Pain is coming to the pump

After flatlining for months, energy prices are poised to head higher.

By Anthony Mirhaydari Nov 16, 2012 5:41PM

Filling fuel tank -- CorbisA side benefit of the recent bout of market weakness and poor economic data at home and overseas has been the drop in crude oil prices over the last three months.


Since stocks peaked in September on the back of aggressive easing measures by the European Central Bank and the Federal Reserve, crude oil has dropped 15% from more than $100 a barrel to near $85. 

 

But now, for three big reasons, crude oil is poised to break higher.

 

Reason 1: Oversupply fading

Part of the reason crude oil has been on the slide, especially the West Texas Intermediate benchmark measured in Cushing, Okla., has been the boom in American oil production thanks to the growth of unconventional, shale rock development. As a result, the gap between WTI and Europe's Brent crude benchmark has blown out to more than $22 as Brent trades near $108 a barrel.

 

The problem is that the growth in American production -- running at near a 25% annual rate right now or some 825,000 barrels per day -- is overwhelming energy infrastructure. Pipelines are full. Storage tanks are full. As a result, producers are turning to loading barrels on trains and trucks with rail shipments running at twice the level seen back in 2010.

 

Relief is coming in the form of the expansion of the Seaway pipeline from 150,000 barrels per day to 400,000 barrels early next year. Storage capacity is also increasing. As a result, Merrill Lynch expects the Cushing oversupply to drop from around 350,000 barrels per day now to near zero in 2013 before moving into a supply deficit of 300,000 barrels in 2014.

 

As all this happens, prices will be pushed higher and the gap between WTI and Brent crude will close.

 

Reason 2: Federal Reserve stimulus

Crude oil prices are sensitive to inflation expectations, which have cooled as economic growth expectations have declined. But now, with the Federal Reserve pumping in monetary policy stimulus at a rate of $85 billion a month, price pressures are building. And they will keep building with the Fed hinting this week that it will replace its expiring Operation Twist program with a $45 billion-a-month QE4 Treasury bond purchase program to accompany its current $40 billion-a-month QE3 mortgage purchase program.

 

But QE4 will have a larger impact than Operation Twist since it will involve the creation of new money to buy long-term bonds, rather than the selling of short-term bonds to buy long-term bonds under Twist.

 

Already, you can see the impact. Last quarter, the GDP Price Index increased at a 3% annualized rate -- a level not seen since the summer of 2011 before the debt ceiling standoff and the August 2011 market meltdown.

 

I expect crude to pop once QE4 is announced.

 

Reason 3: Dollar weakness

As investors have run for the hills given all the recent market volatility, they've sought out safe havens like the U.S. Dollar. The dollar's strength has undermined crude because it's the most common currency used in global energy transactions. So as the greenback jumped over the past month, crude oil has slid lower.

 

A combination of fresh Federal Reserve stimulus, falling fearfulness on Wall Street, and a new Chinese government that is less willing to prop up the dollar to hold their own currency down threatens to pull the dollar down off its perch and given energy traders another reason to move into oil.

 

To take advantage, I'm adding the ProShares Ultra Crude Oil (UCO) to my Edge Letter Sample Portfolio as well as energy industry names Cameron International (CAM), Valero (VLO), and Tesoro (TSO).

 

Disclosure: Anthony has recommended UCO, CAM, VLO, and TSO to his clients.

I found these positions with the help of technical screens developed with Fidelity's Wealth Lab Pro back-testing tools, which you can find here. (Fidelity sponsors the Investor Pro section on MSN Money.)

 

Be sure to check out Anthony's new investment newsletter, the Edge, and his money management service, Mirhaydari Capital Management. A two-week free trial has been extended to MSN Money readers. Click the link above to sign up. Mirhaydari can be contacted at anthony@edgeletter.c​om and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.

144Comments
Nov 16, 2012 6:42PM
avatar
This is meant to be punishment for America because Obama won.
Nov 16, 2012 6:42PM
avatar
Oh really;  now that the election is over.  Let's see.  Gasoline fell dramatically just before the election and now Obama and his rich oil buddies are going to stick it to us.  What kind of a sweetheart deal did Oblame-a get from Big Oil?  He is a lowlife, and he doesn't care about the middle class but only his political career and power.
Nov 16, 2012 6:31PM
avatar
CAPSLOCK IS CRUISE CONTROL FOR COOL!!!!!!!!!!!!!!!11111111111111ONEONEONE
Nov 16, 2012 6:29PM
avatar
Not again, gas goes up, then retreats some and they wait until you get used to the some what lower price, then it rises again.  Gas keeps going up in the long run.
Nov 16, 2012 6:28PM
avatar
**** the oil companies, speculators and **** obama too. They are all a bunch of crooks.
Nov 16, 2012 6:23PM
avatar
So, what else do you expect, the election's over, now the corrupt Republican OIL & FINANCIAL corporate MONARCHY can get back to STEALING from the 99% American People!!! SO, WHAT ELSE IS NEW??
And the sad part is, the 99% American People are supposed to have a JUDICIAL SYSTEM in place to take care of this CRIMINAL MONOPOLY of the 99% American People! I guess the corrupt Republican corporate did a "BOUGHT & PAID FOR" with the Judicial Dep't. JUST LIKE THE NEWS MEDIA!!!
NEVER ENDING CORRUPTION AT ITS FINEST!!!!!!!!!!!!!!!!!!!!

Nov 16, 2012 6:17PM
avatar

Short term gas might go up but it will back down.If you don`t like high gas prices get a

fuel efficient car.Of course, Americans want the biggest car, the biggest truck

the biggest wife, the biggest boat.etc.

Nov 16, 2012 6:09PM
avatar
THE ELECTION IS OVER OF COURSE THE PRICE IS GOING TO RISE WITH OBAMA BACK IN CHARGE. HE DOESN'T CARE HE HASN'T PAID FOR GAS IN YEARS. YOU HAVE TO BUY THE ELECTRIC CAR SO YOU CAN PAY MORE IN YOUR UTILITY BILL THOSE CHARGING STATIONS AREN'T FREE.  DAHHHHHHHHHHHHH
Report
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
Categories
100 character limit
Are you sure you want to delete this comment?

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

120
120 rated 1
268
268 rated 2
439
439 rated 3
709
709 rated 4
641
641 rated 5
609
609 rated 6
640
640 rated 7
516
516 rated 8
272
272 rated 9
152
152 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
EXCEXELON CORPORATION10
TAT&T Inc9
VZVERIZON COMMUNICATIONS8
CTLCENTURYLINK Inc8
AAPLAPPLE Inc10
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.