Crude Catching Fire! Massive Breakout Underway?

MARKET ROUNDUP  Dow: -109.69 to 16,734.19  S&P 500: -13.78 to 1930.11  Nasdaq:  -34.30 to 4,297.63  10-YR Yield: -0.046 to 2.594%  Gold: +12.80 to 1,273.60  Crude Oil: +2.47 to 106.87

Don’t look now, but crude oil prices are really starting to catch fire!

Just since early January, benchmark oil futures are up about $14 a barrel — from $92 to $106. They have made a series of higher lows, and are starting to break above key technical resistance.

With the blue line on the chart below giving way, we could easily see $112. And if that resistance level can’t hold? Then look out above! We could rally back toward the 2008 highs … way up at $147.

What’s driving this bullish action in crude? Several factors …

Click for larger version

First, things are looking grimmer by the day in Iraq. We spent hundreds of billions of dollars, several years of time and thousands of lives trying to help liberate and stabilize Iraq. Yet here we are, with the country falling apart amid unending waves of sectarian strife!

The al-Qaeda-inspired militant group, Islamic State of Iraq and Syria (ISIS), has taken over key cities and swaths of territory in Northern Iraq. That includes the cities of Mosul, Tikrit, and Baiji.

“While U.S. petroleum stockpiles and output are rising fast, OPEC still supplies 40 percent of the world’s oil.”

ISIS is now less than 100 miles from Baghdad, and Iraqi government security forces and police are reportedly fleeing in the face of the onslaught. That means the threat to Iraqi oil production and refining capacity is rising fast. And that’s a huge potential problem because Iraq is the second-largest producer among OPEC countries, with output of 3.3 million barrels per day in May.

Second, ongoing cuts in oil production from elsewhere in OPEC are weighing on supply. Total OPEC production fell by 1 million barrels per day in 2013 to 29.9 million barrels per day, thanks to outages not just in Iraq, but in Libya and Nigeria as well.

Third, while U.S. petroleum stockpiles and output are rising fast, OPEC still supplies 40 percent of the world’s oil. The group failed to boost its production quota of 30 million barrels per day at its Vienna meeting yesterday. And without leading producer Saudi Arabia tapping into its excess production capacity to offset supply squeezes in more turbulent countries, the potential for a large upside breakout in crude prices is growing.

Fourth, the improving global economy is bullish for oil demand. The Energy Information Administration just forecast that global petroleum demand will rise from 90.5 million barrels per day in 2013 to 91.8 million in 2014 and 93.1 million in 2015.

The improving global economy is bullish for oil demand.

Add it all up, and you can see why the petroleum markets are nervous. It doesn’t help that the heart of the Atlantic hurricane season is only two months away either.

As an investor, the renewed chaos is yet one more reason to heed my recommendation to take some profits off the table and institute some stop losses under positions that have run up strongly. But it’s also bullish for companies up and down the domestic energy production and delivery food chain.

Look, these companies were already sitting in the catbird seat with stable oil prices around $100 a barrel. If prices head even higher, it stands to reason they’ll coin even more money. After all, we now have an even more urgent need to generate more domestic production because foreign sources of oil are becoming increasingly unstable.

If you want to get the scoop on two of my favorite energy sector recommendations, check out my new special report “Six Mega Market Winners for 2014 — And Beyond” by clicking here or calling us at 800-291-8545.  You’ll gain access to the full details on two energy transportation and logistics firms that are prospering in this environment — and will do even better if oil goes to $110 and beyond.

So what do you think is driving the resurgence in oil prices? Can the domestic production boom offset the multiple threats to foreign supply? Where are you investing in the energy sector right now — and is that working out for you? Share your best ideas and recommendations in the comments section below.

OUR READERS SPEAK

The tax discussion really heated up after yesterday’s column on a potential corporate tax holiday.

Some of you chimed in to say corporations pay nowhere near 35 percent because of all the loopholes they can exploit already, so a holiday wouldn’t do much good. Others said lower tax rates could help, but only if corporations put the money to good use.

Reader H. Craig. B. weighed in as follows: “To start with, the maximum corporate tax rate (few actually pay anywhere near the max) is theoretically 35 percent. Often, they pay half or less of this maximum tax rate. But that is just semantics and perception, right?

“The real issues here are tax policy and the Federal government’s need for ever more revenue to fund ever higher spending and debt formation. That means a tax increase for someone, in one form or another. That is the reality lost in the debate over one-off tax holidays to pay higher dividends and more stock buybacks in lieu of taking out more low interest debt.”

Reader K. O’C. emphasized the need to ensure companies make good use of any tax relief they received. The comments:

“How about the Govt. charging no corporate tax to industries that have more than an established number of employees (say 1,500) conditional on them repatriating all of their funds and manufacturing to the U.S. (Canada). That would certainly be worth the effort to repatriate, and many companies who have under the established limit would strive to hire more employees to meet the tax-free status. It certainly would result in more taxes through the growth in the overall economy and would take care of the unemployment problem.”

But Reader Linda W. said corporations need to contribute to America’s future just like individuals do, rather than receive another bailout. Her comments:

“The United States provides stability, customers that can buy goods, and a decent infrastructure. Corporations benefit from this. Corporations should pay their fair share of taxes to support our society. If they don’t want to contribute, then they can do business outside the U.S. We do not owe them a free ride.

“The bank bailout, followed by the foreclosure blood bath, is illustrative of the misapplication of our priorities.”

Any other thoughts on this topic? Do you think corporate tax relief will gain traction on Capitol Hill – and is that a good thing? Share your best ideas and recommendations in the comments section below.

OTHER DEVELOPMENTS OF THE DAY

 Initial jobless claims rose 4,000 to 317,000 in the most recent week, a bit higher than expected. Meanwhile, retail sales rose just 0.3 percent in May against forecasts for a rise of 0.6 percent. A key reading of sales outside of the auto and gasoline sectors was unchanged — not the kind of momentum the bulls were hoping for.

 In the wake of his humiliating election defeat, Virginia Republican Eric Cantor said he would step down as House majority leader. It’s unclear who will succeed him in the leadership election scheduled for June 19.

 Yoga apparel retailer Lululemon Athletica (Weiss Ratings: LULU, C+), continued its months-long skid today, losing 15.9 percent thanks to lackluster quarterly sales and a lowered earnings outlook for 2014.

 But retailer Restoration Hardware (Weiss Ratings: RH, C) carved out a different path, surging 12.7  percent. The catalyst: Stronger-than-expected earnings and sales for the first quarter.

 I’ll be enjoying my youngest daughter’s piano recital this evening, then welcoming my oldest daughter back from her Washington D.C. patrol trip tomorrow. For all you fathers out there, you know how rewarding these kinds of experiences are. So I hope you enjoy some time with your daughters and sons this weekend — and have a very Happy Father’s Day!

Reminder: You can let me know what you think by putting your comments at the bottom.

Until next time,

Mike Larson