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In 2008, we’re going to hit an important milestone. In the New Year the world is going to start using oil at a rate of more than 1,000 barrels PER SECOND!
According to the International Energy Agency, global oil demand will average 87.8 million barrels per day (bpd) in 2008, up from 85.7 million bpd in 2007. At 87.8 million bpd, we’ll use 1,016 barrels per second — a sonic boom of energy use.
I also think 2008 is going to be the year we finally see triple-digit oil prices. More on that in a moment. First …
The White House Is Stockpiling
Oil! The Question Is, “Why?”
Since August, the Bush administration has been adding 50,000 barrels a day to the Strategic Petroleum Reserve — the nation’s emergency oil stockpile — with plans to kick up the pace to 70,000 barrels a day by the end of January.
That U.S. oil tank of last resort now contains 695 million barrels of oil — enough to keep the American economy running for just 56 days if imports were suddenly cut off.
The federal government has been aggressively buying up the world’s supply of light sweet crude at a time when crude is selling for over $90 per barrel.
And this binge buying has added as much as 10% to the price of crude, an oil consultant told a Senate panel recently. What’s more, in the recent energy bill passed by Congress, President Bush asked — and received — authorization to DOUBLE the size of the Strategic Petroleum Reserve.
My question — what does the Bush administration know that would make them so eager to add to the Strategic Petroleum Reserve when prices are so high? What are they afraid of?
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Maybe this chart holds a clue …
The chart comes from OPEC’s December Monthly Oil Market Report. As you can see, crude oil prices dropped in both September 2005 and 2006 (the green and pink lines) along with seasonal demand. But this year that’s not happening. As the red circle clearly shows, demand is so strong this year that prices are gushing higher, not lower.
In other words, America is so hooked on oil that higher prices aren’t weaning us off our addiction. And this comes at a time when U.S. crude inventories are near their lowest levels in years.
That Means We’re More Vulnerable Than
Ever to an Interruption of that Oil Supply!
Here are some facts that will keep you awake at night …
- America is the world’s largest consumer of oil, guzzling more than 7.5 billion barrels per year. We import more than half the oil we use, and that amount is rising.
- More than 81% of the world’s discovered and useable oil reserves come from just 10 countries. And 30% of the world’s oil is in three of those countries — Iraq, Kuwait and Saudi Arabia.
- The world consumes an astonishing 173 billion barrels of oil every 2.4 years. At the same time, we find enough new oil to supply just 3% of that.
So, just to keep prices stable over the next decade, we’re going to have to find a couple more fields the size of Ghawar — the biggest oil field in Saudi Arabia … and the world.
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Here Are Three Forces That Will
Squeeze Oil Prices Even Higher
Most people know a terrorist attack, a war in the Persian Gulf, or a natural disaster would cause oil prices to rise.
But there are other fundamental forces that will drive the price of oil higher relentlessly, even without a headline-grabbing catastrophe. Let’s look at three of them …
Force #1: A Thirsty World. Despite economic storm clouds on the horizon in the U.S., the global economy is growing at about 4.5% per year. From Brazil to Singapore, business is booming and incomes are rising.
The world’s population is trading bicycles for cars, and global oil demand can’t keep up. With 14,000 more cars on the road each day, China’s oil demand alone is expected to rise at least 5% this year, according to the IEA.
As a result, the International Energy Agency (IEA) projects in its Medium Term Oil Market Report that global oil demand will grow 2.2% a year, on average. By 2012, demand should reach 95.8 million barrels per day (bpd) vs. 85.7 million bpd this year.
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At the same time, spare capacity — almost all of which is in Saudi Arabia — is going to vanish like a mirage in the desert.
Even worse, the IEA expects supply increases from non-OPEC oil producers and biofuel producers to start dwindling around 2009.
All that boils down to an ugly picture from the IEA: The world’s oil demand growth is going to start outpacing supply growth by 2010!
Force #2: Slipping on the Oil Field Treadmill. The IEA has more gloomy news for us: We’re getting between 3% and 4% LESS out of existing oilfields every year. Mature producing areas and many recent deepwater projects are declining at even sharper rates — 15% to 20% annually!
All told, the oil industry needs to add three million bpd of new supply each year just to offset declines in existing fields.
But the oil majors are having trouble finding oil. For example, last year was the first time — EVER — that Exxon didn’t replace its reserves through its own drilling, according to Oppenheimer research.
Force #3: Oil Exporting Nations Need More of Their Own Product. The economies of many big oil-exporting countries are growing so fast that their domestic need for energy is sucking up their exports. Experts say the sharp growth, if it continues, means several of the world’s most important suppliers may need to start importing oil within a decade.
OPEC member Indonesia has already started importing more oil than it exports …
Mexico could be doing the same within five years …
And domestic consumption in Kuwait, Saudi Arabia and Iran is soaring!
According to a report from CIBC World Markets, Russia, Mexico, and OPEC members will cut crude exports by as much as 2.5 million barrels a day by the end of the decade. That is MORE than the current spare capacity in the oil markets.
When OPEC recently opted to freeze output levels it argued that the global market for crude oil was “well-supplied.”
But maybe the real reason was that OPEC just didn’t have much more to sell.
My Forecast: We Could See Oil Hit $150 a Barrel in 2008
The Energy Information Administration recently told the U.S. Senate that crude should average $85 per barrel in 2008 as fundamentals tighten …
Goldman Sachs said it could hit $105 …
But I’m setting my sights a little higher: I think we could see prices spike to $150 a barrel next year!
That kind of a jump might not stick around very long. But as I just showed you, all the fundamentals are in place for oil to hit — and maintain — triple-digit prices next year.
In fact, I believe the only thing that could derail higher prices is a stiff recession in the U.S. And central banks around the world are working hard to prevent that.
Our own Federal Reserve is throwing everything but the kitchen sink at the markets, and the Bank of England and European Central Banks are doing the same.
How You Can Play
The 2008 Oil Boom
The oil majors are boosting their exploration spending to an estimated $370 billion next year. That means some undervalued oil exploration and production companies are on the launch pad.
That’s precisely why I’ll be recommending some of them to my Red-Hot Resources subscribers very soon.
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Of course, small-cap, early-stage companies carry both higher risk as well as higher reward.
If you prefer more diversified investments, you can always buy the Energy Select SPDR (XLE) or one of the other energy sector ETFs that are stuffed with larger-cap oil & gas companies.
But whatever you do, get ready to watch oil prices in 2008. I think it’s going to be a heck of a show.
Good luck and good trades,
Sean
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