Why Oil is the Name of the Game in 2011

Have you read the latest forecasts for oil prices in 2011? How about some headlines to give you a taste of what the analysts are expecting?

Oil price forecast for 2011, will oil hit $150 by summer?
U.S. Oil Price To Average $93 In 2011, EIA Predicts

OK, maybe $150 oil is a little bit exaggerated by the summer of 2011. Have we forgotten about further Chinese interest rate hikes and European debt woes coming back into the spotlight? What if the USD makes a significant recovery? The only real killer for oil prices in 2011 would be a second recession. Bar that possibility and we are sitting on a global oil demand that increased 2.2 million barrels in 2010 despite prices rising above $80 US per barrel. In 2011, The Deutsche Bank commodities team expects demand to grow by 1.5 million barrels per day. Talk about a growing problem since oil prices definitely contributed to the last global crisis!

Oil has been sitting at about $90 a barrel as OPEC has not signaled any output hikes to cool oil prices down in their last meeting on December 29, 2010. Following a significant price increase since September and with a new OPEC meeting unlikely before June of 2011, I expect oil prices to remain strong in the 1st half of the year. There is no need to speculate on the exact price of a barrel of oil, as long as it is above $75, every single junior oil producer makes money out there whether in Canada or anywhere else. I personally hope $90 becomes the ceiling for oil as there is a danger of higher prices deflating global economic growth. In my opinion, the money to be made is not by buying oil as a commodity, it is by investing in junior oil producers with high growth prospects.

How can demand be growing if many of the developed countries (US, Japan and Europe) are facing their fair share of economic problems? Well, it’s the developing economies (China, India, Brazil..) that are responsible for the increasing consumption growth. According to the IEA, the developing countries brought us back to pre-2007 levels of oil consumption at the end of 2010. Asia’s developing economies are expected to grow by 7% in 2011. China by itself increased its crude oil imports up 17.5 pct to a record high in 2010!

If oil is the name of the game in 2011, I believe natural gas will be the source of pain for many juniors in the sector. As such I began evacuating my NG weighted stocks (70%+ NG) and redeploying the capital into Canadian light oil producers. The challenge is to pull out the troops from the natural gas sector at no loss. I plan to keep an exposure to natural gas through Perpetual Energy as I consider it a long term hold in my HELOC portfolio and it pays me while waiting. Natural Gas will turn around; it’s just a matter of timing so I will keep an eye on NG fundamentals during the year.

What is your investment sector of choice for 2011?