Best of the Week
Most Popular
1. Climate Change Mass Extinction - Birds, Bees and Bugs: Going Going Gone - Richard_Mills
2.A Purrrfect Gold Price Setup! - Peter_Degraaf
3.Who Finances America's Borrowing? Recession Indicator for Independent Thinkers Part 2 - F_F_Wiley
4.America’s One-sided Domestic Financial War - Raymond_Matison
5.Gold Price Summer Doldrums - Zeal_LLC
6.Two Key Events Will Unleash Gold - Jim_Willie_CB
7.Billionaire Schools Teacher in NAFTA Trade Talks - Richard_Mills
8.Get Out Of Crypto Cannabis Bubble Before It Pops and Move Into Bargain Basement Miners - Jeb_Handwerger
9.Stock Market Could Pullback for 1-2 weeks, But Medium Term Bullish - Troy_Bombardia
10.G7 Chaos, Central Banks and US Fed Will Drive Stock Prices This Week - Chris_Vermeulen
Last 7 days
US Stocks Set For Further Advances As Q2 Earnings Start - 15th Jul 18
Stock Market vs. Gold, Long-term Treasury Yields, 10yr-2yr Yield Curve 3 Amigo's Update - 15th Jul 18
China vs the US - The Road to War - 14th Jul 18
Uncle Sam’s Debt-Money System Is Immoral, Tantamount to Theft - 14th Jul 18
Staying in a Caravan - UK Summer Holidays 2018 - Cayton Bay Hoseasons Holiday Park - 14th Jul 18
Gold Stocks Summer Lows - 14th Jul 18
Trump US Trade War With China, Europe Consequences, Implications and Forecasts - 13th Jul 18
Gold Standard Requirements & Currency Crisis - 13th Jul 18
Focus on the Greenback, Will USD Fall Below Euro 1.6? - 13th Jul 18
Stock Market Outlook 2018 - Bullish or Bearish - 13th Jul 18
Rising Inflation is Not Bearish for Stocks - 13th Jul 18
Bitcoin Picture Less Than Pretty - 13th Jul 18
How International Observers Undervalue the Chinese Bond Market - 13th Jul 18
Stocks Trying to Break Higher Again, Will They? - 12th Jul 18
The Rise and Fall of Global Trade – Redux - 12th Jul 18
Corporate Earnings Q2 2018 Will Probably be Strong. What This Means for Stocks - 12th Jul 18
Is the Relative Strength in Gold Miners to Gold Price Significant? - 12th Jul 18
Live Cattle Commodity Trading Analysis - 12th Jul 18
Gold’s & Silver’s Reversals’ Reversal - 12th Jul 18
The Value of Bitcoin - 11th Jul 18
America a Nation Built on Lies - 11th Jul 18
China, Asia and Emerging Markets Could Result In Chaos - 11th Jul 18
Bullish Gold Markets in the Big Picture? - 11th Jul 18
A Public Bank for Los Angeles? City Council Puts It to the Voters - 11th Jul 18
Yield Curve Inversion a Remarkably Accurate Warning Indicator For Economic & Market Peril - 11th Jul 18
Argentina Should Scrap the Peso and Dollarize - 11th Jul 18
Can the Stock Market Close Higher For a Record 10th Year in a Row? - 11th Jul 18
Why Life Insurance Is A Must In Financial Planning - 9th Jul 18
Crude Oil Possibly Setting Up For A Big Downside Move - 9th Jul 18
BREAKING: New Tech Just Unlocked A Trillion Barrels Of Oil - 9th Jul 18
How Trade Wars Penalize Asian Currencies - 9th Jul 18
Another Stock Market Drop Next Week? - 9th Jul 18
Are the Stock Market Bulls Starting to Run? - 9th Jul 18

Market Oracle FREE Newsletter

5 "Tells" that the Stock Markets Are About to Reverse

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