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The Great Energy Reversal

by | published February 13th, 2012

Don't look now… but the almost unthinkable is about to happen.

The United States could finally become completely self-sufficient in its energy policy.

You already know that our energy situation is undergoing a revolution, thanks to things we talk about here every week: huge shale gas surpluses, the highest domestic oil production volume in years, prospects for major gains in North American heavy oil production, and increased efficiency standards.

And you already know that this new vision will lead to huge profits for investors like you and me.

But it does require that we change the way we approach investing in the energy market.

This is A New Kind of Self-Sufficiency

See, it's not that the U.S. market has suddenly figured out how to curb domestic demand levels.

And no – we're not going to stop importing from foreign countries, either.

No matter what anyone tells you, we will still be importing crude, and we will still have to worry about what happens in the Greek Parliament, or with Iran and the Strait of Hormuz.

It's that domestic sources will be producing a greater percentage of the energy we use (and that will have another tangible benefit).

The cost of oil is the primary focus here.

That means a fundamental transformation in the energy balance will be accompanied by a greater percentage of that balance marching to a different tune.

The energy sector reflects the essential pricing and availability component of its dominant element. Globally, that has been – and, for the next two decades or so, will continue to be – crude oil.

However, we are replacing rising portions of the mix by engaging alternative energies or domestic oil and gas.

And that accomplishes three rather significant changes.

Change No. 1: It moves the U.S. market from a price-taker to a price-setter.

Simply put, as a market becomes more dependent on other regions for its primary fuel, it defers pricing to its source.

The obvious secret: OPEC sets the price; the U.S. takes it.

In the case of using more American oil production, the overall price charged to the end user may not go down. In fact, one of the primary reasons we've relied on imports has been the dramatic difference between the low cost of production abroad and the much higher costs at home.

So, again, relying more on domestic production would not lead to a reduction in the price at the pump.

But it will put the costs more and more in American hands.

And that allows us to predict energy costs in what has been a foreign seller's market.

It also means that the imports that we use become secondary to the pricing dynamic, rather than the creator of it.

Change No. 2: Having sufficient domestic volume makes us less susceptible to pricing spikes.

Remember, it's not that the local volume makes the imports unnecessary. And this is not a return to a vision where America is completely self-sufficient and removed from international events.

What happens elsewhere is still going to have an effect on the U.S market. The international oil market is integrated, and, well, international.

But it does mean that the cycles should be less severe.

Greater flexibility in where our energy comes from – with a rising percentage of our sources inside the country (or from Canada) – provides a genuine offset to volume disruptions abroad.

Third (and most important): Crude is no longer “the fuel of choice.”

Whenever the supply and demand for oil products is at issue, vehicle use is usually the dominant concern.

We tend to think first about the relationship between oil prices and transportation… the relationship between the cost of a barrel of crude and a gallon of gasoline.

Yet vehicles are only one of four major “use” categories. The other three are power generation, industrial, and as feeder stock for petrochemicals.

And there, we have made major gains.

Substitutes in these other three categories – primarily from our domestic largesse of unconventional gas – are reducing our dependence upon crude oil as the fuel of choice.

In addition, as trucking fleets replace diesel fuel with compressed natural gas (CNG), there will develop a rising ability to temper the hold crude oil has on the most persistent source of demand for it (from our gas tanks).

Now, this is not going to happen overnight. The domestic replacement of reliance upon some of the crude oil and oil products import volume will not be inexpensive or quick.

Yet it sure does seem to be coming…

Just look at the spread between West Texas Intermediate (WTI) and Brent benchmarks. Brent has now been more expensive than WTI for 377 consecutive trading sessions (since August 13, 2010). The spread stands at almost 19% of the WTI price beginning trade today.

And this isn't only about traditional supply and demand concerns.

International crises, the “Arab Spring,” Iranian sanctions, and a host of other problems have prompted both benchmarks to increase. Clearly, though, the impact has been greater on Brent than on WTI.

Prospects for rising domestic sourcing in the U.S. has not been the major cause of that, but they will figure more prominently in restraining risk elements as we move forward.

Here's the Outlook for the Investor

More of the energy we use will either be produced here or transported in from Canada.

That is going to result in a more defined energy sector – one in which domestic elements have a greater determining factor in price.

The new environment will be unfolding over the next several years, and volatility will still have a thing or two to say about what the investor needs to do.

The international stage will still pressure both prices and availability.

But, as we roll out this new energy balance, what happens here in America will have a greater determining factor in our market pricing and value.

That will allow investment decisions to be made less on what some Ayatollah says, and more on what a domestic energy company does.

That should be the road to greater profits for us.

Sincerely,

Kent

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Please Note: Kent cannot respond to your comments and questions directly. But he can address them in future alerts... so keep an eye on your inbox. If you have a question about your subscription, please email us directly at customerservice@oilandenergyinvestor.com

  1. Richard Pluschau
    February 13th, 2012 at 14:29 | #1

    1. Where do I find your current portfolio recommendations (buy & sell)

    2. Do you have a listing of not more than eight securities? (I cannot manage any portfolio with more than 8 securities)

    Thanks,
    Richard Pluschau

  2. Donald BECKER
    February 13th, 2012 at 14:58 | #2

    With all the banter about natural gas , do you still feel that oil will go to $150 by this summer. Thanks…DRB

  3. Terry Leigh
    February 13th, 2012 at 16:02 | #3

    Hi Kent, I enjoy reading your newsletter and find it quite informative. I am a Canadian citizen who has lived in the US for quite a time and I continue to be concerned about the level of unconcern and interest in the Canadian perspective when it comes to issues such as the Keystone pipeline. Prime Minister Harper has been in China for most of the past week seeking Chinese investment in the oil sands and has clearly stated that it is in Canada’s best long term interests to disengage Canada’s long term trade in oil and other things from the US to other markets. It appears that Obama and Washington in general assume that Canada will await their political pleasure. In most of the commentary and editorials I read, there is a woeful lack of recognition that Canada is a sovereign nation with its own culture and identity who may act in its own interests even though it has a long history of aligning with the US. Do you think a pipeline to the west coast and subsequent export of oil to Asia a reasonable possibility and if so what does this do to the energy picture in the US?

  4. February 13th, 2012 at 16:17 | #4

    You understand I am following Dr. Kents advice on buying some stock he recommended like Lukoil, Chesapeake Energy, Northern Oil & Gas, etc. My comment is more in the idea of a question. When do I think about selling these stocks? I have patiently watched the stocks lose money and also gain. When does Dr. Kent expect them to get higher? He mentions the constriction is imminent. When does this happen? Ted Pantelakis

  5. Fred R. Maiocco, Sr.
    February 13th, 2012 at 18:24 | #5

    Only the Market controls the up & down cycle of a stock’s price. No one knows for certain when an event will occur! If we did, we’d all be RICH. If you make some profit in 3 out of 5 of your trades consistently over time, you will be a successful stock trader. Study the market, select a half a dozen sectors you are familiar with, learn from your mistakes (Keep RECORDS), be consistent on your Buy/Sell rules (be a technician) and be patient!

    Hopefully you purchased these stocks when their Weekly Stochastics were on the bottom of their respective cycle and turning up, rather than in the high 95+% region and ready to drop. If you did “BUY LOW”, I’d highly recommend that your rely heavily on the respective Stocks’ Weekly Stochastics and have a good idea on establishing Trailing Stops in order to protect your profits. You can always buy your favorite stock back at a lower price for these highly recommended Stocks.

    Enjoy! – frm

  6. enthusceptic
    February 13th, 2012 at 18:38 | #6

    The idea of burning CNG in diesel engines is not new, powering trucks, trains and ships. The problem – yes, my broken record is turning again – is the same as with the steam engine. Enormous amounts of fuel are needed.

  7. enthusceptic
    February 13th, 2012 at 18:59 | #7

    I really love Mr. Moors’ writings, but the Money Map Press “customer disservice” sucks megatime.
    My advice is to never subscribe to anything that doesn’t offer at least a 90% refund if you bail out. Especially, you living outside the US beware!
    Why vent here? Have written twice, no answer.

  8. enthusceptic
    February 13th, 2012 at 19:12 | #8

    At least one of the free investment services run ads for Everbank in the US.Tried to contact them, no answer. A lot of North Americans seem to think of the rest of the world as irrelevant.

  9. Robert Berke
    February 14th, 2012 at 01:11 | #9

    @enthusceptic
    Agreed that CNP is not likely to be the fuel of choice for large vehicles like trailer trucks, ships, and trains because the size of tanks needed make it unfeasible. But cng works a lot better for smaller vehicles like cars, delivery vans, garbage trucks and buses. From what I read, it seems like LNG rather than cng is the recommended alternative fuel for the larger vehicles.

  10. March 16th, 2012 at 04:03 | #10

    It is typically more envsxeipe for you to designate “green” power. It is a method to subsidize the building of more wind power, but in reality wind power is not any more “green” than nuclear power. The intermittent nature of wind power makes it necessary to have some sort of “backup” power, usually gas, wind uses much more concrete and steel than nuclear power for the same amount of megawatts. Wind power actually has a larger “footprint” than nuclear power, it takes more land to produce the same amount of power. We need to explore all the methods of producing power while minimizing the effect on the environment, this is one way of donating to that cause and voting with your $$.

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