Dr. Kent Moors
How to Profit from High Crude Oil Prices
[Editor's Note: Dr. Kent Moors, Money Morning's global energy strategist, has been warning investors of the impending oil constriction that will drive crude oil prices well above $100 a barrel - think $150 to $200. He outlined for readers of his Oil & Energy Investor newsletter the four overriding elements in what's going to happen.]
Despite a recent price pullback, my "oil constriction" approach for how to profit from high crude oil prices has not gone away.
In fact, it is right on track.
But we need to remember that the constriction in oil availability will not hit all oil sector shares the same way.
There are four overriding elements in what is coming.
1) Crude Oil and Gas Prices on the Rise
The markets have witnessed a rise in both crude oil and gasoline prices – West Texas Intermediate (WTI) prices are up 37% since Oct. 4, while RBOB (the gasoline futures contract traded on NYMEX) is up 29% since Nov. 25.
The constriction, however, is not simply reflected in the price.
We have a very different dynamic underway than the one experienced in 2008. Three years ago, it was a speculatively driven rise in oil prices that came crashing down when an outside crisis hit (the subprime mortgage mess and the corresponding credit freeze).
This time around, the constriction results from the rapid decline in prices from the third quarter of 2008 through a sluggish leveling-off through the fourth quarter in 2009. This period produced a significant cutback in new drilling.
Consider this: The top 15 oil producers in the world have replaced barely 70% of the extractable reserves they extracted over the past three years.
With conventional production, therefore, the constriction is already in place.
However, we have moved quickly into accelerating unconventional oil production.
That is element number two.
The End of the Beginning?
The energy sector's surge over the last two days may lead some to believe that the rush is now on.
Well, not so fast.
The markets pulled back this morning.
That's expected after a run up. But we need to understand the primary concerns moving forward.
Those are direction and conviction.
The energy sector got slammed worse than the overall market as a whole when it was going down, and it advanced quicker when it increased.
So, what will happen from this point onward?
The safe answer is to suggest mostly lateral movement over the next several months. And that is what most of the TV pundits are doing.
And as usual, they are going to miss another boat.
What has happened over the last two sessions, overlooking the anticipated pullback today, is the first wave in the next move up. It is, therefore, actually the end of a beginning cycle that will put both prices and volatility for energy in general – and for oil in particular – back on the radar.
No move up in oil is accomplished by regular, easy to calculate increments.
But one genuinely new factor has emerged.
And it will dictate more of our investment moves as we get further into this event-filled summer.
Riding the Wave of Anticipation
The return of instability, marked by price acceleration both up and down (but on aggregate leading to higher price levels), will be taking place over shorter periods.
This is an important new wrinkle to understand. It introduces a novel risk element into the equation while, at the same time, setting the stage for increasing profits. Those profits will develop over shorter time periods for the investor who is capable of riding ahead of this curve.
I call this development compression, and it has a pervasive impact on how you should approach to the market.
The Strategic Petroleum Reserve Becomes a Political Football (Yet Again)
Tags: coal reserve, national petroleum reserve, natural gas reserve, naval petroleum reserve, obama strategic petroleum reserve, oil reserve, Petroleum, Petroleum Reserve, strategic petroleum reserve size
How to Profit on the Natural Gas Surplus
The recent mild winter and the unparalleled potential in new shale gas production have combined to result in a depressed pricing market for natural gas.
The rise in demand for everything from electricity to petrochemical feeder stock, liquefied natural gas (LNG) exports, and even usage in vehicle fuels, will start driving that price up over the next two years.
You already know that, of course.
We've talked about it many times before.
But now there's something else on the horizon that is likely to provide a boost to investor prospects even sooner.
Utilities, one of the main beneficiaries of the gas boom, are moving to capitalize on the accelerating transition in power generation.
And in the process, two important trends are emerging that will be of interest to retail investors.
First, the low current prices and the prospect of rapid increases in extraction rates, if the market warrants, are allowing electricity managers the opportunity to plan for multi-year cost projections.
That, in turn, is propelling the intensified replacement of aging capacity with new gas-fueled plants.
As Pacific Gas & Electric Co. (NYSE: PCG) CEO Tony Earley noted this week, infrastructure investment becomes a priority when projected fuel prices are low. The system has to be upgraded and replaced in any event, as large segments of it reach the point of "retirement."
Earley also has advanced the idea that the power industry needs to speak with one voice in its dealings with regulators and policy makers.
This need for solidarity has been reflected in comments from other leaders in the power industry as well.
As policymakers increase capital expenditure spending in infrastructure replacement and expansion, we are also likely to see a renewed interest in developing a consensus on where the next "generation of generators" is going to be moving.
And one of the drivers coming onto the scene moves right into familiar – and profitable -territory, at least for us.
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Germany Set to Invest $260 Billion in a Renewable Revolution
The moment Germany announced its highly publicized decision to phase out nuclear energy in the wake of the Japanese triple disaster; observers began to ask one very important question.
Just what energy source would replace such a huge swath of power in Europe's dominant economy?
The short-term solution had to be natural gas.
But this would make Germany more dependent upon imported energy, especially from Russia.
In that sense, the nuclear phase-out made the Nord Stream pipeline – from Russia, under the Baltic Sea, to northern Germany – absolutely essential.
Today, the first line of the twin pipeline is already in operation. The second should be on line at the end of next year (if not sooner).
Then there is the other Russian project – South Stream. This one intends to move Russian and Central Asian gas into Southern and Central Europe.
Much of that will also reach Germany.
In addition, several pipeline projects are vying for the excess production from the second phase of the Azerbaijani Shah Deniz offshore development in the Caspian Sea.
Included among these is Nabucco, a venture to bypass Russia and transport gas into the Baumgarten hub in Austria for ongoing distribution.
Nabucco has long been the European Union favorite, but it has been unable to attract sufficient supplies. Three other pipeline proposals also are attempting to secure the Caspian gas for transit to Europe.
But there is a problem for Germany in all of this.
It does not want to form an increasing dependence upon imported gas to power its economy.
And this sentiment is driving one of the biggest alternative energy revolutions in recent memory.
The German Push Toward Wind and Solar Power
The 17 currently operating nuclear reactors in the country provide about 20% of the national electricity needs. Any replacement of those plants (where capital expenses are already sunk) will add significantly to the end costs of energy.
That means a political decision following the Fukushima Daiichi disaster one year ago ends up costing the average German citizen even more to secure what is already among the most expensive electricity in the world.
Germany does have shale gas.
But the furor over nuclear power is paralleled with a similar environmental concern regarding the dangers of fracking, a process of pumping water and chemicals under high-pressure to break open the rock and free the gas.
There are now four U.S. examples of seismic anomalies resulting from the combination of fracking and deep horizontal drilling.
And they have not instilled much confidence for the markets.
Instead, what the Germans are deciding to do is already being called the biggest restructuring of the national energy landscape since the end of World War II.
The government will initiate a campaign valued at more than $260 billion to harness wind and solar power.
The price tag is staggering. It is already pegged at more than 8% of the nation's entire gross domestic product (GDP). And it could move even higher.
This will involve huge wind farm areas in the Baltic and massive new high-power transit lines nationwide. The goal is to have at least 35% of the nation's power needs generated from renewable sources by 2020.
However, the developments of this massive policy shift are even more exciting.
It is Deja Vu All Over Again in the Energy Markets
There's been quite a bit of news on whether the government will tap the Strategic Petroleum Reserve (SPR) to combat rising gasoline prices.
I get the feeling I've been here before.
In fact, I wrote about this very topic just three weeks ago. And sure enough, we had conflicting reports on the subject yesterday.
But despite what my wife Marina may think, I don't cause events in the oil markets merely by writing or talking about them.
She remains convinced that when I go on television and discuss higher oil and gas prices, my words provide energy firms the green light to raise them.
The reality is that I just know how politicians think (and panic) when it comes to the energy markets. So please, refrain from shooting the messenger.
Yesterday we also witnessed mixed messages from both politicians and the market.
Crude oil prices initially dove more than $3 per barrel in both London and New York when the story broke that there was a joint U.S.-U.K. agreement to release volume from each country's strategic reserves.
Later in the afternoon, prices shot back up quickly in New York (by that time the market had closed in London) following a White House denial that any such deal was in the works.
Still nobody inside the Beltway is claiming the idea is now off the table.
Was yesterday a trial balloon? Some junior staff member with an itchy dialing finger?
A hasty press release?
All are certainly possibilities.
But the confusion created in the aftermath of the "leak" hides one very simple, inconvenient truth.
There are few, if any, genuine options to offset rising gasoline prices.
Everything we need to do will take a few years to work out.
And it should. But you and I need to continue this conversation.
The Strategic Petroleum Reserve Becomes a Political Football (Yet Again)
With the prices of both crude oil and gasoline racing higher, it was just a matter of time before the cries began sounding to open up the Strategic Petroleum Reserve (SPR). The White House is now under renewed pressure to combat rising gas prices by releasing that oil. The problem is that the SPR was [...]
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