crude oil investing
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A 795,000 Mile Long Pipeline to Big Energy Profits
At the request of a major player in oil and gas pipelines, I was given a major task.I had to estimate how much of the U.S gas and oil infrastructure needs to be replaced by 2025.
Then I needed to estimate the extent of additional connectors that would be needed to handle new domestic hydrocarbon developments.
And you thought Super Bowl Sunday was a lot of pressure.
I have done these estimates before… but something different popped up this time around.
Each time I crunched the figures, a new record amount emerged. Now while my client is in the tubular business, the sector that provides the metal needed to construct pipelines. His interest was straightforward enough – what volume is his company likely to see in the next 12 years?
Well, there are two dynamics here.
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The Doomsayers Are Wrong About Oil Prices
The stock market is not the only thing that is up. Crude oil prices have jumped as well rising faster than the S&P for the past month.
West Texas Intermediate (WTI) next month futures contract prices for crude oil on the NYMEX increased again last week. That marked the seventh consecutive week oil prices have gained, the first time that has happened since 2009. Overall, WTI pricing level has risen 11% since mid-December.
Now all of this means something pretty important. As we've known for a while now, the oil market has been oversold with values unusually low. This has largely resulted from concerns over demand related to the ongoing recovery/recession debate.
However, that debate has never been a particularly genuine one, certainly not for the last two quarters.
Yes, if we fell off a fiscal cliff or ran into a budgetary wall or failed to raise the debt ceiling and the living room chandelier fell on our heads there would be some substance in the Chicken Little approach to market analysis.
But we haven't, and, we won't.
With Congressional approval ratings just above those of Attila the Hun, they will slink in, kick some cans down the street, and slink out. That means the penumbra behind which the doomsayers have operated is no longer worth the smoke and mirrors it is based upon.
Here's why...
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The Trajectory is for Oil Prices to Rise
Crude oil and gasoline futures contract prices moved down yesterday, as the market took a breather from an accelerated upturn.
But the overall medium-term trajectory for oil prices no longer appears to be in doubt.
As I have indicated on several occasions recently, the downward movement in May and June was an overreaction to softness in the sector, with the ultimate slide over twice as large as any objective reading of the fundamentals would justify.
We are now witnessing a return to a "normal" oil market. That doesn't mean a lack of volatility or a narrow range of trading.
This normal is hardly boring.
These Three Factors Determine Oil Prices
What it does mean is that oil prices will be determined by three factors:
- Supply and demand;
- The spread between benchmark crude grades; and
- Geopolitical tensions and events. Here, we are considering matters we've discussed here a number of times.
That results in something I have discussed previously - a sort of "cart leading the horse."
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Why Crude Oil Prices are in Steep Retreat
Oil prices sank to their lowest level in eight months Wednesday and the trend continues.
Crude oil for August delivery fell yesterday (Thursday) below the $80 line to $78.20 a barrel on the New York Mercantile Exchange.
Oil prices breaking the $80 line can have a psychological impact on traders, which could send oil spiraling even further.
"Oil is participating in the broad decline of equities and commodities," Rich Ilczyszyn, chief market strategist and founder of Iitrader.com in Chicago, told Bloomberg News. "We broke an extremely key level for oil, the previous monthly low around $81."
Oil prices fell more than 3.5% the day after the Fed announced a disappointing extension of Operation Twist.
The commodities market, measured by the S&P GSCI Spot Index, entered into a bear market yesterday, off 22% from its highest close of the year on Feb. 24.
Many experts think oil is reaching a bottom - but there are other factors still in play.
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The Top Five Eagle Ford Shale Oil Stocks
The shale oil boom is turning out to be even bigger than anyone predicted.
Recently Money Morning told you about the Bakken oil shale boom. The Eagle Ford shale oil formation in south Texas is nearly as large, and production there is ramping up rapidly.
Eagle Ford is among the largest U.S. shale oil deposits, with recoverable reserves estimated as high as 7 billion to 10 billion barrels.
But Eagle Ford is also "liquids-rich." That means it has a high concentration of oil versus gas -- a major attraction at a time when oil prices are high and natural gas prices are at historic lows.
Many oil companies are eager to get in on the action at Eagle Ford, and expectations are running high.
"We are evaluating a series of projects ... that could literally double our company's earnings over the next few years," Curt Anastasio, CEO of NuStar Energy (NYSE: NS), told Reuters.
Another oil company CEO, Bill Klesse of Valero Energy Corp. (NYSE: VLO), thinks Eagle Ford could have an impact even beyond bigger profits.
"It's going to back out sweet crude imports into the United States, and that's going to happen by 2014," Klesse predicted, speaking at Valero's annual meeting earlier this month.
Indeed, the statistics coming out surrounding the Eagle Ford shale oil operations are impressive.
Data from the Texas Railroad Commission, which regulates energy in the state, tells an amazing story. Shale oil production increased nearly seven-fold from 2010 to 2011, from an average of just less than 12,000 barrels a day to about 83,400 barrels a day.
And that could explode to 500,000 barrels a day by the end of 2012, Klesse said, with output expected to double to 1 million barrels a day "in the next few years."
Impact of Eagle Ford Shale Oil Underestimated
Eagle Ford has progressed so quickly that a forecast of its economic benefits became outdated almost as soon as it was issued last year.
A study by the Center for Community and Business Research at the University of Texas San Antonio's Institute for Economic Development in early 2011 projected the Eagle Ford formation would directly and indirectly contribute $21.5 billion and 68,000 full-time jobs to the 20-county South Texas region by 2020.
Last week UTSA released a follow-up study.
It found the Eagle Ford contributed $25 billion to the local economy in 2011 -- $3.5 billion more than the 2020 projection.
The new UTSA study says Eagle Ford will pump about $62.3 billion into the local economy by 2021. The job creation number increased to nearly 117,000.
"We view the Eagle Ford activity as an economic opportunity of a lifetime," said Mario Hernandez, president of the San Antonio Economic Development Foundation. "The key goal is the increase in investment and jobs. And if the communities will partner with the private companies that are creating these jobs, it can be a win-win for everybody."
Growth that outruns forecasts is good news for investors. Money Morning has sorted through the many choices to zero in on five Eagle Ford shale oil stocks that could do particularly well:
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