07.12.08: Many in the financial markets believe oil and commodity related stocks are either very long in their run or in a bubble that will soon burst. I'm really not in the mood to see these profits disappear from the value of my portfolio. Doesn't the current profile of at least some of these stocks suggest they should be sold?

I get a lot of questions like this because our oil situation is so complicated right now. I'll try to give you a little more insight as to why I don't believe there is a bubble, but I could honestly write a whole book on the subject and still not cover everything!

In a nutshell, our supply is still extremely tight. I've mentioned before that Iraq and Saudi Arabia are the only two major producers with the capacity to produce more crude oil, while Mexico, Russia and Venezuela all producing less this year. As a result, there is a real long-term supply problem brewing, despite the fact that Europe, Japan and the U.S. are now using less crude oil.

One issue I haven't expanded upon before is how much of the emerging world relies on diesel for power generation and transportation. This means the high prices of diesel, jet fuel and other distillates may be here to stay. An interesting tidbit in Thursday's Wall Street Journal was that gasoline is up 28% in the past year, while diesel is up a whopping 65%! The demand for diesel in emerging countries for both transportation and power generation is a big deal and explains much of the pressure on crude oil. When you refine a barrel of crude oil, you get three main things: asphalt, diesel (and other distillates) and gasoline. You cannot change the formula to make more diesel and less gasoline, or vice versa, so this problem is here to stay!

I expect that after Labor Day when demand drops for seasonal reasons that crude oil may slip, but that depends on the Atlantic hurricane season. The recent price relief after the July 4th weekend is primarily due to firmer footing for the dollar, since crude is priced in that currency. The only scenario I foresee that could cause crude oil prices to drop would be if the U.S. dollar rallies dramatically in the upcoming months, which is unlikely. Additionally, the record earnings for many oil-related stocks will likely persist for the next several quarters, so like I've said to my Emerging Growth subscribers, I remain especially bullish on my big energy bet.