Why Oil Is Not in a Bubble and How to Profit From It

May 22, 2008

It looks like the cost of oil is leaving orbit. The average price for gasoline hit its 15th straight daily record, and the crude oil price topped $135 a barrel today. One expert said on CNBC that $12 for gas is “inevitable.” Yikes! Every time I go to the pump, I feel like I need to take out a small business loan just to fill up! When will it all end?

This week, I want to give you my outlook for energy prices, and most importantly, I’ll show you how you can profit safely from the cost of oil’s meteoric rise (hint: invest in exploration). For every $4 you put into your tank, I’ll show you how to make $400 from an energy stock. That’s no exaggeration. In my Emerging Growth service, our 20 biggest winners have given us an average profit of over 114%--and much of that has come during a lousy market for stocks.

I’ll also give you a preview of the June issue of Emerging Growth which goes out to subscribers after the closing bell tomorrow. I’m going to have four new buys, including one stock that just reported 225% earnings growth. So don’t be left behind, sign up for Emerging Growth today.

Get Used to High Prices at the Pump

During my investment seminars that I hold around the country, I keep getting asked if we’re in a bubble for energy stocks that’s about to pop. Don’t bet on it. Personally, I think too many people are caught up in the talk of CNBC. After the network successfully called the housing bubble, now it feels it should call every bubble.

I’ll be honest with you. A large part of the problem is that 88% of the world’s commodities are traded in U.S. dollars. That means that as the dollar gets weaker, commodity prices rise. The greenback appears to have stabilized a bit, and that’s because Bernanke & Co. are probably done cutting interest rates.

But does this mean that the energy bubble is about to burst? Well, it’s possible that prices might fall if we all take Senator Obama’s advice and ditch our SUVs. But in reality, changing behavior is very hard. Here’s bottom line: Don’t expect to see any significant relief at the pump until after Labor Day. That’s when the summer driving season ends. With the Memorial Day weekend set to begin in a few hours, we’re now in the peak season for worldwide crude oil demand.

Goldman Sachs recently rattled world markets with its prediction that crude oil prices could hit $150 to $200 per barrel within the next six to 24 months. Goldman’s forecast carries some weight because more than two years ago, they said oil could soon hit $100 per barrel—and they were right. So I place a lot of clout on their oil forecasts.

So, Where’s the New Oil Going to Come From?

With soaring prices, the search for new sources of oil is relentless. It’s making the California Gold Rush look like a tea party, and the smart investor are cashing in.

Remember that you can sign up for a three-month subscription to Emerging Growth for just $295. This is an excellent time to join us. Also, if you don’t like the returns you get, then you cancel during the first 90 days of your subscription and get 100% of your money back. No questions asked. I can make this offer because I’m confident that once you see how well our system performs, you’ll become a happy, long-term subscriber. I’ve been writing Emerging Growth for nearly 30 years, and some of my original subscribers are still with me (and they’re a lot wealthier too).

Here’s the thing that all investors must understand—the normal link between high prices and increasing production has been broken. The reason is because many of the new sources for oil are very expensive. On top of that, it often takes several years to bring new oil fields online. This means that the best investments will be the ones that solve these problems.

Let me repeat that in case you’re weren’t paying attention: The best investments to own will be the ones that solve the expense and time problems of bringing new oil online.

The biggest recent news in the energy biz is that Brazil announced a second major oil find off of its east coast. In fact, this could be one of the world’s biggest oil discoveries in decades. This field might contain as much as 33 billion barrels in oil equivalent, which would make it the third-largest oil field in the world. Additionally, in 2006, Brazil’s Petrobras discovered the Tupi oil field, which the company says has an estimated eight billion barrels of reserves. That was the biggest strike anywhere in the world since 2000.

I hate to say it, but these new oil discoveries won’t bring us any relief in the immediate future. Even though these discoveries are impressive, the oil won’t hit the market anytime soon. Petrobras’ discovery lies at water depth of more than 6,500 feet and beneath an additional 9,800 feet of sand and rock, as well as a 6,500-foot-thick salt layer. As you can imagine, this makes crude oil production very challenging and very expensive.

After the big oil discoveries in Brazil, the whole industry quickly descended on West Africa. That may sound strange, but it makes perfect sense when you consider that the East Coast of Brazil and the West Coast of Africa are geologically similar. If you recall your high school geography, the continents used to be attached when the earth was one giant super-continent. As a result, both Brazil and West Africa are now the hot spots for worldwide oil exploration, especially in deep water below existing salt domes that currently contain crude oil.

For Oil Exploration, Buy FMC Technologies

With all this exploration going on, that’s the place where investors need to be. Actually one of my favorite stocks right now is FMC Technologies (FTI). It’s one of the best stocks to own for oil exploration. I first recommended this stock in Emerging Growth in September 2006. Since then, it’s soared over 150%. In fact, it’s up over 65% since its February low. The company is prospering from its subsea drilling and production systems for the exploration of oil and gas.

The good news for investors is FMC Technologies has filed with the SEC to spin off its FoodTech and Airport Equipment and Services company into a separate, publicly traded company. I think this is a smart move. Also, the spin-off will be a tax-free exchange. After the spin-off, FMC Technologies will be predominately an oil service company. This should help its valuation because high crude prices have helped boost most oil service companies’ valuations due to high day rates and a record order backlog. I was also pleased to see FMC Technologies raise its full-year earnings guidance. I’ll have more buying instructions for this stock in tomorrow’s Emerging Growth issue, so don’t miss out.

That’s all for this week. Have a happy and safe Memorial Day weekend. I’ll have the next issue of “What’s Working on Wall Street Now,” next Thursday, May 29.

Sincerely,

Louis Navellier