Almost three thousand miles away, Nigerian separatist blew-up an oil pipeline over the weekend…
Meanwhile, Russia is locked in a dispute over the price of gas with Ukraine. Today they stopped deliveries of natural gas to Ukraine, Turkey and Europe to force the Ukrainians to pay up...
While fears about political instability drive the price of oil back up again, the OPEC oil barons are tightening the screws on global oil supplies…
Oil was trading at just $35 per barrel on Christmas Eve. It’s over $50 this morning. That’s a 40% gain in just two weeks. And you can bet that it is going to go a lot higher. In fact, it could easily rise another 70% by the end of this year.
Investing in oil right now could turn out to be the trade of the year. And you can thank the OPEC oil cartel for that.
A Christmas present from the OPEC oil lords
OPEC has agreed to slash its daily oil output by 4.2 million barrels per day since September. That should have sent the price of oil soaring right away. But it kept falling instead because the market didn’t believe they would actually deliver those cuts. You see, the cartel has cried wolf too often in the past, promising cuts that it didn’t deliver on.
But this time things really are different. The massive fall in the oil price threatened to destabilise the economies of the oil exporting countries. And that directly threatened the political position of regimes that run these countries.
So the OPEC oil barons are deadly serious about driving the price of oil back-up. And there is clear evidence that they’re slashing output sharply.
In October, a barrel of the lower quality “heavy” crude that most OPEC countries produce traded for about $4 less than a barrel of high quality “light” crude. Most of the light crude is produced by non-OPEC countries. Right now, it is only about 40 cents cheaper. That shows how quickly OPEC has reduced supply. And the market is set to get a lot tighter in the month ahead as OPEC keeps cutting production.
Investing in oil right now is one of the smartest trades you make this year. The International Energy Agency predicts that oil will rebound to $85 per barrel this year. That’s a 70% gain on where it is now.
This is the time to invest in oil
We stayed out of investing in oil companies as the oil price soared to unrealistic levels in the first half of 2008. But that has totally changed. The price of oil has now fallen 66% from its peak last summer. And it is now unrealistically cheap.
The big question for investors is how to profit from this. You could invest in the big oil companies like Shell and BP .They are trading at very reasonable valuations right now of about five times last year’s earnings. These aren’t bad investments right now.
But these companies have a big problem. They’re finding it harder to replace their oil reserves. Increasingly, the big oil producing countries are handing over their oil reserves to their state-owned oil companies. That leaves the private oil companies to fight over the scraps.
That will hit the giant oil companies the hardest. Because they would have to make a truly major oil discovery to make a big difference to the size of their reserves. And the chances of that happening are going to get smaller in the years ahead.
Then there are the junior oil companies. A significant oil discovery can send their stock prices soaring. Triple digit gains when that happens aren’t uncommon. But many of them are in a bad way right now. Oil exploration is an expensive business. So the combination of lower oil prices and the freeze in banking lending is hitting them hard.
The potential profit from investing in a small cap oil company that strikes oil can be huge. But so are the risks. I doubt that many of the oil companies with less than $1 billion in market value are going to survive this downturn. So this isn’t a gamble that I would take.
Instead, on my Profit Hunter investment service, we have focussed on the mid-sized oil companies. These companies have the financial strength to get through this downturn. But they are still small enough to benefit massively from new oil discoveries. This is where the real money is going to be made in the next oil bull run.
Best regards,
Manraaj Singh
For Fleet Street Daily
P.S. My Profit Hunter investment service has just revealed our top investment pick in the oil sector. To get a copy of this report and one on a second excellent oil investment opportunity, click here.
The bulls are back in town
BY FRANK HEMSLEY
It’s been a long time since you could say these words: the stock market is up year to date. But so far, at least, it’s true. The bulls are back in town.
In fact, all major stock markets rang in 2009 with a decent rally last Friday. The main US indexes rallied by 3% – the best first day of a new year in the last six. The FTSE added an almost equally gung ho 2.8%.
Perhaps it’s a wave of optimism that with a new skipper at the helm, the good ship America will sail out of danger… dragging the world economy with it.
Whatever the reason for this new bullishness, it’s a sharp contrast to 2008, when the Dow had its worst opening day since 1983, falling 220 points or 1.6%. And we know how last year turned out.
The broader US market, as measured by the Standard & Poor’s 500 Index, had a shocking, wealth-destroying year. In fact, at no point last year could you have said “the S&P is up year to date”. The chart below sketches out the miserable picture and the downwards trend in 2008.
According to Bloomberg, the S&P ended every single day of the past year below its closing level of 2007. That’s the first time since 1977 that the gauge never produced a positive return during a calendar year.
“The benchmark index for U.S. stocks closed at 1,468.36 on Dec. 31, 2007, fell to 1,447.16 on the first trading day of the year and didn’t recover. The S&P 500 lost 38.5 percent in 2008, the steepest annual drop since 1937.”
Still, as the chart shows, bulls stepped up to the plate and started buying on 21 November. The index bottomed at 741 and has since raced up to 927. That’s a gain of 25% in the past six weeks.
And with investors betting that President-elect Obama’s planned near-trillion-dollar stimulus package will revive the global economy, perhaps the bulls will build on this momentum in the coming weeks.
The Daily Reckoning – Betting against a false premise
BY BILL BONNER
Captain’s Log: Year of our Lord 2009, 6th day...
We have landed on a strange and wonderful watery planet – the third planet in orbit around the sun, a minor star in the Milky Way galaxy. Well, they say it is a watery planet. Where we are, it is icy. But the locals say it warms up and the ice melts. We’re suspicious; maybe it’s just hype to attract tourists.
But what is strange about this planet is that its inhabitants all seem to play a game of make-believe, in which they all agree to believe things that every one of them knows is untrue. What is wonderful about it is that it seems so easy to make money here; there’s a fool on every corner just waiting for the chance to get rid of his wealth.
Recently, humans – the race that inhabits this place – believed that their lodges and living quarters would become more and more valuable – even though it was obvious that their houses deteriorated every day, as a consequence of solar radiation, wind erosion, liquor spilt on the carpets and other natural phenomenon.
Then, on the back of this remarkable delusion, they built an entire world economy... including extravagantly complex financial instruments which the wisest among them called “weapons of mass financial destruction”.
Someone seems to have cut the power to that illusion a few months ago, so now they are taking up a new one: that if people are given more pieces of green paper they will all be richer.
Yesterday, the Dow – which measures stock prices in the US – fell 81 points. But analysts say the technical indicators are still almost all positive; they think the US is beginning a major rally... or perhaps a new bull market…
To read today’s Daily Reckoning in full, click here
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