On the web since 1997
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On the web since 1997 |
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The Oil DerbyLuke Hodgens / Powerhouse Profits -- It finally looks like oil contracts may be taking a long deserved breather. After flirting with $50 per barrel last week, oil contracts have dropped roughly 5.5% since the high on Friday. Have we reached the peak? Is the oil bubble about to burst? What factors will lead to a long term stabilization of oil prices?Well, dear reader, we at Powerhouse feel that we haven't yet reached the peak price per barrel and the bubble isn't going to burst. However, we do believe that middle to long term prices will stabilize well below current prices. Let me explain. Since June 1st, oil contracts have been headed in one direction - up! From that day's low of $35.54, oil prices raised almost $13 per barrel to last Friday, or 36%. There was not a single day of trading during this period that we saw a trend reversal, or even a flattening of the current upward trend. Oil will see $50 before it sees $40. Oil speculators have turned the oil market into a horse race with $50 being the final leg of the Triple Crown. There is so much cheering for price increases that almost everyone has joined the band wagon. From the end of March to the end of April, oil tested $35, pulled back and then bulled right through. The next goal was $40. You can see the testing of $40 begin in mid May, a pull back-and-gear-up in early June, then a blast through $40 in July. The same pattern is developing here at $50. The recent pull-back will be reversed by speculators cheering for $50. Although recent developments in Venezuela, Iraq and Russia lend credence to the pullback, the race is still on. We think $50 will be tested before summers end - then, after the race is over, a long awaited and real pullback should occur. The bubble will not burst overnight though. Once race fans get their $50, speculators should begin pulling out and the rest of us will follow. I cannot see oil going much higher than $50 since OPEC has been quite accommodating, but on the other hand, oil will not likely dip below $35 this year. Why will oil pull back after $50? Two major reasons - the Yukos fiasco will be over and Venezuela will be pumping more crude. Whether Yukos can find a way to stay in business, or the Russian government dismantles and sells the company to herself at a deep discount, the fiasco should soon be over. The Yukos situation has only added fuel to the speculative fire. It no longer matters (to the oil market) who retains control of Yukos. The market only wants to see stability and flow - stability and flow she shall have - and our pal Hugo? After winning the referendum on the presidential recall, Hugo Chavez is sitting pretty - on top of the western hemisphere's biggest oil reserves. Two things will happen in Venezuela to increase oil supplies. First, major oil companies will invest there, and second, Venezuela will soon bring output up to pre-strike levels - about another 500,000 barrels per day. Although there are some tall barriers to be climbed in tapping Venezuelan oil, companies like ChevronTexaco (NYSE:CVX), Exxon Mobil (NYSE:XOM) and Royal Dutch (NYSE:RD) are in talks with the Venezuelan government to produce crude at levels much higher than are currently being pumped. More flow from Venezuela can be expected within the next six months helping to stabilize oil at a lower price; and if deals with big oil materialize, prices could go even lower - perhaps to $35 by the New Year. We are without a doubt witnessing a sporting event in the oil market. But, dear reader, once all the gamblers and spectators go home, things will slowly get back to near normal. Analysts' target prices for 2005 range anywhere from $28 to $40 per barrel. We at Powerhouse believe $35 is a fair value considering the higher demand. All of this is great news for your wallet - and our economy. Once lower prices settle into the market, energy expenditures will lower, consumer confidence will rise and consumer spending will increase. Oh, and don't forget that pesky inflation, it will be well under control. Q4 2004 and Q1 2005 should bring us some tremendous growth! Luke Hodgens is the editor of |
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