Back Up the Truck as Oil Breaks $100 a Barrel

 |  Includes: BNO, OIL, UGA, UHN, USL, USO
by: Kenneth D. Worth

One hundred dollars a barrel is a key psychological resistance level for the price of oil, kind of like 1,000 was for the Dow between 1968 and 1982, and like $30 was for oil for over two decades.

Monday, Brent crude broke through $100 for the first time since October of 2008. The next stop is $150. And after that, $200. Here's why.

Here is the chart for the ETF that tracks the price of Brent Crude (NYSEARCA:BNO).

Now that is a bull market!

The next time someone says the word “bubble” in reference to crude oil just ask them, “How much would you be willing to pay to fill up your car, rather than walk to work?” It’s all about supply, and OPEC just doesn’t seem to have any to spare.

Why? Simple. The world is now up against the production limits seen in 2005 and 2008 of about 74 million barrels per day. OPEC says they have more to supply, but they said that back in 2008 as well. Give me one good reason to believe that this time will be different. I didn’t think so.

Meanwhile, demand continues to grow worldwide. China alone seems to need an additional million or so barrels of oil a day each year. Chinese crude oil consumption has now passed the magical 10 million barrel per day (mbpd) mark, rising 15% year over year, and seems poised to rise another 10% this year over last. That is another million barrels a day for China alone. And the rest of the world? At least another half a million bpd according to the IEA.

Unless OPEC can pump sufficient oil to supply a growing global economy, the price will rise to the point where it is sufficient to trigger another global recession. Two hundred dollars should probably do it. If the supply isn’t there, demand has to come down somehow. Recessions are the easy way to reduce demand for crude oil. Giving everyone a Toyota Prius to replace their SUV is well, kind of expensive, and we aren’t doing it in any case.

In terms of ETFs, don't bother with USO, USL, OIL and other Cushing, OK based financial instruments. Their performance has severely lagged the actual global price of oil over the past year. Brent crude has risen 35% in the last year. West Texas Intermediate has risen only 22%. USO and OIL have risen a mere 8%, due to the effects of contango and due to front-running by traders who know when the big ETFs will have to roll their contracts over.

USL (NYSEARCA:USL), which holds contracts for 12 months before selling them, has done slightly better, rising 20%. The real star performers, however, the ETFs that actually track the price of the global commodity we all use and need have been the ETFs that hold the petroleum products: UGA (gasoline, up 28%) and UHN (NYSEARCA:UHN) (heating oil, up 29%).

A new ETF that tracks the price of Brent crude (BNO) hasn’t been trading for an entire year yet, but it is up 20% in just the last three months. Seems to be tracking crude pretty well.

The oil production stocks, integrated majors and oil service companies have done very well over the past year as well, but if you have doubts about the strength of the current bull market in equities, you might want to back up the truck with BNO, UGA and UHN.

Fill’er up!

Disclosure: I am long XOP, BNO, UGA.