Two Oil & Gas Game Changers… This Morning
Two major events rocked the oil and gas sector this morning.
But they weren't tied to ubiquitous market volatility or natural disasters.
These were intentional – each a result of human decisions.
Whatever the cause, the result is that we are we are off to the races… and you and I have the opportunity to benefit nicely.
The Embargo Has Begun
First, the European Union (EU) in Brussels passed its anticipated oil embargo against Iran.
The EU also froze assets of the Iranian central bank in Europe. I have recently commented on what this action would mean to the oil markets, even if Tehran does not make good on its threat to close the strategic Strait of Hormuz.
Closing the strait, even for a short time, would lead to the quickest rise in oil prices on record.
But the likelihood of that taking place is uncertain. Iran, after all, gains 80% of its income from oil exports. They would experience a steep financial cut by their own hand.
More certain now are the major crude oil pricing issues that would result from withholding Iranian crude from the European market.
And that one will be happening.
Tehran continues to argue that its nuclear program is for peaceful purposes. Yet Brussels and Washington have long since dismissed that claim. The purification factor sought by Iran goes well beyond what is required for electricity generation.
For that matter, the power reactor about to come on line at the nuclear plant in Bushehr – built by the Russians and containing a closed-loop fuel cycle (both uranium going in and waste coming out are under outside control) – indicates that Iran has other readily available methods of developing a peaceful nuclear program.
Still, the fact remains, Western Europe is Iran's second-largest crude export customer (after China).
That means the economic impact on Iran from the embargo will be significant and quick.
It is certain to disrupt what little political and market stability exists within the country, resulting in an even less-predictive environment.
On the European side, the EU has yet to work out how that crude will be replaced.
It can do so in the shorter-term, but the sanctions will certainly increase the pressure on the longer end of the futures curve. As we move forward, the ability to restrain oil at current prices (about $110 a barrel for Brent in London) will become more of an issue.
Both from the standpoint of what will happen in Iran and in Europe, therefore, uncertainty will increase. Both spike the risk factor, guaranteeing that increasing volatility will raise the price higher.
This market volatility may be the result of human decisions, but it is volatility nonetheless.
The second development today, however, is one that will have a major impact on the U.S. energy markets…
Chesapeake No Longer Going Dry
Chesapeake Energy (NYSE: CHK) announced that it will dramatically cut both its dry natural gas production and its capital investment in ongoing production.
“Wet” gas, on the other hand, will still be produced near the same levels.
This gas has other value-added products contained within it. When separated from the “dry” gas used in the normal heating, power production, and industrial uses, the other wet gas ingredients provide additional revenue streams.
Why is Chesapeake making this move? It's about the price of gas.
The combination of an unusually mild winter and dramatic increases in shale gas production has resulted in a serious gas glut.
Not suprisingly, NYMEX contract prices have collapsed to the lowest level in years – less than $2.50 per 1,000 cubic feet.
Chesapeake is a dominant gas producer, and its move will represent the pulling of about 8% of total volume out of the market.
What it does for investor prospects, however, is even more impressive.
A Positive Ripple for the Midstream
The decision this morning is increasing CHK share value by 5%.
But it is also having an immediate positive ripple effect on midstream companies (those providing the services between wellhead and retail sale); the Master Limited Partnerships (MLPs) controlling natural gas pipelines, producers, and transporters of liquefied natural gas (LNG); and major companies involved in the retrofitting of diesel and gasoline-fueled vehicle engines.
My investment advisory service, Energy Advantage includes a structured exposure to the very shares now benefitting from the Chesapeake decision.
This includes midstream providers, MLPs, LNG exporters and shippers, and the world's leading company for moving diesel engines to the use of compressed natural gas (CNG) and LNG, along with CHK itself.
These company share values are about to improve significantly, and we are going along for a nice profit ride.
Editor's Note: Two major events shook the energy markets today, and Kent is poised to show readers how to profit from them.
But Kent's latest research could make investors even greater profits. And the story is even bigger…