There’s more than one way to invest in energy, and you don’t have to choose between majors and juniors. Frank Curzio, editor of the Small Stock Specialist newsletter, tells us exactly why every investor needs a diversified portfolio of juniors, large-cap oil and gas producers and natural gas services. In this interview with The Energy Report, Curzio talks of a shifting political climate and why it could mean a massive boom for U.S. natural gas exports. Don’t let yourself be caught out in the cold when the natural gas market catches fire.
The Energy Report: Frank, will the ongoing crisis in Ukraine keep oil prices above $100/barrel ($100/bbl)?
Frank Curzio: Yes, I think so. Even without the short-term effects of geopolitical risk, the fundamentals should keep oil at an average price of $95/bbl over the next few years in the U.S. I don’t see it trending too much higher, but I also don’t see it dropping.
The reserve replacement ratio for some large U.S. producers remains over 100%, which is good. International oil companies, like Saudi Aramco, Gazprom (OGZD:LSE; GAZ:FSE; GAZP:MCX; GAZP:RTS; OGZPY:OTC), PetroChina Company Ltd. (PTR:NYSE) and Petróleos Mexicanos (PEMEX) have replaced less than 80% of their oil reserves annually over the past three years. That is troublesome.
Outside the U.S., it’s very difficult to find oil that’s economically priced. There’s plenty of oil, but in a lot of places—Russia and several spots in the Middle East, in particular—explorers and producers are having trouble finding oil that can be developed for less than $90/bbl.
However, demand is still strong. Some reports show people are driving less, but according to a report by IHS Automotive, a record 82 million (82M) automobiles were sold last year around the world. Airbus set a sales record last year, as well, demonstrating strong aviation demand. The emerging markets have been down, but I expect to see more stimulus packages targeted at producing short-term growth over the next few years from the BRIC nations (Brazil, Russia, India, China), particularly China.
In the U.S., manufacturing is strong; gross domestic product is expected to hit 3%. Housing starts are solid in this low-interest rate environment, which will be around for years according to the Federal Reserve Bank. All of these are fundamental changes that will result in oil prices averaging $95/bbl over the long term.
TER: You’ll be speaking at the Stansberry Society Conference with T. Boone Pickens. He takes the position that the U.S. should look to clean energy and capitalize on low domestic natural gas prices by converting heavy truck fleets from diesel to natural gas. Can that be accomplished?
FC: Yes, I’m siding with Boone Pickens; the process has already begun. Wal-Mart, UPS, Coca-Cola, Pepsi and Waste Management are all switching their engines from diesel to natural gas—compressed (CNG) or liquefied (LNG), so they’re also building CNG and LNG fueling stations.
Fuel costs are the biggest expense for transportation companies. Using natural gas instead of diesel amounts to huge savings for companies with large fleets.
TER: What about cars? Can infrastructure be put in place so they can use natural gas?
FC: Some pickup trucks are already being converted to use both natural gas and gasoline. I rode in one when I visited Westport Innovations Inc. (WPT:TSX; WPRT:NASDAQ), and the only difference I noticed was that the engine made no sound at all.
Nearly every auto manufacturer produces cars that run on natural gas—they just don’t do it in the U.S. because we don’t have enough fueling stations yet. When that changes, natural gas cars will be huge. Clean Energy Fuels Corp. (CLNE:NASDAQ) is building CNG and LNG fueling stations, but infrastructure has to be in place before natural gas will become a mainstream fuel for cars. It could happen as soon as five years.
TER: When natural gas prices were low, many coal-burning power plants switched to natural gas. When the price surpassed $6, some returned to burning coal. Will that dance continue or will more utilities switch to natural gas permanently?
FC: I think we’ll see a move to natural gas. There are price spikes and volatility in every commodity. Overall, you need to look at the average price of things, like $3.50/bbl for natural gas over the course of our 100 years’ worth of supply.
We have such a huge supply of natural gas that we have to burn it because we have no place to store it. Think about that for a minute. We have so much natural gas, we are burning it. This tells me the price of natural gas will remain cheap long term, thus making it a much better alternative to coal, both economically and environmentally.