Oil Prices

Oil Prices Due to Rise With Iran Oil Embargo Looming

After an abysmal May, oil prices might be at their low.

From May 1 to June 1 crude oil prices fell 21.8% from $106.50 to $83.23 a barrel, the steepest monthly drop since December 2008.

One week later oil is still hovering around the $83 mark. But why is oil still down?

Oil has also been hampered by weaker than expected economic reports in the United States, suggesting that the world's biggest economy is still struggling in its recovery.

Also the Eurozone debt crisis has had a strengthening effect on the U.S. dollar, which has helped push oil prices down as the dollar is the global currency for oil.

But many experts say the rise in oil prices is inevitable. From a projected 25% increase in global demand by 2015 to the possibility of Iran closing the Strait of Hormuz, there are many factors in play here.

As Money Morning's Chief Investment Strategist Keith Fitz-Gerald stated, "demand isn't the only driving force in oil prices." Also contributing, he says, "are geopolitics, supply constrictions, wars and tyrants with their hand on crude spigots."

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Oil Prices: The Best Oil ETFs for Any Move in Crude

Crude oil prices have been hammered of late.

The cost of oil fell 21.8% between May 1 and June 1 - from $106.50 to $83.23 a barrel - the sharpest monthly drop since December 2008.

A few analysts blame disappointing economic news and stagnant U.S. demand for the short-term decline.

But most think crude has now found a bottom and will likely head higher for the remainder of the year - perhaps a whole lot higher.

Actual oil price estimates range from a fairly conservative average of $104 a barrel, as forecast by the U.S. Energy Information Association (EIA), to a turmoil-driven possibility of $200 a barrel.

Either one represents a substantial profit opportunity for energy bulls.

However, chasing those profits by investing directly in oil can be both a costly and risky proposition.

The standard New York Mercantile Exchange (NYMEX) futures contract for West Texas Intermediate (WTI) crude represents 1,000 barrels of oil, worth roughly $84,000 at this week's prices.

That means a $1 per barrel change in oil prices means a gain or loss of $1,000. What's more, the initial margin requirement to purchase (or short) one contract is currently $6,210.

How to Invest in Oil Without Buying Futures

If that sounds a bit rich for your blood, don't fret - there are several alternatives to futures.

The most attractive is one of the exchange-traded funds (ETFs) designed to closely track the changes in the price of oil.

These funds can be purchased through your regular broker - no commodity account needed - and you can get in the game with a 100-share lot for as little as $2,400 (or half that if you buy "on margin"), depending on the fund you choose.

At last count, there were 20 oil-price ETFs traded on U.S. and Canadian stock exchanges, and an equal number listed on the London Stock Exchange.

But be warned, many of them are fairly new and still lack the liquidity needed to be good trading vehicles. Some are better than others.

In fact, at least four of them have enough daily volume to allow easy entry and exit points, while also offering the potential for profit regardless of which way the price of oil moves.

The two most straightforward choices for a simple bullish play on oil are:

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My Strategy for Uncertain Times in Energy

There has been no shortage of red ink in the market lately.

Paltry new jobs figures (69,000 new jobs, less than half of what was expected) have combined with the ongoing mess in Eurozone and lagging figures from China to sap investor confidence.

This latest action will further depress oil prices, as the rash of bad news translates into even more knee-jerk projections of reduced demand.

Of course, it's much too early to make such predictions based on the news, but the pundits do it all the time.

In any case, we are now in a downward movement that will end only when the market manipulators say so.

When this happens, individual investors always take it on the chin.

That's why I want to take a moment today to outline for you the strategy I use for my Energy Advantage and Energy Inner Circle subscribers.

Of course, if we could time the market, or invest in perfect hindsight, we wouldn't need an investment strategy.

But while some of the largest investment banks are getting it (very) wrong these days, crystal balls seem to be in short supply.

So what should we do?...

Well, there are three overriding considerations you must keep in mind when approaching the energy sector in an environment like this.

  • First, know that this, too, shall pass. Take a deep breath and relax.
  • Second, keep your power dry. There is no point in chasing uncertain shares in an uncertain market, simply because some talking head on TV says they are undervalued. In the current situation, almost 80% of the shares I follow are well below market value. However, until the market finds equilibrium (something it always does, by the way), the undervaluation means little. Nibble when you feel targets are cheap enough, but never go all in.
  • The third point is the single most important thing to remember here. A situation like this one demands that you preserve your investment capital. Uncertainty is always the mother of discretion. The energy sector has been hit harder than the market as a whole for much of the last six weeks. That means you need to set up an exit strategy and stick to it.

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Oil Price Forecast: Expect Oil Prices to End the Year Higher

Forecasts for oil prices in the second half of 2012 and on into 2013 are varied, but there's one point on which virtually all agree: Oil prices won't be going down.

One reason is that oil prices have already dropped substantially in recent weeks.

In fact, oil futures - as measured by the July New York Mercantile Exchange (NYMEX) contract for West Texas Intermediate (WTI) crude - closed below $90 per barrel last week, the lowest level for an active contract since October 2011. That's down $17 a barrel since the beginning of May.

Two factors have contributed to the decline in oil prices:

  • A modest increase in U.S. crude supplies - up 3.8% in April from March levels and 1.5% from a year ago - primarily due to continued low demand as a result of the slower-than-expected economic recovery.
  • Increasing strength in the U.S. dollar - the global pricing currency for crude oil - due to safe-haven buying in response to continued concerns over Eurozone instability.

Oil Prices Continue to Climb

Longer-term, however, both of those situations should stabilize, and then reverse - meaning current oil price levels will likely serve as a base for a rebound in the second half of the year, continuing into 2013.

Even so, the leading "official" sources for oil-price forecasts aren't projecting major spikes, either.

The U.S. Energy Information Association (EIA), in its most recent report issued May 8, predicted prices for WTI crude will average about $104 a barrel for the rest of the year, and that costs to refiners for all crude - domestic and imported - will average $110 a barrel.

The WTI number is down $2 a barrel from March estimates, but $9 a barrel higher than the 2011 average, while the refiners' cost figure is up $8 from 2011.

The American Petroleum Institute (API), a trade organization of more than 500 oil and natural gas companies, didn't issue price forecasts for crude in its most recent (May 18) report, but noted that increased domestic production, slightly higher crude oil stocks (374.8 million barrels) and lower imports in April should serve to keep prices stable to modestly higher going forward.

API also expressed optimism that rising crude production in North Dakota, which hit 551,000 barrels per day in March, and a possible reversal of President Obama's rejection of the Keystone Pipeline project could keep price hikes in check for the remainder of the year.

Such optimism wasn't nearly as prevalent among many private analysts and industry commentators.



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Three Oil Stocks to Watch as Drilling Activity Soars

North America oil drilling is on the rise, and many oil companies - and their stocks - are following.

The Oil and Gas Journal reported for the week ended May 18 there were 12% more oil and gas drilling rigs active in the United States from the same period a year ago, totaling 1,986.

Just look at the Texas Eagle Ford shale region, the largest U.S. shale oil deposit, which is booming more than expected. Shale oil production has 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, according to Valero Energy Corp. (NYSE: VLO) CEO Bill Klesse, with output expected to double to 1 million barrels a day "in the next few years."

Eagle Ford isn't the only area exploding with activity. More than 475 rigs are working across the Permian in West Texas and southeastern New Mexico. Those areas are already producing close to a million barrels a day. By decade's end, that daily total could double to nearly the total oil output of Nigeria.

"We're having a revolution," G. Steven Farris, chief executive of Apache Corp. (NYSE: APA), one of the basin's most active producers, told The New York Times. "And we're just scratching the surface."

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High Oil Prices: Worries Escalate Over $200 Oil and $6 Gas

Could new sanctions against Iran spark a crisis that drives oil prices to $200 a barrel?
The leaders of the Group of Eight (G8) economies certainly hope not.

Even still, they recently unveiled plans to tap into global emergency strategic oil reserves -- just in case.

Citing their "grave concern" over Iran's nuclear program and the "likelihood of further disruptions in oil sales" G8 leaders put the International Energy Agency (IEA) on standby to tap the reserves at a moment's notice.

"Looking ahead we...stand ready to call upon the IEA to take appropriate action to ensure that the market is fully and timely supplied," said the statement summing up their meeting last weekend.

But the G8 may just be trying to calm the markets before the storm. History shows that tapping into the reserves won't do much to prevent higher prices.

And there's no reason to believe this time will be any different.

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Where Are Oil Prices Headed?

The uncertainty looming around worldwide economies sent oil prices sinking below $90 a barrel yesterday (Wednesday), a level not seen since October of last year.

Benchmark crude slid $1.95 Wednesday to finish the day at $89.90 per barrel.

The decline came on the heels of several weeks of slipping oil, sparked by a plethora of less than stellar economic reports. The concerning data mostly involved Europe's ongoing sovereign debt saga.

Oil gained 0.5% in early afternoon New York trading Thursday, but the reasons for the rally were unclear.

"You don't know if this is just a short-covering rally or the start of a more significant rally," Andy Lebow, an oil analyst with Jefferies, told The Wall Street Journal. Lebow said that progress in the talks between Iran and Western powers about Tehran's nuclear ambitions could have spurred Thursday's price reversal.

If the gain isn't maintained, however, prices could head closer to $85 a barrel.



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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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Oil Prices and the Death of Greece

As the Eurozone continues to show weakness, events last weekend in Athens may accelerate the situation. The downward movement in oil prices this week in both London and on the NYMEX testified to the rising concern.

The aftermath of the Greek elections propelled the new radical left party SYRIZA into the limelight as the second strongest party in the country. Given the adamant refusal by SYRIZA leadership to accept bailout reforms, the party's new brokering position means the crisis will continue.

Bitter austerity measures await the formation of a coalition government, since no party received a majority of the seats in parliament from the vote. The coalition is supported by both the New Democracy and socialist PASOK parties, which have taken turns ruling Greece for nearly four decades.

But the surprise showing of SYRIZA has thrown the possibility of an accord into disarray.
At best, this means a further delay and likely a new election.

On the other hand, Greece has little time left. Any further delay in forming a government, with no guarantee that a very angry population will vote any differently the next time around, puts the next tranche of the European Union bailout package in jeopardy.

It is now more likely that Greece will leave (or be pushed out of) the Eurozone, casting a greater uncertainty on both the currency and the southern tier of countries still in the zone.

Spain is the current focus of concern, but Italy is also exhibiting renewed weakness.

Unlike Greece, Spain and Italy have debt problems that dwarf the ability of any Brussels-led support package. These economies are simply too large to be "rescued" from the outside.

The concerns over contagion, therefore, may actually expedite a Greek departure earlier than most thought possible.

Including me.

It is true that any members leaving the Eurozone will have a negative effect upon currency strength and economic prospects. It is also unclear how the Greek departure will aid in shoring up either Spain or Italy. The problems in each of these economies are endemic; they are not primarily a result of "spillovers" from the situation in Greece.

All of which means, to borrow a phrase from former U.S. Secretary of Defense Donald Rumsfeld, there are a series of "known unknowns" now facing the EU. The credit and banking problems are essentially the "known" part of this equation. The extent of the fallout on the euro as a whole is the massive "unknown" flowing through the calculations.

This is accentuated by recent developments in the two major economies using the euro -- Germany and France. No rescue package for any EU member is possible without the leadership of these two dominant European economies. To date, Paris has emphasized protecting its suspect banking sector, while Berlin has a strong political undercurrent demanding additional protection of German production and trade.

However, the recent French elections, in which a socialist has been elected president, and indications surfacing that the German economy may be facing a slowdown, will put continued support of a "bailout for austerity" approach to Greece in question.

Thus far, both major nations have led the EU-Greek approach, strongly arguing that the preservation of the euro demands it. The dramatic political events unfolding in Athens are rapidly undermining that support.

And this has impacted the price of oil.



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There's Always Money in this Fund

It's a tricky market out there for energy investors.

Even though opportunity abounds, there are plenty of factors driving ordinary investors away from the market, like global political tensions, ongoing concerns about available supplies, credit limitations for producers, increased volatility on the derivatives markets, and rising global demand.

There's a lot of noise, and short-term irrationality is trumping fundamentals.

But even amid the confusion, we know one thing for sure.

The price of oil is going to accelerate.

As Kent said on Monday, we have a very different dynamic taking place in the markets from the events of 2008. Three years ago, speculation drove oil prices, but an outside crisis decimated the global markets (namely, the subprime mortgage mess and the corresponding credit freeze).

But this time, we're experiencing a constriction produced by a significant cutback in new oil drilling. With greater unconventional production in the cards and greater concerns about the availability of supply, we're witnessing a perfectly predictable storm of events that will drive prices higher.

Still there's one thing that Kent and I continue to stress before you go out and start buying up energy stocks. That's this:

Rising oil prices will not drive similar performances in all energy companies.

You need to grasp an overall strategy to profit this time around.

The lack of cheap supplies and the cost of procurement in unconventional sources are major concerns. So is the acceleration in short-term swings in volatility. We are entering a period of boosted unconventional oil and gas production to tackle these challenges.

Access to unconventional sources has set off an energy boom here in the United States, as new technologies have enabled this country to greatly improve its oil and gas sourcing. Moving forward, the United States will look to its oil and gas shale plays and to source an expanding fuel supply from our neighbor to the north: Canada.

But it won't be cheap to do this, especially while increased swings in volatility become the norm.

So what's the best way to play volatility while managing your risk?

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Ride the Boom With These 5 Bakken Oil Shale Stocks

The Bakken oil shale boom is the opportunity of a lifetime.

With activity ramping up rapidly - production has soared from 100,000 barrels a day in 2005 to 494,000 barrels a day in February - the Bakken oil shale boom could turn out to be just as big, if not bigger than the California gold rush 1849.

Last week we told you about how the Bakken oil shale boom has affected Williston, ND. The town has an absurdly low unemployment rate of 0.8%, and the average pay for the oil company jobs is about $90,000.

One way to take advantage of this boom yourself would be to move to North Dakota.

But with dozens of companies flocking to the region, a much easier way to get in on the boom is to simply invest in some Bakken oil shale stocks.

The allure of big profits has attracted dozens of companies to the Bakken oil shale formation. The list ranges from industry giants like Exxon Mobil Corporation (NYSE: XOM) and ConocoPhillips (NYSE: COP) to pipeline companies like Enbridge Inc. (NYSE: ENB).

With oil prices expected to keep rising, and the production in the Bakken not expected to peak until 2020, it will be hard not to make money in Bakken oil shale stocks.

"Bakken is almost twice as big as the oil reserve in Prudhoe Bay, Alaska," Harold Hamm, CEO of Continental Resources Inc. (NYSE: CLR) - one of the major players in the Bakken oil shale boom -- told The Wall Street Journal last October. "We expect our reserves and production to triple over the next five years."

Still, some Bakken oil shale stocks will benefit more than others.

For example, the really big companies like Exxon, with large global operations, will see less of a boost than companies with operations concentrated in the Bakken and other North American shale deposits.

Money Morning has taken a look at these Bakken oil shale stocks and found five companies positioned to benefit most from this historic find's tremendous potential.



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Oil Price Manipulation: What President Obama Doesn't Understand About Oil


If you think gasoline prices are volatile now, stay tuned. President Obama's plan to clamp down on oil speculators is going to make things worse.

I'm sure you've seen the news by now.

The president wants to clamp down on so-called "oil price manipulation" and has proposed a $52 billion plan to increase f ederal supervision of oil markets.

What the p resident doesn't understand is that the oil markets already have this function built in.

Speaking from the Rose Garden last Tuesday, President Obama noted specifically that we can't afford to have "speculators artificially manipulating markets buy buying up oil, creating the perception of a shortage and driving prices higher - only to flip the oil for a quick profit."

Evidently, the president hasn't passed Econ 101.

If he had he would know that prices on everything from eggs to houses are by their very definition self regulating.

Speculation, as opposed to manipulation, is a vital part of the markets - they are not the same thing despite the fact that the p resident is interchanging the terms.

If prices are too high, people stop buying. If prices are too low, they stop selling. By authorizing $52 billion in oversight, he's chasing a ghost that he'll never catch.

The Real Problem with Oil Prices

The real problem is that the United States consumes 20% of the world's crude but only produces 2%.

It comes a time when oil demand is expected to rise more than 25% (to 105 million barrels a day) by 2015, according to a new report titled Oil and Gas: A Global Outlook by Global Industry Analysts, Inc.

If you want the biggest piece of the pie from the deli, you have to pay a premium.

There is no hocus pocus and there's no additional oversight necessary. Rather, we need to enforce the laws we already have on the books.

Sure the $10 million fines he's jawboning about (up from $1 million) sound great but they're really a non-starter. In fact, given that Exxon Mobil Corporation (NYSE: XOM) alone generated an average of $1.33 billion a day in 2011, they're little more than an acceptable cost of doing business. Nice try.

Take gasoline, for example.

Prices have jumped 78.2% since the p resident took office and that doesn't sit well with the party faithful who are convinced that evil oil price speculators are responsible.

They are distraught that traders put hundreds of billions of dollars into energy every month because that may cause prices to rise.

This is not complicated. Any time there are more buyers than sellers, prices go up. Any time there is more demand than supply, prices go up.

Contrast what's going on in the oil markets with what's happening in natural gas.
Prices for natural gas are at ten- year lows. Demand has risen but supply has risen faster. There are more suppliers than buyers. So natural gas prices drop.

Natural gas, by the way, is traded by many of the same traders who trade oil.

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How to Profit from a Drop in U.S. Gas Prices

U.S. gas prices have slipped from their recent peaks of $4.00 and above – is there a profit play here? Indeed, Money Morning Chief Investment Strategist Keith Fitz-Gerald joined Fox Business’ “Varney & Co.” to discuss what’s going on with U.S. gas prices. Watch this clip to hear Fitz-Gerald explain what’s driving gas prices. He also shares two stocks investors can buy to profit from this move – if they act fast.

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Election 2012: President Obama Can't Solve High Oil Prices with Trading Regulations

The Obama administration lost its bid to get the Buffett Rule (which would have increased taxes for those earning $1 million or more) passed, so on Tuesday it shifted focus to another battle: Slowing the rise in oil prices.

U.S. President Barack Obama's proposed solution to painfully high prices is to limit speculation in oil markets.

The new bids that the president proposed seek more money ($52 million) for market enforcement and monitoring activities, call for loftier penalties for market manipulation, and require oil traders to put up more of their own cash for transactions.

At a White House press conference Tuesday President Obama said, "None of these will bring gas prices down overnight. But they will prevent market manipulation, and help protect consumers."

The move is in stark contrast with Republicans, who have been lobbying for more domestic drilling to help alleviate the near record-high gas prices. Paying more at the pump takes a bite out of consumer spending and has the potential to stall the slow-going economic recovery.

The maneuver, however, may be focused more on political strategy than consumer interest.

It is extremely doubtful that House Republicans will pass any measure that aims to implement more limits on Wall Street while the GOP looks to reduce regulation of the financial sector.

House Speaker John Boehner, R-OH, called it a political ploy and disparaged President Obama for not using the means already at his disposal to deal with the oil situation.

"The president has all the tools available to him if he believed that the oil market is being manipulated," Boehner said. "Where's his Federal Trade Commission? Where is the SEC? He's got agencies there. So instead of just another political gimmick, why doesn't he put his administration to work to get to the bottom of it?"

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Stable Oil Prices are the Key to Chinese Growth

Last week, oil prices dropped on concerns that Chinese demand might begin to slip.

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.



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