Why You’re Missing the Big Rally in Energy

12/19/2011 11:19 am EST

Focus: COMMODITIES

Sean Brodrick

Editor, Red-Hot Resource Millionaire

There’s a monster rally going on right now in the energy markets, but most investors are missing the boat because they’re listening to the wrong people.
Energy bears are making three main arguments, but they’re all wrong.

The first argument I hear from the energy bears is that the economy isn’t strong enough to sustain these prices. Sure, the economy isn’t as strong as we’d like, but it is getting stronger. The labor market is improving, manufacturing activity is expanding, consumer confidence is rising…heck, even the real estate sector is starting to pick up.

And don’t forget about the 2-trillion dollars in paper assets created by central banks since September. They’re trying to grease the economic wheels in China, Europe, South America, and here. All that money has to go somewhere, and a lot of it flows into commodities like energy.

So, if the global economy continues to improve and policymakers keep printing money, energy prices are likely to keep heading higher.

The energy bears also argue that oil and gas prices are just driven up by speculation. Boy, I wish that were true. I’d speculate myself right to Beverly Hills!
While speculators do play some part, a much bigger force causing higher energy prices is an increase in exports of petroleum products—mostly diesel and gasoline—by US refineries. In fact, exports have surged sharply over the last two years, to about a billion barrels in 2011.

So now, we have to bid against people in Mexico and China for every gallon, and that competition is just going to get more and more fierce in the future.

You may have also heard so-called experts say that OPEC can just pump more oil and drive prices lower. But, the fact is, OPEC’s buffer against supply disruptions has dropped to its lowest levels since 2008, when crude prices made their record run to 147-dollars-a-barrel.

chart
Click to Enlarge

Once again, a drop in OPEC’s spare capacity equals higher prices. And, I think that if this trend continues, crude could challenge those 2008 highs.

They say that the best cure for high oil prices is high oil prices. In other words, as oil and gasoline prices rise, people don’t drive as much, and that sends prices lower again. But, I think this may be overstating things. Americans are less sensitive to rising fuel prices than they were during the last big oil rally. Thanks to Cash for Clunkers and shifting driving habits, they use 8.2% less gasoline than they did just a year ago.

So, while gas prices just over $4 a gallon helped tip us into recession in 2008, I think it may take even higher prices to do the same this time. That means gas prices, and the bull market in energy, still have a ways to run.

An easy way to take advantage of this trend is through the SPDR Select Energy Fund, symbol XLE. But I think the biggest profits will be made in individual names—the kind of picks I give my Global Resource Hunter subscribers.

Remember, before making any investments, be sure to do your due diligence, and pick your exit point before you buy.

Related Articles on COMMODITIES