Global Oil Demand

Global Oil Demand: Are You Ready for Gasoline Under a Buck a Gallon?

by David Fessler, Advisory Panelist, Investment U
Friday, December 12, 2008: Issue #900

When I started driving, gasoline still contained lead and regular was selling for 29 cents a gallon. My father remembers 10 cents a gallon.

While it’s highly unlikely we’ll ever see those prices again, you could see gasoline below $1 a gallon, and it just might hit $0.75 a gallon. It might not be in time for Christmas, but the Easter Bunny might leave it in your Easter Basket.

That’s not just wishful thinking on my part: The International Energy Agency’s (IEA) most recent monthly forecast (released just yesterday) indicates year-over-year global oil demand will shrink in 2008 for the first time in the last 25 years.

Why? Developed nations are skidding into recession and emerging nations have hit the brake pedal on economic growth. And when the United States – by far the largest oil user in the world – cuts back, the ripple effect is devastating to producers.

Oil-laden tankers are backed up at U.S. oil unloading terminals, waiting to unload. At the same time, the nation’s most recent oil inventory report shows that storage tanks are brimming with crude oil, gasoline and heating oil. But that doesn’t mean there’s no money to be made here. In fact there are a number of opportunities to profit in oil right now.

Global Oil Demand – OPEC Cuts Production

OPEC is scrambling to cut production of oil. Chances are good that they won’t cut far enough or fast enough. Supply destruction will continue to lag demand destruction for the foreseeable future. And that sets the stage for a continued softening of pump prices as well as heating oil.

And then, of course, there will be the cheaters: You can expect rogues like Venezuela and Iran to continue to pump and sell as much oil as they can possibly suck out of the ground, since there is little production accounting oversight on the part of OPEC. It was a big problem the last time we had an oil crisis back in the 1970s.

How low could it go? Merrill Lynch is on record predicting $25 a barrel. It has a fairly good chance to go even lower, before supply cuts catch up with global demand slowdown, which is still occurring.

How long will it stay low? It’s hard to say, but any increase in global economic growth would provide a boost in demand and a subsequent rise in the price of oil. Current economic forecasts, while mixed, don’t show much of an increase until the latter half of 2009 – or even early 2010.

For now, though, demand is still falling, with October alone registering a steep 8.3% decline in crude prices. Simple math says that if crude prices are cut in half from here, so, too, could the price at the pump. Car dealers with rows of gas guzzling SUVs on their lots would be jumping for joy.

But just like $147 a barrel was artificially high, so, too, would be $20 a barrel on the low side. As prices begin to stabilize in late 2009 or early 2010, oil will likely return to a trading range of $80 to $100 a barrel. It would begin to slowly rise from there as the global economy climbs out of recession and economic growth rekindles.

2 Places to Put Your Gas-Savings Cash

Naturally, there are a few ways to put your growing mound of gas-saving cash to work:

Shares of Autonation, Inc. (NYSE: AN), one of the largest car dealer networks in the country, are off 50% from their 52-week highs. Any sustained reduction in the price of gasoline will likely have a positive impact on car sales, particularly in the hard-to-move segments of the market like low-mileage SUVs, vans and pickups.

A more direct way to play this would be to pick up a few shares of Valero Energy Corp. (NYSE: VLO) that’s been bouncing along in a tight trading range of $15 to $20 a share since mid-October. Its profits are tied directly to the spread between the price of crude oil and the price of refined products (known as the crack spread). A widening spread bodes well for refiners like Valero.

While I’m not sure I’d be running out to buy a big SUV anytime soon, it’ll certainly be easier on the wallet when pulling up to the pump. But don’t get too comfortable with cheap gasoline. Prices will eventually revert to their natural mean. And in the case of oil, it will eventually be higher.

Good investing,

David Fessler

Today’s Investment U Crib Sheet

As our resident energy and infrastructure expert, David gives us the best ideas to successfully profit from these sectors. And with a new administration taking office next year there will be lots of changes taking place across the country. But we don’t have to wait until January. Here are some of his best ideas from the past few weeks:

The U.S. Department of Energy’s Weatherization Assistance Program (WAP) has provided help to 5.6 million low-income families – enabling them to permanently reduce their energy bills. Part of Obama’s new energy plan revolves around expanding this program to the 28 million homes eligible for help. He gave us three companies that are perfectly placed to provide the products and services to make this happen in Investment U Issue #890, Energy Investment Opportunities: Why 28 Million Customers Need These Upgrades.

It’s ironic that the most powerful nation in the world ranks twenty-fifth when it comes to broadband penetration. Indeed, only a little over 50% of American households have high-speed Internet connections. Compare that to South Korea, which has a broadband penetration of nearly 90%. Obama wants “true broadband to every community in America.” And that’s a lot of opportunities to profit handsomely from those upgrades. Find the seven ways to profit from our country’s biggest infrastructure need in Investment U Issue #886, Broadband Penetration: 7 Ways to Profit From Our Biggest Infrastructure Need.

While the slowdown we are experiencing is nowhere near as severe as the Great Depression, the solution could be the creation of similar New Deal programs with massive government investments in domestic projects. More specifically, developing energy savings, making alternative forms of energy our mainstream sources, and building the green infrastructure to support what will be our growing energy independence. Find out more on this topic in Investment U Issue #883, Obama’s New “Economic Fuel”… and 7 Ways to Profit.

But these aren’t the only ways to cash in on profitable companies leading their sectors. In fact, our White Cap index is filled with companies that dominate the their industries. To get the five newest companies about to be added, learn more about the White Cap Report.

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