Oil Prices Will Likely Remain High This Summer

Posted by Louis Navellier on 5/21/08 10:09 am

This post contains energy stocks that are in our top-ten holdings.

We are now entering the peak season for worldwide oil demand.  As such, you will not likely see any significant relief, if any, at the gas pump until after Labor Day, when the summer driving season ends.  However, you might be able to limit some of the pain at the pump by investing in companies that are well positioned for this energy-inflation environment.  At the end of this post, I’ll share with you some of our top-ten holdings that are in this space.

If you are wondering why diesel prices are so high, it is because the U.S. is now making “clean diesel” that is in high demand in Europe and the rest of the world, so U.S. diesel is now being exported.  In turn, the U.S. continues to import gasoline from other countries to meet demand requirements. 

These gasoline imports must then be blended with ethanol before they are transported to the pump.  If Barack Obama is elected our next president, it is widely assumed that the ethanol mandates and federal subsidies will likely continue, since Southern Illinois is a major corn-growing region, and Obama will probably protect his home state’s subsidies.  If John McCain is elected, it is expected that the federal ethanol subsidies will be cut off and cheaper Brazilian ethanol will likely be increasingly utilized.

Goldman Sachs recently rattled markets with its dire prediction that $150 to $200 per barrel oil is now possible within the next 6 to 24 months.  Yikes!  However, Goldman Sachs admitted that predicting the “ultimate peak” in oil prices and the duration of the current updraft “remains a major uncertainty.” Since Goldman Sachs correctly predicted $100 per barrel oil more than two years ago, its newer warning carries credibility.  I suspect that Goldman Sachs is also long crude oil and is profiting from its meteoric rise. 

One of the big problems emerging is that Mexico, Norway, Russia, and Venezuela are now experiencing declining crude oil production.  As a result, the world has become increasingly dependent on the Organization of Petroleum Exporting Countries (OPEC) for any production increases.  Recently, President Bush visited Saudi Arabia for the second time this year (Vice President Cheney also visited Saudi Arabia in between President Bush’s trips) in an attempt to coax the oil-rich nation to produce more oil.  When President Bush met with King Abdullah back in mid-January, he asked Saudi Arabia to increase production, but received a chilly response. 

Officially, President Bush’s most recent visit was to celebrate 75 years of formal U.S.-Saudi Arabia relations, and to agree on several matters, such as cooperation on nuclear energy, the protection of Saudi Arabia’s vast oil infrastructure, and nonproliferation.  Complicating matters, the Senate Democrats introduced a resolution that would block $1.4 billion in arms sales to Saudi Arabia unless Riyadh agrees to increase its oil production by one million barrels per day.  The Democrats said they introduced the measure to coincide with President Bush’s trip in order to send a message to Saudi Arabia that it should pump more oil to reduce the cost of gas for Americans.

Interestingly, Saudi Arabia has been exceeding its OPEC quotas for the past six months.  Specifically, in April, OPEC said Saudi Arabia produced 9 million barrels a day, which was down slightly from March, but 100,000 barrels per day over its quota.  However, more importantly, Saudi Arabia’s output consistently topped its 8.9 million barrel-quota for the past six months, which is indicative that the country is trying to make sure there is sufficient global supply.  After increasing its oil production above the OPEC quota, Saudi Arabia still holds excess capacity of about 1.9 million barrels a day, which represent virtually all of OPEC’s surplus capacity.

After President Bush’s visit, Saudi Arabia pledged to increase its crude oil production by approximately 300,000 extra barrels per day.  Ali Naimi, Saudi Arabia’s oil minister, said after the meeting with President Bush that the kingdom’s crude oil output would hit 9.45 million barrels per day by June, just in time for peak demand during the summer.  It will be very interesting to see whether crude oil prices will stabilize with the increased Saudi Arabian production.

In the interim, the search for more crude oil around the globe is relentless.  But the normal link between high crude oil prices and increasing production has been disrupted since most of the new sources of crude oil are much more expensive to find or extract.  It can also take several years to bring new oil fields online.  Russia is expected to provide new incentives to coax Western oil companies to help it find new crude oil and natural gas deposits. 

The biggest news in the energy business is that Brazil recently announced a second major oil find off the east coast of Brazil.  The head of Brazil’s National Petroleum Agency, Haroldo Lima, said the oil find could be one of the world’s biggest discoveries in decades, containing as much as 33 billion barrels in oil equivalent, which would make it the third largest oil field in the world.  Additionally, in 2006 Brazil’s Petrobras discovered the Tupi oil field, which the company says has an estimated eight billion barrels.  That was the biggest strike anywhere in the world since 2000.

Even though these new oil discoveries could be very large, the oil would not hit the market anytime soon.  Petrobras’ discovery is in an area known as the “presalt area,” which lies at a water depth of more than 6,500 feet, an additional 9,800 feet of sand and rock, and another 6,500 feet of salt.  This makes crude oil production very challenging and expensive, similar to new deep-water finds in the Gulf of Mexico that have not yet been brought online.

After Petrobras’ discovery, the oil service industry went straight to West Africa, since the East Coast of Brazil and the West Coast of Africa were connected in the Pangaea era, when the earth had one giant super-continent.  This was before the Mid Ocean Ridge and the Atlantic Ocean were formed over 200 million years ago.  As a result, both Brazil and West Africa are now the hot spots for oil exploration. 

Below is a list of Navellier energy companies that are top-ten holdings in our all-cap portfolios.

Vantage Portfolio:
Sasol Ltd. (SSL); 1-yr Chart; Profile
Petroleo Brasileiro (PBR); 1-yr Chart; Profile
EnCana Corp. (ECA); 1-yr Chart; Profile
Cameron International Corp. (CAM); 1-yr Chart; Profile

All Cap Core Portfolio:
Occidental Petroleum Corp. (OXY); 1-yr Chart; Profile

Power Dividend Portfolio:
Noble Energy, Inc. (NBL); 1-yr Chart; Profile
Devon Energy Corp. (DVN); 1-yr Chart; Profile
XTO Energy, Inc. (XTO); 1-yr Chart; Profile

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Investment in equity strategies involves substantial risk and has the potential for partial or complete loss of funds invested.  It should not be assumed that any securities recommendations made by Navellier & Associates, Inc. in the future will be profitable or equal the performance of securities made in this report. For a list of recommendations made by Navellier & Associates, Inc., for the preceding twelve months, please contact Tim Hope at (775) 785-9416.

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