Red-Hot Resources

"Luck is not chance, it’s toil; fortune’s expensive smile is earned.”

Thursday, November 02, 2006

Here’s Fuel For Higher Oil Prices

Yesterday, I put this in my latest issue of Red-Hot Asian Tigers …

In the past few weeks, we've seen money flee the energy sector, as all the hedge funds who drove oil prices higher are now piling on to drive it lower. But while it's true that crude oil stockpiles have built up in the short term, the longer-term picture in energy hasn't changed a bit. And that picture is bullish indeed.

Supply/demand squeeze: The market is shrugging off OPEC's planned cuts of 1.2 million barrels a day in production, saying it's either A) too little, too late or B) OPEC members will cheat and sell the oil anyway.

But you can bet at least some cuts will stick, and they come when the supply-demand fundamentals in crude are already skin-tight. Indeed, in September, global oil demand at 86 million barrels per day ran slightly ahead of supply at 85.4 million barrels per day.

Add to this that sales of large trucks and SUVs in the U.S. are rising as gasoline prices drop, and we could see demand surge. And that would be rocket fuel for prices.

Today, we got the news on sales of large SUVs and trucks (which make up about 65% of new car sales). Sales of those units are booming, thanks to low gasoline prices:

General Motors Corp. led the industry in October with a 17.3 percent sales increase compared with last year, fueled largely by a 33.2 percent jump in truck and SUV sales.

Oh, consumers have short memories. One analyst explained that “the trend toward increased truck sales is likely to continue at least into January because of the discrepancy between incentives on small cars and truck-based vehicles and because gas prices aren't expected to go up.”

My view: Large SUV and truck sales will continue to boom, unless gasoline prices start to rise sooner rather than later. And the more SUVs and trucks that are on the road, the tighter the squeeze on gasoline prices, driving prices higher.
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