Crude oil prices are getting set to break the $100 a barrel mark in coming months . But will they eclipse their all-time high of $147?
Energy-industry specialist Dr. Kent Moors, advisor to six of the world's top 10 oil companies, predicts that oil could hit $150 by July.
That means $4.50 for a gallon of gas while OPEC and Big Oil line their pockets. It could send the U.S. dollar into a tailspin and threaten the country's fledgling economic recovery, as higher prices at the pump trickle into consumer costs across the board.
How can you profit from $150 oil? Read on below to learn the top four ways to bank gains on "peak oil". While everyone piles into Exxon (and that's great), the big money is in China's up-and-coming international oil industry.
Let me show you where to find the best gains and why all of this is happening right now…
Supply, Demand, Frenzy
In 2010, sluggish economic growth kept oil prices in check, even as other commodities surged ahead. U.S. supplies were ample and production from the Organization of Petroleum Exporting Countries (OPEC) was strong.
But going forward, the same factors that drove oil to a record high of $147.48 a barrel in 2008 will again conspire to push prices higher in 2011.
These factors include:
- A weak U.S. dollar.
- Greater global demand.
- Tighter supply.
- And the potential for speculative frenzy – like the one in 2007-2008.
JPMorgan Chase & Co. (NYSE: JPM) and Bank of America Merrill Lynch (NYSE: BAC) are both forecasting triple-digit oil prices for 2011. And Goldman Sachs Group Inc. (NYSE: GS) has said that it expects "substantially higher" oil prices by 2012.
The rising demand for oil from emerging markets will be one of the main catalysts pushing oil prices higher.
Global demand is set to hit a new record in 2011.
Oil demand in the third quarter of 2010 was up 3.7%, the fourth straight quarter of growth – a trend that is likely to continue through 2011 and beyond.
The IEA forecasts global energy demand will rise to 88.2 million barrels per day (bpd) in 2011, up from 86.9 million bpd this year. And most of that demand will come from emerging markets. Oil prices will have every reason to move higher, even if the U.S. recovery falters.
In the last year, global oil consumption rebounded from the lows in early 2009 and now exceeds pre-crisis levels. But consumption in developed economies, like the United States and those in Western Europe, remains 8% below 2007 levels. Emerging markets, like China, India and South Africa, are picking up the slack.
The usage gap between developed markets and their "emerging" counterparts has shrunk from 12 million bpd three years ago to just 4 million bpd today.
Increases in oil demand follow economic growth. And emerging markets, with their strong economic gains, will also be driving growth in oil demand in the next year.
The most dynamic emerging market growth has come from China. Its economy expanded an estimated 9.1% in 2010. To compensate, oil demand in China could grow 10.4% this year – the fastest rate of any country in the world.
To put that in perspective, 700 out of every 1,000 people in the U.S. own cars today. In Europe, 500 out of every 1,000 people own cars. But only 30 out of every 1,000 Chinese own a car. That number could increase eight times over, jumping to 240 out of 1,000, in the next 25 years. That's an average increase of 32% more cars, and their oil consumption, each year.
A Supply Squeeze
Of course, increased demand has led to tighter supplies of crude oil – even in the United States, which has yet to fully emerge from its economic malaise.
U.S. inventories declined quickly at the end of 2010 (40 million barrels, in as little as five-six weeks) and could continue falling in 2011.
On the production side, OPEC will do its part to influence higher oil prices – and it certainly has leverage. The cartel controls 40% of global crude production and that share will grow to 50% by 2035.
Not wanting to hurt fragile demand in the depths of the financial crisis, OPEC was comfortable with crude prices of $70-$80 a barrel in the last few years. But as demand rebounds, the cartel is showing an interest in making $100 a barrel the new standard.
OPEC representatives have said $100 oil prices would not "hurt the global economy".
Indeed, OPEC has indicated that it's comfortable with even higher oil prices – as any group of major crude suppliers would be – and will be reluctant to increase supplies, barring a major spike in prices.
With OPEC's current attitude, oil will easily hit the $100 a barrel level in the first part of 2011.
A Speculative Surge
Other factors, beyond basic supply and demand, are always at play in the oil market. Investor sentiment and the value of the U.S. dollar will both play major roles in 2011 oil prices.
Oil is priced in dollars and is vulnerable to changes in the greenback's value relative to other currencies. A stronger dollar makes oil more expensive for foreign countries.
Conversely, a weaker dollar makes it cheaper for countries that import oil.
Currently, the U.S. Federal Reserve's commitment to a loose monetary policy has undermined the value of the dollar. The Fed has effectively flooded the system with cheap money, and there are more investment dollars available for commodities such as oil.
The price of oil climbed 7% when the Fed announced it would buy an additional $600 billion in U.S. Treasury bonds through June 2011, and it's surged some 17% since the Fed first indicated it would consider a second round of quantitative easing.
When oil reached its record high in 2008, it was largely because speculators had piled into crude – and a host of other commodities – to hedge against the beleaguered greenback. Similar behavior could intensify oil's 2011 ascent.
The bottom line: Both the short and long-term outlooks for oil prices are bullish.
2012 and Beyond
Demand, already buoyed by strong emerging market growth, will continue to accelerate as the global economy continues to mend and mature. Supplies will tighten as a consequence, and OPEC will be slow to increase production.
Finally, speculators looking to both capitalize on the Fed's expansive monetary policy and preserve their wealth in commodities will add fuel to the fire, taking crude oil prices even higher.
The result will be a surge in oil prices that tests the record highs set by "black gold" in 2008. And the outlook just gets better the further you look into the future. 2012 and beyond will see stronger demand and new highs set in the oil markets.
One of the simplest ways to profit from surging oil prices – outside of investing in futures on the NYMEX exchange – would be to invest in an exchange-traded fund (ETF) that tracks the commodity's movement.
The iPath S&P GSCI Crude Oil Total Return ETF (NYSE: OIL) and the PowerShares DB Oil Fund (NYSE: DBO) are two options.
If you're looking for specific companies, it may be best to look in China, where the most growth is currently occurring. To that end, China National Offshore Oil Corp. (CNOOC) (NYSE ADR: CEO) is one option.
CNOOC is often referred to as the most "Western" of China's oil majors because it was founded with a mandate to form joint ventures with foreign companies. CNOOC is the vessel through which China is acquiring foreign expertise in the energy sector.
Domestically, ExxonMobil Corp. (NYSE: XOM) remains one of the safest and most consistent energy plays in the United States. The company has a market capitalization of $363 billion and its stock yields 2.45%.
Indeed, Exxon could be in for another record-breaking year – as could oil prices in general – if there's a reprise of the summer 2008 oil frenzy.
Don't bet against it.
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