“The stock market has firmed up, which is giving the energy market some strength,” said Phil Flynn, of Alaron Trading. “It’s clear that an awful lot of bearish news has already been priced in.”

The Energy Information Administration’s weekly inventory report, delayed a day by the Veteran’s Day holiday, did little to move the market. Crude stocks were near-flat, rising by only 22,000 barrels, far below the forecast for a 1 million barrel gain.

But gasoline supplies rose by 2 million barrels, more than double the 850,000 barrel estimate.

The Organization of Arab Petroleum Exporting Countries, a subset of OPEC, is scheduled to meet in Cairo on November 29. However, non-Arab members of the cartel, such as Venezuela, Iran and Angola, will be invited to take part in talks about the oil market afterwards, OPEC President Chakib Khelil said.

And Brazil’s Petrobras has thrown open the newly-discovered fields off its coast to foreign Big Oil companies. Chevron and Shell expect to begin pumping in 2010, while Exxon, Mobil, Hess and Devon are engaged in exploration. It’s estimated that 50-70 billion barrels of oil could lie beneath Brazilian waters

Source: Crude Edges Higher, Brazil Welcomes Big Oil

Brazil’s economy is booming. Brazilian companies are breaking-out onto the world stage. And its share market has been the best performer among the world’s twenty biggest this year.

The Bovespa Index is up by 13% since the beginning of 2008. Compare that to the FTSE – it’s fallen 5.6% since the start of the year!

The Brazilian stampede: Rich investors are piling in!

But here’s the most telling thing…

The majority of the action in Brazilian shares has NOT been happening in Sao Paulo… but in New York. In fact, the value of Brazilian shares traded in the U.S. has surpassed the daily average in Sao Paula since the beginning of this year.

The average daily trading in Brazilian American Depositary Receipts (ADRs) was $4.07 billion so far this month through May 26, topping the previous record in January of $3.99 billion. In the same period, trading on the Bovespa stock exchange in Sao Paulo averaged $3.59 billion a day.

Why is this significant?

It shows huge foreign interest in Brazilian shares – and with very good reason…

Brazilian companies have become global leaders in key industries.

Companhia Vale do Rio Doce is now the world’s biggest iron-ore producer. State-owned oil company, Petrobras, overtook Mircrosoft to become the world’s sixth-biggest company by market capitalisation last week. Petrobras is sitting on the Western Hemisphere’s largest oil discovery in three decades. Possibly even the third-biggest oil field in the world!

These are names that are going to become much more familiar to us in the decades ahead.

Brazil isn’t just an emerging oil giant… it’s also the biggest producer of the only truly commercially viable alternative to oil – sugar-based ethanol.

In fact, it produces so much of the stuff that the country has been dubbed the “Saudi Arabia of ethanol”.

But Brazil isn’t just a commodities play either…

It has a strong services-based economic sector as well. In fact Profit Hunter rode the country’s banking boom to healthy profit last August through our investment in Banco Itau. [Note: Past performance is no indication of future results]

A five hundred year growth story

Brazil has seen fantastic growth in recent years.

Measured in 1990 dollars, the entire Brazilian economy was worth about $400 million in 1500 A.D. That would have put the country at about number 325 on this year’s Times Rich List. By 1900, that had grown to $12.2 billion – respectable, but hardly impressive.

The real economic boom began in the 20th century.

By 2000, Brazil’s economy had reached $975.44 billion – a massive gain of 7895% since the beginning of the century. And Brazil is perfectly placed to keep up that pace into this century as well.

The IMF predicts the country’s economy will grow 4.75% this year, despite the global economic slowdown.

That’s three times faster than the UK’s expected to grow!

Here at Profit Hunter we’re in no doubt the Brazilian growth story still has a long way to run. And we’re looking for the next under-the-radar play on this amazing economy.

The best way to profit from Booming Brazil

The easiest way to ride this boom would be to get in through an ETF that tracks the Bovespa Index. But that isn’t the smartest way in.

You see, one result of all the trading in Brazilian shares in New York could be to divert investment away from the Brazilian market itself.

That’s been good for the companies, but it might act as a drag on the Bovespa Index going forward.

Instead, we’re looking at a ‘backdoor’ way to get into this story.

That’s not easy when you’ve got the whole world trying to pile into this market. But we’ll keep looking, and we’ll let you know very soon.

Manraaj Singh
Editor
Profit Hunter

Source: Brazil, The World’s Best Performing Stock Market

To answer those questions we turn to a report published in late March by UBS energy analyst Jon Rigby and his team in London. Their incredibly useful report is called, “Will there be enough production capacity?” UBS has been battered by its huge sub-prime related losses. But their work on where future oil production will actually come from nearly redeems them. They have asked just the right question at the right time, and answered it in detail.

The report reaches a number of surprising conclusions about the global oil market. It also includes a useful database of oil projects scheduled to enter production in the next five years. These are projects which could add meaningful capacity (100kbpd or more) to global oil production. We’ll look at who stands to benefit in a moment. But first, some of the report’s findings [emphasis added is ours]:

• “Declining existing basins, rising costs, increased technical challenges, stretched supply chains, geopolitical blocks and tightening fiscal terms all seem impediments to growing global production capacity for oil and gas, despite the clear pricing signals.
• “There is no obvious wall of new production coming to the market in response to high prices.”
• New projects scheduled to come on-line from National Oil Companies (NOCs) belong mostly to three major firms: Aramco, Petrobras, and Gazprom.
• New project cost is rising and becoming more technologically challenging, especially deep-water.
• “Nominal growth rates tied to global GDP now look more unrealistic as potential upstream growth slows. This appears reasonably consistent with a growing view that oil production may actually not exceed 100Mbbl/d.”

The idea that global oil production may never exceed 100mbbl/d is worth a much closer look. I’ll get to that later. But before we look at the end, let us look at the beginning of the end and where new production might come from as the world’s oil producers try to bridge the gap between 87mbpd and 117mbpd.

The good news is that there IS new production capacity in the pipeline this year and next. Keep in mind that the final investment decision on the projects entering into production this year was made anywhere from 3-6 years ago. That shows you how far in advance you have to plan for new production (assuming you’ve even found oil in the first place).

There is no such thing as just-in-time oil production. But let’s take a look at projects that will come on line between now and 2010. We’ve selected only those projects that will produce more than 200kbp or more:

If you include LNG and the barrels of oil equivalent produced from it, your list expands a little more to include the following projects:

Beyond 2010, the future is murkier. But the UBS team has identified projects for which the final investment decision has been made. Assuming cost blowouts can be avoided and the projects aren’t cancelled, here are some of the bigger projects that could come on-stream between 2011 and 2015:

There are some massive LNG and natural gas projects coming on-stream between 2011 and 2015. Gazprom, Shell, BP, and ExxonMobil all look like big winners, should oil prices stay high and pass through to higher LNG prices.

The new oil finds off-shore in Brazil’s Santos Basin are not included in the UBS report because they are not likely to enter into production during the next five years. They will be difficult to produce in any event. Petrobras says the Tupi find may contain as many as 8 million barrels, while the Carioca field may have 33 billion barrels of reserves, of which about 10 billion could be recoverable, according to Citigroup.

Current Production Trumps Reserves

One UBS claim which may surprise older oil hands is that, “the capacity to produce—not reserves—is critical to energy markets.” UBS does not conclude that current producers should be valued differently that companies with large reserves but current production challenges. But it’s worth thinking about.

Almost immediately, pension funds and hedge funds from around the world poured money into this BRIC nation. In fact, Brazil sold over $500 million in bonds to these hungry investors. That doesn’t even count the investment assets that poured into Brazil’s stocks, real estate, etc.

Brazil’s tax revenue also jumped 13% last month alone. Household income has increased, unemployment has gone down, and Brazil’s booming real estate market has all added new money to the government’s coffers.

Brazil has made huge strides in recent years. Just 20 years ago, Brazil was an entirely different country.

The largest economy in South America was drowning in debt. The Brazilian currency, the real, was practically worthless. And even in the ’90s, Brazil was still trying to get its act together and dig itself out of years of debt.

Today, it’s a completely different story. For the past decade, Brazilian officials have capitalized on its expanding commodities and completely rebuilt the economy from the inside out.

And now, Brazil is one of the hottest emerging markets on the planet. I believe Brazil will continue to soar for years to come. I say that because Brazil’s economy expanded 6.2% in just the fourth quarter alone (when other economies around the world were slowing). That’s the highest growth rate since 2004.

Brazil’s currency, the real, has now gained 28% against the buck in the last four years. That’s the very best performer of the top 16 currencies of the world.

And right now, things have never been better for Brazil. Petrobras, Brazil’s state-owned oil company, is hiring another 14,000 engineers, geologists, and drillers as it taps into the biggest crude discovery in the Western Hemisphere since 1976.

In fact, this latest “oil find” may allow Brazil to overtake all of OPEC’s output with the exception of Saudi Arabia. So this will be huge. It will provide a huge base going forward for Brazil to divert some of its oil money into other viable investments.

Money just keeps pouring in as the demand for Brazil’s bonds, stocks, and commodities continues to pump money into the economy.

So what will Brazil do with all this newfound money? Brazil’s reserves have already doubled since 2006 to a whopping $195 billion. Not bad for a country that had trouble paying its debts just a few years ago.

Brazil’s policymakers have considered many options lately. Rather than touch the $195 billion in reserves, they have decided to start a $20 billion sovereign wealth fund (SWF). This new SWF would take this newfound wealth and diversify it into many different investments.

What’s the plan now? First, Brazil’s policymakers will use the proceeds from the recent bond sale to pay off more expensive debts. Then they’re planning to build their SWF. They’ve already announced they’re investing at least part of that $20 billion in U.S. dollars.

Brazil’s policymakers are also planning to use part of this money to buy rivals overseas, fixed income assets, and finance companies seeking to invest in their operations.

Brazil is becoming more solid all the time. And as they diversify their income streams, Brazil’s leaders will just create a brighter, more stable future for themselves.

I find it interesting that they feel buying dollars at this point in time is a worthwhile investment. You buy things only because you think they will go up in value…as far as investments are concerned.

Even the epic dollar bear Jim Rogers agrees there could be a short-term dollar rally. He estimates that it may last only about a year. He’s going to use that dollar rally to finally exit his dollar-denominated assets.

He also stated another reason why the U.S. dollar may rally for about a year: America is a huge agriculture producer. The world is in dire need of agricultural commodities, so our American farmers are going to pick up the slack where the economy has fallen.

So, in the near term, you can see that both Brazil and Jim Rogers are betting on the greenback.

In the longer run, Rogers believes the commodity dollars (Australian dollar, New Zealand dollar, and the Canadian dollar) will do better than those that aren’t commodity exporters during this commodities boom. In fact, he especially emphasized his Aussie dollar position (and since Brazil is also a “commodity currency,” I believe it will prosper right along with these others that Rogers has listed).

So don’t get me wrong, over the years, the dollar will have problems. But in the next few months, there’s money to be made by investing in dollars, and Brazil knows it.

Sean Hyman
For International Living

Editor’s note: Fascinated by currencies? Want to learn more about how the currency markets move and shift your money from your wallet? You can subscribe to the free e-letter, My Two Cents. You’ll hear currency insights, including how to diversify out of the sinking dollar, from experts five days a week.

Source: Brazil Is Hitting the Town and Buying…Dollars?

The Bakken Shale is a rock formation in the Williston Basin, a 202,000-square-mile depression that stretches along the eastern edge of the Rocky Mountains from southern Canada through North Dakota and Montana. Oil-hunting geologists targeted the U.S. portion as far back as the 1950s.

By the 1960s, oil companies had discovered more than 375 million barrels of reserves in North Dakota and eastern Montana. In the early 1980s, Montana’s oil production peaked at 32 million barrels in 1982 and North Dakota at 50 million barrels in 1983.

Then oil plunged from $35 a barrel down to $10. It became too expensive to produce Bakken oil, and the companies shut down operations… until recently.

In 2004, Oil and Gas Investor ran a story called “The Bakken Is Back.” Rising oil prices and tremendous advances in drilling technology suddenly made the Williston Basin a great place to be again.

Wood Mackenzie, the oil and gas industry analysts, estimate Bakken holds 200 billion barrels of oil. That sounds like a lot of oil, doesn’t it? The problem is that it doesn’t tell you one vital piece of information: How much of that oil is recoverable?

In the best oil fields, recoveries are under 30%. However, Bakken isn’t an ideal field. According to a North Dakota Department of Mineral Resources study (which echoes federal findings), Bakken will probably see 1% recovery. So right now, with 200 billion barrels in the ground, we can expect to get 2 billion out.

That’s about six months worth of U.S. imports and not nearly enough to affect the price of oil.

Of course, with oil at $120 per barrel, somebody will figure out how to squeeze more oil out of Bakken. It may cost more, but as long as there is money to be made, somebody will work it out.

Q: I just read Russia is spending $45 billion on finding new oil and gas… How does this compare to other countries? – B.F.

A: Some of the biggest recent news in energy infrastructure has come from Russia’s state-run oil giant, Gazprom.

Gazprom plans to triple its annual exploration and production budget for natural gas to $45 billion by 2010. This is an enormous amount of spending… even more than Brazil’s Petrobras, which plans to spend $118 billion over the next five years (that works out to about $26 billion per year).

And both companies have giant projects to finance. Gazprom needs about $75 billion to develop two giant Arctic fields, including one that holds enough gas to supply the entire world for a year. And Petrobras will spend an estimated $50 billion to $100 billion to develop Tupi – the second-largest discovery in 20 years.

These mind-boggling spending plans are further evidence that the costs of finding and exploiting giant oil and gas fields are soaring. Most of the large fields being discovered are in technically challenging places. It’s not anything like Saudi Arabia’s legacy fields, where you can stick a straw in the ground and up comes crude oil. This spending is incredibly bullish for oil services… and it’s another reason I’m buying Canada.

Gazprom has to drill in the unforgiving Arctic, and Petrobras is trying to tap oil under miles of water. Canada’s oil sands, on the other hand, are right there on the plains of Alberta and Saskatchewan. We already know where it is, how to drill it, and how much it’s going to cost – comparatively little when you look at Tupi and other difficult fields.

And while oil prices are high, oil-sand drillers are making a fortune. Most of Alberta’s main players already have this priced into their stocks. But I’ve found a few fantastic companies next door – in Saskatchewan – that have so far gone undiscovered. Click here to read more details. Good investing,

Matt

Editor’s note: Each Wednesday, Matt Badiali, our frequent contributor and natural resource expert, will answer your most pressing questions regarding commodity investing.

Source: The Commodity Investor Q&A

They sang the national anthem and raised their fists in victory. Senator Carlos Navarrete, leftist leader of the Mexican senate, was especially joyful. “We triumphed! We triumphed!”he said.

What the victors did not realize — or refused to recognize — is that their “triumph”merely took Mexico one step closer to the brink, to a deep, dark chasm into which the entire economy could fall…

Monday was Cinco de Mayo, the “Fifth of May,” so it’s fitting to touch on Mexico this week. Many believe Cinco de Mayo is to Mexico as July 4th is to the United States, but that isn’t quite true. It’s actually a regional holiday for the state of Puebla. (Mexican independence day falls in September.)

In other news, crude oil hit new record highs above $120 a barrel this week. Arjun Murti, the Goldman Sachs analyst who first called for a $105 oil “super-spike” three years ago, now sees the possibility of $200 crude in the next 12-24 months.

You might not see the connection between Mexico and the price of crude at first glance. But believe me, the connection is there — and it’s frightening.

Let me explain…

Bigger Than Exxon

Though not a member of OPEC, Mexico is the seventh-largest oil producer in the world. Petroleos Mexicanos, or “Pemex,” is the country’s state-owned oil company. Pemex pumps out more oil each year than Exxon.

Needless to say, oil is a key driver for the Mexican economy. The cash flow from Pemex alone pays for 40% of Mexico’s federal spending.

Imagine if the U.S. government drew nearly half its funding from the revenues of just one company. That would be one heck of an important company. You would think the powers that be would do everything in their power to keep the cash flowing in.

You would think… and yet, Mexico’s oil giant is headed for collapse.

According to Bloomberg, Pemex is plagued by “too little investment, high taxes, laws that forbid competition, corruption, and corroding and exploding pipelines.” That’s just for starters.

A Budding Crisis

It’s not as if the Pemex crisis is new. Observers have been sounding the alarm with ever-heightening concern for at least the past decade. In the past few years, though, things have taken a serious turn for the worse. The company’s 110,000 union workers are poorly trained and hard to control. Fatal accidents are increasing.

Worse still, Mexico’s oil fields are running dry.

Take the Cantarell field, for example. Cantarell is Mexico’s biggest field. In fact, it’s the second-largest oil field on the planet, behind only Ghawar in Saudi Arabia. In 2005, it came to light that Cantarell production had declined rapidly. “Fallen off a cliff” is how some might put it, in terms of the speed and suddenness of the drop.

If Cantarell production spirals downward into collapse, then Pemex — and, by extension, the entire Mexican economy — will be in deep, deep trouble. Mexico’s finances have been boosted in recent years by the sky-high price of crude, and those extra dollars have hidden Pemex’s behind-the-scenes problems. But fewer barrels from the ground means fewer dollars in the bank. Eventually the dropoff becomes too big — and too painful — to ignore.

Mexico’s Energy Minister predicts that, without new production, the country could be forced to import light crude for gasoline by 2011. (Most of Mexico’s oil is of the heavy, sour variety.) By the year 2016, Mexican oil exports could plummet from 1.67 million barrels per day, last year’s levels, to a shockingly low 289,000 barrels per day. That’s quite a dropoff.

Think how much the world’s oil thirst has grown these past eight years. Now think how much it will grow in the next eight years. Now consider how tight the supply-demand situation has already become — and imagine pulling another 1.4 million barrels or so off the market.

Too Deep to Contemplate

The funny thing is, Mexico has more oil that hasn’t been tapped yet — maybe a lot more.

Bloomberg again has the details: “The Mexican Energy Ministry estimates 30 billion barrels of oil and gas are sitting below deep water on the Mexican side of the Gulf of Mexico. Yet it’s unclear whether Pemex, which hasn’t been permitted to form partnerships with foreign oil companies, has the technology, money or competence to drill successfully.”

The problem comes down to technology and experience. To conquer the deep water and drill for oil 10,000 feet down, you need a heaping helping of both. Pemex has neither. The company’s engineers are not savvy enough, its technology not nearly cutting-edge enough, to handle the challenge of deep-water drilling in the Gulf.

This is where politics comes in.

Almost all Pemex profit — and as much as 60% of sales revenues — goes straight to the government. At the end of the day, the company is little more than a cash cow for the state. And because the Mexican presidency can only be held for a single six-year term, the holder of that office typically cares little about long-term planning. The focus is on spending for the here and now instead.

The nature of the beast explains why Pemex is poorly outfitted and poorly run. Political promises are expensive and Pemex cash is there for the spending; only scraps are left over for upgrades and maintenance. Can you imagine running a company whose masters have no regard for the future? I can’t. Perhaps that’s why Pemex has had four different CEOs and five chairmen in the past eight years. Most of them threw up their hands and quit in disgust.

Q: I’ve made a lot of money in Petrobras. Now it looks like it’s expensive. What say you, Matt? – D.B.

A: By traditional measures like price to earnings, Petrobras is among the most expensive oil companies. That’s due in part to its incredible run. S&A Oil Report subscribers bought in February 2007 and are now up more than 160%.

But oil investors have more useful tools than the P/E ratio to evaluate the likes of Petrobras: lifting costs, discovery costs, netback, and the recycle ratio. These figures tell me nearly everything I need to know about the health and prosperity of an oil company…

Lifting costs tell us how much the company must spend to get a barrel of oil out of the ground. We want to see low lifting costs, which mean higher profits.

Discovery costs tell us how much money the company spends to find a new barrel of oil reserves… It reveals the success of the company’s exploration arm. The lower the number, the better.

Netback is the bottom line… the amount of money the company makes on each barrel it sells. In other words, the profit margin. I like this number because it tells us about both the quality of the oil and the efficiency of the company.

All these numbers are simplified in the recycle ratio…

The recycle ratio tells us how efficiently a company turns a barrel of reserves into a barrel of production. The higher the number, the better the company.

OK, now let’s get back to the question… Is Petrobras cheap or expensive? Here’s a quick comparison:

As you can see, according to the recycle ratio, Petrobras isn’t the best company out there. That’s because it’s primarily an offshore oil company. Offshore exploration and development is incredibly expensive. That same problem is hitting Chevron and Statoil.

I still like Petrobras, but I think most of the easy money’s been made.

Q: With the continued rise in the price of oil and gas, what form of alternative energy (biodiesel, ethanol, solar, wind, nuclear, hydrogen, etc.) do you think has the most potential to help meet future energy needs? – R.M.

A: First things first… we need to split these ideas into two parts – fuels for transport and fuels for electricity.

Oil is not electricity. Oil is transport – cars, boats, planes, trains. About 70% of all the oil we use in this country gets combusted to move us and our stuff from point A to point B.

Alternative transport fuels are tough. I’ll save my thoughts on biofuels for another essay… but I will say, I think natural gas and hydrogen are the right way to go.

As for electricity fuels… right now we use coal and natural gas. Like oil, those prices are on the rise.

I don’t believe nuclear energy is the solution to this problem, at least not in its current form. The dirty secret of the nuclear industry is that we still don’t have an adequate waste disposal system. While carbon dioxide pollution may let New Yorkers grow palm trees, radioactive waste will kill you.

Technical advances in hydroelectric generation eliminated the need to dam rivers. Now, all you need is a steep section of river. That’s great – right up until you have a drought.

Wind and solar face similar problems… You only get power when the wind happens to blow or the sun happens to shine. I think they’re too inconsistent to be large-scale solutions.

On the other hand, geothermal energy – heat from the Earth – is plentiful and cheap. I wrote a report about it last year, and I am conducting research for a new one on the subject right now. Keep an eye on your inbox.

Good investing,

Matt

P.S. If you have any questions on alternative energy investments… or any other commodities… e-mail me here.

According to Bloomberg:

Saudi Arabia’s influence as the biggest oil exporter would wane if the fields are as big as advertised, and China and India would become dominant buyers of Persian Gulf oil, said Peter Zeihan, vice president of analysis at Strategic Forecasting in Austin, Texas.

“The only certainty that comes with the discovery is that the oil, no matter how much there is, will be very hard to reach,” says Jason Simpkins in Money Morning. The field is 170 miles offshore, more than 6,000 feet under the surface of the water trapped beneath a shelf of salt 500 miles long and 125 miles wide.

“A decade ago, gaining access to such a field would have been a pipe dream (no pun intended). Just like Khurais, extraction will be a very costly process, even with today’s technology.

“Petrobas will have to ante up quite a bit of cash to expand its use of drilling rigs, which are in short supply. Right now, there are only 40 rigs on the planet capable of drilling into massive deep-sea salt deposits.”

The Kingdom of Saudi Arabia is the world’s leading petroleum exporter. Officially, it has reserves of about 260 billion barrels of crude oil – approximately 24% of the world’s total proven petroleum reserves.

But Saudi Arabia has a problem. And it’s the same one that every oil-producing nation will face someday: Its oilwells are drying up.

Saudi Arabia’s largest and most productive field, the Ghawar field, produces about five million barrels a day – accounting for more than half of the kingdom’s total production and 6% of total world output. But Ghawar was discovered in 1948 and has required large-scale injections of seawater to artificially pressurize the well since the 1970s. There’s no telling when the last drop of oil will be purged from the biggest oil find of the 20th century, but there’s no doubt Ghawar has seen better days.

As investing legend Jim Rogers pointed out in a recent interview with Money Morning Investment Director Keith Fitz-Gerald Saudi Arabia has claimed to have the same amount of oil it did 20 years ago, but logic seems to run contrary to that assertion.

“Saudi Arabia has announced for 20 years in a row that they have 260 billion barrels of oil in reserve,” Rogers told Money Morning during an interview in Singapore last month. “It’s astonishing. The figure never goes up and it never goes down. They have produced dozens of millions – billions – of dollars of oil in that period of time.

“If you go to Saudi Arabia, you have to wonder: ‘How could this be? How could it be that every year for 20 years in a row, you always have 260 billion barrels of oil in reserve?’ The Saudis say: ‘You either believe us or you don’t.’ And that’s the end of the conversation.”

About 75% the Kingdom’s revenue and 90% of its export earnings come from the oil industry. The oil industry accounts for 45% of Saudi Arabia’s gross domestic product, compared with 40% from the private sector. Without oil, Saudi Arabia would be little more than a desert. So its absolutely imperative the Kingdom find a way to maintain its high production levels.

With all of the most productive, most accessible and most cost-efficient reserves already tapped, Saudi Arabia has undertaken one of the largest industrial projects being executed in the world today. It is spending an estimated $15 billion on a vast network of pipes, treatment facilities, horizontal wells, and water-injection systems for its Khurais complex – a reserve expected to yield 1.2 million barrels a day.

Originally discovered in 1957, Saudi officials hoped the field would turn out to be another Ghawar but were vastly disappointed. The reserve lacks natural pressure, a key component in getting oil out of the ground. It was put into limited production in 1959 before being sidelined. It was brought back online when oil prices spiked in the 1970s and hit a brief peak of 150,000 barrels a day in 1981 before being shut down again.

“It was mainly token production, enough to help power the city of Riyadh and keep the king’s palace cool,” Jack Zagar, a reservoir engineer who worked on Khurais in the 1970s, told The Wall Street Journal.

In 2001, reservoir engineers launched an investigation into the field’s potential and found that injecting massive amounts of seawater would be the only way to generate any significant output from the field. But Khurais is located about 120 miles inland from the Persian Gulf, and more than 60 miles west of Ghawar. Hundreds of miles of pipes will be needed to transport highly filtered saltwater from the Gulf and carry oil back from the middle of the desert.

According to the Wall Street Journal, Saudi Arabian Oil Co., otherwise known as Aramco, spent 20 months shooting 2.8 million three dimensional images of the field’s geological makeup. The company then built models to simulate how the field might respond to water injection. The water injection program will require125 injection wells and dozens of electric submersible pumps to drive 2.4 million barrels of seawater a day into the reserve. That’s two barrels of water for every barrel of oil the company hopes to extract.

“This will be the biggest smart field the world has ever seen,” Nansen Saleri, Aramco’s former head of management, told the Journal.

It will also be a very risky procedure as the water will have to be filtered down to minute particles to avoid clogging the Khurais’ dense layers of rock and blocking the oil. Aramco also runs the risk of flooding the well.

“When you’re injecting water into the periphery [of a field], if you hit fissures in the rock and aren’t managing it well, you can have water flow in and kill a well. And a dead well doesn’t flow,” Saleri said.

At $15 billion, the well will also be very expensive, but with the majority of the world’s “low hanging fruit” already spoken for costly endeavors like these are the future of the oil industry. While in even the latter part of the 1990s it may have cost Aramco $4,000 to add one barrel of daily production capacity, analysts believe it now costs $16,000 for the same production increase.

Could Brazil be the “New Saudi Arabia?”

Rising global demand is a big reason reserves are running low and prices are shooting higher. The International Energy Agency estimates that demand could climb to 99 million barrels a day by 2015, up from the 87 million barrels this year.

But the fact that there hasn’t been a significant oil discovery in the last half century hasn’t hurt either.

And while there may be no stemming the rise in demand, the possibility of another significant discovery, the discovery of a deposit large enough to significantly alter the world’s energy landscape can’t be ruled out.

In fact, just such a discovery may already have been made. Not in the Middle East or Russia, but in Brazil.

Just last week, Haroldo Lima, the head of Brazil’s National Petroleum Agency, revealed the unofficial figures from a new reservoir, known as Carioca, which could hold 33 billion barrels of oil and gas. If true, Carioca would be the world’s largest discovery in at least 32 years. Upon hearing the news, brokers and analysts rushed to tell their clients that Brazil, as one minister put it just months ago, was about to become the “new Saudi Arabia.”

Of course, both Jose Sergio Gabrielli, chief executive officer of Petroleo Brasileiro SA (PBR), or Petrobras, and Energy Minister Edison Lobao said at a press conference at Petrobras headquarters Thursday that they couldn’t confirm Lima’s estimate and reiterated that further drilling was needed before any estimate on volumes could be made.

Even if Lima is exaggerating, experts say even 10 billion recoverable barrels of oil (worth about $1.2 trillion at today’s prices) would be a remarkable find and enough to catapult Brazil into the world’s oil-producing elite. Brazil currently has about 12 billion barrels of proven reserves, and could soon find itself nestled between Nigeria (with 36 billion barrels) and Venezuela (80 billion). [See a related report in today’s issue of Money Morning that details why the price of oil still has much further to run.]

However, Petrobas has a history of playing down its discoveries and is infamous for leaking discovery data. The company downplayed the discovery of the Tupi oil field before announcing last November that the reserve contained between 5 billion and 8 billion barrels of light oil and gas.

Still the only certainty that comes with the Carioca discovery is that the oil, no matter how much there is, will be very hard to reach. The field is 170 miles offshore, more than 6,000 feet under the surface of the water trapped beneath a shelf of salt 500 miles long and 125 miles wide.

A decade ago, gaining access to such a field would have been a pipe dream (no pun intended). Just like Khurais, extraction will be a very costly process, even with today’s technology.

Petrobas will have to ante up quite a bit of cash to expand its use of drilling rigs, which are in short supply. Right now, there are only 40 rigs on the planet capable of drilling into massive deep-sea salt deposits.

Petrobas has already awarded Norway’s SeaDrill Ltd. contracts of up to $4.1 billion for deepwater rigs and signed a letter of understanding with Texas’ Noble for drilling contracts worth as much as $4 billion.

Companies like Transocean Inc. (RIG) Diamond Offshore Drilling Inc. (DO), and Pride International Inc. (PDE) could also be taking orders soon, as another big Brazilian discovery and record high oil prices could lead to a massive rush on deep-sea drilling equipment. In addition to the coast of Brazil, sub-sea salt layers are also present off the coast of Africa and in the Gulf of Mexico.

Q: I saw that Nigerian oil output is going to fall… Doesn’t America import oil from there? What are the ramifications? – D.C.

A: The ramifications are, we could be in trouble.

A recent story in the Financial Times covered the possibility that Nigeria’s crude oil output could fall by a third in the next seven years. The problem is, Nigeria is one of the top five foreign oil suppliers to the U.S.

Here are the latest numbers from the Energy Information Administration:

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Now let me show you that same table from a scary perspective… the change in production levels from 10 years ago, and one year ago.

As you can see, our primary oil suppliers are suffering production declines… except for Canada. The major reasons Mexico, Nigeria, and Venezuela are faltering are lack of investment and government mismanagement. The major reason Canadian production is increasing is the development of its gigantic tar-sand deposits.

So… the short answer to the Nigerian question is “yes… this is bad for the U.S., and it signals higher oil prices.” But so does the decline of Mexico’s Cantarell field and the idiotic ramblings of Hugo Chavez.

Basically, any bad news you read from these regions is just more of a buy signal for the safe, vast deposits of Canada.

Q: Did you see that a rocket hit a Japanese oil tanker in the Middle East? Will that affect U.S. oil prices? – J.S.

A: Absolutely. Attacks on oil tankers, drilling platforms, and pipelines are all too common today. That’s because they make easy targets for any group with a cause and some easily-purchased explosives. What better way to hold a country hostage than to threaten its energy infrastructure?

And now look where you’ve gotten us, J.S., we’re right back to the answer above. We’re right back to Canada.

Canada is sitting on a huge oil reserve with a “no risk” transport route to the world’s largest consumer. Caribou generally do not engage in the destruction of oil infrastructure.

Q: What oil companies will benefit most from the high oil prices? – A.L.

A: In a recent DailyWealth, I covered the benefits of investing in government-backed oil companies, like Brazil’s Petrobras. I think these are big beneficiaries of $117 per barrel of oil.

These majors have many of the benefits of investing in a “non government-backed” oil company like Chevron, except they have huge backers behind them when it comes to securing resources at less-than-competitive rates.

Brazil doesn’t entertain outside offers for its choice of offshore drilling blocks. These are some of the most promising offshore fields in the world, they’re getting more valuable by the day, and they’re reserved for Petrobras.

And let me throw this curve ball in here… natural gas producers.

While the price of natural gas has increased about 40% in the past 12 months, the price of crude oil has skyrocketed 80%.

Natural gas and crude oil can be substituted for each other in some applications, so high crude oil prices act as a magnet to draw natural gas prices higher. That’s great news for natural gas producers like EnCana, XTO Energy, Apache, Devon Energy, and Canadian gas trusts. Many of these companies are soaring right now… which tells us the market agrees with the “higher natural gas price” thesis.

Good investing,

Matthew Badiali

P.S. If you can’t tell yet, I’m as bullish on Canada as any region in the world. The bull market in oil could easily send my top Canada ideas up by hundreds of percent this year. You can learn more on the region’s best investment here.