Oil Prices Will Head Higher

10/13/2010 12:00 pm EST

Focus: STOCKS

Curtis Hesler

Editor, Professional Timing Service

Curtis Hesler, editor of Professional Timing Service, says increasing oil demand, especially in Asia, and tight supply will drive oil prices higher, and he likes one Canadian oil-sands producer.

Deflation—such as it is feared in the West—is not going to force crude oil prices lower. There are several reasons for this, one of which is China.

China is now the world’s second largest economy. Their growth rate has cooled off from white hot to red hot, but they are going to double their energy consumption by the end of this decade.

China now has the world’s largest car market, and those cars are being purchased by drivers not replacing old cars already on the road. Each car sold in China directly adds to global energy consumption, as does the expanding infrastructure being built to accommodate a rising Chinese standard of living.

Although the Chinese economy has cooled off a little, their first-half 2010 [annualized gross domestic product growth] still came in at 11.1%.

You can use [a rule of thumb] of 0.9 to estimate the increase in their oil consumption: Simply divide the GDP growth rate by 0.9 to get a look at crude consumption: 11.1%/0.9=12.3% increase in crude consumption. The point is that China will be a larger importer of crude in 2015 than the US.

India mirrors the Chinese situation. Per capita energy consumption is increasing in Asia much faster than it will decline (if at all) in the West. Bottom line, global demand for crude oil is going to increase, regardless of economic conditions in the West.

The other side of this coin is supply. Forty percent of the major producing areas on the planet are experiencing declining production. Tar sands, which are touted as a savior for the US, are energy intensive to extract and process, and tar sands miners are a long ways from producing the quantities we need.

There is growth and there are profits to be had, but tar sands are not going to produce enough crude to make up for declining fields. Although profit opportunities exist in tar-sand operations and within the alternative energy sector, wind and hydroelectric are not going to fill the gap between supply and demand, either, but there is good money to be made nonetheless.

Suncor Energy (NYSE: SU) extracts and processes tar sands in Canada, and although I don’t expect that tar sands are going to provide us with energy independence, Suncor Energy is an important energy provider.

They have some 27 billion barrels of recoverable oil, but producing oil from tar sands is not just a matter of punching a hole in the ground. Nevertheless, they are profitable and will be an important source of oil in the US and Canada. They have very nice growth prospects and operate in a safe geographical area. Buy Suncor at $30 or better. (It closed below $35 Tuesday—Editor.)

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