Crude Oil and Gas ETFs are Having a Good 2018

Thus far in 2018, the oil and gas industry has been booming. Rig counts in the US are up, prices at the pump are up, and the oil and gas ETFs tracking the sector are up by a lot.

Investors who have been following the industry over the past year could have made some serious money as a few of the leveraged ETFs are up 238% or more. The Velocity Shares 3X Long Crude Oil ETN (UWT) is up 247% over the last 12 months and is up more than 70% year to date. The UBS ETRACS ProShares Daily 3X Long Crude ETN (WTIU) has risen 240% over the last year and 64% year to date. Finally, the Proshares UltraPro 3X Crude Oil ETF (OILU) is up 238% over the last 12 months and 63% year to date.

But, perhaps your less risky and don’t like investing in the leveraged ETFs? Well, you still could have done well as the United States Brent Oil Fund LP (BNO) is up 71% over the last year and 19.9% since the start of 2018. Or perhaps you went with the ProShares K-1 Free Crude Oil Strategy ETF (OILK) which is up 62% in the past 12 months and 23% year to date. Or either the iPath Series B S&P GSCI Crude Oil ETN (OILB) or the United States Oil Fund LP (USO) which are both up more than 61% over the last year and 23% year to date.

There have been some reasons why the industry has been on a tear over the last, and many of that reason don’t show signs of changing in the short term. OPEC is committed to increasing the price of oil (despite its recent modest increase in production), smaller U.S. outfits still need slightly higher prices before they can add additional rigs and become profitable, the economy appears to be healthy and growing, US consumers have not yet begun to fell the “pain at the pump” again really.

While recent data and projections from the U.S. Energy Information Administration don’t indicate massive price increases for oil and gas shortly, they are predicting increases. Speaking of the government, despite President Trump's promises, he has yet been able to change the shift we saw occur during the later Obama years when electric plants switched to natural gas from coal. This is something that really could change the oil and gas landscape in coming years if natural begin to climb naturally. Depending on which resource, oil or natural gas is more profitable, U.S. producers could flip-flop from one to another, causing the prices of both to climb. But, this would be something to watch for in a much longer time horizon than what we are discussing today.

Some investors may feel the run in oil and gas has already taken place and that greener pastures should be explored, as opposed to trying to get on a moving train. But, if the economic reasons for the price increases haven’t changed, then prices should theoretically continue to climb until something else changes.

Furthermore, while OPEC and Russia both talk about higher output, the fact of the matter is both parties want the price of oil to either remain where it is or increase. Most of the countries in OPEC need Oil and Gas money in order to run their governments, while it is clear to most, that some high ranking Russian government officials have personal interests in the industry.

Furthermore, the argument could be made that both Russia and OPEC would rather see prices stay flat as opposed to climbing back to $100 a barrel because current prices keep some of the U.S. producers out of business and this gives Russia and OPEC more control on global production and price stability.

But, regardless of why Russia and OPEC may want to prices getting out of control, they still want to maintain current prices, giving oil and gas a reasonably stable price floor.

Buying different oil and gas ETFs, ETNs or other funds may not produce the huge returns we have seen in the past 12 or 7 months, but they could still bear fruit worth eating. The leveraged investments appear to be extremely risky at this time, even though I don’t see prices falling, but simply because of the daily costs associated with these funds. Buying a solid group of oil and gas ETFs made up of both the companies operating in the industry and the commodities themselves could pay healthy dividends in the coming year.

Matt Thalman
INO.com Contributor - ETFs

This Giant Welfare State Is Running Out of Time

By Justin Spittler

The Saudis are begging Trump to stop pumping so much oil. Saudi Arabia made the plea earlier this month in its monthly oil report. The report said “the collective efforts of all oil producers” would be needed to restore order to the global oil market. It added that this should be "not only for the benefit of the individual countries, but also for the general prosperity of the world economy."

It’s a bizarre request, to say the least. You’re probably even wondering why they would do such a thing. As I'll show you in today's essay, it's a clear act of desperation. One that tells me the country is doomed beyond repair. I’ll get to that in a minute. But first, let me tell you a few things about Saudi Arabia.

It’s the world’s second largest oil producing country after the United States.…
It’s also the largest producer in the Organization of the Petroleum Exporting Countries (OPEC), a cartel of 13 oil producing countries. Like other OPEC countries, Saudi Arabia lives and dies by oil. The commodity makes up 87% of the country’s revenues. This was a great thing when the price of oil was high. Saudi Arabia was basically printing money.

But that hasn’t been the case for years. You see, the price of oil peaked back in June 2014 at over $105 a barrel. It went on to plunge 75% before bottoming in February 2016. Today, it trades under $50.

Low oil prices are wreaking havoc on Saudi Arabia’s finances.…
But not for the reason you might think. You see, Saudi Arabia is the world’s lowest-cost oil producer. Its oil companies can turn a profit at as low as $10 per barrel. That’s one fifth of what oil trades for today.

So what’s the problem? The problem is that Saudi Arabia is one giant welfare state.

Nick Giambruno, editor of Crisis Investing, explains:

Saudi Arabia has a very simple social contract. The royal family gives Saudi citizens cradle-to-grave welfare without taxation. The Saudi government spends a fortune on these welfare programs, which effectively keep its citizens politically sedated. In exchange, the average Saudi citizen forfeits any political power he would otherwise have.

Not only that, about 70% of Saudi nationals work for the government. These “public servants” earn 1.7 times more than their counterparts in the private sector.

In short, Saudi Arabia uses oil money to keep its citizens in line.…
But this scheme isn’t cheap. According to the International Monetary Fund (IMF), Saudi Arabia needs oil to trade north of $86 a barrel to balance its budget. That’s nearly double the current oil price. This is creating big problems for the Saudi kingdom. In 2015, the Saudis posted a record $98 billion deficit. That was equal to about 15% of the country’s annual economic output. Last year, it ran another $79 billion deficit.

Saudi Arabia is now desperately trying to restore its finances.…
It’s slashed its government subsidies. It’s borrowed billions of dollars. It’s even trying to reinvent its oil addicted economy. In fact, it plans to increase non oil revenues sixfold by 2030. It’s also trying to spin off part of the national oil company, Saudi Aramco, on the stock market. And it wants to create a $1.9 trillion public fund to invest at home and abroad.

The Saudis have even tried to rig the global oil market.…
It’s why they met with non OPEC members like Russia at the December meeting. At this meeting, OPEC and non OPEC members agreed to cut production. It was the first deal like this since 2001. OPEC hoped this historic pact would lift oil prices. There’s just one big problem.

U.S. oil producers aren’t playing ball.…
Instead of cutting output, they’ve rapidly increased production. You can see this in the chart below. U.S. oil production has jumped 10% since last July.

U.S. oil production is now approaching the record level set back in 2015. There’s good reason to think production will blow past that high, too. To understand why, look at the chart below. It shows the total number of U.S. rigs actively looking for oil. You can see that the total number of rigs plummeted in November 2015 before bottoming a year ago.

The total U.S. oil rig count has now risen 28 weeks in a row. There are now 396, or 125%, more rigs looking for oil in the United States than there were a year ago.

If this continues, the price of oil will slide lower.…
Saudi Arabia isn’t used to feeling this helpless. After all, the Saudis had a firm grip on the global oil market for decades. If it wanted, it could raise the price of oil by slashing production. It also had the ability to drive the oil price lower by flooding the market with excess oil. Those days are over. The United States now rules the global oil market, and it’s showing no mercy.

Unless this changes soon, Saudi Arabia is doomed.

After all, the country is already in a race against time. According to the IMF, Saudi Arabia is on pace to burn through all of its cash within five years. In other words, we’re witnessing a seismic power shift in the global energy markets, one that could cause oil prices to plunge even lower. That would be bad news for many oil companies in the short term. But it should also lead to one of the best buying opportunities we’ve seen in years. I’ll be sure to let you know when it’s time to pull the trigger. Until then, stay on the sidelines. This one could get nasty.

P.S. Crisis Investing editor Nick Giambruno predicted that Saudi Arabia’s oil addicted economy would implode back in March 2016. Not only that, he told his readers how to profit from this crisis by recommending a world class U.S. oil company.

Nick’s readers are up more than 20% on this investment. But it should head much higher once the U.S. puts Saudi Arabia out of its misery. You can learn all about Nick’s top oil stock by signing up for Crisis Investing. Click here to begin your risk free trial.

The article This Giant Welfare State Is Running Out of Time was originally published at caseyresearch.com.

Crude Oil Seasonality, Inventory Rebalancing and Production Cuts

The historical stock build from December 2014 through July 2016, and subsequent decline from August through December has led some to conclude that global stocks had started to rebalance. Instead, the normal seasonality in stocks had been masked by the high overproduction of OPEC, but then normal seasonality kicked in.

Global OECD inventories from past years demonstrate the normal seasonal patterns, with some variability. As shown in this graph, stocks normal build early in the year and peak around August. Stocks normally drop from September through December. But in 2015, the oversupply was so excessive that stock just kept building through the year. They finally peaked in July 2016, then dropped off due to normal seasonal demand. This normal pattern led to a false conclusion that the rebalancing of stocks had begun.

But according to Energy Department data, OECD stocks in March 2017 are 13 million barrels higher than December. And it projects that stocks are likely to peak in May this year, earlier than normal, but to end 2017 with stocks just 14 million lower than a year ago. This is based on the Energy Information Administration ((EIA)) assumption that OPEC does not hold production to its March level. Furthermore, the EIA projects global stocks to set new record highs in 2018, after the OPEC non OPEC cuts presumably end.

Effect of Production Cuts

Some argue that the 285 million barrel excess above the 5 year average as of the end of December should disappear in five to six months by dividing 285 million by 1.8 million barrels per day, the agreed upon size of the daily cut. But that math first assumes that supply was in balance with demand, makes no allowance for rising supplies, such as in the U.S., and it does not take into account the seasonality.

According to OPEC’s figures, global OECD stocks are likely to build both in the first and second quarters, and then decline in the second half of the year, assuming OPEC production remains at the March level.

There was one development last week, if true, did shift the inventory trend lower. The EIA revised its December estimate of OECD stocks down 105 million barrels, a major revision. That reduced the size of the glut to 201 million above its five year average.

Conclusions

The market dropped sharply in early March as a result of the continued rise in stocks. The market has falsely expected to see inventories to soon decline as a result of the production cuts. But seasonal factors need to be taken into account. We should see global stocks decline in the second half of 2017, assuming OPEC extends its cuts. And the decline may start earlier than normal because U.S. refinery utilization is ramping up faster and earlier than usual, thereby requiring more crude oil.

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Best,
Robert Boslego
INO.com Contributor - Energies

Here’s The Only Oil Stock You Should Own Right Now

By Justin Spittler

It was the most important oil meeting in years. The world was watching closely on Sunday as 16 major oil nations met in Doha, Qatar. Saudi Arabia and Russia, two of the world’s biggest oil producers, were among the heavyweights in attendance. The purpose of the meeting: to reach an agreement to “freeze” oil production at current levels. It was the first time in fifteen years that OPEC, a cartel of 13 oil producing countries, met with nonmembers to discuss freezing output.

As you likely know, the price of oil has crashed 75% since June 2014. Thanks to new methods like “fracking,” the world has too much oil. According to the International Energy Association, oil companies produce about 1.4 million more barrels of oil a day than the global economy consumes. 

In February, oil hits its lowest price since 2003. Low oil prices have slammed economies that depend on oil. For example, Saudi Arabia posted its largest budget deficit in history last year. And Russia’s currency has lost 49% of its value since oil prices began to decline.

Low oil prices have slammed major oil companies, too. Last year, British oil giant BP (BP) recorded its biggest annual loss ever. U.S. oil giants Exxon Mobil (XOM) and Chevron (CVX) earned their lowest annual profits since 2002 last year. Since June 2014, shares of these three oil companies are down 27% on average.

Many experts hoped an agreement to freeze production would support oil prices…
But the countries failed to reach an agreement. Bloomberg Business explained why.

Discussions broke down after Saudi Arabia and other Gulf countries rejected any deal unless all OPEC members joined including Iran…

Iran didn’t even attend the meeting in Doha…
For years, economic sanctions have cut off Iran from the global economy. These sanctions were put in place to prevent Iran from building a nuclear bomb. They crippled Iran's economy in the process. Iran’s oil exports have plunged 45% since 2011.

The U.S. and five other countries lifted these sanctions last year. With the sanctions gone, Iran plans to significantly boost its oil production. In March, Iran pumped 3.3 million barrels per day (bpd), which made it the world’s sixth-biggest oil producer. It hopes to soon increase that to 4 million bpd.
Iran also plans to double its oil exports. In February, Iran sold oil to Europe for the first time since 2012. Bloomberg Business explains:

Iran’s oil minister called a proposal by Saudi Arabia and Russia to freeze oil production “ridiculous” as it seeks to boost output after years of sanctions constrained sales.

Yesterday, the price of oil plunged 6.4% on the bad news…
But it recovered almost all its losses, ending the day down just 0.7%. Today, it’s up 3.2% Oil stocks shrugged off the bad news, too. The SPDR S&P Oil & Gas Exploration & Production ETF (XOP), which tracks major U.S. oil producers, rose 2% yesterday. We see this as an important bullish sign for oil stocks. This bad news could have easily pushed oil below $30 a barrel. Instead, oil is trading higher today than it was yesterday.

It looks like the worst is over for oil stocks…
Although we’re not “calling the bottom” in oil stocks, we do think the oil market has entered a new phase.
You see, when an industry crashes as hard as oil has over the past 18 months, all stocks in the industry usually tank. Even the best companies suffer big losses. But when a crashing market nears a bottom, things start to change. Investors looking for bargains begin to buy top quality companies. Strong companies start to separate themselves from the weak. That’s happening in the oil sector now.

For example, Exxon, the world’s largest publicly traded oil company, has jumped 14% this year. Chevron, the second largest, has jumped 11%. These are both large, quality oil companies. Meanwhile, weaker companies are still fighting to survive. They’re bleeding cash. To make money, they need oil at $50 or higher. Yesterday, oil closed at $41.47…and that’s after a 50% rally since February. We’re not saying oil prices are ready to head higher. As we mentioned, the world is still oversupplied by about 1.4 million barrels per day. We’ll likely see more defaults and bankruptcies in the oil sector.

But we are saying now is a good time to start buying cheap, extremely high quality oil stocks…
Because oil is likely to stay low for at least several more months, it’s important to buy only the very best oil businesses. Stick with companies that have big margins, plenty of cash, and little debt. Only invest in companies that can make money even if oil stays low.

Nick Giambruno, editor of Crisis Investing, just recommended one such oil company. If you don’t know Nick, his specialty is buying quality assets for cheap, when no one else wants them. Following this strategy has allowed him to make large gains for subscribers, like the 210% gain he made on Cypriot hospitality business Lordos Hotels in the wake of that country’s banking crisis a few years back. Nick has been keeping a close eye on the oil industry for months…waiting for the right time to buy. And last month, he told his readers it was finally time to “pull the trigger.”

He recommended a world class oil company with “trophy assets” in America’s richest oil regions...a rock solid balance sheet…and some of the industry’s best profit margins. Most importantly, the company is making money. According to Nick, some of the company’s projects are profitable at as low as $35 oil.
Nick is certain this company will survive the current downturn. Its stock could deliver huge gains when oil prices recover past $50.

You can learn more about this opportunity by signing up for Crisis Investing. Click here to begin your risk-free trial.

Chart of the Day

Silver is having its best day in six months. If you’ve been reading the Dispatch, you know silver recently “broke out.” More specifically, it “carved a bottom.” That happens when an asset stops falling, forms a bottom for a period of time, and starts heading higher. Assets often keep rising after carving bottoms. As you can see below, that’s exactly what silver’s done. Today, silver skyrocketed 5.3%, its biggest jump since October. Silver is now up 23% on the year. It’s at its highest price since last April.

At risk of sounding like a broken record, we think silver is headed much higher. It could easily triple in the coming years. Silver stocks, which are leveraged to the price of silver, could go even higher. If you would like to speculate on higher silver prices, we recommend you watch a short video we just put together. It explains how you could grow your money by 10x or more in the coming years. If interested, you’ll want to watch this presentation soon. It will no longer be available after tomorrow.

Click here to watch.

The article Here’s The Only Oil Stock You Should Own Right Now was originally published at caseyresearch.com.

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How Saudi Arabia and OPEC are Manipulating Oil Prices

About eighteen months ago the international price of WTI Crude Oil, at the close of June 2014, was $105.93 per barrel. Flash forward to today; the price of WTI Crude Oil was just holding above $38.00 per barrel, a drastic fall of more than 65% since June 2014. I will point out several reasons behind this sharp, sudden, and what now seems to be prolonged slump.

The Big Push

Despite a combination of factors triggering the fall in prices, the biggest push came from the U.S. Shale producers. From 2010 to 2014, oil production in the U.S. increased from 5,482,000 bpd to 8,663,000 (a 58% increase), making the U.S. the third largest oil-producing country in the world. The next big push came from Iraq whose production increased from 2,358,000 bpd in 2010 to 3,111,000 bpd in 2014 (a 32% increase), mostly resulting from the revival of its post war oil industry.

The country-wide financial crunch, and the need for the government to increasingly export more to pay foreign companies for their production contracts and continue the fight against militants in the country took production levels to the full of its current capacity. In addition; global demand remained flat, growing at just 1.1% and even declining for some regions during 2014. Demand for oil in the U.S. grew just 0.6% against production growth of 16% during 2014.

Europe registered extremely slow growth in demand, and Asia was plagued by a slowdown in China which registered the lowest growth in its demand for oil in the last five years. Consequently, a global surplus was created courtesy of excess supply and lack of demand, with the U.S. and Iraq contributing to it the most.

The Response

In response to the falling prices, OPEC members met in the November of 2014, in Vienna, to discuss the strategy forward. Advocated by Saudi Arabia, the most influential member of the cartel, along with support from other GCC countries in the OPEC, the cartel reluctantly agreed to maintain its current production levels. This sent WTI Crude Oil and Brent Oil prices below $70, much to the annoyance of Russia (non-OPEC), Nigeria and Venezuela, who desperately needed oil close to $90 to meet their then economic goals.

For Saudi Arabia, the strategy was to leverage their low cost of production advantage in the market and send prices falling beyond such levels so that high cost competitors (U.S. Shale producers are the highest cost producers in the market) are driven out and the market defines a higher equilibrium price from the resulting correction. The GCC region, with a combined $2.5 trillion in exchange reserves, braced itself for lower prices, even to the levels of $20per barrel.

The Knockout Punch

By the end of September 2014, according to data from Baker Hughes, U.S. Shale rigs registered their highest number in as many years at 1,931. However, they also registered their very first decline to 1,917 at the end of November 2014, following OPEC’s first meeting after price falls and its decision to maintain production levels. By June 2015, in time for the next OPEC meeting, U.S. Shale rigs had already declined to just 875 by the end of May; a 54% decline.

The Saudi Arabia strategy was spot on; a classic real-life example of predatory price tactics being used by a market leader, showing its dominant power in the form of deep foreign-exchange pockets and the low costs of production. Furthermore, on the week ending on the date of the most recent OPEC meeting held on December 4th, 2015, the U.S. rig count was down even more to only 737; a 62% decline. Despite increased pressure from the likes of Venezuela, the GCC lobby was able to ensure that production levels were maintained for the foreseeable future.

Now What?

Moving forward; the U.S. production will decline by 600,000 bpd, according to a forecast by the International Energy Agency. Furthermore, news from Iraq is that its production will also decline in 2016 as the battle with militants gets more expensive and foreign companies like British Petroleum have already cut operational budgets for next year, hinting production slowdowns. A few companies in the Kurdish region have even shut down all production, owing to outstanding dues on their contracts with the government.

Hence, for the coming year, global oil supply is very much likely to be curtailed. However, Iran’s recent disclosure of ambitions to double its output once sanctions are lifted next year, and call for $30 billion in investment in its oil and gas industry, is very much likely to spoil any case for a significant price rebound.

The same also led Saudi Arabia and its GCC partners to turn down any requests from other less-economically strong members of OPEC to cut production, in their December 2015, meeting. Under the current scenarios members like Venezuela, Algeria and Nigeria, given their dependence on oil revenues to run their economies, cannot afford to cut their own production but, as members of the cartel, can plea to cut its production share to make room for price improvements, which they can benefit from i.e. forego its market share.

It’s Not Over Until I’ve Won

With news coming from Iran, and the successful delivery of a knockout punch to a six-year shale boom in the U.S., Saudi Arabia feared it would lose share to Iran if it cut its own production. Oil prices will be influenced increasingly by the political scuffles between Saudi Arabia and its allies and Iran. The deadlock and increased uncertainty over Saudi Arabia and Iran’s ties have sent prices plunging further. The Global Hedge Fund industry is increasing its short position for the short-term, which stood at 154 million barrels on November 17th, 2015, when prices hit $40 per barrel; all of this indicating a prolonged bear market for oil.

One important factor that needs to be discussed is the $1+ trillions of junk bonds holding up the shale and other marginal producers. As you know, that has been teetering and looked like a crash not long ago. The pressure is still there. As the shale becomes more impaired, the probability of a high yield market crash looks very high. If that market crashes, what happens to oil?  Wouldn’t there be feedback effects between the oil and the crashing junk market, with a final sudden shutdown of marginal production? Could this be the catalyst for a quick reversal of oil price?

The strategic interests, primarily of the U.S. and Saudi Arabia; the Saudis have strategically decided to go all in to maintain their market share by maximizing oil production, even though the effect on prices is to drive them down even further. In the near term, they have substantial reserves to cover any budget shortfalls due to low prices. More importantly, in the intermediate term, they want to force marginal producers out of business and damage Iran’s hopes of reaping a windfall due to the lifting of sanctions. This is something they have in common with the strategic interests of the U.S. which also include damaging the capabilities of Russia and ISIS. It’s certainly complicated sorting out the projected knock-on effects, but no doubt they are there and very important.    

I’ll Show You How Great I Am

Moreover, despite a more than 50% decline in its oil revenues, the International Monetary Fund has maintained Saudi Arabia’s economy to grow at 3.5% for 2015, buoyed by increasing government spending and oil production. According to data by Deutsche Bank and IMF; in order to balance its fiscal books, Saudi Arabia needs an oil price of$105. But the petroleum sector only accounts for 45% of its GDP, and as of June 2015, according to the Saudi Arabian Monetary Agency, the country had combined foreign reserves of $650 billion. The only challenge for Saudi Arabia is to introduce slight taxes to balance its fiscal books. As for the balance of payments deficit; the country has asserted its will to depend on its reserves for the foreseeable future.

Conclusion

The above are some of the advantages which only Saudi Arabia and a couple of other GCC members in the OPEC enjoy, which will help them sustain their strategy even beyond 2016 if required. But I believe it won’t take that long. International pressure from other OPEC members, and even the global oil corporations’ lobby will push leaders on both sides to negotiate a deal to streamline prices.

With the U.S. players more or less out by the end of 2016, the OPEC will be in more control of price fluctuations and, therefore, in light of any deal between Iran and Saudi Arabia (both OPEC members) and even Russia (non-OPEC), will alter global supply for prices to rebound, thus controlling prices again.

What we see now in oil price manipulation is just the mid-way point. Lots of opportunity in oil and oil related companies will slowly start to present themselves over the next year which I will share my trades and long term investment pays with subscribers of my newsletter at The Gold & Oil Guy.com

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www.The Gold & Oil Guy.com

Chris Vermeulen

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This Unique Oil Stock is Offering A Huge Dividend Yield

By Justin Spittler

One of Casey Research's biggest calls this year is paying off.....…
In early August, E.B. Tucker, editor of The Casey Report, told subscribers how to profit from the world’s oversupply of oil. If you read financial newspapers for more than a week, you’ll notice that global oil production is near record highs. Last year, global oil output reached its highest level in at least twenty five years, according to the U.S. Energy Information Administration (EIA).

High oil prices were a big reason for the surge in production. Between 2011 and mid 2014, the price of oil hovered around $90/barrel. But oil peaked at $106 last June, and it’s been falling ever since. Today, a barrel of oil goes for about $45. Even though the price of oil has been cut in half, global oil production is still near all time highs. The Organization of the Petroleum Exporting Countries (OPEC), a cartel of 12 oil producing nations, is still pumping a record amount of oil. And it plans to increase production next year. In the U.S., oil supplies are still about 100 million barrels above their five year average.

E.B. explains why some countries have no choice but to keep pumping oil.....

Oil is the foundation of many countries’ economies. Take Venezuela, for example. Venezuela produces over 2.5 million barrels per day (BPD) of oil. Oil exports make up half of the country’s economic output. The country is so dependent on oil that cutting production would be economic suicide. This is happening across the globe. Giant state run oil companies continue to pump because it’s the only way for these countries to make money. This is why global oil production has not fallen even though the price of oil has been cut in half. In many areas, production has actually increased.

The extra oil has weighed on oil prices......
Weak oil prices have hammered virtually all oil companies…including the biggest oil companies on the planet. Profits for ExxonMobil (XOM), the largest U.S. oil company, fell 52% during the second quarter due to weak oil prices. Its stock is now down 24% since oil peaked last summer. Chevron (CVX), America’s second biggest oil company, earned its lowest profit in twelve years during the second quarter. Its stock price is down 34% since last summer’s peak. The entire industry is struggling. XOP, an ETF that holds the largest oil explorers and producers, has dropped 52% over the same period.

But oil tanker companies are making more money than they have in seven years...…
Unlike oil producers, oil tanker companies don’t need high oil prices to make big profits. That’s because they make money based on how much oil they move. Their revenues aren’t directly tied to the price of oil.
On Monday, Bloomberg Business explained why oil tankers are making the most money they’ve made in years. The world’s biggest crude oil tankers earned more than $100,000 a day for the first time since 2008. Ships hauling two million barrel cargoes of Saudi Arabian crude to Japan, a benchmark route, earned $104,256 a day, a level last seen in July 2008, according to data on Friday from the Baltic Exchange in London. The rate was a 13 percent gain from Thursday.

Casey Research’s favorite oil tanker company is cashing in on higher shipping rates...…
On August 13, E.B. Tucker told readers of The Casey Report about a company called Euronav (EURN).
According to E.B., Euronav is the best oil tanker company in the world. The company has one of the newest and largest fleets on the planet. Euronav’s sales more than doubled during the first half of the year.

The company’s EBITDA (earnings before taxes, interest, and accounting charges) quadrupled. And because Euronav’s policy is to pay out at least 80% of its profits as dividends, the company doubled its dividend payment last quarter.

Investors who acted on E.B.’s recommendation have already pocketed a 5% quarterly dividend. Based on its last two dividends, Euronav is paying an annualized yield of 12%. That’s not bad considering 10 Treasuries pay just 2.07% right now. Euronav’s stock is up big too. It has gained 15% in the past month alone...while the S&P just gained 1%.

E.B. thinks Euronav is just getting started.....

Euronav’s stock price has rocketed in recent weeks, but it’s going to go much higher. Euronav is a great business and the economics of shipping oil are improving. The market hasn’t fully caught on to how good things are in the industry right now. Shipping rates are ripping higher, but the supply of ships can’t keep up with demand. The largest supertankers can carry 2 million barrels of oil at a time. They measure three football fields long. These ships take years to build and cost about $100 million each. Shipping rates should stay high as the world works through this huge oil glut.

It’s a great time to own shipping companies. And Euronav is the best of the bunch. Euronav has shot up since E.B. recommended it, but the buying window hasn’t closed. In fact, Euronav is still below E.B.’s “buy under” price of $17.50. You can learn more about Euronav by taking The Casey Report for a risk free spin today. You’ll also learn about E.B.’s other top investment ideas, including a unique way to profit from the “digital revolution” in money. Click here to get started.

The article This Unique Oil Stock is Offering A Huge Dividend Yield was originally published at caseyresearch.com.

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Riding the Energy Wave to the Future

By John Mauldin 

“Formula for success: rise early, work hard, strike oil.” –  J. Paul Getty

This week’s yuan devaluation was big news, but it’s really part of a much bigger saga. Events around the globe are combining to create huge economic change over the next few years. We are watching giant, multidimensional chess games played by some master players. Energy is the chessboard that connects all the players. What happens when the board changes shape in the middle of the game? If you don’t know the new energy landscape, you’ll have a hard time playing to a draw, much less winning.

Today I’ll tell you about some big shifts in the energy industry. These shifts are about as positive as can be, unless you need high oil prices to run your country. In the long run, these changes are bullish for the whole world, which I think this will surprise many of you. And though we’ve been used to thinking about energy and technology as two different facets of modern life, today they are inextricably linked.
When energy changes, everything else changes, too.

16 Candles

Thoughts from the Frontline is now entering its 16^th year of continuous weekly publication. I constantly meet readers who have been with me since the beginning – and even some who read an earlier print version of my letters. I put TFTF on the Internet in August 2000 as a free letter, starting with just a few thousand names, and was amazed at how rapidly it grew. It took just a few years for me to realize that this new thing called the Internet was the real deal, and I discontinued my print version. We now push the letter out to almost one million readers each week, and the letter is posted on dozens of websites.

I began to archive the letter in January 2001; and every issue – the good, the bad, and the sometimes very ugly – is still there in the archives, just as I wrote it. I will admit there are a few paragraphs, and maybe even a whole letter or two, that I would like to go back and expunge from the record. But I think it’s better just to let it all be what it is.

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I thank you for allowing me to come into your homes and offices each week. I consider it a privilege and honor to be able to offer you my research and thoughts. This letter has been free from the beginning, and my full intent is that it will always remain that way. Longtime readers know the topics can vary widely over the course of the year. I write about what I find interesting that week. I find that writing helps me focus my own thinking.

If you are reading this for the first time, you can go to www.mauldineconomics.com, subscribe by giving us your email address, and join my one million closest friends who get my letter each week. And if you’re a regular reader, why not give me a 16^th birthday present and suggest to your friends that they subscribe too! I also want to thank the staff and my partners, who make it possible for me to spend the bulk of my time thinking and writing. And traveling, of course. And now let’s think about energy.

The Cover Pic Indicator

Contrarian and value investors like to buy assets that are in distress, or at least “out of favor.” You don’t hear much about those assets at the time. That’s part of being distressed – everyone ignores you. So, following that logic, the last thing you want to buy is a stock or industry that appears on the cover page of popular financial publications. Commodity and energy bulls should take note of last weekend’s Barron’s cover.

“COMMODITIES: TIME TO BUY,” Barron’s practically screamed at its readers. In case you can’t read the fine print on the cover, it says, The harsh selloff in energy, gold, and other commodities is starting to look like capitulation. Opportunities in Exxon, Chevron, BHP, Goldcorp. Plus six funds and six ETFs to help build a position in this oversold sector.

I presume the photo is supposed to show the sun rising on an oil rig, not setting. The article quotes some very smart people who are bullish on commodities right now. Some energy stocks look like real bargains. Barron’s is simply repeating the market’s conventional wisdom: After a brutal decline, oil prices are stabilizing and should head higher as the global economy recovers.

That’s a perfectly defensible position – but I think it’s wrong.

It’s wrong because it misses a major shift in the way we produce energy. Many people think OPEC’s high oil and gas prices led to the US shale energy boom. That’s not right. The shale boom was born in a time of lower energy prices, and it was the result of new technologies that make recovering large quantities of oil and gas less expensive than ever.

I used to get the occasional letter from James Howard Kunstler, who would tell me that whatever letter I had just written was completely bass-ackwards, and how his books explained that we were going to run out of energy and then collapse. His books (Wikipedia lists about a dozen) and dozens of others warned us of Peak Oil. (For the record, James, a certain longtime editor on my staff made sure I got all your letters, reports, and more, as he is firmly in your camp! I kept smiling and saying that he was (and is) wrong; but Charley is a phenomenal editor, and you put up with a few quirks for brilliant editing that makes you look better. Besides, if the world does come to an end, I can wend my way to his survivalist farm and beg for a job and food, although I’m not exactly sure I’m ready to milk goats. Just for old time’s sake.)

I have written for years that Peak Oil is nonsense. Longtime readers know that I’m a believer in ever-accelerating technological transformation, but I have to admit I did not see the exponential transformation of the drilling business as it is currently unfolding. The changes are truly breathtaking and have gone largely unnoticed.

By now, you probably know about fracking, the technology where drillers pump liquids into a well to “fracture” the ground and release oil and gas deposits. It’s controversial in certain quarters, especially among those who hate anything carbon-related.

Fracking technology is moving forward like all other technologies: very fast. Newer techniques promise to reduce the side effects, at even lower operating costs. Furthermore, fracking is only the beginning of this revolution. The Manhattan Institute recently published an excellent (bordering on brilliant) report by Mark P. Mills, Shale 2.0: Technology and the Coming Big Data Revolution in America’s Shale Oil Fields. I highly recommend it.

Mills outlines the way the new technologies are turning this industry on its head. Shale production or “unconventional” production is really a completely new industry.

Here is a short quote: The price and availability of oil (and natural gas) are determined by three interlocking variables: politics, money, and technology. Hydrocarbons have existed in enormous quantities for millennia across the planet. Governments control land access and business freedoms. Access to capital and the nature of fiscal policy are also critical determinants of commerce, especially for capital-intensive industries. But were it not for technology, oil and natural gas would not flow, and the associated growth that these resources fuel would not materialize.

While the conventional and so-called unconventional (i.e., shale) oil industries display clear similarities in basic mechanics and operations – drills, pipes, and pumps – most of the conventional equipment, methods, and materials were not designed or optimized for the new techniques and challenges needed in shale production. By innovatively applying old and new technologies, shale operators propelled a stunningly fast gain in the productivity of shale rigs (Figure 4), with costs per rig stable or declining.

[Look at the above chart for a few moments; it’s truly staggering. In just seven years, the amount of oil per well in some shale plays has risen by a factor of 10! That is almost all due to new technologies that are increasingly coming online.]

Shale companies now produce more oil with two rigs than they did just a few years ago with three rigs, sometimes even spending less overall. At $55 per barrel, at least one of the big players in the Texas Eagle Ford shale reports a 70 percent financial rate of return. If world prices rise slightly, to $65 per barrel, some of the more efficient shale oil operators today would enjoy a higher rate of return than when oil stood at $95 per barrel in 2012.

Read that last paragraph again. Some shale operators can make good money at $55 a barrel. At $65, they can make higher returns than they did three years ago with oil at $95. I have friends here in Dallas who are raising money for wells that can do better than break even at $40 per barrel, although they think $60 is where the new normal will settle out. Texans are nothing if not optimistic.

To continue reading this article from Thoughts from the Frontline – a free weekly publication by John Mauldin, renowned financial expert, best selling author, and Chairman of Mauldin Economics – please click here.

The article Thoughts from the Frontline: Riding the Energy Wave to the Future was originally published at mauldineconomics.com.

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Make No Mistake, the Oil Slump Is Going to Hurt the US Too

By Marin Katusa, Chief Energy Investment Strategist

If you only paid attention to the mainstream media, you’d be forgiven for thinking that the US is going to get away from the collapse in oil prices scott free. According to popular belief, America is even going to be a net winner from cheaper oil prices, because they will act like a tax cut for US consumers. Or so we are told. In reality, though, many of the jobs the U.S. energy boom has created in the last few years are now at risk, and their loss could drag the economy into a recession.

The view that cheaper oil automatically boosts U.S. GDP is overly simplistic. It assumes that US consumers will spend the money they save at the pump on U.S. made goods rather than imports. And it assumes consumers won’t save some of this windfall rather than spending it. Those are shaky enough. But the story that cheap fuel for our cars is good for us is also based on an even more dangerous assumption: that the price of oil won’t fall far enough to wipe out the US shale sector, or at least seriously impact the volume of US oil production.

The nightmare for the US oil industry is that the only way that the market mechanism can eliminate the global oil glut—without a formal agreement between OPEC, Russia, and other producers to cut production—is if the price of oil falls below the “cash cost” of production, i.e., it reaches the price at which oil companies lose money on every single barrel they produce.

If oil doesn’t sink below the cash cost of production, then we’ll have more of what we’re seeing now. US shale producers, like oil companies the world over, are only going to continue to add to the global oil glut—now running at 2-4 million barrels per day—by keeping their existing wells going full tilt.

True, oil would have to fall even further if it’s going to rebalance the oil market by bankrupting the world’s most marginal producers. But that’s what’s bound to happen if the oversupply continues. And because North American shale producers have relatively high cash costs (in the $30 range), the Saudis could very well succeed in making a big portion of US and Canadian oil production disappear, if they are determined to.

In this scenario, the US is clearly headed for a recession, because the US owes nearly all the jobs that have been created in the last few years to the shale boom. All those related jobs in equipment, manufacturing, and transportation are also at stake. It’s no accident that all new jobs created since June 2009 have been in the five shale states, with Texas home to 40% of them.

Even if oil were to recover to $70, $1 trillion of global oil sector capital expenditure—in fields representing up to 7.5 million bbl/d of production—would be at risk, according to Goldman Sachs. And that doesn’t even include the US shale sector! Unless the price of oil miraculously recovers, tens of billions of dollars worth of oil and gas related capital expenditure in the U.S. is going to dry up next year. While US oil and gas capex only represents about 1% of GDP, it still amounts to 10% of total US capex.

We’re not lost quite yet. Producers can hang on for a while, since there has been a lot of forward hedging at higher prices. But eventually hedges run out—and if the price of oil stays down sufficiently long, then the US is facing a massive amount of capital destruction in the energy industry.

There will be spillover into the financial arena, as well. Energy junk bonds may only account for 15% of the US junk bond market, or $200 billion, but the banks are also exposed to $300 billion in leveraged loans to the energy sector. Some of these lenders are local and regional banks, like Oklahoma based BOK Financial, which has to be nervously eyeing the 19% of its portfolio that’s made up of energy loans.

If oil prices stay at $55 a barrel, a third of companies rated B or CCC may be unable to meet their obligations, according to Deutsche Bank. But that looks like a conservative estimate, considering that many North American shale oil fields don’t make money below $55. And fully 50% are uneconomic at $50.

So if oil falls to $40 a barrel, a cascading 2008-style financial collapse, at least in the junk bond market, is in the cards. No wonder the "too big to fail banks" slipped a measure into the recently passed budget bill that put the US taxpayer back on the hook to insure any ill advised derivatives trades!

We know what happened the last time a bubble in financial assets popped in the US. There was a banking crisis, a serious recession, and a big spike in unemployment. It’s hard to see why it should be different this time. It’s a crying shame. The US has come so close to becoming energy independent. But it’s going to have to get its head around the idea that it could become a big oil importer again. In the end, the US energy boom may add up to nothing more than an illusion dependent upon the artificially cheap debt environment created by the Federal Reserve’s easy money policy.

However, there are a handful of domestic producers with high operating margins that are positioned to profit right through this slump in oil prices. To find out their names, sign up for Marin Katusa’s just launched advisory, The Colder War Letter.

You’ll also receive monthly updates on the latest geopolitical moves in this struggle to control the world’s oil pricing and the energy sector at large and what it means for your personal wealth. Plus, you’ll get a free hardback copy of Marin’s New York Times bestselling book, The Colder War, just for signing up today. Click here for all the details.

The article Make No Mistake, the Oil Slump Is Going to Hurt the US Too was originally published at casey research

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Mike Seerys Weekly Crude Oil Market Recap for Week Ending Friday December 19th

Crude oil futures in the February contract are up $3 this Friday afternoon in New York currently trading at 57.40 after settling last Friday around 58.08 a barrel finishing down nearly $1 for the trading week and traded as low as 53.94 before slightly rallying as oversupply and lack of demand continue to push oil prices to 5 year lows.

If you’re still short this market I would continue to place my stop above the 10 day high which in Monday’s trade will be 64.35 risking around 700 points or $7,000 per contract plus slippage and commission, however the chart structure will improve on a daily basis as the 10 day high will be lowered significantly in the next several days.

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This has been one of the best trends in recent memory as prices have basically collapsed in recent weeks ever since OPEC announced that they will not cut production on Thanksgiving Day which sent prices sharply lower as there is also huge supplies here in the U.S. so who knows how low prices can go as I still highly recommended not to be buying this market so if you are currently not short I would sit on the sidelines and look for a market with better chart structure and less risk.

Crude oil futures are trading far below their 20 and 100 day moving average as consumers around the country are certainly benefiting from lower oil prices at the pump which is also good for the stock market in my opinion as volatility in oil is as high as I’ve ever seen it so be careful as volatility is here to stay.
Trend: Lower
Chart structure: Improving

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