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 June 15, 2009
Why $100 Oil Is Right Around the Corner

 

It's only a matter of time. . .

Even as oil dips below $70 per barrel, I wonder how long it will be until crude is trading back in triple digits.

Yes, you read that correctly.

And quite frankly, I have a feeling many of you agree oil will move that high in the long run. Understandably, there are a few dissenters. I can remember a particularly vicious email from a gentleman who was certain oil would remain below $50 per barrel for at least another five years.

I couldn't help but laugh at the idea.

For the sake of decency, I'll spare you the expletives he used to justify his prediction. And as you know, things turned out a little differently than my disgruntled friend believed. I'll bet those of you (like myself) who felt oil was sorely undervalued at $40 per barrel have done quite well since early March.

Lately, there have been a number of predictions tossed back and forth. Take the latest forecast by Goldman Sachs — they're calling for oil prices to rise to $85 per barrel by the end of 2009, with tighter fundamentals and an economic recovery as the driving forces. They're betting OPEC will cut output and lower supply.

Toss in some good news on an economic recovery, and oil's climbing to $85 a barrel is certainly a possibility.

If that's the case, where will that put us? Well, I'll put it this way — every day that oil trades lower is another opportunity for investors take advantage and post some solid gains.

But before I get into that, let's quickly go over why oil's price may be headed back to triple digits. . .

Crude Oil Forecast

Although the U.S. is the undisputed king of oil consumption, don't take your eyes off of China. In fact, if things continue the way they have been, China will take our oil guzzling crown as early as 2014.

Last week, China reported its industrial production grew 8.9% last month compared to a year ago. The news had two immediate effects. . .

For starters, the news was enough to help push crude oil as high as $73.23 a barrel during trading last week. Furthermore, the industrial growth also led the IEA to revise its global demand forecast.

For the record, that's the IEA's first demand projection increase since last August. Their monthly oil report expects global demand to fall by 2.47 million barrels per day (their previous estimate was a 2.56 million barrel decline).

If the IEA report isn't enough to make you believe demand is back on the rise, also take the Energy Information Administration's (EIA) weekly oil report under consideration.

A week ago, the EIA reported a 4.4 million barrel draw on U.S. crude oil stocks. Last Tuesday, the administration released its Short-Term Energy Outlook, which stated that U.S. motor gasoline demand will increase by 30,000 barrels per day due to lower prices. Also, the EIA reported that an economic recovery in 2010 will lead to a 300,000 bbl/day increase in total liquid fuel consumption.

And then we get to OPEC. . .

The Next Oil Price Spike

Recently, Saudi Arabia reiterated that problems still persist in the oil markets and pointed out that a barrel of oil is still less than half the price from last July's record of $147 per barrel.

Even though oil is still trying to find support at $70 a barrel, the Saudis still insist future investments are in danger. Their state-run oil company, Saudi Aramco, said 2008's oil price collapse was merely "a temporary phenomenon."

They went even further, saying, "If others do not begin to invest similarly in new capacity expansion projects, we could see within two to three years another price spike similar to, or worse than, what we witnessed in 2008."

For once, I'm inclined to agree with the Saudis.

Depending on demand growth over the next 12 months, I think $100 per barrel is within reason. As for further OPEC production cutbacks, I'd like to hear their next 'comfort level' price for oil. If crude prices rise over $80 per barrel, I wouldn't be surprised if OPEC suddenly felt that $90 per barrel was acceptable.

But let's get back to another matter at hand. . .

What will another oil price spike mean for us? Well, as you might expect, another run for oil will open the door wide for investors.

Going Long on Oil

It's no secret many of my readers have been raking in huge gains since early March. I'd say it has been a pleasant ride for some of us.

Last Friday, investors began taking some of their profits off the table. And for the most part, I can understand their reasons. Oil finally broke $70 per barrel and is looking for support. The latest round of selling was due.

Trust me, dear reader, taking a gain is never a wrong move, especially in today's market. And if you've waited on the sidelines, I can only hope you're on board for the next run. Like I said earlier, the door is wide open right now. Next week, I'll show you my five favorite oil companies worth picking up before oil makes a climb over $80 a barrel.

Until next time,

keith kohl

Keith Kohl

Energy and Capital