7 Billion Reasons Why Oil Prices Are Header Higher (XLE, USO, CVX, XOM, DVN, COP)
Sean Brodrick: Could high oil prices kick America into another recession? What’s driving these triple-digit oil prices? Are prices headed higher or lower?
These are questions I get all the time, and I’d like to tackle them today, using three charts with some striking — and perhaps even a bit surprising — information that I think you as an individual investor in the energy space can benefit from. Plus, I’ll show you how you can profit from what’s coming next.
So, could high oil prices kick America into another recession? My answer is …
1. Oil Prices at Current Levels Will NOT Trigger a Recession.
Oil has traded above $100 for all but a couple of days in the past year. This persistently high oil price has many concerned that it will seriously threaten the global recovery, which is in low gear anyway.
While it’s true that recessions are preceded by oil price spikes 90% of the time, there’s more causality in the fact that recessions are preceded by the Federal Open Market Committee raising interest rates, as it tries to curb inflation (which it sees in higher oil prices) and slow the economy.
Now, we have a Fed that publicly (and repeatedly) says it will keep interest rates low at least through 2014. And while oil prices may seem high, the rise has been gradual — not a spike or a shock. This is very different from when oil more than doubled in price (from January 2007 to July 2008) due to a sharp increase in Chinese demand.
This gradual rise in oil prices has given Americans time to adjust. Plus, consumers moving toward more fuel-efficient cars is also worth noting. Check out this chart from WardsAuto.com on the fuel economy of U.S. vehicles.
- Cars and light trucks sold in March hit a record combined 24.1 miles per gallon (mpg) rating, a 1% improvement on the previous record set in February. It was the first time the index has risen above 24 mpg.
- The new benchmark represents a 15% increase in fuel efficiency over the index’s base rating of 20.9 mpg, established in fourth-quarter 2007.
- Vehicles rated higher than 30 mpg on the index accounted for 11.8% of sales in March, up from 4.3% a year ago. The 270% increase was made possible, in part, by the increasing number of vehicles available in that category.
This means that the average vehicle efficiency last month was a whopping 20% higher than in 2007, just five years ago. And we can take that to mean that America’s economy is (roughly) 20% less vulnerable to a gas price spike than it was five years ago.
Are oil prices around $100 a barrel causing us to slide into recession? Nope.
So, what IS causing prices to stay in the triple-digit area? Well, I’ll tell you one thing that ISN’T a culprit, and it may surprise you …
2. Oil Speculators Are NOT the Cause of High Oil Prices.
It seems like every other day I read a story about evil oil speculators. Heck, Sen. Bernie Sanders (I-Vt.) introduced a bill to rein in oil speculation. Surely, speculators are the reason we’re paying $100 a barrel for oil, right?
Here’s a chart from Reuters, using data from the U.S. Commodity Futures Trading Commission (CFTC), showing the number of net long speculators in the oil market. Look at the left side of the chart, and see what’s happened since February …
That’s right, speculators have removed net long crude oil positions since February — while prices we pay at the gas pump continued to go higher.
The fact is, commodities markets need at least some “pure” speculators (meaning those who act as brokers or investors rather than actual producers or consumers of oil) in order to function. And it’s not just me saying that. CFTC Commissioner Bart Chilton said last month that “Speculators are necessary liquidity providers to (commodities) markets.”
And as for why gas prices are going higher — well, we’re exporting a lot more gasoline. This helps America’s balance of trade, and is a good thing.
Bottom line: The price of oil has a lot more to do with global demand, the outlook on the global economy, and perceived threats to supply.
While speculation has some effect on oil prices, it’s not as much as people think, and it can both push prices up and drag them down, depending on how speculators feel about the other factors I mentioned.
So, we can all breathe a sigh of relief about oil prices, right? Not so fast. Let me show you my third chart, which tells you where they’re heading …
3. Oil Prices Will Zig-Zag Higher, and Here’s 7 Billion Reasons Why.
The world’s 7 billionth person was born last year, according to the best guesstimates. And we’ve added another 7 million people since then.
What does that have to do with the price of oil? A tremendous number of those people want to live — and drive — like Americans.
Here’s a chart from TheOilDrum.com, which illustrates the problem …
You can see that per-capita energy use is rising, and has been for years. It kicked into overdrive right after World War II, then leveled off in the 1970s and 1980s. Now, it’s shifting higher again.
The new demand pretty much all comes from the developing world — Brazil, Russia, Africa and, as you would probably expect, China. In fact, China’s imports of crude oil hit their third-highest level in March at 5.55 million barrels per day. That’s 8.7% higher year-over-year.
I keep hearing about China’s economy slowing down. Funny, but China’s drivers are actually speeding up, at least when it comes to oil demand.
To be sure, there seems to be enough oil … for now. The Organization of Petroleum Exporting Countries said last week that oil markets are well-supplied, and it blamed recent high prices on saber-rattling in the Middle East between Iran and Israel.
Still, the International Energy Agency forecasts that, despite a recovery that seems stuck in low gear, global oil demand will still climb 800,000 barrels per day (bpd) this year to 89.9 million bpd.
How You Can Play It
Oil companies have been beaten into the dirt lately, on worries that the global recovery is going to stall. While it’s possible, I don’t think it’s likely — and many oil producers are making a killing with oil trading at around $100 a barrel.
You can pick up individual stocks — do your own due diligence of course — or just add a fund that owns a basket of oil stocks. The Energy Select Sector SPDR (NYSEARCA:XLE) is the biggest and best-known, although there are other funds that might give you more bang for your buck.
And in this month’s Global Resource Hunter — which comes out tomorrow — I show subscribers three more charts, along with ideas on stocks that are uniquely leveraged to profit on the oil boom going on right here in the U.S.A.
Plus, my members are sitting on a nice 18%-plus gain in a solid energy play, and there’s more to come in playing these powerful energy trends. If you want to get onboard Global Resource Hunter and get tomorrow’s issue as soon as it’s published, CLICK HERE.
Related: United States Oil Fund (NYSEARCA:USO), SPDR Select Sector Fund (NYSEARCA:XLE), ConocoPhillips (NYSE:COP), Chevron Corporation (NYSE:CVX), Devon Energy Corporation (NYSE:DVN), Exxon Mobil Corporation (NYSE:XOM).
Yours for trading profits,
Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, Michael Larson and Bryan Rich. 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 Andrea Baumwald, John Burke, Marci Campbell, Selene Ceballo, Amber Dakar, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.
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