The Thirst For Oil Continues; and The U.S. Is Getting Squeezed Out (USO, OIH, XLE, ERY, ERX)

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December 7, 2011 2:58pm NYSE:ERX NYSE:ERY

Kevin Kerr: Oil prices (NYSEARCA:USO) have been on a wild ride the second half of 2011, and that’s likely to continue for the foreseeable future. A myriad of factors are contributing to the growing volatility in the energy patch, everything from political unrest in various oil producing nations, weaker

fiat currencies, uncertainty in Europe, and fluctuating demand and supply numbers.

This constantly changing data has been a catalyst for oil prices to drop to a low of around $75 and then rally to over $100 in just the last few months. Such trading ranges are highly unusual.

The Changing Landscape of Oil Production

The various regime changes and ongoing political unrest in the Middle East have put energy traders on edge, and thus caused oil prices to ratchet up rapidly. The overthrow and deaths of several key oil producing leaders, such as Libya’s Muammar Gaddafi, have changed the matrix for oil production going forward. And traders are left with more questions and concerns, rather than solutions.

Iran is the latest oil producing chokepoint nation to cause distress in the market. The country’s ongoing threat to develop nuclear power, and thus nuclear weapons, has been a continuous concern for some time, and now it seems to be coming to a head. Iran has clearly stated that it has every intention of wiping Israel off the map, a statement the Israelis clearly have a justification to be concerned about. Even so, Iran has a cozy relationship with Russia, one of its biggest suppliers of nuclear technology, supposedly for peaceful purposes.

At the end of the day, Russia has close commercial ties with Iran and has even built a nuclear power plant there that was switched on this year. It has repeatedly said too much pressure on Tehran is “counterproductive.”

Russia is instead calling for a step-by-step process under which existing sanctions would be eased in return for actions by Tehran to dispel international concerns. The problem is reaching a boiling point. And there are concerns that Israel may act sooner rather than later to protect itself from real or perceived threats, thus starting a chain reaction of events.

OPEC Growing Increasingly Unfriendly

The fact of the matter is that OPEC has come to the realization that their oil supply lines are the lifeblood of their economies and that civil unrest is a growing problem that must be dealt with swiftly or the result for the leadership can be swift and bloody. Gross disparities between the “haves” and “have nots” in most of these oil-producing nations is a real threat. And OPEC leaders are taking steps to try and balance the equation a bit and share the wealth a little bit more.

OPEC faces a tough balancing act: It must keep prices high enough to generate a certain amount of revenue while not letting prices rise too sharply and risk crushing demand. Soaring prices could reinvigorate investment in alternative energy and other non-OPEC drilling programs.

When oil hit $147 a barrel a few years back, we saw an exponential increase in investment in everything from solar, wind, and bio fuel companies, as well as a myriad of drilling programs. However, as energy prices dissipated, much of that red-hot investment money disappeared too.

It was a shot over OPEC’s bow though, and they see the writing on the wall. Another thorn in OPEC’s side is the slide of the U.S. dollar and the ongoing weak euro currency. OPEC ministers have repeatedly considered trading oil in another currency as an alternative to the dollar. And this chatter is rapidly turning into serious conversation, as OPEC looks for a way to shore up losses as a result of the weak dollar. The possibly of using a gold-backed UAE Dinar or some “basket” of currencies has been seriously entertained.

More and more OPEC nations are trying to distance themselves as a tool of the West and play more to the concerns of their member nations and the long-term livelihood from oil exports.

Which means …

The U.S. Is Being Squeezed Out of the Equation!

As strategic alliances between China and Russia expand and develop, the U.S. is not developing any substantially new supply lines for the next 50 years. In addition to partnerships with Russia, China is also growing oil production in key African nations. The thirst for oil in China is unquenchable and likely to keep on growing at a breath taking pace.

China is well aware of this. And like so many other commodities the nation demands, it’s setting up long-term supply partnerships to meet its needs. Again the U.S. has very little presence on a relative basis in Africa, which I think is a huge mistake.

Africa presents the last best hope of future supplies of almost every primary commodity. Industries like mining, agriculture, soft commodities, and certainly energy, are all in large supply. China has set down deep roots in the continent and is investing in infrastructure and communities to keep workers happy. Most importantly they’re learning how to navigate the harsh and constantly changing political landscape in Africa, which can be extremely challenging.

China knows exactly how to play it and largely uses barter deals to get what it wants, rather than cold cash. Since 2004, China has a multitude of deals in at least seven or more resource-rich countries in Africa, for a total of over $14 billion.

Another example is reconstruction in war-battered Angola, which has been helped by three oil-backed loans from Beijing. Basically the Chinese companies have built roads, railways, hospitals, schools, and water systems in exchange for various commodity supplies from the region.

Nigeria took out two similar loans to finance projects that use gas to generate electricity. In the past, Chinese teams have built a hydropower project in the Republic of the Congo which was repaid in oil, and another in Ghana which was repaid in cocoa beans.

The Future of Oil and Energy Investment

For the foreseeable future, fossil fuels continue to provide the vast majority of energy supplies for the world population. And as the race continues to find cheap, reliable and abundant supplies, Africa remains a focal point for investment. China knows this and so do investors who are savvy and looking for some long-term sustainable gains in the energy sector.

The winners are likely to be companies that are providing the equipment, drilling technology and expertise, as well as infrastructure to Africa, for oil production and mining.

Related: Oil Services HOLDRS ETF (AMEX:OIH), United States Oil ETF (NYSEARCA:USO), Direxion Daily Energy Bull 3X Shares (NYSEARCA:ERX), Energy Select Sector SPDR ETF (NYSEARCA:XLE), Direxion Daily Energy Bear 3X Shares ETF (NYSEARCA:ERY).

Best wishes,

Written By Kevin Kerr From Money And Markets

Money and Markets (MaM)is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, Michael Larson and Bryan Rich. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaMare based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Andrea Baumwald, John Burke, Marci Campbell, Selene Ceballo, Amber Dakar, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economics.

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