Oil Prices

Hydrokinetic Power is the Next Wave in Cheap Energy

In an era of cheap capital, emerging technology companies could provide investors the biggest bang for the buck we've seen in years.

The key is finding a market that already has billions of dollars in pent up demand - like cheap energy.

Of all the cheap alternatives available to us today, I'm most excited by hydrokinetic power systems for the simple reason that the oceans contain enough energy to potentially support more than 50% of US demand alone, according to the US Department of Energy.

In case you are not familiar with the term, hydrokinetic systems produce power from the water's kinetic energy. It's quite literally power from the motion in the ocean.

Critics charge there are limits involved because the technology we need to make, transmit and store wave-based energy is primitive and prohibitively expensive.

And they're right... it is, or at least has been to date.

That's why despite years of effort and billions of dollars in government-sponsored financing, there are a mere 5 megawatts of wave-generated energy being created worldwide.

According to Forbes Magazine, that's only enough to light 4,000 U.S. homes.

Yet studies estimate that two-thirds of the world's economically feasible hydropower has yet to be exploited. Perhaps not surprisingly, much of this untapped energy is concentrated in South America, Asia and Africa.

That's my kind of opportunity - but it will require a sea change in our thinking (pun absolutely intended).

The Rising Tide in Hydrokinetic Power

That's because traditional "alternative" power choices tend to evolve in terms of how applications like solar, hydro, thermal and gas production ties into the grid. As such, they're dependent on environmental variables that come and go.

On the other hand, hydrokinetic systems really are the grid. By placing turbines, bobbers and impellers into large bodies of water, they become part of the very system they're tapping into.

And it's a whopper of a system.

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Occidental Petroleum Corp. (NYSE: OXY): The Best Way to Profit From the Monterey Shale

It has been a long time since California seen a profit opportunity like this.

The state's Monterey Shale formation may hold as much as 500 billionbarrels of oil making it more valuable than the gold rush of 1848.

With oil prices expected to hit $150, if not $200 a barrel this year that means the profit potential is limitless.

After all, peak oil isn't a myth - it's a reality.

Traditional oil production is plateauing, while demand in emerging markets continues to rapidly increase.

Meanwhile, turmoil in the Middle East has threatened supplies even further. And the war with Iraq didn't end up being the energy bonanza many thought it would.

And now the Arab Spring and tensions in Iran have escalated to the extent that military intervention there seems to be a foregone conclusion.

That's why the Monterey Shale - a rib-shaped formation that extends from Northern California down through the Los Angeles area and then offshore to outlying islands - is getting so much attention.

And unlike other shale plays in the United States, the Monterey is primarily oil, not gas.

That means Monterey shale does not require hydraulic fracturing, which has come under fire from environmentalists.

It also means companies can extract much of the oil using simple vertical wells, rather than the more expensive horizontal drilling needed for shale gas plays. Some horizontal drilling will be used, but it is not required in all fields, greatly reducing operating expenses.

In fact, in large parts of the formation, production costs are less than $10 a barrel.

Think about what that means for profit margins with crude prices currently near $110 a barrel.

So how can investors profit?

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Iran is Now a Full-Blown Crisis, Stage Set for $200 Oil

Just when it looked like we could take a breather from the Strait of Hormuz, all attention is back on Iran.

There are three reasons for this - all happening within the last week:

  1. First was Tehran's successful launch of a satellite, viewed by all in the region as being for military intelligence.
  2. Second, in his toughest talk to date, Iranian Supreme Leader Ayatollah Ali Khamenei voiced defiance to Western sanctions and pledged open retaliation if they are instituted.
  3. Finally, last Thursday, U.S. Secretary of Defense Leon Panetta expressed concern that, if matters continue, Israel could attempt an air-strike takeout of Iranian nuclear facilities within a month. Iran has been frantically moving essential components of its nuclear program underground to withstand such an attack.
All of this is, once again, leading to a rise in crude oil prices.

What's more, the EU decision to stop importing Iranian crude starting July 1 will cripple any chance Tehran has to combat escalating economic and political turmoil at home.

Yet Khamenei's defiant tone during his Friday prayer meeting speech indicates that Iran's religious leadership will not wait for the system to unravel.

And that is what makes this both a full-blown and an intensifying crisis.

Brinksmanship in the Straits of Hormuz

So what's being done?

Washington has little - leverage, save its ability to temper an immediate escalation by Israel (leverage the U.S. can still apply, at least for the moment). It also has some indirect influence on what the E.U. does.

Meanwhile, Saudi Arabia also is a wild card. It will not tolerate a nuclear Iran.

And yes, there are ample indications that American and Israeli intelligence have concluded Iran will achieve the ability to develop nuclear weapons in the next 18 to 24 months.

Some elements of that process will be available earlier, but remember: A weapon is of little value unless it can be controlled and delivered. The logistical and infrastructure considerations need to be in place first.

Yet with such an inevitable conclusion staring them in the face, the West has decided to embark on a risky path...

The target here is not the nuclear project at all (over which there is less and less outside control). Instead, it has become about creating massive domestic instability to bring down a regime.

Now, this is not about ending the theocracy. With or without Mahmoud Ahmadinejad as president or Ali Khamenei as supreme leader, Iran will remain a Shiite-dominated country. Religion decisively controls politics, and the clergy oversees the society.

The West is seeking a more moderate application of what will remain the Iranian cultural reality.

However, as the brinksmanship intensifies, so will the price of crude oil. Tehran, in this dangerous game of international chicken, really only has one card to play - the Strait of Hormuz.

There has been much misinformation circulated about the strait. Here are the facts.

On any given day, 18% to 20% of the world's crude oil passes through it.

According to the Energy Information Administration, the Strait's narrowest point is 21 miles wide; however, the width of the shipping lane in either direction is just two miles, cushioned by another two-mile buffer zone.

Of greater significance, though, is the fact that most of the world's current excess capacity is Saudi. (This is the oil that can be brought to market quickly to offset unusual demand spikes or cuts in supply elsewhere.) And, unfortunately, Saudi volume must find its way through the same little strait.

If we're unable to access the Saudi excess, that loss guarantees the global market will be out of balance. That will intensify the price upsurge - an upsurge that is already happening.

Now for the question I'm being asked several times a day in media interviews...

Just how bad can it get?



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Anadarko Petroleum Corp. (NYSE: APC) Ready to Rebound After Oil Spill Losses

Anadarko Petroleum Corp. (NYSE: APC) reported after market close today (Monday) a fourth-quarter profit loss, due to a $4 billion pay out made last quarter related to the BP PlC (NYSE ADR: BP) oil spill in 2010.

Anadarko, the largest U.S. independent oil and gas company by market value, reported a $358 million, or 72 cents per share, loss for the quarter. Revenue rose 42.7% to $3.84 billion from the year earlier quarter.

Excluding the spill-related payout and other items, Anadarko earned 85 cents a share. Wall Street expected the company to book earnings of 60 cents a share, more than doubling the 29 cents earned in 2010's last quarter.

Now with its legal battles behind it, the company is ready to take off as higher oil prices and a recent discovery drive future earnings.

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LNG Stocks Are Set to Take Off

As I have discussed over the last two years, liquefied natural gas (LNG) is going to be a complete game-changer.

And along the way, a small group of LNG stocks will become the main focus for investors.

Remember, the LNG process cools natural gas to a liquid form, allowing it to be shipped over long distances. Upon arrival, the liquefied gas is returned its original state before being injected into pipeline for delivery to foreign consumers.

Already, the construction of LNG receiving terminals in Asia and Europe is accelerating.

Here's why.

The European and Asian markets have the biggest need for imports. These markets have a need to meet rising demand and restrain the prices commanded by long-term pipeline-delivered gas.

Luckily, LNG can do both.

Traditionally, natural gas has only been able to develop regional "spot" markets. These are locations where the availability of volume provides an opportunity for traders to execute a price for a quick sale (usually within 72 hours).

This is because the availability of product depends upon the development of import pipelines, which are multi-year, capital-intensive projects.

LNG, on the other hand, can be delivered to a terminal, so it can provide an immediate increase in available local supply.

To the extent that the LNG trade can be sustained, new spot markets are immediately formed around the hubs that develop at the intersection of terminal and delivery pipelines.

And now Qatar - one of the world's largest producers of conventional gas (that is, from freestanding gas fields) - has banked on LNG being the wave of the future.

Qatar has become the first country to commit all of its production to the LNG trade.

And that is a huge vote of confidence for this market.

Considering the number of new tankers involved, this single decision jolted the global shipbuilding industry into one of the most significant increases in business ever recorded.

The Qatari decision was just the first step...

A Global Boost for LNG Stocks

New export terminals are being built by other major gas producers - Russia, North Africa, and Canada. Our neighbors to the north have clearly signaled where the U.S. will be moving next.

A project is moving forward at Kitimat, British Columbia, on the North Pacific coast. It is scheduled for completion in 2014.

Developers originally intended this project to be an LNG receiving facility. But by the time the construction began, the intended flow of gas had changed by 180 degrees.

Today, this facility will be 100% committed to exporting LNG.

And the reason is the same one that is prompting so much U.S. discussion...



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How to Profit from the "Shale Oil Bubble"

It's true: French, Japanese, and Chinese energy companies cannot seem to get their hands on a big enough slice of U.S. shale oil deposits these days.

However, that doesn't mean this investment frenzy is evidence of a "shale oil bubble."

Instead, it's a classic sign of an investment trend - one that will continue throughout 2012 creating an opportunity for investors to profit.

Consider that in just the past two weeks:

  • French oil major Total S.A. (NYSE ADR: TOT) invested $2.3 billion in Chesapeake Energy Corp.'s (NYSE: CHK) Utica Shale operation in eastern Ohio.
  • China Petroleum & Chemical Corp. (NYSE ADR: SNP), spent $2.2 billion for a 30% stake in five Devon Energy Corp. (NYSE: DVN) shale projects.
  • And Japan's Marubeni Corp., a commodities trader, agreed to pay $1.3 billion for a stake in Hunt Oil Co.'s Eagle Ford shale property in Texas.

The Reality Behind the Shale Oil Bull Market

That's a clear sign to investors that interest in shale deposits among foreign energy companies is beginning to heat up.

And to hear the mainstream media tell it, these companies are overpaying for access to U.S. shale deposits.

In fact, they claim that has led to astronomical valuations and the formation of a "shale oil bubble."

But that that perception is actually only half right: While the value of shale deposits has skyrocketed, the reality is that the higher prices are fully justified based on the increasing demands for oil and gas.

What's more, the foreign companies that are paying top dollar for access to U.S. shale assets aren't just paying for access-they're also paying for expertise.

"Foreign majors needaccess to technology andexpertise, as well as being able to putsome portion of reserves on their books," said Money Morning Global Energy Strategist and Editor of the Oil & Energy Investor Dr. Kent Moors. "For that they are quite prepared to farm in for a minority position in development projects."

In return, U.S. energy companies get the investment dollars needed to develop costly and complex reserves.

These foreign investments also give U.S. companies the money they need to acquire more land leases and increase their odds of hitting an especially productive gas or oil reservoir known as a "sweet spot."

That, Dr. Moors says, is where the "bubble" talk comes from.

"U.S. operators cannot afford to under-commit and that has led to an inflation in land prices," Moors said. "Those prices are nowrather out of proportion toa NYMEX gas price of $2.60 per 1,000 cubic feet and hugestorage volume dueto amild winter."

Still, the demand curve for gas will eventually move up as a result of increased usage in electricity generation, replacement of crude oil in petrochemicals, and a renewed emphasis on liquefied natural gas (LNG).

These energy companies, therefore, are taking a medium-term view. In short, they believe that once demand and prices begin to rise, these higher land values will be justifiable.

So where do investors fit in?...

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Prepare for Iran's Energy Market Chaos with the United States Oil Fund LP (NYSE: USO)

Iran kicked off the New Year with aggressive messages for the Western world, setting the stage for heightened political tensions and a huge oil price push in 2012.

Oil futures finished at their highest level in eight months yesterday (Tuesday), with West Texas Intermediate crude jumping 4.2% to settle at $102.96 a barrel on the on the New York Mercantile Exchange (NYMEX).

The surge came after Iran warned a U.S. aircraft carrier to stay out of the Persian Gulf. The message fueled speculation that Iran will make good on its threat to close the Strait of Hormuz to oil tankers.

An average of 14 supertankers carrying one-sixth of the world's oil shipments every day pass through the Strait, a narrow channel which the U.S. Department of Energy calls "the world's most important oil chokepoint."

With global oil demand expected to rise to a record 89.5 million barrels per day in 2012, a major disruption to oil exports from Iran would drastically affect pricing.

Even though Iran has made such threats repeatedly over the past 20 years, tighter sanctions imposed by the United States and Europe may have pushed the country to its breaking point. Iran just concluded a 10-day military exercise intended to prove to the West that it can choke off the flow of Persian Gulf oil whenever it wants.

Now Iran is expected to trigger oil market performance similar to spring 2011, when Libya's civil war caused oil prices to spike close to $115 a barrel.

In fact, if the Iranian government made good on shutting down the Strait, oil prices would probably shoot up $20 to $30 a barrel within hours and the price of gasoline in the United States would rise by $1 a gallon.

While we can't control Iran's actions, we can control how we prepare for whatever political and economic turmoil it inflicts. That's why it's time to buy the United States Oil Fund LP (NYSE: USO).

Global Political Tensions Will Bolster US Oil Fund

Iran is trying to scare the world out of imposing more sanctions against it, which drastically limit the country's ability to conduct business.

The latest sanctions, signed into law by U.S. President Barack Obama last Saturday, will make it far more difficult for refiners to buy crude oil from Iran, the world's fourth-largest oil exporter.



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Should We Be Worried About Iran?

If the Iranian government makes good on its recent threats to stop oil shipments through the Strait of Hormuz, oil prices would shoot up $20 to $30 a barrel within hours and the price of gasoline in the United States would rise by $1 a gallon.

Such a steep spike in crude oil prices would plunge the United States and Europe back into recession, said Money Morning Global Energy Strategist Dr. Kent Moors.

Iran just concluded a 10-day military exercise intended to prove to the West that it can choke off the flow of Persian Gulf oil whenever it wants.

The world's fourth-biggest oil producer is unhappy with fresh U.S. financial sanctions that will make it harder to sell its oil, which accounts for half of the government's revenue.

"Tehran is making a renewed political point here. The message is - we can close this anytime we want to," said Moors, who has studied Iran for more than a decade. "The oil markets are essentially ignoring the likelihood at the moment, but any increase in tensions will increase risk assessment and thereby pricing."

One reason the markets haven't reacted much to Iran's latest rhetoric is that although it has threatened to close the Strait of Hormuz many times over the past 20 years, it has never followed through on the threat.

But a fresh wave of Western sanctions could hurt Iran's economy enough to make Tehran much less cautious.

The latest sanctions, signed into law by U.S. President Barack Obama on Saturday, will make it far more difficult for refiners to buy crude oil from Iran. And looming on the horizon is further action by the European Union (EU), which next month will consider an embargo of Iranian oil.

"The present United Nations, U.S. and EU sanctions have already had a significant toll," said Moors. "They have effectively prevented Iranian access to main international banking networks. Iran now has to use inefficient exchange mechanisms."

Because international oil trade is conducted in U.S. dollars, Moors said, Iran must have a convenient way to convert U.S. dollars into its home currency or other currencies it needs, such as euros.

Pushed to the Brink

The impact of the sanctions combined with internal political instability has driven Iran to turn up the volume on its rhetoric.

"Tehran has limited options remaining," Moors said, noting Iran has historically used verbal attacks on the West to distract its population from the country's problems. "The Iranian economy is seriously weakening, the political division among the ayatollahs is increasing, and unrest is rising."

Analysts worry an Iranian government that feels cornered would be more prone to dangerous risk-taking in its dealings with the West. So while totally shutting down the Strait of Hormuz isn't likely, Iran could still escalate a confrontation beyond mere talk.



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2012 Oil Price Outlook: How to Profit From $150 Oil

2011 was an up-and-down year for oil prices, but don't expect that pattern to repeat in 2012.

No, next year, the trajectory for oil prices will be far more linear - and it's pointed up.

In fact, we could even see $150 oil by mid-summer.

There are two key reasons why:

  • Despite the economic crisis in Europe, oil demand proved resilient in 2011. It is poised to remain steady in 2012, and then escalate drastically for the foreseeable future.
  • Supplies will once again be constrained, and the potential for political upheaval in major oil-producing nations has increased.
These are the principal reasons oil prices have surged about 30% since dipping below $80 a barrel in early October. They're also why the world's upper-echelon of energy forecasters has oil prices building a floor above $90 a barrel and rising from there.

Indeed, Goldman Sachs Group Inc. (NYSE: GS) recently recommended that traders buy July 2012 Brent crude futures in anticipation of a rally to $120 a barrel. It was one of the bank's top six trades for 2012 published in its "Global Economics Weekly" report.

Barclays Capital agrees.

"Even in the worst case scenario, the downside to oil prices is unlikely to be anything as severe as during the 2008-2009 cycle," Barclays analysts Roxana Molina and Amrita Sen wrote in a report earlier this year. "As a result, we maintain our price forecast of $115 per barrel for Brent in 2012 and expect $90 per barrel to hold as a sustainable floor even under gloomy macroeconomic conditions."
As for West Texas Intermediate (WTI) crude the Energy Information Administration (EIA) expects it to average nearly $94 a barrel next year.

And even that's a conservative estimate.

"Given the oil volume constriction oncoming and the continuing increase in global demand - this drives the price, not North America or Western Europe - we will reach $150or beyond by July 4," said Money Morning Global Energy Strategist Dr. Kent Moors.



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Why Oil Prices Won't Stay Down For Long

Oil prices, like stocks, took a few big hits last week.

West Texas Intermediate crude last week dropped below $80 a barrel before bouncing back up to $87 a barrel this week. Meanwhile, Brent crude fell to a six-month low below $100 a barrel before climbing back to $110 a barrel this week.

To hear the mainstream media tell it, much of the drop is based on the assumption that global growth is waning and oil demand is soon to follow.

But that couldn't be more wrong.

Energy is one of the most highly leveraged and most liquid trading vehicles on the planet. A good portion of the decline we've experienced in recent weeks can be explained by nothing more than trading houses raising cash to meet margin calls or redemption requests from hedge funds, pension funds, and other investors.

That's all there is to it. Firms simply need cash and are selling the most easily sellable assets they've got. In the past that's been gold, but lately it's been oil.

Longer-term, demand is still going up and $120 a barrel oil is our next stop, followed by prices of $150 or more in the years ahead.

What's happening now with the markets and energy prices is like being in the eye of a hurricane.
That is, it won't be long before we're once again caught up in the whirlwind growth of emerging markets and energy demand shoots sharply higher.

The Looming Demand Downpour

Global demand is still rising - and it's not going to slow down any time soon. There are huge swaths of the world now adopting gasoline engines.

Let me give you two examples.

Take the farmers in Cambodia. Many put up sheets in their fields at sunset. They then mount small incandescent light bulbs on sticks behind the sheets. The bulbs are powered by small gasoline generators to ensure they stay on all night.

In the morning, those farmers go back and harvest the thousands of crickets that have collided with the sheet after having been drawn to the lights. They wrap up the fallen bugs and head to the markets where they are sold as food.

It's much the same situation in Africa, where small villages require simple engines to pump water.

You may think bugs and small farm pumps are no big deal, but there's an even greater energy revolution going on in the transportation industry.



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How to Fix the U.S. Housing Market

If this week's economic reports showed us anything, it's the fact that two years into what's supposed to be an economic recovery, the U.S. housing market remains on life support.

But here's what those reports didn't tell you: If the housing market isn't fixed soon, it's going to drag the rest of the economy down into a hellish bottom that will take years, if not decades, to crawl out of.

The housing market is our single-most important generator of gross domestic product (GDP) and, ultimately, national wealth.

It's time we fixed what's broken and implemented new financing and tax strategies to stabilize prices.

Contrary to the naysayers - and in spite of political pandering and procrastination - we can almost immediately execute a simple two-pronged plan to fix mortgage financing and stabilize U.S. housing prices.

I call it a not-so-modest proposal.

The Worst Since the Great Depression

The facts are frightening: We are in a bad place. The plunge in housing prices we've seen during the current downturn is on par with the horrific freefall the U.S. housing market experienced during the Great Depression.

And without an effective plan to arrest the double-dip in housing, there's no bottom in sight.

Hope Now, an alliance of lenders, investors and non-profits formed at the behest of the U.S. Department of the Treasury and the U.S. Department of Housing and Urban Development, counts 3.45 million homes being foreclosed from 2007 through 2010. Current estimates of pending and potential foreclosures range from another 4 million to as many as 14 million.

According to RealtyTrac, a real-estate data provider, the country's biggest banks and mortgage lenders are sitting on 872,000 repossessed homes. If you add in the rest of the nation's banks, lenders and mortgage-servicers, the true number of these REO (real-estate owned) homes is closer to 1.9 million.

These shocking statistics illustrate just how large the current overhang of bank-owned properties actually is (at current sales levels, REO properties would take three years to unload). And they help us to understand how the staggering number of yet to-be-foreclosed, repossessed, and sold homes will depress U.S. housing market prices for years to come.



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What's Up With Drop in Oil Prices?

Oil prices took a hit last week, falling as much as $10 a barrel in one day. Money Morning Chief Investment Strategist Keith Fitz-Gerald joined FoxBusiness' "Varney & Co." to analyze what last week's drop in oil prices means for investors and consumers, and to share his long-term oil market outlook.

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Oil Prices Look to Top $150 by Midsummer On Resilient Demand and MENA Turmoil

Money Morning predicted in its 2011 Outlook series that oil prices would see $100 a barrel by summer. And that's proven to be true - but not entirely for the reasons we discussed.

In addition to the increased demand we talked about in January, violence in the Middle East and North Africa (MENA) has driven oil prices into the stratosphere. The price of light, sweet crude climbed above $112 a barrel last week, up more than 22% from where it started the year.

A recent pullback has driven prices back down to about $107 a barrel, but don't be fooled. Strong demand in emerging markets, a weak dollar, political turmoil in the MENA region, and a strong speculative sentiment will continue to push oil prices higher.

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