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Best Oil Plays This Summer

Posted May 10, 2008

Best Oil Plays This Summer

Baltimore — (TFN): Krista Das: U.S. crude oil hit a record high last week. The June contract began trading over $119.00 a barrel. According to the International Energy Agency, this is higher than the inflation-adjusted peak after the Iranian Revolution in 1980 when considering inflation.

Joining me today is Blue Chip expert Todd Schoenberger who regularly appears on CNBC and Fox News. Todd, welcome to Market Insights.

Todd Schoenberger: Thank you for having me.

Krista Das: Do you think the cost of crude oil is likely to continue rising?

Todd Schoenberger: No, not right now Krista. I actually could see it dropping from here. I’m kind of surprised that the May contract had risen as much as it did. Futures contracts are up 8 percent year to date. Now that we’re trading into the June contract and I still see prices hovering above $115.00, I’m still surprised by this, but realistically you are probably going to start seeing prices of crude drop within the next few weeks.

Krista Das: There is an increased number of people investing in commodities, including oil, due to recent Wall Street woes. How should we play oil right now?

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Todd Schoenberger: Historically speaking, when you look at crude production and output, the second quarter is typically the weakest. That’s why I’m kind of surprised to see oil prices as high as they are.

However, the June contract is trading now. Weather has moderated around the United States, temperatures are quite mild, so there’s less of a demand for heating oil. You definitely should start seeing prices for crude dropping. That’s going to have a negative impact on royalty revenues for some of the big oil companies. And that in turn could have a negative effect on the U.S. stock market.

Krista Das: Oil investors seem to be panicking about supply disruptions in Nigeria and the U.K., not to mention the problems that we’re facing in Iraq and Iran. Is shorting oil stocks a good idea?

Todd Schoenberger: Right now I would have to say yes if you are looking for the quick trade. or the long‑term investor, no. You definitely should be focused on oil. Keep in mind all the countries that are growing at almost double-digit clips. That equals oil consumption.

Look at China. China still has a gross domestic product growth figure of well over 10 percent. India is still at 8 ½ percent. Even here in the United States, some Wall Street economists are still calling for 1 ½ to 2 percent growth this year, which actually isn’t that bad.

And so when you are looking at oil consumption and you’re looking at developed countries that are continuing to evolve, that means greater oil consumptions. For the long‑term investor, it’s a good idea to stay long. But if you’re looking for the quick trade though, don’t be surprised if you start seeing prices of crude dropping from here.

But once that July contract and August contracts start trading, keep in mind that might be a good time to go long again.
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