There’s Nothing Holding Back Oil Prices

10/10/2007 12:00 am EST

Focus: COMMODITIES

Curtis Hesler

Editor, Professional Timing Service

Curtis Hesler, editor of Professional Timing Service, says strong global energy demand, tight supply, and geopolitical events could drive oil prices much, much higher.

The global appetite for crude has been increasing at a rate of about 1.5 million barrels a day per year. Large, national users are nailing down supplies by making deals with producing countries. China, for example, is in bed big time with the Iranians and Venezuelans. They are also actively sequestering supplies in Africa. They (unlike us) are under no delusions about the limited quantities of crude available, and they (unlike us) are proactive in trying to guarantee that they have their share when supplies get tight. They know there is no more easy oil.

I look for some countries, like Mexico, to begin limiting exports in order to hold back production for their own domestic use. With the production declines we are seeing in Mexico, they may cease to be a source for US supply in the not-too-distant future. A drop in available supplies of crude for the US market will cause a recession. There is nothing the Federal Reserve can do about that.

On the other hand, a recession in the US will not change the imbalance between the global supply of crude and world demand. Global demand will continue to outpace supply, and prices are going to go higher. The sacrificial lamb in the Fed's efforts to keep the economy humming will be the dollar. As the dollar falls, gold and crude oil prices will rise.

It sounds like the powers that be are softening up the public for an extension of the Iraqi-Afghan war [to Iran]. I expect to see military action taken against Iran, regardless of who ends up in the White House. The casus belli is rooted in the argument that Iran is responsible for training and equipping anti-West factions fighting in Iraq and, therefore, is responsible for the murder of hundreds of Americans and thousands of Iraqis.

US Central Command has detailed plans drawn up, and a US aircraft battle group, along with two expeditionary strike groups that include submarines and amphibious assault ships, are stationed in the Persian Gulf. Couple this with increasingly heated rhetoric about "confronting this danger before it is too late" (sound familiar?), and it adds up to the West (us) chomping at the bit-if not to stage a full-scale invasion, then to at least strike Iranian targets.

The short-term, technical outlook is that crude, like gold, is overbought and needs a rest, but a surprise geopolitical event will set the technical aspects on their ear. Your approach should be to expect some profit taking in crude. Crude should be able to hold $72.00 at the worst in a selloff. Use weakness to buy; and in the meantime, hang on to what you have. Gold and crude are not good trading markets, because the surprises will always be on the up side. Shorting energy or precious metals is reckless, and not holding a position is equally as unwise.

Subscribe to Professional Timing Service here...

Related Articles on COMMODITIES