Friday, June 17, 2005

Gushing with oil? Oil reaches new highs

The price of light sweet crude reached new highs today at over $58 a barrel. For those of you who followed my advice in my March 23rd blog entry 'Oil Investments' will have made a nice 20% gain on XLE (Energy ETF). In that entry, I suggested accumulating shares of XLE when a barrel of oil corrects below $38. Oil retreated during the months of April and May and by mid-May, Oil was below $38. XLE fell below $37 on May 16th and today closed at $45.84.

My prediction is that oil will continue its streak and peak beyond $60 before retreating back to the low 50's. People have to understand that the days of cheap oil are days gone by. We have to get used to living in a world with high energy prices in a larger 10-15 year commodities boom cycle. We are in a demand driven oil boom with tight supplies. Add in the terrorism factor and natural oil disruption factor (such as hurricanes in the gulf of Mexico), we get the high prices of oil we have today.

In the past Saudi Arabia has had the ability to significantly increase their oil production overnight. This is no longer the case: at least not with sweet crude. They are able to increase the production of sour crude only. What is the difference? Sweet crude is more expensive than sour crude and the problem is that most refineries in the USA does not have the infrastructure to refine sour crude. The end result is that sour crude supply may increase but it will not affect increases of price at the pump.

This handicap at most refineries creates a huge opportunity for refineries that can refine sour crude as the gap between sweet and sour crude prices widen. They are able to sell the final petroleum products at the same high prices as others while purchasing their crude at a discount.

One of the biggest sour crude capable refiner in the US is Valero Energy (VLO). This stock has risen from as low as $56 from the sell off in May to the current $80. This company has a great balance sheet, good management and leveraged to the price of oil. I would recommend picking up shares when oil pulls back as anticipated in the near future.