Extended markets ran into resistance where expected this week, within the Sept. S&P 2810-2820 (S...
Investing for $100 a Barrel Oil
08/29/2007 12:00 am EST
Curtis Hesler, editor of Professional Timing Service, says an economic slowdown will not reduce demand for oil, and he says investors should be prepared for much higher crude prices.
Most of the insanity in the market this month was brought on by overleveraged hedge fund managers blindly liquidating positions in a fit of emotion to meet margin calls. As the margin liquidation process starts, one margin call ignites another and the selling spirals out of control.
The Fed stepped in and provided a drizzle to quench the firestorm in the form of a discount rate cut of 50 basis points. The market responded favorably [until Tuesday, when the Dow Jones Industrial Average fell 280 points].
The discount rate cut was welcome, but it’s not enough. They will certainly cut the fed funds rate at the October Federal Open Market Committee meeting, if not before. I would not rule out the possibility that they could cut the fed funds rate in a surprise announcement between meetings. It is rare, but it has happened—especially if they see an immediate need to avert further calamity.
I think we are already in a recession. I expect it to be powerful, but I don’t see it affecting the global demand for raw materials. Domestic demand for energy will continue to increase, regardless of a recession. The Energy Information Administration (EIA) reported global oil consumption increased [1.4 million barrels per day] during the second quarter of 2007 compared to levels a year ago.
Meanwhile, production is falling in Venezuela, Iraq, Iran, Indonesia, Libya, Nigeria, Kuwait, Mexico, and Russia. Saudi Arabia is pushing on a string to maintain production at current levels. Also, new production that is brought on line to replace mature light crude is predominantly “difficult to refine” sour crude.
Prices do not run linearly; they zigzag. Crude moved to $78.00 recently—which was essentially the old 2006 high—and everyone turned bullish. We forecast a technical correction back to $69.00 to $70.00. I believe we will still see that $69.00 level, but due to the opportunity handed to us by the mindless liquidation over the last couple of weeks, it really doesn’t matter at this point. You need to be investing now for $100.00 oil in the future.
How do you invest for $100.00 oil? The best avenue is to seek those situations that make money as a consequence of $100.00 oil—not necessarily those that produce it. The exception is Apache (NYSE: APA). It fell as low as $72.65 lately, and purchases up to $78.00 are recommended. (It closed below $74 Tuesday—Editor.) Apache is the one major that should be in your portfolio.
If you are hungry for yield, Blackrock Global Energy (NYSE: BGR) is still selling just below our downside buy price. Buy BGR up to $28.00 for a yield of about 5.4%. (It closed at $28 Tuesday—Editor.)
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