Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Could Gold Price Reach $7,000 by 2030? - 6th Aug 20
Bananas for All! Keep Dancing… FOMC - 6th Aug 20
How to Do Bets During This Time - 6th Aug 20
How to develop your stock trading strategy - 6th Aug 20
Stock Investors What to do if Trump Bans TikTok - 5th Aug 20
Gold Trifecta of Key Signals for Gold Mining Stocks - 5th Aug 20
ARE YOU LOVING YOUR SERVITUDE? - 5th Aug 20
Stock Market Uptrend Continues? - 4th Aug 20
The Dimensions of Covid-19: The Hong Kong Flu Redux - 4th Aug 20
High Yield Junk Bonds Are Hot Again -- Despite Warning Signs - 4th Aug 20
Gold Stocks Autumn Rally - 4th Aug 20
“Government Sachs” Is Worried About the Federal Reserve Note - 4th Aug 20
Gold Miners Still Pushing That Cart of Rocks Up Hill - 4th Aug 20
UK Government to Cancel Christmas - Crazy Covid Eid 2020! - 4th Aug 20
Covid-19 Exposes NHS Institutional Racism Against Black and Asian Staff and Patients - 4th Aug 20
How Sony Is Fueling the Computer Vision Boom - 3rd Aug 20
Computer Gaming System Rig Top Tips For 6 Years Future Proofing Build Spec - 3rd Aug 20
Cornwwall Bude Caravan Park Holidays 2020 - Look Inside Holiday Resort Caravan - 3rd Aug 20
UK Caravan Park Holidays 2020 Review - Hoseasons Cayton Bay North East England - 3rd Aug 20
Best Travel Bags for 2020 Summer Holidays , Back Sling packs, water proof, money belt and tactical - 3rd Aug 20
Precious Metals Warn Of Increased Volatility Ahead - 2nd Aug 20
The Key USDX Sign for Gold and Silver - 2nd Aug 20
Corona Crisis Will Have Lasting Impact on Gold Market - 2nd Aug 20
Gold & Silver: Two Pictures - 1st Aug 20
The Bullish Case for Stocks Isn't Over Yet - 1st Aug 20
Is Gold Price Action Warning Of Imminent Monetary Collapse - Part 2? - 1st Aug 20
Will America Accept the World's Worst Pandemic Response Government - 1st Aug 20
Stock Market Technical Patterns, Future Expectations and More – Part II - 1st Aug 20
Trump White House Accelerating Toward a US Dollar Crisis - 31st Jul 20
Why US Commercial Real Estate is Set to Get Slammed - 31st Jul 20
Gold Price Blows Through Upside Resistance - The Chase Is On - 31st Jul 20
Is Crude Oil Price Setting Up for a Waterfall Decline? - 31st Jul 20
Stock Market Technical Patterns, Future Expectations and More - 30th Jul 20
Why Big Money Is Already Pouring Into Edge Computing Tech Stocks - 30th Jul 20
Economic and Geopolitical Worries Fuel Gold’s Rally - 30th Jul 20
How to Finance an Investment Property - 30th Jul 20
I Hate Banks - Including Goldman Sachs - 29th Jul 20
NASDAQ Stock Market Double Top & Price Channels Suggest Pending Price Correction - 29th Jul 20
Silver Price Surge Leaves Naysayers in the Dust - 29th Jul 20
UK Supermarket Covid-19 Shop - Few Masks, Lack of Social Distancing (Tesco) - 29th Jul 20
Budgie Clipped Wings, How Long Before it Can Fly Again? - 29th Jul 20
How To Take Advantage Of Tesla's 400% Stock Surge - 29th Jul 20
Gold Makes Record High and Targets $6,000 in New Bull Cycle - 28th Jul 20
Gold Strong Signal For A Secular Bull Market - 28th Jul 20
Anatomy of a Gold and Silver Precious Metals Bull Market - 28th Jul 20
Shopify Is Seizing an $80 Billion Pot of Gold - 28th Jul 20
Stock Market Minor Correction Underway - 28th Jul 20
Why College Is Never Coming Back - 27th Jul 20
Stocks Disconnect from Economy, Gold Responds - 27th Jul 20
Silver Begins Big Upside Rally Attempt - 27th Jul 20
The Gold and Silver Markets Have Changed… What About You? - 27th Jul 20
Google, Apple And Amazon Are Leading A $30 Trillion Assault On Wall Street - 27th Jul 20
This Stock Market Indicator Reaches "Lowest Level in Nearly 20 Years" - 26th Jul 20
New Wave of Economic Stimulus Lifts Gold Price - 26th Jul 20
Stock Market Slow Grind Higher Above the Early June Stock Highs - 26th Jul 20
How High Will Silver Go? - 25th Jul 20
If You Own Gold, Look Out Below - 25th Jul 20
Crude Oil and Energy Sets Up Near Major Resistance – Breakdown Pending - 25th Jul 20
FREE Access to Premium Market Forecasts by Elliott Wave International - 25th Jul 20
The Promise of Silver as August Approaches: Accumulation and Conversation - 25th Jul 20
The Silver Bull Gateway is at Hand - 24th Jul 20
The Prospects of S&P 500 Above the Early June Highs - 24th Jul 20
How Silver Could Surpass Its All-Time High - 24th Jul 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

How to Profit from the Next Spike in Crude Oil Prices

Commodities / Oil Companies Mar 01, 2010 - 05:25 AM GMT

By: Money_Morning

Commodities

Best Financial Markets Analysis ArticleMartin Hutchinson writes: Earlier this week, British company Desire PLC (Pink Sheets: DSPMF) began drilling in an offshore block of the Falkland Islands. Immediately, Argentina President Cristina Fernandez de Kirchner let loose with a howl of rage, and the Summit of Latin American and Caribbean Unity issued a protest against the British company's drilling operations.


Argentina's claim to the Falklands had remained dormant since the war 28 years ago, yet the moment the drill bit touched seabed the years rolled away. This showed yet again that oil remains salient to international politics and the world economy in a way shared by no other commodity. So how should investors play it?

Nearly 18 months after the 2008 financial crisis, central banks worldwide still maintain the loose monetary policy they each enacted to counter the financial problems that resulted.

In the United States, interest rates remain at zero while inflation is already nudging above the 3.0% level. In Britain and Japan, interest rates are also close to zero, although in Japan's case the country has the excuse that inflation rates are negative. In the European Union (EU), the official short-term rate is 1.0%. China's interest rates are higher, but the Asian giant's M2 money supply rose 26% for the 12 months that ended in January. None of this monetary "stimulus" looks like it's being removed any time soon. So the bull market in commodities and energy is likely to continue.

Don't overlook the expansion in China and India's automobile markets. China's motor vehicle sales rose an astounding 46% last year to 13.6 million, leaving the United States - the world's second-largest market - in the dust. This year in China, motor-vehicle sales are expected to rise past 15 million vehicles - equivalent to the U.S. market in a good year.

India's motor vehicle sales have also been rising rapidly - topping 2.5 million in 2009 - and are expected to rise another 10% to 15% in 2010.  All those new cars need fuel, and that's why demand for oil has continued to advance.

Conventionally, we played rises in oil prices by buying stock in the major oil companies. The problem today is that the majors don't actually have all that much oil. Furthermore, much of the oil they produce is in difficult countries, and when prices go up, those countries tear up contracts to make sure they keep all but a thin sliver of the profits.

In country after country - including such attractive markets as Brazil - governments are continually renegotiating oil-production contracts to give themselves an ever-increasing share of the revenue.

A second possibility is to buy companies with access to high-cost reserves in stable regions. As the price of oil rises, the profits of those companies increase exponentially. The obvious example here is Suncor Energy Inc. (NYSE: SU).

Suncor is the largest producer of oil from the Alberta Tar Sands, with reserves of 1.7 trillion barrels of oil, as much as the entire Middle East. Suncor's price has dropped from its 52-week high near $40 a share. At roughly $29 a share, the company's stock is now trading at only 32 times trailing earnings, and even sports a dividend yield in excess of 1.0%. For a pure oil price play, Suncor is attractive at these levels.

A third possibility is to buy an oil-oriented exchange-traded fund (ETF). These have the disadvantage that the storage cost of oil is very considerable. So they can't just buy the physical commodity like the SPDR Gold ETF (NYSE: GLD). One ETF that's reasonably liquid is United States Oil Fund LP (NYSE: USO), which seeks to track the price of West Texas Intermediate Light, one of the main benchmark crudes. U.S. Oil has a market capitalization of $2.15 billion, so is reasonably liquid and has only moderate costs.

A final possibility is to buy shares in either one of the Canadian royalty trusts or one of the U.S. trusts whose primary function is to exploit known reserves of crude oil. These have the advantage of paying substantial dividends as the crude is extracted and sold. However, the tax regime of the Canadian royalty trusts will change in 2011. At present, it's not entirely clear what effect this have on the dividends and earnings, but it will certainly reduce them. That means the U.S. trusts are generally more attractive.

One U.S. trust that I currently like is BreitBurn Energy Partners LP (Nasdaq: BBEP). BreitBurn is an oil-and-gas producer from properties in Michigan's Antrim Shale, California, Wyoming, Florida, Indiana and Kentucky, so it's pretty broadly spread.

BreitBurn suffered cash-flow difficulties early last year, so was forced to abandon its annual dividend of $2.08 per share. In addition, it was involved with a lawsuit of staggering incomprehensibility with another company, Quicksilver Resources Inc. (NYSE: KWK). However, the lawsuit has now been settled. And, in even-better news, BreitBurn has re-instituted its dividend at a level of $1.50 per share annually. That's a yield of over 10% at the current share price, and those don't grow on trees - the company is also selling at around two thirds of net asset value (NAV). Its only disadvantage as an oil play is that it hedges a substantial portion of its output, which makes earnings statements incomprehensible and can lead to record losses when oil prices rise. But a prolonged oil price rise is still good - it enables it to hedge future production at higher prices, thereby locking in operating profits.

Unlike the increase in gold and silver prices, which is primarily inflation- and speculator-driven, the increase in oil prices rise is largely demand-driven, caused by the explosion in automobile purchases and other oil use in the emerging markets.

If you ask me, that looks to be a pretty solid basis for expecting it to continue long-term -even if interest rates rise.

Source : http://moneymorning.com/2010/03/01/oil-prices-14/

Money Morning/The Money Map Report

©2010 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules