3 Forces Set To Send Oil Prices Soaring
Money Morning Staff: A Big Lie has spread like a virus through the energy-investing world. It infects the television financial news and newspaper headlines every day.
It has polluted the 2012 election debate with misinformation by politicians and talking heads.
And it threatens your investments while making energy insiders billions each year.
The lie started spreading over the summer. You may have seen a report issued by Credit Suisse that said that oil could go as low as $50 a barrel. Or the predictions on CNBC saying $40 a barrel. Others said oil prices could fall even further.
These “talking heads” are saying that if we increase our supplies here in the U.S., oil prices will drop like a brick.
Apparently some people on Wall Street and Washington believe that by scaring the individual investor they stand make a greater profit for themselves.
Some political candidates even said that they guaranteed $2.50 per gallon gasoline if they were elected. Drill, baby, drill,” has become something of a national catchphrase.
They argue that drilling more and more of our oil here in the United States will magically drive oil prices back down to levels not seen since the 20th century. Because they think that oil companies will ramp up production and lose billions of dollars a day just by giving oil away.
But I’m telling you now…
Drill All You Want… Oil Prices Are Still Headed Higher
What I said at the time – and what I am telling you now – is that these views do not reflect the actual market or the new reality we find ourselves in today.
The problem is these experts don’t understand the simple math behind energy production.
They believe that $2 gasoline is possible, $40 oil is inevitable, and that the days of cheap oil are set to return. But something has happened around the world that has completely undermines this myth… and this story has finally been exposed for what it is…
In this special report, we’ll break down exactly what we see happening. We’ll look at 3 huge and tantalizing forces creating a new surge in oil prices. And we’ll show you how you can capitalize on these trends and make enormous sums of money in oil in the very near future.
Why The Distortion?
But first, let me tell you why some people on Wall Street (not to mention some highly misinformed TV pundits) are completely wrong in their recent oil price assessments.
A lot of this sentiment stems from the idea that we have now increased our supplies here in the United States.
This is, of course, true. Output has surged across the country, from the Bakkan to Eagle Ford to the Permian Basin. (Texas is on pace to issue the most drilling permits since 1985.)
And the EIA predicts that imports share of the U.S. oil supply will fall to 39% next year, the lowest since 1991.
Clearly, all this activity will create real opportunities for investors.
But none of this will drive the price of oil down.
Today, prices are not just reflective of new supplies, either too much or too little. By focusing only on how much is there, these analysts provide a fundamentally distorted view of the oil market.
Yes, the rise of new sources has altered the picture. But so has the rise in demand globally and at a rate much faster than anticipated.
In fact, the impact of unconventional oil (like our huge sources of shale oil) is now projected to be less than expected, even with additional volume coming on line.
I am not alone in believing that oil prices are set to rise, not fall, in this age of expanded oil and gas.
The Fundamentals Are What Matter to Oil Prices
Bernstein Research, regarded as the top energy research company in the world by their institutional investors, concluded oil prices will be rising to $158 on average for Brent in London, and about $153 for West Texas Intermediate (WTI) in New York before the end of the decade, with a concerted upward trajectory kicking in early next year.
And that’s just the average price. Spikes will carry it much higher.
Bernstein also flatly dismisses the protracted effect some television pundits think is coming from shale oil. While it will have a much more pronounced result in North America, the unconventional will have a more subdued effect on prices elsewhere in the world.
The estimate is that the overall impact of the “new oil” will comprise only 3.2% of worldwide supply at the beginning of the next decade, with most of that being in the U.S. market.
Remember, this is a global market.
Global demand and availability determines price, with that price translated to the market by the dominant benchmarks – Brent and West Texas Intermediate (WTI).
This is not simply a question of how much supply is available. Three more fundamental forces are currently influencing an upward move.
3 Forces Set To Send Oil Prices Soaring
Force # 1: The World’s Rapidly Expanding Oil Addiction
The International Energy Agency (IEA) recently estimated that worldwide fuel consumption will rise to a yearly average of 95.7 million barrels a day in 2017, up from 89 million in 2011. It has also forecast that world oil output will rise by 1.5 million barrels a day each year to 2017… attaining 102 million barrels a day.
Right now there is no question the U.S. is the world’s thirstiest nation on earth when it comes to oil consumption, consuming more than 19 million barrels a day, double the amount China currently consumes, and six times more than India.
But such a huge disparity won’t last much longer. The areas that will directly affect the price are definitely not North America and Western Europe.
Middle class societies around the globe, especially in China and India, continue to grow dramatically. It won’t be long before 7 billion people around the world will want to live off the hog just like the Americans do, driving big cars and burning up a ton of energy every single day.
Between now and 2035 you’ll have 90% of the world’s population growth and 90% of the energy growth coming from emerging markets. Think of how much oil they will need to keep their societies running!
Global demand alone is going to push oil prices through the roof.
Force #2: The Era of “Cheap Oil” Is Over
It’s amazing that in the time since we kicked off the industrial revolution, we have basically extracted all of the easy energy there is to be had using our past, current and near-future technologies.
There is no getting around this. New oil doesn’t appear magically overnight. And neither do new oil refining processes.
Today, finding conventional oil has become harder and harder. It’s either deeper in the ground, or farther offshore. As you can see in the graph below, the wells alone are costing more than 10 times what they did just a decade ago. The average cost of each well has soared.
And we just don’t get the major oil finds anymore like we used to. The press went crazy when another big oil well was discovered in the Campos Basin in Brazil. As much as 250 million barrels of oil are believed to be there. But that would represent a fraction of what we found in oil’s heyday.
When it comes to forecasting future oil prices, one ratio to look at is called the Energy Return on Energy Invested, or EROEI. It simply measures how much energy it takes to get energy out of the ground.
In the 1930s you could get about 100 barrels of oil out of the ground for every barrel you used. By 1970 that figure was 25-barrels-to-1.
Today, we’re only getting about 3, maybe 5, barrels of oil, for every one barrel of energy we use to extract it.
In a nutshell, that means that oil has become incredibly expensive to get out of the ground. Ultimately, for oil companies just to meet their margins, the price of oil will have to come up exponentially.
Force #3: Unconventional Oil Costs Are Sky-High
Today the world uses about 89 million barrels of oil a day, up from about 72 million barrels in 2004 when conventional oil production hit its peak. And as we discussed earlier, this number is set to increase dramatically over the next decade.
So how do we fill the gap?
The answer is we are now turning to “unconventional” sources to make up the difference.
I’m talking about the rise of shale and tight gas and oil, coal bed methane, heavy oil, bitumen, and synthetic (upgraded) volume from oil sands.
In terms of meeting future supply demands, this is extremely exciting. These new sources offer real hope for America realizing true energy independence, while opening up some eye-popping profit opportunities for investors.
In just the last 3 years alone Texas has seen a 230-fold increase in their output of crude oil that’s derived from shale. That’s about a 23,000% spike, coming mostly from the Eagle Ford basin.
And the Bakken oil shale formation in North Dakota is among the largest ever found.
According to a recent study by Advanced Resources International, Bakken oil shale production will surpass 1 million barrels a day in 2015, eventually peaking at about 1.45 million barrels a day in 2020. In fact, earlier this year North Dakota surpassed Alaska as the second leading state in crude oil production, trailing only Texas.
Although unconventional oil sources currently only represent about 3% of global supply, the IEA projects that it will more than double by 2020.
The only problem is this: Unconventional oil source costs are soaring. Cost of production is mostly to blame.
You see, unconventional sources cost a lot of money in technology – and resources to recover. The more drilling in shale fields and tar sands, the more water, pipeline, and machinery must be used. And those costs add up quickly.
In addition, the infrastructure for these new sources (pipelines, roads, etc) will take years to build and cost global energy companies a fortune. These costs will naturally be passed on at the pump – meaning higher prices for oil and gas around the world.
But this is creating an incredible profit opportunity for you…
The Conditions Are In Place… And Now Oil Prices Are Set To Go Up, Up, Up
These costs have already fundamentally altered the dynamics upon which global oil pricing is determined.
As you can see in the graph below, the marginal cost of production has soared in the last decade. The graph to the left shows the marginal cost of the 50 largest oil producers in the world. Notice how the steady increase in the cost curve mirrors the overall price of Brent crude oil, the same oil that is the benchmark for global oil prices.
These two graphs show that as production costs increase, global oil prices increase. And there is little that we can do to reduce the cost, given that this is an international oil market.
Below are a range of the marginal production costs for each source of oil around the world:
- $40 – $80 a barrel for a new barrel in OPEC countries;
- $70 – $90 a barrel in the Canadian tar sands;
- $70 – $90 a barrel in Venezuela’s Orinoco belt;
- $70 – $80 a barrel for U.S. deep-water oil; and,
- At least $80 is needed to sustain U.S. shale production.
As you can see in the final two figures, the United States energy figures are just as high as many of the other unconventional sources around the world. And barring a technological breakthrough that drastically makes unconventional sources more affordable, the cost of oil production continues to accelerate.
As a result, companies require that oil prices be higher in order for these fields to be profitable.
Years ago, the world could produce and sell oil at $5, $10, and $15 a barrel.
But as global demand has soared, sources of supply have changed. This will force the price of oil to surge around the world.
How To Profit From The Soaring Price of Oil
If you want to make money in energy investing right now, you need to park yourself right in the middle of the supply chain.
That’s midstream investing. It remains the single best way to profit off energy companies as global demand and energy prices continue to rise.
Midstreams are the segment that connects the “upstream” exploration and production companies to the “downstream” retail, refining, and marketing channels. This part of the energy value chain includes pipelines, gathering facilities, storage, initial processing, and terminal services for oil and gas.
By owning companies involved in the center of the supply chain, you’re far less susceptible to price fluctuations in the underlying commodity. What’s more, you are able to collect easy profits from the growing demand in fuels.
Simply put, this is the “Sweet Spot” of energy investing.
This is the place where we can collect hefty dividends and position ourselves for big appreciations in share prices, as more oil and gas is pulled out of the ground around the world.
I’m talking about Master Limited Partnerships (MLPs).
MLPs will once again be the hot approach to owning midstream assets, in general, and pipelines, in particular. Equity issues from MLPs had been strong performers with dividend yields well above the market average.
With oil and gas likely to experience occasional pricing pressures, the overall impact on both the MLP shares and midstreams in general will be felt for a bit longer.
Related Tickers: United States Oil (NYSEARCA:USO), ProShares Ultra DJ-UBS Crude Oil (NYSEARCA:UCO), ProShares UltraShort DJ-UBS (NYSEARCA:SCO), Chevron Corporation (NYSE:CVX), ConocoPhillips (NYSE:COP), Exxon Mobil Corporation (NYSE:XOM), Devon Energy Corporation (NYSE:DVN).
We’re in the midst of the greatest investing boom in almost 60 years. And rest assured – this boom is not about to end anytime soon. You see, the flattening of the world continues to spawn new markets worth trillions of dollars; new customers that measure in the billions; an insatiable global demand for basic resources that’s growing exponentially; and a technological revolution even in the most distant markets on the planet.And Money Morning is here to help investors profit handsomely on this seismic shift in the global economy. In fact, we believe this is where the only real fortunes will be made in the months and years to come.