Why the oil price will keep on rising… and how to make the maximum profit…

Enough people have made bad stock picks in the oil market lately... make sure you don’t become one of them...

You may be thinking:

"If oil is going to keep on climbing... how can there be any bad oil plays?"

Well, when it comes down to it... the answer’s quite simple... let me explain...

The oil price rally does indeed have a lot further to go... currently it’s sitting around $123, with the futures strip price at $120.95. Meanwhile Reuters’ consensus 2008 oil price forecast from 33 analysts stands at $96.68.

This means that, according to the futures market, analysts are under forecasting the oil price this year by a massive 25%.

I believe the futures strip price is a much better indicator of what is ahead than analysts’ forecasts. This will greatly drive earnings at my own favourite oil company... and I think the oil price is going even higher...

And here’s why...

Yesterday’s US oil inventory data was fascinating. The oil price hit a new high despite a better-than-expected rise in US inventories.

US crude oil inventories rose 5.7m barrels last week, significantly higher than expectations for a 1.6m-barrel build. Gasoline stocks rose 800,000 barrels compared with expectations for a 10,000-barrel rise.

Distillate inventories, which include heating fuel and diesel, fell 100,000 barrels to 105.7 million barrels.

But the refineries are spoiling some people’s parties...

Perhaps the most bullish news for the oil price, however, is US refinery capacity utilisation. Last week, US refineries operated at a mere 85%. Refiners are not producing gasoline because it is not in their interests when the crack spread is so low.

Refiners have operated at lower rates than is typical for this time of year as the profit margin (the crack spread) for producing gasoline has remained at below average levels. The spread is currently at $7.75 a barrel today, compared with $30.33 a barrel last year.

"You have more crude coming in but it's just sitting there, no one is turning it into gasoline," Hudson Capital's Jonathon Kornafel told Bloomberg. "The margin is so cheap, you can't blame them."

So, with refiners in the US not producing enough gasoline ahead of the peak US driving season and economic activity in the US being higher than many commentators had expected, both the supply and demand situation is supportive.

There is also the fact that oil price have continued the relentless charge ahead, against the seasonal norm. Usually oil prices ease between the northern hemisphere winter heating season and the peak summer driving season. This year they have not.

Geopolitical concerns will also continue to support the price. The situation in Nigeria remains finely balanced and Iraq is still not pumping as much oil as it did before the US invasion. With rhetoric against Iran increasing, there are also major concerns here to keep oil traders chattering like fish wives.

But as all the people who have recently invested in oil refineries can testify... not every oil play is as safe as you think...

That’s why I’ve put together what I believe to be the smartest and safest oil play to take full advantage of the current situation. You can read about this and all my other recommendations right here...

Regards,

Garry White
Editor
Smart Commodities UK