Why You Should Be Maximum Bullish on the Canadian Oil Sands

By Matt Badiali, editor, S&A Resource Report
Monday, February 14, 2011

If the giant gap between per-person oil consumption in the United States versus China and India isn't enough to get you bullish on crude oil, I have frightening numbers to show you...

 

Most Americans hear vague statements about our "dangerous dependence" on Middle Eastern oil. But what most folks don't know is that we import more oil from Mexico than we do from Saudi Arabia. Another thing most folks don't know is that we import nearly as much oil from Nigeria and Venezuela. In 2010, we imported nearly three times more oil from Mexico, Nigeria, and Venezuela combined than we did from Saudi Arabia.

 

Now here's where it gets frightening... and why you should have a portion of your portfolio in the huge, safe Canadian oil sands.

 

One, Mexico's national oil company, PEMEX, is a disaster. Our neighbor to the south supplies about 12% of our monthly oil imports. Its production is in steep decline. Mexico produces less oil today than it did back in 1996. Today, its production is down 34% from its December 2003 peak.

 

Two, Venezuela supplies us with 8% of our crude oil imports. Its president, Hugo Chavez, is a lunatic who hates America.

 

Several years ago, Chavez kicked out all the international oil companies operating in the country, after they had invested millions of dollars there. Then he hired the giant service companies, like Schlumberger and Halliburton, to run his fields... until he owed them millions of dollars. Then he kicked them out, too. He's determined to ship as much Venezuelan oil to China, rather than the States.

 

Three, we have Nigeria, which supplies us with about 8% of our imported oil. Nigeria is blessed with incredible oil wealth... But it's a corrupt hellhole of a country. Angry mobs of disenfranchised locals constantly storm oil platforms and tap pipelines. It ranks No. 134 out of 178 countries in Transparency International's Corruption Index. You want to keep few eggs in this rickety basket.

 

So as you can see, we depend on many importers who are inept, enduring declining production, corrupt, or a mixture of the three. That's why you need to own a slice of the Canadian oil sands.

 

The Canadian oil sands hold the world's largest safe store of crude oil. Canada regularly ranks in the top 10 least-corrupt countries in the world. Its oil is a pipeline ride away from the U.S. There's no exploration risk. The oil is there... not miles under the ocean floor or in a dangerous place like Nigeria.

 

That's why China is buying up as much of the stuff as it can. The country is desperate to lock up safe oil supplies for the long term...

 

In the first six months of 2010, Chinese national oil companies and investment companies spent $7.3 billion on Canadian oil sands projects. PetroChina bought 60% of Athabasca Oil Sands Corp's Mackay River and Dover projects for $1.9 billion. Sinopec bought ConocoPhillips's 9% stake in oil sands miner Syncrude for $4.65 billion. China Investment Corp, a Chinese government-funded investment company, bought 45% of Penn West Energy's Peace River project. China is getting friendly with Canada for the long haul.

THE OIL TO GAS RATIO IS BACK TO AN EXTREME

Our favorite "contrarian's commodity" is back on the burner…

For the past several years, we've checked in with the oil to natural gas ratio to find great investment opportunities. While "energy cousins" oil and gas have similar applications, the price between the two gets out of whack from time to time.

Years ago, you could consider natural gas cheap relative to oil when the ratio reached 14. New drilling technologies have changed the nature of this ratio, and now we need a reading of 22 before we'll call gas "cheap."

As you can see from today's chart, the oil to gas ratio has reached the low 20s four times in the past two years. Each time, natural gas rallied hard from this extreme "boiling point" reading of cheapness.

Now note the right-hand side of the chart. Mild weather has reduced demand for natural gas-fired heating, which has pushed the price of gas down… and sent the reading back to 22. This makes income-producing royalty trusts and large "hoards" of natural gas an attractive way to own vast amounts of this cheap and clean source of energy.

Chindia Natural Gas Consumption

It's one of the clearest trends on Earth today... Earlier this month, we reported China imported 30% more natural gas in the first 11 months of 2010 than the same period in 2009. India's natural gas demand is also soaring. Take a look at the natural gas consumption in China and India (aka "Chindia") over the past 25 years. You'll notice a pattern...

We'll bet demand only increases this year. And China's betting more than $1 billion on the same result... Today, Chinese oil giant CNOOC announced it is buying stakes in several shale oil and gas leases owned by Chesapeake Energy for $570 million. The deal entitles CNOOC to a 33% stake in Chesapeake leases covering 800,000 acres in northeast Colorado and southeast Wyoming. CNOOC will also fund two-thirds of Chesapeake's share of drilling and other costs up to $697 million.


The deal is similar to the October 2010 CNOOC-Chesapeake arrangement where the Chinese company bought one-third of Chesapeake's 600,000-acre Eagle Ford shale project for $1.08 billion. (This marked the first major investment by a China state-run company in onshore U.S. energy reserves.) Matt Badiali's Resource Report readers bought into Eagle Ford long before China. (Our friend Cactus Schroeder – a Texas wildcatter – told us about the development.)

Last July, Matt told his readers:

As you may know, drilling shale formations like the Eagle Ford for the natural gas trapped inside has been the most important trend in the U.S. energy sector over the last decade. Developing the tools to extract shale gas is singularly responsible for an explosion of U.S. natural gas reserves. Now, oil and gas explorers are applying those tools to the biggest shale formation in Texas. I'd love to give you some firm figures on the potential Eagle Ford production. But drilling there is so new, it's impossible to make a reliable estimate on how much oil and gas it holds. Just know that the Eagle Ford is going to be a monster. One of the oilmen I rode with said it will easily be the biggest discovery of his more than 30-year career... and maybe the largest in the history of the U.S. oil industry.

Matt recommended EV Energy Partners and Vanguard Natural Resources as Eagle Ford plays. In six months, readers ar e up 40% and 55%, respectively. More gains are on the way... and both stocks yield more than 7%.

How the Egypt Crisis Can Impact the Oil Market

by Kent Moors Ph.D. | published January 31st, 2011

At some point around 2:30 p.m. Eastern this afternoon, I'll be a guest on Fox Business to discuss the Egyptian political protests and the oil market.

The unfolding crisis has four impacts on oil.

Thought I would give you advance notice on what I will be saying…

Impact No. 1: Instability Can Cause Panic

First, while Egypt itself does not directly provide a great deal of oil to the international market, any instability in this region causes the traders to panic. (The hefty rises in oil prices on Friday attest to this fact.)

While prices are stabilizing today – after a quick round of profit-taking – they will begin experiencing upward pressure again (primarily for the reasons I will summarize below).

Keep your eyes on the Brent price in London, where the importance of what is happening on the streets of Cairo is more immediate. The price for crude is approaching the magic benchmark of $100 a barrel.

There are no indications that the unrest is likely to translate into a government takeover by radical groups. We are, of course, still quite early in the process, but Egypt remains a secular Islamic state, at least for the moment.

True, this is the birthplace of the Muslim Brotherhood some 60 years ago, the forerunner of radical Islam. However, these days, it is poorly organized, without effective leadership, and significantly weakened by government pressure over the years.

In any event, this is currently a popular uprising and bears little relationship to wider political issues – unless, of course, we assess its result to the broader region. The events unfolding, first in Tunisia and then in Egypt, have brought attention to the unstable hold governments throughout the region have on their nations.

Here is where the true problems may result.

Egypt, Turkey and Jordan are the leading secular Islamic states in the Middle East. But they have only moderate amounts of oil and gas. More disconcerting is the possibility of reactionary elements gaining control in places that have a more immediate impact on the flow of energy.

Impact No. 2: Western Producers and Drillers Could Suffer

Second, Egypt has been increasing its development offshore, especially of natural gas in the Nile Delta, the Gulf of Suez, and the deeper waters of the Mediterranean Sea.

Here, there are assets of major Western companies at stake – BP (NYSE:BP), Exxon Mobil Corp. (NYSE:XOM), Chevron Corp. (NYSE:CVX), Royal Dutch Shell (NYSE:RDS), Eni (NYSE:E), British Gas Group (OTC:BRGYY), Edison (OTC:EDIHF), and dozens of mid-sized companies.

In addition, there are substantial assets of leading drillers, including Transocean Ltd. (NYSE:RIG), Diamond Offshore Drilling Inc. (NYSE:DO), and Baker Hughes Inc. (NYSE:BHI).

What to watch here is the response to political pressures on the two dominant Egyptian state companies – the Egyptian General Petroleum Corp. (EGPC) and the Egyptian General Gas Holding (EGAS). These two control the dominant state position in all hydrocarbon projects in the country.

Impact No. 3: Eurozone Electricity Prices May Fluctuate

Third, developments there – should they lead to any interruption in deliveries – will have a more pronounced effect on the European gas market.

The discovery of large gas deposits over the past several years has catapulted Egypt into the fast track lane for liquefied natural gas (LNG) exports to the European Union.

Any problem on this front would change dynamics in LNG imports and provide instability in electricity prices on the continent.

Impact No. 4: Delivery Interruptions Bring in Serious Volatility

Finally – and, in my judgment, most significantly – while Egypt does not provide a great amount of the global oil and gas, it does control about 5% of its delivery.

Some 1.8 million barrels of oil move through the Suez Canal each day; another 1.1 million or so barrels pass along the Sumed pipeline from the Gulf of Suez to Alexandria and further export.

Any interruptions here would move the oil market into considerable volatility, requiring a rebalancing of contracts and a noticeable escalation in prices.

A rule of thumb to remember – each 1% decline in global supply availability without an equivalent decline in demand pushes average crude oil prices up $10 a barrel.

At minimum, therefore, that would translate into an almost overnight NYMEX price level of $140 a barrel and a Brent price pushing $150.

Currently, the only problems in the Suez Canal are a result of communications being subject to government cuts countrywide. There is no indication the oil flow is impeded at this point.

But this is a fluid situation, and the likelihood of supply cuts elsewhere in the region as the popular uprisings increase, are a genuine concern.

Sincerely,
Kent

http://video.foxbusiness.com/v/4518236/disruption-on-the-horizon-for 

State of Denial By David Galland, Managing Director, Casey Research

Does the price action of gold of late make you scratch your head, falling as it has from its recent high of $1,420 to $1,359 as I write? Hard not to make one wonder, considering the nature of so much recent breaking news…

• Consumer prices in December exceeded forecasts, up 0.5%, with core inflation up 1%.
   
• Producer prices rose 1.1% in December.
   
• China’s inflation, at over 5%, is beginning to cause problems.
   
• Import prices into the U.S. are on the rise.
   
• The European Central Bank is now warning of inflation, and interest rates there continue to rise.
   
• Back in the U.S., the rise in interest rates is becoming persistent, with 10-year Treasury rates moving from 2.57% in November to 3.31% today – something that Bernanke is trying to spin as a positive, but given the amount of debt sloshing about, it is very much not.
   
• Oil – the stuff that makes the world go ‘round – appears stuck at around $90, no matter whether the news is good, or bad.
   
• The U.S. government is trying to chase foreign depositors away from the dollar by broadcasting that the IRS wants to begin looking in to all foreign-held U.S. bank accounts. Trying to keep ahead of the curve, JP Morgan, among others, has told foreign account holders they have to close their accounts by March 31. The harder it becomes to do business with the U.S., the weaker the demand for dollars. The weaker the demand for the dollar, the weaker the dollar will be… interest rates will have to rise to offset the fall, and import prices will go up even further.
   
• Following that thread, China and Russia have recently struck a deal to bypass the U.S. dollar in bilateral trade – the latest and most substantial act of foreign nations taking active measures to ditch the dollar.
   
• Food prices are soaring – with corn contracts up over 90% from June lows, and wheat up 80%.

And, yet, gold goes down.

Doesn’t make much sense, does it?

In my firmly held opinion, what we’re seeing is nothing more than the consequences of Mr. Market’s confusion – about gold, about the dollar, about Europe, about Asia… and especially about the potential consequences of Uncle Sam’s massive meddling in all manner of markets. Thus Mr. Market desperately looks to the equally confused punditry for an explanation, and gets fed a lot of nonsense and hoo ha about “risk on” and “risk off,” and the benefits of the governments “quantitative easing,” and so on.

Don’t let yourself be confused in the slightest about what’s going on, and pay no attention to the punditry. The analysis they do is garden variety at best, and they have it dead wrong… just as they almost always do.

To make that point, I’ll share a quote from the excellent book When Money Dies, referring to the Vossische Zietung, one of Germany’s leading financial newspapers back in the 1920s as the inflation began to spin dangerously out of control:

The Chancellor would accept no connection between printing money and its depreciation. Indeed, it remained largely unrecognized in Cabinet, bank, parliament or press. The Vossische Zietung of August 16 declared that… … the opinion that the flood of paper is the real origin of the depreciation is not only wrong but dangerously wrong… Both private and public statistics have long shown that for the last two years the interior depreciation of the mark is due to the depreciation of the rate of exchange… it should be remembered today that our paper circulation, although it shows on paper a terrifying array of millards, is really not excessively high… we have no ‘dangerous flood of paper’…

Another particularly telling quote from around the same time was from the Berliner Borsen Courier:

It has long been realized that the printing of notes is the result not the cause of depreciation, and that the amount of currency, as it increases in bulk, is really decreasing in value. A point has now been reached where the lack of money has a worse effect than the depreciation itself… Even should the quantity of paper money be three times its present size, it would constitute no real obstacle to stabilization. Until such a time, therefore, let us print notes!

At the time of that quote, the money printing in Germany had pushed the mark from 5 to the dollar to over 1800. Yet, almost no one in a position of influence was connecting the dots.

That’s much as is the case today. Until there has been a fundamental shift in U.S. fiscal and monetary policy, I would like to strongly suggest you trust your own instincts about the relative value of holding gold versus dollars – or any of the fiat currencies, for that matter – and set your sails accordingly.

Or, you can listen to Bernanke, who said yesterday:

“Interest rates are higher, but I think that’s mostly because the news is better. It’s responding to a stronger economy and better expectations. So I think that the policy has helped.”

And, don’t forget: historically interest rates, gold, and inflation all rise together. Not until we see positive real interest rates – interest rates that clearly outstrip the depreciation of the currency – will gold stop being a good investment. We are nowhere near that point.

Riots in Egypt & The Price of Oil - by Economic Collapse

As if the world economy did not have enough problems already, now the riots in Egypt threaten to send the price of oil soaring into the stratosphere.  On Friday, the price of U.S. crude soared 4 percent.  A 4 percent rise in a single day is pretty staggering.  The price of Brent crude in London closed just under the magic $100 a barrel mark at $99.42.  The incredibly violent riots in Egypt have financial markets all over the globe on edge right now.  Any time there is violence or war in the Middle East it has a dramatic impact on financial markets, but this time things seem even more serious than usual.  Many believe that we could see an entirely new Egyptian government emerge out of this crisis, and the uncertainty that would bring would make investors all around the globe nervous.  Financial markets like predictability, peace and security.  If Egyptian President Hosni Mubarak's 30 year reign is brought to an end, it will severely shake up the entire region, and that will not be good news for the global economy.


Have you seen how violent these protests have become?  Cars and buildings are on fire all over the place.  Even the headquarters of Hosni Mubarak's political party was burned down.  The Egyptian military has been deployed on the streets of Cairo.  Protesters have been showering government forces with stones, firebombs and anything else that they can find to throw.  Security forces have been using rubber bullets, water cannons and tear gas to try to disperse the protesters but those efforts seem to be doing little good.  Deaths and injuries are being reported all over the place.  There are even rumors that the wife and son of Hosni Mubarak have already left the country.

At this point, Mubarak has gone on national television and has announced that he has asked his cabinet to resign.  That is an absolutely stunning move, but it is doubtful that the protesters will be satisfied.  All over Cairo protesters continue to chant for Mubarak to resign.

The following is a short compilation of some raw video from the riots in Egypt....
These riots in Egypt come on the heels of violent uprisings in Algeria and Tunisia.  In fact, it seems like virtually the entire Middle East is in a very foul mood right now.  Riots have been reported in Lebanon, in Jordan and in Yemen over the past few days.

Some of the rioting has been motivated by economic factors, but unfortunately all of this rioting is only going to make the global economic situation even worse.  Concern over all of these riots is driving up the price of oil and driving up the prices of agricultural commodities.  These higher prices are going to make it even harder for the poor people in the Middle East to afford food.

But also it must be acknowledged that much of this rioting is being done for very deep political and religious reasons as well.  Many westerners are cheering the protests in Egypt because they envision the protesters to be some sort of "freedom fighters".  But the vast majority of these protesters do not desire "American-style democracy".  The Muslim Brotherhood is one of the groups at the heart of these protests.  The government that they intend to set up would not give "liberty and freedom for all".  Rather, it would be a hardline Islamic government based on Shariah law.  According to Wikipedia, the Muslim Brotherhood bills itself as the "world's most influential Islamist movement", and their goal is to impose their version of Islam on society....

The Brotherhood's stated goal is to instill the Qur'an and Sunnah as the "sole reference point for ... ordering the life of the Muslim family, individual, community ... and state"

So unless your version of "freedom" includes being forced to live like the Taliban, then you probably would not enjoy the "liberty" that the Muslim Brotherhood wishes to impose on you.
Coptic Christians all over Egypt are already being slaughtered even with a relatively pro-western president in power.  On New Year's Day, an attack on a Coptic Christian church in Egypt killed 21 people.  The following is how one eyewitness described the scene to a reporter from the New York Times....

“There were bodies on the streets,” said Sherif Ibrahim, who saw the blast’s aftermath. “Hands, legs, stomachs. Girls, women and men.”

Once a radical Islamic government is installed in Egypt it will be open season on all Christians.
Yes, there is a whole lot of blame to be passed around to other nations, organizations and individuals in the Middle East for things they have done as well, but that does not excuse the horrific persecution of the Coptic Christians in Egypt.

We have to call a spade a spade.  We cannot condemn some forms of tyranny and persecution and then make excuses for other forms of tyranny and persecution just because those doing it are on "our side".
Replacing one form of tyranny (Mubarak) with an even more repressive form of tyranny (The Muslim Brotherhood) is not something that those who love liberty and freedom should be celebrating.
In any event, everyone should be able to agree that these events are going to severely rattle world financial markets that were already very nervous about 2011.

If these violent riots in Egypt and other countries in the Middle East keep going on, the global price of oil and the global price of food will continue to soar.

Not that oil and food were not going to be heading in that direction anyway.  Yesterday I wrote about the warning signs for the global economy that we are starting to see.  Wheat and corn have absolutely skyrocketed in price over the past 6 months.  The UN had already been projecting that we would see a 30 percent increase in the global price of food in 2011 even before these riots.
If you add rampant political instability into the mix, there is no telling how bad food inflation could get this year.

Many experts have already been forecasting substantial food shortages throughout the world this year based on all the extreme weather we have been having.  So what is going to happen if something causes those food shortages to be even worse than anticipated?

We live in very interesting times my friends.  The globe is becoming an increasingly unstable place.  Even nations that seemed perfectly stable just a few months ago can erupt in rioting at almost any moment.
People around the world are getting angry.  Thanks to the Internet, people are able to circumvent official government propaganda more easily than ever before.  This is making it harder and harder for governments to control people.

Egypt tried to regain some of that control during the riots by shutting down cell phones and by shutting down the Internet but it did not work.

Let's just hope that Egypt can soon find peace and that the changes that are made in the Egyptian government are good for freedom and liberty.

Warren Buffett....The Guru & His successor?