Crude Oil

Why The Fiscal Cliff "Deal" is Spelled P-O-R-K

Savings piggy bank

Behind the scenes of the Fiscal Cliff debate, there was plenty of f-bombing, poison pilling, and grandstanding leading up to the deal - and that was before the members of Congress and the Senate actually got serious with their usual ultimatums, followed by earnest- looking sound bites and posturing. But what gets me really riled up is the amount of "pork" contained in the bill...

Where Oil Prices Are Headed In the Face of the Fiscal Cliff

You have heard all the stories of what will happen when the U.S. economy falls over the fiscal cliff.

As I write this, it appears that will happen--at least on paper.

Of course, it will take some time for the tax increases to kick in, while the automatic spending cuts may take a month or longer.

That may make it easier for some Members of Congress to act. Since the taxes will have technically increased, it will be easier for them to vote for an artificial tax cut.

I consider this the pinnacle of absurdity.

Subjecting most Americans to this charade-making them vulnerable to cuts in paychecks, dividends, and social security benefits merely to make some political brownie points-is the height of travesty.

But here we are.

Even if there is a this weekend or Monday, nobody will know what that means for several weeks. This will drag the drama on for a while longer as the precocious children inside the Beltway refuse to play on the same ball field.

Now we all know how this will end. There will be a stopgap measure rather quickly (probably around the time most receive that first paycheck of the New Year) to prolong the process into the first quarter - right into yet another showdown on increasing the debt ceiling.

Isn't there anybody else out there as sick of this as I am?

But in the end, we are interested in what the shenanigans mean for the energy sector.

Oddly enough, gas and oil prices have acted as if the cliff were an ant hill.



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Why Japan's "Lost Decades" Are Headed to America in 2016

It's only been a little more than a week since Shinzo Abe won election as Japan's latest Prime Minister in a landslide-election victory and the pundits are already lining up telling investors to "buy Japan" because it's "dirt cheap."

The hope is that Abe's promises of fresh stimulus, unlimited spending and placing a priority on domestic infrastructure will be the elixir that restores Japan's global muscle.

As a veteran global trader who actually lives in Japan part time each year, and who has for the last 20+ years, let me make a counterpoint with particular force - don't fall for it.

I've heard this mantra eight times since Japan's market collapsed in 1990 - each time a new stimulus plan was launched - and six times since 2006 as each of the six former "newly elected" Prime Ministers came to power.

The bottom line: The Nikkei is still down 73.89% from its December 29, 1989 peak. That means it's going to have to rebound a staggering 283% just to break even.

Now here's the thing. What's happening in Japan is not "someone else's" problem. Nor is it something you should gloss over.

In fact, the pain Japan continues to suffer should scare the hell out of you.

And here's why ...

The so-called "Lost Decade" that's now more than 20 years long in Japan is a portrait of precisely what's to come for us here in the United States.

Perhaps not for a few years yet, but it will happen just as we have already followed in Japan's footsteps with a "lost decade" of our own.

The parallels are staggering.

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2013 Oil Price Forecast: Why Oil Remains a "Must-Have" Profit Play Next Year

One of the most important topics we discussed in Moscow last week were the various forecasts of where crude oil prices are likely to be in 2013.

These 2013 oil price forecasts were all over the place, owing to the high level of uncertainty on a number of basic elements.

According to the Russian Ministry of Energy, or Minenergo, the "official" government estimate has oil prices low - at about $80 a barrel in 2013.

However, there were other estimates floating about. The Ministry of Finance (MinFin) set up what can only be described as a recession approach. That figure puts oil prices at $62-$65 a barrel.

Then there was the Ministry of Economic Development (MED). MED considered both domestic and external trade considerations. The estimate coming from this ministry was lower than that of Minenergo, but at $75 a barrel was higher than that of MinFin.

Against this backdrop of competing forecasts made by battling Russian ministries, estimates from the outside including my own are much, much different-as in decidedly to the upside.

Granted, all of the non-Russian suggestions cite the three unknowns limiting the cost of crude elsewhere: the fiscal cliff, the Eurozone debt crisis, and the expected levels of productivity and demand coming from China.

Nonetheless, a strong consensus did emerge from North American and European experts during our sidebar conversations in Moscow.

The overwhelming view was that oil prices will be moving higher next year, although the continuing volatility will guarantee that this is hardly going to be a straight line advance.

Even still, there will be a number of factors that will push Brent and WTI prices as much as 20% higher next year-particularly in the first quarter.

Here's why oil will still remain a "must-have" investment next year.



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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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The Impact of Shale Oil Means the Tables Have Turned in Our Favor

The Eagle Ford shale formation lies south of our headquarters in San Antonio, Texas, giving the U.S. Global investment team a firsthand, tacit perspective on the oil and gas industry's growing natural resources phenomenon.

We've witnessed how the oil activity is boosting the local economy with solid-paying jobs, a healthy housing market and strong consumer sentiment, as oil giants such as Schlumberger and Halliburton take a bigger stake in the area.

After seven long decades of importing oil, the U.S. seems only a few years away from reversing the flow, largely from shale technology not only in Texas but several areas around the country.

In 2005, the U.S. reported net imports of 13.5 million barrels per day, or almost two-thirds of its oil needs, according to Raymond James. By the end of 2012, net imports are projected to fall to 8.6 million barrels per day, which is about half of the country's current consumption.

By 2020, the estimated gap between supply and demand narrows considerably. Take a look...

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Are the Russians on the Verge of a Major Arctic Oil Coup?

As I move into the main meetings here in Moscow, something unexpected has joined the conversations on oil prices, European pipeline prospects, liquefied natural gas (LNG) trading scenarios, and the prospects of unconventional shale.

That something is venture capital funding.

The Kremlin has developed several venture capital funds with potential state-supported investments amounting to at least $12 billion.

It may be early yet, but I see signs of where these new efforts may be directed.

You should watch out for two aspects with this story.

The first must happen in Russia.

But the second is likely to take shape in an unexpected place: Boston, MA.

Here's why. It has to do with Arctic oil.

Several years ago, then-Prime Minister Vladimir Putin declared that the under-used and under-equipped shipbuilding sector would be transformed into a global leader in the design and construction of offshore platforms and drilling rigs.

Of even greater interest was the initial challenge given at the time - to develop a whole new generation of ice-resistant platforms for Arctic drilling.

Moscow had already recognized it could arrest a serious decline in its mature Western Siberian fields only by moving out in three directions. They are:

  • Into highly promising but infrastructure-poor Eastern Siberian;
  • Onto the continental shelf; or,
  • North of the Arctic Circle.
Then the U.S. Geological Survey (USGS) issued its long-awaited Circum-Arctic Resource Appraisal (CARA).

This major multi-year effort evaluated petroleum resource potential for all areas north of the Arctic Circle (66.56° north latitude) having at least a 10% chance of one or more significant oil or gas accumulations (50 million barrels of oil equivalent or above).

CARA concluded that 84% of the total undiscovered oil and gas left in the world is sitting offshore, the bulk of it in three huge Arctic basins.

Russia, the survey concluded, controlled the largest single chunk of it.



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Put These Shale Oil Fields on Your Radar for Energy Profits

Energy companies in search of the next big shale play are scouring shale oil and natural gas fields in Oklahoma and South Dakota.

The shale oil fields in the two states remain largely unknown to energy investors.

As Money Morning reported Nov. 27, fracking technology has opened vast shale oil and gas fields that previously had been uneconomical to exploit.

With rapid growth in recent years, so-called unconventional oil has accounted for about 2 million barrels per day of production in 2012.

In Oklahoma, where oil was discovered in 1897, conventional oil production peaked in 1927, and the state's fields were thought to be exhausted.

Oklahoma's main field, the Anadarko Basin in the western half of the state, has yielded most of Oklahoma's oil and natural gas in recent years.

Now drillers are targeting the basin's Woodford shale layer.

One of the Most Unknown -and Promising - Shale Oil Fields

One of the companies drilling in the Woodford shale layer is Continental Resources (NYSE: CLR), who told Reuters the site is "one of the thickest, best-quality resource shale reservoirs in the country."

Continental is known for its success drilling in North Dakota's Bakken, one of the best-known shale oil fields.

At 3,300 square miles in area, the Woodford shale layer is smaller than the 13,000-square-mile Bakken shale oil field or the 5,000-square-mile Eagle Ford field in Texas. But the Woodford shale reservoir is thicker, at 150 to 400 feet thick, compared with Eagle Ford at 100 to 250 feet and Bakken at 10 to 250 feet.

The U.S. Geological Survey estimates Woodford contains 400 million barrels of recoverable oil. The site is also believed to contain 250 million barrels of condensates and lots of natural gas.

Continental Resources is one of the bigger players in the Woodford reservoir. The company has increased its acreage holdings in Woodford at an even faster rate than it has in the Bakken. From 2009 to October 2012, Continental's net acreage in Woodford rose 1135 to 316,000 acres while its net acreage in the Bakken increased by 51% to 915,000 acres.

Shale Oil: Moving South from the Bakken

Another developing shale oil play that is relatively unknown - the Tyler formation - is in the Dakotas.

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These Signs Point to Higher Oil Prices in 2013

On Monday, oil prices climbed above $90 for the first time in over a month, as encouraging data from China subdued concerns about going off the fiscal cliff.

Those worries have helped keep oil prices mired in the $85-$90 range after flirting with $100 in mid-September.

But positive manufacturing data from China, the hopes for a fiscal cliff resolution and a subsequent market rally, along with the ever-present risk of violence and chaos in the Middle East, are all sending oil prices higher today.

Those factors, as well as several others, should keep the pressure on for higher oil prices.



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Why Oil Prices Can't (and Won't) Collapse

The markets opened again yesterday after the tragic storm across the East Coast.

In a world ravaged by storms, geopolitical tensions, rising demand, supply concerns, and increasing costs, it's important to know what's really driving oil prices moving forward.

The most important thing you can know is that increased market volatility is not going away. The challenge, of course, is to harness these volatile forces in order to come out ahead in the future.

That's the subject today. First I need to set the picture of where we are today.

There has been persistent talk from the usual sources that the price of oil will collapse, along with a range of field support and midstream service providers.

There is just one problem with this argument.

It's just not going to happen.

Don't get me wrong. I am not suggesting that the accelerating volatility in oil prices will point only in one direction, or that the trajectory is straight up. This is not going to be the first half of 2008 revisited.

Rather, we will continue to experience intense movements over shorter intervals. This is what statisticians call kurtosis - greater amounts of volatility occurring in shorter cycles.

Despite the overall upward trend demanded by indicators, these more compact movements will occasionally go in either direction.

That means we can experience downward spikes restraining oil prices over shorter durations. Nonetheless, the overall medium-term dynamic continues to move up. This is producing what I call a "ratcheting" effect: The market prices will undergo downward pressures within a basic upward tendency.

So where are oil prices going?



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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.
But it really doesn't work this way anymore. While such factors are not completely irrelevant, they are also not calling the shots.

There are several factors contributing to this New Normal, but I will be restricting my comments this morning to just three.

They are:
  1. The balance between conventional and unconventional production;
  2. Increased market volatility; and
  3. Global geopolitical matters.
So let's get started.

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There is Nothing the Shorts Can Do About Higher Oil Prices

After another pricing pull back of almost 10% earlier this week, crude oil prices rebounded on the back of an unlikely source.

A Spanish deputy prime minister presented a budget. The proposal was hardly earth shattering.

It detailed planned expenditure cuts but provided no details on the other shoe that has to fall - tax increases. Given that a main element in the Eurozone crisis continues to be on the fiscal side, tax increases will have to follow.

The difference cannot be made up only from program cuts. The budget announcement, therefore, appears simply to forestall the inevitable.

Nonetheless, a dry news conference in Madrid was the latest excuse for bulls to take over and drive the oil price (and the markets) higher.

This is merely the latest example of an immediate overreaction to developments.

Yes, it is important that Spain is positioning itself to benefit from the new paper buyout plans being orchestrated by the European Central Bank (ECB).

Unlike the basket case of Greece, the Spanish have made an effort to clean up their act prior to a bailout request.

Next up are the stress test results of Spanish banks. An independent audit show Spanish banks need $76.3 billion.

And while there is some question over whether the test is a valid indicator of overall banking sector weakness, there is no doubt what the government's objective is.

This will not be an across-the-board rescue of the banking sector because Madrid does not want a full-blown rescue from the EIB.

That would put the entire Spanish banking industry under pan-European oversight. Now it may ultimately come to that. But before officials capitulate, they will orchestrate a smaller number of comparatively healthier financial institutions (at least on paper).

This hardly ends the crisis.

But it does indicate that a strategy is taking shape. And that is all the bulls needed to charge forward.

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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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