However, for potentially outsized, market-beating returns, I prefer to go with individual stocks. I think there are many, many bargains in the energy sector, just the kind I recommended in my recent energy report .

Since I published that report less than a month ago, we've seen some incredibly volatile action in the market. Through the end of trading on Monday, the Dow has gained 3.9%. The S&P 500 is DOWN 3.5%. And the portfolio of oil stocks I recommended is up 6.5%.

Stocks like ...

  • An under-the-radar foreign oil producer that just discovered a huge oil field, and expects its oil and gas production to rise by double-digits this year.
  • The oil drilling contractor that saw its earnings jump over 70% in the most recent quarter and has another great quarter in the works.
  • The Canadian oil sands play that is flying under Wall Street's radar. Its production should QUINTUPLE by the end of the year, and it is already exceeding its production milestones.

And these stocks are just getting started! They were punished along with the major indices in the recent sell-off. But they're recovering a lot faster — and I think their best days are ahead, as oil crosses the triple-digit mark and goes even higher.

Good luck and good trades,


P.S. It's not too late to get on board. If you want to protect your portfolio and potentially reap a whirlwind of gains, buy my oil report, Running on Fumes , by clicking here now .

This investment news is brought to you by Money and Markets . Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit .

Money and Markets Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in