What happened in oil and refining margins was a reflection of an increasingly tight and therefore vulnerable supply system. An article in last week's Barron's reflected that if the energy sector of the S&P 500 Index was not part of the Index, it would have been down 10 percent for the year.

 

Are we still bullish on oil? Definitely, yes. However, short-term, we are due for a correction for three reasons. The first reason is from a contrarian perspective. Whenever the front page of the Economist features a cartoon showing the U.S. and China consuming all the oil, and CNBC newscasters turn bullish on oil, it is time for a correction.

More importantly is the annual weather cycle, which as Chart #2 illustrates, the price of oil historically corrects in October and November after hiking upward during the summer hurricane season.

Thirdly, the rapid rise in gasoline prices coupled with the millions of consumers in Louisiana, Mississippi and Alabama unable to drive will affect demand. In addition, the cost of repairing this critical transportation artery for the U.S. economy may cost more than $100 billion, which is bullish for many basic materials and engineering companies. More importantly, the reconstruction should address the social issues in the region, and this is always good for long-term economic growth.

Long-term implications for oil remain bullish even though we see a near-term correction to the high $40's and low $50's for crude, which in turn creates a great buying opportunity. We suggest you leave the timing to U.S. Global Investors' investment team. Unless you believe peace in Iraq and the policies of an Islamic Theocracy will become more moderate, which in turn will allow Iraqi oil production to rise to previous levels. Unless you believe the proven reserves claimed by OPEC actually exist. Unless you believe there will be a dramatic decrease in the growth rate of oil consumption. Unless you believe technology will save us. Then investors should add to their positions in a pull back.