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Stock Ideas Investors Daily Edge The Oil Market is Handing You a Giftı Take It!
Stock Ideas Investors Daily Edge The Oil Market is Handing You a Giftı Take It! 
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| The Oil Market is Handing You a Giftı Take It! |
| Friday, 25 July 2008 | ||||||||
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The oil correction has finally arrived. And with it comes opportunity… In my last article for IDE Unplugged, I suggested that oil was overdue for a pullback and that the turnaround would be swift. The next day, crude surged to an all-time high over $147 a barrel. Since then, oil has shed almost $23 settling just over $124 a barrel on Wednesday. If you acted on my short-term trading recommendation to buy the airlines, you’re probably pretty happy right now. Almost every airline is up sharply, with American (AMR) up 102 percent, Continental (CAL) up 78 percent, and Delta (DAL) up 66 percent, in just two weeks. Call options on these companies have made some investors a fortune. In the near term, I believe oil will show continued weakness while the excesses of such a sustained rise work themselves out. But the opportunity I have for you today is not on the downside. And it’s not a short-term trade. I believe it is one of the safest and potentially most profitable long-term bets in the market right now. In the coming years, oil is almost certainly going higher – MUCH higher. But the way to play it is NOT to buy the oil companies. Let me tell you why… All the easy barrels of oil have already been discovered. The oil that is left is harder to find, more difficult to extract, and it is of lower quality. For these reasons, almost every major oil company is having a difficult time replacing their reserves each year. On top of this, most of the major fields that are already producing are in a state of significant decline. 20 years ago, there were more than a dozen oil fields that pumped a million barrels per day. Today, there are only four. And next year, there will probably be three, as Mexico’s giant Cantarell Field has virtually collapsed. Production there fell 34 percent from May of 2007 to May 2008. To add to the problem, as production and reserves are falling, demand has continued to surge. And over the long term, demand will continue to increase, even as prices rise. Not only is the world population expected to DOUBLE in the next 20 years, but our society will be far more industrialized.
And here’s the real kicker… Right now, the U.S. uses 25 percent of the world’s oil production, but we are home to only five percent of the world’s population. That means it would only take a very small increase in demand from the other 95 percent of the world to make a dramatic impact on oil inventories! On average, those in the U.S. use 25 barrels of oil per person, per year. I expect those numbers to fall. But consider this, China uses less than two and India uses less than one barrel of oil per person per year. However, these two countries are home to nearly 40 percent of the world’s population. Therefore just a fractional increase in per capita demand would swamp the world’s already falling supplies. That’s the long term picture. In the short term, the price of oil might continue to fall. If it does, treat it as a buying opportunity. So, what do you buy? As I mentioned, don’t buy the oil companies. The big oil majors are like slowly sinking ships. They need your investment dollars to patch the holes and keep the boat afloat, as their production and reserve numbers are falling. It is estimated that the petro-giants will spend $10 trillion in the coming decades on oil and gas exploration and production. Don’t invest in the companies SPENDING this money. Instead, invest in the companies that will be RECEIVING this money. By that, I mean the companies that are helping Big Oil… and Really Big Oil (the National Oil Companies) to find and produce more crude. All that money will flow toward the drillers, the oil services companies (pumps, pipes, bits and chemicals), and the seismic surveyors. Look for ETFs and the strongest companies within these sectors. Buy on weakness and hold for the long term. Jon P.S. To let me know what you thought of today's article, send an e-mail to: This e-mail address is being protected from spam bots, you need JavaScript enabled to view it
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