The Coming “Oil Shock” [ConocoPhillips, Linn Energy LLC, BreitBurn Energy Partners L.P., BP plc (ADR)]

The Coming “Oil Shock”

Dan and others also put emphasis on the real supply side quandary.

The last extended period of low oil prices was from 1985 to 1990. In 1985, when oil prices collapsed in a similar fashion to what is occurring today, the world had 13 million bpd of spare capacity, with 7 million of that in Saudi Arabia. OPEC was well-positioned to comfortably meet any increase in demand.

Today, just about all of the world’s discretionary spare capacity resides in Saudi Arabia and amounts to no more than 2 million bpd. Oil expert Lou Powers says that Saudi Arabia will have difficulty maintaining production at over 10 million bpd for an extended period. If we do swing to a supply shortage, the Saudis may find themselves needing to open all production for a prolonged period of time. Lou says at that point the world will be headed right back into an oil shock and we will see much higher oil prices than $100 per barrel.

Recall that North America and deepwater projects are the only places with meaningful production upside. If crude oil prices remain below $60 a barrel for any length of time, it could prove catastrophic to non-OPEC supply. At some point, OPEC action may become necessary.

But some are pointing elsewhere. Steve Kopits says the cut may not initially come from either Saudi Arabia or OPEC. “OPEC could cut production to prop up prices and increase revenues,” Steve says. “But for now, a better strategy for Saudi Arabia would be to hang back, deflect criticism, and let events play out. If the Russians are thinking clearly, Moscow will cut first.”

Because there is one truism in all of this…

Before the spike in crude oil prices occurs, a range of highly profitable energy sector prospects will fall into our laps.

Seriously oversold markets have a way of doing that.

Money MorningWritten By Kent Moors From Money Morning

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.

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