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
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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 8:14PM
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The 47percent dont care cause they dont work and dont have cars and the metro takes them to the food bank while they are talking on the obamaphone, and scheduling the next tattoo and nail job.  Oh and dont forget the diamonds in the teeth.  
Nov 16, 2012 6:29PM
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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 7:04PM
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As long as his majesty and king is in office. Energy prices will escalate. We have him for the next 4 years or until he gets impeached for the Benghazi cover up. Oh no that would put Biden in the oval office( he is an idiot). Scratch that. It is not supply or demand that is causing the price jumps. The continuing degradation of the dollar that is in play here, and will be until congress gets some balls and puts an end to this no budget ,borrow a trillion every year administration and his free stuff for the masses policies.

 

Nov 16, 2012 6:09PM
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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
Nov 16, 2012 6:28PM
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**** the oil companies, speculators and **** obama too. They are all a bunch of crooks.
Nov 16, 2012 8:21PM
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I seem to remember O-blah-blah saying that he wanted gas prices to be $8 - $19 a gallon so his "green energy" vehicles would be more affordable. Well, now it seems that he has nothing in his way to accomplish that goal and to hell with the rest of us who can not afford either. Just look at the failed Chevy Volt to see what he want everybody to be driving.

One

Big

Azz

Mistake

America

Nov 16, 2012 6:42PM
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This is meant to be punishment for America because Obama won.
Nov 16, 2012 8:01PM
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Get real Somone, WWE is fake and so is Obama.
Nov 16, 2012 9:31PM
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ya..just  keep printing that money...pretty soon it wont be worth ......
Nov 16, 2012 8:55PM
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Doesnt surprise me that gas prices are going back up again.  Elections are over so prices of course are going to up.  Google and look at how gas prices always seems to drop right before election, and then go up directly after it.  Seriously look at the 2012, 2008 and the 2004 election season and look at the prices before and after.

 

Nov 16, 2012 7:57PM
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What a crock that prices went down. Supply and demand use to dicate pricing. Everyone should be a whole lot more worried about the Jan 2013 EPA report on fracking. We'll have even more limited production and refining causing more shortages due to this current government. Then again, they can blame it on Bush or that more drilling is being done of Federal land like in the debates. Ha
Nov 16, 2012 10:20PM
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Pain is coming to the pump

HUH?
When did the pain ever go away?

Nov 16, 2012 9:39PM
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All those poor investments in alternate energy by Obama have to be made to look better, so the sources of energy we rely on are gonna have to be made more unaffordable. Just a little temporary drop during the elections to make it look like Obama was coming to the rescue. Your bed America, lie down.
Nov 17, 2012 3:24AM
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Hey Anthony.M tell me buddy, What country are you from and what progressive liberal collage did i help pay for you to attend so you can write this garbage?
Nov 16, 2012 6:48PM
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Gas and oil and stocks will crash just like they did in 2009. The fed is printing very little cash. 90%+ of new money is electronic money that gets electronically transferred to  the banks balance sheet. It never sees the light of day. Talk to your friends and neighbors. Do they have more "stimulus" or less? Anthony seems to be isolated from main street. As long as the debt bubble continues to deflate, which pulls stimulus out of the economy, we will have deflationary pressures. Gold and oil and gas are down year over year. Those comm. are suppose to be the inflation bench marks. And stocks are now rolling over.
Nov 19, 2012 8:24AM
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So a few years back when crude hit $145 a barrel gas prices soared to $4 a gallon because the crude price was so high. Now crude is at $85 a barrel but gas prices are still around $3.50 a gallon, what a crock........from politicians to "regulators", to the big oil firms they are all screwing us!
Nov 17, 2012 12:42AM
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Hey Anthony. Pain at the pump is coming back? Are you an idiot? When Bush left office the price was $1.78 on average. It has been over $3 for years now and heading back to $4. Since when has it eased? You are the typical fool that buys in to the "new normal" that Obama has lulled all of you liberals into. Start writing like a professional if you can.
Nov 17, 2012 11:55AM
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Pain is COMING to the pump ??.... duh.... in my world it came a couple years ago and never left. The good old rule of supply and demand, if they keep the drilling and production down so less is available, then the price goes up..... last time I had the misfortune to be in DC, every gov't building we entered (in December) was 80+ degrees with windows open (and 90% of the spaces were not in use...), hey they can afford it just tax everybody some more to pay it, do you think somebody really cares how many frail old folks freeze or how many shiver when they keep the heat at 60 degrees all winter?  Thank goodness the Salvation Army sells long johns.....
Nov 17, 2012 2:12AM
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Of course gas goes up. Obama is killing the dollar . Crude is based in dollar and worth the same. This price rise is all Obama and his fisical irresponsability and his printing press. The mooches do not help with their demand for unearned goodies
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