Dear Wealth Daily Reader,
Last week, crude oil prices jumped to the highest level so far this year. This latest increase is attributed to a recent Energy Department report speculating that fuel inventories will drop sharply because refineries are operating at lower levels.
But trust me, oil prices breaking records is something you’re going to hear a lot about in 2007.
From geopolitical tensions to peak oil and weather concerns, there are a wide range of factors that can propel fragile oil prices. Yet it only takes one event to escalate the cost of oil.
Bombs, Barrels and Hurricanes
Buckle up, 2007 is going to be rough.
Another geopolitical storm will come to a head in the Middle East this year. This time around, the U.S. is looking to sink its teeth into Iran.
But how soon until this tension erupts?
Well, let’s consider the facts so far.
Iran’s controversial nuclear program came under the global spotlight last week when they refused to stop enriching uranium, defying a 60- day deadline set by the U.N. on December 23, 2006. So what is the U.N.’s expected answer?
But regardless of the U.N.’s reaction, the United States looks ready for a showdown. The latest growth of U.S. naval forces in the Persian Gulf is a huge red flag. This buildup of forces has sparked rumors that U.S.-led air strikes would begin as early as mid April.
Even more troubling is Iran’s desire to push buttons.
Two weeks ago, Iranian patrol boats alarmed the U.S. by briefly crossing into Iraqi waters. Also, Iranian naval forces have increased military training exercises over the last few months.
As I’ve said before, if there is an open confrontation between the U.S. and Iran, we’ll be lucky if oil prices ever drop below $100 per barrel again.
But oil volatility has another ace up its sleeve this year.
Weather has always had the potential to run up oil prices. Remember the devastating hurricane season in 2005?
When Hurricane Katrina pummeled the Gulf Coast, roughly 1.9 million barrels per day of refining capacity was lost. And recovery costs were estimated between $100-$200 billion. Oil prices peaked over $76 per barrel in July, 2006. Even considering prices have stabilized near $60 per barrel, that is still double the average crude oil price four years ago.
Luckily, 2006’s hurricane season was relatively mild.
But according to some meteorologists, there is a strong possibility that the upcoming 2007 hurricane season will be very active.
This is because current El Niño conditions are weakening and should no longer influence weather patterns after April-May 2007 (June 1 is the beginning of the hurricane season). You see, the El Niño pattern in 2006 played a huge role in the mild Atlantic hurricane season we experienced.
And because ocean temperatures have been above average for the past few years, hurricanes have occurred more frequently and were more powerful in non-El Niño years.
What do you think are our chances of dodging a bullet two years in a row?
As a smart investor, you need to figure out the best way to take advantage of oil’s uncertain future.
Personally, I like the future of smaller exploration companies. Their value will grow as prices go higher.
Think about it.
Big companies constantly need to keep up their reserves. And this is increasingly difficult in the face of aging oilfields. Peak oil is causing extraction from these maturing fields to reach excessively high costs.
And don’t forget unconventional oil. Over the next decade, we’ll begin to see a "quantity over quality" motto for meeting oil consumption. Unconventional sources like Canadian oil sands will become a major player as the Middle East’s giant oil fields deplete further.
So where do you start when looking for the right play?
Don’t worry, we’ve got you covered.
Right now we’re looking into several small exploration companies that are about to explode – and all you have to do is sit back and let your portfolio enjoy the ride.
Until next time,