Oil has gone from about $38 per barrel to around $58 per barrel in the last two months. The recommended plays from the last two articles have also run.

The two ETF’s I have recommended have performed exactly as advertised. Both, DXO and DIG have consistently returned at least twice the increase in the price of crude oil. Within days of the first recommendation you could have purchased DXO for as little as $2.71 per share, it’s now about $3.46.

The current price of crude, $58, and the expected price target of $75 per barrel would suggest another 60% gain is possible for both in the near term. At this point the move in the price of oil is almost unavoidable, for many reasons.

In just the past two weeks, two different OPEC spokesmen have stated that oil has to go to at least $75 per barrel, and production will either be cut, or would not increase when the world economy to expands, which amounts to a cut. This is reason enough for the excess oil reserves we have to dry up in a hurry.

With information like this on the street it is conceivable that if any really significant positive information about the health of our economy, or any other key world player’s economy, were to be released we could see a run well beyond our near term price of $75.

The U.S. economy is showing signs of improving. The most recent jobs numbers indicate we are on the right track for a healthy recovery.

The stock market’s recent move is indicative of it reacting to news six months into the future. Six months is about when most believe the economy should be moving into positive territory and the increases we have seen in oil prices are paralleling the upward moves in the market.

We are moving into the summer driving season and increased gasoline consumption. This too adds to the demands on our reserves and in recent years has driven the cost of gas up.

China’s economy is starting to rev up. 85% of their stimulus package was committed to infrastructure as compared to 5% of ours. This has had a more immediate affect on their numbers and it is showing in the rate of recovery.

As the economies of the world start to generate bigger and bigger numbers, the demand for energy will explode again. It’s doubtful we will see $146 per barrel again soon, but it will happen again.

The more immediate opportunity is in the next nine months. The price target of $75 is a forgone conclusion. How much higher it runs is a function not so much of consumption but of anticipated demand in response to how quickly the world economies recover.

So here again are the recommendations, with a new one.

DXO is a pure crude play that will give you two times the return of any increase in the price of crude.

DIG is a crude and natural gas play that also gives you two times the return of the price of crude and natural gas. It isn’t as clean a play as DXO but its return has outpaced DXO a little in the past few weeks.

The new play is a gasoline play, UGA. This is a pure play on the price of gasoline. It pays one to one for any price move on unleaded gasoline delivered to New York harbor traded on the New York Mercantile Exchange.

Gas in my area has moved from $1.99 to $2.29 in a week.

This is a move you must make now or get used to watching from the side lines. As the price moves into the sixties in the next few months, the total return on this play will have dropped to the point that it will have become a sucker play with the uninformed buying at the top.

This will not be a straight shot; you will have a few more opportunities on pull backs to average in and get your overall cost down. But make no mistake; oil is going back to the $75 to $100 range, and maybe higher. You have had plenty of opportunities to take advantage of it.

Source: Last Call for Oil

This from Today’s Financial News:

Even with the threat of a strike, crude prices managed to dip below the crucial $40 level, the unofficial delineator between cheap and moderately priced oil. What will happen through the rest of the week is up to the United Steelworkers.

If the union, which represents some 30,000 employees and about 70% of the nation’s refinery production, votes against the proposed contract, volatility is bound to rise. If a contracted is ratified over the next day or so, then volatility and prices are likely to drop even further.

The union and the nation’s oil companies are working on a day-by-day basis, but insiders say they are getting close to a compromise. In fact, some say it looks like a strike may even be unlikely. But unions have surprised us before and will certainly do it again.

Destroying what’s left

What makes a worker want to go on strike in this economic downturn, especially after they were promised a raise, remains out of my grasp. But then again, what makes unions tick in the first place has always been a mystery to me. They drove large manufacturers out of my hometown, took Detroit to its knees and now they are threatening to tear at the throat of the nation’s last great blue-collar profit maker.

If these workers get the guts to strike, as an investor, you have a few options. You can pick a major oil refiner, like Valero (NYSE:VLO), the nation’s largest, and short it. After all, even a short-term strike will pull down its quarterly profits.

Another option is to play the broader refining industry through an ETF like United States Gasoline Fund (NYSE:UGA). As production falls, gasoline prices will rise.

Finally, you can play the broader energy market through a fund like the Ultra Oil and Gas ProShares (NYSE:DIG). If shares go up, its price will jump at a two-to-one ratio, at least on a day-to-day basis. Be careful with these ETFs as they are calculated on a single day, not a long-term trend. With the right level of volatility, these shares can actually drop in value even as prices rise over the long-term.  They do it quite often.

But do not be certain crude prices will rise because of a refinery-level strike. Chances are, it could be just the opposite. We already have too much oil on the market. If refineries shut down, the supply glut will be even worse. In that case, take the Ultrashort Oil and Gas ProShares (NYSE:DIG).

No matter which slant you take or which way you choose to invest, one thing is certain. The nation’s largest companies are once again out of the predictable hands of a free market. They have been seized by unions and greedy politicians.

It makes the job of an investor even harder, but the profit opportunity is there just the same.

Source: Playing a potential refinery strike

This from Money Morning:

Oil prices have fallen 70% since hitting a record $147.27 a barrel in July, which means in just five months, crude has given up all the price gains it made in the past four years.

After such a wrenching plunge, many analysts believe the outlook for the “black gold” remains bleak – and in the short term it certainly is. In the long run, however, dwindling supplies, resurgent demand, and a lack of investment will cause crude oil to double, triple, or even quintuple in price over the next few years.

In fact, the Paris-based International Energy Agency (IEA) – energy advisor to 28 industrialized nations – says oil will rise to $100 a barrel by 2015, as a result of a major “supply crunch,” and will ultimately soar to $200 a barrel.

But before it does, prices are likely to sink even further, perhaps falling as low as $20 a barrel in the first quarter of the New Year.

Indeed, much of Wall Street expects oil prices to average about $50 a barrel in 2009. Some of the firms and their specific forecasts include:

• Deutsche Bank AG (DB, which says oil prices will average $47.50 for all of next year.
• Merrill Lynch & Co. Inc. (MER), which predicts that prices will average $50 even.
• Moody’s Investors Service (MCO) also says crude will average $50 a barrel in 2009, but says that average will increase to $55 a barrel for 2010.
• Goldman Sachs Group Inc. (NYSE:GS) is slightly more bearish, predicting that prices will average $45 for all of next year – after falling as low as $30 in the 2009 first quarter. (It’s worth noting that Goldman – just five months ago – predicted oil prices would hit $200 a barrel in 2009).

But analysts also agree on something else: When the recessionary tide finally recedes, all of the factors that drove oil to its record high last summer will once again be exposed, and crude again will again soar to record highs.

“We may see prices drop lower – into the twenties, even – but there’s a better-than-average chance that they’ll be back over $70 a barrel by the end of next year,” says Money Morning Investment Director Keith Fitz-Gerald. “That’s where firms like Goldman and Merrill are getting all of these ‘middle-of-the road,’ $50-a-barrel estimates. And it’s why investors who buy in through the first quarter could enjoy compelling returns at the end of the year.”

In the meantime, however, low oil prices are crimping investment in new capacity, a reality that will lead to much higher prices down the road.

Just ask the IEA.

IEA: Rising Demand + Lack of Investment = ‘Supply Crunch’

According to widely respected energy advisor, global oil demand will slide 0.2%, or 200,000 barrels per day (bpd), this year, falling to an average of 85.8 million bpd. But the IEA also says that oil demand will advance by an annual average of 1.6% between 2006 and 2030.

The bottom line: Regardless of any short-term pullback, daily demand will rise from the current level of 86 million barrels to 106 million barrels in 2030. In other words, daily demand in 2030 will be 23%.

To meet that demand, the agency estimates that the world needs $26.3 trillion in supply-side investments over the next 21 years.

China, India and other developing countries, alone, will need investments of $360 billion a year through 2030, the agency said.

About 7 million bpd of additional capacity needs to be added to the market by 2015. And right now – because of marketplace changes – the financial incentives to make that happen just don’t exist.

Exploration costs have more than quadrupled since 2000, as oil producers have been forced to take on more complex projects, and the costs of both labor and materials have skyrocketed. At the same time, the steep drop in oil prices has put even more pressure on energy companies to curtail their investments rather than increase them.

Earlier this year, for instance, ConocoPhillips (NYSE:COP) and Saudi Arabia Investment Co. (ARAMCO) were forced to postpone bidding on the construction of a 400,000 bpd export refinery at the Yanbu Industrial City.

“We see and hear about energy investments being delayed … this is a major worry and could lead to a supply crunch and much higher oil prices than we’ve seen before,” said Fatih Birol, the IEA’s chief economist.

The IEA predicts that, by 2015, a lack of investment and rising demand will create a “supply crunch” – that will once again send oil prices up into the triple digits.

“There remains a real risk that under-investment will cause an oil supply crunch in that time frame,” the IEA said in an executive summary of its “2008 World Energy Outlook.” “The gap between what is currently being built and what will be needed to keep pace with demand is set to widen sharply after 2010.”

The agency predicts that crude will average more than $100 a barrel from 2008 to 2015 and rise above $200 a barrel by 2030, as demand far outpaces supply.

“While the situation facing the world is critical, it is vital we keep our eye on the medium to long-term target of a sustainable energy future,” Nobuo Tanaka, the Paris-based agency’s executive director, told reporters in London. “While market imbalances will feed instability, the era of cheap oil is over.”

While it’s probably true that the “era of cheap oil” is in our rearview mirror, a new question has arisen: Just how high do oil prices go?

According to some analysts, the IEA’s target price of $200 a barrel is far too conservative.

$500 Oil?

The lack of exploration and development is certainly a problem. But a much bigger issue is the fact that output from the world’s existing oil fields has sharply declined.

“The future rate of decline in output from producing oilfields as they mature is the single most important determinant of the amount of new capacity that will need to be built globally to meet demand,” the IEA says.

And output from the world’s oilfields is declining faster than previously thought.

In its “2007 World Energy Outlook,” the IEA estimated that output from the world’s existing oilfields was declining by 3.7% a year. But in its latest report, published in November, the IEA revised that estimate to an annual decline of 6.7%. (The November report was based on the first major study of the world’s 800 largest oil fields.)

Unfortunately, the IEA is behind the curve.

For nearly a decade, Matthew R. Simmons has said that the world’s oil production was nearing – or already at – an “inflection point.” While his book “Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy,” was scoffed at when it was originally published back in 2005, Simmons is now viewed as perhaps the preeminent expert on the so-called “peak oil” movement.

“Like most people who ignore conventional wisdom, he was scoffed at, ridiculed, and denied,” commodities guru Jim Rogers told Fortune magazine. “And now, of course, people are starting to say, ‘Oh, well, I thought of that.’”

Simmons, chairman of the Houston-based investment bank Simmons & Co. International, poured through hundreds of technical documents submitted by Saudi oil geologists to the Society of Petroleum Engineers over the past 50 years.

“I finished reading the last paper on a Sunday afternoon,” Simmons told Fortune, “and I sat back and thought, ‘Holy crap, this is unbelievable. I’ve just discovered the biggest energy illusion ever in the world. We’re in big trouble. I’m going to write a book.’ ”

Much of the alleged Saudi Arabia subterfuge has to do with a complete lack of transparency with respect to the Organization of Petroleum Exporting Countries. After OPEC decided to base its production quotas on reserve figures in the 1980s, several of the cartel’s producers suddenly raised their levels of  “proven reserves” by 40% or more.

Back in 1988, for instance, Saudi Arabia raised its proven-reserve figure from 170 billion barrels to about 260 billion barrels. That figure has remained more or less constant since then, despite the fact that billions of barrels of oil have been pumped out of the ground.

“Saudi Arabia has announced for 20 years in a row that they have 260 billion barrels of oil in reserve,” Rogers told Money Morning during an exclusive interview in Singapore recently.  “It’s astonishing.  The figure never goes up and it never goes down.  They have produced dozens of millions – billions – of dollars of oil in that period of time.

“Every oil country in the world has declining reserves except Saudi Arabia,” Rogers said. “And I know that every oil company has declining reserves.  So unless somebody discovers a lot of oil very quickly in very accessible areas, the surprise is going to be how high the price stays, and how high it goes.”

Simmons thinks oil prices could hit $300 a barrel – and could possibly even surge as high as $500 a barrel – during the next several years.

“Black Gold” Profit Plays

When it comes to investing, the oil sector poses some very clear risks, especially given the murky near-term outlook. However, there are a number of large-cap integrated oil companies that may offer some truly compelling values at current prices.

Exxon Mobil Corp. (NYSE:XOM) and Chevron Corp. (NYSE:CVX) are currently trading at multi-year lows, making them exceptionally cheap in both relative and absolute terms. These companies also have strong balance sheets (Exxon is “AAA”- rated and has more cash on its balance sheet than debt), generate strong cash flows, and have traditionally increased their dividends on a regular basis.

Chevron was actually recommended as a “Buy” by Money Morning Contributing Editor Horacio Marquez in his “Buy, Sell or Hold” column earlier this year.

“Chevron is the kind of company that is capable of continuing to post large profits – propelling its share higher from current levels – even if oil-and-gas prices were to drop from current levels over the next three years,” Marquez said. “That’s because Chevron’s business is well cushioned, since refining, marketing and chemicals margins would expand dramatically if market ‘spot’ prices were to decline. Also, the company’s production is poised to expand strongly and Chevron uses some selective hedging that works very well in downside oil markets.”

Offshore drillers, particularly those capable of drilling in the deepest waters, also offer value at current levels. Petroleo Brasileiro (ADR:PBR), also known as Petrobras, is particularly appealing, as it recently discovered one of the largest offshore oil fields on earth off the coast of Rio de Janeiro. Known as Carioca, the field could hold 33 billion barrels of oil and gas, making the world’s largest discovery in at least 32 years.

Fitz-Gerald, the Money Morning investment director, suggests investors look at China National Offshore Oil Corporation, or CNOOC Ltd. (ADR:CEO). The Hong Kong-based company recently got approval for a $29 billion exploration project in the South China Sea. The company expects to produce 50 million tons of oil equivalent per year from that region during the next 10-20 years. That would equal the production of China’s biggest project, the Daqing Oil Field.

Petrobras and CNOOC are also attractive because, as foreign companies, they will also get a boost from any devaluation in the U.S. dollar.

All of these companies have been hit hard by the combination of commodity-price weakness and credit market turmoil. But these operators do not require peak-cycle commodity prices to generate stellar results and have little or no credit-market exposure.

For a more direct play on oil prices, you might also try an exchange-traded fund (ETF), such as the United States Oil Fund LP (NYSE:USO), the iPath S&P GSCI Crude Oil Total Return Fund (NYSE:OIL), or the United States Gasoline Fund LP (NYSE:UGA).

Source: Why Crude Oil Will Present Investors With A Golden Opportunity In 2009

This from Money Morning:

Many of my neighbors here in Oregon are enjoying the big decline in gasoline prices, particularly those who still own SUVs, pickup trucks or any of the other fire-breathing, piston-clanking monstrosities I’ve seen on the road recently.

And no wonder. Gasoline prices in our neck of the woods have fallen between 60% and 70% since July, when oil closed at a peak price of $145.29 a barrel. Here in Oregon, that means that my wife and I don’t feel like we’ve been mugged every time we fill up.

But what happens when the prices start going up again? Global demand for oil will fall this year for the first time since 1983 as the world financial crisis saps demand, the International Energy Agency said a week ago. That has some people believing that prices will remain low.
But I wouldn’t bet on it – at least not for long.

The Organization of Petroleum Exporting Countries (OPEC) is making loud noises that it wants to see $75 a barrel again soon, which would represent a 70% increase from the $43.60 a barrel where oil closed yesterday (Tuesday). OPEC, supplier of more than 40% of the world’s oil, is ready to make a “big” cut in supplies when it meets in Oran, Algeria, today (Wednesday), Venezuelan Oil Minister Rafael Ramirez told journalists.

How much of a production cut we’ll see is anybody’s guess, depending on who does the cutting and who actually abides by the agreement over time. But we’ll know very shortly.

Russia recently announced, after years of going it alone, that it wants to actually join OPEC. Now OPEC has asked Russia to cut oil output by between 200,000 and 300,000 barrels a day to help revive prices, OAO Lukoil Chief Executive Officer Vagit Alekperov said in Moscow on Monday. And Russia may well do just that.

A price of $60 to $80 a barrel would be consistent with a global production cut of about 2.5 million barrels, and that’s a figure apparently supported by OPEC representatives we spoke to.   Leonid Fedun, OAO Lukoil’s deputy chief executive officer, noted in a recent Bloomberg News report that “there is a consensus [among members] to reduce production.”

This highlights something that’s often missed in the Western media, where the price of oil is typically associated with the price of gasoline and how that price impacts driving habits. According to CNN, MSNBC and a whole host of others, evidently that’s what matters to us.

But in OPEC-producing countries, it’s a different story. There the price of oil is more typically associated with external trade relationships and hard currency requirements that are policy level decisions often made at the expense of individual concerns. And I don’t have to remind you that most OPEC member countries don’t exactly specialize in freedom of choice, so the odds are high that what the energy ministers want, the energy ministers will get … but that’s a story for another time.

Here’s one other point to consider: With all the media’s focus on OPEC, there’s been little mention of China, India and the whole host of emerging markets that are still experiencing double-digit growth in oil demand. That’s not going away.

The bottom line here is that it would behoove interested investors (and people who like to drive less fuel efficient cars) to hedge any potential future rise in gasoline prices sooner rather than later. Here’s one quick and dirty way to do it.

If you drive 20,000 miles a year and your car gets 30 miles to the gallon at a time when fuel costs $1.75 a gallon, you are looking at an annual fuel bill of $1,166.67. If OPEC gets its wish and oil rises by 70%, gas prices may rise in tandem. Therefore, buying the equivalent share value of your projected annual fuel expenditure in such exchange-traded funds (ETFs) as the United States Oil Fund LP (NYSE:USO), the iPath S&P GSCI Crude Oil Total Return Fund (NYSE:OIL) or the United States Gasoline Fund LP (NYSE:UGA) could be just the ticket.

As prices rise, so, too, will the value of your investments. If prices fall further, you’ll obviously lose money, but you’ll be paying less at the pump at the same time.

Granted, what I am proposing is not a perfect hedge. Among other things, there are potential capital gains to contend with when you sell 12 months from now – taxes, transaction costs and a whole host of other variables that could come into play. At the same time, you could simply alter your driving habits, which, of course, would change the value of your calculations midstream.

None of that really is material, though. Hedges are never perfect.

But they do offer you a chance of “being in the neighborhood” when it comes to protecting your wallet from what could be vastly higher oil prices to come.

Source: Pledge to Hedge: Three Ways to Lock in Low Gas Prices Right Now

Today’s unsettled trading environment is not for the faint of heart, that’s for sure. This is no time to climb out too far on a limb – whether going long or short on the markets. That’s because we’ve seen our fair share of whipsaws lately – sharp moves in BOTH directions – often within days of each other.

But there’s one investment strategy that’s tailor-made for this kind of market: They’re called “pairs” trades.

In February, I wrote about just such a “hedged” profit opportunity in a pairs-trade between natural gas and crude oil. At the time, I was concerned about a potential correction in crude due to slowing growth. Now a correction may have started.

So rather than make an outright directional bet in energy markets, I saw an opportunity to profit from a spread trade instead.

The Double-Profit Play with Crude Oil’s Cousin

Specifically, I have been bullish on the price of natural gas, which is way undervalued relative to its cousin, crude oil. I pointed out that with easy-to-trade ETFs, it’s now possible to effortlessly go long natural gas (UNG) while shorting crude oil (USO) without ever trading a single futures contract.

In such a trade, it doesn’t really matter where the overall market goes. As long as the spread narrows between natural gas and oil, you’ll make money.

A similar opportunity is now in place between crude oil and its distillate offspring, gasoline.

If You Think Prices at the Pump are High Now…
Hold on to Your Wallet

Since June 1st last year, crude oil surged almost 58% higher in price. Over the same period however, the price of unleaded gasoline has only advanced about 19% (see graph above).

Now, I realize many of us are already suffering from sticker-shock at the pumps, so the last thing you want to hear about is higher gas prices. In fact, my soccer-team toting Ford Explorer now takes about 80 bucks per fill-up! I’d switch to a Honda, but I just can’t fit six 11-year-old soccer players in it – unless I strap a few to the roof.

Anyway, back to the spread-trade in gasoline and crude. Gasoline prices are spiraling to record highs already, but hang on to your wallets, because the indicators I watch suggest a gallon of unleaded may soon shoot even higher in price.

Here’s the thing: Prices at the pump usually climb as America enters its summer travel season, boosting demand for gasoline. Over the past five years, demand for unleaded has jumped on average 4% between April and July, according to a recent Bloomberg article.

Crude Oil and Gasoline Prices are Out-of-Whack

Right now, commodity traders should be bidding up the price of unleaded gasoline to match sky-rocketing crude oil, and in anticipation of seasonal trends kicking in. However, unleaded gasoline is actually dirt-cheap right now compared to crude.

In fact, Bloomberg points out that: “A barrel of wholesale gasoline fetched 50 cents less than crude oil” just two weeks ago! This marks only the fifth time in the past 20 years that refined gasoline sold at a lower price than crude, according to data from the New York Mercantile Exchange.

As seasonal trends begin to kick in (April is already here), we could see unleaded gas play catch up to crude in a very big way. In fact, research suggests that investors who sell crude oil to buy gasoline “may return about 20-percent by June” as the price difference between the two is bound to rise in favor of gasoline, according to Bloomberg.

Now Here’s A Handy Way to Play It…

Until recently, investors in unleaded gas had pretty much just one option: Open a commodity-futures trading account. But in February, the folks that came out with the first crude oil ETF (USO), and the first natural gas ETF (UNG), struck again: Now they’ve launched the U.S. Gasoline ETF (UGA). This fund tracks the price of unleaded gasoline, as measured by changes in futures contracts traded on NYMEX.

So it’s now possible for you to easily execute this particular “pairs” trade with ETFs in your standard brokerage account. And you can do it all in the same fund family – by shorting USO and going long UGA.

It looks to me like the “spread” is already narrowing between crude and unleaded as gasoline inventories melt away faster than the polar ice caps. With millions of Americans getting set to load up the family-truckster for summer vacation…I expect gasoline prices to move much higher and close the gap with crude oil.

MIKE BURNICK, Senior Editor & Global Markets Analyst

P.S. Last week readers of my signature investment service, Market Shock Trader closed out a call option trade on the U.S. Natural Gas ETF (UNG) for gains of 159.7%. If you would like to access details of my NEXT energy sector options play, sign up for a risk-free trial of Market Shock Trader.