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The Oil Constriction Heats Up this Summer

by | published April 23rd, 2012

I always appreciate getting emails from so many subscribers, and I wish we had more time to answer the great questions you raise.

Today I do want to answer one particularly central question posed by a Canadian member regarding an issue we’ve covered extensively.

In a quite thoughtful email last week, William K. wrote (in part):

My one overwhelming question dates to the late 2011 comments made by you that were ripe with positive comments as to the coming explosion or as you call it, “the Oil Constriction.” If my memory serves me right, should we not be seeing positive and upwardly moving oil prices across the board by this time? You gave reference to the events that transpired in the crash of 2008-09 and the amount of time that had to go by prior to oil hitting its recovery stage and thus, much higher oil pricing, i.e. somewhere around a minimum of $150 and $200 per barrel of oil…

I have been talking with several other investors who also believe in your theories, but, we are getting nervous, as May is on the doorstep and oil just keeps going south on our investments. Are we premature in our thinking process, or should we be waiting another 4 to 6 weeks before the oil constriction begins and we start seeing a northerly upsurge in oil pricing?

Well, Bill, my “oil constriction” approach has not gone away.

In fact, it is right on track.

But we need to remember that the constriction in oil availability will not hit all oil sector shares the same way.

There are four overriding elements in what is coming.

1) Crude and Gasoline Prices on the Rise

First, the markets have witnessed a rise in both crude oil and gasoline prices – West Texas Intermediate (WTI) prices are up 37.5% since October 4, while RBOB (the gasoline futures contract traded on NYMEX) is up 56% since November 25.

The constriction, however, is not simply reflected in the price.

We have a very different dynamic underway than the one experienced in 2008. Three years ago, it was a speculatively driven rise in oil prices that came crashing down when an outside crisis hit (the subprime mortgage mess and the corresponding credit freeze).

This time around, the constriction results from the rapid decline in prices from the third quarter of 2008 through a sluggish leveling-off through the fourth quarter in 2009. This period produced a significant cutback in new drilling.

Consider this: The top 15 oil producers in the world have replaced barely 70% of the extractable reserves they extracted over the past three years.

With conventional production, therefore, the constriction is already in place.

However, we have moved quickly into accelerating unconventional oil production.

That is element number two.

2) A Rebalancing Act in Crude Prices

Here we are speaking of shale, tight and heavy oil, bitumen, and oil sands. These are providing a major new domestic sourcing that is lowering our import requirements. But the largess is producing dislocations in some locations, while increasing prices in others.

The new infrastructure requirements following rising unconventional production affect everything from the wellhead, through the transport system, to the massive refinery investments necessary to upgrade and process this lower quality crude.

The upside to the situation is that there is a great deal of this unconventional supply in the U.S. and Canada. The downside is the upward pressure on prices resulting from the more expensive volume.

This requires some significant rebalancing of the market – both in terms of product and distribution. Yet a balanced market will still result in higher prices. That is because of two pervasive considerations: the higher overall cost of the new sources and the reliance on imports for any of the U.S. needs.

For reasons I’ve mentioned on a number of occasions here in OEI, Brent will remain priced higher than WTI for some time. That higher price is reflected whenever the imported volume makes it into the American domestic market.

3) Global Demand Swelling as Summer Approaches

Third is the demand level.

We continue to see only modest recovery rises in U.S. demand figures. As the economic recovery gains strength (and despite a very gun shy market of late, there are developing indications that the recovery is setting in – led by intensifying levels in the forward leading economic indicators), those demand figures will be increasing. In addition, the summer driving season will do that by default.

Global demand, on the other hand, continues to rise. Both OPEC and the International Energy Agency (IEA) continue to see increasing usage, now closing in on 89 million barrels a day. This remains centered in the developing, not the developed, nations.

By mid-summer, this is all going to be coming together.

4) Geopolitical Tensions are Heating Up

Finally, there’s the wildcard of geopolitical events and tensions.

Oil is traded on an international market, and what happens in one region impacts every domestic market open to global trade, regardless of how much internal oil a country may possess.

There is also another mistake consistently made about the geopolitical factor. Crises such as the current tensions with Iran, the Libyan civil war last year, or the ongoing “Arab Spring” are still regarded by many as exceptions to some “rule” of stability.

They are not.

This is the new reality of the global oil market.

All four of these elements are colliding to increase prices, intensifying the constriction now firmly in place.

Bill K. is also a subscriber to both Energy Advantage and Energy Inner Circle. That means he already knows two other things. Number One: The rising pricing tide will not raise evenly all stocks.

You need an overall strategy for your portfolio.

Number Two: When the pop does hit, as it has with a number of our holdings in both services, the double and triple-digit returns take place rapidly.

Sincerely,

Kent

Editor’s Note: The ongoing oil constriction is the most profitable opportunity for energy investors all year. To discover the best ways to profit from this perfect storm, take a free look at Kent’s latest research by clicking here.

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. J
    April 23rd, 2012 at 11:28 | #1

    what is happening to apache and anadarko and haliburton and suncor , they keep headed south?

  2. Garland Anderson
    April 23rd, 2012 at 11:56 | #2

    What’s holding down the performance of Zion Oil (ZN) in Israel?

  3. William Puckett
    April 23rd, 2012 at 12:27 | #3

    Dr. Kent Moores

    Please tell me the best oil stock to invest in today.

    Sincerely Yours

    William Puckett

  4. David Andersen
    April 23rd, 2012 at 12:29 | #4

    Dr. Kent, I am a member of all of your services except your new Ghost Options and this is only because I employ the “set it and forget it” investment strategy. I can see volatility in Energy reducing my profit expectations in your stock picks. On April 3, you provided 3 ETF Funds where we could gain exposure. You also said BNO would go up faster. All are down now. Which single play can I make and not loose? PS-I even sold my Methanex because of continued southerly results and also the new Europe gas finds. Help the constriction on my purse, please.

  5. ernie baldwin
    April 23rd, 2012 at 12:43 | #5

    I noted that a Nov. 2011 K.M. prediction that U.S. gasoline would reach $5.00 a gallon in March of 2012. Didn’t happen….

  6. April 23rd, 2012 at 15:12 | #6

    Dr. Moors-

    I’m VERY disappointed in your handling of Westport Innovations (WPR). Its price dropped precipitously recently, and you issued no “sell” advice (none that I received, anyhow). I lost over $600 in profits and am now in a negative position. Meanwhile, another service to which I subscribe HAD (unknown to me) issued a “sell” on this stock in a timely manner. I have, therefore, lost confidence in you and am cancelling my subscription to your service. As far as I’m concerned, you’ve blown it.

    Charles S. Wertalik

  7. Larry
    April 23rd, 2012 at 16:27 | #7

    You wrote: “The top 15 oil producers in the world have replaced barely 70% of the extractable reserves they extracted over the past three years.”

    I don’t understand this statement. Could you elaborate a little?

  8. pt49
    April 23rd, 2012 at 17:22 | #8

    Oil exports are now over 3 mill barrels a day out of Iraq and rising, they now have 2 floating terminals in operation loading 300k barrels a day each on ships, with a capacity of 900,000 a day each once fully operational. A further 2 terminals come online within 6 months, and when all 4 are operating at capacity Iraq will be exporting just on 5 mill barrels a day. Their ultimate target is 12 mill a day… which may be a little optimistic (they desperatly need new port facilities).

    Iraq is about to experience a massive boom in construction, if they can evade the bullets flying in the Arab Spring. Predicted growth rivaling China in its boom years… 25% per annum is realistic.

  9. H.S. McAlister
    April 23rd, 2012 at 19:43 | #9

    Agree with comments about Westport. I have a lot of respect for Kent Moors intelligence and knowledge. However what I am not impressed with is the number of emails I receive asking me to put up big $ to get “secret” information that is in advance of the masses. Mass marketing via the Internet, I think is Dr Moors key to riches. Good marketing …… not so good advice?

  10. Erwin
    April 23rd, 2012 at 21:27 | #10

    All B .S. You guys have been saying this for over a year now. All I have done is lose money on Dr Moors predictions. 1st it was going to happen last summer. then it was going to happen in Jan 2012 Now its going to happen this summer. Guess you keep predicting and sometime something just might happen. How do you stay inbusiness?? Erwin Morris

  11. John Geary
    April 23rd, 2012 at 21:54 | #11

    Dear Chuck,

    I imagine you’re a subscriber to the Energy Inner Circle, which is where Dr. Moors recommended WPRT a buy over six months ago at a market price of $21/share. It is now trading at $31, down over $10 dollars in the last 45 days, but still well above his buy recommendation point. I believe Dr. Moors recommended a sell of part of your position to take some profits shortly over a month ago. In any event WPRT and GLNG, though advocated for in his Energy Inner Circle (which is more a short term trade subscription) is also part of is his core energy advantage portfolio holdings. Dr. Moors spoke in great detail about the long-term growth potential of these two companies with the emergence of natural gas powered engines and transporting LNG. The fact that you did not timely take some profits off the table, and entered late in the position, is not Dr. Moors’s fault, as he has been active in his proclamation that the energy sector stocks, especially field services, have faced a bit of a pullback and would continue to do so until further notice. Try investing in more than one stock, and do so when the recommendations first come out, before you ignorantly and arbitrarily mutter your negativities toward Dr. Moors and his credibility. If you pay attention to his overall holdings, there are a myriad of double and triple digit winners. Sorry you missed, and are still missing the big picure.

    John Geary

  12. Bert Lindsey
    April 24th, 2012 at 05:07 | #12

    $7.10…equivalent price of gasoline, per gallon, in Czech Republic.
    Don’t worry, you will get your $5.00 per gallon….
    This price reflects RECENT increases in the past 2 months…

  13. Noel Douglas
    April 24th, 2012 at 11:37 | #13

    I also invested in Westport Innovations and as the market dropped I lost $10,000.00. I pulled everything out and I am sitting waiting for even a larger drop as Europe’s dollar seems to be in trouble,(4-5 countries),probably will go down. Who is going to back them?
    Dr. Kent sounds as he is on the correct track ,as the whole world is so connected that every single sneeze drops the market, so I believe that he knew this back when he developed his new Phamtam System. I will make my loss back in the future. Thanks Dr.Kent.**Noel Douglas**

  14. John Eastman
    April 25th, 2012 at 21:41 | #14

    I have been a subscriber since Feb and followed all recomendations. I have lost a significant amount of my investment value. I am a playing with my retirement funds. I am not happy with Dr. Moors. He seems to be another self promoter. His predictions have not materialized and his stock advice overall is negative.
    John Eastman

  15. Steve
    April 26th, 2012 at 11:02 | #15

    Dr. Moors’ short run predictions seem to be correct about 55% of the time. In the long run, he and I will be dead.

  16. mike
    April 27th, 2012 at 09:54 | #16

    I am Still invested for in Westport Innovations I am waiting for oil to go up. I am also invest in KOG, SSN and AXAS. I am hoping to make some money on the oil stocks to off set my lost. I am down about 16000.00.

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