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Energy & Commodities

What’s the Deal With Oil Prices?

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Posted by Byron King

on Thursday, 14 June 2012 08:00

What the heck is happening with oil prices?

West Texas Intermediate (WTI) oil is selling in the $82 ranger per barrel — way down from recent postings near $110. Overseas, the Brent price for oil is about $97 per barrel — way down from $125 per barrel as recently as early May.

What’s going on? How low can oil prices go? Are we looking at the beginning of a major price slide? Is the oil and oil service investment space under a pricing assault?

I doubt it. Here’s why: 40% of global oil production comes from places where the national governments cannot afford oil prices to go much lower than they are currently.

The nearby chart tells the tale.

DRUS06-13-12-1

This chart, courtesy of Pierre Sigonney, chief economist of the French oil giant Total SA, describes the oil price level that a series of major producers require in order to balance their national budgets.

The red-shaded region at the bottom is the “breakeven cost” for producers (as estimated by Total). That is, the red shading reflects how much it costs to lift barrels of crude oil out of the ground.

As you can see from the chart, many producers lift oil at an overall cost of $10-20 per barrel. Even the major international players (the red bar on the far right) are in the $40 per barrel average for production.

But take a look at that yellow “budget break-even” line. That’s the price at which the major petro-players have to sell oil in order to fund their national spending. Keep in mind that all of the countries on the list — from Qatar to Venezuela — rely on oil sales for the vast majority of their national income.

Specifically, Libya, Saudi Arabia, Algeria, Iraq, Angola, Nigeria, Ecuador, Iran, Russia and Venezuela all require oil prices of at least $80-100 (or more) just to have sufficient income to run their national budgets. Without a strong oil price, these countries will have bread lines and riots. West Texas Intermediate at $82 a barrel and Brent hovering under $100 is the threshold of pain for the world’s largest oil-producing nations.

Now consider that the 10 countries I just named account for about 35 million barrels of global oil output every day — over 40% of total world crude oil output. (Add in natural gas and gas liquids, and it’s even more.) That’s 40% of world crude output coming from places where the national governments cannot tolerate a price drop for long. So no… the oil price shouldn’t go down much from here.

Still, let’s do some devil’s advocacy and think it all through. The European economy is on the ropes. Chinese economic activity is decelerating. Japan is in a bizarre, permanent recession. The US economy appears to be stalling, and is possibly slipping back into Recession II.

So yes… there are problems all over the place. We could see precipitous drops in energy demand from many quarters. But if oil prices fall too far, they probably won’t stay down for long. The world’s largest oil producers cannot afford it, in any sense of the word.

Indeed, an oil price drop will present another re-entry opportunity for investors to pick up more shares of great oil production and/or oil service companies at a relative bargain. Keep in mind that a pullback in share price could also make the dividend yield even more attractive for many oil players.

Between now and the end of the year, I expect to see oil prices firm up gradually, perhaps even violently. We could also see another sharp, upward spike based on all manner of political and technical events.

The consulting firm KPMG recently predicted that oil prices will remain volatile for the rest of the year. There’s a chance we could see over $140 per barrel, according to a wide-ranging poll of energy executives by KPMG. The underlying issues are economic uncertainty, geopolitical risk, rising operational costs and regulatory concerns.

Libya is back online, for example. But according to what I’ve been told, the wartime damage from earlier this year was not properly repaired. Thus Libyan production facilities, pipelines, pumps, etc., are more jury-rigged than not. We could see a sudden drop in Libyan output based on mechanical and engineering issues. And Libya is just one of the ten countries on that chart above.

There is plenty of risk of supply disruptions from the other nine as well.

Buy the dips!

Regards,

Byron King
for The Daily Reckoning

 

Byron King

Byron King is the managing editor of Outstanding Investments and Energy & Scarcity Investor. He is a Harvard-trained geologist who has traveled to every U.S. state and territory and six of the seven continents. He has conducted site visits to mineral deposits in 26 countries and deep-water oil fields in five oceans. This provides him with a unique perspective on the myriad of investment opportunities in energy and mineral exploration. He has been interviewed by dozens of major print and broadcast media outlets including The Financial TimesThe GuardianThe Washington PostMSN MoneyMarketWatchFox Business News, and PBS Newshour.

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Read more: What's the Deal With Oil Prices? http://dailyreckoning.com/whats-the-deal-with-oil-prices/#ixzz1xmArIiTx



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Energy & Commodities

One of North America's 'Colossal' Resource Plays

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Posted by Keith Schaefer: Oil & Gas Investments Bulletin

on Wednesday, 13 June 2012 12:28

In many ways the oil industry is a fashion industry, and in 2011 the exciting new model on the investment bankers’ catwalk was the Duvernay shale.

Over $2 billion was spent acquiring big land packages, and the rising price per acre kept the play in the news headlines.

Covering over 100,000 km2 along the edges of the foothills of the Canadian Rockies, it’s the source rock for almost all the pools of oil that have created fortunes for Alberta oilmen.

Canada's second largest brokerage firm, BMO Nesbit Burns, says the highly productive wet gas window in the Duvernay is 7500 km2--that’s 30% larger than the EagleFord wet gas, or liquid rich, area.

It’s huge—no, it’s colossal. It’s over-pressured, and has a high organic content—all the right signs for a great “resource play."

.....read the entire analysis HERE

Duvernay map--NEB 2




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Energy & Commodities

Byron King: It's Time to 'Buy Low' on Rare Earth Stocks

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Posted by Brian Sylvester - The Critical Metals Report

on Tuesday, 12 June 2012 12:51

Resource developers, especially in the rare earths space, are suffering from the market's obsession with immediate results, says Byron King, writer and editor for Agora Financial's Outstanding Investmentsand Energy & Scarcity Investor newsletters and contributor to the Daily Resource Hunter. Nonetheless, he argues, large-scale demand for high-tech metals remains. The question is, which developers can weather the storm? 

COMPANIES MENTIONEDENERGIZER RESOURCES INC. - FLINDERS RESOURCES LTD. - FOCUS GRAPHITE INC. - LYNAS CORP. - MATERION -MEDALLION RESOURCES LTD. - MOLYCORP INC. - NEO MATERIAL TECHNOLOGIES - NORTHERN GRAPHITE CORPORATION - STANS ENERGY CORP.UCORE RARE METALS INC.

The Critical Metals Report: In the last nine months, poor stock performance has shaken investors' confidence in the rare earth elements (REEs) sector. What will restore their risk appetites?

Byron King: We need to see successful efforts from developers. Molycorp Inc. (MCP:NYSE) is not the success story it should have been. Molycorp presented itself as an all-American, mine-to-magnets resource, but when it joined forces with Neo Material Technologies (NEM:TSX), its research and development went to Singapore and its manufacturing to China. Its share price is down from a where it was a few months ago, let alone a year ago.

Lynas Corp. (LYC:ASX) was another great hope, but it has had trouble getting its plant in Malaysia up and running. Just as it was nearing the end of construction, local communities raised concerns about radiation in the materials the company is processing and bringing in from Australia. You have to wonder about the source of those problems. Cynics would say, follow the money. What do key Chinese players think about a new, Western player in the sector?

Looking at the smaller developers, their efforts have been slower and more expensive than expected. They prove the rule that nothing is easy in the REE space. It is a hard, technical space to work in. Many management teams are feeling their way through the maze.

Everybody is getting slammed. At the same time, some of the really smart money sees this as the perfect opportunity to buy low." –Byron King

....read more HERE

rare-earth-elements




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Energy & Commodities

Does Any Clear Picture Emerge From Crude Oil & Crude Gold Charts?

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Posted by P Radomski via SafeHaven.com

on Friday, 08 June 2012 07:15

Based on the June 7th, 2012 Premium Update. Visit our archives for more gold & silver analysis.

We have all seen the newspapers headlines about the troubles in Greece, Spain, Portugal, Ireland and the entire eurozone. The situation in the U.S. is not much better, even if the press is ignoring it for the moment. In both blocks there is high debt and large, long-term entitlement programs for citizens without any clear notion of where the money to fund these programs will come from. (Hint--the printing press.)

The global economic situation is unstable and untenable. How long can citizens in the West continue to buy more and more imported manufactured goods from the East? When the West's appetite for unessential consumer goods will lessen as people learn to do with less because they have no choice, the economic situation in China and South East Asia will be even worse than it is in the west. The West can always go back to manufacturing, but it's unlikely that Asia can go back to agriculture.

The month of May was possibly the worst month for gold prices in three decades, but it was unexpectedly followed on Friday, June 1, by the best daily climb--$66 -- since last August. The principal catalyst was the dismal US job report by the US Labor Department. Economists had hoped to hear about the creation of 150,000 positions, but the actual number was half that, 69,000, which brought on expectations of another round of QE, (that is, Quantitative Easing, not Queen Elizabeth who celebrated her 60 years Jubilee this week). It was interesting to note how the same financial media outlets that had eulogized the bull market just a week ago were now celebrating its return as a safe haven.

With that in mind, let's take a look at the technical picture. Let's begin with the analysis of the crude oil market (charts courtesy by http://stockcharts.com.)

25724 a

,....read more HERE (comments & Charts on Gold



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Energy & Commodities

It's Probably Nothing.... er..Demand for Petroleum/Gasoline Vanishing

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Posted by Mike Shedlock Mish's Global Economic Trend Analysis

on Thursday, 07 June 2012 08:34

The following chart from reader Tim Wallace shows three-month usage for March, April, May compared to the same three months in prior years.

Picture 1

The chart shows petroleum usage is back to levels seen in 1998. Gasoline usage is back to levels seen in 2002.

This chart is consistent with reports that show petroleum usage in the eurozone is expected to fall to 1996 levels.

For more details and an analysis of tanker rates, please see Oil Tanker Rates Lowest Since 1997 as Demand in Europe Plunges to 1996 Level, Production in US at 13-Year High; IMF Smoking Happy Dope.

14-16 years of petroleum supply demand growth has vanished.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click HERE To Scroll Thru My Recent Post List including Merkel Bends, Equity Markets and Precious Metals Cheer, Bond Market Yawns; Lending to Peter so Peter Can Lend to Paul



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