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Trading Lessons

Three Energy Charts That Should Scare the Bejeezus Out of You

Commodities / Crude Oil Jan 09, 2011 - 10:44 AM GMT

By: Sean_Brodrick

Commodities

Best Financial Markets Analysis ArticleAfter surging into the end of the year, oil and oil stocks have pulled back. Why?

• It’s certainly not global economic fundamentals, which are improving, with car sales rising and unemployment dropping.

• It’s not oil inventories — U.S. oil stockpiles dropped 20 million barrels in a recent one-month period.


• It’s not expectations of global oil demand — which keep getting yanked higher for 2011.

The reason crude crumbled earlier this week was simple profit taking. We could see some more profit taking in the short-term. But all the things I’m watching tell me we could be headed for much higher crude oil prices — at least $105 a barrel in the first half of 2011, and potentially $130 or higher later in the year.

That means this pullback is a golden opportunity in sweet, black crude.

Why do I think crude oil is headed higher? Let me show you three charts. As a consumer, they scare the heck out of me. As an investor, they tell me there’s money to be made in the oil market.

Chart #1: Mexico’s Oil Production Is Lower … Lower …

Mexico's Oil Exports Slump Lower Every Year

Mexico’s crude oil exports dropped again in 2010, continuing a 4-year, 27% drop in that country’s oil exports, which peaked in 2006. Leading the charge lower is a cliff-steep drop in production in Mexico’s super-giant oil field, Cantarell.

This is bad news for the United States because Mexico is our #2 supplier of imported oil.

The U.S. Energy Information Administration (EIA) expects that Mexico’s oil production will drop again in 2011. At the current rate of decline, the EIA expects Mexico will become an oil importer in 2015. But other independent experts say Mexico’s oil crash is coming a lot sooner — by 2014, or maybe even 2013.

Since the oil market discounts the future, oil traders will start pushing up oil prices far in advance of Mexican exports hitting bottom.

Chart #2: Drilling Is Drying Up in the U.S. Gulf of Mexico

The Obama administration lifted its offshore drilling ban months ago, and the U.S. government is making a lot of noise over the fact that the Bureau of Ocean Energy Management, Regulation and Enforcement (BOEMRE) is going to expedite drilling approvals for 13 companies.

But the damage has been done. Many shelved projects won’t come online for a long time. Experts say the wait could continue until the second half of this year, and maybe into 2012.

It’s not only deepwater drilling that is impacted. Even shallow-water drilling rigs are cooling their heels. The combined effect brings us to the next chart:

U.S. GoM Rig Count

On the far right of the chart, you can see that drill rig counts were dropping anyway. They started to climb last year, only to swoon after BP’s Deepwater Horizon explosion in the Gulf of Mexico.

It’s a trend that continues. In the last week of December, the U.S. offshore rig count dropped 4% from the previous week — but it was down a whopping 42.86% year over year. In the latest example, contract driller Noble Corp. said Monday that Marathon Oil Co. is cancelling a four-year, $752 million contract to lease an ultra-deep-water rig in the Gulf of Mexico.

If rigs aren’t drilling, those offshore fields won’t be producing. The EIA says that U.S. oil production from the Gulf of Mexico should drop by 170,000 barrels a day in 2011.

To be sure, the BP Deepwater horizon oil spill was one of the greatest environmental disasters this country has ever faced, spewing 4.9 million barrels of oil into the Gulf of Mexico. Personally, I’d be happy to see BP executives thrown in prison. But we are sacrificing our future energy security if we don’t tap the oil in the Gulf, and naturally, less supply means higher prices.

Speaking of higher prices …

Chart #3: U.S. Gasoline Prices Head for $4 a Gallon (Again)

In this next chart from dshort.com, the two-year trend in U.S. gasoline prices becomes painfully clear:

Are gas prices headed back to old highs?

This is an ugly trend that affects nearly all Americans. I think we’re headed back to $4 a gallon gasoline, and maybe higher than that. For a nation designed around the automobile, that is downright dangerous.

But there’s one nation that is catching up to us in our car-crazy gasoline use. That country is China, which now buys more new cars per year than the United States.

China’ year-on-year oil demand rose 6.7% in the first 11 months of 2010, including a 12% rise in October and 15% in November. We don’t have the data on December yet, but as you can see, not only is China using more oil, its demand is accelerating!

And the Chinese don’t have to worry about the chart above because gasoline prices are strictly regulated by the Chinese government.

Do I mean the Chinese government will subsidize gasoline prices to keep its citizens happy? Yes, that’s exactly what I mean. And China has the cash do it — after all, we send them more and more of our money every day.

It’s Time to Take Action!

Oil and gasoline prices are being squeezed higher by a combination of tight supplies and increasing demand. The trend is clear. What’s not clear to many is what to do about it.

You can buy a bicycle (I recommend that — everyone could use the exercise). You can curl up in the fetal position (I don’t recommend that). Or you can take charge of your investing destiny and buy a basket of the best stocks and funds to ride the coming surge in oil prices.

Not all energy stocks are created equal. There will be some real winners in the coming energy crisis — as well as some stocks I wouldn’t want to touch.

You can do your own research, which is always a good thing. Or you can hop on the profit train as I put together MY best picks in a new energy report, Burning Oil: 7 Winners in the Next Energy Boom.

The report is packed with analysis, insight, and my picks of the best oil picks to power up your portfolio. What’s more, I’m including three follow-ups with a subscription to the initial report.

The report comes out one week from now. If you buy it now, you can get it at a HUGE discount.

For details on what’s coming in my report, Burning Oil: 7 Winners in the Next Energy Boom, point your web browser here. And whatever you do, I don’t recommend you ignore the coming energy shock. It’s best to prepare your portfolio and your life for the higher prices ahead.

Yours for trading profits,

Sean

P.S. This is an incredible opportunity — don’t waste it. The next oil shock is coming whether you like it or not. You can invest wisely and cushion yourself against rising prices … or you’ll wish you had. Don’t wait! Get onboard today.

This investment news is brought to you by Uncommon Wisdom. Uncommon Wisdom is a free daily investment newsletter from Weiss Research analysts offering the latest investing news and financial insights for the stock market, precious metals, natural resources, Asian and South American markets. From time to time, the authors of Uncommon Wisdom also cover other topics they feel can contribute to making you healthy, wealthy and wise. To view archives or subscribe, visit http://www.uncommonwisdomdaily.com.


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