Thereâ€™s good news and bad news from my recent trip to London.
Letâ€™s start with the bad: the euro crisis situation isnâ€™t going to end anytime soon. Eurozone wages are down and so is global competitiveness. Combined with a financial crisis and higher energy prices the situation isnâ€™t set to ameliorate.
Weâ€™ll see more global volatility until someone gets a hold on this situation, thatâ€™s for sure.
Thereâ€™s a bullish uptrend set to take North American energy by storm.
This new force is set to spur the U.S. economy and lead to local profit opportunities, for youâ€¦
To set the stage, your editor enjoyed a quick stint in London to attend the Platts International Oil Conference.
The conference, as our resident geologist Byron King says, is a great way to get an outside perspective on the world oil scene. A few sleepless nights and 1,200 pounds can, indeed, get you a new look at whatâ€™s happening in the global oil patch.
But, to appreciate the opportunity thatâ€™s set to hit our shores soon, youâ€™ve got to get a feel for whatâ€™s happening worldwide.
As I explained above, much of the talk was on the grim outlook for the Eurozone. Indeed, no matter where or what you invest in, this euro crisis will have an immediate impact on your holdings.
A key detriment to the Eurozone is expensive energy â€” oil in particular.
â€śOil is a key driver at the heart of the economic dislocationsâ€ť says Sabine Schels, Senior Director and Global Commodity Strategist at Bank of America Merrill Lynch. And, she continues, â€śhigh oil prices [globally] are here to stay for some time.â€ť
One reason for continued high oil prices are rising OPEC budgets. To bring one barrel of OPEC oil to market it now costs $80-90 on average, Schels says.
You see, the rest of the world isnâ€™t enjoying the same fortune as North America. Instead OPEC producers, as I was told more than once last week, are incurring much higher costs to produce crude. The standard breakeven Iâ€™m hearing now is congruent with what Schels quoted above: $80-90 a barrel.
So if you think the Saudi sheiks are getting oil for $10 a barrel and selling it for over $100 (at Brent prices), youâ€™re wrong.
Instead, OPEC, along with the rest of the world, is paying a lot just to get oil out of the ground. The reason is simple, too. To keep production high theyâ€™re using some of the latest technology in what the industry calls Enhanced Oil Recovery (EOR).
EOR doesnâ€™t come cheap, which can be seen in the $80-90/bbl breakeven price.
Thatâ€™s where the opportunity lies for America â€” as true today with WTI oil prices hovering over $90 as it was three months ago with prices at $110.
â€śNorth America will account for 75% of crude output growth in the next five yearsâ€ť Schels says. Better yet, the U.S. is set to be the largest contributor to global oil growth, with the Eagle Ford and Bakken ramping up by 2016, she notes.
Getting back to the bigger picture, I bet you see whatâ€™s happening.
The U.S. has quietly taken the driverâ€™s seat with regard to world energy. Canada is riding shotgun, and OPEC is feeling the squeeze of the back seat.
North American oil production is set to boom. Weâ€™ve already seeing this story unfold with natural gas. Now crude oil is set to have a similar run.
Pipelines are filled, railways are booming with crude deliveries and in general the U.S. is starting to feel a glut of oil.
â€śWait a second!â€ť you may say. How come the price of oil here in the U.S. isnâ€™t dropping, how come gasoline prices are still high?
To that question there are several answers. For starters, this oil is just starting to overwhelm the oil transportation infrastructure â€” itâ€™ll indeed take time before the U.S. can efficiently use this added supply. But we are seeing the effect in the continued gap between London-based Brent prices and prices here in the U.S.
More importantly the reason weâ€™re not seeing the instant benefit of higher oil production is a bad decision made a few years back.
10-20 years ago no one saw this ramp-up in U.S. crude coming. Instead, most refiners planned on having Canadian, Venezuelan or Middle East Crude coming through refining row in Houston â€” and so the refiners built out their plants to be able to process heavy, sour crude.
This was a strategic mistake. Weâ€™re now sitting on a boatload of refining capability for heavy sour crude â€” when the Bakken, Eagle Ford and Permian Basin are spitting out gobs of light, sweet crude.
Thatâ€™s another reason why the outlook for U.S. refineries isnâ€™t so rosy. They run the highest margins on heavy sour crude, not the light stuff that weâ€™re set to be flush with.
This is a similar situation to those companies that began building LNG import facilities here in the U.S. A decade ago, no one thought weâ€™d be flush with natural gas. But we are! So in turn, at least one of these import facilities (Cheniereâ€™s Sabine Pass) is being turned into an export facility.
The same type of turnaround will be happening in the coming months for the U.S. oil industry. Surely the industry will find a way to process this crude efficiently â€” and use it for many other industrial processes. In turn weâ€™ll see a lot of home-grown wealth in the U.S.
Cheap energy and a booming energy sector will lead to more value-added manufacturing and a quicker rebound for the U.S.
Although this outlook doesnâ€™t solve the euro crisis, it DOES give us reason to believe the U.S. will decouple from Eurozone woes â€” something that could happen very soon.
The Keystone XL Pipeline, much like the seaway pipeline reversal wonâ€™t have any effect on this boom â€” thereâ€™s simply too much oil set to hit the U.S.
The reason is simple â€” or shall I say the three reasons are simple. When you account for the ramp-up in production thatâ€™s coming online (and set to continue growing) with Canadian oil sands, North Dakotaâ€™s booming Bakken and the liquid-rich Eagle Ford shale in South Texas, youâ€™ll see that North America is going to continue producing way more crude than its pipeline systems can handle.
Prices will be cheaper than Brent, and give the U.S. a short-term competitive advantage over the rest of the world.
A world, by the way, that is still set to consume lots of oil â€” euro crisis or not.
Worldwide, by 2035 â€śweâ€™ll need another four Saudi Arabias,â€ť says Shell Oilâ€™s Executive VP of Strategy and Planning, Ruth Carnie. â€śThis oil shortfall,â€ť she explains, â€śis just due to natural depletion.â€ť
Carnie forecasts â€śa historic transformation of the [global] energy systemâ€ť by 2050. Most notably due to these pressing factors:
- Nine billion people on the planet,
- 75% These folks will reside 75% in more-developed cities
- They will be 3-4 times as rich
- Theyâ€™ll own two billion vehicles
- Requiring 50% more energy
In a nutshell the world needs a lot more oil. A majority of that oil growth in the next five years is going to come from North America and the U.S. in particular. This is a massive opportunity for U.S. oil investors.
If youâ€™re looking for ways to play this trend, a few of my favorites are all major oil companies with solid operations in the U.S. â€” namely, Shell Oil (RDS: NYSE), Chevron Corp (CVX: NYSE) and Statoil (STO: NYSE.)
Whatâ€™s great about investing in these set-to-boom companies is that they all pay a healthy dividend. So you can get paid while you wait for energy shares to turn around.
Itâ€™s only a matter of time before the market trend for U.S. operations heads higher. When it does, plan on seeing five years of solid growth from U.S. oil players.
More on this topic later, stay tuned.
Keep your boots muddy,
Source: Daily Resource Hunter