By Louis Navellier
Blue Chip Growth Letter

       The oil futures market is being manipulated by unscrupulous traders. Crude oil inventories in the U.S. are nearing a three-year high, and oil prices already cracked $50 per barrel (Ed. Note: Oil prices set a new record of $58.60 a barrel on June 17th). Also, gasoline inventories have risen as they normally do in the spring. The price of heavy crude remains at a substantial discount to sweet crude. The wider the margin between heavy and sweet crude oil, the more refiners make. There are many opportunities in the energy sector, but they may not be as easy as they have been in the past. I plan to cut back on any oil stocks in the upcoming months if they become too volatile.
        When you think about the recent rise in oil prices, you can remember that there's always a crisis that oil traders will use as an excuse to raise prices. Turmoil in Iraq, Nigeria, Venezuela and other countries was a reason for traders to raise prices, but those disruptions have diminished considerably in the past few months. Russia's purge of Yukos' assets helped drive oil prices higher, even though the flow of oil wasn't significantly disrupted. Recently, the late winter in the Northeast and unseasonably high heating oil demand were excuses to raise oil prices. The next excuse to raise oil prices will likely be the summer driving season. I hope that the oil traders' scare tactics will have less impact in the future.
        The best thing that could happen to the energy stocks on our Buy List would be for oil to settle down into a tight trading range so we could get a better handle on corporate profits. Virtually all of the energy stocks on our Buy List make money if oil is $45 or $50 a barrel. However, as oil becomes more volatile, so do our energy stocks.
        Right now, there's a good possibility that oil and possibly natural gas prices will settle down because of softer spring demand. However, there's no doubt that stronger demand is on the horizon. Refineries typically build gasoline inventories prior to the summer driving season, so I expect that gasoline inventories will be rising. World demand will continue to be the most important factor in determining future oil prices.
        If demand for oil continues to rise, I expect that oil could hit $60 per barrel within a year. Interestingly, Chinese oil imports actually fell earlier this year, but I suspect that it was an anomaly. One of the most predictable indicators for higher oil prices has been incremental demand from China. As Chinese oil imports steadily rise, oil prices also rise.
        Eventually, the exploration for new oil in the world will add new supplies, and oil prices will settle down when an equilibrium is reached. However, the exact level for equilibrium is uncertain. It will be interesting to see whether oil settles down around the $50, $60 or $70 level in the next few years.
        A recent report by Goldman Sachs said that oil might have a "super spike" to $105 per barrel. In my opinion, this is very irresponsible. Although such a spike is possible in the event of a severe supply disruption, the truth is that folks in the Middle East, Nigeria, Russia and Venezuela are too busy making windfall profits to let any supply disruptions ruin their prosperity.
        Companies like ConocoPhillips (COP), with their modern recovery methods, should be able to boost production in Russia substantially. Oil service companies like Transocean (RIG) will be able to help expand oil and natural gas supplies in the Gulf of Mexico and throughout the world. The second-highest proven oil reserves in the world are locked up in Alberta's tar sands, so I expect that Canadian Natural Resources (CNQ), Imperial Oil (IMO) and Suncor Energy (SU) will be able to boost their production exponentially as soon as EnCana (ECA) boosts natural gas supplies, which are required for tar sand extraction.
        The big question is: Will these production increases take one, two or several years? I suspect the world oil markets will find equilibrium faster than many people think because wind-fall profits are still incredibly attractive. But, I must admit that I have no idea where oil prices will stabilize, but it will likely be far below $105. Let's hope that oil prices stabilize instead of being jerked around by unscrupulous futures traders. This will reduce the volatility of our energy stocks.
        Editor's Note: Louis Navellier's is editor of Blue Chip Growth Letter, 9420 Key West Ave., Rockville, MD 20850, 1 year, 12 issues $299.