bunch of bobble-heads and tongue-waggers are saying that the recent decline shows the top is in for crude oil this year. Sheesh … gimme some of what they’re smokin’.
Yes, crude oil prices went down, skidding along a slope greased by an announcement from Saudi Arabian Oil Minister Ali al-Naimi, who signaled OPEC may increase supply to keep prices lower. Mind you, this is only a week or so after other OPEC spokesmen said they saw no problem with $100 oil.
If you’re confused, that’s part of the plan. I believe OPEC likes to keep us guessing.
Falling oil prices lead to the danger zone — it’s amazing how quickly some people get complacent when the price of crude goes lower. But the fact is, the long-term forces that should push oil much higher remain in place. Plus, there are also short-term developments that should put the pedal to the metal on prices at the pump.
For example …
Rising Global Demand. Many people missed what else al-Naimi said — that OPEC believes worldwide oil demand should increase by as much as 1.8 million barrels a day (bpd) in 2011. This is higher than the OPEC growth forecast made just two weeks ago!
For its part, our own Energy Information Administration expects world oil demand will climb 1.47 million bpd to 86.65 million bpd in 2011.
The International Energy Agency has its own forecast. None of the three big global oil agencies agree on just how much oil demand will climb this year. But they all agree on one thing — global oil demand is going up fast!
Americans Are Driving More. The miles driven in the United States are going up again. According to the Department of Transportation, vehicle miles driven in November were up 1.1% compared to November 2009 …
Source: Calculated Risk
We have yet to get above the 2008 peak, but we’re on the road higher. And where are Americans driving? Maybe to the mall …
Consumer Confidence Jumps. The Conference Board reported its consumer confidence index was at 60.6, up from 52.5 in December. This month’s reading is the second-highest since the recession officially ended in June 2009. The only higher reading was 62.7 in May 2010 — just before the economy hit a slowdown that persisted into early summer.
Consumers are feeling more confident because the job picture is finally starting to improve. Assuming consumers are right, and we aren’t in some kind of economic fake-out, the U.S. economy is improving. In the past, that has been coincident with rising energy demand. And the funny thing is, none of the big global agencies — the IEA, OPEC or EIA — is expecting much oil demand growth in the United States.
Maybe we’ll play catch-up with the rest of the world …
Stronger Global Economic Growth. The International Monetary Fund (IMF) just raised its forecast for global economic growth this year. The world economy will grow 4.4%, up from the 4.2% growth the IMF projected in October. China and India are expected to lead the way, with GDP growth of 9.6% and 8.4% respectively.
The IMF also says the global economy grew faster than expected in 2010.
The IMF isn’t expecting a lot of growth in Europe, but it may be underestimating the euro zone. Industrial orders in the euro area increased 1.9% in November from the previous month, when they gained 1.4%.
So, sure enough, this all points to higher oil demand in the United States and around the world in the first half of this year, at least. And that’s why my target for oil in the next six months is $105 a barrel.
Longer-Term, Big Trends Look Ugly
Beyond the short-term, longer-term forces come into play. I’ve pounded the table about these forces for weeks now ( 3 Energy Charts That Should Scare the Bejeezus Out of You, A Whale of a Tale on Energy and Oil Shock Dead Ahead … Take Action NOW!).
These forces include a surge in car ownership and oil demand in India and China, the long-term decline in existing oil fields, a potential catastrophic decline in Mexican oil production, and a steep drop in exploratory drilling in the U.S. Gulf of Mexico.
Speaking of the drop in U.S. offshore oil exploration, here’s another chart for you: U.S. production of crude oil.
That sure looks like a slippery slope. The secondary peak in this graph is Prudhoe Bay coming into production. That was in the 1970s. Despite three more decades of searching, we haven’t found another supergiant oil field in the United States, and we’ve found precious few around the world.
Well, what about all the shale oil we hear about? I think shale oil is very interesting, and in fact I have some recommendations on how to play it in my new report, Burning Oil: 7 Winners in the Next Energy Boom.
And just this week, analysts from Raymond James said that crude oil from the Bakken Shale in North Dakota’s Williston Basin will hit nearly 1.2 million barrels a day, or 15%, of U.S. output by 2015.
Now for the bad news. That’s really not a lot of oil when the United States uses 19.1 million barrels a day. And that’s not a lot compared to other U.S. oil finds. Heck, at its peak, the North Slope of Alaska alone was pumping out more than 2 million barrels a day.
Canada’s Chinese Surprise
Well, we can always buy oil from Canada, right? After all, Canada has vast deposits of oil. However, nearly all its estimated 178 billion barrels of reserves are in oil sands. It’s an ecological nightmare to extract oil from sand, and the difficulty limits production.
Also, remember our friends the Chinese, and how energy hungry they are? Well, it turns out Canadian National Railway is in talks with Chinese companies about possible exports of crude oil produced in Saskatchewan via railway to a port on Canada’s west coast.
Saskatchewan has recoverable reserves of 1.2 billion barrels of crude oil. The United States is the major export market for Canadian crude oil. But the Chinese want it. And they probably can get it.
You’ll remember that last year, China’s Sinopec bought a 9% stake in Syncrude, Canada’s largest oil-sands project, for $4.65 billion, while China Investment Corp. ponied up $821 billion to buy a 45% stake in an oil-sands project owned by Penn West Energy Trust.
What are we going to do if China starts exporting large amounts of Canadian crude? Invade Canada to protect “our” oil? Are we going to claim those sneaky Canadians are hiding weapons of mass destruction in their mukluks? I don’t think so! And China has all the money it needs to buy as much Canadian oil as it wants. After all, we ship China more of our money every day.
So, the long-term picture looks down-right desperate. And the short-term could see a surge in global demand, squeezing oil prices much higher.
Crude Oil Chart Points the Way Higher
Now, one more chart … a weekly chart of crude oil.
You can see how crude has trended higher. It pushed above overhead resistance, and is now coming back to test that former resistance as support.
Maybe the bears are right … maybe crude oil has topped out. But this chart sure looks more bullish than bearish. And I think it’s a signpost on the road to higher prices.
There are many ways you can prepare for higher oil prices. One way is to invest in select stocks and funds is one way to cushion yourself against more pain at the gas pump. And you can do that with my new report, Burning Oil: 7 Winners in the Next Energy Boom. My report is packed with analysis and red-hot recommendations in the best energy stocks and funds, plus a “secret” weapon you might want to add to your arsenal of profit potential.
I’ll talk to you again when I get back from Mexico, when I may have a tale of golden treasure to tell. Until then, good luck, and good trades.
ETF Daily News Notes Some Oil Related ETFs: iPath S&P GSCI Crude Oil (NYSE:OIL), PowerShares DB Oil (NYSE:DBO), ProShares Ultra DJ-UBS Crude (NYSE:UCO), PowerShares DB Energy (NYSE:DBE), United States 12 Month Oil (NYSE:USL), PowerShares DB Crude Oil Dble (NYSE:DTO), ProShares UltraShort DJ-UBS (NYSE:SCO), United States Short Oil (NYSE:DNO), PowerShares DB Crude Oil Long (NYSE:OLO), United States Brent Oil (NYSE:BNO), PowerShares DB Crude Oil Short (NYSE:SZO), United States Heating Oil (NYSE:UHN), Oil Services HOLDRs (NYSE:OIH).
Uncommon Wisdom (UWD) is published by Weiss Research, Inc. and written by Sean Brodrick, Larry Edelson, and Tony Sagami. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in UWD, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in UWD 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, Roberto McGrath, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Marty Sleva, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.
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