At least we can say it was expected.
There’s been a huge rush of speculators into the oil market, most of them looking for a hedge against the falling dollar. Last week, oil prices spiked to a record $139.12 per barrel.
Even though prices dropped a few days later, it has rebounded again over $135 a barrel. So let me ask you, how can we expect speculators not to take some profits?
Now that $100 oil is a reality, we’re told it’s just some fluke.
"Don’t worry, things will get back to normal." That’s the attitude we’re supposed to have, right? That’s what we’re told.
Well, I wouldn’t bet on that just yet.
Tighter Crude Oil Market
We can nearly assume oil prices won’t retreat below $100 a barrel for a sustained period of time. In fact, I really wouldn’t be surprised if we never again pay under that benchmark for WTI (the light, sweet crude known as Western Texas Intermediate).
Let’s take a look at how the U.S. is easing our concerns over where oil prices are headed . . .
The Energy Information Agency (EIA) released its Short-Term Energy Outlook last week. According to their data report, global oil consumption grew by 630,000 barrels per day during the first quarter of 2008 compared with last year. That is actually lower than the one million barrels per day that demand was expected to rise.
This time around they’re predicting that non-OECD consumption will grow by 1.2 million bbl/d for both 2008 and 2009 (lowered from previous estimates). Not surprisingly, they’ve reported that the largest consumption growth is expected to come from China, India and the Middle East. Higher consumption in the Middle East will inevitably lead to less oil available for exporting.
Well, at least we agree on something.
Even though the EIA is attempting to alleviate our concerns over $100/bbl oil, they’re not doing a very good job. Oil prices have been able to break record after record in spite of oil inventories consistently rising! Remember, inventories have only dropped once in over eight weeks.
I’m not too sure the U.S. government is too confident in the report.
No Relief for Future Markets in 2008
Although attempts to drill in the Arctic National Wildlife Refuge (ANWR) have failed in the past, another piece of legislation has reached the U.S. Senate to tap its resources. This time, drilling would be permitted if oil prices reach $125 a barrel.
Trust me, the problem won’t be hitting $125 a barrel. I’ve already said that oil might spike as high as $150 a barrel by July (if things keep going this way, we’ll see them much sooner).
There are, however, other things to consider.
Here’s my problem with drilling in the Arctic: Are the potential oil reserves in ANWR worth the decade-long development efforts?
Let’s assume for a minute that the legislation passes and the environmental protesters (I can only imagine the protests over this legislation) are appeased. I know it’s hard to do, but for now we’ll just pretend.
We won’t see a drop of production for nearly a decade, if not longer. There would have to be a massive amount of investment dollars to tap the Arctic. According to the USGS, a 1.9 million acre area of ANWR may hold up to 16 billion barrels of oil. The amount of oil may be staggering, but it will take years to set up the infrastructure to produce and transport Arctic oil to the U.S.
Do you really think an extra million barrels per day in 2025 will be enough?
I didn’t think so.
Investing in A Tight Oil Market
The good part is that the U.S. doesn’t need to begin the long venture of Arctic drilling. We’re looking to meet that demand somewhere else.
Any push to open up drilling in ANWR is going to be met with a huge amount of protests from environmentalists. As I just mentioned, however, the largest obstacle isn’t getting the drillers in there, but rather setting up the infrastructure necessary to make a dent in U.S. demand.
Over the next ten years, the major question the U.S. will be trying to answer is how to eliminate their dependence on foreign oil.
Investors trying to crack the riddle of our falling domestic production have a much better opportunity in other plays. Specifically, I’d suggest taking a closer look at the oil boom happening right now in North Dakota. The Bakken formation is shaping up to be one of the best oil plays in North America.
Fortunately for us, producers have been perfecting the necessary techniques to extract the light, sweet crude in the Bakken formation. Breakthroughs in horizontal drilling has opened up billions of barrels of oil to oil companies. So long as oil prices remain high, the rush to pick up Bakken property will continue over the next few years.
Until next time,
Keith Kohl
