This from Fleet Street Invest:

Israeli tanks have just rolled into Gaza…Almost three thousand miles away, Nigerian separatist blew-up an oil pipeline over the weekend…Meanwhile, Russia is locked in a dispute over the price of gas with Ukraine. Today they stopped deliveries of natural gas to Ukraine, Turkey and Europe to force the Ukrainians to pay up…

While fears about political instability drive the price of oil back up again, the OPEC oil barons are tightening the screws on global oil supplies…Oil was trading at just $35 per barrel on Christmas Eve. It’s over $50 this morning. That’s a 40% gain in just two weeks. And you can bet that it is going to go a lot higher. In fact, it could easily rise another 70% by the end of this year.

Investing in oil right now could turn out to be the trade of the year. And you can thank the OPEC oil cartel for that.

A Christmas present from the OPEC oil lords

OPEC has agreed to slash its daily oil output by 4.2 million barrels per day since September. That should have sent the price of oil soaring right away. But it kept falling instead because the market didn’t believe they would actually deliver those cuts. You see, the cartel has cried wolf too often in the past, promising cuts that it didn’t deliver on.

But this time things really are different. The massive fall in the oil price threatened to destabilise the economies of the oil exporting countries. And that directly threatened the political position of regimes that run these countries.

So the OPEC oil barons are deadly serious about driving the price of oil back-up. And there is clear evidence that they’re slashing output sharply.

In October, a barrel of the lower quality “heavy” crude that most OPEC countries produce traded for about $4 less than a barrel of high quality “light” crude. Most of the light crude is produced by non-OPEC countries. Right now, it is only about 40 cents cheaper. That shows how quickly OPEC has reduced supply. And the market is set to get a lot tighter in the month ahead as OPEC keeps cutting production.

Investing in oil right now is one of the smartest trades you make this year. The International Energy Agency predicts that oil will rebound to $85 per barrel this year. That’s a 70% gain on where it is now.

This is the time to invest in oil

We stayed out of investing in oil companies as the oil price soared to unrealistic levels in the first half of 2008. But that has totally changed. The price of oil has now fallen 66% from its peak last summer. And it is now unrealistically cheap.

The big question for investors is how to profit from this. You could invest in the big oil companies like Shell and BP . They are trading at very reasonable valuations right now of about five times last year’s earnings. These aren’t bad investments right now.

But these companies have a big problem. They’re finding it harder to replace their oil reserves. Increasingly, the big oil producing countries are handing over their oil reserves to their state-owned oil companies. That leaves the private oil companies to fight over the scraps.

That will hit the giant oil companies the hardest. Because they would have to make a truly major oil discovery to make a big difference to the size of their reserves. And the chances of that happening are going to get smaller in the years ahead.

Then there are the junior oil companies. A significant oil discovery can send their stock prices soaring. Triple digit gains when that happens aren’t uncommon. But many of them are in a bad way right now. Oil exploration is an expensive business. So the combination of lower oil prices and the freeze in banking lending is hitting them hard.

The potential profit from investing in a small cap oil company that strikes oil can be huge. But so are the risks. I doubt that many of the oil companies with less than $1 billion in market value are going to survive this downturn. So this isn’t a gamble that I would take.

Instead, on my Profit Hunter investment service, we have focussed on the mid-sized oil companies. These companies have the financial strength to get through this downturn. But they are still small enough to benefit massively from new oil discoveries. This is where the real money is going to be made in the next oil bull run.

Source: Get In On The Trade Of The Year

Exxon Mobil, the largest U.S. oil company, earned $14.8 billion, or $2.86 per share, a 58% increase from the $9.41 billion, or $1.70 per share it earned in the third quarter of 2007. Exxon Mobil’s record-setting profit was enough to beat analyst expectations of $2.38 a share, according FactSet Research data.

Exxon Mobil beat its own record for the largest quarterly profit for a U.S. company, which it had previously set in the second quarter of 2008 with a gain of $11.68 billion.

Royal Dutch Shell PLC (ADR: RDS.A, RDS.B) also announced third quarter earnings today, beating Bloomberg’s average analyst estimates. Europe’s largest oil company saw a 22% increase in profit to $8.45 billion from $6.9 billion in the same period the year prior.

During the quarter, oil averaged $118 per barrel. But crude prices have since slipped nearly $80 from a record high of more than $147 per barrel in July, which means Exxon Mobil’s string of record-setting profits could end in the fourth quarter.

While profits will likely dip in the near-term, analysts remain bullish on the long-term prospects of oil majors.

“The oil majors are coming all above expectations, which means they have resilient qualities,” Jason Kenney, an analyst at ING Wholesale Banking in Edinburgh, told Bloomberg News. “They show the benefit of being an integrated company, and they have the flexibility to weather the storm.”

High oil prices helped the oil majors to beat Wall Street expectations, despite production declines during the quarter. Exxon Mobil’s production dropped 8.2% during the quarter, while Shell’s output slumped 6.6%.

“This is a good outcome but some investors will be disappointed by the sluggish production volumes,” Tony Shepard, an analyst at London-based broker Charles Stanley, told the International Herald Tribune, speaking of Shell’s results. “Given the fall in the oil price, an issue for all oil and gas companies is current levels of capital expenditure.”

Exxon Mobil reaffirmed its capital spending budget of $25 million over the next five years, regardless of the subsequent trend of oil prices. However, Shell announced it would delay moving forward with developing its Athabasca oil-sands project in Alberta, Canada due to increased costs.

Source: Exxon Mobil Posts Record $14.8 Billion Profit, Shell Tops Estimates

While BP was quick to write the summons off as a “routine procedural matter,” analysts see it as yet another attempt to drive BP from the country’s treasured energy sector.

A source close to the situation told Reuters that the investigation will take place next week.

“The questioning was planned for this week, but for some reason they have already postponed it to early next week,” the source said.

The timing of the summons is precarious in that it comes just a week after BP’s Russian partners demanded Dudley’s removal – an overture BP has rebuffed citing Dudley’s strong performance.

However, Mikhail Fridman, Vikto Vekselberg and Len Blavatnik lead a group of billionaire shareholders who have accused Dudley of favoring the British company’s interest. Dudley worked at BP before assuming his current position as the head of TNK-BP in 2003.

The summons also follows a series of other setbacks that have bedeviled the venture. Earlier this year, 78 Federal Security Service (FSB) officers raided the Moscow offices of BP and TNK-BP. The raid resulted in the arrest of one TNK-BP employee and his brother, who will both face charges of industrial espionage.

Soon after the raid, the Natural Resources ministry said it would check TNK-BP’s largest oil field for environmental violations and the Interior Ministry accused the company of breaking visa rules, a charge that left some BP staff stranded outside the country.

Russia’s history of wrangling control of oil projects from foreign oil majors has many analysts anticipating BP will have its role reduced to that of a minority shareholder.

“We are all worried there is going to be some political maneuvering in order to relieve BP of the stake,” Colin Morton, a fund manager at Rensburg Fund Management who owns BP shares, recently told Reuters.

Two years ago, OAO Yukos Oil Co., formerly one of the world’s largest private oil companies, went out of business after Russia’s Federal Tax Service demanded the payment of $30 billion in back taxes.

Soon after, Royal Dutch Shell PLC (RDS.A, RDS.B) was forced to relinquish control of its Sakhalin-2 oil and gas project to OAO Gazprom for $7.45 billion when the Russian government threatened to block investment plans by canceling building permits on environmental grounds.

And just last year, TNK-BP was talked into selling its 62.8% stake in one of the world’s largest gas fields, the Kovytkta field, to Gazprom, after Russian authorities threatened to revoke the company’s license to develop it.

So it’s perfectly reasonable to believe that TNK-BP, Russia’s third-largest oil producer, could be Gazprom’s next takeover target. It’s also reasonable to expect that Gazprom may want more than to simply replace the Russian oligarchs as junior partners in the venture.

RBK Daily recently reported that Gazprom is seeking a 1% stake in the joint venture from BP, while at the same time buying out TNK-BP’s three Russian shareholders, thereby giving the state monopoly a controlling stake in TNK-BP.

Meanwhile, a source close to BP told the Wall Street Journal, that the company believes the Russian shareholders are putting pressure on Dudley in attempt to strengthen their hand in negotiations with a state-owned company like Gazprom. The Russian shareholders want to rein in long-term investments, such as enhanced oil recovery, health and safety, and privileged dividends, because they are aiming to sell their share to a state-run firm, the source told the paper.

BP Chief Executive Tony Hayward recently arrived in Moscow in part to attend the annual shareholders’ meeting of Russia’s OAO Rosneft, the country’s largest oil firm of which BP is a minority shareholder, Reuters reported.

“BP is committed to Russia,” Hayward said addressing the meeting. “Russia, alongside the Middle East, is one of the world’s great hydrocarbon provinces. Russia is a great nation in the process of economic transformation.”

While BP may remain committed to Russia, however, it doesn’t seem as though Russia is equally committed to BP. And so far, the process of undermining foreign oil companies and surreptitiously consolidating Russia’s energy sector under state control has not ended with Vladimir Putin’s presidency.

“This is exactly the kind of issue that is making Medvedev’s life so difficult as he tries to rebrand Russia as an attractive investment location,” Chris Weafer, chief strategist Moscow-based investment bank OAO UralSib, told Reuters. “The fate of TNK-BP is a major test for how the government vies the investment climate.”

Source: BP Exec Questioned in Corporate Tax Probe as Russia Reclaims its Energy Sector

As I said on Friday, Congress just passed a US$57 billion alternative energy plan – that promises to do little but make the headlines.

Meanwhile, in another chamber of Congress, executives of big-oil firms were called on the carpet to account for recent sky-rocketing crude oil prices.

Congress wants to know why crude oil is soaring past US$135 a barrel – double the price of last year! Hmm… more demand than supply maybe?

Of course Congress just doesn’t get it! As the CEO of ConocoPhillips correctly points out, “The fundamental laws of supply and demand are at work.” We are getting squeezed by oil exporting nations that are “managing demand for their own interest,” and severely restricted access to energy reserves both at home and abroad.

Today, the International Energy Agency said that a major supply crunch is looming unless the world’s oil majors can ratchet up production by 12.5 million barrels a day within the next seven years. Uh… don’t count on it.

Decades of underinvestment in new energy exploration and development, and a seismic shift in who controls access to new energy deposits means sustainable high prices for years to come. Fossil fuels are a dead-end for American big-oil firms – it’s time to embrace an alternative energy future!

MIKE BURNICK, Senior Editor & Global Markets Analyst

Source: Congress Doesn’t Understand $135 Oil

Let’s start with a multiple-choice question.

With the oil price above $100 a barrel, who makes the most money out of a gallon of petrol at the pump? Is it:

A. Greedy oil companies.
B. Greedy Opec members.
C. Our glorious Government.

You don’t really need me to answer that do you?

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There is also the ridiculous, facile notion doing the rounds that the high oil price is somehow the fault of BP, Shell and the other major oil companies. Utter cock-a-doodle-do.

Yes, they make a lot of money, yes their management get paid a lot, but companies such as BP, Shell and Exxon are small fry compared to National Oil Companies (NOCs). National Oil Companies, such as Saudi Aramco, control approximately 90% of the world’s oil reserves and 75% of production (similar numbers apply to gas).

In addition, about 60% of the yet-to-be discovered reserves are estimated to lie in countries where NOCs have privileged access to reserves. Thus, future production is likely to stay dominated by NOCs. Indeed, if global supplies were controlled by companies such as BP and Shell, production would likely be more efficient and prices lower.

But the price of oil is not set by NOCs either, nor is it set by Opec.

The price of crude oil is set by movements on the three major international petroleum exchanges: the New York Mercantile Exchange, the International Petroleum Exchange in London and the Singapore International Monetary Exchange. In other words, it is set by the market.

Just like any good exchange, they are no doubt full of gamblers, speculators, scoundrels, and wide boys – people like you and me – but, nevertheless, the price agreed for a barrel of crude is a price agreed in a market that is, for the most part, free. You can manipulate it, you can influence it, but the overriding rules of supply and demand dominate in the grand scheme of things. The free market price of oil is rising because demand is greater than supply.

So stop blaming BP and stop blaming Shell. They’re just businesses and business is there to make money.

We all know why demand is rising. China’s energy consumption is rampant. India’s is not far behind. Then there’s that ever-expanding middle class appearing the world over. Demand has not declined in this recent economic downturn, nor will it do so by anything significant should the downturn worsen, as I’ve shown before (see here: Will oil hit $160 a barrel next week? http://www.moneyweek.com/file/44753/could-the-oil-price-hit-160-a-barrel.html). A few Westerners tightening their belts is insignificant compared to this once-in-a-century expansion in the East.

Meanwhile, the downward trend in new oil supply shows no signs of decelerating.

International oil majors now control a mere 6% of oil and 20% of gas reserves, according to the report. The rest is in the hands of national oil companies.

The unpalatable reality is that national producers such as Venezuela or Russia today have less need of international oil majors to help them develop their untapped reserves.

“There’s an air of panic about the world’s energy-guzzling nations,” says Manraaj Singh

“Russian oil production, the world’s second biggest, has peaked. It may never return to current levels.

“Leonid Fedun, 52, vice-president of Lukoil, Russia’s largest independent oil company, told the FT he believed last year’s Russian oil production of about 10 million barrels per day was the highest he would see “in his lifetime”.

“It’s fueling concerns that the world’s biggest oil producers cannot keep up with rampant Asian demand.

Oil prices are going to keep on rising, says Black Bear of the Secret Order of Jurojin, regardless of who is in control of reserves.

“People have been asking me if it’s too late to buy oil. Heck no, not if you think oil is going to $140 or $150 per barrel this year — and I do. But there’s a better bargain in energy, which I recommended that Secret Order of Jurojin subscribers buy this week: natural gas.”

“You can play natural gas with one of the natural gas ETFs, or with an undervalued natural gas producer. Or, you can go for the leverage of futures and futures options on natural gas. Be sure that any trade fits your risk profile, and run ideas past your investment advisor.”