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Crude closed at
$34.45 per barrel on January 19th, less than a quarter of the price it
commanded at its peak in mid-July. The falloff from July 2008 was the
most dramatic downswing in the history of petroleum.
Another swing is in the works, this time in the
opposite direction. Here are three signs that point
in that direction:
U.S. producers are scaling back. This
summer, when prices were high and rising,
U.S. production was
160 million barrels a month. Now, with
the prices falling, producers would just as soon see
the U.S. buy cheap oil from somewhere else than to
run the spigot wide open and give their crude away.
Production in September waned
-25%
to less than 120
million barrels a month. You didn't hear this
milestone on the news, but domestic production fell to the
lowest level since World War II.
Now, if U.S. producers
thought that $30-40 per barrel was the best they could do, you can bet
they'd keep production humming and take advantage of a good price
like they did this summer. But producers aren't doing
that; they're doing the opposite. You see, the oil
industry has a long memory. They've lived through
boom-bust cycles before, and they know downturns don't last
forever. So rather than sell now when prices are low, they're
scaling back production so they can sell more later when
prices are higher. After all, it doesn't cost anything
to let the oil sit in the ground, but producers lose real money
selling oil cheap. And once it's gone, it's gone. Oil
is like real estate: They aren't making any more of it.
OPEC is getting serious about cuts, too.
OPEC has seen this before. The
cartel, which produces about a quarter of the world's oil
and roughly 45% of U.S. imports, envisions a target price of
$75 a barrel. OPEC attempts to manage the price of oil
by establishing output quotas for its member nations.
When the price of oil was high, there was
no incentive to adhere to supply quotas.
Why limit yourself
to selling 10 million barrels of oil at $145 per barrel when you can sell 20
million? It didn't matter: Crude was selling for twice the target price
anyway. In fact, over the past few years OPEC's supply cuts
have been largely laughed off by the market because everyone
knew that the limits were being ignored.
But things change when the price falls. And when oil
falls like it did, losing
three-quarters of its value, then the national
budgets in many OPEC states are seriously affected.
That's where we are now, and the oil ministers in
OPEC-member nations are ratcheting down production quotas.
Less supply, greater demand -- we all know what that does to
prices. OPEC doesn't want to sell anyone cheap oil,
either, and the market knows that the cartel is serious
about these cuts.
Futures
traders have already begun to price in a rebound. The "forward curve" -- which plots the
price of futures contracts traded on the New York
Mercantile Exchange -- shows crude will increase to
$57 a barrel by November. In fact, the curve
currently looks like it did 10 years ago, after the
Russian default and the collapse of a major hedge
fund sparked fears of a global recession that
would cut energy use.
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The price drop in
late '98 was the steepest the market had seen in a decade.
The bottom just fell out of the market. It sounds a lot like
today.
And you probably remember what happened to prices: OPEC
cut production nearly
-7%, and -- surprise! -- oil prices
more than doubled. Well, we're going to see the exact
same thing. In fact, it has
already started: OPEC has announced a serious
initiative to bolster the price of oil. For instance, Kuwait, OPEC's No. 3 producer, said
it would initiate a
-5% cut later this month.
Other OPEC countries have made similar significant cuts
already or are preparing to.
Now, demand has slipped. U.S. stockpiles of crude
and finished gasoline have been trending upward, according
to national data. So the question is whether the OPEC
cuts will truly decrease supply or just make up for slack
demand. The International Energy Agency says
worldwide demand for crude in 2009 will actually increase
because huge economies like China and India are still
expanding at such a rapid clip.
Does that mean the OPEC cuts are going to work?
Indeed. On top of that, scaled back U.S. production will
have some impact, as will moves by energy giant Russia to curtail its output as well.
When is this going to happen? Soon.
Some oil industry heavy-hitters are so sure
the price is going to skyrocket in the next few months that
they are actually leasing supertankers, filling them up with
cheap crude and just sitting on them. When the
price of oil goes back up, these tankers will dock and
unload two million barrels worth of profits. Check out the
forward curve chart above. It's easy to see how buying
oil today for the February price and holding it to sell at
the November price is already a winning proposition -- even
when you factor in the 90 cents a barrel it costs to store
crude on a ship each month.
My prediction: We ain't
seen nothing yet. The price of oil will reach $100 then fall back to the
upper $80s, exceeding the OPEC
target. These creative traders storing crude may well clear $60 a
barrel. Across a tanker containing two million barrels,
that's $120 million. Talk about your ship coming in.
How You Can Profit From Oil's Rise
Now, you probably don't have a supertanker captain in your
Rolodex -- I don't, either. But we can both take
heart, because individuals like you and me can still get in on the action. In fact, buying
shares in the ProShares Ultra Dow Jones Crude Index ETF --
which trades under the ticker UCO --
will let you profit handsomely from crude's rise. That's because this fund
uses leverage to double the return of crude oil. In fact, if the price of oil goes
up +25%, this fund will gain +50%. If crude gains
+50%, then UCO goes up +100%. I think oil can easily
rise +100%. I'll let you do the math on what that does to UCO...
Oil's rise is inevitable. The futures market is,
wisely, betting on the guys with the pump jacks -- U.S.
producers and OPEC oil ministers -- to engineer a significant
supply cut. That's smart. You may not be able to
fill up a supertanker
and send it out to sea to wait for the price to rise, but you can still
position your portfolio to take full advantage of the
rebound and profit when it does. Your ship can
come in, too.
But I'm not the only one that thinks this. Paul Tracy, editor of the
StreetAuthority
Market Advisor, recently cited oil's
rebound as Prediction #1 on his list of "11 Surprising
Investment Predictions for 2009."
Along with the oil rebound, Paul makes several other bold
investment predictions in this report, including:
War will erupt in a
parched area of the globe over water. Two
companies that positioned themselves years ago to
exploit the increasing scarcity of nature's most
critical resource will prosper.
President Obama will pour billions into rebuilding the
nation's highways, bridges and other ailing infrastructure.
Three construction companies' revenues will skyrocket.
The recession will end
by June 2009. But certain industries will be decimated.
With their stocks at fire-sale
prices, takeover
fever will spread like contagion in corporate America.
Investors who stake out positions in takeover targets
will reap huge gains.
These are just four of the 11 investment angles that Paul's
research team believes will trigger explosive profits for
investors in 2009.
Visit this link to read all of Paul's predictions right now.
Many happy returns!
-- Andy Obermueller
Co-Editor
StreetAuthority Investor Update
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