Oil Prices
US OIL FUND ETF
NYSE: USO
May 23 10:00 AM
no chart
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Last price32.86Prev Close33.46
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Change-0.60% Change-1.8%
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Open33.78Volume6,541,066
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Day Low32.86Day High32.96
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Bid32.86Ask32.85
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52 Wk Low29.4652 Wk High36.84
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Market Cap19,675ExchangeNYSE
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Shale Oil Stocks are Poised to Earn Investors Big Profits
With oil production soaring in the United States, shale oil stocks will be pumping out profits for years to come.
It's all thanks to huge deposits of shale oil.
At least four new major shale oil plays including the Bakken in Montana and North Dakota, the Eagle Ford in Texas, and the Marcellus in Pennsylvania and New York, may have more than 20 billion barrels each of recoverable oil.
Each of these new shale oil plays has the potential to double the total reserves we have today.
In fact, the "shale oil revolution" will soon make the United States the world's leading producer of crude oil, a report from Goldman Sachs Group Inc. (NYSE: GS) recently predicted.
The United States will produce more than 10.7 million barrels of oil per day by 2017, the report said. That's more than any other country, including Saudi Arabia.
And even though oil prices are in a short-term swoon, the glut of shale oil is about to make savvy investors a huge fortune.
That's why you need to take a hard look at a particular group of shale oil stocks that stand to benefit most from this boom.
But first, you need to know how this came about.
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Why Crude Oil Prices are in Steep Retreat
Oil prices sank to their lowest level in eight months Wednesday and the trend continues.
Crude oil for August delivery fell yesterday (Thursday) below the $80 line to $78.20 a barrel on the New York Mercantile Exchange.
Oil prices breaking the $80 line can have a psychological impact on traders, which could send oil spiraling even further.
"Oil is participating in the broad decline of equities and commodities," Rich Ilczyszyn, chief market strategist and founder of Iitrader.com in Chicago, told Bloomberg News. "We broke an extremely key level for oil, the previous monthly low around $81."
Oil prices fell more than 3.5% the day after the Fed announced a disappointing extension of Operation Twist.
The commodities market, measured by the S&P GSCI Spot Index, entered into a bear market yesterday, off 22% from its highest close of the year on Feb. 24.
Many experts think oil is reaching a bottom - but there are other factors still in play.
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The Three Big Factors Weighing on Oil Prices
Oil prices this week have been pressured by a trio of global factors: OPEC, Iran, and the Eurozone debt crisis.
Crude experienced wide swings on Tuesday, sinking as low as $81 a barrel, a new eight-month low. Prices bounced back later in the day and finished moderately higher at $83.34.
Over the last year, oil prices have fluctuated between $74.95 and $110.55 - with more volatility expected.
Oil's recent wide price swings highlight the market's uncertainty over changes in global supply and demand.
"Oil has given up the ghost, the overriding concern is for global demand to moderate or even come off quite a bit in Europe, the United States and even China and India," David Morrison at GFT Global told Reuters.
Oil Prices and the OPEC Summit
Weighing on crude oil prices this week were words Monday from Saudi Arabia's oil minister as he arrived in Vienna for Thursday's OPEC summit.
The Saudi minister remarked that OPEC production quotas may be too low. The suggestion could move OPEC members such as Iran and Venezuela to shy away from a production cut.
In a research note Tuesday, analysts at energy focused investment bank Simmons and Company wrote, "This position is an indication that Saudi is not overly concerned about the recent pullback in oil prices. It is not yet anxious to aggressively cut supply."
As a matter of fact, Saudi Arabia has actually been increasing its oil supply over the last few months in an effort to pick up the slack from Iran's declining output, which experienced a slump in exports on the heels of tightening U.S. sanctions.
Iran is the No. 2 oil producer in OPEC's exporting countries, earning more than half of government revenue from oil sales, according to the International Monetary Fund (IMF). Its oil output has slipped more than 40% this year, the International Energy Agency (IEA) reported Wednesday.
The IEA report could influence OPEC's decision on production quotas. At OPEC's last meeting in December the members decided to maintain actual output at 30 million barrels per day.
Iran Sanctions Approaching
Also influencing oil prices was a report from the Obama administration on Monday that noted seven countries, including India and South Korea (sizable importers of Iranian crude), have sufficiently reduced their oil imports from Iran and will not be subject to sanctions from the U.S., set to take effect at the end of June.
"By reducing Iran's oil sales, we are sending a decisive message to Iran's leaders: until they take concrete actions to satisfy the concerns of the international community, they will continue to face increasing isolation and pressure," U.S. Secretary of State Hillary Clinton said in a statement Monday.
Oil prices have slipped as markets expect the U.S. exemptions will prevent major supply disruptions.
China, the leading Iranian crude importer in the first half of last year, has not yet been granted an exemption. U.S. officials said talks were ongoing and that status could change before the June 28 deadline to impose sanctions.
Talks over Iran's nuclear programs will restart this weekend in Moscow. It'll likely be the final round of discussion before the sanctions and before a ban on importing Iranian oil into Europe is set in motion.
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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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