By William Patalon III
Executive Editor
Money Morning/The Money Map Report
A plummeting greenback, inflationary fears fanned by the U.S. central bank and soaring global demand are combining to fuel a record advance in crude oil prices.
But the market madness of recent days is just the start. Crude oil prices will hit $187 a barrel within 36 months, translating into gasoline prices of more than $6 a gallon, and giving investors one of their biggest profit opportunities in decades, Money Morning Investment Director Keith Fitz-Gerald predicts.
That forecast runs counter to many analysts who are describing the current spike in energy prices as a speculative "bubble" fueled by fearful investors.
"Many people think high oil prices are a bubble. Maybe, but not for long and certainly not given the growth in global demand," Fitz-Gerald says. "Of course, prices will not stabilize anytime soon. Savvy investors [will realize that] we are still in the very early stages of a generational game with the potential to be played for great profits."
Investors have been pouring money into oil and other commodities amid spiraling worries about a U.S. recession, a spike in global inflation and a U.S. dollar that's in a freefall against such currencies as the euro.
The greenback hit a new record against the euro yesterday (Wednesday), falling to $1.5513 per euro, the lowest since the pan-European currency debuted in 1999. Oil prices have been in a scorching uptrend. Crude prices hit a record $110.20 a barrel on the New York Mercantile Exchange (NMX) yesterday, their 11th new high in the last 12 trading sessions.
Crude oil prices have jumped 8% so far this month, and are up 18% since the start of February and have surged 86% in the past 12 months. At this time a year ago, crude oil was trading at $58.92 a barrel.
Consumers are no doubt feeling the squeeze: Gasoline prices at the pump jumped to a new record of nearly $3.25 a gallon yesterday, as investors shrugged off positive news about inventories and demand. The U.S. Department of Energy said that stockpiles of oil and gasoline rose last week for the eighth time in nine weeks. And the Energy Department, the International Energy Agency and the Organization of the Petroleum Exporting Countries have repeatedly said that demand for oil and gas will advance at much lower rates than they'd previously projected.
Even so, gasoline is now expected to continue its march, and prices at the pump could reach $3.75 a gallon by spring.
Money Morning's Fitz-Gerald, a longtime energy bull, says that investors and consumers can expect more of the same. More than five years ago, when crude oil was trading at a price below $20 a barrel, the former longtime professional trader publicly predicted that crude prices would reach the century mark - $100 a barrel - within a decade.
Now that it's eclipsed that psychologically important price point, a number of experts have been predicting oil prices will move even higher.
In a March 6 report, Goldman Sachs Group Inc. (GS) boosted its oil-price target for 2009 to $105 a barrel, up 17% from its earlier target price of $90. According to Goldman, non-OPEC production is ready to plateau while growing consumption in China and other parts of emerging Asia is stoking global demand and constricting supplies.
Indeed, China - the world's second-biggest consumer of crude - increased its oil imports 18% in February, and simultaneously halted exports in order to meet rising demand for oil and gasoline.
Matthew R. Simmons, chairman of the Houston-based investment bank Simmons & Co. International, told Bloomberg News that oil is headed for $120 "in the short term. I'm one of the few people who's not surprised to see crude at $107. I still think it's a bargain" at current price levels.
If oil hits these lofty levels, gasoline prices will exceed $4 a gallon at the pump, though some experts say that gas prices also will drop back before they reach that level.
However, many analysts contend that the most recent run-up in oil prices is clearly a speculative bubble. The key reasons behind that assertion:
While it's true that oil prices are likely to drop back some in the near term, Money Morning's Fitz-Gerald doesn't agree that that this is just a bubble that will eventually burst, returning oil prices to much lower levels. Nor does he agree with analysts who think that crude oil will rise a bit more and then settle in at that new, slightly higher price point.
In the long run, at least, he believes oil and gasoline prices are headed higher - much higher.
Using the same predictive software that's allowed him to make other key market calls, Fitz-Gerald says that his analysis says crude oil will drop back from its record levels. Sometime in the next 36 months - sooner if a sudden event somewhere in the world either somehow crimps global oil supplies, sparks panic buying, or both - oil will advance from those lower levels until it hits the predicted price point of $187 a barrel.
But Money Morning's Fitz-Gerald sees oil-and-gasoline prices going higher - much higher. And he's very clear about just why that's going to happen:
Oil prices have made a major move in the past five years - just as the emergence of China, Russia and several other key economies transformed crude-oil pricing into much more of a global game. High prices have sent cash pouring into the coffers of oil-producers in Asia and the Middle East. Many countries have used that capital to finance global investment initiatives, creating government-controlled "sovereign wealth funds" to do their bidding.
Little wonder crude oil has become a strategic asset - as well as an energy source.
"As oil and other fuels become a more and more precious resource, OPEC countries, China, Russia and others will begin holding back oil, instead of putting it into the market," Fitz-Gerald says. "That's going to be devastating in the short-run."
If it creates captive supplies of crude, China has demonstrated that it's more than willing to endure controversy and cut deals with countries U.S. refiners either can't or won't deal with. China Petroleum & Chemical Corp. (SNP), and PetroChina Company Ltd. (PTR) - two of China's biggest oil companies - have invested in such political hot spots as Africa and Iran.
The Chinese government, desperate to lock down supplies of such crucial natural resources as metal ores and crude oil, has sealed deals with Sudan, Chad and the Congo. African Business reports that trade between Africa and China has advanced at a rate of 40% a year since 2001. In 2006, bilateral trade between the two was $50 billion.
Already, 14% of China's oil imports come from Angola. About 60% of Sudan's oil goes to China.
Clearly, supplies of crude oil are going to get tighter. Mix in a geopolitical surprise and crude prices could easily spike a price point up near the $200 level that has been predicted by Fitz-Gerald's proprietary analytics.
Fitz-Gerald has developed a three-pronged energy investment strategy for investors who wish to capitalize on his forecast for crude oil prices:
Go Deep: As Fitz-Gerald noted, with oil prices soaring, oil companies have begun to exploit resources previously considered too expensive - or too dangerous - to tap into. When oil was trading in the range of $20 to $30 a barrel - creating meager profit opportunities for so-called "Big Oil" - companies refused to finance any project that couldn't generate crude for a cost of $10-$15 a barrel. Needless to say, rising oil prices have changed that corporate outlook. At $100 a barrel, companies are looking at an array of exploration opportunities.
In total, producers will spend a record $369 billion on energy projects this year, 11% more than in 2007, said a Dec. 7 report from Lehman Brothers Holdings Inc. (LEH).
Fitz-Gerald favors StatoilHydro ASA (STO). StatOil is an integrated oil and gas company that focuses on the exploration, development and production of oil and natural gas from the Norwegian Continental Shelf. It has business operations in 34 countries, proven reserves of 1.675 billion barrels and is expanding aggressively to diversify internationally.
Just last week, the company announced plans to spend as much as $2.1 billion on operations in Brazil and the Gulf of Mexico. It bought the 50% stake it didn't already own in Peregrino, a heavy oil field in Brazil, and 25% of the deep water Kaskida discovery in the Gulf of Mexico, from the Texas-based Anadarko Petroleum Corp. (APC).
Target China: According to Fitz-Gerald, every investor must have a China strategy. And that holds true for the energy sector, as well. CNOOC Ltd. (CEO) China's offshore oil and natural gas explorer, is a prime candidate to fill both those spots. At $169, the shares are closer to their 52-week high ($218.20) than they are to their 12-month trading low ($79.20), and are on the pricey side, Fitz-Gerald says. But as a long-term play on both China and on oil prices, investors with the patience to let such a strategy play out may find this a profitable pick, he said.
Goldman Sachs on Friday upgraded the shares from a "Neutral" to a "Buy," citing a profit forecast for this year and next that's much more aggressive than the consensus Wall Street estimate. Given the weak dollar, CNOOC could also be on the prowl for acquisitions, which would further boost its earnings potential.
Explore Your Alternatives: As Fitz-Gerald likes to say, "alternative energy is an alternative no longer." Just as the massive upward move in energy prices is jump-starting deepwater drilling, it is also supercharging innovation, starting with research into alternative fuels for automobiles and then moving into alternative sources of energy for the production of electricity for towns, cities and countries.
Investment opportunities abound. But this arena can be as tricky as investing in raw Internet startups - you never know which firms will thrive and which will founder. For that reason, it's sound strategy to turn to a fund manager with alternative-energy savvy. Indeed, there are a number of exchange-traded funds (ETFs) that focus on "clean" technology. Fitz-Gerald's choice: The PowerShares WilderHill Clean Energy fund (PBW).
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About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning at Money Map Press.