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Oil

All You Need to Know About Iran, $200 Oil, and $6.00 Gas

If you're unsettled by the thought of gasoline at $4.00 a gallon, brace yourself.

With tensions between Iran and the West quickly escalating, we could see gas jump to $6.00 a gallon at the pump in a matter of months.

Make no mistake about it: If Iran were to follow through on its threats to close the Strait of Hormuz, oil prices would surge as high as $200 a barrel in matter of days.

But that's just the beginning…

A wider Iranian war could throw the entire region into chaos — making $100 oil seem like a bargain.

None of this is hyperbole. In fact, these dangers are likely according to of one of world's leading energy analysts, Dr. Kent Moors.

Dr. Moors is an advisor to six of the world's top 10 oil companies, including natural gas producers throughout Russia, the Caspian Basin, the Persian Gulf and North Africa. He also consults for high-level officials from the U.S., Russian, Kazakh, Bahamian, Iraqi and Kurdish governments on all things energy related.

In short, Kent's insights are invaluable.

That's why we've given Dr. Moors a chance to address all of the concerns swirling around the energy market today.

In the interview that follows you'll learn what you really need to know about Iran, the global oil market, and most importantly, what you can do to profit…

Dr. Kent Moors on the Brewing Crisis in the Gulf

Q) Dr. Moors, how serious are the recent developments in Iran?

Moors: This is the most serious U.S.-Iranian crisis since the fall of the Shah in 1979. There's a very dangerous situation inside Iran that is only being accentuated by the oil market problems that have resulted from Western sanctions.

First off, on the Strait of Hormuz: This is the most significant oil choke point in the world. Some 35% of the world's seaborne oil shipments and at least 18% of daily global crude shipments pass through this narrow channel in the Persian Gulf. And while the Iranian Revolutionary Guard Navy is not large enough to blockade the Strait of Hormuz for any length of time, it could disrupt traffic.

Q) What effect would closing the Straits of Hormuz have on oil and gas prices?

Moors: Closing the strait would result in a rise in crude oil prices of between $20 and $40 a barrel in a matter of hours. Any interruption beyond 72 hours would push prices to between $150 and $200 a barrel.

As far as gas prices are concerned, the basic rule of thumb is that each $1.00 rise in a barrel of oil results in a 3.2-cent rise in a gallon of gasoline. So $200 oil would equal $6.00-plus gasoline.

Q) Why is this crisis unfolding right now?

Moors: Three major elements are causing Iran to become belligerent:

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Small Shale Oil Companies Make Prime Take Over Targets

Cash-rich oil majors are set to go on an epic buying spree. In the process, they are going to create a huge investment opportunity.

Small oil companies have become attractive takeover targets because they have something that oil majors like Exxon Mobil Corp. (NYSE: XOM) and Chevron Corp. (NYSE: CVX) want – expertise in the hydraulic fracking and horizontal drilling methods that are used to extract oil from North America's vast shale reserves.

And many of these takeover targets are companies based in North America.

"The main opportunities to profit from M&A (mergers and acquisitions) will be in the U.S. and Canadian markets," said Money Morning Global Energy Strategist Editor of theOil & Energy Investor Dr. Kent Moors.

Ironically, many of these small companies developed their expertise after buying assets the majors sold as soon as easy-to-reach deposits were tapped. Many of those assets contained shale oil, which is much harder and more expensive to extract.

But since the global price of oil is high enough to make shale oil drilling profitable, the oil majors have been seeking out smaller players to retrieve their assets and expertise.

"These shale prospects are exploration frontiers and the big international players see them as a runway to growth," Mark Hanson, an analyst at Morningstar Inc. told Bloomberg News.

Shale oil becomes profitable when global oil prices are in the $70 a barrel range. The higher the price of oil goes, the more attractive shale oil formations become.

The price of West Texas Intermediate (WTI) averaged about $95 a barrel in 2011, but will keep rising. Moors believes oil will reach $150 a barrel as early as this summer.

So the big oil companies, with billions of dollars of profits burning a hole in their deep pockets, have plenty of motivation to shop around.

For investors that means they need to stake out their positions before all the buying starts.

That's the only way to take advantage of the sudden jump in the stock price that occurs when a takeover deal is announced. Luckily, several oil sector analysts have already identified the most likely takeover targets.

According to Subash Chandra, an analyst specializing in energy stocks for Jeffries Group Inc., the stocks to watch are

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Foreign Funding Ushers In a New Era of Profit Opportunities for U.S. Gas Companies

U.S. natural gas companies have found a convenient new way to boost their profits – by drawing in overseas companies to help fund their development projects.

The maneuver was illustrated yesterday (Tuesday), when two large foreign companies bought big stakes in major U.S. shale projects.

French oil major Total S.A. (NYSE ADR: TOT) said it would invest $2.3 billion in Chesapeake Energy Corp.'s (NYSE: CHK) Utica Shale operation in eastern Ohio. Within hours, China Petroleum & Chemical Corp. (NYSE ADR: SNP), also known as Sinopec, announced a $2.2 billion deal to buy a 30% stake in five Devon Energy Corp. (NYSE: DVN) shale projects.

The deals follow several last year that have helped U.S. companies raise the cash they need to accelerate drilling for shale gas, which is more expensive than drilling for conventional natural gas.

"We will be seeing more of this kind of joint venture activity, bringing in foreign companies with deep pockets to offset rising development expenses for shale projects, while still allowing the U.S. company to retain control," said Money Morning Global Energy Strategist and Editor of the Oil & Energy Investor Dr. Kent Moors.

But the Chesapeake-Total deal takes this idea one step further, allowing Total to actually lease land in the Utica shale gas deposits.

"This is going to usher in a new era in how we develop the vast unconventional reserves in this country," said Moors.

Actually owning some of the shale gas deposits adds directly to the foreign company's share value, while the acceleration of the project made possible by the cash infusion boosts the U.S. company's stock.

"Having an American producer control a mega domestic project, but deflecting large chunks of the expense to a foreign company, is an ideal solution," Moors said.

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Five Fallacies of the Keystone Oil Pipeline

There's been a lot of buzz about Keystone oil pipeline recently, but unfortunately, the facts about the project have been obscured by political wrangling.

That's not good for the investors who have money at stake. So here's what you really need to know about the Keystone oil pipeline – and more importantly, the five biggest fallacies being espoused by unscrupulous politicians and the debate-warping mainstream media.

First proposed by TransCanada Corp. (NYSE:TRP) in 2008, the 1,700-mile Keystone oil pipeline would carry 700,000 barrels of crude per day from the Canadian oil sands in Alberta to refineries in Port Arthur, TX.

As far as facts go, that's about all the politicians in Washington agree on. Now here's where the truth ends and the spin begins:

Fallacy No. 1: The Keystone pipeline will create 20,000 jobs … or 100,000 jobs.

TransCanada commissioned a study that said construction of the pipeline would create 20,000 construction jobs, and more than 100,000 spin-off jobs. Republican (and a few Democratic) supporters have been only too happy to repeat these numbers in speeches in support of the pipeline.

The State Department, in its study, came up with a more modest figure of 5,000 to 6,000 construction jobs.

The discrepancy comes from how the TransCanada study calculated the jobs. That study used a "one person, one year model." So if it takes 6,500 workers two years to build the pipeline, that's 13,000 jobs, with the other 7,000 coming from supply manufacturers.

And if that math isn't fuzzy enough for you, take a look at the calculations for the 118,000 spin-off jobs.

That number is based on the one person, one-year model in addition to something called the multiplier effect, which takes the capital costs of the project and feeds it into a formula. In short, these job numbers are about as reliable as a politician's campaign promise.

And yet one more delicious irony: Back in 2009, Republicans complained that the $787 billion stimulus package failed to create long-term stability given that many of the jobs created only lasted as long as the public works projects that were proposed.

Democrats defended the temporary nature of the employment, arguing that it was a necessary step in order to boost economic demand around the country. Now it's the Democrats arguing that the Keystone project fails to create permanent jobs, while Republicans argue the project is needed to combat unemployment.

Fallacy No. 2: Keystone pipeline will increase greenhouse gases, worsening climate change.

Well, yes and no.

The argument from Democrats is that the process of extracting the oil from the Athabasca fields will generate greenhouse gases. Sure enough, it does. But stopping the Keystone pipeline won't change that unless it prevents production, a long shot at best.

You see, the Keystone pipeline isn't the only game in town. At least one other proposed pipeline would run across British Columbia to Canada's west coast, where it would be exported to Asian markets.

The greenhouse gas impact studies assume no Keystone pipeline means no production from the Athabasca oil sands, and assume as well that the Keystone pipeline would pump nothing but oil sands product at 100% capacity 100% of the time – not likely.

The true impact of the Keystone pipeline on global greenhouse gas emissions isn't clear, but would be far lower than its opponents claim.

Fallacy No. 3: The United States is dangerously reliant on hostile energy sources.

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2012 Oil Price Outlook: How to Profit From $150 Oil

2011 was an up-and-down year for oil prices, but don't expect that pattern to repeat in 2012.

No, next year, the trajectory for oil prices will be far more linear – and it's pointed up.

In fact, we could even see $150 oil by mid-summer.

There are two key reasons why:

  • Despite the economic crisis in Europe, oil demand proved resilient in 2011. It is poised to remain steady in 2012, and then escalate drastically for the foreseeable future.
  • Supplies will once again be constrained, and the potential for political upheaval in major oil-producing nations has increased.

These are the principal reasons oil prices have surged about 30% since dipping below $80 a barrel in early October. They're also why the world's upper-echelon of energy forecasters has oil prices building a floor above $90 a barrel and rising from there.

Indeed, Goldman Sachs Group Inc. (NYSE: GS) recently recommended that traders buy July 2012 Brent crude futures in anticipation of a rally to $120 a barrel. It was one of the bank's top six trades for 2012 published in its "Global Economics Weekly" report.

Barclays Capital agrees.


"Even in the worst case scenario, the downside to oil prices is unlikely to be anything as severe as during the 2008-2009 cycle," Barclays analysts Roxana Molina and Amrita Sen wrote in a report earlier this year. "As a result, we maintain our price forecast of $115 per barrel for Brent in 2012 and expect $90 per barrel to hold as a sustainable floor even under gloomy macroeconomic conditions."

As for West Texas Intermediate (WTI) crude the Energy Information Administration (EIA) expects it to average nearly $94 a barrel next year.

And even that's a conservative estimate.

"Given the oil volume constriction oncoming and the continuing increase in global demand – this drives the price, not North America or Western Europe – we will reach $150or beyond by July 4," said Money Morning Global Energy Strategist Dr. Kent Moors.

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The Changing Nature of Global Gas Projects

I wrapped up my recent trip to Russia at 4 a.m. last Friday in a Moscow airport.

One thing is certain about my trips to Russia – the time schedule is always off.

But I can't complain; the weeklong visit provided many benefits.

As I told you two weeks ago the primary purpose of my trip was to evaluate natural gas projects in northern Russia. It's becoming increasingly necessary to estimate global-wide gas prospects in order to determine effective price levels.

That's because the age of "spot" market prices in the gas sector is rapidly approaching.

And it's about to change the way the markets operate for everyone involved.

On the Spot

Spot markets allow for a very short-term exchange of volume (usually 72 hours) and serve to undergird longer-term contract pricing.

The spot markets tend to offset longer contract terms by providing volume at what is usually a discount to the contracts, which are more properly futures contracts on natural gas.

However, natural gas has not had featured spot sales except in those areas that serve as major centers for pipeline interchange. Those areas then become provisional benchmarks for wider markets.

This is different than crude oil, which can be moved by tankers to virtually anywhere there is a decent port, allowing the establishment of local spot markets. Gas, on the other hand, has been limited by how far pipelines extend.

But the acceleration of liquefied natural gas (LNG) trade – in which gas is cooled to a liquid state, transported by tanker, and then "regasified" on the other end – has altered the picture.

Completely.

Indeed, with more than 90 new terminals set to open, under construction, or in the final stages of approval worldwide, LNG is one of the most decisive changes to hit the energy sector in decades.

LNG imports are essential to meet energy needs in parts of the world where there's little domestic supply. Exporting LNG also provides a new outlet in those regions where new unconventional gas volume strains local demand and threatens adequate price levels for producers.

This latter consideration affects all major shale gas production basins in North America, from the Horn River and Montney in Western Canada to the Marcellus, Barnett, and Fayetteville in the United States.

And, as I have noted on several occasions, the rise of LNG trade can serve as a major excess production drain off for the United States.

What LNG does not do, however, is address a growing global concern.

See, it is one thing to provide an end market for additional production. It is quite another to integrate the production assets into the equation.

Let me explain.

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Anadarko Petroleum Corp.(NYSE: APC) is a "King" in the U.S. Oil and Gas Industry

Anadarko Petroleum Corp. (NYSE: APC) has been a big player in U.S. onshore oil and gas production, and it's about to get significantly bigger, unlocking incredible profits for investors.

Anadarko has stakes in some of the most prolific U.S. oil fields in Texas, Colorado, Wyoming, Utah, and Pennsylvania. It's also an international leader in unconventional production, employing methods like horizontal drilling to increase productivity rates from deep wells.

But a recent major development will propel Anadarko to the top of the U.S. oil and gas industry.

You see, the company reevaluated one of its Colorado oil fields and now believes it holds between 500 million and 1.5 billion barrels of oil and natural gas. This is huge. A billion-barrel field is a rare find; only a handful have been discovered in the United States.

This new discovery could increase Anadarko's annual production rate in the region by 20% in 2012. It also prompted Tudor, Pickering, Holt & Co. analysts to name the company "King of the Rockies" and raise its net-asset-value estimate for Anadarko by 5% per share.

Anadarko was already solid, but the new discovery has made it a must-have investment in the oil and gas industry. It's time to buy Anadarko Petroleum Corp. (**)

Anadarko Petroleum Corp.: An Oil Industry "King"

Anadarko's big oil find came from the Wattenberg shale in northeast Colorado. The formation was first discovered in 1970 and is listed in the top 20 U.S. oil and gas fields.

Anadarko has been using horizontal drilling, the technology it uses in the Eagle Ford shale oil field in Texas, to unlock the liquid-rich Wattenberg. Based on 11 test wells, Anadarko is confident it can drill between 1,200 and 2,700 wells over time, and will ramp up Wattenberg's development by drilling 160 wells in 2012.

The Wattenberg wells also have a quick payback rate.

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Lure of Profits Spurs Oil Sands Pipeline Projects

There's a pipeline race happening in the oil industry, and the winner will unlock huge profits.

You see, the Canadian oil sands are missing an efficient way to get the oil from the fields to the refineries and to the customers. That means profits are trapped in areas like the Athabasca oil sands of northeasternAlberta, Canada — the second-largest crude reserves in the world with about 1.7 trillion barrels of oil.

That's why TransCanada Corp.'s (NYSE:TRP) Keystone XL pipeline, recently delayed for a year for further review by the U.S. State Department, has been such a big deal. The Keystone pipeline would bring the Canadian crude from Alberta to U.S. refineries, reducing the need for imports from distant and often unstable Middle Eastern countries.

But because the Keystone pipeline crosses an international border, the State Department must approve it,but the 1,700 mile route has raised environmental concerns.

Now several other companies have redoubled their efforts on similar oil pipeline projects, not only to move oil from Canada but also to relieve an oil bottleneck in Cushing, OK, that is helping depress prices of West Texas Intermediate (WTI) crude.

"The markets need a solution really badly to the Cushing problem," Lanny Pendill, senior energy and utilities analyst at Edward Jones told MarketWatch. "If Keystone gets deferred too long, it's highly likely that competing proposals will gain traction at TransCanada's expense."

Other companies did indeed react swiftly to TransCanada's setback.

Almost immediately after the announcement that Keystone pipeline would be delayed, Canadian pipeline company Enbridge Inc. (NYSE: ENB) said it had bought a 50% stake in the Seaway Crude Pipeline, which now carries oil from Freeport, TX, to Cushing. Enbridge plans to reverse the flow of oil next year. (Enterprise Products Partners LP (NYSE: EPD) owns the other 50%.)

"The producers think this is great, because now you have enhanced connectivity and enhanced transportation into the largest area and concentration of refiners in the U.S," Darren Horowitz, an analyst with Raymond James & Associates (NYSE: RJF), told Bloomberg.

Price Pressures

The bottleneck at Cushing has been a major factor in opening a spread between the market price of WTI and Brent crude.

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EOG Resources Inc.(NYSE: EOG) Is Looking to Lead U.S. Oil Production

EOG Resources Inc. (NYSE: EOG) has undergone a massive change in its business model – and it's paying off astoundingly.

EOG Resources used to be known as a leader in natural gas exploration and production.
But low natural gas prices led to declining profits. In fact, the company lost $70.9 million in 2010's third quarter.

So it embraced a major production and technology change. EOG perfected horizontal drilling techniques to access shale rock formations trapping large reserves of oil – instead of reserves of gas, as many competitors were doing.

Now EOG has transformed from a leading gas drilling company to a major oil producer, increasing its liquid production last year by 49%.

With this new production model, EOG's profits are driven by high oil prices instead of depressed natural gas prices. The company just reported its third-quarter earnings and the results are astonishing – it turned a loss from the same quarter last year into a blowout earnings surprise this year. Net income hit $541 million.

The bottom-line growth helped the company's share price rally 20% since earnings were released Nov. 2.

By changing its focus to profitable oil production, EOG Resources is now a low-risk, high-reward energy stock, making it a "Buy" for investors looking to cash in on rising oil prices. (**)

EOG Resources Inc.: Unlocking Profits from Shale Oil

EOG Resources is one of the largest independent (non-integrated) U.S. oil and natural gas companies, with proven reserves in the United States, Canada, Trinidad, the United Kingdom, and China.

It's the largest oil producer in North Dakota's Bakken Shale, and the largest producer in the Eagle Ford Shale in South Texas. These two shale oil fields have played a key role in ramping up U.S. oil production over the past few years, with each having an estimated 4 billion barrels of recoverable reserves.

EOG's extensive operations in these fields have pushed its total liquid production to 130,000 barrels per day, and Chief Executive Officer Mark G. Papa said he expects to reach 200,000 barrels per day in 2012. That could make the company the second or third largest oil producer in the United States.

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The Narrowing Spread Means Higher Crude

I just left Baltimore, where I met with the Oil & Energy Investor and Money Morning editorial teams to discuss some interesting new developments.

This was followed rather quickly by a flight to Frankfurt, Germany, for meetings on a potentially major push in the European approach to a rapidly changing energy landscape.

I will fill you in on both later, because today we need to talk a bit about an important matter unfolding in oil…

The Crude Spread is at a Four-Month Low

On Friday, the spread between the Brent price in London and the quote for West Texas Intermediate (WTI) in New York declined to below 20% of the WTI price.

The straight nominal difference of $17.27 is now the lowest it's been since July 6.
And at 18.46%, the spread as a percentage of the closing WTI price (the better way to gauge its actual impact on prices in the United States) is narrower than at any time since June 29.

These changes have been rather dramatic – and quick.

On Oct. 20, the same figures were $25.57 and 30%.

Recall that what has transpired for the past 306 consecutive daily trading sessions, continuously since Aug. 13, 2010, is itself unusual. For that entire period, the market has priced Brent higher, despite it being an inferior grade of crude relative to WTI.

I have discussed the reasons before, but this time around, we need to consider what the shrinking spread actually reveals.

A part of the explanation lies in where the market is going.

However, another part – perhaps even the primary explanation – reflects how traders have been maintaining the spread as other pressures were building in that same market.

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