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I just drove to Orlando, Florida and back — Ouch! My aching wallet! And my little Honda CRV averaged 26.5 miles per gallon on the trip, so my pain from paying for expensive gasoline wasn’t nearly as bad as a lot of people on the road … especially those drivers in Suburbans, Expeditions and Navigators who passed me like I was standing still.
Today, I have good news and bad news. The pain at the pump is probably going to get a lot worse. In fact, if you think gas prices are rising quickly now, the move this summer could seem practically supersonic.
The good news is you can cash in big-time as prices go higher. I’ll get to that in a bit. First, here are four of the major forces that could send gasoline prices ballistic this summer …
1.) Gasoline Starts to Outpace Crude Oil. Over the past year, gasoline prices have soared about 31%. Sure, that hurts, but oil prices have nearly doubled at the same time. According to the U.S. Energy Department, the cost of crude accounts for 73% of the price of gasoline. So, gasoline should have gone up more.
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Energy Panic! Just when it seemed the energy crisis couldn’t possible get any worse, it’s doing just that — causing major supply bottlenecks, triggering truckers’ strikes in several industrial nations, prompting widespread cutbacks by U.S. airlines, and fast becoming an energy panic of historic dimensions. |
What happened was that as consumers got sticker shock, refiners hesitated to pass along price hikes — and the crack spread between crude and gasoline got smaller.
The crack spread is the difference between the price of crude oil and the value of the petroleum products that refiners can make from it. The crack spread can widen or narrow over time, depending on supply and demand.
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In March, the crack spread narrowed severely. But it’s been rebounding since then. I think crude oil is going to continue to trend higher — I made a pretty good case for that last week, in my column, How the New Oil Crisis Affects You.
If the crack spread widens on top of that, we could have a blow-out summer for gasoline prices.
2.) Do Saudi Promises Cover Up a Big Lie? Over the weekend, Saudi Arabia agreed to pump more oil. In a meeting with U.N. chief Ban Ki-moon, the Saudis agreed to boost their oil output from June to July by 200,000 barrels per day (bpd). And that comes on top of the 300,000 bpd they reportedly added in May. Problem over, right? So how come prices didn’t fall off a cliff on Monday?
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The problem is that it’s too little too late. Saudi Arabia, United Arab Emirates, Iran, Kuwait, Iraq and Qatar saw their production drop by 544,000 barrels a day last year. At the same time, their domestic demand increased by 318,000 barrels a day. So, their net exports dropped by 862,000 barrels. It would seem then, that Saudi Arabia’s latest promise of production is not enough to even make up for last year’s cut in OPEC exports. Saudi Arabia would have to crank up production by a MILLION barrels a day to make up for the difference in net OPEC exports over the last couple years. And that’s production that Saudi Arabia probably doesn’t have.
And net exports aren’t just an OPEC problem. Thanks to rising domestic demand, the net oil exports of the world’s top 20 exporters peaked in 2005.
3.) Demand Is Surging Around the World. The incremental drops in oil and gas demand we are seeing in developed countries like Germany, Japan, the U.S. and Britain just aren’t enough to make a difference as demand surges in countries like India, China, Brazil and Russia.
This year, emerging markets combined (China, India, Russia and their other “life in the fast lane” buddies) will pass the U.S. in oil use. And their gasoline use is rising, too.
In fact, China just became a net importer of gasoline for the first time. China’s gas guzzling is being fueled by its preparations for hosting the summer Olympics in August and the fact that Chinese car sales will probably climb to 10 million this year.
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| As prices have exploded, a shortage of diesel fuel has hit southern China’s Guangdong Province. The “No Diesel Now†signs have once again been hung out in front of gas stations in the Baiyun, Haizhu and Panyu districts of Guangzhou City. |
China’s diesel imports are roaring higher as well — up 35% in April — and that puts even more strain on the global oil supply.
When you add rising global demand to the falling net exports I showed you earlier, it seems likely that oil and gas prices are on the road to much higher prices, even if nothing goes wrong. The problem is, things can go REALLY wrong …
4.) Risk Rises of Potentially Devastating Hurricane Season. The Gulf of Mexico is home to 40% of America’s refining capacity, along with 20% of the natural gas and 30% of the oil produced in the U.S. Hurricanes Katrina and Rita proved that the Gulf of Mexico is America’s soft underbelly, vulnerable to a devastating punch from Mother Nature during hurricane season.
When La Niña is strong, hurricanes are also more powerful than normal. Well, batten down the hatches, because a strong La Niña is expected to last through the summer, delivering worse-than-average storm activity THIS season.
The National Oceanic and Atmospheric Administration (NOAA) predicted above-normal hurricane activity in its Atlantic Hurricane Season Outlook. NOAA projects 12 to 16 named storms will form within the Atlantic Basin, including 6 to 9 hurricanes, of which 2 to 5 will be intense during the upcoming hurricane season.
And while offshore platforms have been reinforced since hurricanes wreaked havoc in the Gulf of Mexico’s “Energy Alley,” all it would take is one bad storm in the wrong place to still swamp refineries or even knock out the Louisiana Offshore Oil Port (LOOP), which is connected to 50% of U.S. refinery capacity.
If a hurricane hits in the wrong place, forget $4 a gallon gasoline … $5 a gallon gasoline … heck, we might be looking at $6 a gallon gasoline or higher. That would be a sharp price spike — not the kind that sticks. But the higher we go, and the longer we stay higher, the more “normal” otherwise outrageous gasoline prices become.
How You Can Play Soaring Gasoline Prices
Refiners should do well as crack spreads widen. Those include Valero Energy (VLO) and Holly Corp. (HOC). Just be careful — while these stocks could reap rapid gains on a widening crack spread, they could get hurt again if oil prices take off the way I think they will.
I’ve been right so far. And I have the track record to prove it.
Just Look at the Results From My First Oil Report …
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In mid-January, I published an oil report. The open positions are up 38.9% … trouncing S&P 500’s sub-2% earnings and handily beating the benchmark energy sector ETF (XLE).
What’s more, this portfolio is so hot, I’ve already fired off updates recommending that subscribers bag gains … twice. So subscribers who bought the report have rung the cash register two different times even as they continue to ride the energy rocket even higher.
Now, I have a whole new set of recommendations. And I think my next picks have the potential to do even better. Why? Because when the next energy shock hits, investors are likely to throw money at these stocks hand over fist.
I’m not just stopping with oil stocks this time. I’m picking the best of natural gas, oil services technology, drilling and even solar stocks that are on the launch pad, ready to ride the next surge higher in oil prices.
That’s the goal of my exclusive report:
Energy Panic — The Next Profit Bonanza.
In it, I name seven stocks that run the gamut of conventional and leading-edge energy, along with three funds for broad diversification. Together, I think these picks give you maximum leverage with minimum capital exposure.
Here is a sneak preview of the companies in my special new energy report I’m sending to my subscribers on July 1 …
Pick #1. A major oil company, little-known in America, that is a partner in some of the biggest oil discoveries in recent memory.
Pick #2. The can-do oil services company that is riding a gusher of profits.
Pick #3. An oil and gas driller that also builds its own rigs — putting it in the catbird seat for the next generation of oil exploration.
Pick #4. A company with state-of-the-art, proven technology that can vastly increase the flow of oil from old wells. As the price of crude skyrockets, I think this stock is going to become very popular.
Pick #5. A deepwater driller that is signing big-money, multi-year contracts — with no end in sight to its flood of business.
Pick #6. An unconventional natural gas play that is tapping into a veritable Fort Knox of underground treasure.
Pick #7. A solar stock that is a dusty jewel in the dustbin … and could far outshine its competition.
Picks #8, #9 and #10. Three red-hot energy funds that I believe are THE best of the best in the energy arena. One fund is loaded with stocks in the industry that will likely reap a mother lode of profits as oil companies ramp up their search for crude. The other two funds are poised to ride the surge in commodity prices.
Of course, market conditions are volatile, and because I want to make sure you get the very best recommendations available, I may substitute some picks when I publish this report.
Are profits guaranteed? Of course not. Stock investments are risky by nature. And as with any investment, you CAN lose money. But, I’m convinced each of these is loaded with value and on the verge of blast-off.
I’ll also be selling this report — including three follow-ups — for $195. I think it would be cheap at triple the price, but if you contact us at 1-800-291-8545, and mention my name, you can reserve a copy for the low pre-publication price of $95 — 50% off the regular price.
You can also secure your copy of Energy Panic — The Next Profit Bonanza online by clicking here. Then, on July 1, we’ll email you a PDF copy so you can jump on my red-hot recommendations as soon as they come off the press.
The next short-term pullback in oil prices will give you an excellent buying opportunity — a chance to load up on these stocks for the coming rocket ride.
Wall Street didn’t see $100-a-barrel oil coming, and it’s in denial about $200 oil. But you can be prepared to protect your portfolio and potentially reap a whirlwind of gains.
Good luck and good trades,
Sean
About Money and Markets
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Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Tony Sagami, Nilus Mattive, Sean Brodrick, Larry Edelson, Michael Larson and Jack Crooks. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Kristen Adams, Andrea Baumwald, John Burke, Amber Dakar, Dinesh Kalera, Christina Kern, Mathias Korzan, Red Morgan, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau and Leslie Underwood.
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