Category

Oil

Four Things Suppressing Crude Oil Prices Today

The collapse of talks between Iran and the "Big 6" (the five permanent members of the UN Security Council plus Germany) should have accelerated international crude oil prices.

And yes, they are higher.

But the real spike hasn't hit. Not yet.

The rising crisis atmosphere in the region and the genuine possibility that a fourth round of talks between the two sides will not even take place should have renewed the upward movement.

That hasn't taken place yet, either.

Oil prices are caught between the normal dynamics of geopolitical concerns – which push prices north – and continuing concerns over a global economic slowdown – which results in lowering expectations.

Now, this limbo is a delicate balance; it could change in a matter of hours.

We are likely to see a short-term rise Monday evening if the Norwegian oil and gas sector strike is not averted. Labor negotiations between Norway's oil workers and employers over pay and pensions failed – yet again – yesterday. The country is now just hours away from the first complete shutdown of its oil industry in decades. (Already, the strike has cut oil output by 13%, according to Reuters.)

Then there are the figures coming out from the Energy Information Administration (EIA) on Wednesday, which will almost certainly show a drawdown on U.S. inventories. Normally, that would also push up prices.

However, absent an Iranian move against the Strait of Hormuz or a major refinery accident somewhere in the world, the rise will be less than usual.

That's because right now, four things are tempering the oil price rise:

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Oil Prices Look For Steady Rebound

Why have oil prices been down lately even with the Iran oil embargo in place, and when will oil prices pick back up?

Dr. Kent Moors, Global Energy Strategist for Money Morning, tackled those questions today (Friday) on Fox Business and gave his latest prediction on the future for oil prices.

Despite the high level of worldwide supply for oil, Moors expects oil to rise from the amount of global demand. He noted that the effects of the embargo have been overshadowed by Europe's debt crisis and once those sanctions are felt oil will start to rise.

You can see all of Moors' analysis on oil prices in the accompanying video.

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Three Reasons Oil Prices are Gushing

Oil prices have taken a backseat lately to the turmoil in Europe and Obamacare. But investors and consumers are starting to take notice again.

For the first time in three weeks, oil staged a noticeable rally. Brent crude oil topped $100 a barrel on Tuesday and crude for August delivery jumped $3.80 to $87.57 a barrel.

Tuesday's rise in oil came off Monday's 1.4% decline and follows a selloff that has pushed oil down some 22% from its 2012 peak of $128.40 on March 1. In the second quarter, oil prices experienced their biggest quarterly drop since the financial crisis of 2008.

Moving oil prices higher on Tuesday was a trio of factors: Iran tensions, dwindling inventories, and a wager that further policy action to shore up global growth is on the horizon.

Oil Prices and Iran Tensions

Concerns about Iran had calmed over the past month along with the sagging worldwide oil prices, but those worries were stoked Tuesday by an army general in Iran.

The general reportedly said that the country wouldn't "sit idly by" as the U.S. and Europe built a missile-defense shield program that could target Iran.

Late Monday, Iranian authorities staged missile drills to test weapons reportedly capable of hitting targets as far away as Israel. Iran officials also announced possible legislation targeted at closing the Strait of Hormuz, one of the world's most important choke points. Approximately 20% of the world's oil, nearly 17 million barrels a day, passes through the narrow strait.

Iran's move came on the heels of the European Union's full embargo on Iranian oil that went into effect Sunday. The EU embargo halts the vast majority of imports into Europe, ending exemptions for contracts signed before 2012, and barring insurance for Iranian oil shipments.

"Iran is always a factor and it has the potential to have a dramatic impact on oil prices," Ben Le Brun, a markets analyst at OptionsXpress in Sydney, told Reuters.

While Iran was the biggest catalyst behind oil's ascent Tuesday, it wasn't the only factor moving oil upwards.

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Shale Oil Stocks are Poised to Earn Investors Big Profits

With oil production soaring in the United States, shale oil stocks will be pumping out profits for years to come.

It's all thanks to huge deposits of shale oil.

At least four new major shale oil plays including the Bakken in Montana and North Dakota, the Eagle Ford in Texas, and the Marcellus in Pennsylvania and New York, may have more than 20 billion barrels each of recoverable oil.

Each of these new shale oil plays has the potential to double the total reserves we have today.

In fact, the "shale oil revolution" will soon make the United States the world's leading producer of crude oil, a report from Goldman Sachs Group Inc. (NYSE: GS) recently predicted.

The United States will produce more than 10.7 million barrels of oil per day by 2017, the report said. That's more than any other country, including Saudi Arabia.

And even though oil prices are in a short-term swoon, the glut of shale oil is about to make savvy investors a huge fortune.

That's why you need to take a hard look at a particular group of shale oil stocks that stand to benefit most from this boom.

But first, you need to know how this came about.

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Oil Prices Due to Rise With Iran Oil Embargo Looming

After an abysmal May, oil prices might be at their low.

From May 1 to June 1 crude oil prices fell 21.8% from $106.50 to $83.23 a barrel, the steepest monthly drop since December 2008.

One week later oil is still hovering around the $83 mark. But why is oil still down?

Oil has also been hampered by weaker than expected economic reports in the United States, suggesting that the world's biggest economy is still struggling in its recovery.

Also the Eurozone debt crisis has had a strengthening effect on the U.S. dollar, which has helped push oil prices down as the dollar is the global currency for oil.

But many experts say the rise in oil prices is inevitable. From a projected 25% increase in global demand by 2015 to the possibility of Iran closing the Strait of Hormuz, there are many factors in play here.

As Money Morning's Chief Investment Strategist Keith Fitz-Gerald stated, "demand isn't the only driving force in oil prices." Also contributing, he says, "are geopolitics, supply constrictions, wars and tyrants with their hand on crude spigots."

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My Strategy for Uncertain Times in Energy

There has been no shortage of red ink in the market lately.

Paltry new jobs figures (69,000 new jobs, less than half of what was expected) have combined with the ongoing mess in Eurozone and lagging figures from China to sap investor confidence.

This latest action will further depress oil prices, as the rash of bad news translates into even more knee-jerk projections of reduced demand.

Of course, it's much too early to make such predictions based on the news, but the pundits do it all the time.

In any case, we are now in a downward movement that will end only when the market manipulators say so.

When this happens, individual investors always take it on the chin.

That's why I want to take a moment today to outline for you the strategy I use for my Energy Advantage and Energy Inner Circle subscribers.

Of course, if we could time the market, or invest in perfect hindsight, we wouldn't need an investment strategy.

But while some of the largest investment banks are getting it (very) wrong these days, crystal balls seem to be in short supply.

So what should we do?…

Well, there are three overriding considerations you must keep in mind when approaching the energy sector in an environment like this.

  • First, know that this, too, shall pass. Take a deep breath and relax.
  • Second, keep your power dry. There is no point in chasing uncertain shares in an uncertain market, simply because some talking head on TV says they are undervalued. In the current situation, almost 80% of the shares I follow are well below market value. However, until the market finds equilibrium (something it always does, by the way), the undervaluation means little. Nibble when you feel targets are cheap enough, but never go all in.
  • The third point is the single most important thing to remember here. A situation like this one demands that you preserve your investment capital. Uncertainty is always the mother of discretion. The energy sector has been hit harder than the market as a whole for much of the last six weeks. That means you need to set up an exit strategy and stick to it.

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Oil Price Forecast: Expect Oil Prices to End the Year Higher

Forecasts for oil prices in the second half of 2012 and on into 2013 are varied, but there's one point on which virtually all agree: Oil prices won't be going down.

One reason is that oil prices have already dropped substantially in recent weeks.

In fact, oil futures – as measured by the July New York Mercantile Exchange (NYMEX) contract for West Texas Intermediate (WTI) crude – closed below $90 per barrel last week, the lowest level for an active contract since October 2011. That's down $17 a barrel since the beginning of May.

Two factors have contributed to the decline in oil prices:

  • A modest increase in U.S. crude supplies – up 3.8% in April from March levels and 1.5% from a year ago – primarily due to continued low demand as a result of the slower-than-expected economic recovery.
  • Increasing strength in the U.S. dollar – the global pricing currency for crude oil – due to safe-haven buying in response to continued concerns over Eurozone instability.

Oil Prices Continue to Climb

Longer-term, however, both of those situations should stabilize, and then reverse – meaning current oil price levels will likely serve as a base for a rebound in the second half of the year, continuing into 2013.

Even so, the leading "official" sources for oil-price forecasts aren't projecting major spikes, either.

The U.S. Energy Information Association (EIA), in its most recent report issued May 8, predicted prices for WTI crude will average about $104 a barrel for the rest of the year, and that costs to refiners for all crude – domestic and imported – will average $110 a barrel.

The WTI number is down $2 a barrel from March estimates, but $9 a barrel higher than the 2011 average, while the refiners' cost figure is up $8 from 2011.

The American Petroleum Institute (API), a trade organization of more than 500 oil and natural gas companies, didn't issue price forecasts for crude in its most recent (May 18) report, but noted that increased domestic production, slightly higher crude oil stocks (374.8 million barrels) and lower imports in April should serve to keep prices stable to modestly higher going forward.

API also expressed optimism that rising crude production in North Dakota, which hit 551,000 barrels per day in March, and a possible reversal of President Obama's rejection of the Keystone Pipeline project could keep price hikes in check for the remainder of the year.

Such optimism wasn't nearly as prevalent among many private analysts and industry commentators.

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Where Are Oil Prices Headed?

The uncertainty looming around worldwide economies sent oil prices sinking below $90 a barrel yesterday (Wednesday), a level not seen since October of last year.

Benchmark crude slid $1.95 Wednesday to finish the day at $89.90 per barrel.

The decline came on the heels of several weeks of slipping oil, sparked by a plethora of less than stellar economic reports. The concerning data mostly involved Europe's ongoing sovereign debt saga.

Oil gained 0.5% in early afternoon New York trading Thursday, but the reasons for the rally were unclear.

"You don't know if this is just a short-covering rally or the start of a more significant rally," Andy Lebow, an oil analyst with Jefferies, told The Wall Street Journal. Lebow said that progress in the talks between Iran and Western powers about Tehran's nuclear ambitions could have spurred Thursday's price reversal.

If the gain isn't maintained, however, prices could head closer to $85 a barrel.

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The Top Five Eagle Ford Shale Oil Stocks

The shale oil boom is turning out to be even bigger than anyone predicted.

Recently Money Morning told you about the Bakken oil shale boom. The Eagle Ford shale oil formation in south Texas is nearly as large, and production there is ramping up rapidly.

Eagle Ford is among the largest U.S. shale oil deposits, with recoverable reserves estimated as high as 7 billion to 10 billion barrels.

But Eagle Ford is also "liquids-rich." That means it has a high concentration of oil versus gas — a major attraction at a time when oil prices are high and natural gas prices are at historic lows.

Many oil companies are eager to get in on the action at Eagle Ford, and expectations are running high.

"We are evaluating a series of projects … that could literally double our company's earnings over the next few years," Curt Anastasio, CEO of NuStar Energy (NYSE: NS), told Reuters.

Another oil company CEO, Bill Klesse of Valero Energy Corp. (NYSE: VLO), thinks Eagle Ford could have an impact even beyond bigger profits.

"It's going to back out sweet crude imports into the United States, and that's going to happen by 2014," Klesse predicted, speaking at Valero's annual meeting earlier this month.

Indeed, the statistics coming out surrounding the Eagle Ford shale oil operations are impressive.

Data from the Texas Railroad Commission, which regulates energy in the state, tells an amazing story. Shale oil production increased nearly seven-fold from 2010 to 2011, from an average of just less than 12,000 barrels a day to about 83,400 barrels a day.

And that could explode to 500,000 barrels a day by the end of 2012, Klesse said, with output expected to double to 1 million barrels a day "in the next few years."

Impact of Eagle Ford Shale Oil Underestimated

Eagle Ford has progressed so quickly that a forecast of its economic benefits became outdated almost as soon as it was issued last year.

A study by the Center for Community and Business Research at the University of Texas San Antonio's Institute for Economic Development in early 2011 projected the Eagle Ford formation would directly and indirectly contribute $21.5 billion and 68,000 full-time jobs to the 20-county South Texas region by 2020.

Last week UTSA released a follow-up study.

It found the Eagle Ford contributed $25 billion to the local economy in 2011 — $3.5 billion more than the 2020 projection.

The new UTSA study says Eagle Ford will pump about $62.3 billion into the local economy by 2021. The job creation number increased to nearly 117,000.

"We view the Eagle Ford activity as an economic opportunity of a lifetime," said Mario Hernandez, president of the San Antonio Economic Development Foundation. "The key goal is the increase in investment and jobs. And if the communities will partner with the private companies that are creating these jobs, it can be a win-win for everybody."

Growth that outruns forecasts is good news for investors. Money Morning has sorted through the many choices to zero in on five Eagle Ford shale oil stocks that could do particularly well:

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Oil Prices and the Death of Greece

As the Eurozone continues to show weakness, events last weekend in Athens may accelerate the situation. The downward movement in oil prices this week in both London and on the NYMEX testified to the rising concern.

The aftermath of the Greek elections propelled the new radical left party SYRIZA into the limelight as the second strongest party in the country. Given the adamant refusal by SYRIZA leadership to accept bailout reforms, the party's new brokering position means the crisis will continue.

Bitter austerity measures await the formation of a coalition government, since no party received a majority of the seats in parliament from the vote. The coalition is supported by both the New Democracy and socialist PASOK parties, which have taken turns ruling Greece for nearly four decades.

But the surprise showing of SYRIZA has thrown the possibility of an accord into disarray.
At best, this means a further delay and likely a new election.

On the other hand, Greece has little time left. Any further delay in forming a government, with no guarantee that a very angry population will vote any differently the next time around, puts the next tranche of the European Union bailout package in jeopardy.

It is now more likely that Greece will leave (or be pushed out of) the Eurozone, casting a greater uncertainty on both the currency and the southern tier of countries still in the zone.

Spain is the current focus of concern, but Italy is also exhibiting renewed weakness.

Unlike Greece, Spain and Italy have debt problems that dwarf the ability of any Brussels-led support package. These economies are simply too large to be "rescued" from the outside.

The concerns over contagion, therefore, may actually expedite a Greek departure earlier than most thought possible.

Including me.

It is true that any members leaving the Eurozone will have a negative effect upon currency strength and economic prospects. It is also unclear how the Greek departure will aid in shoring up either Spain or Italy. The problems in each of these economies are endemic; they are not primarily a result of "spillovers" from the situation in Greece.

All of which means, to borrow a phrase from former U.S. Secretary of Defense Donald Rumsfeld, there are a series of "known unknowns" now facing the EU. The credit and banking problems are essentially the "known" part of this equation. The extent of the fallout on the euro as a whole is the massive "unknown" flowing through the calculations.

This is accentuated by recent developments in the two major economies using the euro — Germany and France. No rescue package for any EU member is possible without the leadership of these two dominant European economies. To date, Paris has emphasized protecting its suspect banking sector, while Berlin has a strong political undercurrent demanding additional protection of German production and trade.

However, the recent French elections, in which a socialist has been elected president, and indications surfacing that the German economy may be facing a slowdown, will put continued support of a "bailout for austerity" approach to Greece in question.

Thus far, both major nations have led the EU-Greek approach, strongly arguing that the preservation of the euro demands it. The dramatic political events unfolding in Athens are rapidly undermining that support.

And this has impacted the price of oil.

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