Best of the Week
Most Popular
1. Five Charts That Show We Are on the Brink of an Unthinkable Financial Crisis- John_Mauldin
2.Bitcoin Parabolic Mania - Zeal_LLC
3.Bitcoin Doesn’t Exist – 2 - Raul_I_Meijer
4.Best Time / Month of Year to BUY a USED Car is DECEMBER, UK Analysis - Nadeem_Walayat
5.Labour Sheffield City Council Election Panic Could Prompt Suspension of Tree Felling's Private Security - N_Walayat
6.War on Gold Intensifies: It Betrays the Elitists’ Panic and Augurs Their Coming Defeat Part2 - Stewart_Dougherty
7.How High Will Gold Go? - Harry_Dent
8.Bitcoin Doesn’t Exist – Forks and Mad Max - Raul_I_Meijer
9.UK Stagflation Risk As Inflation Hits 3.1% and House Prices Fall - GoldCore
10.New EU Rules For Cross-Border Cash, Gold Bullion Movements - GoldCore
Last 7 days
Worse than Watergate - Release the Memo - Investigate Uranium One - 23rd Jan 18
CAT Stock Bouncing after JPM Upgrade How High and How Long Can This CAT Jump? - 23rd Jan 18
Why Banks Will Be Slammed In The Next Crisis—And That May Be Good News - 23rd Jan 18
Medicare Premiums Are A Shared Pool - Coming Changes That Will Transform Retirement - 23rd Jan 18
Charged Atmosphere of Heavy Police and Security Presence at Sheffield Street Tree Felling Protests - 23rd Jan 18
Pension Crisis And Deficit of £2.6 Billion At Carillion To Impact UK - 22nd Jan 18
Two Factors for Gold That You Don’t Want to Miss - 22nd Jan 18
Why You Must Own Silver in 2018 - 22nd Jan 18
This Could Be The Hottest Mining Stock Of 2018 - 22nd Jan 18
Stock Index Trend Trade Setups for the SP500 & NASDAQ - 22nd Jan 18
Stock Market Deceleration / Distribution - 22nd Jan 18
US Markets vs Govt Shutdown: Stock Markets at all time highs - 22nd Jan 18
Land Rover Discovery Sport - 1 Month Driving Test Review - 22nd Jan 18
Why should you use high-quality YouTube to mp3 converter? - 22nd Jan 18
Silver As Strategic Metal: Why Its Price Will Soar - 21st Jan 18
Stocks, Gold and Interest Rates Three Amigos Ride On - 21st Jan 18
Why Sometimes, "Beating the S&P 500" Isn't Good Enough - 21st Jan 18
Bunnies and Geckos of Sheffield Street Tree Fellings Protests Explained - 21st Jan 18
Jim Rickards: Next Financial Panic Will Be the Biggest of All, with Only One Place to Turn… - 20th Jan 18
Macro Trend Changes for Gold in 2018 and Beyond - Empire Club of Canada - 20th Jan 18
Top 5 Trader Information Sources for Timely, Successful Investing - 20th Jan 18
Bond Market Bear Creating Gold Bull Market - 19th Jan 18
Gold Stocks GDX $25 Breakout on Earnings - 19th Jan 18
SPX is Higher But No Breakout - 19th Jan 18
Game Changer for Bitcoin - 19th Jan 18
Upside Risk for Gold in 2018 - 19th Jan 18
Money Minute - A 60-second snapshot of the UK Economy - 19th Jan 18
Discovery Sport Real MPG Fuel Economy Vs Land Rover 53.3 MPG Sales Pitch - 19th Jan 18
For Americans Buying Gold and Silver: Still a Big U.S. Pricing Advantage - 19th Jan 18
5 Maps And Charts That Predict Geopolitical Trends In 2018 - 19th Jan 18
North Korean Quagmire: Part 2. Bombing, Nuclear Threats, and Resolution - 19th Jan 18
Complete Guide On Forex Trading Market - 19th Jan 18
Bitcoin Crash Sees Flight To Physical Gold Coins and Bars - 18th Jan 18
The Interest Rates Are What Matter In This Market - 18th Jan 18
Crude Oil Sweat, Blood and Tears - 18th Jan 18
Land Rover Discovery Sport - Week 3 HSE Black Test Review - 18th Jan 18
The North Korea Quagmire: Part 1, A Contest of Colonialism and Communism - 18th Jan 18
Understand Currency Trade and Make Plenty of Money - 18th Jan 18
Bitcoin Price Crash Below $10,000. What's Next? We have answers… - 18th Jan 18
How to Trade Gold During Second Half of January, Daily Cycle Prediction - 18th Jan 18
More U.S. States Are Knocking Down Gold & Silver Barriers - 18th Jan 18
5 Economic Predictions for 2018 - 18th Jan 18
Land Rover Discovery Sport - What You Need to Know Before Buying - Owning Week 2 - 17th Jan 18
Bitcoin and Stock Prices, Both Symptoms of Speculative Extremes! - 17th Jan 18
So That’s What Stock Market Volatility Looks Like - 17th Jan 18
Tips On Choosing the Right Forex Dealer - 17th Jan 18
Crude Oil is Starting 2018 Strong but there's Undeniable Risk to the Downside - 16th Jan 18
SPX, NDX, INDU and RUT Stock Indices all at Resistance Levels - 16th Jan 18
Silver Prices To Surge – JP Morgan Has Acquired A “Massive Quantity of Physical Silver” - 16th Jan 18
Carillion Bankruptcy and the PFI Sector Spiraling Costs Crisis, Amey, G4S, Balfour Beatty, Serco.... - 16th Jan 18
Artificial Intelligence - Extermination of Humanity - 16th Jan 18
Carillion Goes Bust, as Government Refuses to Bailout PFI Contractors Debt and Pensions Liabilities - 15th Jan 18
What Really Happens in Iran?  - 15th Jan 18
Stock Market Near an Intermediate Top? - 15th Jan 18
The Key Economic Indicator You Should Watch in 2018 - 15th Jan 18
London Property Market Crash Looms As Prices Drop To 2 1/2 Year Low - 15th Jan 18
Some Fascinating Stock Market Fibonacci Relationships... - 15th Jan 18

Market Oracle FREE Newsletter

6 Critical Money Making Rules

As Oil Prices Climb, Here’s How to Play the Rebound in Energy

Commodities / Crude Oil Feb 14, 2015 - 03:02 PM GMT

By: Money_Morning

Commodities

Dr. Kent Moors writes: As I write this, crude oil prices continue to advance. Brent is over $61 a barrel, while West Texas Intermediate (WTI) is pushing $53.

Both are higher than at any time since before Christmas.

Absent any major geopolitical tension, beyond the levels we’re already seeing, oil prices should begin to level off.


And while oil is not going to surge in the short-term, a floor has emerged that is going to hand us some fantastic new opportunities.

Oil won’t have to hit triple digits for them to pay off either, provided certain factors continue to fall into place.

But in today’s world it’s not all about oil, not by a long shot. The biggest gains are more likely to be found elsewhere in the sector.

So in today’s issue, I want to sketch out my strategies to profit off the rebound in energy…

Oil Prices: Unconventional Production is Still the Wildcard

This strategy has two central considerations. The first involves what’s happening with oil. The second outlines the broader energy investment opportunities this changing market will provide.

Today, I’ll discuss oil. Next week, I’ll talk about a range of opportunities outside of crude.

Even with higher prices, it’s important to keep in mind that crude is still subject to several major considerations. Initially, and still most importantly, are the ongoing supply side issues. The oil “glut” is the biggest reason oil prices fell over the last quarter of 2014.

That’s because there was a much bigger increase in U.S.-based shale and tight oil production than originally estimated. What’s more, on a longer-term basis, these unconventional reserves are going to develop into a global supply issue, since some 86% of the recoverable unconventional oil reserves are actually located someplace other than North America.

Now admittedly, these global reserves will take longer to develop, since they require considerable capital expenditures to create a full infrastructure network and service support system. But this is a trend that will unfold by the end of this decade and continue at least until 2035.

However, unlike previous downturns in oil prices, the demand side is holding up well.

Despite the overblown alarm spouted by the so-called pundits, 2014 recorded the highest daily global demand for oil on record, and it’s expected to grow by about 1.6% this year.

In fact, both OPEC and the International Energy Agency have raised their demand estimates again, while lowering non-OPEC conventional production expectation. U.S. shale and tight oil remains the wildcard, and it will probably take two quarters to determine the impact production cuts will have.

The difference this time is that, despite global daily demand being within 2 million barrels of the available export supply reserves (virtually all Saudi), we now know there is considerable excess capacity available on the unconventional side.

As expanded U.S. crude oil exports are approved, that capacity will have a more worldwide effect. All that’s needed on this front is for Congress to change the statute. That’s very likely now.

It’s as Simple as Supply and Demand

The key here remains a balance between supply and demand. That also means a new balance between OPEC and non-OPEC production.

OPEC continues to control 40% of the world’s production. But that doesn’t buy what it used to. As I and several other analysts have noted, the traditional “call on OPEC,” the monthly draw on extractions by which the market used to be balanced, has quickly given way to the “call on shale.”

The U.S. ultimately determines the supply-demand equation. But remember: While the excess supply is now American, the demand is still determined by regions elsewhere in the world.

Of course, oil prices will still have much to say about the overall strength of the energy sector. But it’s not nearly as important as it was just six months ago. There are different energy expectations now in play that will determine where we invest.

In the current pricing spread, oversold oil and natural gas stocks offer some nice upside. In fact, by the second quarter of this year, I expect WTI to trade between $60 and $65 a barrel, and I expect Brent to see a range between $68 and $72 a barrel. By the end of this year, WTI could trade in the low $80 range.

Yet, as I told Energy Advantage subscribers earlier today, this will only happen if certain factors fall into place.

The most important is lower production in the face of continuing supply side surpluses. This will depend on the ability of U.S. operating companies to limit new projects of a certain type.

Not all new production will be discouraged. The extension of vertical, shallow pattern drilling emphasizing known basins and low-cost operations will actually be encouraged in this kind of climate. The reductions are going to come from the larger, deeper, horizontal/fractured, and much more expensive projects.

But this rebalancing will take some time and we will continue to see excess production until it kicks in.

Of course, several pundits continue to insist that declining rig counts aren’t an indication of a cut in production, since nearly the same volumes continue to be extracted from existing projects.

There is some truth to this. Falling rig counts simply point toward a readjustment of capital expenditures, but say nothing directly about the wells already finished.

After all, since 80% of the costs of these project is front-loaded, it makes sense to continue production at existing wells.

However, what this analysis misses is the declining production curve at these wells. All wells reach maximum production rather quickly. It then becomes a consideration of what secondary recovery techniques (water flooding, natural gas reinjection, chemical additives) are added to reduce the rate of decline.

When shale and tight oil/gas production is considered, that decline curve happens even faster. The majority of the extraction from these wells takes place over the first 18 months of operations.

This is the important point to remember. Given the age of currently producing wells, the aggregate declines won’t begin to show up until this summer. The market understands this and is already building it into futures contract pricing.

Where We Go From Here

Now that doesn’t mean there will be a race in the other direction. But it does mean the supply side excess will begin to level off. Given that global demand is moving up again, the prospect emerges for a better pricing picture.

But there is not going to be a “rising tide that lifts all boats” in this scenario.

The location of the drilling, increasing efficiency, the ability to expand known reservoir development with step-out wells, access to existing infrastructure, and direct tie-ins to end users (read: refineries) will be important.

Then there are the financial pressures. Some companies will require either mergers or straight acquisition to continue operations. There will be more consolidation, and the sector promises to look different (and leaner) in only a few months.

In addition, we will also see a restructuring of assets throughout the upstream (production) to midstream (transport and soon export) to downstream (refining and distribution) process.

All of these will hand us some very nice investment opportunities.

But again, this story is much bigger than oil. And in the next issue, I’ll discuss the range of opportunities outside the world of crude.

Source :http://oilandenergyinvestor.com/2015/02/oil-prices-climb-heres-play-rebound-energy/

Money Morning/The Money Map Report

©2014 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 investent 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 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

© 2005-2018 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