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May 20, 2018 | Why Your Gasoline Costs So Much

Sean Brodrick

Sean is the natural resource analyst for Weiss Group. You can read his thoughts on gold, oil, cannabis, uranium and other natural resources at EdelsonInstitute.com

Man, the prices at the pump are soaring. Why is that? Isn’t America pumping more oil than ever? What the ding-dang is going on? Well, I’ll explain not only why gasoline prices are high, but what you can do about it.

First, you know oil is a global market, right? It gets pumped and shipped around the world. So, supplies around the world affect the global price of oil.

Therefore, it’s important to know that global oil stocks have dropped to a three-year low. Here’s a chart of oil stockpiles in the 35 countries that belong to the Organization for Economic Cooperation and Development (OECD). That’s industrialized countries like the U.S., ones that won’t lie about their oil in storage (Cough! Saudi Arabia! Cough!)


Click image for a larger view.

So, yeah, commercial oil stocks in industrialized economies fell to 2.819 billion barrels. That’s according to the International Energy Agency (IEA). And that’s the lowest level in three years.

Now, this is partly due to the fact that OPEC and 10 producers outside the oil cartel, including Russia, are holding back crude production by roughly 1.8 million barrels a day since the start of last year.

The other part of the equation is that the global economy is shifting higher. The faster the gears of the global economy whirl, the more oil is used up.

But hold on a darned minute! What about those fat-cat oil men romping around on TV, rolling in money and higher production with big ol’ smiles on their faces? They didn’t make any deal with OPEC to cut production.

And it’s true, total U.S. oil production stood at 10.7 million barrels a day for the week ended May 4, according to the Energy Information Administration. That’s a record based on weekly EIA data dating back to January 1983.

In fact, hold on to your 10-gallon hats: Total U.S. oil production has already surpassed that of OPEC’s leading producer Saudi Arabia. And America is on track to topple Russia to become the world’s largest crude oil producer as early as later this year, the IEA says.

So, the heck with the world. We’ve got a lot of oil here at home. Why are our prices so high?

I’ll tell you why. We’re also exporting a lot more oil. In fact, here’s a chart of U.S. oil exports …


Click image for a larger view.

Dang, that’s lift-off, amigo!

Now for the shock. I hope you’re sitting down.

We would be paying oil prices that are a lot higher if transporters could only get it out of the country.

See, our oil prices are high — recently at around $71.50 for the U.S. crude oil benchmark, West Texas Intermediate. But international oil prices are even higher. The international benchmark, Brent crude, recently traded at $80.50.

That’s a $9 difference. Per barrel! You get about 20 gallons of gasoline out of a barrel of oil. Sure, there are other products as well. But if we paid international rates, we could easily pay another 40 cents per gallon for gasoline.

Ouch!

You think that’s bad. Thanks to taxes and other things, our friends in Canada pay about twice what we do (on average) for gasoline.

So, be glad you’re getting a “discount.” A discount you’re only getting because they can’t ship American oil out of the country fast enough.

Now for the bad news. Are you sitting down?

The Louisiana Oil Port (LOOP) has expanded so it can ship out even more oil.

Consultants at Woods MacKenzie — who know a thing or two — say U.S. exports will continue to rise. And by 2022, the U.S. will be the fourth-biggest exporter of oil in the world. We now export slightly over 2.5 million barrels of oil per day. By 2022, the U.S. should export 4 million bpd.

I don’t know what the price of oil will be in 2022. I do know that Goldman Sachs and others recently slapped price targets on U.S. oil for next year of $100 per barrel.

So, sure, stocks leveraged to oil prices have moved up recently. Making all those Texas fat-cats rich! No one cries for them when prices go down, but that’s another story. The thing is, how would you like to get a piece of that action?’

Here’s how you do it.

On any pullback, buy the SPDR Oil & Gas Equipment & Services ETF (NYSE: XES).


Click image for a larger view. Permalink: http://schrts.co/X1sfpn

You can see that in the last month, the XES has handily outperformed the Energy Select SPDR (NYSE: XLE). And both are leaving the S&P 500 in the dust.

The XES is stuffed with oil services companies — the kind of oily stocks that starved during the lean times. Now every big company in the XLE is knocking on their door, trying to give them work. They can charge whatever they want.

So, if Goldman Sachs and others are right, and oil goes to $100 per barrel next year, those oil services stocks are oil-soaked pigs that should fly!

And the best part — and this brings me back to where I started — you can make a whole lot more in profits than you’ll pay at the gas pump due to higher prices.

Just wait for the pullback to buy. You know there’s always a pullback, right?

Good luck and good trades.

Sean

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May 20th, 2018

Posted In: The Edelson Institute

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