The price of oil has gone through the roof. But you still have a chance to profit from the next move higher.
Oil is now up by 91% since hitting a low in February.
On 12 February, a barrel of the black stuff fetched just $34. This morning it costs $65.
But I don’t believe that oil’s rally is over. In fact, it’s just beginning. My target for the oil price is $80-90 by the end of this year. And I expect it to hit $150 per barrel over the next two years. So if you have missed out on the oil rally so far, there is still time to get in.
The chart below shows the crude oil price from January 2009 to the present. It gives a pretty clear picture of how sharp this rebound has been.
Crude Oil Price in 2009
Back in January I wrote showing you why low oil prices were a fantastic investment opportunity. Hopefully, you had a chance to act on it then.
Now an unlikely coalition of angry Iranians, chubby American suburbanites and financial speculators is set drive the oil price even higher.
Oil is set to deliver a 25% return by year end and 131% by 2011
The oil price has to be at $80 per barrel to make it economically feasible to invest in new production projects. So that’s the bare minimum that I see it going to by year’s end. Low oil prices have already forced oil companies to slash new investment drastically. This situation just can’t last much longer.
So Saudi Arabia’s oil minister, Ali Al-Naimi, is warning that oil could hit $150 per barrel over the next two years. That’s a 131% gain on its current price. And last week Al-Naimi said that a pick-up in global oil demand should push its price back up to $75-80 by the end of this year.
The trigger for the oil price rally was OPEC’s decision to slash its oil production by 4.2 million barrels per day since September. And the OPEC ministers are meeting in Vienna today to consider their next move. OPEC has indicated that it won’t cut output any further right now. So the oil price could actually pull back in the short term. But oil looks set to soar to $80 per barrel even if OPEC doesn’t announce another cut for the rest of the year. Here’s why…
Right now, the cartel has only delivered on 80% of its promised production cuts. Some of its biggest members like Iran and Venezuela are still producing well above their quota. So OPEC doesn’t need to announce another round of cuts for the oil market to become much tighter. All it needs to do is enforce its production quotas. Because if OPEC does deliver on its cuts, the price of oil is set to soar. And the trigger for that could come from Iran in the next three weeks. Let me explain.
Why the Iranian election means higher oil prices
Iran has been one of the worst offenders in breaking its OPEC production quota. A big part of Iran’s over-production is political. The country holds its presidential election on 12 June. The incumbent right-wing president Ahmadinejad is fighting for his political life. He faces a fierce challenge from the moderate, reformist ex-prime minister Mir-Hossein Moussavi.
Ahmadinejad has won support among Iran’s poor by handing out huge amounts of Iran’s oil wealth on pet schemes. His latest one is handing-out free potatoes to the poor. But his economic policies have been a disaster. His spending spree has driven-up rents and food prices, but failed to bring unemployment down. That’s given plenty of ammunition to his opponents.
With a vicious election battle on his hands he is in no mood to crack down on oil production. Instead he has been riding the higher oil prices on the back of other members’ production cuts. But pressure on Iran to stick to its quota is growing from other OPEC members. I think we will see it happen after the Iranian election in June. It will probably happen faster under the reformist Moussavi than under the populist Ahmadinejad. But it will happen.
Iran is OPEC’s second-biggest producer after Saudi. So when it does start complying with its quota, the oil market could tighten rapidly. That will give the oil price another shot in the arm.
Chubby American suburbanites to the rescue
And then there is the demand side of this equation. The oil price got pummelled last year because of fears of a massive slump in demand as the recession hit – particularly in America. But those fears have been wildly exaggerated.
Anyone who has ever been to America instantly realises that you can’t get anywhere without a car. The entire country is held prisoner to its automobile culture. That simple fact puts a floor under how far America’s demand for oil can fall.
As the recession bit in the US, oil demand fell. This has produced a big rise in oil inventories in America. And that glut in supply has been one of the major reasons for the fall in the oil price. But America is now heading into the “driving season”. This is when the country’s chubby suburbanites pack their families into their cars and drive off on their summer holidays. The driving season is when US oil demand hits its peak. And it is a major reason why oil prices are heading higher.
You see, the arrival of the driving season has sent the rise in US oil inventories into reverse. Because US oil refineries have stepped up petrol production to meet rising demand from motorists.
Oil analysts were forecasting a small drop of 700,000 barrels in crude oil reserves last week. The real figure turned to much, much higher – a whopping 5.4 million barrels. Recession or not, America’s chubby suburbanites are determined to have their driving holidays. And that is brilliant news for the oil price going forward.
This confluence of factors: lower OPEC production, rising US demand and the surge of speculative funds is rapidly becoming a pretty potent cocktail. If you aren’t already invested in oil, it is time to get in.
Best regards,
Manraaj Singh
For The Right Side
Editor’s note: If you acted on Manraaj’s oil play in Addax Petroleum, you probably made a gain of 138% or thereabouts – in just five months. That opportunity’s closed now, but he believes his current “backdoor” way to play oil could deliver even more. Click here to discover how this oil “price fix” could hand you up to 288% return on your money...
Past performance and forecasts are not reliable indicators of future results. Your capital is at risk when you invest in shares, never risk more than you can afford to lose. Seek independent financial advice if necessary.
MARKET NOTES
What this yardstick says about silver
BY SHIVVY ARORA
Here’s a yardstick that we like to turn to every now and then. It’s the gold to silver ratio.
The gold/silver ratio is simply the price of an ounce of gold divided by the price of an ounce of silver. So if gold trades at $1000 and silver at $10, then the ratio is 100.
Over the past decade, the ratio has averaged about 50. So when the ratio is way above (or below) that, silver could be seen as being undervalued (or overvalued) in relation to gold.
Take a look at the chart below, which focuses on the past three years. As you can see from the red line, currently, approximately 63 ounces of silver will fetch you an ounce of the yellow metal.
A reversion to the mean?
Despite falling from its highs of 84.4 (circled) in late-October last year, the current ratio level is still substantially higher than the 10-year average. What’s going on here?
Well this reversion towards the mean is not the result of a falling gold price. We know that because gold has been rising steadily – up 13% over the past month from $864 to $974.
It’s because the silver price has been rising faster than the gold price. In fact, over the same period of a month, silver has moved from $12 to $15.5 – a rise of 29%. Silver has risen more than twice as fast as gold.
Where does it go from here? Well, we don’t believe that gold is set for a major correction any time soon. With a return of inflation a very real possibility, gold will continue to attract attention as a store of value – an inflation hedge.
So if the gold/silver ratio continues to head back towards its 10-year average at 50, that means one thing: silver is going up.
The Daily Reckoning – Class of ’09: You’re Screwed!
BY BILL BONNER
London, England
Friday, 29 May 2009
“Pssst... .hey kid... you, in the red robe...
“You’re just graduating from college, right?
“You wanna make some real money?
“Then, rush to Detroit. Set up a law firm specializing in bankruptcy.”
More advice to college graduates follows (below)...
Two auto-parts suppliers have already filed under Chapter 11. GM is expected to do so momentarily.
Too bad about GM. It was set up in 1916. If it had been able to hold together for another 7 years, it would have gone 100 years without having to declare bankruptcy.
All people die. All companies die too. That’s why ‘buy and hold’ is wishful thinking. Buy and hold long enough and you are sure to go broke. And die.
Eventually, the undertakers and bankruptcy lawyers get you. And today, business is good in Detroit. What cleared the way for the GM bankruptcy was a deal with the bondholders in which they take equity in exchange for their debt and agree not to contest the bankruptcy filing. Still, the deal – and other deals relating to it, including the presence of one very big and very odd shareholder, the government of the United States of America – is so complicated, it’s bound to give bankruptcy lawyers plenty of work for many years.
But business seems to be picking up everywhere... at least, that’s the impression you get from reading the paper. The war against capitalism seems to be going pretty well, in other words.
Yesterday, the rally continued on Wall Street, with the Dow up 103 points. Oil rose too. It is trading at $65 a barrel this morning. And look at gold – the old yellow metal is at $963 and still going up.
Does this mean the feds are winning the war?
Read on…
To read the Daily Reckoning in full, click here.
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