What EROEI is – and How to Use It
In Friday's Oil & Energy Investor, I began a discussion about the importance of a metric known as Energy Returned on Energy Invested (EROEI).
As our research disclosed in the "Your Future: The Ultimate Pyramid Scheme" documentary, the factor is becoming a substantial element in the availability and cost of energy in general.
But oil is the most critical energy source in this discussion.
Our research has found that the situation will not be improving. We will be reaching a point when our need for exponential growth in energy, the environment, and the economy will become unsustainable. From there, we will experience a tipping point, and then a major collapse.
This will require that each of us change the way we structure our investments, secure our assets, and provide for our families.
However, in the interim, there will also be some amazing opportunities to make unparalleled profits in the energy sector.
And, in all of this, EROEI will be figuring in important ways.
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Oil Prices: U.S. Drought Hurting More than Crops
The unusually warm and dry weather across more than half of the United States has resulted in one of the worst droughts in U.S. history. Much has been made about how the crisis will affect crops and cattle, but it could also alter oil production and prices.
With nearly 64% of the contiguous United States in a drought, the highest percentage since the U.S. Drought Monitor began recording such data in 2000, the economic repercussions are searing.
To date, 2012 has already surpassed 2011's $12 billion in drought losses, and this year is on pace to rival the droughts of 1980 and 1988, which endured losses worth a current value of $56 billion and $78 billion, respectively.
According to 70 years' worth of data studied by the National Center for Atmospheric Research, weather (from heat waves to cold spells to droughts) can cause up to a 1.7% rise or fall each year in the U.S. economy's gross domestic product.
Farmers and agricultural companies have been voicing concerns, now oil and gas companies are speaking up.
With farmers trying to hold on to every ounce of water they find, oil companies don't know how they will get the water needed to drill into their oil fields.
"Water is the key to unlocking oil and gas. We take it for granted," in the U.S., said Chris Faulkner, president and chief executive officer of Breitling Oil & Gas, which has numerous operations in several of the new shale regions.
Oil Prices: Three Factors to Watch this Week
Oil prices took a break today (Monday) from their four-day streak of gains. Crude for September delivery ended 35 cents lower, or 0.4%, to $89.78 a barrel on the New York Mercantile Exchange.
But there are a few catalysts that could propel energy higher this week.
The recent resurgence in oil prices – up about 14% in the past month – has trickled to prices at the pump, too.
For the third consecutive week last week, the Energy Information Administration (EIA) reported the U.S. average retail price of regular gasoline jumped seven cents to $3.49 a gallon. The national average diesel fuel price increased nine cents to $3.78 per gallon.
Money Morning Global Energy Strategist Dr. Kent Moors warned a few weeks back of this expected oil price climb. He said "the gasoline and oil markets have certainly been oversold and remain so to this day," adding that "the rebound is likely to be greater there than in the energy sector as a whole."
It appears that rebound has started. Here are three factors that could fuel the oil price climb this week.
Will Oil Prices be the Next Manipulation Scandal?
According to the International Organization of Securities Commissions (IOSCO), the current system of oil price reporting is "susceptible to manipulation or distortion."
Comparisons to Libor manipulation have been made because oil prices, such as Brent, serve as a benchmark for trillions of dollars of securities and contracts.
There is the potential for market participants to manipulate oil price assessments published by price-reporting agencies (PRA) through the submission of false information and selective reporting of deals.
Traders at various banks voluntarily report the prices they pay for oil contracts to Platts and other PRAs. Platts, which provides the most influential assessment, uses a number of trades to decide what the benchmark price, quoted to the outside world, should be.
That is where the trouble begins.
Why Gas Prices are Heading Higher
With "Big Ben" testifying over the next two days on Capitol Hill, the indices will be bouncing around.
I always find it curious that the same Street urchins who criticize government for interfering in the "free market" are nonetheless the same ones pouting in the corner when the Fed doesn't propose a new bailout to improve their portfolio values.
When my children would pull a stunt like that, they would be sent to bed early… not given a seven-figure salary and benefits.
In any case, that's not the only pouting going on…
A few weeks ago, pundits were claiming U.S. gas prices could be moving down to as low as $3 a gallon nationwide.
Well, these same guys have been quiet lately.
That's because the price has been moving, all right, but in the opposite direction.
The RBOB near-month futures price was up again yesterday (Monday) at market's open. This is the contract traded on the NYMEX for blended gasoline. The price has increased 5.6% in the past week and 11.6% for the month. As of Monday's open, the price had recovered 13% from the recent low, just three weeks ago.
Gasoline is now tracking ahead of the rise in crude oil futures prices.
The reasons are rather straightforward.
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:
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.
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.
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.
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.
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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