Natural gas prices are on the rise, but natural gas stocks have failed to respond. Wait, if we look at what happened about 10 years ago… oh, wow… Read more...
If you can sell something for $4 here and $16 somewhere else, where would you sell it?
Well, the shale gas we're producing in North America has buyers in Asia willing to pay 4x the going price here. That spells a lot of opportunity for companies helping to get liquefied natural gas (LNG) across the Pacific.
See our top choices for this nascent boom here...
It's no secret America has been in the midst of a natural gas revolution.
The technological advancement of fracking is causing nothing less than a full on shale boom, opening up amazing new profit opportunities if you know how to invest in natural gas - which I'll get to later.
Americans worried about how rising oil prices might affect prices at the pump are about to get blindsided by looming gas tax hikes that almost guarantee higher gasoline prices.
And it's not just state governments looking to shake down American motorists.
Alarmingly, the International Monetary Fund (IMF) has called for the U.S. government to increase the current federal gasoline tax of $0.184 per gallon by a whopping $1.40.
In a March 26 speech, IMF Deputy Director David Lipton said the gas tax hike would pay for social programs around the world as well as to save the environment.
"The time has come for subsidy reform and carbon taxation," Lipton said.
This federal gas tax hike, if imposed, would add $14 to a typical 10-gallon fill-up and hundreds of dollars to the annual cost of driving.
Fortunately for U.S. drivers, few in Washington support the IMF proposal.
"Higher gas prices hit those who can least afford it the most as American families are forced to pay a larger percentage of their income on higher energy prices," Rep. Fred Upton, R-MI, chairman of the House Energy and Commerce Committee, told Fox Business. "Drivers across the country are already struggling to pay up to $4.00 a gallon for gas, and further price increases at the pump could be devastating to low- and middle-class families and disastrous to our economic recovery."
Now if only state legislatures felt the same way...
But while U.S. oil production continues to rise, and gasoline consumption continues to fall, gas prices have remained stubbornly high: The national average was about $3.65 last week.
And that trend is expected to continue, with the United States surging past Saudi Arabia as the world's largest producer of crude oil as soon as 2020. Meanwhile, U.S. gasoline demand is at its lowest in more than a decade - down to 8.7 million barrels a day.
Facts like that have led some pundits to predict falling oil prices. Last year, some politicians were promising that stepped-up U.S. oil production could lower gasoline prices to $2.50 a gallon.
Frustrated U.S. drivers struggling to cope with high gas prices were eager to believe such promises, no matter how unlikely.
Unfortunately, all that new U.S. oil, while helpful in some ways, will not have much effect on gas prices - either now or in the foreseeable future.
"The problem is that prices are not just reflective of new supplies, either too much or too little," explained Money Morning Global Energy Strategist Dr. Kent Moors. "By focusing only on how much is there, these analysts provide a fundamentally distorted view of the oil market."
The average price of gas in the United States is still below the 2012 average of $3.63 for a gallon of regular, but that won't be true for long.
Gas prices have risen every day for three weeks, and motorists are starting to wonder when the surge will end.
Nationwide, the average price for a gallon of regular gas is up 26.3 cents, or about 8%, this year to $3.55, the highest level since the end of October.
And the 17.4-cent spike in the average price of gas between Jan. 28 and Feb. 4 was the largest weekly increase in almost two years.
Unfortunately, it's unlikely gas prices will drop anytime soon.
As the hurricane hit land yesterday (Tuesday), oil and gas production in the Gulf of Mexico had virtually shut down. Oil companies now must wait out the storm before they can assess any damages.
Energy firms in the region have suspended 93% of the typical U.S. oil production and 67% of natural gas in the gulf, according to a report released Tuesday by the Bureau of Safety and Environmental Enforcement. Companies have evacuated 503 platforms and 49 rigs in the region.
In addition, gasoline refiners have shut down approximately 6.7% of total U.S. refining capacity, a move that will lead to reductions in gasoline inventories and short-term price increases. Exxon Mobil Corp. (NYSE: XOM),Phillips 66 (NYSE: PSX)and Valero Energy Corp. (NYSE: VLO)all reported yesterday that they have temporarily shuttered Gulf Coast refining operations.
But Hurricane Isaac's disruptive presence isn't the only strain on the U.S. refining network. There's another major catalyst triggering higher gas prices.
Over the weekend, tragedy struck the second-largest refinery in Venezuela.
An explosion and fire on Saturday at the Amuay refinery in Venezuela killed 48 people, wounded hundreds, and destroyed hundreds of nearby homes. It is the deadliest refining accident in more than a decade.
The government-run Petroleos de Venezuela (PDVSA) owns the plant, which can process 645,000 barrels of oil a day but has been forced to suspend operations.
Hurricane Isaac already has forced several energy giants to shut down major Gulf oil and gas projects until the storm passes. That's going to spell higher gas prices for U.S. consumers.
The emergency response will be the largest challenge to the U.S. energy sector since 2008, when Hurricane Gustav and Ike struck the region. Both hurricanes caused month-long disruptions at off-shore facilities and damaged a number of midstream operations in processing, pipeline, and storage along the coast.
By Monday, the U.S. Bureau of Safety and Environmental Enforcement reported that daily oil production in the Gulf was down 78% and natural gas production down 48%. Energy producers including Royal Dutch Shell Plc (NYSE ADR: RDS.A, RDS.B), Chevron Corp. (NYSE: CVX) and British Petroleum (NYSE ADR: BP) have evacuated more than 346 platforms and 41 rigs.
More shutdowns are expected on Monday and Tuesday as the storm gains strength.
"There's panic right now that this could stage a direct hit on New Orleans or the Chevron refinery in Pascagoula [Mississippi]," Tom Kloza, chief oil analyst for the Oil Price Information Service, told ABC 15 News in Arizona. "The refineries, once they're within 24 hours of either tropical storm or hurricane force winds, they have to start a shutdown.
British Petroleum shut down four oil and gas platforms in the Gulf of Mexico on Sunday and evacuated all of its workers. The shutdown includes the evacuation of Thunder Horse, the world's largest production semi-submersible with a production capacity of 250,000 barrels of oil a day and 200 million cubic feet a day of natural gas.
The company is still under obvious scrutiny of its offshore projects given the Deepwater Horizon spill in 2010 which killed 11 workers and gushed millions of gallons of oil into the Gulf.
It appears those concerns are going to be short lived.
According to a report by the IMF this morning, Chinese GDP will rebound strongly to 8.8% in 2013, up from a dip to 8.2% in 2012, propelled largely by increased domestic consumer consumption.
That's important to note since the Chinese also need reliable energy sources to continue this remarkable, ongoing boom.
After all, China needs to procure oil supplies from around the globe to facilitate this sort of growth.
How can the price of oil be declining, yet the price of gasoline remain so high?
At close of trade yesterday, the West Texas Intermediate (WTI) benchmark futures crude oil contract for the near out month in NYMEX trade had declined 2.6% for the week and 4% for the month.
However, the same contract for RBOB (Reformulated Blendstock for Oxygenate Blending) - the NYMEX gasoline futures standard - was up 1.6% for the week and 4.2% for the month.
Normally, we expect that movements in the crude oil price, as the single-largest component in oil product prices, would pretty much dictate where gasoline is headed.
And in normal circumstances, that is usually the case.
Welcome to the Unusual Pricing CaseThe current gasoline phenomenon results from several factors:
- Refinery capacity utilization;
- The continuing outsized spread between WTI and Brent oil prices in London; and
- The mix of increasing unconventional domestic oil flow (shale, heavy, tight oils produced in the U.S., synthetic oil from oil sands coming down from Canada); and
Put simply, while we are using more of this new "replacement oil" than we ever have (a good thing for those concerned about reliance on imports from abroad), its use is also adding to the price at the pump.
Of greater importance, however, is the second element: the WTI-Brent pricing environment.
We have talked about this spread on a number of previous occasions. Brent is again selling higher by about 20% to the price of WTI.
That's important when factoring in the actual cost of the feeder stock for refineries.
While the WTI price has been going down (until this morning), Brent has been more subdued. In fact, the Brent price is down only 0.5% over the past month and is slightly higher (also about 0.5%) over the past week.
This year, the U.S. market is likely to be importing on average about 45% to 47% of what it needs on a daily basis. Only a few years ago, that market was dependent on imports for two-thirds of its requirements.
Additionally, American domestic daily production will be close to 10 million barrels, a level not seen since the mid-1990s. That is a result of the acceleration in unconventional extractions in places like the Bakken in North Dakota, the Monterey in California, and Eagle Ford in Texas, as well as for prospects for new basins like the Utica in eastern Ohio.
There's another important question that needs to be asked at this point.
But while that assurance managed to siphon a few dollars off of oil futures, the reality is there's nothing Saudi Arabia - or anyone else, for that matter - can do about rising oil prices.
In fact, crude is still on track to reach $150 a barrel by mid-summer.
As Saudi Oil Minister Ali Naimi pointed out last week, current oil supplies already exceed global demand by 1 million-2 million barrels per day.
For its part, Saudi Arabia is already breaking its own OPEC-imposed production quota limit, churning out about 10 million barrels of oil per day - close to its 12.5 million barrel capacity.
Yet the effect of that production has been negligible.
Oil is still trading at $106 a barrel on the NYMEX - something that has clearly flummoxed the world's largest oil producer.
"I think high prices are unjustified today on a supply-demand basis," said Naimi. "We really don't understand why the prices are behaving the way they are."
Naimi and his colleagues may not understand oil's price gyrations, but Dr. Kent Moors, an adviser to six of the world's top 10 oil companies and energy consultant to governments around the world, does.
"Despite the excess storage capacity in both the U.S. and European markets and the contracts already at sea, oil traders set prices on a futures curve," said Moors. "In a normal market the price is set at the expected cost of the next available barrel. During times of crisis, on the other hand, that price is determined by the cost of the most expensive next available barrel."
And with tensions with Iran running high, we are currently in crisis mode. Pushed to the brink by Western sanctions, Iran has threatened to close the Strait of Hormuz - the narrow channel in the Persian Gulf through which 35% of the world's seaborne oil shipments and at least 18% of daily global crude shipments pass.
If Iran closes the Strait of Hormuz, crude oil prices will pop by between $30 and $40 a barrel within hours. Should the strait remain closed for 72 hours, oil trading will push up the barrel price to $180 in New York, and closer to $200 in Europe.
The situation is further complicated by potential military conflict - such as an Israeli air strike on Iran's nuclear facilities.
And with indications that Iran will have the ability to develop nuclear weapons in the next 18 to 24 months, Western powers have apparently shifted their focus from halting Iran's nuclear program to sowing instability in the country with the hopes of catalyzing a regime change.
So what does that mean for investors?
That's higher than the average for all of 2011, which was the priciest year ever for gasoline. And what's worse is they're only going higher from here.
But if you think that investing in oil majors will help you overcome the sting of high gas prices this summer, think again.
While prices for both gasoline and crude oil have surged more than 10% this year, stock prices for oil majors like ExxonMobil Corp. (NYSE: XOM) and Chevron Corp. (NYSE: CVX) have been flat.
The dividends these companies pay won't make a dent, either.
It would take the average American something along the lines of a $20,000 investment in a stock that yields 3% to compensate for the surge we've seen in gas prices.
One reason these stocks have floundered is that the recent rise in oil prices has largely been the result of political tensions in Iran, rather than increased demand for oil.
Another is that President Obama has Big Oil subsidies in his crosshairs as he heads into this year's election.
Energy lobbyists have flooded Capitol Hill and Republicans have rallied to the defense of oil companies, but the November election will ultimately decide the fate of the $4 billion of subsidies oil majors get every year.
With so much money at stake, investors are rightfully wary of companies like Exxon and Chevron.
Still, that begs the question: If big oil stocks offer no respite from high gas prices, where can investors turn?
One solution is to invest in the United States Gasoline Fund LP (NYSE: UGA).
UGA invests in futures contracts on unleaded gasoline traded on the New York Mercantile Exchange (NYMEX). It's already up 18% this year.
But there's still an even better option, and that's
Average gas prices currently are about $3.69 according to AAA's Daily Fuel Gauge Report. That's higher than the average for the whole of 2011, which was the priciest year ever for gasoline.
The average price for U.S. gas has climbed more than 10% in just the past two months. This suggests a trajectory that could produce a spike of 60 cents a gallon or more by May.
"I actually believe that prices will be moving higher than 60 cents a gallon on average," Money Morning energy expert Dr. Kent Moors recently told Executive Editor William Patalon III. "By mid-summer, in fact, we could see $5 a gallon being reached in certain regions of the U.S. market."
Here's why we could be facing the most painful year at the pump - and how you can offset record-breaking gasoline costs.
What's Driving U.S. Gas Prices to $5 a GallonUsually, higher gas prices result from low supply and high demand, but that's not the case this year. Even with consumption growing in emerging markets like China and India, the current surge in gas prices isn't based on increased demand for crude oil.
In fact, according to Tom Kloza, chief oil analyst for the Oil Price Information Service (OPIS), demand for oil is at its lowest point since April 1997.
Instead, there are a new set of factors pushing U.S. gas prices higher, including:
The cost to buy the "clean energy" is collapsing as crude oil, a product that needs refining, stays above $100 per barrel.
In fact, this chart for natural gas is what I call a Widow Maker.
Take a look...
As you can see, it shows the price of the March 2012 NG contract over the past two years - and it's not pretty.
Why Natural Gas Prices Will Continue to DropThe last time I wrote about natural gas for Buy, Sell or Hold was November 2010.
At the time, natural gas was about to start its most seasonally bullish period of the year. I recommended a multi-month trade with an exit by the end of the March 2011 contract.
However, this year is completely different. Natural gas has collapsed in price instead of climbing during the peak winter cold months.
While it's been a warmer than normal winter across the United States, especially in the Snow Belt, this price drop has more to do with U.S. production rising on a year-over-year basis than it does the weather.