This from Rude Awakening:

The IEA estimates that the oil industry will have to invest over $350 billion per year to counter the steep rates of decline in output. And even that will not be sufficient to maintain levels of output for traditional forms of crude oil. Thus, much of the future investment will have to go toward extracting other kinds of hydrocarbon substances. And these “other kinds” tend to be very expensive to develop.

There are many different kinds of hydrocarbon molecules in the world. The total worldwide carbon base actually adds up to a very big number, and that is NOT including the carbon that is part of the current living biology of the planet. For now I’m just discussing the fossilized carbon like oil, natural gas, bitumen in tar sands, oil shale and coal.

The big problem for the non-oil forms of carbon is the cost of converting it into a viable fuel. We see that, for example, in the Canadian tar sands projects. Lots of steel, concrete, labor, machinery, water and energy input — all to extract this thick, gunky crud that has to be upgraded to something that looks like diesel fuel.

The tar sands are full of hydrocarbons, but they are not inexpensive to extract. The same goes for every other non-convention hydrocarbon source.

The nearby chart shows the total hydrocarbon resources in the world and the relative costs to convert them into a barrel of oil or oil equivalent. This is my summary, based on several different government and academic compilations:

These are big numbers, right? And they can supply a lot of energy over a long time…at a price. But that price will almost certainly be more than $60 a barrel…much more.

Source: $60 Oil…And Why it Won’t Last

This from The Rude Awakening:

During times like these, it’s all too easy to become caught up in the moment. Fear is a powerful emotion. As the markets continue to crumble, many investors lose sight of their goals. They sell positions indiscriminately; they become irrational.

The sell-off we’re experiencing right now is global. And no stock or commodity has escaped the devastation. That’s why we’re looking at a scarce and valuable resource for steady long-term gains: oil.

One energy guru recently made a big bet on oil. He repurchased shares of Exxon (NYSE:XOM), ConocoPhillips (NYSE:COP), Pioneer Natural Resources (NYSE:PXD), BP (NYSE:BP) and Statoil (NYSE:STO) — all at rock-bottom prices. We say he RE-purchased these shares because, in a prescient move, this sage sold off every oil stock he owned in May…back when oil was sitting atop $129 per barrel.

Richard Rainwater knew he would be leaving the party a bit early to the party — and probably miss the top — when he sold his oil investments back in spring. But he also knew that the gains from his $300 million invested in oil stocks and futures were in jeopardy.

“I just felt that America was not ready for $4 gas and we would see a pause here,” he told Time magazine in June.

Rainwater cashed in his profits just before oil’s peak in July. Now, he’s ready to do it all over again, spreading his millions across Exxon, ConocoPhillips and other big-name petroleum pushers.

Rainwater’s outlook is simple: Increased worldwide demand will continue to push the oil price up in the long term. Rainwater’s not alone, either. Analysts and industry experts — like oil tycoon T. Boone Pickens and OPEC President Chakib Khelil — have been making it perfectly clear…oil won’t be down too long.
On July 11, 2008, oil made a record ascent to $147.27 — a 123% jump in only 12 months. Since that momentous event, however, it has been all downhill for the energy sector. As the nearby chart illustrates, oil stocks (yellow line) have been closely tracking the downward trajectory of crude oil (blue line).

With oil sitting below $60 right now, oil aficionados like Pickens are bracing for the run-up to come. “The Saudis claim they have more oil; they don’t. The president wasted his time to go to Saudi Arabia, to say, ‘Give us more oil.’ They can’t give any more oil…they’re stacking up the money as fast as they can stack it up,” warned Pickens in an interview with CNBC.

The allure of oil is hard to refute. With finite supplies and unquenchable demand, it’s clear why many investment houses put oil above $200 in the near future. According to Pickens, it’s just a case of an oil-hungry economy overwhelming producers: “Eighty-five million barrels of oil a day is all the world can produce, and the demand is 87 million. It’s just that simple. It doesn’t have anything to do with the value of the dollar.”

Now is the time to buy oil. The second quarter of 2008 saw the largest drop in oil prices in 17 years. Now with OPEC slashing its production outlook for the rest of 2008 and 2009, it’s unclear just how long prices will be able to stay under $100…much less under $57.

Source: Surviving the Selloff

And if you thought things couldn’t get any worse, the Financial Times reported on Monday that U.S. mortgage rates soared last week amid a sharp rise in Treasury market yields. Make no mistake, inflation’s back. A Volker-like response may seem alarmist, even far-fetched, to many. However, investors are bracing for the Federal Reserve to raise rates going forward.

At least those rate increases could help U.S. Treasury Secretary Paulson fulfill his recent promise to “defend the dollar.” Secretary Paulson is on the final day of a four-day trip to Saudi Arabia, Qatar and the United Arab Emirates to negotiate currency and economic issues (i.e., a supply increase) from members of the OPEC cartel.

Shall we say America’s relationship with OPEC is a bit strained? Perhaps we’ve stayed a bit too long and expected a bit too much. The greenback keeps sliding down a cliff. Oil-producing states holding their dollar currency pegs are importing more and more inflation. At some point, both parties must reconcile that M3 – the fullest measure of U.S. money supply – can’t outpace a nation’s GDP forever.

Regardless, the Fed seemed content to exchange $16 billion worth of Treasury notes for mortgage- and asset-backed securities last Thursday. In its 10th Term Securities Lending Facility (TSLF), the Fed gave desperate investment houses another chance to dump their worthless derivatives for good ol’ American IOUs. To date, brokerage firms have dumped $175 billion on the Fed’s balance sheet.

Even holders of the mighty euro are feeling the pinch. We read in The Economist last week that customs seizures of counterfeit goods rose by 17% in the EU last year. Cigarettes and clothing accounted for more than half the sham gear seized.

It seems like desperate times call for desperate measures. And the masses, desperate for answers, call on politicians for help.

And any political production worth its salt has three main characters: the hero, the martyr and the villain. Heroes (politicians) need a martyr (America’s middle class) and a villain (oil companies) – and, if they’re lucky, a super villain (foreign oil companies).

Our colleague Eric Fry sums it up best: “When share prices soar, we call it a ‘bull market.’ When home values soar, we call it ‘healthy price appreciation.’ But when oil prices soar, we call it ‘speculation’ and ‘manipulation’…and then we gaze around for someone to blame.”

The members of Congress recently convened a special hearing to berate, rebuke and ridicule executives from five major oil companies. Each congressional inquisitor took a turn excoriating the oil companies for daring to earn a profit, especially when so many Americans have so little money. It just isn’t fair.

A few months earlier, you may recall, Congress invited the heads of America’s leading financial institutions to a little tête-à-tête. During that encounter, the congressional inquisitors took turns admonishing the finance CEOs for feathering their nests a bit too lavishly. But none of the execs in attendance drew much criticism for frittering away billions of dollars of shareholder wealth.

Therefore, the essential message from the nation’s top lawmakers is clear: Losing billions of dollars of shareholder wealth is a bad thing, but not nearly as bad as adding billions of dollars to shareholder wealth. In fact, earning billions for shareholders is such a bad thing that it must be legislated away or taxed into extinction.

Where were the nation’s top legislator-inquisitors when the NASDAQ bull market of 1999 and 2000 was powering higher? Where was the outrage over the “speculation” that produced obscene “windfall profits” for the Wall Street firms?”

We’re not so sure. But we continue to see that many in the West want to go through life pretending they’re still the greatest story never told.

It comes as no surprise. From Dutch tulips to dotcoms, people fool themselves into believing it’s “different” this time.

It’s never different this time.

Christopher Hancock
for The Daily Reckoning Australia

P.S. to get The Daily Reckoning direct to your inbox sign up to our free e-mail newsletter or if you prefer to use RSS, subscribe to the Daily Reckoning RSS feed.

Source: Congress Berates, Rebukes and Ridicules Executives from Five Major Oil Companies

The WTI futures market is now in “contango” – a highly extraordinary situation.

And it’s yet another bullish sign for the oil price. I’ll tell you how to best profit from this in just a moment.

First though, what is contango? I’ll explain…

It is where the price of a commodity for future delivery is higher than the spot price – i.e. how much it’s trading for at this precise moment in time.

What normally happens is the opposite. Longer-term futures are usually lower than near-term.

This tells us one crucial thing: that fears for future supply are high.

You see, major oil companies don’t use the latest futures contracts to plan their budgets… they use the futures strip price which is the average value of the next 12 contracts.

And right now, that’s more than what oil trading for.

What’s also unprecedented is the speed with which this change in the curve has happened.

The WTI contract for delivery in December 2016 has surged $17.08 (a staggering 14%) in just three trading days. Not only that, crude for delivery in July this year rose just 1.9% over the same three-day period.

So, what’s going on..?

This price action in the derivative markets could mean one of three things:

1. The market expects near-term demand to slump.
2. Fuel-reliant businesses such as airlines, cruise operators and logistics companies are hedging against significant price rises.
3. The market expects future oil supply will not meet future oil demand.

Now, nothing in this world is caused by just one event, a combination of factors entwine to cause a reaction. However, I think we can discount a near-term slump in oil consumption as the reason for the curve shift.

All the headlines in the US are about how high fuel prices are affecting people’s lives.

But with most of the developing world subsidising their fuel, WTI price rises do not affect demand in these countries. It just puts more strain on their treasury departments.

Take the recent demand figures from China…

The country’s consumption hit a record high in the first quarter of this year. The China Petroleum and Chemical Industry Association said consumption of gasoline, diesel and kerosene rose by 16.5% year-on-year in the first three months of 2008. Crude oil consumption rose by 8%.

This scenario is being repeated all across Asia.

Demand for oil is 2 million barrels higher than current supply

The second point, about hedging, is very pertinent indeed.

I believe that the Goldman Sachs forecast that oil would hit $141 in the second half of the year must have caused finance directors at all the major airlines to turn a whiter shade of pale. This, I reckon, is the cause of a significant amount of the gains.

However, I think the most important reason is concerns about future supplies.

When T. Boone Pickens parroted Goldman’s view on Tuesday (he said oil would hit $150 in the second half) he said it was because supply wasn’t keeping up with demand.

Opec expects demand this year to be 87m barrels per day (bpd). The world is only pumping 85m bpd – leaving an expected deficit of 2m bpd.

The combination of Goldman’s warnings with Pickens comments has sent the futures market higher. This has made its way into spot prices (which hit a record just below $130 yesterday).

These type of comments are almost becoming self-fulfilling prophesies. Goldman (which has been best at calling the oil spike) says something will happen so futures are dragged higher. This pulls up the spot price.

Great news for one under-valued oil play…

These events are manna from heaven for our Smart Commodities UK oil play.

If analysts other than Goldman don’t raise their oil-price forecasts, then it is almost certain that it will beat consensus expectations in the next quarter and its shares will be re-rated.

If other brokers do actually raise their expectations, then the whole sector will need to be re-rated because the forward price-earnings multiple would fall to a ridiculous level.

Even after recent gains, my recommendation is trading on a price-earnings multiple of around 8.

This is an utterly ridiculous rating for a company selling a vital product in a contango market.

If you’d like to access this company’s details, you can do so here.

Review my service

Regards,

Garry White
Editor
Smart Commodities UK

Source: An Unusual Oil Glitch Is Set to Make One Stock Soar