$72 per barrel and still rising…
Oil has been one of the most brilliant investments this year. It’s already up by 125% from its lows this year.
Back in February you could have bought a barrel of oil for just over $32. If you are a regular Right Side reader, you know that already. Because we’ve been urging you to invest in oil…almost ad nauseam.
Oil has been a fantastically profitable play already. And it still makes a lot of sense to buy into the oil boom. Because every bit of news that’s come out recently show us that oil is set to rise a lot further. We are now facing $150 by 2011 and $300 by 2015. And I’d like to show you a few simple ways to keep profiting from it.
The rich countries are predicting a jump in demand
Yesterday, the International Energy Agency (IEA) gave the oil price another boost. Its latest monthly report sees “the first signs of a true recovery in oil demand”. It says that “While the rise in oil prices since mid-February has largely just tracked the upward momentum in financial markets, the latest surge in crude oil markets was partly fuelled by a long–awaited emergence of improving fundamentals.”
The IEA report doesn’t just say that oil demand is rising. It also warns that oil production in the non-OPEC countries is going to fall by 100,000 barrels per day this year. So the oil market is set to keep tightening. And the price is set to keep rising.
By the way, the IEA is the energy watchdog of the big Western economies. So it really isn’t in the business of talking-up the oil price. That’s why the markets take their warnings so seriously.
The oil barons are putting their foot on the pedal
The main driver for the surge in oil prices has been OPEC. The oil exporters’ cartel has announced 4.2 million barrels in oil cuts since last September. And OPEC has absolutely no plans to take its foot off the pedal. Just this Wednesday, Kuwait’s oil minister said that OPEC won’t raise its production targets unless oil goes to $100 per barrel. So anyone betting on a surge in new oil production to drive down the price of the black fuel is barking up the wrong tree.
OPEC has delivered about 70% of its targeted cuts so far. So they are going to be reducing oil supplies over the coming months. Not raising them. The oil price is about to get another boost.
That’s bad news for the global economy. Cheap energy was one of the few things that kept the current recession from turning into a full-blown depression. Now the surging oil price risks killing whatever small signs of a recovery there are. In fact, Alastair Darling was warning of just that in the Financial Times yesterday.
Get ready for a major tax rise
That puts people like you and me in a tough spot.
Rising commodity prices are really a tax on consumers. So you’re, effectively going to be paying tax to the oil-producing countries every time you pull into a petrol station.
Prices are already climbing at the pump. It cost about 86p per litre in January. It costs just over £1 now. That’s already putting us close to the record £1.20 per litre we hit last summer. No need to remind you what that was like…
But here’s the incredible thing. Crude oil prices today are just half the $147 per barrel they were at last summer. The oil companies kept petrol prices high at the pump even when crude oil prices fell drastically earlier this year. So if the price of oil continues to rise, Britain faces record prices at the pump this year. That really is the last thing any of us need in the middle of a recession.
Get higher oil prices working for you
You won’t be able to avoid higher oil prices burning a hole in your pocket at the pump this summer unless you plan to give up driving altogether. But that makes this the perfect time to put higher oil prices to work for you.
One simple way you could profit from this is through ETFs that track the oil price. Some of them like the ETFS WTI 1-year (OSW1) give you a chance to make shorter-term bets. Other like the ETFS WTI 3-year (OSW3) give you a chance to bet on the longer-term trend in the oil price.
And of course, there are the oil companies. I favour aggressive mid-sized oil companies like Heritage Oil (HOIL) and Tullow Oil (TLW) . These are companies that are adding to their oil reserves in a big way.
But oil shares have rallied recently, so many of them are fully-valued in the near-term. Still, if you are a long-term investor, buying and holding on to companies like those could pay-off very nicely over the next few of years.
Best regards,
Manraaj Singh
For The Right Side
Manraaj Singh is the Investment Strategist for Profit Hunter.
P.S. For some really interesting “backdoor” oil plays, keep an eye out for colleague Tom Bulford’s new report: 3 Tiny Stocks and One Big Oil Boom. He’s got some potentially explosive ideas from the penny share market. I had a sneak peek at this report earlier and I know he’s releasing it tomorrow, so check your inbox then.
MARKET NOTES
Investing in the ‘green revolution’
BY SHIVVY ARORA
Oil’s not the only exciting energy story right now.
Since April this year, we’ve seen investors broaden their exposure to energy stocks by investing in natural gas.
The natural gas exchange traded fund (ticker: UNG) has been seeing some strong action recently. The chart below shows its trading volume (in dollar terms), relative to that of oil on a 50-day moving average basis. This means we’re seeing the average trading volume of the ETF over the last 50 days. And this is expressed as a percentage of the volume of oil traded.
Trading activity in gas is now 77% the value of trading in oil. This is up by a whopping 900% from March‘s levels of 7.6% (circled).
Natural gas has been catching the eye of investors recently
Source: Bespoke Investments
Despite the huge increase in trading volume, natural gas prices have been falling. While oil has rallied by 58% since the beginning of the year, gas is down by 34% for the same period.
One of the reasons natural gas prices are falling is its storage levels. When this is low, markets take this to be a signal for a smaller supply cushion - and prices will rise. When levels rise, it has the opposite effect and prices tend to drop. Only last week, the U.S. Energy Information Administration (EIA) said natural gas reserves were up 30% from last year – this swayed market trading accordingly.
We see the outlook for natural gas as positive. It’s 18 times cheaper than oil and there’s been rapid growth in its exploration and production technologies. The IEA expects prices to rise on stabilising demand. Falling rig counts mean a reduction in supply. All this points to a natural gas rally before the end of the year…
The Daily Reckoning - Kleptocracy in America
BY BILL BONNER
London, England
Friday, 12 June 2009
Nothing much happened in the markets yesterday. Stocks up. Gold up. Oil up. Bonds up. Dollar down.
But listen up... an important announcement:
The bear market/credit crisis/depression is over!
How do we know? Abby Cohen says so.
“June 10 (Bloomberg) -- U.S. financial markets have been moving “back towards normal” since March, said Abby Joseph Cohen, Goldman Sachs Group Inc.’s senior investment strategist, in an interview.
“Much of what we can recognize as happening now is really a restoration of where we should be,” Cohen said “This situation is much closer to normal than any place we have been over the last 18 months.”
Bloomberg does not mention it but soldiers had more of a fighting chance under George Armstrong Custer than investors following Abbey Joseph Cohen. In August of 2007, she told CNBC that S&P 500 would rally to 1,600 by December. Then, in December, she predicted the S&P 500 index would reach 1,675 in 2008. In fact, the S&P 500 traded as low as 741.02 by November 2008.
We wonder what they put in the water where Abby Cohen lives. The woman always thinks stocks are going up, of course... but there is nothing odd about that; she’s paid to think stocks are going up.
But why does she think the situation is close to normal? What’s normal in her world? Deficits at 13% of GDP? GM goings bust? US presidents running auto companies and banks? Bailouts... boondoggles... and baloney equal to the entire nation’s output?
If this is ‘normal’... what’s not?
We went for dinner with a group of Americans last night – to one of London’s oldest gentleman’s clubs. Women are not allowed at the bar or in many other parts of the club, but they may come for dinner in the main dining room…
Read on…
To read the Daily Reckoning in full, click here.
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