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Friday, December 01, 2006

Is Oil Back in Bull Mode?

On November 19, on this blog, I said that oil would have to close back above $62 per barrel for me to turn bullish again. Well, guess what?! That's just what oil did!Oil is pulling back a bit this morning, which is not too surprising. Now, can oil keep its gains, or is this just a fake-out? Everything I see tells me that this is the real thing.

DEMAND. We have very strong demand for everything from diesel to heating oil, and colder temperatures coming in. Gasoline use is growing at a slower pace, but still growing.

Sales of GM trucks and SUVs leaped 33.2 percent last month. Car makers are throwing cash on the hood to move those gas-sucking trucks and SUVs.

Globally, demand is rising, too. Chinese put 7 million new cars on the road this year alone! Global oil use hit 84.5 million barrels per day this year and should average 85.9 million barrels per day next year, according to the International Energy Agency. That’s more than 59,600 barrels a minute!

GEOPOLITICAL RISK. Obviously there is geopolitical risk that is ongoing.

There are other geopolitical risks that aren’t even on the front burner.

Three more countries – Angola, Ecuador and Sudan -- want to join OPEC. This could impede investment by foreign oil companies in the three countries.

OPEC CUT: OPEC secretary general Mohammad Barkindo says another production cut is still on the table when the oil cartel meets in two weeks. Some people think Venezuela being less demanding than usual is a sign oil prices will stay low. Hey, it's not them I'm worried about. It's the fact that Saudi Arabia and Kuwait say they're open to more cuts that worries me. We know Chavez hates Uncle Sam -- Saudi Arabia and Kuwait are supposed to be our friends.

SUPPLY IS TIGHT. The Western oil majors — like ExxonMobil, Chevron, BP, and Shell — are failing to replace the reserves they pump. In 1997, they were able to replace 140% of their reserves; in 2005, they were able to replace only 75%! This indicates just how hard it’s becoming to find oil.

The North Sea has peaked … Kuwait has peaked … Mexico’s giant Cantarell field is heading toward a collapse – production there should fall 14% a year.

America has 5% of the world’s population yet consumes 25% of its energy (two-thirds of which we have to import). That’s not just vulnerability … that’s a disaster waiting to happen!

The wild card is if we have a recession next year. If we do, oil prices could go lower. Otherwise, look for $80 per barrel oil in 2007 and then some. My target for the end of this year: $68 per barrel.

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