An Outrageous Prediction about Oil for 2013

With the drama of the presidential election behind us, it's time for investors to focus on the real task at hand: How investments will pan out next year, particularly in the energy sector. After all, energy has a role in just about every good produced and service rendered in this country.

Being the contrarian investor that I am, I think 2013 could mark the end of triple-digit prices for oil. The good news is energy investors don't have to panic. There are plenty of opportunities to profit from cheap oil.

Black gold's last "hurrah..."

From its 2008 peak near $133 per barrel, oil has settled back to around $88 per barrel -- a nearly 34% drop. But the best way to track oil prices is by following the performance of the United States Oil Fund ETF (NYSE: USO), which tracks the minute-by-minute fluctuations of West Texas Intermediate (WTI) crude.

Take a look at the chart below...

Since the steady climb in 2008, USO has been in a clear downtrend. Yes, oil has rallied somewhat here and there this year thanks to geopolitical tension in the Middle East and the Federal Reserve's quantitative easing (inflation supports commodity prices, deflation softens them, and the Fed has definitely had an inflationary posture). But the fact is that oil is headed down below $90 per barrel and possibly lower in 2013 and the next several years.

Here's why...

Increased domestic production -- I may sound like Captain Obvious as I talk about the huge wealth of fossil fuel resources currently being tapped in the Bakken and Eagle Ford deposits. But the underlying numbers the nation has to look forward to are downright epic. The United States will likely be producing nearly 11 million barrels of oil per day domestically by 2015, according to the National Association of Business Economists. By 2020, that number could jump to 14 million barrels per day. This brings the country pretty close to energy independence. In fact, U.S. Department of Energy data shows that for the first time since 1949, the United States exported more petroleum products than it imported in 2011.


The days of U.S. dependence on foreign oil are dwindling and the country will enjoy this bonus in the form of lower energy prices, a stronger domestic economy, as well as a tamer geo-political climate. Oil exploration and production will likely continue to grow in the country as the federal government crafts new and definitive energy policies in the next few years.

1. Tensions easing in Iran -- The United States is not dependent on crude oil from Iran, but it does pose a real threat to the security of the global flow of oil. Its close proximity to the Strait of Hormuz -- the only open passage from the Persian Gulf to the open ocean -- along with its belligerent relationship with Israel and its advanced pursuit of nuclear weaponry keep global financial markets on tender hooks. But expect to see some form of resolution in tensions with Iran. Even if an airstrike is carried out, expect oil prices to spike only temporarily.

2. Softer global demand -- While the U.S. economy seems to be muddling toward improvement, the fiscal and economic problems in Europe continue to cloud the global economic outlook with uncertainty. Germany is showing visible signs of slowing and France is heading into a recession. And the troubles in Spain, Greece and Italy have been well-documented at this point. In light of all this, the Paris-based International Energy Agency projects crude oil demand in Europe to contract 2.5% this year. (more)