Wealth:  Stocks to buy as gasoline prices increase

Toby Smith, Editor of ChangeWave Investing suggests we can profit from the seemingly unending rise in oil prices.  He acknowledges that the latest rise (in August 2005) is "being blamed on security threats in Saudi Arabia , Iran's resumption of nuclear activity, and on and on. Every day it's something new. And even though President Bush signed the energy bill yesterday, we all know that this will do little to ease our current pump prices. What's next?

Toby explains a possible scenario. "If we got a sell-off in oil services with oil down to $48, we would be BIG buyers of Patterson-UTI Energy, BJ Services, Halliburton"

"The rules are being rewritten, and there are ways to profit. Today this relationship between current inventory and futures prices has broken down. And basically NO ONE knows what the price of oil or natural gas "should be." The industry figures out "days of forward demand" coverage (i.e., how many days of energy were in storage divided by daily demand metrics) and then, in past years, used high levels of forward demand coverage (58–60 days, in the oil glut times in 1998–1999) to cut prices and tight days coverage (50.3 in April) to raise prices. Today we are at 52.4. Not a glut, but not as tight as April — yet prices are one-third higher as I write this. What's the answer to this riddle? It's the death of OPEC. OPEC's historic backlog of inventory that could hit the markets like a ton of bricks and turn shortages into gluts no longer exists. We know this traditional safety valve no longer works because if OPEC (read: Saudi Arabia ) COULD break the logjam on pricing, they would have.

In short, what we have is such a tight relationship between global supply of crude/refining capability and extra barrels of oil to make up for lost daily production, that ANY severe storm, labor unrest, refinery outage, production facility attack, etc. makes large energy consumers buy now and ask questions later.

Now the possibility of too much storage in the natural gas world is an issue since we hit the limits of physical capacity last November, according to the natural gas experts I've talked with. Without the construction of additional storage, we are basically at the mercy of the seasons. We need more storage for oil and distillates as well—lots more storage. And let's not bring refining capacity into this discussion.

Now if the reduction of gas and oil price supports in China (gasoline sells in Beijing for $1.63 a gallon) cuts demand significantly, we could see a price collapse in oil. But the drop in second-quarter oil demand in China (1% drop vs. 15.4% increase in 2004 and 11% in 2003) is now on my radar. Sometimes energy prices take on a life of their own. And China is expected to announce the construction of the first of many huge storage tanks for building a strategic reserve. But it seems unlikely they would start to fill this reserve with oil at the high end of its trading range.

So we will watch the Chinese economy and energy-intensive industries like steel and cement, as well as other construction-sensitive commodities to get a handle on whether this is a slowing trend or just a statistical blip.

An oil price pop would hurt heavily oil-dominated players like Occidental Petroleum or Conoco more than most stocks, but all exploration and production stocks would take a 20% or so hit with news of sustained declines in Chinese importation of oil.

But that's not the case for oil services. One energy analyst I trust figures that oil would have to go to $32 a barrel before a 10% cut in drilling would happen. With so many old drilling services contracts coming up for renewal and such a limited number of rigs and people to work the increasing need for well-drilling, look for oil services stocks to be calmer. If we got a sell-off in oil services with oil down to $48, we would be BIG buyers of Patterson-UTI Energy, BJ Services, Halliburton, etc."

END: Wealth:  Stocks to buy as gasoline prices increase

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