Many investors study supply and demand statistics to figure out where they think the oil price is going.

But by far, the biggest factor that determines the oil price is the US dollar, says Donald Dony, who pens The Technical Speculator investment newsletter.

“The US dollar is absolutely pivotal for commodity prices,” he says.  To pros in the investment game, that is a truism; obvious.  But most investors underestimate the background impact the U.S. greenback has on oil prices.

And Dony expects the US dollar to keep grinding higher.

“Our analysis  on the USD is looking bullish on the longer term basis—86-87 or even up to 90 cents on USD index.  The U.S. economy continues to improve thanks to the ongoing commitment of the Fed to its stimulus program.  As long as the Dollar keeps rising, we will definitely see a negative impact on oil prices.  The dollar needs to fall through $0.82 before a trend reversal occurs.  If it does, commodities should jump.”

He adds that the US dollar and the S&P 500 index appear to be back to their traditional—and positive—connection, that’s not good for commodities.

“I see another six more months of higher S&P.  All tops are big distribution pattern. Generally speaking, what happens is that for 6-8 months the market can’t move higher—but it doesn’t drop, either.

“If that’s the case, we have nothing like that in the S&P right now.  That alone gives us a bit of a picture. If the S&P stays at 1600 all through the summer, we may not see a downturn until the end of the year.  These distributions last for months—often 6 months or more, where the market tries to go higher but there just aren’t enough buyers.”

Dony also says the oil price also follows the stock market… but not like it did years ago.  He says that now, unlike 30 years ago, we have a real world economy; it’s not just the S&P based in the USA.  Oil is following what global markets are doing, not just the S&P—and he says global markets not really going anywhere; they’re up marginally but not strong.

Dony expects the world’s stock markets to continue advancing slowly as long as the U.S. stimulus program is in place.

“The charts show there is a rhythm to GDP (Gross Domestic Product) over the last 30-40 years that gives us a low every five years.  If that’s the case, we’ll likely see the next low sometime in 2014.  I don’t know how deep or how long the next correctionMarket pullbacks X to Y % will be.  And most of the world’s GDP has already declined for the last two years—even three. I expect another low next year.”

So what are a couple of his favourite stock charts in the Canadian oilpatch?

Enerplus—ERF-TSX/NYSE—in November 2012 it took a Mexican cliff dive, and has now been forming a wonderful base, and $13.50 was a big resistance level.  Then it broke through, and came back to $13.00-$13.50 which is now support—good time to be buying.

Freehold Royalties Ltd.—FRU-TSX; FRHLF-PINK—This is the pattern level I look for.  It has resistance level of a year or more.  When it breaks through it means something special, that’s a really strong sign and you see a fairly significant move.  The technical target is $31.50

PenGrowth Energy Corp—PGF-TSX; PGH-NYSE—it’s almost the same as ERF; it’s making a change in direction.  It pops up in March, good support at 4.80.  I like the ERF chart more but PGF shows a lot of promise.

Dony says the US dollar has ALWAYS been the driving force for commodity prices.  He says that in the 1960s-70s, the U.S. dollar was relatively weak, and commodity prices took off.  In the 1980s & 1990s the US dollar moved up in a gradual strengthening phase, and commodities went nowhere for 20 years.  When the dollar crested in 2002 because of crushing national debt, commodities roared.  Now the greenback has bottomed since 2008.  In fact, over the last two years, the Big dollar has been rising.

“It’s a simplification but it’s a fact—the dollar is way more important than all the supply and demand factors.  Copper should be taking off to the moon.  China is stockpiling the stuff and controls 50% of the world’s supply.  But copper is falling like a stone because the US dollar is up.

“It throws a blanket on the supply and demand stuff—except for natural gas, you have to look at the US dollar to get a real grip on commodity prices.”

Ah yes, natural gas—the best performing commodity over the last 12 months. In my next story, Dony gives us thoughts on where the charts are telling him the price is headed, and what some of his favourite stock charts are in that sector.

Neither Donald Dony nor Keith Schaefer own any stock mentioned in this article.

You can check out Donald Dony’s site at http://www.technicalspeculator.com/index.php

by +Keith Schaefer

Oil producers in Alberta have embraced the holy rail, shipping out by train car an estimated 120,000 barrels of oil per day (bopd) to refiners on the east coast and the U.S. Gulf.

Despite rail costs doubling pipeline tariffs, producers were able to get such a better price railing it past the mid-continent refineries all the way to the US East Coast and Gulf Coast–it made the logistics worth the time.

But just as Canadian rail use is set to soar again—you can boost that number to 200,000 bpd by the end of the year when several terminals are completed, say analysts—rail may no longer be economic.  Rail could be a victim of its own success.

“In May or June, producers that have traditional access to pipe may see better netbacks than rail,” one oil and gas marketer told me last week.  NetbackSee Recycle Ratio is the industry word for profit per barrel.

Railing oil has been more profitable than transporting by pipe for a lot of Canadian producers since last summer–when the difference between US and Canadian oil prices widened.  It has also been necessary, as producers have had to find alternate routes to market—rising oil volumes competed for limited pipeline space.

And while pipeline tariffs might be cheaper than rail, the additional fees add up: producers often have to shell out trucking fees to a pipeline-connected battery, plus diluent fees (diluent makes heavy oil flow in the pipe better) and perhaps a fee to remove water from the oil to bring it up to pipeline spec.

“The netbackSee Recycle Ratio has been greater by rail—usually more than 10% better than the pipeline-connected alternative,” says Chris Cooper, CEO of Aroway Energy, a 1000 bopd producer in southern Saskatchewan. “In some months it can exceed 20%.”

Smaller producers without access to the financing needed for long-term (10-20 years) contracts on pipelines, make every penny count when marketing their barrels. Cooper’s savings are diluent costs of $6/b and pipeline fee/tariffs of almost $1.50/barrel.

“The price paid for the crude shipped to the rail facility fluctuates on WCS prices,” Cooper says. “We were getting $45-$50 in Jan, we’re getting $66.72 today.”

Last year the rail rush was driven by limited pipeline capacity and the wide gap between the price for US oil and the price for Canadian oil.  The difference between the two (or the difference in oil price between any two places) is called the “differential.”

There was some BIG differentials at Christmas 2012—Canadian light oilAn oil of low specific gravity or relatively low boiling point (as below about 200° C) traded as low as $68/barrel and heavy oil at $48/barrel.

At the same time, refiners on the U.S. Gulf Coast and northeast were paying overseas prices for their heavy oil feedstock, around $110/barrel.  That’s a big differential! So there was lots of room to spend $14-$18/barrel to rail it to a much higher priced market.

Fast forward to late April 2013.  Light oilAn oil of low specific gravity or relatively low boiling point (as below about 200° C) only has $3/bbl discount to WTI, trading at $86.13/bbl and heavy oil (WCS, or Western Canada Select) gets $71.431.  Part of the reason for higher prices is seasonal; less oil gets produced in Canada in Q2 because of spring break up, so supply is less.  But another reason is that rail has created a bigger demand by making Canadian oil available to more US refineries.

When Canadian crude was selling $40 less than its U.S. counterpart, rail made sense; producers paid $14/bbl to hit northeast refineries or $14-$18 to the U.S. Gulf Coast, where refineries paid Brent prices of up to $119/barrel.

However, when the Canadian-US arb tightens to $12-$14/bbl, like it is now, it may not be worth it.

In addition to the narrow differential, the cost to ship crude by rail, from loading prices to rental fees, has jumped in a classical supply-demand imbalance response.

Shipping oil by rail used to be the answer to tight pipeline capacity and cheap Canadian crude.  But the question now is… has that train left the station?

WIDE DIFFERENTIALS MAKE RAIL SENSE

Analysts and producers say shipping crude by rail, usually an expensive choice, made sense when West Texas Intermediate (WTI) was $20 per barrel less than Brent priced crude, and Western Canada Select was about $15 under WTI.

Refiners on the U.S. Gulf Coast and the northeast U.S. and Canada pay higher international prices based on Brent, so when the difference between coastal and inland crude widens, the netbackSee Recycle Ratio from rail is higher, especially if you can’t get pipeline capacity.

Last November, Southern Pacific was raking in $20-$30/bbl more by railing and barging its bitumenVery viscous (gooey) form of crude oil to Louisiana than it would have at the congested Cushing, Oklahoma hub. The junior oil sands producer paid $31/bbl to rail and barge its oil to a Louisiana refinery, compared to $8/bbl by pipeline. But a $20 differential from Brent and lower diluent costs made the move profitable.

Cooper says that typically, a company’s oil marketer negotiates and lines up rail loading space for crude trucking shipments out of the field. Even so, high demand has translated into waits of up to six months for rail loading space.
Once at the terminal the custody transfer is made and the producer gets paid a single price for its crude.

“If you’re bigger, doing like 10,000 barrels of oil per day, those operators probably have an ability to rent rail cars somewhere from somebody to get it to the right refinery; we’re too small to do that. Others have rail agreements and agreements to bring back diluent in the same cars.”

Approximately 19,000 tank cars were ordered by Canadian companies, according to Rail Theory Forecasts. The railcars are insulated to carry heavy crude but will not be delivered until 2014.

Most producers have opted to lease tank cars, for term contracts of up to five years on average, rather than build. They are taking advantage of the thousands of kilometres of railroad tracks which already exist, crisscrossing North America, connecting to industrial hubs, pipelines and waterways.

In Western Canada, transportation companies have been busy expanding and building new transload terminals to total about 16 facilities run by six major players – Canadian Pacific Railway, Altex Energy, Canadian National Railways, Torq Transload, Gibson Energy, Canexus Corp. and Keyera/Enbridge.

CP said in December it would be shipping 70,000 carloads of crude by the first quarter of 2013, out of Canada and the U.S. That’s up from 500 in 2009.

The company expects to transport 44.8 million barrels this year, based on about 640 barrels for each rail car, up from 8.3 million barrels of crude oil in 2011.

Three years ago rival Canadian National didn’t even ship oil. The railway firm moved some 3.2 million barrels of crude in 2011, an estimated 19.2 million barrels by the end of 2012, and could eventually handle 200,000 barrels a day or more.

The run for rail started in North Dakota when producers untapped tight oil reserves with horizontal drilling and multi-staged fracturing. Volumes exploded without enough pipeline capacity to move product to market.

By 2012 the number of U.S. trains moving oil soared to 233,811 carloads, up from 9,500 carloads just five years prior.

Keep in mind those numbers look to be derailed as the price of Canadian crude climbs and the netbackSee Recycle Ratio to shipping by train drops.

- Keith

The energy sector is such a typical American-Canadian contrast.  It’s like the Americans love to shoot guns, and the Canadians love to dodge bullets.


In the USA, the Shale Revolution has turned the American energy industry upside down with huge new supplies of natural gas and light oilAn oil of low specific gravity or relatively low boiling point (as below about 200° C). 
 


They have reversed a 40-year decline in oil production in a stunningly short four years.  Their entrepreneurial system made it happen; it couldn’t have happened anywhere else in the world.  Kudos to them.
 


The Yanks have built drill rigs, oil pipelines, water pipelines, and brought back billions of dollars of petrochemical plants; secured rail to transport their crude all over the country—the American industry has shown itself to be remarkably agile and responsive.
 


The world’s oil has been getting heavier for years—and so has the infrastructure to transport and refine it.  So the fact that US production increases are in light oilAn oil of low specific gravity or relatively low boiling point (as below about 200° C) make theirs an even bigger transformation.


Now, look at Canada trying to get its heavy oil to market—but only if you want to laugh.



In Canada, investors have been able to predict our rising heavy oil production for years—think of the old joke where in Regina Saskatchewan, you can see your dog run away for three days, the land is so flat—investors have had that kind of visibility on this issue. 
 


And here we are still beholden to the same one customer, and now we can’t even get all of our product down to them!  Canada has actually gone backwards in that respect.  That’s why we’re price takers and they’re not, and why Canada is vulnerable to the low oil prices seen at Christmas 2012.


Now, despite all our bumbling, Canadian heavy oil discounts are now quite low, meaning the price of our heavy oil is quite high—it was $80.95 in early April, a big jump from the $48 it was getting last Christmas. 

This is a GREAT price, and makes this drama mere entertainment, not a national tragedy anymore.
 
This is because Canada has adapted at least one way, and found a way to rail oil down to the US refineries—but it’s still going to only US refineries.
 


But I can’t help thinking…the US has gone through a much greater upheaval, socially and economically, from the Shale Revolution than Canada has. 


They have adapted better, adapted more quickly, than Canada has…at every turn. 

And there has been a lot of turns! And they keep coming!  Horizontal drilling, hydraulic fracturing over 300 feet, then 1000 feet, then half a mile, one mile, now two miles. 

Suddenly full oil refineries, suddenly empty gas pipelines (it’s everywhere now, who needs gas pipelines?)—billions were spent on gas pipelines only a few years ago are now well under capacity.


In the US, business just moves on, recognizing the new business reality.  Canadians use the National Energy Board to decide the best way to keep everyone from losing money.  It’s like Americans love to brag about how much they spent and Canadians brag about how much they saved.


And almost all Canadian oil pricing problems would be solved by getting one, just one, 1200 mile pipeline from the Alberta oilsands to the British Columbia west coast; from Fort McMurray to Prince Rupert.

But it has created a family feud in Canada that has dominated news headlines for well over a year.
 
Opposition against this west coast pipeline has drawn protests from environmentalists and First Nations, and even left-wing Canadian politicians.

In the US, build it, and they will come.  In Canada, build it, and they will protest.
 
Of course Uncle Sam agitating the locals under the guise of environmentalism doesn’t help, either. 

And don’t kid yourself, they are actively trying to keep Canadian oil for themselves; it’s well documented (stand by for a full feature story or three on that in the coming weeks).
 


But oil is a global product, and it flows from areas of low price to areas of high price. 

That’s the whole point of pipelines—to get it to higher-priced markets. If the differentials remain wide enough for long enough, that oil WILL find its way to market—even if it has to be pulled by wagon.
 


I don’t think Canada is going to get backed out of the market, because somehow somewhere somebody is going to find a way to get that cheap oil. 

For example, I think we will get Canadian oil to Asia—but it will likely go through the Gulf Coast to get there, and get exported from there.   When I look at a map, I don’t know whether to laugh or cry. 
 


But it’s interesting that a “national interest” seems to be building around the idea of—instead of doing a simple 1200 mile pipeline west—reverse an existing gas line that crosses two thirds of the continent to get western Canadian heavy oil to eastern Canada and refine it there.
 


Hey, that could work, and make more of Canada feel part of the oil wealth that has such a huge impact on our country.  Quebec and New Brunswick refineries would finally get western Canadian crude, instead of from Venezuela. 


The refineries would have to be expanded to handle our growing crude supply, as would port facilities.  It would involve huge infrastructure spending and create thousands of jobs in Atlantic Canada.
 


It’s already well known that many of the oilsands workers are Maritimers, but it’s also true that the jobs in “Fort Mac” have saved rural areas across ALL of western Canada from big unemployment. 


But that pipeline reversal won’t be ready until 2017 at the earliest—four years from now. 2017 is the best case scenario.


America’s gun culture is famous for the phrase, “Shoot first, ask questions later.” Canadians are more prone to the phrase, “Ask questions first. Shoot, we’re too late.”


How typical.

by +Keith Schaefer

Can shale oil and gas carry the U.S. to energy independence?

The short answer is no, says Credit Suisse (CS) in a September 7 report, but North America as a whole could be energy self-sufficient.

CS hangs their thesis on 4 key pegs:

1. Flow rates from oil wells about 25% higher than now, based on future technology advances

North American drivers are now competing with global drivers — and global industry — for cheap American crude.

The first chart says there is a low amount of middle distillates globally—these are the refined oil products that are used to power and transport the world: diesel, jet fuel, home heating oil, etc.

The above chart means that either demand is low, or supply is low.  But then I look at the chart below, and I see supply is high and rising—so I conclude demand must be higher (which I have to think is bullish).

US refineries are dramatically increasing their exports of light/middle distillates from the Gulf refinery complex out into the rest of the world.

And yet global distillate levels are still low.  That intimates a bullish world demand case to me, and tells me we won’t see a dramatic drop in the price of oil.

Refineries export into a global market for their refined products, which are all priced on Brent Crude, while their input costs—North American crude oil—is priced on cheaper WTI, or West Texas Intermediate.

That $15/barrel price difference between the Brent and WTI is pure profit for refineries.  The WTI price is so much cheaper because of the HUGE supply of new oil created by the U.S. in the fast-growing Shale Revolution.

It allows refineries to choose whatever global product has the best price for export—and that’s not always driving gasoline for North Americans.   Several North American refineries are trying their best to move their processing over to other products besides driving gasoline.

But even with lots of gasoline, domestic drivers are now competing with those around the world for cheap North American crude products.

And that should keep retail gasoline prices high.

Click here for my FOX interview.

by +Keith Schaefer

P.S. Meet me at one of these 4 conferences where I’ll be speaking in the next two weeks:

One2one Energy Investor Forums

1. Calgary September 19th – Please click here to sign up.
2. Vancouver September 20^th— Please click here to sign up.
3. Chicago Hard Assets Investment Conference September 21-22, 2012 — http://www.hardassetschi.com
4. Toronto Resource Investment Conference September 27-28, 2012 — http://cambridgehouse.com/event/toronto-resource-investment-conference

Editor’s Note:  Everyone, it seems, is talking about the Keystone pipeline. Recently I wrote a story on a mostly unexplored topic in the U.S gas price debate – a problem that could soon affect oil refineries and the price consumers pay for gas on America’s east and west coasts. You see, drivers on both coasts – but especially the heavily populated east coast – are increasingly vulnerable to sharp increase in gas prices, as I explain below. (I wrote this story for BusinessInsider.com – one of the top business sites in the world. A link to the full article follows my excerpt below.)

by +Keith Schaefer

Forget Keystone  – the U.S. Desperately Needs an East-West Pipeline

In the debate over rising gas prices, one largely overlooked issue is the lack of US oil pipeline distribution to the East Coast, where refineries that must import higher priced Brent crude are being shut down.

America has more than enough cheap domestic oil, thanks to the North Dakota Bakken and the Canadian oilsands. And it doesn’t face a refinery crisis in terms of capacity – after all, even though the US hasn’t built a new refinery since 1976, oil refining has actually increased by 2 million bopd to 17.7 million bopd since 1985 (and US refinery demand has been steady at 14.8 million bopd since 2005).

Instead, the real problem is that coastal refineries can’t source the cheaper North American crude. The Brent oil price fluctuates widely with geopolitical news. A stable, nationwide refinery system—well connected with pipelines—is one area where the US can help control price surges in local markets. Few things affect local gas prices like the shutting down of an oil refinery – and right now, the East Coast is at risk of losing three.

Politicians talk to the potential of the Keystone XL to bring cheaper Canadian crude to the Gulf Coast. But this north-south pipeline isn’t as badly needed as west-east lines that can carry cheaper American and Canadian crude from Cushing, Oklahoma to money-losing refineries on the East Coast. Today, the country’s five oil districts are not well connected by pipeline–each district must rely on its own crude supplies.

Only the Midwest and Gulf Coast refineries have access to all the new cheap crude coming out of the US shale plays and the Canadian oilsands. As a result, consumers in these regions enjoy WTI pricing – some of the lowest retail gasoline prices in the world.

Only the Midwest and Gulf Coast refineries have access to all the new cheap crude coming out of the US shale plays and the Canadian oilsands. As a result, consumers in these regions enjoy WTI pricing – some of the lowest retail gasoline prices in the world. With no pipelines from the heartland, refineries on the east and west coasts are forced to use imported crude based on Brent pricing—which is $20/bbl more than WTI, $40/bbl more than Canadian light oilAn oil of low specific gravity or relatively low boiling point (as below about 200° C), and $50/bbl more than the huge new supply of Canadian oilsands crude.

These coastal refineries are having to buy crude at higher international prices and then sell the finished product into a US market that enjoys some of, if not the, lowest retail gasoline prices in the developed world. This leads to serious financial losses for the refineries and, as a result, more energy companies are looking to get out of the refinery business. Right now there are three refineries up for sale on the East Coast – two by Sunoco and one by ConocoPhillips - and more could be coming. Altogether, these three plants have a refining capacity of over 800,000 bopd. If these shut down, the entire eastern seaboard, but especially the US Northeast, could see a supply crisis and a record jump in gas prices this summer just as the driving season hits top gear.

But this would not be happening if these refineries – and the others along the east and west coasts of the US – could access all the cheap light oilAn oil of low specific gravity or relatively low boiling point (as below about 200° C) being produced in the North Dakota Bakken and other shale plays in the US. Or the Canadian crude that’s even cheaper. That means more pipelines – east-west pipelines, not north-south. That cheap domestic crude has to flow to the coasts and help make those refineries profitable again. But to be clear, all that cheap crude getting to coastal refineries – east or west – won’t lower gasoline prices, but it would likely prevent these refinery closures, and the massive price hikes that could happen along with it.

A recent study conducted by Bentek Energy (Crude Awakening: Shale Boom Hits Oil) found that North American crude production will increase 36 percent, or 3.1 million bopd, by 2016 due to shale oil plays and the Canadian oilsands. The firm notes, however, that this positive outlook on supply is undermined by the fact that there is inadequate transportation capacity to get that oil to refineries. It’s tracking the development schedules of 75 pipeline expansions, 25 rail expansions and 7 refinery expansions—though the near term expansions are mostly in the Gulf Coast which already holds half the US refining capacity. That’s little comfort to the drivers on the east coast.

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

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:

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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 correctionMarket pullbacks X to Y %.  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 correctionMarket pullbacks X to Y % 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 correctionMarket pullbacks X to Y % which has come and currently it is pointing to a further correctionMarket pullbacks X to Y % 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