Economic Growth and Oil Prices
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August 4, 2010

*****Economic Growth and Oil Prices

*****Bakken Earnings Blowout

*****Maguire Properties Up 28%

Fellow investor,

The headline reads "Oil falls to near $82 on weak US crude demand." As if that's some kind of revelation. The better question is "why is crude oil $82 a barrel when U.S. crude demand is weak?"

The latest round of economic data for the U.S. is pretty much the same as it has been: not disastrous, but not strong by any means. June consumer spending was flat and household purchases rose just 1.6% in the second quarter.

Many analysts still seem to think that oil prices are driven solely by demand in the U.S. But a report from Sander Capital sums up the reality: "The underlying fact is the emerging markets are still growing and so is their consumption of energy…"

The graphic below uses just China alone to demonstrate the point. The top part represents crude oil and oil product imports for China for the full year 2009, broken out by month. Remember, 2009 is when pretty much the rest of the world—including China's major export markets—was in deep recession. And still crude oil imports climbed to 21.3 million tons by December, up from 12.8 million in January. And China's just one of several fast growing emerging market economies.

Oil prices will, and in fact do, rise regardless of the strength of the U.S. economic recovery. When the U.S. economy finally start growing at a more robust pace, it will only push oil prices that much higher.

Investors simply must have oil stocks in their portfolio.

*****The first of the Bakken oil pool companies from the Energy World Profits' portfolio reported 2Q earnings last night. They were quite good. Average daily production exceeded the company's latest estimates. The company had raised estimates to 7,000 to 7,500 boepd (barrels of oil equivalent per day), from 6,000 to 6,500 boepd.

The final count was 7,756 boepd. Of course, that pushed the company's earnings per share. Over the last month or so, analysts boosted their estimates to $0.07 to $0.09 a share from $0.06. The actual number was $0.16 a share in 2Q earnings. I'd say that qualifies as a blowout. That's the kind of oil company we like.

Production for the third quarter is expected to be 7,900 boepd. But with higher oil prices, earnings could surprise to the upside again.

The company also reported that it had added 52,000 acres of exploration land in the Bakken. That gives it 358,000 total acres. (For perspective, this is just about the size of Houston, Texas.) This company has an aggressive 10-year plan to bring over 200 well sites online. And once it proves the long term viability of its plan, it becomes a very attractive buyout target for a larger oil player. This earnings report is bound to open some eyes in the oil industry.

*****The other two Bakken oil companies in the Energy World Profits report earnings August 5 and August 9. I expect to see similarly positive results. If you want in before the stock prices make their next move higher, you can learn how HERE.

*****Homebuilder Pulte Homes (NYSE:PHM) reported a profit for the second quarter, its first since 2006. That's more indicative of the success of its own cost-cutting measures than a statement about the housing market.

But don't ignore the Obama administration's latest moves to support current homeowners. $600 million is going to help homeowners in five states hard hit by the housing bubble and recession in general: Arizona, California, Florida, Michigan, and Nevada.

While this doesn't help homebuilders directly, it may keep some homes facing foreclosure off the market. That, in turn, will help support prices that might otherwise make a downward turn if inventory rises. No doubt a floor to prices will help the homebuilders.

It's also worth noting that mortgage applications are up for the third week in a row.

*****If you took my advice and bought Maguire Properties (NYSE:MPG) around $2.60 a share, you're up as much as 28%.

The stock hit resistance at $3.50 a share yesterday and backed off. If it drops below $3.25, you should take your profits. But in the meantime, it's worth seeing if the stock can break out above $3.50.

*****As always, you can write me with your comments at ianwyatt@wyattresearch.com. And if you bought Maguire Properties, let me know how you're doing. 

Until tomorrow,

Ian Wyatt
Editor
Daily Profit





Posted 08-04-2010 10:10 AM by Ian Wyatt