For the first time since 1949, the United States is poised to become a net exporter of petroleum products, according to the Petroleum Supply Monthly report for November put out by the U.S. Energy Information Administration.

Through the first nine months of 2011, the U.S. exported 753.4 million barrels of gasoline, diesel and other oil-based fuels while only importing 689.4 million barrels.

America’s neighbors were far and away the biggest consumers of Yankee petroleum. Mexico imported more than 150 million barrels while Canada brought in slightly more than 64 million. The next closest country – Brazil – imported about 40 million barrels.

Jeremy Friesen, a commodity strategist at Societe Generale SA in Hong Kong, told Bloomberg News that part of the reason for the shift is that America’s consumption of oil has remained stagnant compared to the rest of the world.

“The U.S. has been flat or down for overall oil consumption versus the world, which continues to rise mainly due to emerging markets,” he said. “Latin American fuel demand continues to be pretty good.”

According to The Wall Street Journal, U.S. consumers used 7.7 percent less gasoline this August compared to four years prior, when usage hit its apex. In addition, the increased use of ethanol has depressed the consumption of gasoline.

While most experts are citing decreased domestic consumption as the driving force behind the reversal of the 62-year-old trend, increased domestic production is also playing a role.

According to the San Francisco Chronicle, production of domestic fuel products has gone up over the past two years in part due to the increased development of shale gas reserves.

One of the most prominent shale gas plays – the Bakken in North Dakota – saw gas production at 485 million cubic feet per day in September of this year, which is a more than three-fold increase over that figure in 2005, reports the EIA.

Expressed another way, the Bakken produced 424,000 barrels of oil equivalent per day in July, an 86 percent increase over the same month in 2009, reports the Journal.

Another domestic source of petroleum products that has taken off in recent years is the Eagle Ford shale in Texas.

According to the Railroad Commission of Texas, the first eight months of 2011 saw the play produce more than 8 million barrels of shale oil, compared to the about 3.76 million it produced in all of 2010.

Additionally, 2011 shale gas production in the Eagle Ford play through August reached 139 billion cubic feet, while the entire 2010 total was 108 billion cubic feet.

The increased production and dwindling consumption in the U.S., combined with eager international markets have worked together to put America in the position to be a net oil products exporter.

“Instead of that product backing up and depressing prices, it’s being sent to other countries,” Tom Kloza, chief oil analyst with the Oil Price Information Service, told the Chronicle.

According to some the U.S. will remain a net exporter of petroleum products for years to come, as the 900 million barrel figure the country imported in 2005 has steadily declined.

“It looks like a trend that could stay in place for the rest of the decade,” Dave Ernsberger, global director of oil with Platts, told The Wall Street Journal. “The conventional wisdom is that U.S. is this giant black hole sucking in energy from around the world. This changes that dynamic. ”

OGIB Portfolio Returns for 2011: 48% average gain on closed positions; 24% average gain on open positions

by Martin Pelletier, Trivest Wealth Counsel

Oil prices have been the top performing asset class over the past month as speculators have completely ignored the Euro-zone contagion. Instead, they’ve bid up the commodity on the potential for another round of QE as well as escalating nuclear tensions in Iran. Spot WTI pricing for example is up over 25% from its October lows compared to the S&P TSX that is up only 9%.

A more serious concern is that the oil futures market has moved into backwardation – meaning the forward price is less than the current near-month and/or spot price. Looking one-year out, the forward WTI price of oil is currently trading at an approximate 8% to 10% discount to the current spot price. In a normal market, oil futures typically trade in contango where the forward price is higher than the near-month to compensate for the cost of storage in addition to factoring in the risk of carry.

In early 2008, oil futures were in steep contango whereby speculators believed that the potential for a recession was somewhat low and any downturn would be short-lived. This in-turn provided a strong incentive to build oil inventories to take advantage of the large forward spread.  Thereafter, when the financial crisis hit in late 2008, WTI oil prices collapsed from $145 to $30 per barrel as global oil inventories were excessive given the current economic picture at the time.

This go around speculators are doing the opposite, selling off the long-end of the curve thereby creating an incentive to draw oil inventories. Consequently, current global oil inventories have been reduced to nine year lows and continue to be drawn down given the large forward discount.  This is particularly troublesome as let’s assume we escape the near-term Euro-debt crisis contagion and the global economy resumes a respectable growth trajectory.

Global demand for crude oil would also consequently expand at a time when global oil inventories are at near decade lows. Therefore, there would be the potential for another large spike in oil prices, which could yet again temper or even derail the economic recovery.

In the near-term, we see at least 10% to 15% downside to current spot oil prices and much prefer to own the back-end of the forward curve. In our view, spot prices should come down as soon as speculators realize that Israel does not have the military capability to attack Iran. Israel also certainly isn’t going to get support from the Europeans who have their own mess to deal with, and not the Americans especially considering 2012 is an election year.

In regards to another round of QE, we just don’t see Bernanke stepping in here and inflating commodity prices even higher – especially with WTI rocketing to near $100 per barrel once again. The blog Zero Hedge posted a little reminder today that perhaps inflated oil prices are perhaps not such a good thing after all:  “Every $1 per barrel rise in oil decreases U.S. GDP by $100 billion per year and every 1 cent increase in gasoline decreases U.S. consumer disposable income by about $600 million per year.”

So, how does an investor play this? Outside of our clients, we don’t want to give away our secret sauce. However, we’ll tell you this much, there are many different ways to position a long on the back-end of the curve, and for those bold enough, they can use the proceeds from the front-end to finance it.

PS–Sign up for Martin’s weekly updated on Friday afternoons–it’s one of the few regular reports I read every week–inquiry@trivestwealth.com

This chart is bullish for oil.  It shows the number of non-commercial net long crude oil positions in the NYMEX (New York Mercantile Exchange) is moving down – these are the people we all call “The Speculators”.  Getting these (politically unpopular) people out of the oil market is what I think one of the primary goals of the IEA was, when they announced a globally co-ordinated release of 60 million barrels into the market in late June.

This shows the speculators leaving the market – but the oil price is not declining.  This shows real demand is taking the place of speculators.  Now of course it could be argued that without the IEA intervention, world oil prices could be $10/barrel higher right now.

With expected demand rising up 4 million barrels a day more through the fall (this seasonal increase happens every year; it’s not a guess) it shows oil investors are going to have to see a dramatic decline in the world’s economy to keep oil lower.

Source: BMO Nesbitt Burns Research Comment July 4 2011

Want to learn more about investing in junior oil and natural gas stocks? If you have a Facebook account, just “like” this article and a hidden link to Keith’s 10 page how-to on oil and gas investing will appear:

ETFs, or Exchange Traded Funds, not only track the price of oil, but they can actually provide clues as to where the oil price is going.   I’ll show you how to read their charts, and show you the ETF that I think most accurately follows and even warns investors of oil price moves. (Hint – it’s not who you think.)

Currently Light Sweet Crude futures remain in an uptrend, over the last month price has tumbled from former highs at $114.83 in May to $95.25 currently on the July contract.  The two-year chart below, in 2-day increments, shows the course of oil prices with a continuous futures chart.

ETFs allow individual investors to partake in the price fluctuation of oil in a way very similar to simply purchasing a stock.  (For further information on ETFs, see Keith Schaefer’s report: ETF Investing in the Oil & Gas Market).

The chart below shows the price of light sweet crude in yellow/red, and two ETFs – USO-NYSE, which is the United States Oil Fund (purple), and an ETF which gets far less attention – XOP (light blue).  XOP is the symbol for the SPDR S&P Oil & Gas Exploration & Production ETF traded on the NYSEArca exchange – so it is an ETF that covers oil stocks/equities, whereas USO tries to track the commodity.

How to use ETFs to predict moves in the price of oil How to use ETFs to Predict Moves in the Price of Oil

Source: Thinkorswim

General Chart Comments

From the chart above much information can be extrapolated.  Namely we can see that at this time oil still remains in a primary uptrend, even though we have seen a sizable correction.  There are two trendlines shown on the chart – the first one is red and indicates an aggressive upward trend.

At some point all aggressive moves slow down.  The green trendline is also present which marks the more stable rise of oil prices over the last year.

If oil prices move below that red line, currently intersecting at $92 (this will change over time as the line is sloping), it indicates that oil is correcting to its primary uptrend level (green line).

The green line currently intersects at $80, but will rise over time as the line is sloping. An upward sloping trendline such as this helps a trader gauge when longer term trends are shifting.  Markets move in waves – in an uptrend, markets have progressively higher low prices and progressively higher high prices.

If oil can hold above the $92 level it indicates strength, based on this simple method derived from former price action.  On the other hand, if the commodity moves below that level we could see prices in the low$80s, where there is likely to be buying interest once again.

Using ETFs as a Form of Analysis

The ETFs shown in the chart are not only investment vehicles, but they are also analysis tools.  USO (purple on chart) has already broken below its trendline (yellow line) indicating that lower prices are likely for that security.  This provides some confirmation of the decline in oil, although XOP is a better gauge.

XOP provides valuable information.  Not only has it been the far more profitable play from rising oil prices, but also generally leads oil prices – providing a bit of a snapshot into potential moves in crude.

This occurs because XOP is an ETF that doesn’t track crude – it tracks oil exploration and production companies – which provide a large input the for the oil market as a whole and thus the price of oil.  If investors are buying these securities, which are held by a sector ETF such as XOP, it indicates that the market is anticipating rising oil prices.  The same situation applies if investors are selling these securities help by the XOP ETF in anticipation of falling oil prices.

Looking at the chart, XOP (light blue) has moved aggressively higher over the last year.  Rarely did it pull back significantly, even when oil declined.  I have highlighted a few sections of the chart for educational purposes.  The first, light blue highlighted box on the left s (#1) hows XOP making a lower price high, while oil made a higher price high (all contained within the rectangle).  This was a warning for oil prices and quickly oil prices corrected by about 15%.  This is commonly called divergence.

The next box to the right (#2) shows oil correcting to the prior low yet XOP pulled back very little in comparison – oil quickly moves higher following XOP’s lead.  The next highlighted blue box (#3) shows a similar situation to the last – XOP leading oil higher.

The final box is highlighted in white (#4) and is a potential warning signal similar to our first highlighted area.  For the first time in over a year XOP made a lower high, while oil made a new high.  This was a warning signal for the correction in oil, and remains a warning signal.  XOP has shown a strong tendency to lead oil prices and now it is retreating, leading oil lower.

You will notice at the far right of the chart, which shows June 15 price action, that while oil has paused near recent lows, XOP has retreated below its recent low.  This makes further declines in oil likely, as long as XOP continues to decline or fails to rally on oil price rises.

Tying it together

Investors can use the XOP ETF to help them see the likely course the commodity will take.  XOP has been a sound indicator for the strength of oil prices.  It pointed to strong oil prices through the rise, and even when crude corrected, it indicated a correction which has come and currently it is pointing to a further correction in oil.

In the beginning of this report the low $80’s was discussed as a potential target for the oil price.

If oil continues to drop below that level, we can look to the XOP indicator as a sign of a potential bottom.  When oil makes new lows (compared to recent price action), but XOP fails to make new lows, oil prices have a high probability to begin moving higher as well.

While USO comes to mind when looking for a place to take advantage of a rise in oil prices, it has proven not to be the most efficient vehicle.  XOP, when oil prices are rising, has proven to lead oil and also generally outperform.

Investors must remember XOP will also lead on the way down, retreating fast and more aggressively than oil; therefore, a prudent exit strategy is required. XOP also lacks the trading volume that USO has (still 2-10 million shares a day), yet it functions as an excellent analytical tool for oil prices.

- Cory Mitchell, CMT

Sector Diversification: Target Oil Sands

Just about everybody on Earth ought to know by now about the oil sands are a vast and virtually limitless supply that’s going to backstop North American energy security for a century or more.

But for all the hype and hoopla, surprisingly few investors know how to play the full oil sands value chain.

The thing to remember about a massive development undertaking — a mega, mega project — is that it’s not a single homogenous entity, there’s a whole support network that has to be built around it.

Oil and gas producers are basically procurement houses that go out and buy what they need. Everything from drilling wells to building and operating pipelines — even the catering — is contracted to third parties. By entering specific points in the supply chain, it’s possible to create a surprisingly resilient portfolio that’s diversified while still taking advantage of big growth opportunities in the many, many years ahead.

The first link is the producers. For almost half a century oil sands have traditionally been a game for Majors, Everyone thinks of trucks and shovels, but more than 80 per cent of the resource is actually too deep to be mined. Most of the new production over the decade will come from specialized steam injection schemes.

The past 18 months there have been some high profile IPOs, backed with foreign capital from China. Names like Athabasca Oil Sands and MEG Energy are but two. Given China’s voracious appetite for overseas investment, there will inevitably be more IPOs to come.

On that front, the first half of this year also promises to be active, with Laricina Energy and OSUM Oil Sands hitting the street this spring. Calgary-based Peters and Co. recently did a valuation on both companies and says that they’re going to be popular issues. Laracina could fetch $37/share and OSUM $16/share on their respective IPOs. Call it informed speculation considering they’ll probably be in the underwriting syndicate, at which point they’ll be restricted.

Another bright light is Black Pearl (TSX-PXX) headed by former Black Rock Ventures guru John Festival. You might recall he sold his predecessor company to Shell a couple of years back for a few billion, little wonder the shares have tripled in less than a year.

The real key to this oil sands renaissance is horizontal drilling and steam injection. By now SAGD (Steam Assisted Gravity Drainage) is a relatively mature technology that sees pairs of parallel horizontal wells work in tandem to inject steam and bring oil back up to the surface. This is a sophisticated undertaking that requires the skills of a surgeon and some heavy iron. Enter the drillers.

The coldest winter in a decade means all of Canada’s contract drillers are really hot right now. Precision Drilling (TSX-PD) (NYSE: PDS) is up almost 20 per cent in the past two weeks alone and rivals like Trinidad Drilling (TSX-TDG) (OTC: TDGCF.PK)and Murray Edwards’ Ensign Resource Services (TSX-ESI) (OTC: ESVIF.PK) have had a good run this winter. Both have good exposure to the oilseeds, with Ensign running nearly 300 coring rigs that are used to prove up reserves, while Precision has the heavy iron need to drill the new steam assisted thermal wells.

The best performer of all is Stoneham Drilling Trust (TSX-STG.UN) (STHMF/STHMF.PK)which is fast becoming a player with its share price quadrupling since last October. It’s one of the last remaining oil and gas trusts, but that will change around Canada Day when it converts to a corp. One of the company’s biggest customers is Cenovus Energy (TSX-CVE) (NYSE: CVE)which is the industry leader in the thermal oil sands space.

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They Don’t Make Fracking. They Make Fracking Better (and More Profitable)

This small energy services company’s patent-pending fracking technology is changing EVERYTHING.

Rest assured, it is a profit opportunity not to be missed. (It’s my # 1 trade of the year.)

Get every last detail on this company, its revolutionary fracking process, and what it could mean for your portfolio… here in my new video.

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Keeping those rigs turning requires a whole support network of its own – where do you go when a reamer or a winch goes down in the middle of the night? That’s where CE Franklin comes in. (TSX-CFT) (NASDAQ: CFK) is the Canadian Tire of the oil patch, supplying literally thousands of products like valves, flanges and drill pipe that are essential to support field operations. The company’s web site boasts that it can fix everything from quads and pick-up trucks to full blown drilling rigs.

In February, the company reported that oil sands accounts for about 15 per cent, or $11.5 million of its fourth quarter sales revenue and the company said it is committed to leveraging its presence in the Fort McMurray area to capture a bigger slice of this pie.

Although it’s firmly rooted in the oil and gas industry, the company’s operating metrics have a retail character, like the oil patch version of Walmart. IROC (TSX-ISC) is another new entrant that has managed to post impressive share price gains while remaining affordable. Higher drilling levels will inevitably translate to higher sales revenue for everybody in the space and IROC is positioned for growth.

In its most recent operational update, the company said its Canada Tech division hopes to start realizing positive returns from a series of products and solutions designed specifically for steam assisted gravity drainage projects in the oil sands.

Up until now we’ve been talking about upstream production. But selling all that oil to American — and possibly Asian — markets is the key to true diversification for investors and oil companies alike. The downstream is the one area where your interests are truly aligned with industry.

Led by pipelines, it’s a whole parallel universe of support services that connect producers with refineries and trading hubs. Canada’s pipes are in an exciting growth period, and we’re talking about some extremely ambitious projects: namely Enbridge’s proposed Gateway to the West Coast and TransCanada’s Keystone to the Gulf of Mexico. When completed, the projects will move more than 1.5 million barrels of oil sands crude for export. To put it in perspective, Libya — an OPEC member — was only exporting 1.5 million barrels a day before it came unhinged.

TransCanada’s (TSX-TRP) (NYSE: TRP) Keystone is banking on the U.S. to get over its fixation with “dirty” oil, but rival Enbridge (TSX-ENB) (NYSE: ENB) has been looking to the West Coast and threatening to break-out to Asia. Both are taking bold steps that will allow Canadian production to get the full world price and open new markets.

Both have had good share price appreciation and it’s hard not to like the steady returns offered by owning a high-yielding dividend. They are also a lot less exposed to volatile commodity prices. Due to the way they’re financed, pipelines are considered lower risk lower reward, but both companies have been showing good near and long-term growth.

Either one is a good hold or place to park when the market turns south. Enbridge will be splitting its shares later this spring, which will make them more affordable to own.

Finally, it’s one thing to throw a bunch of steel into the ground but quite another to keep it up and running. Sometime in the next year or two, the amount of money required to maintain all these pots and pans is going to surpass the amount of new capital investment, which is estimated at around $18 billion this year, according to the Oilsands Review magazine.

Put another way that means almost half of all the spending in the oil patch will go to keeping these oil sands projects going — it’s a staggering sum.

On that front, Flint Energy Services (TSX-FES) (OTC: FESVF.PK)is probably the best positioned to capitalize. Last November it announced a $450-million contract with Suncor to keep its oil sands projects — some of which have been operating for 40 years — in tip-top shape.

Company representatives told the OSR it expects revenue from its oilsands maintenance unit to equal and surpass its oil sands construction division in the next five years.

There you have it, a long and rather exhaustive look at the oil sands value chain. By picking spots along each length of the chain it’s possible to actually diversify within the sector and profit on what will likely prove to be the last big oil rush on Earth, providing even the humblest investor with a steady stream of profits for decades to come.

- The OGIB Research Team

Editor’s Note: My research team told you last time about how lower gas prices could affect their reserves, as reserve reporting season is underway.  Below, they take a look at how some junior oil companies might fare.
- Keith

Part 3 of a 3-part Series

Reserves redux:

Last time we talked about reserve reports and how natural gas producers could have their credit lines and valuations cut because of the low carrying value of their reserves.

This time we’re going to talk about how the same phenomenon is going to have the entirely opposite effect for oil producers, especially heavy oil that makes up the majority of the crude stream coming out of Western Canada.

If you’ll recall, we talked about how oil and gas companies have to file an inventory statement effective Dec. 31 that details the net present value of their reserves based on future projected cash flows (which in turn are based on independent price assumptions for the next 12 to 24 months).

Then we talked about how any drastic change in the valuation of those reserves was akin to lowering (or increasing) the net worth of your house against the balance of the mortgage on your home. We also talked about how a 20 per cent decline in the price of natural gas was going to bite into the NAVs of several high profile gas producers and possibly send them scrambling to shore up balance sheets, by jettisoning unprofitable assets, selling equity and paying down debt — or else.

The good news is that oil-weighted producers are going through the same exercise with a different conclusion. The really good news is that most of them are going to see their net asset values and credit lines increased, given where crude prices have been for the past 12 months and given where they’re likely to stay thanks to all the trouble in places like Libya and Egypt.

And the best news of all is that it means we’re probably looking at a round of upgrades — and higher stock prices — for the entire sector. This, even though the rising Canadian dollar essentially wiped out any oil price gains in 2010; Canadian-denominated crude prices were actually down about two per cent year over year.

But nobody wants to hear us crash the oil price party with mundane things like currency valuations. Much better to party like it’s 1992 — the last time the Middle East looked like it was set to explode. Back then, if you’ll recall, Saddam Hussein had oil prices pushing the then unheard-of heights of $75 with George the Elder banging at his door in Desert Storm I.

Then, as now: peace sells. The problem is that nobody’s buying.

According to a recent report by Peters and Co., the oil-weighted guys are going to be flush with cash which will drive consolidation within the junior heavy oil space. The start-up of Keystone into the U.S. Gull is going to change the market no matter what happens in places like Cairo or Tripoli.

The North American market is too localized to really be affected. The upshot is that tensions in far off places like Libya and Egypt only increase the role for Canadian oil, as the U.S. tries to diminish its dependence on Middle East crude.

Based on geography alone, Canadian producers hold an almost insurmountable advantage.

But before we go any further, a note of caution. The geopolitical risk trade is the worst trade you’ll ever make. Just because the world seems to be going up in a hand basket doesn’t mean oil is going to hit $150 any time soon. Or stay there for more than a few weeks if it does. Don’t get sucked into what MIGHT happen. More often than not, it doesn’t happen and you’ll be left holding the bag.

Think about WHAT’s going to happen when everything settles down.

Take some time, dig into the financial statements and look for that reserve report. Then take the forecast price of oil used in the financial statements, and knock it down 15 or even 20 per cent.

Anybody that’s showing profits at $50 a barrel is going to be doing just fine at $70 or even $80. Assuming prices do spike above $100 you’ll be in a good spot to reap big rewards — just don’t be banking on the sky to fall for it to happen.

A couple names to consider: Black Pearl Resources (PXX-TSX). Here you’re getting proven management in addition to oil price exposure. These were the guys behind Blackrock Ventures before it was sold to Shell for mega-billions a couple years ago.

Black Pearl is a new stage entrant, but they’ve got some good production history — 7,700 barrels a day and rising — and a lot of expertise working their main assets near Peace River. But a big chunk of their meteoric rise in stock price over the last few months is vastly (and fastly) growing reserves (sense a theme emerging?).

In January, the company released its 2010 reserve reconciliation showing they added 7.5 million boe in reserves, but added almost 750 million barrels in a more risky category – contingent resources – and about 98 per cent of it oil. That’s a staggering sum; we’re talking resources to production of almost 300 years at current rates.  Most of these resources come from its Blackrod SAGD heavy oil project (Steam Assisted Gravity Drainage).

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Fracking: Today’s Headlines… And What They’re Missing

“Gasland’s War on Fracking Continues”

“NY Times Uncovers Secret Documents about the Dangers of Hydraulic Fracturing…”

“Environmentalists Wants New Rules on Gas Extraction”

Now here’s the Big Point each of these headlines completely misses…

A North American energy services company has developed a (patent-pending) fracking technology that is 100% environmentally sustainable. Make no mistake — its business is BOOMING.

To learn more about it — and how you could profit handsomely — watch the full video here.

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As CEO John Festival said in the news release: “Our objective over the next few years is to get these barrels reclassified from the resource category to reserves.”

In doing so, the company will be adding real value that will inevitably translate into higher share price multiples. Think about what that family room addition will do to the resale value of your house.  And like I said, this management team has sold a company before for a lot of money.

Likewise, consider Twin Butte Energy (TBE-TSX). They started off as a gas company but quickly shifted to oil around 2006 when it became clear the Katrina Premium on gas prices was just a figment of the imagination.

Earlier this month the company reported a23 per cent increase in total proved plus probable oil and gas reserves, which rose by 6.9 million barrels of oil equivalent to 37.5 million boe.  That reserve addition was nearly quadruple 2010 reserves it produced.

Finding, development and acquisition (FD&A) including future development costs came in at $10.48 per boe on a proved plus probable basis and $14.28 per boe on a proved basis, which is right up the fairway and a chip shot to the green as far as industry-wide performance goes.

In other words, these guys will do quite well even if oil prices come down from current levels — which they probably will, if past events like the first Gulf War are any guide.

But the increase in reserves combined with the low operating and development costs will ensure a steady stream of cash and higher valuations for you, dear investor, dictators be damned.

It may be the end of the world as we know it, but as long as you’re long on oil, we’ll all be fine.

- OGIB Research Team

Editor’s Note:  Ever wonder how companies can estimate tens of billions of barrels of oil on their property before they drill it?  I’ll explore that in a story next week.  Meantime, click below to read the first two parts of the above series:

Part 1: How To Use the ‘Recycle Ratio’ To Invest in Oil & Gas
Part 2: Unconventional Oil & Gas Plays: What I Look for in the “Reserve Report”

- Keith

By Jim Williams, WTRG Economics (www.wtrg.com)

Current OPEC spare capacity would suggest a lower world oil price, but the distribution of this spare capacity could be one reason why oil prices are higher than many experts think it should be.

Usually the more spare capacity (supply) in a market there is the lower the price – simple economics.  But the reality is that Saudi Arabia is the only country in the world with significant spare capacity to produce more oil in the world and influence prices. And they currently favour a $70-$80 barrel oil price.

In 2003, OPEC had 2 million barrels a day LESS spare capacity it has now, and oil was under $40/barrel – but spare capacity was more evenly spread out among the 11 member states.

If everybody has spare capacity, the potential for cheating on production quotas is greatly increased and that carries a higher downside risk for prices.  Should the world economy grow more quickly, only the Saudis have the ability to increase production enough to meet demand and influence prices.

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The two charts below show the spare oil producing capacity of each OPEC country now, and in 2003.  See how much the Saudi spare capacity has increased as a percentage of OPEC spare capacity.

Back in 2003 the distribution of spare capacity was more evenly spread out – as it had been for several years. The Saudis only had 52% of OPEC spare capacity in 2003. There were three members with over 10% and a fourth at 9%.  Again, the more countries with spare capacity the greater the odds that one or more will take advantage of their position with higher production leading to lower prices.

The US government EIA now estimates OPEC spare capacity at 4.96 million barrels per day. Only Saudi Arabia with 3.75 million b/d excess capacity has any significant power. Kuwait and UAE each have an estimated 300,000 b/d of spare capacity and Qatar has 260,000 b/d. With Saudi Arabia controlling 76% of the spare capacity the combined power (16%) of Kuwait, Qatar and UAE is barely enough to influence prices.

It’s the Saudi spare capacity, not their production, which has such dominant pricing power.

Before 2003 there was a strong relationship between price and spare capacity. Low prices generally coincided with spare capacity over 3 million barrels of oil per day (bopd). However, it is important to note that prices can and often and do rise with higher spare capacity in the 3 million plus zone.

In the graph below, note the spikes in spare capacity near the price troughs during the first 10 years. In most cases that are neither increased capacity nor suddenly lower demand, but rather OPEC implementing a new lower production quota to shore low prices.

As prices deteriorate there is even more incentive to cheat to maintain revenue, which adds to the oil on the market and puts downward pressure on prices.  This is less likely to happen in the current situation of concentrated spare capacity.

Typically, big OPEC decisions to dramatically lower and realign quotas are only possible in an extremely low price environment. That is why sudden spikes in spare capacity occur at the bottom of the price cycle as OPEC takes production off the market.

The concentration of spare capacity has its risks. Saudi Arabia can easily mitigate the loss of exports from any other OPEC member, but no one can come close to covering any loss of oil from the Saudis. If the Iranian situation ever turns from a shouting match into a shooting match, there will be an attempt by Iran to blockade the Straight of Hormuz.  While the Saudis can shift some exports by pipeline to the Red Sea, a blockade still halts the transport of nearly 17 million barrels per day out of the Persian Gulf. A blockade however short-lived would send prices limit up.

It is appropriate that to have an Iranian war risk premium in the oil price, but I do not see this as an immediate risk. However, sanctions are beginning to hurt Iran and the rhetoric is rising. Iran notified the U.S. it was kind enough to dig graves for soldiers from an American invasion force. The level of Iranian threats could eventually have an impact on price, but they have difficulty gaining traction in a market that swings between optimism and economic doom.

A recent Bloomberg headline tells us that we cannot even take internal stability in Saudi Arabia for granted: “Al-Qaeda Seeks Overthrow of Saudi Arabia Monarchy, Killing of Christians.” It is little coincidence this comes at the beginning of Ramadan and the Saudi test of the giant Mecca clock. Some scholars presented arguments that Mecca time should replace Greenwich Mean Time.

It’s also easy to see that spare capacity has always been the key to power within the organization. A country with spare capacity can increase production and with enough, as in the case of Saudi Arabia in 1986, maintain revenues in the face of lower prices. Spare capacity means influence over prices and other members pay attention to that power.

With the current concentration of spare capacity, the Saudis could, for the sake of argument, tell a cheating OPEC producer – hey, stop that or we’ll put 2 million barrels a day on the market, and then watch what happens to your revenue.

To that end, it is puzzling that OPEC members are not mounting much more aggressive drilling and exploration campaigns to increase spare capacity.

Higher capacity is eventually rewarded with higher quotas. To the extent that OPEC output determines prices, prices are now determined by the Saudis.

It is in individual OPEC member’s best interest to increase spare capacity.  However, it is clearly not in their collective interest that spare capacity is widely distributed.

By Brian Hoffman

About six months ago I wrote that the technical outlook for oil prices indicated oil prices may drop in the event of a downward breakout from the rising wedge that had formed in the price chart for light crude oil, or that prices should find support at US$85 per barrel if an upward breakout were to occur from that price level.  A downward breakout occurred and we are now looking at the possibility of even lower oil prices over the next few months.

First, a refresher on wedge chart formations, which are continuation patterns such that a rising wedge is a temporary pause in a falling price trend, and a falling wedge is a temporary pause in a rising price trend.  During the formation of a rising wedge the selling pressure on prices has started to overwhelm the buying pressure resulting in the slope of the top trend line (resistance) tilting towards the bottom trend line (support).  If the support provided by the bottom trend line fails to hold prices and a downward breakout occurs, a sharp and significant price drop may follow.

Oil prices are currently trying to find support at US$70, and the next strong support level is at US$60, which would result in a retracement of about 50 per cent of the move from the US$32 low of early 2009 to the recent high of US$88 high.  If oil prices were to drop as low as US$60 and find support at that level the stage could be set for the next rally in oil prices.  On the upside, oil prices need to break through US$90 and find support at that level in order to reverse the current bearish trend.

Another bearish indicator for oil is the recent breach in the uptrend in the Relative Strength Index (RSI).  RSI is a momentum indicator, or oscillator, that measures the relative strength of the price of a security or, in this case, a commodity against itself.  A buy signal is triggered when an upward breakout in the RSI is confirmed by an upward breakout in price.  Conversely, a sell signal is triggered when a downward breakout in the RSI is confirmed by a downward breakout in price.  A sell signal was triggered in May (see bottom panel in the chart above).  Notice the price action for oil the last time the RSI uptrend line was breached in June 2008, which definitely confirmed the sell signal at that time.

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 New technologies – at this very moment – are revolutionizing the oil and gas exploration industries.

 But only a handful of people truly understand how the technology works.

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Oil prices have several support levels below US$60, but a breach of the US$60 support level could result in prices dropping a lot lower and potentially retesting the US$32 low from late 2008.  Although such a scenario is extreme, it is within the realm of possibilities given the technical weakness in broader market indexes, including the energy sector (see below), as well as the ongoing global financial deleveraging process and the austerity measures that the future holds.

The price charts for the United States Oil Fund, LP (USO-NYSE, US$34.23), an ETF that tracks the performance of light crude oil prices, and the iShares CDN S&P/TSX Capped Energy Index Fund (XEG-TSX, $17.64), an ETF that tracks large-cap Canadian oil and gas companies, are shown below.  Notice the similarities in those price charts to the chart for light crude oil prices above in terms of downward breakouts from rising wedges and the sell signals triggered from breaches of the RSI uptrend lines along with the downward price breakout confirmations (the horizontal lines in the charts below indicate near-term support levels).  The noticeable differences with the XEG ETF’s price action are that the downward breakout from its rising wedge occurred a lot sooner and the price failed to exceed the January price high during the seasonally strong February to May period.  With oil prices performing better than the share prices of oil companies that is a bearish indicator for the XEG ETF.

Conclusion: Oil prices may drop to US$60 over the next few months if they fail to find support at US$70, which will impact oil-related investments.  Watch support levels on positions of oil sector investments as the share prices of some oil companies have already breached their support levels.  If oil prices drop to US$60 then wait for support to firmly establish at that level before taking positions in oil-related investments.  This scenario may take until October to play out, which may present an ideal entry point in November.

Brian Hoffman, CA, CPA, is an affiliate of the Market Technicians Assoc. and a member of the Canadian Society of Technical Analysts (E-mail: bk.hoffman@rogers.com)

A large part of Canada’s massive oil sands deposits could become one of the most “green” energies on the planet, by using electricity to heat up and break down the heavy oil.  EEOR, or Electrically Enhanced Oil Recovery^SM is a new technology being field tested in Saskatchewan by a Canadian junior producer, Deloro Resources.

EEOR uses little water, emits no greenhouses gases on site, and uses electricity from local utilities to a conventional heavy oil well, says Phil Bell, President and CEO of Electro-Petroleum Inc., (EPI) the Pennsylvania company which developed the technology.

He adds that EEOR also greatly increases production, which means that both capital and operating costs will be a fraction of current technologies, like SAGD (Steam Assisted Gravity Drainage).

____________________________________________________________________

This Technological Revolution Allowed Me to Earn Short-term Oil & Gas Profits of 146.1%

New technologies – at this very moment – are revolutionizing the oil and gas exploration industries.

But only a handful of people truly understand how the technology works.

This remarkable scenario creates an enormous, short-term profit opportunity each time a company employs these new technologies successfully.

I’d like to show you exactly how this scenario is unfolding…and how you can pounce on the next triple-digit oil & gas blockbuster.

Click here to read my full report that explains how to get started.

_______________________________________________________________________

EEOR is simple technology which passes direct current between electrodes at the surface and at the bottom of a well (it can also be passed between the bottom of two wells). This electrical current creates several changes in the oil formation sands.

One is that the heavy oil breaks down by a process known as “cold cracking”. So the heavy minerals and asphalt-like products that make heavy oil “heavy” are cracked, and the oil becomes lighter, increasing the API gravity, which is more valuable.  This also makes the oil flow more easily (the industry calls this reducing viscosity).

Bell says that fine sands and other sands are also affected by the current.  The electrical field helps to create more permeability, which is the ability of the rock or sand to allow oil to pass through it.  So both the new, lighter oil flows more freely in the sands and has more permeability, providing a double bonus.

Bell says that in a California field test, EEOR increased production from five to 50 bopd of heavy oil, increased the API from 8.1 to 10.7, lowered the amount of water coming up the well and lowered the amount of sour gas being produced.

The electrical current itself, going from the surface to the bottom of the well bore, acts as a driver for oil flow to the well.

The electricity also heats up the formation near the well bore itself, allowing the heavy oil to flow better. Once at surface it can be transported via heated lines and put in heated storage tanks onsite.

Conventional technologies must also heat up the oil to get it to flow, usually by drilling two long well bores deep into the formation.  Producers must then wait for the upper steam well to heat up the surrounding oil formation before oil starts to flow from the lower well.

Bell says that energy costs for EEOR are less than $4/barrel, and capital costs are less than $10/barrel on only a 20 bopd well.  Another positive for EEOR is that it works at depths greater than 2500 feet, or 800 metres, while conventional SAGD only works above 2500 feet.

“The technology is not fully commercial yet”, says Bell.  He doesn’t want to get into details but says they are now working on several projects.

“We found Deloro via our partners at Yet2.com.  They didn’t have capital to do a steam project” and the reservoir characteristics were such that Bell thought it was a good fit.

“Capital costs will be a fraction of what they would pay for a steam operation and opex (operating costs) will be less,” Bell says.

EPI and Deloro have made one heavy oil well at Wilkie produce up to 19-25 bopd, and a second well has now been permitted. EPI is paying 50% of the well and will receive 50% of the proceeds until payout, and then goes to a 10% working interest.

EPI plans to use the success at Wilkie and its other projects to extend the use of the EEOR technology into bigger fields with larger working interests.

The global oil price got slaughtered this week, taking oil stocks down with it.  Is this a buying opportunity?

Only history will tell us, but I would suggest now that the stock charts of many oil producers have pierced their long term, 200 day moving averages, they will take weeks or months to “recycle”, and base again for a move up later this year.

There will be a rally next week, but the likelihood of oil market charts bouncing back up THROUGH their short term moving averages and staying there are slim.  The daily, weekly, and monthly charts for oil are all negative now.   (Natural gas charts however are in much better shape.)

So I’m now compiling my list of favourite junior and intermediate oil stocks – both the ones I already own and some of the good growth stories I missed – and charting the buy points to look for over the coming weeks and months.

I’ll be telling subscribers exactly where I have my bids in, what prices I’ll be looking for through the spring and summer.   I use several technical indicators – moving averages, and fibonaccis. (What’s a Fibonacci?  http://tinyurl.com/23hr47c)

I’m not sure how much more downside these junior and intermediate oil stocks, but they may trend sideways for several weeks, allowing the long term moving averages to catch up (and I guess I’m lucky that many of the long term averages on the OGIB portfolio stocks have a long way to catch up).

So that’s why I’ll be preaching patience – until, of course, the facts change.

The fundamentals are still in place for a good oil market – global demand has not slackened. Truly, if the southern Mediterranean countries now in economic turmoil reduced oil consumption by 10%, how much does that affect the big picture?  It’s a drop in the barrel.

Personally, I see very little downside on oil, but I have no ego in my opinion. I will let the charts – on oil and the individual stocks - tell me how to trade.

So I think this next few weeks will be a great time to be accumulating both oil stocks and the odd well situated natural gas stock.

Sow the seeds of profit over the summer,  and prepare for the fall harvest.