The pan-European FTSEurofirst 300 <.FTEU3> index of top shares fell 0.5 percent to close at 973.92 points, breaking a four-day winning streak, and having hit its highest close since early October on Tuesday.

The European benchmark index is still up 50.9 percent from its lifetime low of March 9, as investors have become more confident on the prospects of recovery.

“The market has come a long way, and the economics are still supportive,” said Georgina Taylor, equity strategist, Legal & General Investment Management.

“We’re just seeing a little profit taking. Nothing has been derailed. Housing data is improving. The only area of concern is consumer spending.”

Energy companies were the biggest drag on the index, with crude prices down more than 1 percent to just above $71 a barrel, after the U.S. Energy Information Administration said inventories had risen.

BG Group , BP , Repsol and Total were between 0.9 and 2.3 percent lower.

UK-based oil explorer Tullow Oil fell 3.9 percent after it said interim profits dropped 83 percent on lower oil prices and production.

Other economics news was mostly upbeat. Sales of newly built U.S. single-family homes rose in July to their fastest pace in 10 months, while orders for long-lasting manufactured goods surged, hinting a modest economic recovery was taking shape.

However, some investors chose to focus on orders excluding transportation climbing slightly less than forecast.

Back in Europe, the business climate index of Germany’s Ifo, a Munich-based think tank, rose to 90.5 from an upwardly revised 87.4 in July.

“The Ifo figures did not have a momentum effect, despite them being very good. But one also has to acknowledge that the markets are moving on high levels and that people may be following the strategy of ’selling on good news,’” said Joerg Rahn, chief investment officer at wealth management company Marcard, Stein & Co.

Miners also fell. Copper miner Antofagasta lost 4.8 percent after it posted lower-than-expected earnings in the first half and warned prices were likely to remain volatile in the second half.

BHP Billiton , Xstrata , Anglo American and Rio Tinto were down 1.4 to 4.1 percent.

NATIXIS SOARS

Among individual movers, French bank Natixis soared 38.8 percent after majority owner state-backed BPCE said it will guarantee roughly 35 billion euros ($50.12 billion) worth of toxic assets at the investment bank.

Alcatel-Lucent surged 11.9 percent as traders cited market talk of a possible bid from a Chinese manufacturer of telecom gear and a rating upgrade by Natixis.

Heineken , the world’s third-largest brewer, rose 7.2 percent, after reporting a rise in first-half operating profit, driven by cost savings, beat forecasts.

Guinness maker Diageo rose 2.6 percent, ahead of full-year results on Thursday.

Suez Environnement soared 11.5 percent after the French utility group reported forecast-topping first-half profit despite a sharp drop in waste business.

However, GDF Suez , the French electricity and gas group, fell 1.7 percent, ahead of first-half results on Thursday.

Swiss Life fell 7 percent after saying it is cutting jobs and costs after two investments in Germany failed to yield hoped-for benefits, even as first-half profits beat forecasts.

Across Europe, the FTSE 100 <.FTSE> index closed 0.5 percent lower, Germany’s DAX <.GDAXI> fell 0.6 percent and France’s CAC 40 <.FCHI> was down 0.3 percent.

Aug 26 (Reuters)

U.S. crude for October fell 79 cents to $71.26 a barrel by 12:40 p.m. EDT (1640 GMT), after falling $2.32 on Tuesday. Brent crude fell 49 cents to $71.33 a barrel after losing $2.44 the previous day.

The U.S. Energy Information Administration (EIA), the statistical arm of the Department of Energy, reported on Wednesday that crude stocks in the world’s largest energy consumer rose by 200,000 barrels last week.

While the build in crude stocks was nowhere near as large as the 4.3 million rise reported by the American Petroleum Institute on Tuesday, it still confounded initial market predictions for a 1.1 million barrel drop.

“We remain in a situation of massive over-supply, which is off the charts, but it does appear to be peaking,” Summit Energy analyst Brad Samples said.

Gasoline stocks fell by 1.7 million barrels last week according to the EIA, against expectations for a smaller 1 million barrel drop, while distillates rose by 800,000 barrels compared with predictions for a 300,000 barrel build.

SELL-OFF?

Investors took the opportunity to lock-in profits on Tuesday after crude touched the key psychological $75 mark for the first time since last October, crowning a near 130 percent jump in prices from the lows at the turn of the year.

Some analysts said the failure to break through the key level may signal that prices have topped out, with demand for oil still depressed by the global economic slowdown and signs of a broad recovery still murky.

“The price action of the past 24 hours would appear to favor additional price declines,” said Jim Ritterbusch, president of Ritterbusch & Associates.

Prices took some support from U.S economic data released on Wednesday showing a mild recovery in the housing market, but earlier data on durable goods orders suggested lingering weakness in the manufacturing sector.

Equity markets were mixed with Wall Street edging higher while European bourses generally dipped, highlighting the uncertainty surrounding the economic outlook.

Venezuela’s oil minister Rafael Ramirez said OPEC is unlikely to raise output at its September meeting, despite concerns from some quarters that oil prices are too high for a still fragile global economy.

“Inventories have declined but they remain above average. We need for them to come down to the average levels,” Ramirez said.

Another member of the Organization of the Petroleum Exporting Countries, Iran, said oil demand was set to increase next year by up to 1 million barrels per day after this year’s sharp decline.

Aug 26 (Reuters)

The market awaited U.S. Energy Information Administration (EIA) data due at 1430 GMT to see if they would confirm the trend from Tuesday’s American Petroleum Institute (API) figures.

U.S. crude oil for September delivery was down 90 cents at $64.71 a barrel by 1407 GMT, having fallen to a low of $63.76. London Brent crude for September lost 50 cents to $66.37.

The fall followed five days of rises that had pushed U.S. crude oil futures up more than 10 percent in just a week.

“The market has exhausted itself and needs to pause,” VTB Capital analyst Andrey Kryuchenkov said in a research note. “Today, all attention will be on the weekly U.S. fuel inventories.”

U.S. crude oil stockpiles rose unexpectedly last week as domestic refining activity slumped, the API said on Tuesday.

Commercial oil inventories jumped 3.1 million barrels to 349.883 million barrels, reversing a stretch of weekly declines triggered by thin import levels and defying analyst expectations for a 2.1 million barrel drop.

A Reuters survey of 15 analysts forecast the EIA would report a drop in crude oil inventories as slow imports countered a decline in refining activity.

HIGH STOCKS

But refined products supplies were expected to have risen, despite the lower domestic refinery capacity use.

Global oil inventories are at historically high levels, equivalent to around 62 days of forward demand by the industrialised countries of the Organisation for Economic Cooperation and Development (OECD).

Robert Montefusco, broker at Sucden Financial in London, said oil came under additional pressure on Wednesday after disappointing results from U.S. bank Morgan Stanley .

Morgan Stanley reported its third consecutive quarterly loss on Wednesday, saddled with a charge related to repaying government loans and the accounting impact of improvement in its debt prices.

“We are not getting to much help from the stock market,” Montefusco said. “We’ve had some poor figures from Morgan Stanley so that has put pressure on stocks and oil too.”

But data showing apparent oil demand in the world’s second-largest energy user rose for the third month in a row offered some support.

China’s implied oil demand in June rose 1.8 percent over a year ago, Reuters calculations from official data showed on Wednesday.

July 22 (Reuters)

U.S. crude futures traded down $1.01 to $63.04 a barrel by 1:13 p.m. EDT (1713 GMT) as investors sought safer havens. London Brent crude fell 74 cents to $63.31 a barrel.

“The worries are that the pace of the economic recovery hasn’t materialized the way that people who plunged into the commodity markets thought, and now they are running for the exits,” said Gene McGillian, an analyst at Tradition Energy in Stamford, Connecticut. “The question is how far they will run.”

Safe-haven currencies such as the dollar gained on the concerns about a potential turnaround to the global economic crisis, while U.S. stocks fell.

Crude prices have dropped from $73 a barrel in late June on worries a rebound in global fuel demand may be far off, after economic optimism helped lift prices from lows under $33 struck in December.

The U.S. Energy Information Administration raised its outlook for global oil demand by 170,000 barrels per day (bpd) in a report released on Tuesday.

“There has been stronger economic activity in Asia than was previously anticipated, and the current forecast reflects higher expected oil consumption in that region,” the EIA said.

Surging demand from China and other developing economies launched oil and other commodities on a six-year rally that sent crude to a record high near $150 a barrel last year, before the economic crisis hit demand.

Weekly U.S. inventory data is expected to show a fall in crude oil stockpiles and a build in gasoline and distillate stocks in the week to July 3, the build up to the long U.S. Independence Day holiday weekend when summer gasoline demand typically peaks.

Data from the American Petroleum Institute is scheduled to be released later Tuesday, with the EIA’s weekly inventory report due out on Wednesday.

Crude has found limited support from OPEC member Nigeria, where militants have launched at least four attacks against oil installations in the past 10 days, helping to underpin prices on Tuesday.

NEW YORK, July 7 (Reuters)

In its weekly inventory report, the Energy Information Administration said crude stocks unexpectedly rose 2.33 million barrels in the week ended June 26, advancing for the first week since late May.

Gasoline supplies increased 2.3 million barrels and distillates were up 2.9 million barrels. Both numbers were higher than expected. And total U.S. daily fuel demand in the four weeks ended June 26 was down 5.8 percent from a year earlier, the EIA said.

“Supply and consumption remain really bad,” said Bill O’Grady, the chief markets strategist at St. Louis-based Confluence Investment Management. “It’s hard to make a bullish case for anything.”

Source: Crude Slides

U.S. crude for August was up 58 cents at $68.08, by 1212 GMT, off an earlier low of $66.37. U.S. crude for July delivery expired on Monday, settling down $2.62 at $66.93 a barrel.

London Brent crude rose 48 cents to $67.46.

The dollar fell more than 0.5 percent against a basket of currencies on Tuesday. A lower dollar can strengthen commodities denominated in the currency.

The market awaited U.S. weekly inventory data from the American Petroleum Institute due later on Tuesday and U.S. government oil stocks figures on Wednesday for clues on the demand outlook for the world’s top energy consumer.

A Reuters poll of analysts ahead of the government inventory data forecast crude stocks fell by 1.3 million barrels last week on lower imports, while gasoline stocks and distillates, including heating oil and diesel fuel, were seen rising.

The API will release its weekly stockpile data at 2030 GMT, while the U.S. Energy Information Administration will release its report on Wednesday at 1430 GMT.

And that suggests higher oil and gasoline prices in coming months – perhaps as much as 50% – 70% higher, or more – particularly if a U.S. economic recovery is truly in the offing.

To really see what I’m talking about, let’s start with a close look at consumption. I’m asked about this frequently in my global wanderings, most recently at the Las Vegas Money Show last week.

For months we’ve been hearing about a drop in global demand. It’s a popular story and one that sounds credible: After all, it seems logical to assume that during economic chaos, consumers and businesses alike will rethink their budgets and ratchet back their spending.

For consumers, the continued economic malaise will mean fewer trips to the store, less-ambitious vacations, and car-pooling to school or work . For businesses, the cutbacks by consumers will clearly translate into canceling trips where conference calls will suffice and using lower-cost shipping alternatives for the decreased sales volumes most U.S. companies will experience.

According to the U.S. Energy Information Administration, oil consumption fell by nearly 50,000 barrels a day throughout 2008. According to the latest figures, the EIA suggests that global oil demand may slump to 83.4 million barrels a day in 2009 – nearly 2.4 million barrels below 2008 consumption levels. On a percentage basis, that’s almost a 3% drop. I have my doubts that we’ll actually see a decline of this magnitude, but if it does occur, it will be the first time ever that consumption has declined for two straight years. That alone is pretty noteworthy in this era of cohesive and powerful global growth.

The reason I have my doubts about such a steep decline in demand is this: While overall consumption is dropping in such developed economies as the United States, Europe and Australia, it’s being at least partially offset by continued growth in China, the Middle East and Latin America. Because the data produced there is less than transparent, I can’t help but think that analysts are underestimating the growth we’ll be seeing in those markets, where consumption is accelerating strongly. And it’s entirely possible that growth in those markets will outstrip any fall here in the developed world.

Even if the growth in the emerging markets doesn’t quite offset the decline in their developed brethren, analysts seem to be forgetting that oil prices are a function of two variables – consumption and production. And it’s the change in production that’s going to catch a lot of people by surprise.

After a run of record high oil prices punctuated by frantic resources development, we’re now seeing the opposite scenario. The long period of lower than anticipated oil prices following oil’s meteoric rise last year means that the entire industry is no longer making the investments needed to sustain production capacity or actual production.

And not many folks recognize this fact.

For instance, direct project investment in drilling may be down as much as 20%, while the number of drill rigs in operation in America alone has dropped by more than 40%. Various estimates from the EIA and private sources suggest that actual U.S. production may fall by as much as 320,000 barrels a day. While the amount is a matter of debate, the fact that production is declining is not.

More than 20% of total U.S. oil production comes from tiny wells located in remote areas that were marginally profitable producers when crude oil was trading at $100 a barrel. With oil currently at about $61 a barrel, those producers are practically worthless now.  So the “mom-and-pop” shops that own them are actually abandoning entire fields and equipment without a moment’s thought.

To be fair, at least part of the drop in demand can be attributed to increased reliance on methanol, ethanol and other types of biofuel, but that’s hard to quantify at the moment because the long period of low oil prices has eroded the economic viability of alternative fuels – at least for now.

The story is much the same with new exploration projects being cancelled left, right and center. The trend is particularly apparent in the Canadian oil sands that were everybody’s fancy only 24 months ago. Now we’re seeing Royal Dutch Shell PLC (NYSE ADR: RDS.A, RDS.B), StatoilHydro ASA (NYSE ADR: STO) and Petro-Canada USA (NYSE: PCZ) each backing away from multi-million dollar investments that were to bring online an estimated 500,000 barrels a day.

Russian, Saudi and Mexican producers are reporting the biggest production drops seen in 50 years. Even Venezuelan leader President Hugo Chavez – the perennial motor mouth and longtime U.S. critic – is eating crow. He’s begrudgingly invited (read that to mean “is begging”) the oil companies whose assets he nationalized only a year ago to “come back” into the market.

He has no choice. Venezuela’s oil production is already below its 1997 levels, and many analysts say that output could fall even more since Chavez has done such a thorough job of alienating the big foreign oil companies that actually possess the technology needed to extract crude oil from that country’s hard-to-reach reserves.

Chavez’s Chavez’s government seized the assets of 60 foreign and domestic oil service companies after conflict erupted over nearly $14 billion in debt owed by the country’s state-owned energy company, Petroleos de Venezuela (PDVSA). PDVSA accumulated the debt as oil prices took a dramatic slide from over $147 a barrel last July to less than $35 a barrel in February.

Then there’s simple shrinkage. This is an oil industry term for declining output. The EIA recently released data suggesting that production at more than 800 oil fields around the world is going to decline by about 9.1%. It doesn’t matter whether the decline is prompted by depletion, war, or simple neglect. The fact is that this shrinkage will take an estimated 7.6 million barrels per day out of the system.

I could go on but I think you get the picture.

Now imagine what could happen to oil-and-gasoline prices when normalized demand resumes. Not only will there be less oil in storage, but virtually the entire industry – exploration, production, refining and sales – is going to be caught sitting on its heels when the world needs it to be zooming along in high gear. And that means the companies that make up this industry will have to ramp up again to meet the newly increased consumption demands.

This whole process could take two years – or even longer – to play out.

As for prices, history is replete with examples of what happens when there are major shortages of key commodities.

In the Energy Crisis of 1973-74, for example, I can still remember the numbingly long gas lines and waiting in the car for hours to get a fill-up. My father and grandfather vividly remember that prices quadrupled in a matter of months. I’m sure you do, too.

Only a few years later, in 1979, we got another oil shock when prices quadrupled again. Because it was coupled with stagnant economic growth and virulent inflation (stagflation), this period was an economic disaster for the United States.

For those who had learned from the earlier crisis, however, it was a mondo- profit opportunity.

The same can be said for 2007-2008, when the huge spike in oil prices that I predicted contributed to the bear market in stocks, tight credit and recessionary conditions that led to the current malaise that continues to grip the U.S. economy. As much as anything else, high oil prices contributed to the carnage we’ve seen in the auto-making and airline industries, and to the financial crisis that started here before spanning the globe.

Which brings us full circle.

Many investors will refuse to believe we’ve arrived at this new energy nexus, especially given all the hype we’ve seen surrounding alternative fuels, hybrid vehicles and the new “green” mentality that’s taken hold here in this country. If you listen to some of the real believers, they’ll tell you that we could be living in a petroleum-free Nirvana – as early as tomorrow.

While I personally would like that, too, it’s a misleading argument if for no other reason than there are millions of consumer items we use – from plastic bags to makeup – still created using petroleum. And there are still more than 60,000 manufacturing processes that depend on petroleum, and even the most aggressive estimates suggest that it will take the world decades to shift away from them.

We’re in much the same situation when it comes to hybrid vehicles. There isn’t a mass-produced electric vehicle available today that could offset the coming rise in recovery-driven demand for oil and gasoline. There’s a strong effort underway, but I’m not aware of a single company ready to field the solution in cost-affordable quantities by 2010 – which is when most analysts say a recovering economy will stoke demand for oil.

Of course, U.S. President Barack Obama’s much-lauded efficiency and greenhouse-gas-standards mandate will help significantly, but that’s like bolting the barn door after the horses have run for the fields. The irony of watching auto executives “applaud” his press conference was almost too much to watch with a straight face. But that’s a story for another time.

The bottom line is this: Our society will be highly dependent on oil for many years to come and investors should plan accordingly.

If governments around the world really want to get serious, they could collectively work to eliminate the fuel subsidies that are part of the price paid for gasoline in Asia or sugarcane ethanol in Brazil. We could also stop our own energy pork barreling. But given the complete lack of transparency that surrounds this issue – not to mention the influence wielded by vested industry interests, and the scores of well-paid lobbyists that patrol the halls of power in our nation’s capital – I don’t think we’ll see any big changes anytime soon.

So I’m left with one inescapable conclusion, at least in the intermediate term. Every investor needs to have at least some sort of energy strategy – preferably one that includes a range of drillers, producers and suppliers to cover the spectrum from wellhead to consumer.

That way, we can profit from an increase in energy prices that we can only hope rise fast enough to jump-start the oil industry’s production arm but not so fast that it snuffs out the badly needed economic recovery.

Editor’s Note: Money Morning Investment Director Keith Fitz-Gerald is the editor of the new Geiger Index trading service. As the whipsaw trading patterns investors have endured this year have shown, the ongoing global financial crisis has changed the investment game forever. Uncertainty is now the norm and that new reality alone has created a whole set of new rules that will help determine who profits and who loses. Investors who ignore this “New Reality”will struggle, and will find their financial forays to be frustrating and unrewarding. But investors who embrace this change will not only survive – they will thrive. With the Geiger Index, Fitz-Gerald has already isolated these new rules and has unlocked the key to what he refers to as “Golden Age of Wealth Creation” The Geiger Index system allows Fitz-Gerald to predict the price movements of broad indexes, or of individual stocks, with a high degree of certainty. And it’s particularly well suited to the kind of market we’re all facing right now. Check out our latest report on these new rules, and on this new market environment.

Source: With Oil Prices Poised to Jump as Much as 70%, Every Investor Needs an Energy Strategy

U.S. crude oil and gasoline stockpiles fell sharply last week, according to a U.S. Energy Information Administration report, with crude down 2.1 million barrels and gasoline off 4.3 million barrels.

“Week over week, the report is very bullish,” said Phil Flynn of Alaron trading in Chicago.

“There are still questions over the economy, whether these prices can be sustained, which is why we will probably return to the stock market to see if there are any signs of economic help.”

Stock market strength has supported crude prices in recent months, helping lift them from lows below $34 a barrel on optimism any rebound in the economy could spur fuel demand. The Dow industrials briefly turned negative on Wednesday as bank stocks extended losses, while the S&P 500 and Nasdaq trimmed gains.

Weak demand has sent crude prices off record highs over $147 a barrel struck last July.

Fire struck gasoline-making units at two U.S. refineries this week, triggering a roughly 8 percent spike in U.S. gasoline futures on Tuesday as the United States gears up for the Memorial Day holiday on Monday, traditionally the start of summer driving season.

Data from Japan showed gasoline inventories at their lowest level since September 2007 and kerosene stocks declining to a near three-year low in part due to strong sales.

Further strength has come from unrest in OPEC member Nigeria, Africa’s top oil and gas exporter. Shooting broke out in the Nigerian oil port city of Warri on Wednesday following days of military helicopter and gunboat raids on militant camps in the surrounding creeks.

Top Italian oil and gas company ENI SpA declared force majeure for its Brass River export terminal in Nigeria, adding its output affected so far was 9,000 barrels per day.

The Algerian oil minister said the Organization of the Petroleum Exporting Countries (OPEC), which has agreed to cut 4.2 million bpd of output since September to prop up prices, has no reason to cut output again when it next meets on May 28.

The International Energy Agency said the economic downturn is cutting investment in energy supply, raising the risk of higher prices in future that could hamper any recovery.

NEW YORK, May 20 (Reuters)

• The Dow Jones Industrial Average remained steady above 12,000.

• The leading indicator of existing home sales was down over 21% from the previous year, and the official unemployment rate was just beginning its upward creep by crossing the 5% mark.

• The first official admissions of the “R” word. In early April 2008, the International Monetary Fund (IMF) declared a 25% chance of a global recession, and Federal Reserve Chairman Ben Bernanke told Congress that gross domestic product “could even contract slightly.”

• The novelty of bailouts began. Bernanke also assured Congress that the Fed’s emergency authorization of a loan against $29 billion of Bear Stearns assets wasn’t putting taxpayer money at risk: “I feel reasonably confident that we’ll be able to recover all the principal and indeed some interest, and there is some chance of even upside beyond that.”

• The dollar’s six-year slide against the euro, hitting its lowest ever at $1.60 in late April. It also fell below the 7-yuan mark in China for the first time.

• And oil, comfortably above $100/barrel, was heading for its summer crest of $147.

A scant 12 months later, the Dow is trying to stagger back from a plunge to 6,500. Home sales are hinting a possible turnaround, unemployment (even the official, conservative figures) is expected to reach double digits before long, “recession” and “bailout” are household words (often accompanied by four-letter ones), the dollar is recovering… and a barrel of oil is worth half that hundred dollars. Hardly worth pulling out of the ground.

What happened? And even more important for us as investors, what’s going to happen?

The Casey Energy Opportunities team pulled together the pieces of the oil sector picture that other sources tend to scatter or ignore. We’ll give you a broader understanding of the drivers within the oil industry, the markets in which they operate, and how you can use that knowledge to push your profits upward.

The Oil Industry Now: A Rock, a Hard Place, and a Supply Glut That Isn’t

Everyone who drives a car or heats a home with petroleum has welcomed the fall in oil prices from their high in the summer of 2008.

While it’s hard to argue that filling your tank at $2 per gallon is a lot easier on the wallet than $4 or $5 per gallon, the broader economic effects of such low oil prices are troubling.

Leading the concerns is the drop in oil exploration and drilling that accompany a drop in price. Below the $50/barrel mark – and for many companies the bar is closer to $65 even for conventional fields – oil producers typically spend more money getting oil out of the ground than they can recoup by selling it. At the same time, turbulent financial markets have tightened credit. These two factors have pressured producers to allocate exploration budgets away from drilling projects and toward meeting debt obligations and day-to-day operating costs instead.

The plunge in prices has consumed the cash buffers of even the major oil companies. ConocoPhillips, for example, announced in January that along with eliminating 1,300 jobs and writing down $34 billion in assets, it was also planning to cut its 2009 investment budget by 18%. Exploration projects are part of both writedowns and spending cuts. The results of curtailed exploration are two-fold. First, some oil companies will be simply unable to survive the economic crisis. Second, supply in the longer term is being sacrificed to stay afloat now.

Storage facilities are bulging. The chart below shows the contents of the Cushing, OK, storage facility — where NYMEX deliveries take place — have recently doubled from their average 2008 volume. Along with a host of other facilities around the world, it got this way because of an unusually dramatic contango at the beginning of 2009. (A contango is a kind of market inversion, when the current [spot] price dips lower than the future price.)

In January, the spot price of oil plummeted as low as $37/barrel, while futures for July delivery were trading for $52. That meant if an oil company could buy and store product for seven months, it could lay out $37/barrel and be guaranteed a profit of $15 – or 40%, minus costs – in July. And indeed the buying frenzy took off, reinforcing the decision to turn off the drills.

So for the moment, we are artificially flush with oil, and demand has dropped as the global economy will likely shrink for the first time since World War II. It’s no surprise that oil prices have been staying down.

Many analysts say we won’t feel the effects of declining exploration for a few years. But the numbers are emerging already. According to the U.S. Energy Information Administration (EIA), non-OPEC countries demonstrated an average annual growth in supply of 570,000 barrels/day from 2000 through 2007. In contrast, they recorded a drop last year of some 300,000 barrels/day.

At the same time, OPEC appears to be conforming to its production cuts of 4.2 million barrels/day, begun in September 2008. The oil cartel is known to announce cuts that its members don’t actually follow; it’s in their economic best interest, if only in the short term, to sell all they can. But this time, oil has plunged far below levels to sustain their economies. Even Saudi Arabia expects to run a budget deficit this year.

OPEC, which produces about 40% of the world’s oil, would like to see prices around $75/barrel, at least. But the fragile global economy would have a difficult time absorbing such a price at the moment, and the cartel decided against further production cuts when it met in March. In fact, some three weeks later, Saudi Arabia actually announced a price cut on all its grades of crude to European, North American, and Mediterranean markets – a dramatic attempt to spur demand amidst high inventories.

So, entwined as it is with the economy, the oil industry is currently in a conundrum. The fix it requires – higher prices for its product – will choke the framework in which it operates.

At the same time, we’ve got supply problems ahead.

How Did We Get Here Anyway?

Like many aspects of the markets, movements in price are driven partly by real factors and partly by perception. Rags-to-riches-to-rags-to-riches Texas oilwoman Sue Sanders summed it up when she noted wryly in her 1940 autobiography that “nothing succeeds like reports of success.”

Last year’s run-up of oil was no exception: part real, part report. Some of the real factors:

• The weak U.S. dollar. The United States is not the only country that buys oil in U.S. dollars. The price per barrel is pegged to it, in fact. When the dollar is weak, the cost of U.S. exports drops; and indeed by December 2008, the U.S. trade deficit had fallen to its lowest in nearly six years ($39.9 billion, according to U.S. Commerce Department data). However, a weak dollar means it takes more dollars to buy a barrel of oil. Global concerns over the strength of the U.S. economy, including America’s ever-rising level of debt, had undermined the dollar to the point that OPEC members began to murmur about dumping it for the euro or a basket of currencies.

• Geopolitical turbulence in oil-producing countries. The Iraq war, oil-related militancy in Nigeria, and Iran-Israel-U.S. posturing over nuclear issues were hotspots in the first half of 2008. The average nightly news covered casualties in Iraq, but industry watchers tracked attacks on pipelines and oil facilities. Likewise, in Nigeria, sabotage and oil worker kidnappings by militant groups such as the Movement for the Emancipation of the Niger Delta (MEND) regularly shut down facilities to repair, negotiate, or improve security. And as spring warmed up, so did the war of words between Iran and Israel. By early July, Iran had gone so far to indicate it would move against shipping in the Persian Gulf if attacked. The United States would have moved next, of course… thus driving up the price of oil in the jittery oil markets, which depend on Persian Gulf shipping lanes.

• Unusually low crude and gasoline supplies entering the 2008 summer driving season. In early April, the EIA reported significant drops in supply – gasoline declined by 4.53 million barrels and crude oil by 3.2 million barrels, a one-two blow that surprised and worried industry watchers. Behind the gasoline slump were lower refinery margins, called crack spreads. In mid-March, when refineries would normally be coming off their maintenance schedules to churn out gasoline for summer driving, the margin for turning a barrel of crude into gasoline was negative for the first time in three years. Refineries sought profits in other oil products, and the markets responded to the expected imbalance in supply and demand.

• High demand. China is a stand-out here, and for more than its usual energy appetite. China has a penchant for aiming to break records – from its goals in five-year plans and building projects to its haul of Olympic medals – and in the first half of 2008, it was visited by some dramatic examples: a great earthquake and major snowstorms, events that disrupted the country’s energy industry. Combine that with the fact that China was also preparing for the Beijing Olympics in August, and it’s easy to understand why it was buying oil very heavily until mid-summer.

On the perception side of price drivers, it’s hard to overlook the fact that the market push stayed strong in the face of increasingly gloomy economic data. Casey Research was earlier than most in predicting the economic crash (we published reports such as “The Coming Currency Crisis” in June 2006), but by spring 2008, even officialdom was dancing around the word recession.

Normally, news of burgeoning foreclosures, plummeting home sales, spiking personal and business bankruptcies, rising unemployment, and other economic indicators would tend to exert a bearish influence. After all, consumers generate 70% of U.S. economic activity, and if they stop or cut back on driving to work or the shopping mall, telephone relatives or business partners instead of flying out to see them, reduce purchases of items containing plastics, turn down the thermostat, and other weather-the-storm measures, oil consumption should decline.

It took months for all these drivers to realign – but as we all know, they did, and then some. The chicken-and-egg debate, whether oil’s sky shot triggered or portended the economic debacle in the closing months of 2008, will require more distance and data to resolve. But it’s true that the dollar had started its comeback by mid-summer, supply had caught up, geopolitics had settled a bit, China backed off on its buying, no major hurricanes hit – but economic realities did.

Meanwhile, Congress jumped up and down and cried “Speculators!” “OPEC!” “Oil producers!” in tidy sound bites.

The Next Big Plays: Where You Need to Be

Oil companies are influenced by the range of market drivers and economic conditions according to size. The junior oil producers, those with market capitalizations of $250 million or less, have the small-business advantage of flexibility when times are good. These times aren’t good, of course, and even well-managed juniors with good projects are in trouble. Their vulnerability is in the credit market. You’ve likely heard of credit lines being revoked and refinancings denied to people with impeccable credit. Now imagine pitching a drill project without a wallet full of assets ready to lay on the table.

Mid-tier producers, with market caps between $250 million to $2 billion, will look to mergers and acquisitions to survive. The majors ($2-20 billion market cap) and Big Oil (over $20 billion) will also be shopping. With low oil prices shutting down exploration, development, and even production, these companies will be looking to replace their reserves instead by purchasing smaller, solid companies with proven production. It’s simply cheaper.

We see two ways to profit from this trend.

First, we buy shares in undervalued, producing companies that are profitable even below $40/barrel, are best of peer, and own large reserves. These are the companies that Big Oil will be looking to acquire. One such company, an oil sands producer, is currently a part of the Casey Energy Opportunities portfolio.

Second, we believe that owning a potential consolidator is the best position. As debt load and low commodity prices overtake them, junior producers will be forced to consolidate their projects. We currently own one such candidate, and are scouting for others with such muscle. Consolidators will be purchasing projects from the bank at 25 to 30 cents on the dollar.

Our tactics have already paid off handsomely in the last six months: all our recent recommendations have been on fire. A few tripled their value, and one generated a return of 540%.

As we’ve seen, supply problems are looming, no matter what timetable of Peak Oil you may believe in. With increased demand inevitably come higher prices. Our approach at Casey Energy Opportunities positions us to take advantage of the trend in both the short and longer term. And we guide our subscribers not only when to buy or sell, but also when to take profits and a “Casey Free Ride” to eliminate risk.

We’d like to offer you the opportunity to kick the tires of Casey Energy Opportunities RISK-FREE for 90 days, with 100% money-back guarantee. Click here to give it a try.

Source: The Price of Oil

Oil pulled back yesterday after advancing early 2.7% to touch a six-month high of $60.08.

Oil has rallied sharply, surging more than 70% from its mid-February low below $34 a barrel. Year to date, it has gained more than 30%, befuddling analysts who keep looking for the rally to turn around, as it “should” since demand still remains weak.

On the bullish side, China, the world’s second-largest oil consumer, announced that it increased its imports by 13.6% last month, to 3.9 million barrels a day.

Production from the 11 OPEC members bound by quotas rose 130,000 barrels a day to 25.74 million barrels in April from 25.61 million barrels in March. 12th member Iraq does not participate in output agreements.

And the Energy Information Administration said yesterday in its monthly report that it now projects world oil demand to fall by 1.8 million barrels per day in 2009, or 400,000 barrels larger than the EIA had forecast last month.

Source: Oil Slightly Higher