Crude Oil Prices
US OIL FUND ETF
NYSE: USO
May 17
no chart
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Last price34.21Prev Close33.87
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Change0.34% Change1.0%
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Open34.23Volume5,677,900
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Day Low33.86Day High34.29
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Bid34.17Ask34.18
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52 Wk Low29.4652 Wk High36.84
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Market Cap19,675ExchangeNYSE
Today
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How the Biggest Investors Are Playing the "New World Order" in Oil and Gas
Thanks to the fracking boom of the last few years North America is now on a path toward energy self-sufficiency.
In fact, the International Energy Agency (IEA) now believes that, thanks to astonishing growth in oil and natural gas output, the U.S. could even become a net exporter of natural gas by 2020, and even net-energy self-sufficient by 2035.
According to IEA estimates, the U.S. is already the world's No. 2 natural gas producer.
The IEA has also indicated that increasing production from Canadian oil sands means North America could become a net oil exporter. And by 2035, it's forecast that nearly 90% of Middle Eastern oil exports will find a home in Asia.
These tectonic energy shifts have not gone unnoticed by OPEC and large state-owned energy companies. Major Asian and Middle Eastern interests have already made major acquisitions in Canada and the U.S., with an eye towards many more.
Every day it seems the energy scene is changing at a lightning pace, creating a new world order in energy.
So to gain further insight into this rapidly changing climate, I recently sat down with energy consultant Peter Barker-Homek, a true energy insider.
Peter is the founder of Eta Draco, an advisory firm focused on building operations and capital structures to provide for enduring growth and to anticipate cyclical downturns for small- to medium-sized enterprises.
Mr. Barker-Homek knows more than a thing or two about the global energy sector.
As the previous CEO at TAQA, the Abu Dhabi national energy company, and a seasoned energy executive in a Fortune 20 company, Peter has completed $40 billion in energy-related transactions.
He has more than 20 years' experience in major markets worldwide, and even served in the U.S. Department of State and the U.S. Marine Corps as an Officer/Pilot. He has appeared on CNN, BNN, CNBC, Sky News, Bloomberg TV, BBC Radio, Al Jazeera, and CrossFire, and is regularly cited in industry journals and periodicals.
I think you'll enjoy what Peter had to say during our recent Q&A.
If I did my job right, some of it may even shock you.
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Oil Prices Have Dipped, Just Don't Expect These Discounts to Last
Markets declined significantly in the wake of last Tuesday's Presidential election. In the two days that followed the S&P shed almost 3.6%.
But now the energy sector in general - and oil in particular - is poised for a major move up.
As I am writing this, six of the nine elements I regularly monitor to determine oil prices are pointing north.
The relationship between refinery margins (the difference between what it costs to produce oil products and the price that can be charged at the wholesale level - where the refiners make their profit) and inventory in gasoline are also indicating an oversold market, even without factoring in the East Coast double whammy of Hurricane Sandy and a Nor'easter.
The underlying dynamics, therefore, haven't changed. If left to its own devices, oil prices should be moving up (and our profits right along with it).
So why the dip?
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Oil Prices: As the WTI-Brent Spread Widens, Refineries Are Set to Advance
Brent and WTI crude oil prices have been on a downward trajectory. Recently Brent had declined for seven consecutive trading sessions while WTI had been down for five.
Given the importance these benchmarks have in pricing crude worldwide, it is useful to review what they are before talking about their widening spreads.
Brent and WTI (West Texas Intermediate) are the two principal crude oil price benchmarks of global trade. Brent is set in London, WTI on the NYMEX in New York.
As I have observed in Money Morning on a number of occasions, neither benchmark actually reflects the quality of the oil traded worldwide.
On average, 85% of the oil in the international market on any given day is more sour (having a higher sulfur content) than either of these benchmarks. That means the actual trades are done at a discount to the price of one or the other of these standards.
Both are denominated in dollars, the currency in which virtually all oil consignments internationally are priced. That certainly is one primary reason for their continued use.
In addition, the daily liquidity of futures contracts traded in the world's two largest investment locations is yet a reason for their use.
Finally, with more than 200 benchmark rates for crude existing throughout the world, most having insufficient volume to constitute a basis for oil prices, there needs to be yardsticks to determine pricing differentials and swaps.
Those common yardsticks should be the most liquid and highest volume trading contracts available.
Brent and WTI fit the bill in all of these aspects, despite the fact they don't reflect the lower quality of most oil traded.
Oil Prices: Global Markets Favor Brent Crude
Still, the most interesting development since mid-August 2010 has been the following: despite representing lower quality oil, Brent has been trading at a premium to WTI.
Of the two, Brent has more sulfur content. That should result in a lower price rather than higher comparative price.
Actual trading conditions prompt a spread in favor of Brent for several reasons.
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Why Oil Prices Are Entering a "New Normal"
One of the things I have learned from almost four decades of doing this is that oil and gas specialists know a great deal about what they do for a living.
However, few of these specialists really understand enough about what the person to the right or left of them does. This tends to breed tunnel vision.
And these days it has become a serious problem.
That's because what is now hitting the oil and gas markets requires a more expansive and integrative understanding of what is actually taking place.
The truth is energy markets are evolving.
We are entering a period in energy and oil prices that I have begun calling the "New Normal."
You see, a volatile, dynamically changing combination of factors now undermines the traditional way of viewing oil and gas markets.
And it is about to get a whole lot more unnerving for the average analyst who still insists on pushing square pegs into round holes.
Unfortunately, for the old school aficionado, we are rapidly moving into new territory. Here, market machinations are occurring that defy the "traditional" explanations.
Oil Prices and the Talking Heads
You know what I mean by "traditional."
The talking heads on television try to explain the latest spurt or dive in oil prices by relying on the same trite and tired lineage of explanations.
In just the last month, we've seen movements in energy prices justified solely on the following factors:- A supply glut in Cushing, Okla.;
- Fluctuations in the euro-dollar exchange rate;
- The European credit crunch;
- The latest unemployment figures;
- Inflation;
- Manufacturing, housing, or production figures.
There are several factors contributing to this New Normal, but I will be restricting my comments this morning to just three.
They are:- The balance between conventional and unconventional production;
- Increased market volatility; and
- Global geopolitical matters.
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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.
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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.
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