Bullish should not mean blind.
I see oil zooming. But I also keep my eyes wide open for anything that might get in its way.
I step back. I make sure Im not influenced by the euphoria. I question every indicator at my disposal.
Thats especially important right now with oil busting out to $65.30 this morning … with oil news hitting the headlines … and with investor emotion heating up.
But coldly and objectively, I think the next stop for this oil market express train were on is …
Thats my near-term target, and heres why …
First, oil prices are rising even though
Normally, rising stockpiles signal that demand is falling and prices should come down. But thats not happening here.
Why?
Because
- The world has changed dramatically in the last twenty years. Between
- Although the
- That means that over 95% of the worlds population can affect oil inventories in dramatic ways that are not being reported, or at best, are reported with a long lag.
My view: The rest of the world is consuming MORE OIL than is currently being reported.
Second, although oil has exploded higher, its not yet off the charts. Quite to the contrary, the charts show it still has plenty of upside potential left on this move to about $75 per barrel.
Suppose Im wrong? Then, it has solid support at about $62. And even in the worst case for oil bulls, the very most I could see it correcting is down to the low- or mid-$50s. I dont think thats going to happen. But if it does, welcome it as a buying opportunity!
The key point to remember: With each new phase, the up-and-down swings are getting wider and wilder. And right now, were in the midst of an explosive upswing.
Third, nearly all of the same, powerful, supply-and-demand forces that have driven oil from $30 to $65 are still firmly in place today:
|
Supply The world is no closer to resolving the disruptions and bottlenecks in the oil market now, at $65 oil, than it was at $30, $40 or $50. The same trouble spots are in the news. The same names keep coming up on the trading floors: The Gulf of Mexico … the Demand |
In a world running out of oil, all of this is bullish, pure and simple.
Fourth, heres a new, emerging factor that could soon burst into the headlines …
Strategic Oil Reserves
All told, their combined storage capacity will be the equivalent of 30 days of imports, roughly 292 million barrels of oil.
The key question: How does China get the oil to fill up these huge storage tanks?
By buying it, of course. By going into the open market and bidding for oil aggressively, RIGHT NOW. I suspect thats the hidden force thats been helping to propel oil sharply higher … and will continue to do so.
Oil Takeovers:
The Boom Is Just Beginning
Just in the past two weeks weve witnessed over $7 billion in mergers and acquisitions in the oil and gas industry. A solid beginning. But merely the first phase.
Unlike the merger frenzy of the tech boom which was based almost entirely on huff and puff, the takeover boom in oil and gas is based on real assets with real value. And its driven by actual demand for the most important commodity in the world.
That gives this merger and acquisition spree much longer legs. Compared to what weve seen historically in other industries, I expect the oil merger boom to be more sustainable, involve fiercer competitive bidding and generate more profits for investors.
The takeover boom in oil is a natural consequence of the worldwide scramble to secure diminishing supplies of a mission-critical commodity in limited supply.
Gasoline Prices
About To Explode
Oil is grabbing all the headlines, but gas prices are also soaring, with much more upside still to come.
Right now, the national average for a gallon of self-serve unleaded is $2.354. Thats a whopping 50 cents more per gallon than this time last year.
But with crude oil soaring and the summer driving season still in full swing, dont be shocked to see gas prices at the pump surge to $3.00 per gallon within six months and up to $5.00 by the end of next year.
To most of us, that may sound high. But consider yourself lucky because gas prices here are much cheaper than overseas. In London, youll pay $5.79 a gallon; in Amsterdam, more than $6.40. Thats mostly because of high taxes. But it shows you what is possible, and ultimately, what people will tolerate.
Plus, never forget the more subtle, but equally powerful, force behind the bull market in oil and gas:
The Treasury just announced that the U.S. federal deficit totaled $52.79 billion in July, and that the deficit for the past 10 months totaled $302.6 billion.
Thats down by 23.6% from the red ink of $396.32 billion during the same period in 2004.
Question: If the deficit is $302.6 billion, then why has the total federal debt ballooned from $7.379 trillion to $7.883 trillion $504 billion higher over the same period?
And why is the U.S. dollar starting to fall again, sliding nearly 4% in the past five weeks?
My view: The Federal Reserve is working hard behind the scenes to create as much credit as possible to neutralize the effects of rising interest rates. Put another way, the Fed is printing money like crazy.
We wont know for sure until we can see how all this shows up in the money supply figures. But rarely is the smart money wrong. And right now, the smart money is selling the dollar again, while buying real assets oil, gas, gold and more, with renewed vigor.
Recommendations
for Late-Comers
If youre not already on board with investments that are already soaring in this market right now, what do you do?
Just follow these steps:
1. Decide how much you are comfortable allocating to oil stocks or oil stock options. Lets say its $30,000.
2. Split that figure in half.
3. Put the first half in the investments weve been recommending. If youre relatively risk adverse, use the more conservative vehicles like Canadian royalty trusts that aim primarily for yield. And if youre relatively aggressive, go for the call options that have been generating up to triple-digit gains.
4. Unless youre a very sophisticated investor, stay away from speculation in futures contracts. And dont borrow to invest.
5. Keep the second half of your allocation in cash. Save the ammo for the next correction. It may be a very short one like we saw on Tuesday. Or it may be a bit deeper, after oil hits my targets. Either way it should be a great buying opportunity.
6. If you want to join the charter members to my Energy Options Alert, dont delay. This morning when I checked, there were only 68 slots left. I figure theyll be all gone by Sunday night.
Stay tuned.
Best wishes,
Larry Edelson, Editor
Real Wealth Report
Energy Options Alert
About MONEY AND MARKETS
MONEY AND MARKETS (MAM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Larry Edelson, Tony Sagami and other contributors. 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 inasmuch as we do not track the actual prices investors pay or receive. Contributors include Marie Albin, John Burke, Michael Burnick, Beth Cain, Amber Dakar, Scot Galvin, Michael Larson, Monica Lewman-Garcia, Julie Trudeau and others.
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