How to Profit From the Surge in Oil

Have you watched the oil markets over the last few days? Oil is setting record prices. As I write this we are now trading over $ 142 a barrel for the first time. The Dow Jones Industrial Average is hitting new lows . . . giving up almost 1,100 points in June alone. And the month’s not over yet.

We’ve had a huge number of news stories impact oil prices. Oil was stuck in a trading range of between 130 and 138 for the last few weeks. After being range bound, all of this oil news pushed the market up.

So where’s oil headed?

You’re not going to like my answer, but more on that in a minute. First let’s look at what has happened over the last few days.

Just a scant seven days ago China announced that they would remove some of their subsidies in the oil market. This effectively caused a price increase of about 8% on gasoline, diesel, and aviation fuel. Up til now they’ve held prices low in China to encourage growth and development. The expectation is that higher prices for gas and oil will cause demand to fall in China.

The oil markets basically ignored the news. After a one day drop prices continued their rally.

Then the Saudi oil summit took place. Over the weekend, hundreds of countries attended a summit in Saudi Arabia. The goal was to discuss ways to decrease oil consumption. A lot of hot air was being blown by politicians at this gathering. The only thing substantial to come from the meeting . . . .a weak promise from Saudi Arabia to increase oil output.

This news should have at least sent the price of oil down a little, but once again the market ignored the news.

Then the Fed spoke.

Big Ben had his moment in the spotlight this week. He and his fellow Fed cronies highlighted inflation as a key concern. Specifically they called out fuel and food as the big drivers. Then they decided to hold rates steady. With the anticipation of a rate increase in the Euro, the US Dollar weakened. Remember oil is priced in US Dollars and this news contributed to the move up in oil.

Ben wasn’t the only one speaking.

Our “good friend” Chakib Khelil president of OPEC had something important to say. To paraphrase, he essentially said: This summer oil will hit $ 150 to $ 170 a barrel. Then decline later in the year. He didn’t think prices would hit $ 200 a barrel. I don’t know . . . is that good or bad?

Well I can tell you his comments caused the oil markets to skyrocket by $ 4 in just a few moments.

Then Libya decided to play on the global stage. They announced they were “thinking” about cutting production. Their logic is the oil market is well supplied. Of course that logic makes no sense. But the mere statement helped add fuel to the fire.

So enough news. What’s all this mean?

It means oil is fragile. Not like your grandmother’s glass angel collection. I mean its price level is fragile, and it’s more fragile to the upside than the downside. Think about it. Major news that should push prices lower hasn’t had an effect. Let’s play a little game called “What-If.”

What if Iraq production is interrupted by terrorists? What if Iran cuts supply? What if Libya cuts supply? What if Venezuela cuts production? What if a pipeline breaks? What if a hurricane hits oil platforms in the Gulf? Any one of these events, and hundreds of others, could cause the price of oil to skyrocket.

In my opinion, and I don’t think you’re going to like it . . .

I think we’re more likely to see oil prices head higher than lower. And it will be a really, really long time before oil falls below $ 100 a barrel. I’d expect to pay $ 4 for a gallon of gas. And don’t be surprised if it’s much higher – maybe as high as $ 8 per gallon.

Watch for the mud to fly in Congress as they try to figure out an energy policy.

To invest for profit in these fragile times I’d look to the oil and gas industries for great profits. And I’d expect to see alternative energy companies, especially solar, continue to run. Commodities should continue higher as well – driving inflation around the globe.

Another way we’ve been profiting from the surge in oil is through currencies. All of this is moving the US Dollar in a very predictable way. In June we made just 2 trades in my Currency Options Insider service. They’re up a cumulative 224%. Not a bad place to put a portion of your investment portfolio – especially with oil set to move higher.

SABUNG AYAM