Oil surged after a surprising weekly inventory report on crude stocks from the Energy Department that showed a decline of 4.6 million barrels for the week ended June 6. Supplies are now down 23.6 million barrels in just four weeks.

Energy also reported that gasoline stocks were up by 1 million barrels, and distillates were up by 2.3 million barrels. Refinery utilization stood at 88.6% of capacity, compared with 89.7% a week earlier.

Nevertheless, refiners’ utilization “has significantly improved over the last month as the gasoline crack spread has expanded mightily,” wrote Chris Lafakis, of Moody’s Economy.com. “Crack spread expansion has provided refineries with all the incentive they need to churn out extra gasoline.”

Crack spread is the margin that a refinery can earn by refining a barrel of oil into finished products such as gasoline.

There’s no way he’s going to “call for a top in this market,” wrote John Person, president of National Futures Advisory Service. “Not by a long shot … Unless we close back under the $118 level, I would continue to be a buyer in this market on substantial breaks like we did last week near the $122-to-$125 level.”

Source: Oil Comes Storming Back

This from The Wall Street Journal:

With oil’s multi-year ascent showing no signs of stopping — crude futures set another record Tuesday, closing at $129.07 a barrel in New York trading — energy security has emerged as a major concern for the Pentagon.

The U.S. military consumes 340,000 barrels of oil a day, or 1.5% of all of the oil used in the country. The Defense Department’s overall energy bill was $13.6 billion in 2006, the latest figure available — almost 25% higher than the year before. The Air Force’s bill for jet fuel alone has tripled in the past four years. When the White House submitted its latest budget request for the wars in Iraq and Afghanistan, it tacked on a $2 billion surcharge for rising fuel costs.

Synthetic fuel, which can be made from coal or natural gas, is expensive now, but could cost far less than the current price of oil if it’s mass-produced.

The report also reveals that the Pentagon has embraced planning around peak oil theory:

Earlier this year, they brought Houston investment banker Matthew Simmons to the Pentagon for a presentation on peak oil; he warned that under the theory, “energy security becomes an oxymoron.”

“The U.S. will adopt liquid coal (also known as coal to liquid or CTL), because it has to do so,” says Byron King in his Energy and Oil blog.

“There are few other large-scale industrial alternatives. Windmills, biofuels, conservation and every other energy-saving and energy-extending idea will help. But the world we live in is built to run on oil, and nothing else will cut it for some things when it comes to running a fast-transforming economy. So stand by for liquid coal.”

The PPI report will undoubtedly rekindle the inflation-versus-recession debate (with more than a few comments about stagflation thrown in for good measure).

While the wholesale inflation gauge (PPI) provides another look into how escalating food and energy prices are impacting the economy, the most recent moves in oil and gas may not be factored in for another month or two.

On an optimistic note, gasoline prices historically peak around Memorial Day and then fall throughout the remainder of the summer. As we’ve said here a number of times before, don’t expect that pattern to repeat itself this year [Indeed, please click here to check out a related story in this issue of Money Morning that details our expectation that oil-and-gasoline prices are headed even higher].

In this column four weeks ago, we told you to ignore a U.S. Energy Department forecast that gasoline prices at the pump would reach $3.73 a gallon before falling. In fact, I said flat out that the Energy Department was wrong. And Money Morning Investment Director Keith Fitz-Gerald shortly thereafter reiterated that belief that the Energy Department’s prediction was way off the beam. And how right we were – that price already has been surpassed and consumers in some parts of California and Hawaii are paying in excess of $4.00 a gallon.

Less than two weeks ago we actually boosted our target price for oil to $225 a barrel (remember that Keith Fitz-Gerald, now Money Morning’s investment director, was probably the first investment guru to predict triple-digit oil prices).

As noted, however, much of this won’t be reflected for a couple of weeks.

Wednesday’s release of the minutes from the last Fed meeting should provide investors with a bit more insight into the mindsets of central bank policymakers and just how likely they will be to stand pat on interest rates: In one of the most aggressive rate-cutting campaigns in the central bank’s history, policymakers have pared the benchmark Federal Funds rate seven times since mid-September. Investors expect the Fed to sit tight (and hold off on further rate activity) at least through the summer months.

More retailers will report this week [Target Corp. (TGT), The Home Depot Inc. (HD) but few surprise are expected at this point in an earnings cycle that – except for the discounters – has been full of disappointing retail-sales reports.

The Money Morning Story SNAFU

When they received their daily e-letter last Monday, sharp-eyed Money Morning readers noticed something peculiar about this column.

It seemed familiar.

There’s a very good reason they felt that way. They were right.

Due to a technical problem, and some human error, the column we’d put together for Monday’s newsletter was inadvertently replaced by the afore-mentioned April 14 story in which we’d told you that the Energy Department’s optimism about summer gasoline prices was wrong.

We replaced that story on the Web site with the correct piece – a warning about the week’s upcoming retail-sales reports, but we heard about the mistake. As we deserved to.

As bad as we felt about the mistake, we still found several positives. First and foremost, we were reminded yet again that we have a loyal following that reads our work closely and carefully – and for the most part enjoys and benefits from what we do.

And if you all had to read one of our “old” stories a second time, I’m happy to say that it was a strongly worded prediction piece that proved us correct.

Market Matters

Over that past year-plus, the subprime debacle and related credit crisis have prompted discussions about “disaster,” “devastation,” “tragedy,” and “catastrophe.” Homeowners were unable to afford their houses, institutions faced significant asset write-downs, hard-working folks lost jobs, and investors watched portfolio values decline. While these financial consequences undoubtedly have been traumatic for many, the events of the past two weeks can serve to lend some perspective. The death toll in Myanmar has reached about 80,000 with another 50,000 people still missing. Likewise, in China, where the earthquake eventually may take over 50,000 lives as well. Somehow, missing quarterly earnings by a few cents simply does not seem quite as significant.

Speaking of…earnings season plugged along and the results to date have given some analysts (the slightest) reason for optimism. As the week began, about 90% of Standard & Poor’s 500 Index companies had reported and 62% actually beat expectations. While average quarterly earnings have plummeted by over 17% on a consolidated basis, the results looked far stronger once the financial firms were removed from the equation.

Without that struggling sector, first-quarter profits actually increased by more than 7%. Retailers took center stage this week as Wal-Mart Stores Inc. (WMT) proved again that discounters are benefiting from the current consumer nervousness. However, while Macy’s Inc. (M) and JC Penney Co. Inc. (JCP) suffered from weak sales, their results (and guidance) bested Street projections. Sony Corp. (ADR: SNE) rebounded as TVs and cameras moved back onto consumer shopping lists. Bond insurers MBIA Inc. (MBI) and Freddie Mac (FRE) reported wider losses, while UK-based HBSC Holdings PLC (ADR: HBC) realized higher profits.

Board directors and corporate execs again played “Let’s Make a Deal” as CBS Corp. (CBS) announced its intent to buy CNET Networks Inc. (CNET); Hewlett-Packard Co. (HPQ) made overtures toward Electronic Data Systems Corp. (EDS); General Electric Co. (GE) is reportedly putting its long-time appliance biz up for auction; and billionaire stakeholder Carl Icahn pushed for Yahoo! Inc. (YHOO) management to reopen talks with Microsoft Corp. (MSFT). Analysts often welcome merger news and consider it a positive sign of a rebounding business climate. Research in Motion Ltd. (RIMM) shares soared this week on news that its newest Blackberry creation will soon hit the market; and Merck & Co. Inc. (MRK) received a major victory when a Texas appeals court overturned a Vioxx verdict that, initially, awarded $32 million in damages.

Goldman Sachs Group Inc. (GS) apparently enjoyed the limelight (and the stir its analysts caused) two weeks ago. Last week, the investment bank was at it again, forecasting that crude prices will rise to $141 a barrel during the second half of 2008. Oil surged to about $128 a barrel late last week as gasoline prices soared to over $3.75 a gallon – just a week before the widely-traveled Memorial Day weekend.

Accompanied by that reassuring bit of alleged “certainty,” gasoline at $4 a gallon doesn’t sound quite so scary. In other words, we know that gas prices are headed higher, but we also know that there’s a limit, and we know exactly what that limit is.

Early last week, the U.S. Department of Energy said that it expects average monthly gasoline prices to peak at $3.60 a gallon this spring, since that high price will serve to curb demand and keep prices in check.[although even the Energy Department report said that before prices level off there could be interim price spikes that will take pump prices up over the $4 a gallon level].
With crude oil having spiked above the $112 a barrel level last week on reports of declining oil supplies, grandstanding politicos on both sides of the aisle took the opportunity to bash each other’s energy policies [Don’t tell me … it must be an election year]. Seeming to add credibility to the Energy Department’s prognostication was last week’s weekly inventory report that showed that demand is waning – ostensibly because record gas prices now stand more than 55 cents a gallon higher than they were at this time last year.

But here’s the problem.

The Energy Department is wrong.

Indeed, the federal agency is just the latest “expert” to make erroneous forecasts for energy prices. Thankfully, that’s not true of Money Morning.

Since its inception last year, Money Morning has repeatedly predicted incrementally higher prices for crude oil and gasoline. Invariably, these predictions have proved themselves correct. And we’ve done more than just make predictions: We’ve also outlined investment opportunities that would allow investors to capitalize on this advance in energy prices.

In December, for the first time ever, Money Morning Investment Director Keith Fitz-Gerald publicly predicted that oil prices would reach $187 a barrel within three years. In mid-March, he reiterated this projection [accompanied by several suggested ways for investors to profit from this powerful trend]. Not only has this forecast continued to receive widespread play on energy- and investment-related Web sites, we’re starting to see similar “me too” predictions being made by some the energy sector’s heavyweight experts: Literally only days after Money Morning reiterated its forecast, Wall Street giant Goldman Sachs Group Inc. (GS) said that crude oil prices would reach $175 a barrel in the next two years.

This underscores one of the key mandates for Money Morning. While it’s true that we’re the hottest global-investing news service in the market today, this case study demonstrates that we’re more than just a purveyor of news. Our role is to provide our regular readers and subscribers with the news, of course, but it’s more important for us to explain just what the news actually means. To that end, look for us to:

• Put the news in context.
• To describe how the issue at hand fits in with the handful of powerful global trends that we’ve ferreted out and identified as the top ones that you need to follow if you’re to succeed and profit.
• To stay ahead of the crowd by projecting the “end game” – the outcome – for these top trends.
• And, finally, to research and highlight investment opportunities that are the best-positioned to benefit from these trends, meaning these represent some of the best profit opportunities in the market today [Editor’s Note: If this investing strategy appeals to you, it’s well-worth checking out our affiliated monthly newsletter that maintains several portfolios of stocks and funds chosen using these guidelines. New subscribers get a free copy of investment guru Jim Rogers’ new best-seller, "A Bull in China."]

Stay tuned: We’ll continue to follow the oil-and-gasoline saga as it unfolds, and we’ll continue to find ways for investors to profit from this and other top global trends.

Last Week’s Market Action

If you’re of a certain age, surely you remember some of the marketing “slogans” airlines used to burnish their brand names and, hopefully, to attract passengers. attract passengers.

After all, whatever happened to: “We Earn our Wings Everyday,” or “Fly the Friendly Skies,” or even “Something Special in the Air?”

Last week, however, the more appropriate taglines may have well have been: “We No Longer Overlook Safety,” or “Enjoy Your Stay in the Updated Airport Concourse,” or even better “When the FAA Talks, We Now Listen.”

As if the escalating gasoline prices have not caused enough hardships for the airlines, in recent weeks, they seemed to realize that they actually are required to abide by government safety regulations. Just last week, American Airlines Inc. (AMR) canceled more than 3,000 flights, thus, inconveniencing an estimated 250,000 travelers because a little faulty wiring “may” cause fires in certain aircraft. While some analysts were astonished at the lapse in judgment exercised by AMR’s airline management, others believed this to be classic bureaucratic overreaction due to previous lax oversight. In any case, the airlines undoubtedly will see their future earnings suffer and ticketed customers will experience extended delays [forcing them to seek out the closest Chili’s Bar & Grill inside the airline terminal - at least perhaps representing a boon for the earnings for that company].

Early last week, the U.S. Department of Energy said that it expects average monthly gasoline prices to peak at $3.60 a gallon this spring, since that high price will serve to curb demand and keep prices in check.[although even the Energy Department report said that before prices level off there could be interim price spikes that will take pump prices up over the $4 a gallon level].

With crude oil having spiked above the $112 a barrel level last week on reports of declining oil supplies, grandstanding politicos on both sides of the aisle took the opportunity to bash each other’s energy policies [Don’t tell me … it must be an election year]. Seeming to add credibility to the Energy Department’s prognostication was last week’s weekly inventory report that showed that demand is waning – ostensibly because record gas prices now stand more than 55 cents a gallon higher than they were at this time last year.

But here’s the problem. The Energy Department is wrong. Thankfully, that’s not true of Money Morning. Since its inception last year, Money Morning has repeatedly predicted incrementally higher prices for crude oil and gasoline. Invariably, these predictions have proved themselves correct. And we’ve done more than just make predictions: We’ve also outlined investment opportunities that would allow investors to capitalize on this advance in energy prices.

In December, for the first time ever, Money Morning Investment Director Keith Fitz-Gerald publicly predicted that oil prices would reach $187 a barrel within three years. In mid-March, he reiterated this projection [accompanied by several suggested ways for investors to profit from this powerful trend]. Not only has this forecast continued to receive widespread play on energy- and investment-related Web sites, we’re starting to see similar “me too” predictions being made by some the energy sector’s heavyweight experts: Literally only days after Money Morning reiterated its forecast, Wall Street giant Goldman Sachs Group Inc. (GS) said that crude oil prices would reach $175 a barrel in the next two years.

This underscores one of the key mandates for Money Morning. While it’s true that we’re the hottest global-investing news service in the market today, this case study demonstrates that we’re more than just a purveyor of news. Our role is to provide our regular readers and subscribers with the news, of course, but it’s more important for us to explain just what the news actually means. To that end, look for us to:

• Put the news in context.
• To describe how the issue at hand fits in with the handful of powerful global trends that we’ve ferreted out and identified as the top ones that you need to follow if you’re to succeed and profit.
• To stay ahead of the crowd by projecting the “end game” – the outcome – for these top trends.
• And, finally, to research and highlight investment opportunities that are the best-positioned to benefit from these trends, meaning these represent some of the best profit opportunities in the market today [Editor’s Note: If this investing strategy appeals to you, it’s well-worth checking out our affiliated monthly newsletter that maintains several portfolios of stocks and funds chosen using these guidelines. New subscribers get a free copy of investment guru Jim Rogers’ new best-seller, "A Bull in China."]

Stay tuned: We’ll continue to follow the oil-and-gasoline saga as it unfolds, and we’ll continue to find ways for investors to profit from this and other top global trends.

Last Week’s Market Action

If you’re of a certain age, surely you remember some of the marketing “slogans” airlines used to burnish their brand names and, hopefully, to attract passengers. attract passengers.

After all, whatever happened to: “We Earn our Wings Everyday,” or “Fly the Friendly Skies,” or even “Something Special in the Air?”

Last week, however, the more appropriate taglines may have well have been: “We No Longer Overlook Safety,” or “Enjoy Your Stay in the Updated Airport Concourse,” or even better “When the FAA Talks, We Now Listen.”

As if the escalating gasoline prices have not caused enough hardships for the airlines, in recent weeks, they seemed to realize that they actually are required to abide by government safety regulations. Just last week, American Airlines Inc. (AMR) canceled more than 3,000 flights, thus, inconveniencing an estimated 250,000 travelers because a little faulty wiring “may” cause fires in certain aircraft. While some analysts were astonished at the lapse in judgment exercised by AMR’s airline management, others believed this to be classic bureaucratic overreaction due to previous lax oversight. In any case, the airlines undoubtedly will see their future earnings suffer and ticketed customers will experience extended delays [forcing them to seek out the closest Chili’s Bar & Grill inside the airline terminal - at least perhaps representing a boon for the earnings for that company].