There is an easy way to find out where the market thinks a particular sector is heading: Check out the movement of futures contracts held by top hedge fund managers. These days, the signal is clear and pointing in one direction. Check this out.
Oil prices have continued their upward move that began at the end of 2012, gaining over 8% in the past month.
Now, an oil analyst with Goldman Sachs Group Inc. (NYSE: GS) predicts Brent crude could soar much higher in the next few months.
Jeff Currie, GS's head of commodity research, said he wouldn't be surprised "if we woke up in summer and oil cost $150" per barrel.
That would be a 35% gain from Brent's recent price of $111.
Using the narrowing spread between the Brent price and that of West Texas Intermediate (WTI), at $95, Currie's forecast implies a 40% increase in WTI prices.
And there are many reasons oil could hit those highs by summer, or even sooner.
Many investors have heard of the Bakken oil field in North Dakota and Montana, but most are unaware of how important this formation is becoming to the U.S. economy.
More germane to investors is the fact that there is still a lot of money to be made from Bakken oil in the months and years ahead.
Just ask Warren Buffett.
He spotted the potential of Bakken oil well ahead of most and bought a non-energy company that would benefit greatly from the boom. Three years ago he bought Burlington Northern Santa Fe (BNSF) Railway Co. for $26 billion.
That railroad is now one of the main beneficiaries of the Bakken oil boom. (And people thought he just had always wanted to own a train set!)
"We're the 1,000-pound gorilla in the oil markets," BNSF CEO Matt Rose told Bloomberg News. "Crude by rail is going to be really strong for us. It's been a real benefit to us to replace some of that lost coal business."
The Bakken oil formation isn't just an investing opportunity; it's transforming the U.S. energy landscape.
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.
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.
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.
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...
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.
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.
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 FieldsOne 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 BakkenAnother developing shale oil play that is relatively unknown - the Tyler formation - is in the Dakotas.
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.
Dr. Alfredo Armendariz, the EPA regional administrator for Region 6, was overly candid in a 2010 policy discussion in which he said that the agency's stance is to "crucify" a few oil and gas companies in order to set an example and force the rest of the industry to submit to new rules.
"You make examples out of people who are not complying with the law," he stated.
Now, it looks like those comments have cost him his job.
Morgan Little at the LA Times explains.
"Alfredo Armendariz, a regional administrator for theEnvironmental Protection Agency, has resigned in the wake of criticism for comments made in Texas two years ago comparing the methods of the EPA to those of Romans using crucifixions to conquer foreign lands."
The resignation is certainly a starting point in order to limit the political damage.
Nothing like having Goldman Sachs (NYSE: GS) confirm what we've already been saying for a year.
But last week, Goldman Sachs reminded us that they are bullish on the oil and gas pipeline sector by upgrading a number of portfolio stocks that have been prominent features of our portfolios and discussion on the sector.
Goldman analysts made headlines last week by adding a number of pipeline firms to their "Conviction Buy" list. The company added Williams Companies (NYSE: WMB) while dropping Buckeye Partners L.P. Nonetheless, Goldman still rates Buckeye as a "Buy."
Goldman also raised a number of additional stocks to the buy list, including Plains All American Pipeline LP (NYSE: PAA), and maintained its "Buy" ratings on Enterprise Products Partners (NYSE: EPD), and Enduro Royalty Trust (NYSE: NDRO), and Magellan Midstream Partners (NYSE: MMP).
The reason for these moves shouldn't be a surprise to anyone who follows us at Oil and Energy Investor.
The Sweet Spot in Oil and Gas Pipeline CompaniesIt's not surprising that Goldman Sachs is so bullish on the pipeline industry. After all, my colleague Dr. Kent Moors has been touting the best known secret on the markets for more than a year.
If you want to make money in energy investing, you want to park yourself right in the middle of the supply chain. By doing so, you're far less susceptible to price fluctuations in the underlying commodity, and you are able to collect easy profits from the growing demand in fuels.
Midstream companies, those that connect the upstream exploration and production companies to the downstream retail, refining and marketing channels, provide vital services in transportation, storage, and processing.
Simply put, this is the "Sweet Spot" of energy investing.
I started scanning the energy and agricultural stocks I monitor, and began combing financials, looking for some undervalued little company about to pop.
Then I stopped.
I already knew a failsafe way to ace Kent's challenge. And so do you. We talk about it all the time.
It's the midstream sector of the energy supply chain, particularly in Master Limited Partnerships or MLPs
And it's the best and easiest way to make money in energy today.
I want you to understand the value of these companies that are involved in the gathering, transport, and storage of oil and gas. Not in terms of just how important they are to the industry, but also how important they can be to generating very strong returns for your wallet.
Because if you're ignoring them, you're missing out.
That's why today I'm going to share with you one investment opportunity in Kent's Energy Advantage portfolio that is blowing the doors off and making investors a killing.
And you can join in.
MLPs: The Golden Age ContinuesThe United States is in the early stages of one of the greatest financial booms in its history.
Technological advances in horizontal drilling have allowed companies to access natural gas and oil resources once thought to be unattainable.
Upstream gas drillers continue to develop shale deposits in Pennsylvania, New York, Utah, and other states. So someone has to take care of all the gathering, feeder and transport pipelines, terminals, storage facilities, fractionating, and initial processing of these fuels.
This is what has made Master Limited Partnerships (MLPs) such attractive opportunities.
These midstream companies make their money by charging transport fees for the fuels they process. And over the past few years, these fees have remained almost constant, even though natural gas prices have dropped considerably.
MLPs offer investors the opportunity to make profits in two ways.
- The stock appreciates in value, due to growth in the sector and strong financial returns.
- The stock pays higher-than-average yields and quarter distributions to investors (otherwise known as dividends).
And when we identify MLP plays that do both at the same time, that's when we really start to see some profits.
A 139% Return in Under Three YearsMLPs are attractive investments. So are the indices that track their overall performance.
And for the last 18 months, Energy Advantage readers have benefited from growth of one fantastic index.
The JPMorgan Alerian MLP Index ETN (NYSE: AMJ) tracks the performance of the booming energy MLP sector. Created in 2009, the market cap-weighted index currently pays an attractive yield of 5%, while the underlying share price has doubled in a little less than three years.
The index offers many of the same benefits of investing in a traditional MLP. The two biggest benefits are those opportunities to acquire a strong yield and to reinvest those dividends into appreciating shares.
This two-step process unleashes the power of income investing.
Just how much potential are we talking about?
With concerns over the likelihood of higher gas prices this summer, the bill and its sponsors propose the creation of a "Reasonable Profits Board" that would control the profits of oil and gas companies.
Under the bill, this board - made up of unelected bureaucrats - could apply a "windfall profit tax" on the sale of oil and gas at rates of 50% to 100%. These taxes would take aim at corporate profits that the board feels are "unreasonable" or "unfair."
Congress would then appropriate the money raised to subsidize electric vehicles and mass transit.
Now you may want to take a second and breathe, because this is no satire.
Oh, and the proposed bill offers no specific guidance on how the board would determine what represents a "reasonable profit." How do we even begin to define this term? Are some profits more unreasonable than others? And who decides what is "reasonable?"
Apple Inc. (Nasdaq: AAPL) last week shattered earnings expectations. The electronics company has a profit margin north of 20%; meanwhile, the oil and gas industry has a sector-wide margin a little less than 10%.
And though the price of oil and gas will rise in the future - and despite the name of the bill - a reasonable profits board would do nothing to improve consumers' plights at the pump.
In fact, it would only make things worse for people like you and me.
Although the president never actually lied, he repeatedly left out facts that contradict his claims of success.
President Obama hadn't yet left the House chamber when the reality check started. And it didn't take long to find some pretty big the holes in the State of the Union address.