It

• Predictions from one month
  ago

• Why
  oil stocks are on the upswing

• Billions of barrels in the
  Bakken

One
month ago, I wrote about the sudden downtrend in oil prices. Of
course at that point BP Plc (NYSE: BP)
had
already been in the news for a few weeks thanks to the oil spill in
the Gulf of Mexico. At the same time, the broad market was still
reeling from the near -1,000 point flash crash.

Out of
all this bad news it seemed as though oil stocks were among the
worst hit.

On May
10, I showed you this chart to illustrate how the 13 largest oil
companies, represented by the AMEX oil index (AMEX: XOI), were in
the midst of a 10% drop in just one week:

I
also predicted
that prices might drop lower. I wrote:

“This
13 company index could test the year-to-date lows of 990 –
but there are also the sub-800 lows of just over a year ago to
contend with as well. I won’t pretend to know which lows the
index will test, but I’ll look for any reversal at these key
numbers as a time to buy.”

Since
then, this index blew by the 990 level, and fell even further, down
another 12% since May 10:

This
index hasn’t tested the sub-800 lows, and there’s no
definite rule of charting that says it has to test those lows,
especially since this index is not traded.

As far
as BP has fallen, it’s only dinged the index for about 35
points since the leak began on April 20^th. The good news
is that the index is back on the upswing. Once you scrub out BP,
the index of the other 12 oil companies is back in the
black.

This
week,
the index is up over 1% – and not including BP, most of the stocks
in the index are up as well.

I think
this reversal, in the largest oil companies across all sectors,
could signal a larger reversal for oil prices, as well as for
smaller oil companies – especially those not involved in offshore
drilling.

I’ll
get to which companies I’m keeping an eye on in a
second…

But
there’s additional news about oil reserves that makes me even
more certain about this trend.

According
to an article in
The Wall Street Journal this morning, oil prices rose
again today due to expectations of a second consecutive week of
diminished U.S. oil stockpiles.

Yesterday,
the American Petroleum Institute “…estimated crude
stocks fell by 4.5 million barrels last
week.”

Reduced
supply of oil ahead of the summer driving season seems hugely
bullish for oil prices – and I would not be surprised if the price
per barrel moves from the $73 range up to over $90 a barrel by the
end of the summer.

Okay,
so I’m cheating a little bit. I cribbed my prediction
somewhat from Gregor Macdonald, our Energy Analyst here at Wyatt
Investment Research.

Gregor
talks a lot about summer seasonality, and how over the past few
decades, the price of oil TENDS to have an early peak in April,
followed by a moderate decline to early summer lows in June,
followed again by a peak sometime in late summer/early
fall.

A quick
glance at this chart showing oil prices so far this year seems to
show that he’s been correct so far:

Will he
be correct for the rest of the year? We’ll have to wait and
see. But Gregor is the best energy analyst I’ve ever worked
with, and he’s right more often than he’s
wrong.

So if
you’re bullish on oil, today could be one of the best times
in 2010 to build a position in oil companies.

And you
could do much worse than to buy the strongest companies in the Amex
oil index. But I think the potential for profit is better in some
of the smaller, land based oil producers.

I’m

thinking specifically of the companies currently producing oil in
The Bakken region of North Dakota. Right now, there are only a
handful of companies in the area, and an even smaller number that
are currently profitable at $73 oil. As oil prices rise, these
companies will only become more profitable, so it’s the
perfect time to build a position.

The
best part about this opportunity is that most of the Bakken is in
an area known as the badlands. No one wants to live there.
It’s largely inhospitable for farming. The terrain is rocky,
harsh and remote. I can’t think of a better place to be
producing oil. It’s miles from any major body of water, and
there are no people. So pollution is way down on the list of
concerns for companies there. No matter how politically unpopular
it becomes for oil companies, the operators in this region will be
somewhat sheltered by the remoteness and lack of population in the
area.

If
you’d like to read more about his issue, I highly recommend
checking out this write-up on our favorite Bakken stocks today.

Click here for the details.

Good
Investing,

Kevin
McElroy

Editor

Resource
Prospector