The Best Time To Invest in Oil

Brian Hicks

Updated August 13, 2008

Dear Wealth Daily reader:

Last Friday, this headline ran across the newswire…

The Great Oil Bubble Has Burst

It was published by the British fish wrap The Telegraph.

You can read the entire article here:

But before you do that, I want you to read the first sentence of the last paragraph of the piece:

"But for the time being, a return to a relatively "normal" oil price in the $60 to $80 range would take the sting out of the current inflationary surge…"

The last time the price of oil was in the $80-range was in October 2007.

It’s interesting that all of a sudden $80 a barrel is "normal." I say this because I just read a bunch of articles regarding the price of oil that were published last September-October. Take a look…

  • "Crude oil closed above $80 a barrel for the first time today, breaking a longstanding psychological barrier just days after oil producers tried to bring prices down by promising to increase output." NY Times, Sept. 13, 2007
  • "Oil prices at $80 a barrel should be a source of happiness to crude oil producing countries. But the OPEC is not happy.

    Abdalla el-Badri, Opec secretary general, said in its first response to the current record prices that oil prices were high and would not last, because they are not supported by oil market fundamentals." – Financial Times, September 13
  • "To listen to Big Oil executives, there’s no reason why a barrel of crude costs $80.

    ‘No one has to wait at the gas pumps of the world. There is no physical problem,’ Jeroen van der Veer, head of Royal Dutch Shell, recently told reporters in Calgary. ‘[There’s] a lot of psychology in the price.

    Van der Veer’s comments echoed those of Exxon Chief Executive Rex Tillerson, who said earlier this month that he "cannot explain why we have $70 oil today. We are not having trouble finding oil. There is something else going on that I don’t get."

For over a decade, $20 a barrel oil was considered the price of a healthy and normal oil market. It was akin to 120-over-80 blood pressure.

Today, that price level is in constant flux. Nobody really knows what the healthy-normal price of oil is. But according to everybody who’s proclaimed the oil crisis is over, $80 is now the new $20.

But we think the true value of oil is much higher than today’s $114 a barrel price.

In fact, we’re telling everybody it’s time to buy on the dip and invest in oil.

Here’s a great analysis of the current oil situation by Barry Ritholtz who writes the Big Picture blog:

Back in July, I noted that we had exited many energy positions, and would like to see Oil pull back to $105-110 to re-enter them.

This was a tactical, not secular, repositioning.

Why not secular? Well, for a few reasons. Commodity rallies tend to run decades, not years. And the rise of China and India means huge new demands on global energy reserves are going to keep prices elevated far above the old days of $30 oil.

But the biggest reason is this simple chart, via ITF Interim Report on Crude Oil:

20080813 wd chart

Sources: Federal Reserve, IAE, ITF

Note that these aren’t projections, but are actually based upon data.

You don’t have to be a technician to look at that chart and recognize something new is going on. Back in 2003, global GDP began pulling away from Oil production. Note that Oil broke out over $32 shortly thereafter, and never looked back. In the annual BusinessWeek forecasts (2004), I was one of a handful of strategists who picked energy as my top sector.

It’s also pretty clear that all of the hullaboo on offshore drilling is just so much political nonsense. Yes, we should be drilling. No, it won’t make much of a difference in prices. Here’s the usually circumspect John Berry, explaining why:

"It’s absurd to argue that ending the moratorium on drilling off parts of the U.S. coasts would quickly bring down the high price of gasoline.

This chimera is being touted by President George W. Bush and other Republican politicians, including the party’s presumptive presidential nominee, Senator John McCain of Arizona, to deflect blame for what it’s costing for a fill-up.

To get around the fact that it would be a decade or more before any oil would be likely to flow, a few partisan analysts have said that the cost of gasoline would fall right away. They argue that the prospect of additional oil supply in the future would lead oil companies to produce more oil immediately because they would expect prices for crude to be lower later on.

Well, wouldn’t that depend on whether a producer had the capacity to pump more oil today, and whether it thought lifting the moratorium would add a significant amount of oil to future supply relative to future demand?

There are good reasons to question whether another 1 million or 2 million barrels of crude a day would make much difference in prices when world consumption is running at 85 million barrels a day.

About a fourth of all U.S. oil production is already coming from offshore wells, primarily in the central and western portions of the Gulf of Mexico that aren’t covered by the moratorium."

Such silliness.

We should be doing more of everything… investing in alternative energy, nukes, conservation, tax credits, solar, etc. Focusing on this one issue is simply to the exclusion of all else is childish ignorance. In this country, we keep refusing to make the difficult decisions. Everything requires a quick and painless fix. (We better wise up fast).

Hence, the pullback in Oil may be viewed as a short-term opportunity to invest and prosper.

Amen to that.


Brian Hicks

P.S. Many of you are already enjoying the profit taking from the oil boom in the domestic Bakken formation. And if you’re not, it’s time to get in. The energy sector is heating up again, as are the stock plays in the $20 Trillion Report. Learn how to get your piece of the Bakken profits at these still-low levels in our new Bakken North Dakota-Montana research report.   


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