Best of the Week
Most Popular
1. US Housing Market House Prices Bull Market Trend Current State - Nadeem_Walayat
2.Gold and Silver End of Week Technical, CoT and Fundamental Status - Gary_Tanashian
3.Stock Market Dow Trend Forecast - April Update - Nadeem_Walayat
4.When Will the Stock Market’s Rally Stop? - Troy_Bombardia
5.Russia and China Intend to Drain the West of Its Gold - MoneyMetals
6.BAIDU (BIDU) - Top 10 Artificial Intelligence Stocks Investing To Profit from AI Mega-trend - Nadeem_Walayat
7.Stop Feeding the Chinese Empire - ‘Belt and Road’ Trojan Horse - Richard_Mills
8.Stock Market US China Trade War Panic! Trend Forecast May 2019 Update - Nadeem_Walayat
9.US China Trade Impasse Threatens US Lithium, Rare Earth Imports - Richard_Mills
10.How to Invest in AI Stocks to Profit from the Machine Intelligence Mega-trend - Nadeem_Walayat
Last 7 days
China Hang Seng Stocks Index Collapses and Commodities - 24th May 19
Costco Corp. (COST): Finding Opportunity in Five Minutes or Less - 24th May 19
How Free Bets Have Impacted the Online Casino Industry - 24th May 19
This Ultimate Formula Will Help You Avoid Dividend Cutting Stocks - 24th May 19
Benefits of a Lottery Online Account - 24th May 19
Technical Analyst: Gold Price Weakness Should Be Short Term - 24th May 19
Silver Price Looking Weaker than Gold - 24th May 19
Nigel Farage's Brexit Party EU Elections Seats Results Forecast - 24th May 19
Powerful Signal from Gold GDX - 24th May 19
Eye Opening Currency Charts – Why Precious Metals Are Falling - 23rd May 19
Netflix Has 175 Days Left to Pull Off a Miracle… or It’s All Over - 23rd May 19
Capitalism Works, Ravenous Capitalism Doesn’t - 23rd May 19
The Euro Is Bidding Its Time: A Reversal at Hand? - 23rd May 19
Gold Demand Rose 7% in Q1 2019. A Launching Pad Higher for Gold? - 23rd May 19
Global Economic Tensions Translate Into Oil Price Volatility - 22nd May 19
The Coming Pension Crisis Is So Big That It’s a Problem for Everyone - 22nd May 19
Crude Oil, Hot Stocks, and Currencies – Markets III - 22nd May 19
The No.1 Energy Stock for 2019 - 22nd May 19
Brexit Party and Lib-Dems Pull Further Away from Labour and Tories in Latest Opinion Polls - 22nd May 19
The Deep State vs Donald Trump - US vs Them Part 2 - 21st May 19
Deep State & Financial Powers Worry about Alternative Currencies - 21st May 19
Gold’s Exciting Boredom - 21st May 19
Trade War Fears Again, Will Stocks Resume the Downtrend? - 21st May 19
Buffett Mistake Costs Him $4.3 Billion This Year—Here’s What Every Investor Can Learn from It - 21st May 19
Dow Stock Market Trend Forecast 2019 May Update - Video - 20th May 19
A Brief History of Financial Entropy - 20th May 19
Gold, MMT, Fiat Money Inflation In France - 20th May 19
WAR - Us versus Them Narrative - 20th May 19
US - Iran War Safe-haven Reasons to Own Gold - 20th May 19
How long does Google have to reference a website? - 20th May 19
Tory Leadership Contest - Will Michael Gove Stab Boris Johnson in the Back Again? - 19th May 19
Stock Market Counter-trend Rally - 19th May 19
Will Stock Market “Sell in May, Go Away” Lead to a Correction… or a Crash? - 19th May 19
US vs. Global Stocks Sector Rotation – What Next? Part 1 - 19th May 19
BrExit Party EarthQuake Could Win it 150 MP's at Next UK General Election! - 18th May 19
Dow Stock Market Trend Forecast 2019 May Update - 18th May 19
US Economy to Die a Traditional Death… Inflation Is Going to Move Higher - 18th May 19
Trump’s Trade War Is Good for These 3 Dividend Stocks - 18th May 19
GDX Gold Mining Stocks Fundamentals Update - 17th May 19
Stock Markets Rally Hard – Is The Volatility Move Over? - 17th May 19
The Use of Technical Analysis for Forex Traders - 17th May 19
Brexit Party Set to Storm EU Parliament Elections - Seats Forecast - 17th May 19
Is the Trade War a Catalyst for Gold? - 17th May 19
This Is a Recession Indicator No One Is Talking About—and It’s Flashing Red - 17th May 19
War! Good or Bad for Stocks? - 17th May 19
How Many Seats Will Brexit Party Win - EU Parliament Elections Forecast 2019 - 16th May 19

Market Oracle FREE Newsletter

U.S. House Prices Analysis and Trend Forecast 2019 to 2021

Three Triggers for Higher Crude Oil Prices

Commodities / Crude Oil Aug 28, 2009 - 12:46 PM GMT

By: Uncommon_Wisdom

Commodities

Best Financial Markets Analysis ArticleSean Brodrick writes: Oil prices recently came close to $75 a barrel before heading south again. Enjoy the cheap oil while you can. The odds are you’ll be paying higher oil prices by the end of the year.

The good news is there are some easy ways to profit from it. First, let’s look at the forces that could drive oil higher …


Force #1 — The Crisis at Our Border. Mexico’s oil production is on the slippery slope of doom. Pemex, Mexico’s national oil company, said that it now expects to produce 2.6 million barrels a day this year, a big drop from earlier estimates of 2.8 million barrels a day made just months ago.

Pemex’s total oil output fell 7.8 percent in July. Production from its supergiant oil field Cantarell dropped by 41 percent year-over-year! And Mexico’s exports to the United States dropped 13.4 percent year over year to 1.07 million barrels a day. That’s down one-third from July 2007’s export levels.

I’ll say that again — in just two years, Mexico’s oil exports to the United States have dropped by one-third.

What’s more, Pemex consistently misses its production targets and underestimates the amount that its production will decline. And it doesn’t have much money for oil-field development, so the problem is probably going to get worse, not better.

This is a brewing crisis for the United States, which uses a lot of Mexican oil. Mexico is our No. 3 source of imported oil.

Top 5 Sources of U.S. Petroleum Imports, 2008

The big hit is from Cantarell. Originally one of the largest oil fields in the world, it produced 1.86 million barrels of crude a day as recently as 2006. Fast-forward, and it is now pumping 590,000 barrels per day. Its production has dropped by 20 percent in just seven months. And some experts say Cantarell could be producing less than 500,000 barrels per day by the end of this year!

Mexico’s production shortfall could impact all U.S. drivers. And that’s not all. Since Mexico’s oil revenues pay for that country’s social services, a steep decline in Mexican oil production could trigger a humanitarian catastrophe.

The flow of illegal immigrants across the U.S./Mexican border has slowed due to the recession; if Mexican oil revenue falls off a cliff, that flow could swell into a flood.

Force #2 — China’s Oil Thirst Is Increasing. China is shrugging off the global recession, and its oil use is revving up with a vengeance. In July, China’s implied oil demand rose 3.5 percent from a year earlier in its fourth consecutive rise as refiners ramped up production. Meanwhile, China’s crude oil imports raced to a record in July, up 42 percent from last year.

China has overtaken Japan as the world’s No. 2 buyer of crude oil, importing 4.62 million barrels a day in July, up 14 percent from June.

Longer-term, China’s oil demand has grown from 4.8 million barrels of oil a day in 2000 to 8 million barrels today, a whopping 67 percent growth.

Driving this growth is China’s booming auto sales. In July, China’s auto sales jumped an astonishing 70 percent higher than a year earlier. China’s automobile market may post higher sales than the U.S. auto market for a full year for the first time ever.

China’s not the only one. India’s car sales were up 31 percent year over year. In fact, this may be the first year that emerging markets (combined) use more oil than the United States.

To feed this tremendous growth, both China and India are looking for oil around the world. China in particular is using its $2.3 trillion in cash and foreign reserves to make deals left and right, with countries, including Russia, Angola, Iraq, Brazil and even Cuba. This essentially locks in that production for China and locks it out for the United States.

Force #3. U.S. gasoline consumption is roaring back. Despite a severe recession, the United States still imports 9.19 million barrels of oil a day.

Our total liquid fuel use (including gasoline, jet fuel and distillates such as diesel and heating oil) is down year over year — 18.7 million barrels a day in 2009 from 19.5 million barrels a day in 2008 — but it’s going back up again. We should be using 19 million barrels per day in 2010, according to the Energy Information Administration.

U.S. Liquid Fuels Consumption Growth

What about all those gas hogs that got replaced in the “Cash for Clunkers” program? The good news is nearly 700,000 clunkers were traded in, and the Department of Transportation reported that the average fuel efficiency of trade-ins was 15.8 mpg, compared to 24.9 mpg for the new cars purchased to replace them. That’s a 61 percent fuel efficiency improvement.

The bad news is the program probably got only about 4 percent of America’s fuel-wasting gas hogs off the road, according to some estimates.

Meanwhile, the number of oil drilling rigs here in the United States is dropping fast. Look at this table from Baker Hughes showing the number of active drill rigs …

Area Last Count Count Change from Last Year Date of Last Year’s Count
U.S. Aug. 21, 09 985 -1013 from Aug. 22, 08
Canada Aug. 21, 09 164 -293 from Aug. 22 08
International July 09 974 -118 July 08

The United States has managed to shed more than 1,400 working drill rigs over the course of a year. Is this laying the groundwork for another price surge? Bet on it. A whopping 76 percent of our domestic oil production is used for transportation.

It sure seems like the United States didn’t learn its lesson from last year’s high gasoline prices. That means we’re probably going to have to learn it all over again, the hard way.

3 Ways You Can Profit

Let me give you three ideas on how to make the most of the coming boom in oil prices …

Pick #1 for the Crisis in Mexico: Buy Petrobras (PBR). Brazil’s national oil company is finding plenty of oil. It has discovered three “megafields” in three years — Tupi in 2007, Jupiter in 2008 and Iguacu in 2009.

Also, Petrobras’ long-term business plan calls for investing $174 billion over the next five years in developing its resources. The company says it has $30 billion in hand, including $10 billion from China’s Sinopec in exchange for 200,000 barrels of oil a day for 10 years.

Finally, Pemex has already approached Petrobras about a deepwater joint venture to find more oil in Mexican waters. So that’s another way Petrobras could profit from this crisis.

Pick #2 for the Oil Boom in China: Buy Marathon Oil (MRO). This oil explorer and developer recently made a deal with China on an oil exploration block in Angola in Africa.

Marathon operates all over the world, and so has the potential for more deals with China. Plus, Marathon trades at a discount to the industry and the S&P 500 on price-to-earnings, price-to-sales, price-to-book and price-to-cash-flow ratio.

Pick #3 for America’s Oil Squeeze: Buy the iShares Dow Jones US Oil & Gas Exploration Index (IEO). Full disclosure: This is an exchange-traded fund I’ve already recommended to my Red-Hot Commodity ETFs subscribers. But I think it’s the right place to be in this market.

U.S. oil exploration is obviously at a low point, and this fund is packed with companies that will make the most of it as money flows into this industry. Its holdings include Occidental Petroleum, Apache Corporation, Anadarko Petroleum, and more.

Do your own due diligence on any of these recommendations. And remember, especially if you’re trading on your own, have your exit point picked BEFORE you enter. That goes double in this fast and furious market.

Yours for trading profits,

Sean

Sean Brodrick writes:

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.

Uncommon Wisdom 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