Where's Oil Going in 2010?
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Your Daily Profit

December 15, 2009

*****Good and Bad News?
*****Deflation
*****Oil and the U.S. dollar

Fellow Investor,

First, the good news. Industrial production was up 0.8% in November. That’s the fourth gain in five months. Depleted inventories are being replenished, and this might actually help the unemployment rate.

The bad news is that prices at the wholesale level rose 1.8%. That number includes food and fuel, which tend to be volatile. Take those items out, and wholesale prices were up just 0.5%. That’s actually not bad news at all.

Considering the high unemployment numbers, it’s a wonder prices can rise at all. Also remember that deflation is still a threat to the U.S. economy. So from that perspective, a little pricing power is a good thing.

Of course, that’s not helping Best Buy (NYSE:BBY). The electronic retailer is down 7% after reporting earnings today. The company said profit margins will be down for the current quarter because it’s had to cut prices. And that’s probably going to be a common theme for retailers during this holiday shopping season.

Retail sales are up from a year ago. But it’s because more people are shopping. People are actually spending less, and stores have to lower prices to attract shoppers.  

*****Crude oil and the U.S. dollar are up today. It’s not supposed to work like that. Conventional wisdom says that a stronger dollar should send oil prices lower, since oil’s denominated in dollars.

The stronger than expected industrial production number can certainly help account for oil’s strength in the face of a rising dollar. But in my opinion long-term supply and demand issues are also driving oil prices.

Everybody knows that there is a surplus of oil right now. It’s also common knowledge that demand for oil is down. Some analysts are even forecasting oil to trade in the $50-$60 range for 2010.

I suppose if you focus on current supply and demand, you can make a case for lower oil prices. If oil were renewable resource, this would make sense. But oil’s not a renewable resource. Oil is finite. We may not know exactly how much oil exists today. And we may not be able to predict how much oil is yet-to-be discovered.

But we do know that non-OPEC oil production has been in decline since 2004. And it’s not just a lack of investment in new production that’s causing the decline. It’s also a matter of oil fields like the North Sea and Mexico’s Cantarell simply not producing as much as they once did.

Some now estimate that demand could meet current production capacity in the next five years. Of course, the global economy has to keep rebounding for this to happen. But if it does, oil prices will be a lot higher than they are right now.

I consider oil to be a core holding for any portfolio. The best bets going forward will probably be small exploration companies. They have the most to gain as oil prices rise.

*****I’ve got a great new company I’m about to recommend to SmallCapInvestor PRO members. It’s a Chinese company that is helping the Chinese government deal with some of its pollution problems.

China is expected to spend $45 billion in this company’s sector over the next three years. And because this company is already getting government contracts, I expect it has a very bright future, heck it’s already growing revenues at a 131% clip.

The best part about this company is that it is tiny. It has a market cap of just $120 million. And there are only five million shares outstanding. For more on how you can start getting all of my SmallCapInvestor PRO stock recommendations click HERE.

Until tomorrow,

Ian Wyatt
Editor

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Posted 12-15-2009 2:21 PM by Ian Wyatt