How to Hedge Oil Prices in Volatile Markets
Welcome to the new pricing environment.
We're already started to see kneejerk reactions to short-term indicators last Friday.
A better than expected jobs report sent crude oil prices higher immediately. The figure was encouraging but not a barnburner. Of course, some massive upward revisions for the previous two months hardly hurt either.
Some of this is the result of investors still gun shy after a massive recession. Now we have certainly had a very nice bull market run and the prospects of another meltdown any time soon are negligible.
Nonetheless, the new drivers of oil prices provide little chance for real dynamics to work themselves out. This is all about reaction. Picture it as the newest investor version of smoke and mirrors.
Today's prospects are very good for the oil sector. Natural gas has pulled back from some heavy gains. Major losses earlier this week were erased on Friday. There is a range forming, and it is likely to remain absent any unexpected developments (largely geopolitical at this point).
Demand will increase as we move into the summer; global levels will rise quicker than domestic in the U.S. or Western Europe. That will provide some upward pressure on oil prices.
Remember as well that, while certain region such as the U.S. have a new largess in unconventional (tight or shale) oil, the full volume of that new production will be more expensive to bring on line. That means the additional extraction will not decrease the overall price.
However, the real question is how to make money if trading is in a narrow range for the near term.
You need to develop a new hedging strategy. Here's how…
A Major Breakthrough in U.S. Oil Exports May Be Coming
As the crude market continues to show considerable volatility, price gyrations are prompting another round of concerns over supply and production.
There isn't a shortage to worry about right now.
But whenever we have some issues on the demand side, attention shifts to the supply currently available on the market. And it's in this repetitive exercise that one of the major errors by analysts always occurs.
I have noted this shortcoming on several occasions.
Why the "Death of Peak Oil" Still Won't Mean Cheap Oil
Today (Wednesday) an analyst from Citigroup became the latest lemming to declare the death of peak oil.
In a report entitled "The End is Nigh," Seth Kleinman says a combination of flattening demand and rising supply will cause oil prices to slide slightly by the end of the decade to $80-$90 a barrel.
But while oil companies have made many large new discoveries over the past few years, including big shale oil finds in North America and Australia as well as deepwater finds in the Gulf of Mexico, that doesn't mean oil prices will fall.
In fact, according to Money Morning Global Energy Strategist Dr. Kent Moors, it's far more likely that oil prices will continue to rise over the next decade.
Moors points out what most other analysts seem to be missing – that all of the new oil finds present many challenges that will add to the cost of extraction.
"None of this new volume is light, sweet crude," Moors said. "The average wellhead costs continue to go up, and that moves its way downstream to processing, wholesale, and retail."
Forget the Kneejerk Reactions, Oil Prices Are Going Higher
With all of the concern exhibited over Cyprus' problems with banks and China's high-profile billion-dollar solar implosion, the doomsayers are once again predicting an oil price crash.
These guys must really need your money!
Each new geopolitical event is cast as the end of the world as we know it.
The fact is there is nothing on the horizon that will collapse oil prices for one very simple reason.
The prospects for oil prices are increasing, and elevating oil products along with them. Most sections of the U.S. will be testing 2008 gasoline price highs at the pump well before mid-summer.
Yes, we did see a swing down in crude futures during the initial stages of the Cypriot crisis, augmented by some short-lived negative comments on Chinese industrial prospects.
But by last Friday morning, stabilization had occurred and an oversold crude oil futures market began to move back up.
Oil Companies Hope for New Opportunity in Energy-Rich Venezuela
One of the biggest headlines recently related to oil companies was news of the passing of Venezuelan President Hugo Chavez.
"El Commandante" as he was affectionately referred to by his countrymen, at least by those who approved of his leftist policies, was 58 and succumbed to a lengthy battle with cancer.
Predictably, news of Chavez's passing has sparked ample speculation about what the future holds for Venezuela's oil industry and those oil companies looking to profit from a possible renaissance there.
Venezuela is South America's largest oil producer and an OPEC member. In what may come as a surprise to some investors, Venezuela could be called the Saudi Arabia of OPEC.
In other words, the South American nation is home to about 300 billion barrels of proven oil reserves, compared to about 270 billion barrels in Saudi Arabia. That is according to OPEC's own estimate.
Not only that, but Venezuela is home to the largest natural gas reserves in the Western Hemisphere.
Given those superlatives, it is easy to understand why some Western oil companies are cautiously optimistic about what the future may hold for them in Venezuela.
Buy, Sell or Hold: Strong Oil Prices Make Apache Corp. a Good Bet
In fact, since April 2011 Apache shares are down by 44%. Compared to its peers, that makes Apache what's known as a "laggard."
But there is more here than meets the eye, since it is very hard to find anything to nit-pick when it comes to their financials.
Fundamentally speaking, the company seems on solid ground, which is why I'm willing to buy Apache shares.
In fact, even after an $18 billion flurry of acquisitions over the last couple of years, Apache's balance sheet still remains strong while adding new layers of growth potential.
And as one of the world's largest independent energy companies, Apache continues to report healthy cash flows, strong profit margins, and has a forecasted sales growth of 8.1% for 2013.
So why haven't investors been willing to buy, even when the company appears to be doing all the right things?
The answer is two-fold: Oil prices and the skittish political situation hovering over their oil rigs in Egypt.
Why Bigger Isn't Always Better in the Oil Business
Forty years ago, British economist E. F. Schumacher wrote that "Small is Beautiful" in a famous book by the same name.
The vision champions market approaches that discount the importance of size to results, a philosophy that contrasted the notion that "Bigger is Better."
In bringing the idea of his teacher (Leopold Kohr) to a broader canvass and a wider audience, Schumacher began a debate that has revolved around the impact of technology and market size ever since.
Just last weekend, the debate renewed.
Again it was an English environment, but the subject matter would have been quite unexpected only a few years ago. This time the occasion was our annual energy consultations at Windsor Castle outside London. The debate focused on both size and profitability of oil companies in the development of new fields.
The key lesson: During expanding times in the oil business, like today, small is not only beautiful.
It is also profitable.
And it can be for you as well if you take the time to learn why…
Australia Shale Oil Discovery Continues the Country's "Lucky" Streak
Investors are well aware of the shale oil revolution in the United States. But the "revolution" does not end here; it is spreading globally to countries as diverse as China and Poland.
There is one country in particular though that may experience circumstances similar to the United States, if not greater.
I'm talking about Australia, which has often been called "The Lucky Country." That description was first penned in 1964 by Donald Horne and he actually meant it negatively at the time.
But in recent decades, the term has been given a positive spin thanks to Australia's abundance of natural resources and its geographical location near the world's biggest consumer of commodities – China.
And Australia may have struck luck again thanks to the recent announcement of a massive shale oil discovery.
The Arckaringa Basin Could Be the Largest Shale Oil Find of All Time
Over the past few days, I have released information on what could be the largest shale oil find ever recorded.
It's located in an area of Australia called the Arckaringa Basin and contains as much as 233 billion barrels (or more) of recoverable shale oil.
That's more than all of the estimated oil in Iran, Iraq, Canada, or Venezuela. And it's just 30 billion barrels shy of the estimated reserves in all of Saudi Arabia.
The discovery at the Arckaringa basin is so big it's already prompting some observers to begin talking about energy independence for Australia, much in the same way Americans did after similar discoveries in the Bakken, Marcellus, Eagle Ford, and Utica basins.
And there is one small company that controls what is shaping up to be the biggest worldwide oil project to hit in decades.
How China and Saudi Arabia Mean You Should Bet on Higher Oil Prices
As Money Morning Global Energy Strategist Dr. Kent Moors pointed out not long ago, the sky is not falling on oil prices despite what the doomsayers believe.
There are two crucial countries that are behind the recent rise in oil prices: China and Saudi Arabia.
And if these two nations keep on their current path, it will mean one thing…
Even higher oil prices in 2013. Here's why.