The Consensus in Europe is Simple, Oil Prices are Headed Higher
My latest trip to London may have centered on the briefings I gave on Iranian oil sanctions, but I also did a number of media appearances.
As I have mentioned before, questions from European interviewers are generally more knowledgeable and to the point than in the states. This may be because places like London are much closer to the events directly affecting oil prices.
However, there was a surprising element.
Nobody - be he/she a commentator, journalist, analyst, or expert – expected a fall in oil prices. The entire market environment in Europe is looking in the other direction.
In London, my predictions of $130 a barrel for Brent and $115 for WTI (West Texas Intermediate, the benchmark crude traded on the NYMEX) by the end of 2012 were considered on the low side.
My further suggestion of $150 for Brent and $130 for WTI by the end of 2013 have caused some disagreement in the states, but are par for the course averages for what people are saying over in Europe.
In fact, the overwhelming consensus in Europe is that oil will rise, absent exogenous economic or financial problems.
In other words, the price can go down, but such a move would be a result of another bout with credit crises, intra bank problems, or currency weakening.
In such situations, the lowering of oil prices has nothing to do with oil, or its supply/demand balance, or its trade. Rather, economic constriction results in concerns over short and medium-term demand and those translate into a lower price.
Left on its own, the consensus over here is simple. Oil goes up.
Concerns Grow in Europe Over Oil Prices
Now, unlike in the U.S., the conversation does not then immediately move to prices at the pump.
Gasoline is less of an issue for the simple reason that a combination of heavy taxation, lowered usage and a far better mass transit system has made driving more of a luxury than in the U.S.
Paying the equivalent of $7 a gallon tends to have that effect.
When it Comes to the Facts and Figures, America is in Trouble
There are always at least two sides to every story.
That's true when it comes to trading (there's always a buyer and a seller). It's also true when it comes to politics.
But, just like in trading or investing, when it comes to politics, it's not about being "right" or "wrong." It's about distilling rhetoric and opinions down to facts and figures that can then (hopefully) be more objectively observed and used to fashion compromises that lead to winning positions, financially and socially.
I try to let the facts and figures speak for themselves and peel back others' opinions to get at what's really happening and why.
I change my opinions all the time, whenever there are new facts that warrant consideration. But in the end, I take a stance.
I'm telling you this because I'm about to lay out some insights and some indictments regarding the economy, Wall Street, and oil, and then delve into something that's so charged that some of you are going to flip out.
But before you do, remember, there are two sides to every story.
First up: poverty.
Just look at the numbers out this morning…
You Can Drill All You Want, Oil Prices Are Still Headed Higher
Today I want to focus again on oil prices. It seems that some TV pundits have never heard (with apologies to Alexander Pope) that a little knowledge is a dangerous thing.
Some people on Wall Street believe that by scaring the individual investor they stand to make a greater profit for themselves.
Over the summer, there was a report issued by Credit Suisse that said that oil could hit $50 a barrel. We've also seen predictions on CNBC saying $40 a barrel. Others think that oil prices could fall even go further.
What I am telling you now is that these views do not reflect the actual market or the new reality we find ourselves in today.
A lot of this sentiment stems from the idea that we have now increased our supplies here in the United States. Some political candidates even said that they guaranteed "$2.50" per gallon gasoline if they were elected.
"Drill, baby, drill" has become something of a national catchphrase.
The problem is that prices are not just reflective of new supplies, either too much or too little. By focusing only on how much is there, these analysts provide a fundamentally distorted view of the oil market.
Yes, the rise of new sources has altered the picture. But so has the rise in demand globally and at a rate much faster than anticipated.
In fact, the impact of unconventional oil (like our huge sources of shale oil) is now projected to be less than expected, even with additional volume coming on line.
And one report issued last week reflects that fundamental view and explains why oil prices are set to rise, not fall in this age of expanded unconventional oil and gas.
The Fundamentals Are What Matter to Oil Prices
I want to introduce you to a company called Bernstein Research.
They are regarded as the top energy research company in the world by their institutional investors. They're in 40 countries. They win awards every year for having the best analysts in the sectors they cover.
And they are very successful in their forward focus because they emphasize the fundamentals.
Last week, Bernstein Research released a detailed report reflecting the position I have been holding for some time-oil prices are headed higher.
Jim Rogers On QE3, Gold, Silver and Oil
In fact, Rogers said repeating the same program the Fed has already attempted will make policymakers "look like fools again."
In an interview with CNBC before the Fed's announcement, the chairman of Rogers Holdings said he was skeptical that additional stimulus measures could have any meaningful effect on the U.S. economy. He added that despite his reservations, he expected the Fed to unveil QE3.
The iconic financier also lashed out at the new developments in Europe, including a move from Germany last week to funnel taxpayer cash into the European Central Bank's OMT program, their own version of quantitative easing. Rogers maintained they are not addressing the root of the problems plaguing the Eurozone area.
On Europe's move to implement a euro version of QE, Rogers said it affords the Western world "unanimity towards mutual destruction."
Any relief will be temporary, warned Rogers.
"We're all going to pay a horrible price for this in a year or two or three," he said.
As for why the Fed will continue its ineffective stance of zero to 0.25% interest rates through at least mid-2015, and the tossing good money after bad, Rogers advised the reasons are simple.
It's an election year and "Mr. Bernanke wants to keep his job."
That's why Rogers is getting defensive with commodities.
Oil Prices Dip After Hurricane Isaac Weakens
After the country braced for the worst outcome, Hurricane Isaac spared the oil industry from costly damage, and oil prices erased earlier gains.
Isaac lost intensity since making landfall Tuesday night, taking the pressure off crude. Benchmark oil fell 87 cents Thursday to finish trading at $94.62 in New York.
Oil traders this week geared up for the impact from Hurricane Isaac-related supply disruptions as refineries along the Gulf Coast either slashed operations or completely shut down, and key import terminals were closed.
As the powerful storm grew closer to shore Tuesday, oil production in the U.S. Gulf of Mexico was nearly completely idled.
According to the U.S. Bureau of Safety and Environmental Enforcement, which oversees offshore oil and gas operations, an estimated 1.3 million barrels a day of crude, 93% of the oil production in the Gulf's federal waters was offline as a result of Isaac. The region's natural gas output was slashed by nearly two-thirds.
The agency said 509 production platforms were evacuated, or 85% of manned platforms in the Gulf of Mexico. Workers have also been pulled from 50 drilling rigs, or 66% of the total.
Luckily Hurricane Isaac spared the southern coast of costly oil rig damage. It was downgraded Wednesday to a tropical storm, relaxing pressure to dip into oil reserves to combat higher prices.
Higher Gas Prices a Sure Bet Due to Hurricane Isaac, Fire
As the hurricane hit land yesterday (Tuesday), oil and gas production in the Gulf of Mexico had virtually shut down. Oil companies now must wait out the storm before they can assess any damages.
Energy firms in the region have suspended 93% of the typical U.S. oil production and 67% of natural gas in the gulf, according to a report released Tuesday by the Bureau of Safety and Environmental Enforcement. Companies have evacuated 503 platforms and 49 rigs in the region.
In addition, gasoline refiners have shut down approximately 6.7% of total U.S. refining capacity, a move that will lead to reductions in gasoline inventories and short-term price increases. Exxon Mobil Corp. (NYSE: XOM),Phillips 66 (NYSE: PSX)and Valero Energy Corp. (NYSE: VLO)all reported yesterday that they have temporarily shuttered Gulf Coast refining operations.
But Hurricane Isaac's disruptive presence isn't the only strain on the U.S. refining network. There's another major catalyst triggering higher gas prices.
Over the weekend, tragedy struck the second-largest refinery in Venezuela.
An explosion and fire on Saturday at the Amuay refinery in Venezuela killed 48 people, wounded hundreds, and destroyed hundreds of nearby homes. It is the deadliest refining accident in more than a decade.
The government-run Petroleos de Venezuela (PDVSA) owns the plant, which can process 645,000 barrels of oil a day but has been forced to suspend operations.
Ignore the Doom-and-Gloom Crowd When They Talk About $40 Oil
I just returned from a week down South with a few of my energy clients. It's good to get my hands dirty and remind myself firsthand what is going on at the project level of some of the country's top energy companies.
But when I returned home this weekend, I made the mistake of flicking on the television and opening the newspaper.
I can't believe that the pundits are now predicting that oil will fall to $40 a barrel. They also are projecting that the entire natural gas sector is going to collapse.
Here we go again.
Yes, we are wrestling with an energy sector that remains gun shy on elements from market volatility to geopolitical tensions.
And sure, $40 a barrel is possible, but only in an improbable situation where global demand for oil completely collapses, along with the world economy.
But we are in a new reality. And such doom and gloom predictions are highly oversimplified and potentially dangerous to you as an investor.
Oil Prices Promise to Head Higher As Mexican Production Dwindles
In addition to Iranian threats and growing demand, dwindling production of crude in Mexico promises to push oil prices higher as well.
Mexico is the third biggest exporter of oil to the United States. That's bad news for the U.S. economy which always gets hit when oil prices rise.
From 2004 to 2008, the U.S. Department of Energy reports such jolts, along with OPEC price manipulation, cost roughly $1.9 trillion. Plus, a recession followed each major blow.
According to the U.S. Energy Information Administration (EIA), Mexican oil production reached a peak of 3.2 million barrels a day in 2008. And by 2011, it wasn't even producing 3 million barrels a day.
Since then oil production has slipped to 2.5 million barrels a day.
Worse still, Mexico could actually become a net importer of oil within a decade if it cannot find fresh discoveries to make up for the 25% production drop since 2004 and fails to change its current policies.
Oil Prices are Higher, But It Won't Be Much Help for Alternative Energy
Well, not this time.
During the run up to mid-$4 gas and $147 a barrel oil in 2008, many assumed these costs would continue to advance. That made alternative sources – especially renewables such as solar, wind, biofuels, and geothermal – more attractive to investors, politicians, and energy enthusiasts.
Alternative sources are more expensive than conventional oil, gas, or coal. They are, however, more environmentally friendly. Paying those higher costs was regarded as a tradeoff for cleaner energy sources and a reduction in emissions.
Today, that view has changed.
U.S. Oil and Gas Squeezes Alternative Energy Prospects
It's part of the reason why I've recently avoided alternative energy companies like First Solar (Nasdaq: FSLR), Canadian Solar (Nasdaq: CSIQ) or SunPower Corporation (Nasdaq: SPWR) in my Energy Advantage portfolio.
The economic downturn has made reliance on more expensive energy sources a difficult proposition to accept. Renewables are hardly a convincing argument anymore, especially during a sluggish economic recovery.
Yes, increasing oil and gas prices should reduce the spread between conventional and renewable, thereby providing stronger arguments for change. And proponents argue that alternatives provide an enhanced advantage given that they can also be domestically produced.
Just don't bet on these arguments holding up this time. Here's why.
Don't Ignore This Shift in the Global Oil Market