The Crude Oil Market

Keith Kohl

Written By Keith Kohl

Posted February 10, 2009

Trust me, $40 a barrel is a considerably cheap price for oil.

And I know for a fact I’m not the only one thinking that.

Last month, I was curious to find out where you thought oil prices were headed. Not surprisingly, an overwhelming majority of you felt oil would move in only one direction: much higher. Granted, the timing of this move was contested. That’s understandable.

The interesting part (for myself, at least) wasn’t the bullish oil price forecast by my readers, but the fact that I cannot recall one person saying oil would drop below $30 per barrel in the long run. Then again, my readers seem to have a better handle on the situation than most.

But if you’ve been confused as to why oil has been trading flat lately, don’t take it personal, you’re not alone…

Confused Crude Oil Markets

It feels like things have been turned completely upside down.

Don’t believe me?

Take last week’s 7.2 million barrel build in U.S. crude oil stocks, for example. That kind of drop should have sent oil prices much lower. The price dial hardly moved and prices rebounded the very next day. Our stocks are well above the 5-year average. We are now 46.1 million barrels compared to a year ago.

As if that weren’t enough, do you remember what happened when OPEC announced their second production cut late last year? Was it enough to turn things around? Hardly. Oil prices merely shrugged off the news, falling to a price we haven’t seen in years. According to Bloomberg, OPEC has stuck to their guns, cutting production by over 4 million barrels per day. And to think, they still have another 900,000 bbls/day left to cut.

You don’t need a crystal ball to forecast higher oil prices in the latter half of 2009. Crude contracts for December ’09 are $55 per barrel. It’s no wonder producers are topping off their tankers and parking them offshore. With the difference between March and December contracts, can you really blame them?

Then again, there’s another reason you and I hold on to our bullish outlook.

Blindsided by the Peak… Again

Last year was interesting, to say the least. If nothing else, one question was answered: How high will oil jump before a consumer uproar? The answer, of course, was $150 a barrel. That price raised prices well over $4 per gallon at my local pump (and from some of the horror stories I’ve heard from readers, I was lucky). Personally, it was enough for me to move closer to work.

The indignation over gasoline prices led to some outrageous ideas. Did anyone else laugh when the politicians clamored about suing OPEC?

Sure, cheap gas is great. Even though I fill up my tank half as much nowadays, it’s still good not to feel ripped off. Unfortunately, not enough people realize the hole we’re digging ourselves into.

Think about it for a second…

If gas between $4-5 per gallon was enough to curtail driving demand, is gasoline under $2 per gallon enough to get you back on the road more? Of course it is. You can bet driving demand is going to pick back up this summer, pushing prices higher.

It’s not a question of ‘if’ oil prices will rebound, but rather ‘when.’

I said earlier that $40 per barrel is cheap. I wasn’t kidding. When one-quarter of the world’s oil production comes from just 20 giant oil fields, it’s alarming to think that some of those giant fields have been pumping crude for the last sixty years.

Production at those same fields is now peaking (if it hasn’t already). In other words, dear reader, we’re running out of that cheap oil. You may not think that’s a big deal. Just consider the fact that we are importing 70% of our oil demand. Didn’t we learn our lesson from Cantarell?

Staying Ahead of the Curve

With that in mind, investors should recognize this buying opportunity. You don’t need me to tell you how many energy companies have been unfairly beaten down during the last six months. Naturally, it’s not as easy as throwing a dart and grabbing whatever it hits.

Believe me, those companies are out there. It’s just a matter of separating them from the rest of the pack. Next week, I’ll tell you pitfalls to be wary of and what to look for before picking up your energy stock.

Until next time,

keith kohl

Keith Kohl

Energy and Capital

P.S. I know the kind of patience needed to wait for your favorite stock move into a specific price range. In this market climate, that can take days or even weeks of careful watching. The reward for such diligence, however, can be extremely profitable. My Energy and Capital readers have felt this success firsthand by taking advantage of Ian Cooper’s Options Trading Pit. Maybe it’s time you joined us.

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