Are You Ready For This Crude Possibility?
Oil’s back on the move again…
After plunging from $106 a barrel down to $78 in May and June, the lifeblood of global commerce is finding its footing. In fact, oil’s back up to $93… a solid 18% advance from the late June lows.
Take a look…
No matter how you slice it, that’s a hefty rally. And it’s contrary to bearish energy analysts who thought crude would plunge to $70 or lower this summer.
Why are some analysts so bearish on oil?
First of all, European debt troubles had investors shaking in their boots until just a few weeks ago. If things had taken a severe turn for the worse across the pond, crude may have indeed collapsed to $70 or lower last month.
But financial Armageddon didn’t happen- just like I told you it wouldn’t.
Instead, European leaders came to grips with the severity of the region’s issues. And more importantly, they created a plan… a plan that gives investors a roadmap to a long-term solution.
Relief over Europe’s new proposal was obvious on June 29th when crude surged $7.00… the biggest one-day oil market rally in over a year (blue arrow in chart).
But European worries aren’t the only thing bearish energy analysts are focused on…
Growing doubts over the health of the global economy also played a big part in crude’s Spring downturn. US unemployment remains stubbornly high, while US GDP growth remains frustratingly low. What’s more, manufacturing data has come in remarkably weak in recent reports.
This weak economic data has many analysts convinced a US recession is right around the corner… something that doesn’t bode well for energy demand. If that’s truly the case, oil may indeed be headed for further weakness.
But I don’t think it is…
More likely than not, it’s just a summer lull.
Compare the recent slowdown to mid-2011 when we saw similar weakness in job growth, manufacturing, and GDP readings. Investors got worried, and oil skidded to $78 a barrel.
But by the end of the summer, these important data points had turned higher.
It was then apparent the US economy was chugging along better than most realized. And that (along with Middle Eastern supply worries) sent oil back up to $100 a barrel by the end of 2011.
I think this same scenario is playing out again this summer.
What’s more…
Even if the recent slowdown is more than just a summer lull, Ben Bernanke is on record saying he’s ready to support the US economy.
In a hearing before the Senate Banking Committee on Tuesday, Bernanke said the Fed has additional tools to fight another growth slowdown. And that statement has many investors believing QE3 may come sooner rather than later.
Bottom line…
With or without help from the Fed, the US economy is likely to strengthen in coming months. This means energy demand will probably remain intact, and oil will likely stay in the $80- $100 a barrel range.
Let me show you what I mean…
As you can see from this long-term weekly chart, crude’s in a solid trading range between $80 (green line) and $105 (red line). If the economy stays on track like I think it will, crude should stay in this range for the foreseeable future.
But there is one caveat…
Iran.
The rogue nation is returning to its disruptive ways after negotiations over their nuclear program came to a screeching halt a few weeks ago.
The country is once again threatening to close the vital Strait of Hormuz. In case you don’t know, the Strait is a vital Middle Eastern shipping lane. A whopping twenty percent of the world’s oil passes through this essential waterway every day.
If Iran follows through on their threat, oil will easily surpass the $110 a barrel mark. A confrontation in the Strait may not last long, but there’s no doubt we’ll see a volatile short-term reaction in the oil market.
So what’s the best way to profit from rising oil prices?
There are a number of ETFs that track the price of crude including the US Oil Fund (USO) and the US 12 Month Oil Fund (USL). But I wouldn’t recommend buying them at current prices based solely on a potential confrontation with Iran. Trading oil based solely on prospective geopolitical events is a risky proposition.
However, there are a number of major oil and gas names trading at relatively cheap valuations right now. For example, BP (BP), Statoil (STO), and ConocoPhillips (COP) all trade at a mere 5x trailing earnings (or less). That’s cheap compared to the S&P 500, which currently trades at 16x earnings.
And the best part is, all these companies yield at least 4%. Investing in these companies for the long haul will not only give your portfolio exposure to rising oil prices, but give you a nice dividend to boot!
***Editor’s Note*** It’s not too late! Robert just released the name of a tiny biotech stock I think you’ll want the name of. The first time he recommended it, it went up 114%. The second time it was 136%. Who knows how high it’ll climb this time! Click here for details…
Until Next Time,
Justin Bennett
Category: Commodities
