Important Update on Crude Oil

by Sean Brodrick Dear Subscriber, The early part of July saw crude oil tumble 19 percent from its June highs. This led many investors to wonder: "Is the rally in crude over?" Probably not. While oil may bounce around between $54 and $64 for a bit, it's probably going higher. The good news is you can make some nice money on the move. First, let's start with a chart of crude oil ... A weekly chart of oil shows that despite the recent pullback, its uptrend remains intact. Momentum is positive. Technically speaking, there's nothing to prevent oil from rising to $77 or even $90. Now, that doesn't have to happen. Oil could go down to test support at $50, and if that breaks, go even lower. The frustrating thing about oil is that it has disconnected from fundamentals. We are swimming in oil ... there are tankers filled to the brim with oil, floating off our shores. So what drives oil? Two things ... The U.S. dollar. Oil has become the counter-trade to the greenback  even more than gold  as traders use crude to hedge their dollar exposure.   Expectations of global boom or bust. Depending on the outlook for the global economy, traders will buy oil if they think they can see the light at the end of the recessionary tunnel. All that other stuff barrels in storage, amount of demand is secondary. Sure, oil prices weakened when gasoline usage over the July 4th holiday hit a five-year low, and dropped 3.3 percent from last year. But that's really a function of how traders view the global recovery (or lack of one). So let's look at these two forces  starting with the U.S. dollar. The Dollar: Two Peaks and a Plunge My view on the U.S. dollar is bearish, starting with its chart ... Looking at this chart, you can see the dollar formed a double top and slid lower. It is now tightening in a range, a "pennant" pattern. The saying goes that "flags and pennants fly at half mast." In other words, the next leg down for the dollar could be a real doozy. The fundamentals that will likely drive the buck lower are simple. The Good-Time Charlies in Washington are printing new dollars by the metric tonne. They are doing this to pay for the ballooning deficit. $1 trillion in the hole ... so far! In case you missed it, the Federal budget deficit rose by $94.3 billion in June, pushing the total shortfall for the current fiscal year (which began in October) to $1.09 trillion. Much worse than that, tax receipts keep sinking while spending keeps expanding. We'll probably be much deeper in the hole by the end of the year. New rejection of the dollar overseas. In previous columns, I (and Larry) have told you how China, Russia and Brazil all talked about how they own too many U.S. Treasuries and need to move away from the dollar. Then India got into the act recently. And now Japan is getting onboard. On Monday, Japan's opposition party, leading in polls two months ahead of elections, said the nation should consider shifting its $1 trillion of foreign reserves away from the dollar and buying International Monetary Fund bonds. Masaharu Nakagawa, the shadow finance minister in the Democratic Party of Japan, said in an interview in Tokyo on July 9 that: "In the medium to long term, we need to do what we can to avoid the risk of currency losses or economic turbulence that could result if the dollar were to swing." He added: "Many countries are starting to diversify their reserves." Then on Tuesday, Japan's finance minister rushed out to say Japan LOVED the dollar and it wasn't going to diversify away from the greenback at all. Ri-i-i-i-ght! This has been the case time and again in China, Russia and other countries ... one guy speaks the truth, and then another official comes out and smoothes things over. The fact is that our government is going to have to issue about $2 trillion dollars in new debt this year and then AT LEAST another $1.5 trillion next year. If foreigners don't buy that debt, the Treasury will be forced to buy its own debt. This puts more weight on the dollar, and could lead to a serious and sharp correction, maybe even a collapse. Internal Sponsorship FINAL Hours to Save $3,003! Tonight at midnight, our one-time Charter Enrollment for The Foundation Alliance CLOSES FOREVER ... And your chance to SAVE up to $3,003 on "buy" and "sell" signals that could have turned your $10,000 investment into $351,000 will have expired. Click this link for full details ...   So, basically, I think the dollar is going lower. That's one force that should drive oil higher. But how about expectations for the global economy? Will Asia Lead The World Out of the Recession? The economies of the United States, Europe, and other developed nations seem to be stuck in low gear. Not so the economies of Asia. Some examples ... India's industrial production rose 2.7 percent in May, up from 1.2 percent in April. That was much better than expectations of a 1.3 percent rise. At the same time, India's consumer goods production was up 12.4 percent, a level of growth that U.S. manufacturers can only envy.   China saw its imports fall 13.2 percent in June. That sounds bad, but it was much better than expectations for a 20 percent drop and a big improvement over the 25.2 percent drop in May. In fact, China's imports are up 70 percent since they bottomed in January.   It appears that global trade is picking up, and that is very good news for China. Singapore saw its economy surge to an annualized 20.4 percent growth rate in the most-recent quarter from the previous three months, the first growth in a year. What's more, the Singapore government raised its economic forecast for 2009. South Korea last month raised its GDP estimate for 2009 and 2010, saying fiscal stimulus and interest-rate cuts stoked consumer confidence. And now let's talk about real growth in oil demand. Not here in the United States  where it's still flat. But in China. Vehicle sales in China jumped 36.5 percent in June from a year ago. That's the fourth straight month that vehicle sales have topped 1.1 million units, according the China Association of Automobile Manufacturers. China is on track to see more than 11 million vehicles sold this year. That's more than the number of cars that will be sold in the United States. What's more, almost all the cars sold in the United States are replacement vehicles. Almost all the cars sold in China are to new buyers. So, that implies a huge increase in China's gasoline and oil demand. The International Energy Agency recently upgraded its 2009 forecast for Chinese demand to 7.98 million barrels a day, from 7.86 million barrels a day in its previous report on June 11. China's oil demand rose 9.5 percent in May, the second monthly increase. Short-Term and Long-Term Outlook In the short-term, we could see lower crude oil prices. One force hanging over the market is all those millions of barrels of oil in storage at sea. However, there's not as much as there was in April, when oil stored in tankers peaked at 100 million barrels, according to reports from oil brokers. Since then, trading firms have sold about 30 million barrels into the market. The remaining oil in tanker storage should drop by another 15 percent by the end of this month. The selling of that oil has helped make up for production cuts by OPEC. But it can't last forever. And as that oil in storage is used up, the longer-term fundamentals for crude, which are very bullish  should come back into play. Add in the fact that the economies of Asia are shifting into higher gear and that the U.S. dollar could be cruising for a bruising, and yes, I think the next move to the upside in oil could be quite explosive. Three Ways to Play Oil's Big Trend If oil breaks out to the upside, I'd recommend using ETFs that hold baskets of oil stocks to play that move. Oil industry stocks should be leveraged to the price of oil, which should give them an even bigger move percentage-wise. Some choices include ... The SPDR Energy Sector ETF (XLE) - the granddaddy of oil ETFs holds famous names including Chevron, and Exxon (22 percent of the fund) and ConocoPhillips.   The SPDR S&P Oil & Gas Exploration and Production ETF (XOP) - this holds explorers and producers including Tesoro, Holly, Frontier Oil and more.   The Oil Service HOLDRS (OIH) - this is stuffed with oil service names, including Schlumberger, Halliburton and Transocean. All of these funds have pros and cons. Just do your own due diligence, have the stomach for volatility, and be ready to get out when the gettin's good. It's a trader's market, and oil is more explosive than ever, but you can ride it to potentially big gains. Yours for trading profits, Sean P.S. Be sure to check out the daily posts on my blog at http://blogs.uncommonwisdomdaily.com/red-hot-energy-and-gold/

About Uncommon Wisdom For more information and archived issues, visit http://www.uncommonwisdomdaily.com Uncommon Wisdom (UWD) is published by Weiss Research, Inc. and written by Sean Brodrick, Larry Edelson, and Tony Sagami. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in UWD, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in UWD are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Kristen Adams, Andrea Baumwald, John Burke, Amber Dakar, Dinesh Kalera, Red Morgan, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig. This investment news is brought to you by Uncommon Wisdom. Uncommon Wisdom is a free daily investment newsletter from Weiss Research analysts offering the latest investing news and financial insights for the stock market, precious metals, natural resources, Asian and South American markets. From time to time, the authors of Uncommon Wisdom also cover other topics they feel can contribute to making you healthy, wealthy and wise. To view archives or subscribe, visit http://www.uncommonwisdomdaily.com.

www.howestreet.com

Printer Friendly version...