Is oil’s wild ride over?
If you follow the energy markets in the slightest, there’s a good chance this thought has crossed your mind lately. Last year turned out to be a roller coaster for energy, including record highs and mind-numbing, multi-year lows.
For those of you who took advantage of the situation, you got the best of both worlds. I’ll get into that a bit later.
Admittedly, it hasn’t been easy watching oil prices plummet over $100 per barrel during the last half of 2008. It was difficult not to cringe.
In order to defend prices (and no doubt while watching their revenue slip through their fingers), OPEC started swinging. If you told me a few years ago that OPEC would cut output by four million barrels per day, I wouldn’t even guess how high prices would have jumped.
Last month, after their second round of cuts (2.2 million barrels per day, the single largest in their history), oil prices merely shrugged and fell as low as $32 per barrel.
Normally, I wouldn’t get too hung up on OPEC numbers. Cheating on their quotas is nothing new. I have a feeling OPEC is going to stick to their cuts this time.
Believe me, you aren’t the only one who thinks oil is cheap under $50 per barrel.
Last week, both China and the U.S. announced plans to build up their crude stockpile. The U.S. Department of Energy said it will buy nearly 12 million barrels of crude. As of last week, U.S. crude stocks were approximately 29 million barrels more than a year ago.
Peaks, Plateaus and Falling Imports
Depending on who I ask, the world’s oil production has either peaked, plateaued, or will peak within a few years.
Whichever answer you support, my question for you is simply, "Do you honestly see production growing?"
Not only are we in a period of low prices and multi-year low prices, but budgets across the board have been cut (sometimes more than once within the the last three months).
The lack of investment by itself is enough for me to remain bullish on prices in 2009.
Think about it…
Although I won’t rush and call a bottom in prices, I think 2009 will turn out to be a more stable environment for the world’s economy—especially during the second half of the year. Once things pick up again, that lack of investment will take its toll.
Let’s take a quick look at our largest crude suppliers:
Canada: As you know, Canada supplies about 2.5 million barrels of oil per day to the U.S. There’s no question the Alberta oil sands have been one of the hardest hit areas by low oil prices. Not a week goes by that I don’t hear about another project being canceled or delayed.
Saudi Arabia: As usual, the Saudis are taking the brunt of OPEC’s production cuts. Our second largest source of oil is having their own peak oil problems, especially with the amount of water needed to pump into Ghawar, their largest field. Furthermore, we all know about OPEC’s proclivity towards shady numbers (their sudden reserve increase in 1990 is enough to make me pause).
Mexico: Production at Cantarell has become the poster child for peak oil. Production at the field (once accounting for 65% of Pemex’s total output, Cantarell now makes up only 32%) now stands under one million barrels per day. That’s a 33% drop in production compared to a year ago. As our third largest crude supplier, I can’t help but wonder how much longer Mexico can keep it up.
Picking Up Domestic Production
One way or another, we’re going to have to make up for the loss of imports. Although Canadian production can pick up once prices move higher, the loss of our Mexican imports will become a reality.
According to the EIA, our domestic crude production fell approximately 130,000 barrels per day compared to last year. This year, however, might be a different story.
It’s no secret that U.S. oil production has been in decline for more than three decades. In fact, it has been about seventeen years since the last time our production actually increased!
Looking at the EIA’s outlook, things are about to change. They’re projecting that U.S. production in 2009 will grow by over 300,000 barrels per day. The growth is attributed to new offshore production coming online from the Thunder Horse platform and the Tahiti platform. Both are located in the Gulf of Mexico.
Part of me believes this increase is more wishful thinking, and I have a feeling many of my readers feel the same way.
Future Investments
Earlier, I mentioned how some investors got the best of both worlds in 2008.
Those of you that were savvy enough to get out when energy companies were posting record highs made a considerable chunk of change. Unfortunately, some of the investors who missed the move panicked and rushed to dump what they could.
The situation is quite different now as the markets have become less volatile. Regardless of whether you feel the bottom has happened yet, the fact remains that some of these energy companies are ripe for the picking. Over the next few weeks, I’ll show you exactly where to look.
Until next time,
Keith Kohl
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