Where Next For The Oil Price?

Oil, it seems, hits a new record high practically every week. And it’s got western politicians chewing the bedclothes.

After all, the economies they preside over depend heavily on oil. The current price spike is wreaking havoc — threatening inflation spirals... strikes... you name it. The west has practically begged the oil producers to up their supply. It hopes this will help bring down the price of oil — which this morning was $136 per barrel.

Yesterday, at the Jeddah Energy Meeting, the Saudis confirmed what everyone had already heard. They’re going to raise production by 200,000 barrels per day (bpd).

Will this do the trick? Will it send oil’s bull run into reverse? And how should you, as an investor, position yourself for when oil makes its next big move?

For starters, no-one’s convinced the Saudis’ move will make a blind bit of difference.

Chakib Khelil, head of OPEC, says it’s not lack of supply that’s driving up oil. It’s speculators.

Meanwhile Jeroen van der Veer, chief executive of Royal Dutch Shell, says there is no "silver bullet".

"What I've heard so far are basically all good ideas, but it will probably not change the price tomorrow morning," he said.

And then there’s Nigeria. It’s been estimated that output there has been cut by 300,000 bpd this year as a result of rebel attacks on pipelines.

So, 200,000 bpd are being added, but 300,000 bpd are being taken out. It doesn’t take a genius to figure out that this should push the price up, not down.

So don’t expect an oil price collapse any time soon. Our research director Theo reckons oil still has a long way to go yet.

Looking further out, though — and we’re now talking years rather than months — there are reasons to believe the price will eventually come down.

The first oil price shocks of the 1970s had a profound effect on western economies. The three-day week, for example, became a feature of British life.

But as time went on the west adapted. Habits changed - we used more fuel-efficient cars. We reduced our demand for oil.

We also started to look for oil in new places — a move which led to North Sea oil production. This increased supply.

I believe something similar could happen again. The FT’s Lex column today suggests that developing countries — whose thirst for oil is often cited as a key price driver — could design cities with an eye on keeping oil consumption down.

These countries have an advantage over the west in that their urbanisation is a work-in-progress. They can build their cities with Peak Oil in mind — for example by incorporating mass transit systems so that fewer car journeys are made.

Add in the increased output from new discoveries — high oil prices are a major incentive to explorers — and there are good reasons to believe oil will eventually retreat from its current highs.

This makes a big difference in how you invest. Oil is something investors should have exposure to — but you need to take account of the downside.

I believe, somewhere down the line, oil speculators will get burned. A pure play on oil is the best thing you can have — so long as the price is going up. If it goes the other way, you lose. And you could lose big.

Garry White, our commodities expert, has selected two stocks which offer you some protection against an oil price fall — while still allowing you to reap the benefits if the price continues to surge.

Find out HERE how you can benefit from Garry’s advice.

Alistair Darling couldn’t prevent inflation. So now he wants us to do it for him

"Pay awards in both the public and private sectors have got to be consistent with our inflation target of 2%."

The words of our glorious Chancellor Alistair Darling there. As spoken to the BBC yesterday.

"Consistent with" is a deliberately meaningless, politician-type phrase. Does he mean we all have to accept 2% pay rises even though inflation is more than that?

Probably. But he’s left himself room to deny as much when someone puts him on the spot.

"I thought the message sounded better than when he said the same thing last week," said colleague Theo Casey at this morning’s meeting. "Must have had a better writer."

Whoever’s writing Darling’s lines, they’re a waste of ink. Private sector pay deals are none of the Government’s business. Public deals, meanwhile, are where the real battle will be. Listening to the political rhetoric you’d expect the Government will take a tough line, and forcibly lower its employees’ living standards. But, when you put it like that, it doesn’t sound very nice, does it? Certainly not the sort of thing unpopular politicians want to do.

Something tells me that — when it comes to the crunch — industrial action will speak louder than words...

For those who "don’t do weekends"...

If you didn’t get a chance to read my email on Saturday, this is for you. An opportunity to make serious money from the currency markets — where you’re not at the mercy of bull runs and bear runs, and where the profits you make are tax free.

You see, with currency trading there’s always someone making money. If the dollar falls against the euro, that also means the euro rises against the dollar.

Someone’s always winning. That gives the currency — or Forex — market a big advantage over stocks.

In a stock market, all shares can fall in a crash. But the same dynamics don’t apply to Forex.

So if this sounds like something you’d be interested in, then you should definitely check out the following:

Why British kids can’t do maths

An interesting take on British indebtedness from our Penny Sleuth, Tom Bulford. Primary schools are to get 13,000 new maths teachers — because most current teachers lack the confidence to teach the subject.

"All of personal finance is basically just about numbers," says Tom.

In today’s Penny Sleuth, Tom takes a look at how innumeracy has caused many in Britain to make seriously bad financial decisions

Until tomorrow

Ben Traynor

Today’s Daily Reckoning — The Fed loses control of inflation...

The world is in danger of a "global stock and credit crash," says the Royal Bank of Scotland.

A "very nasty period," may be coming, it goes on, as "the chickens come home to roost."

Morgan Stanley also warns that a ‘catastrophic event’ may be coming, caused by the collision between Europe’s tight monetary policy and America’s loose one.

Surging inflation all over the world is putting pressure on the Fed to raise rates. But raising rates in an economy with rising employment and falling house prices could be disastrous.

On the other hand, not raising rates could provoke a disaster of its own. It could cause the dollar to collapse as prices soar.

You can read today’s Daily Reckoning in full HERE.

P.S. If you enjoyed this article you can find out more about our free email, The Right Side by clicking here.

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Where Next For The Oil Price?

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Where Next For The Oil Price?