Oil Stocks: Why They Say $100.00-a-Barrel Oil Is a Reality

Long-time subscribers know my fondness for stock price charts in determining

future trends. I believe, most of the time, that the price of stocks are a leading indicator

of what lies ahead, especially for individual stock sectors.

Months before the turmoil in Egypt erupted, the price of oil started to rise. After crashing

to a low of about $30.00 a barrel in the depth of the 2008 financial crisis, oil came

running back to $91.00 a barrel. (While the Dow Jones Industrial Average is up 87% from its

2008 low, the price of oil has risen 200% since its 2008 low.)

Looking at the charts right now, the Dow Jones U.S. & Gas Index literally shows a straight

line upward from September 2010, when the index traded at 440, to 635 today—a gain of 44% in

five months. The chart screams of higher stock prices ahead for the oil companies—which the

market obviously relates to higher crude oil prices.

Blame the exploding economies of China and India, a colder-than-expected 2010/2011 winter in

the northeast U.S., an improving North American economy, tensions over the Suez Canal, and

recovering car sales worldwide, but the stock price charts indicate that oil prices will

continue to rise.

Now my two contrarian spins on rising oil prices:

Firstly, rising oil prices are inflationary. With inflation come rising interest rates.

Secondly, crude oil is priced throughout the world predominately in U.S. dollars. As the

U.S. dollar continues its long-term devaluation against other world currencies, the price of

oil rises, because it takes more real U.S. dollars to purchase crude.

I’ve often looked at crude as a “put” against the declining value of the U.S. dollar. The

more the greenback falls in value against other world currencies, the higher oil prices

move. Who knows; maybe one day world oil producers will demand payment for their crude in

non-U.S. dollars. Anyone say “gold?”

Michael’s Personal Notes:

While I was driving downtown late yesterday afternoon, I was listening to the radio. Three

CNBC journalists were interviewing the president of Newmont Mining Corporation (NYSE/NEM).

The first asked about what happens when gold prices run up to $1,500 an ounce and come

running back down. Another asked why Newmont doesn’t hedge its bets, with the price of gold

so high right now. A layperson listener like me couldn’t help but notice that all three of

the CNBC interviewers were negative or bearish on gold.

When the president of Newmont got off the phone, one interviewer basically said to another

interviewer, “What happens when the price of gold bullion comes crashing below $1,000 per

ounce; how hard will Newmont stock get hit?”

My two points on this: the majority of investors do not believe that the price of gold will

continue to rise. Wednesday, I quoted a recent Bloomberg poll that said more than half of

1,000 investors polled thought the gold market was in a bubble. As long as this negativity

towards gold bullion exists, the price of gold will continue to rise.

Secondly, there was no mention during the CNCB Newmont interview of the effects of the price

of gold, because the U.S. greenback is devalued against other major world currencies. This

is key; the purchasing power of the U.S. dollar is a major factor in the pricing of gold

bullion.

After Barrick Gold Corporation (NYSE/ABX), Newmont is the second-largest producer of gold in

the world. The amount of $10,000 invested in Newmont stock in 2001 would be worth $38,220

today, even after the recent correction in the gold prices. Newmont has been an excellent

way to play the run-up in gold prices.