Energy Stocks to Buy for the 2nd Half of 2010

If the global economy is indeed recovering (and granted, that's a very big IF) - energy stocks *should* continue to take off and lead the way.  But the tough thing about finding energy good energy stocks to buy is the same problem as finding oil and energy in the first place - it's tough!

Energy demand, until the recession hit, was steadily climbing each year - while supply was flat to declining. So where should you look to play this trend, if and when it resumes?

Our "energy guru" Marin Katusa says you should look to an uncovered, untapped area of the world...read on as Marin explains...


The Secret to Finding Winning Energy Stocks

By Marin Katusa, Chief Investment Strategist, Casey Research Energy Team

As the world hesitantly emerges from recession, the one question that seems to be on the lips of investors everywhere is: what’s next? As the tragedy continues to unfold in the Gulf of Mexico, with no fix in sight, market attention has suddenly shifted to the energy sector after years of neglect. Pundits and would-be energy experts are a dime a dozen. Speculation about oversold or underbought oil abounds.

But the real profits in energy won’t be made anywhere near the Gulf and have little to do with going long or short on BP or Transocean.

They’ll come from being the first to arrive on the newest scene, getting there before the crowds do. The current economic climate has opened up doors to some exciting opportunities around the world. Discovering which of these is going to be the next big winner, however, can be quite the challenge.

A question that our subscribers ask us time and again is, “What is your secret to consistently picking winning stocks?” As seasoned resource investors, our answer today is the same one that company founder Doug Casey has been giving for decades. It’s what he calls the “8 Ps” of resource stock evaluation.

The 8 Ps are: People, Projects, Paper, Promotion, Push, Phinancing, Politics and Price. They form the basis of the job interview that any Casey stock recommendation must go through as part of the due diligence we perform.

These criteria let us look beyond a few numbers, deep into the real fundamentals of a company. But even before we turn our attention to individual companies to select the few gems that we include in our newsletter, we concentrate our efforts on finding the niche in the energy market that is about to explode. Then we can sort out who is most likely to exploit that niche.

We’ve traveled the world, and we believe we’ve found the most promising area for oil exploration.

East Africa: Oil and the Elephant

Africa might be the final frontier, the last place left on Earth where elephant deposits – very large oil and gas reserves – remain to be found. This makes Africa a central piece in the world energy matrix, and the area is getting some major attention.

When oil and Africa are mentioned in the same sentence, thoughts automatically jump to oil rigs dotting the landscapes of Nigeria and Libya. But the ship has sailed for West and North Africa – their oil fields are either producing or about to come online. Anyone looking at buying into the energy mammoths operating there will find it just too dear.

The last oil elephants are in fact thousands of miles away, in East Africa. Yet it remains, for the most part, a blank slate. If we graph oil production on the continent, the picture looks like this:

East Africa has been largely ignored since early drills, almost 50 years ago, came up dry. But then Irish oil giant Tullow discovered over 2 million barrels under the waters of Lake Albert, Uganda, in 2009, and the region suddenly shot into the limelight.

Now some of the biggest players in the field are jostling each other to get in on the action. France’s Total SA, China’s CNOOC (China National Offshore Oil Corp), and Ireland’s Tullow are only three of the energy titans wooing governments and smaller companies. Just days ago, on June 2, Afren bought out Canada’s Black Marlin Energy, in a US$100M deal that gives the formerly West Africa-focused British producer a significant foothold in the east.

But East Africa is anything but a cakewalk. Poor governance, limited rule of law, and a severe lack of transportation infrastructure are just some of the problems that companies looking to do business there are facing.

Additionally, unlike West and Northern Africa, which have a complex network of pipelines, East Africa has only two. With the Lake Albert discovery, another pipeline is being built by some of the major companies in the region, but it won’t be operational until 2011.

Violence is also a serious threat. Quite a few militant groups are active in the region, attacking oil rigs and pipelines, kidnapping foreign oil workers. And the operations of pirates in the Gulf of Aden are well documented.

Nor is political stability a given. Mogadishu, in Somalia, still remains a no-go zone. Parts of Ethiopia are plagued by rebel insurgencies, and the country is at war with Eritrea. Even Kenya, a model of governance by African standards, has simmering ethnic and political grievances that could erupt at any time.

In short, the threats to both body and business often impede a firm’s ability to function, let alone continue exploration and production in the region.

If it’s so bad there, then why is East Africa one of our top picks for 2010?

There’s an old Chinese saying, “If you don’t go into the tiger’s den, you won’t get the tiger.” As we’ve proved in the past, a high-risk project is by no means an automatic guarantor of failure. After all, this is only picking the sector... if a company sails through the Eight Ps, the potential reward can outweigh the risk.

As an example: When we identified renewable energy as the sector to watch in 2008, our recommendation was a high-risk play. Reservoir Capital, a hydroelectric company, had acquired some viable projects in Serbia, a country with great geology for hydroelectricity.

But how stable was Serbia itself? They had just lost a war, Kosovo’s declaration of independence caused the coalition government of 2008 to collapse over a weekend, and anti-Western radicals seemed poised to win the elections.

It looked grim. Yet we reasoned that no matter which party won, people still would need jobs. In a country starved for power, a company that was already open for business, with good prospects, was miles ahead of the competition. Not to mention that Reservoir had balanced its position by putting its fingers in a couple of mineral deposit pies as well.

A green light for Politics, albeit shaky, meant that Reservoir had successfully passed through the 8 Ps. And sure enough, our high-risk gamble paid off, garnering over 300% in gains for subscribers, as you can see:

Like Serbia, East Africa is certainly an intimidating prospect, but that doesn’t mean investors should stay away. Better technology, higher world oil prices and decreased risk in some of the countries (compared to 20 years ago) have turned the scene on its head.

Realistically, only five other regions remain where an oil elephant may be found, and they all have their problems. The Gulf of Mexico is going to be hit with tighter regulations. Iraq and Iran are crippled by terrible royalty structures. West Africa and Brazil are restricted to the big boys, since new fields are so costly to bring online.

That leaves East Africa.

For the smaller fry in the oil industry, the area represents their best chance to get in on the ground floor and reap potentially huge rewards in the future. For the government players, East African oil can generate much-needed cash, as well as help meet their nations’ rising energy needs. And for the majors, a shiny new market is opening up.

This corner of the world is elephant country in more ways than one. It is, in our opinion, the place to watch in the near future. But not everyone will hit the energy jackpot, of course. In East Africa, as elsewhere, it’s survival of the fittest, and our job is to determine who’s most likely to come out on top.

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Marin is the senior editor of Casey’s Energy Report, focused on discovering outstanding small-cap opportunities in the energy sector, such as the ones mentioned above. And he’s simply the best at it. It’s no coincidence that of 19 recent stock picks, all 19 were winners... a 100% success rate. Learn in this report how you, too, can profit from his expertise and spot-on instincts.

What Renewable Energy Should You Invest In - And Profit From the Oil Spill?

While the oil spill may have been a real bummer - like true capitalists, it's our job to ferret out profits from the carnage!  So where should we look?  You'd expect renewables to get a nice boost - but which ones?  Our energy correspondent Charles Brant explores this question, and shares his favorite place to look for investment opportunities - and the pot is even sweeter after the spill...

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Who Will Profit from the Oil Spill?

By Charles S. Brant, Energy Correspondent, Casey’s Energy Opportunities

The disaster in the Gulf of Mexico may be the best thing that’s ever happened to green energy producers in the U.S – but the one that benefits the most will probably surprise you.

As the damaged Deepwater Horizon well continues to pump out 5,000 barrels of oil per day into the Gulf, all the major stakeholders are scrambling to find a way to contain the damage. Investors in BP, Anadarko, Transocean, and Halliburton have had a rough few weeks and should be nervous about the future. The growing political firestorm that’s accompanied this ecological disaster is drastically reshaping the energy landscape in the U.S. There’s huge money to be made from the biggest structural change to the energy markets in the past 50 years, if you know where to look.

The political and economic fallout from this accident is starting to take shape, with the executives from BP, Transocean, and Halliburton being paraded in front of Congress for a public chastising. Predictably, politicians are making stern promises of tighter regulations in the future.

At this point, it’s a guessing game as to what the new permanent regulations will be. So far, a temporary moratorium has been put in place on the issuance of new offshore oil and gas drilling permits. In addition, the Department of the Interior plans to restructure the federal Minerals Management Service (MMS) to eliminate the conflict of interest inherent in its role of monitoring safety, managing offshore leasing, and collecting royalty income.

The Department of the Interior has plans to make offshore drilling rig inspections much stricter. Interior Secretary Ken Salazar has also promised tighter environmental restrictions for onshore as well as offshore exploration and production. Lastly, in a knee-jerk reaction to the oil spill, the Senate Climate Bill gives states the right to veto offshore projects within 75 miles of shore.

Although these regulatory changes aren’t set in stone yet, it’s a foregone conclusion that any company involved in offshore drilling will feel some pain. Any exploration and production company that continues to operate offshore will face reduced margins from a higher-cost structure from increased taxes, regulation, and insurance.

Offshore production supplies a large amount of oil and gas to the U.S. The U.S. Energy Information Agency estimates that U.S. offshore reserves account for 17% of total U.S. proved reserves for crude oil, condensate, and natural gas liquids, as the illustration below shows.

Of the total known U.S. offshore reserves, the Gulf of Mexico accounts for 90%, with the rest found in California and Alaska. In 2009, BP produced nearly a quarter of all the Gulf’s oil and gas located in federal water. Shell and Chevron produced 12% and 11%, respectively.

The sheer size of offshore reserves guarantees exploration and production will never be completely abandoned in the U.S., but don’t expect any growth. In fact, the Gulf of Mexico disaster probably destroyed any hope of any future drilling in environmentally sensitive areas, like the Arctic National Wildlife Reserve.

The market has reacted strongly to the spill, punishing the stocks of every company involved in offshore drilling. Now many are suggesting it might be an overreaction that could benefit your investment portfolio if you dare buy in now. However, there are better ways to work this news to your benefit.

The oil spill will be a very expensive setback for all the players involved in offshore production; we’ve already seen that reflected in their stock prices. In the near term, offshore exploration and production companies and the oil services companies will show margin erosion as they digest higher costs. In the medium term, some companies will pull up stakes and move completely into non-U.S. offshore projects, as they’ll realize the cost of doing business in the U.S. outweighs any potential gains.

The market might be overreacting, but we’re not convinced these depressed stocks represent good value. While it’s possible there are some good bargains, it’s still too early to consider speculating in any offshore-related companies. Specifically, the threat of increased regulation, massive tax increases, and rising insurance costs will create a hostile environment for these companies going forward.

Instead of risking your capital on so many unknowns, a prudent alternative is to look at energy producers in the renewable energy sector. The oil spill has only strengthened the current administration’s resolve to make greener energies supply a larger chunk of America’s energy needs in lieu of traditional fossil fuels. Congress is doing its part by giving huge subsidies to companies in this field.

There are a lot of renewable options that will benefit from the subsidies and political wrangling, but our current favorite by a long shot is geothermal power.

Of all the renewables, we think geothermal has the best upside potential. Based on economics and efficiency alone – unlike wind and solar energy, geothermal is reliable for round-the-clock generation and is already price competitive with fossil fuels without any subsidies – geothermal outperforms competing renewable technologies.

Add the government subsidies on top of the existing good economics and the pot gets even sweeter in the short term. Once the spill is finally contained, attention will shift to previously low-key renewables, like geothermal, and soon after the market will recognize geothermal as the clear winner.

We’ve researched companies up and down the geothermal supply chain and we’re seeing value in a number of quality companies that we think are poised to outperform. With the coming flood of money and attention that will be focused on green energy, you’ll want to move quickly before these bargains go away.

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Want to know which geothermal stocks are set to explode to the upside? Try Casey’s Energy Opportunities risk-free for 3 months today and gain access to one of the best energy analysts of our day, Marin Katusa. Marin and his energy team know all the inside details and have prepared a shortlist of the best companies to own. For only $39 per year, they will keep you in the loop on nuclear, geothermal and other renewable energies.

Peak Oil Update: Why the US is in Dire Energy Straits

How's the oil supply looking in the US?  Not particularly good, writes our good friend and colleague David Galland.

After a brief respite during the Great Deleveraging, as oil dropped to $35/barrel, it's been on a relentless climb back up.  David dives into the supply and demand fundamentals facing America here...

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Three Mile Island for U.S. Oil

By David Galland, Managing Director, Casey Energy Report

Willie Shakespeare may have summed it up best when, borrowing the voice of King Richard III, he penned “A horse! A horse! My kingdom for a horse!”

History is replete with examples of how, but for the proverbial horse, kingdoms have been lost.

My reference point is an accident that will almost certainly lead to tragic miscalculations and havoc down the road. And, I might add, an exceptional opportunity for the patient and attentive investor.

It has to do with an impending shortage of easily accessible (read: inexpensive) oil to quench the insatiable thirst of the United States.

It’s also connected to the inroads the cash-rich and geopolitically ambivalent Chinese – among others – have been making in building strategic relationships, and making direct investments, with the world’s major energy providers.

With only so much oil to go around, every new off-take agreement signed by the Chinese with the Saudis or Venezuelans, for example, is a net loss in supply to other bidders, notably the world’s largest energy consumer, the United States.

That the Chinese, and other countries, are aggressively securing long-term energy arrangements, coincidental with what appears to be an official U.S. diplomatic initiative to actively offend all the major energy producers, makes the securing of U.S.-controlled reserves and production critical.

The problem with cheap oil can be seen in the chart here.



And it has been confirmed in a recent report issued by the U.S. military, conveniently summarized by DailyFinance: “A recent Joint Operating Environment report issued by the U.S. Joint Forces Command suggests that the U.S. could face oil shortages much sooner than many have anticipated.

“The report speculates that by 2012, surplus oil production capacity will dry up; by 2015, the world could face shortages of nearly 10 million barrels per day; and by 2030, the world will require production of 118 million barrels of oil per day, but will produce only 100 million barrels a day.”

Bottom line: The U.S. needs secure oil sources, and “on the double,” as a military type might say. And so the pressure has increased for the U.S. government to remove its actual and effective regulatory bans on offshore drilling.

While it’s more smoke than fire, the Obama administration recently made a tentative step in that direction – because even though its most ardent supporters may hate the extractive industries, Team Obama is not stupid enough to think that the energy gap is going to be closed by solar or wind power anytime soon.

Which brings us to the lost horse in this drama – the messy sinking of an oil rig off the coast of Louisiana, resulting in a spill of about 5,000 barrels, or 210,000 gallons, a day into the Gulf. It is estimated that it could take a month or more to cap the well.

The damage caused by this untimely sinking will extend far beyond wreaking havoc on the wildlife – the real importance is that it hands the luddites and enviro-fanatics just the ammunition they need to stick a brick wall in front of the baby steps underway for expanded offshore drilling. It is the equivalent of the accident at Three Mile Island, which set the nuclear power industry back by decades.

And that means precious time lost, and a near certainty that America will find itself hostage to the oil-producing nations in the years just ahead. That, in turn, means higher and higher prices, and hundreds of billions of dollars flowing overseas. Which, in turn, means a persistently high current account deficit, adding yet more weight to the pressure building on top of the U.S. dollar.

Even if the U.S. were to adopt the equivalent of a war footing in its quest for new offshore discoveries, the size of our steady demand assures that any new finds would still be insufficient over the medium to long term. If the military’s assessment is even close to being on target – with global shortages appearing in four short years – then even the most urgent action taken today would prove woefully inadequate.

But the U.S. is not adopting anything remotely close to urgent action in the quest for new oil supplies. Quite the opposite. The administration and its well-meaning but ill-advised allies are advancing legislation to hinder and penalize virtually all the base-load power providers. And thanks to the poorly timed sinking of the Deepwater Horizon rig, the opponents of “dirty” energy have been provided with a powerful weapon to be used in challenging all new offshore drilling initiatives.

How to play it? First and foremost, you’ll need to be patient. Oil prices aren’t going to skyrocket overnight, and the base-load power industries – oil, coal, gas, and nuclear – will still have to struggle through the coming onslaught of politically motivated regulatory hamstringing. Between now and the time that the depth of the nation’s energy problem becomes apparent to all, the energy sector will remain volatile.

The time to begin buying is when new legislation, coupled with a next leg down in the broader economy and markets, results in an across-the-board sell-off in the energy sector. That will be the time to get serious about building your energy portfolio. Between now and then, your goal should be to learn as much as you can about this critical sector.

And don’t forget to include the oil services sector in your studies. That sector could be the poster child for “feast or famine.” While the sector has bounced off its 2009 bottom, as the inevitable scramble for new offshore discoveries begins, the better-run companies will reward patient investors with multiples.

But first, thanks in no small part to the sinking of the Deepwater Horizon rig, the U.S. will take several steps back – away from anything that looks like energy security.

The single best way to stay closely in touch with energy and the many opportunities to profit available is with a subscription to Casey’s Energy Report, headed up by the hard-charging Marin Katusa in close collaboration with Dr. Marc Bustin, arguably one of North America’s top unconventional oil and gas experts. It is no coincidence that of 19 stocks Marin recently picked, 19 were winners… a 100% success rate. Click here for more.

Ed. note: I am a Casey Affiliate and an Energy Report subscriber - the publication is excellent, and a really great value.

The Best Investment for Riding the Green Energy Bubble

Green, green, green. We need to be green this, and green that. With the government this focused on green energy, I'm becoming more and more convinced that this whole green energy thing is turning into a giant circus. When was the last time the government was ahead of any trend, after all?

Although government may be "the ultimate herd" - buying high, selling low, and coming to the party in the 9th inning - there is one source of energy that is, actually, economically viable.

Guest author, and mathematician/poker extraordinaire Marin Katusa, digs into the whole green energy movement/farce here, separating the hype from the smart money in the energy sector.

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Black Gold... Green Oil

By Marin Katusa, Chief Investment Strategist, Casey’s Energy Report

This summer, there's been a flurry of new green announcements from the world's major oil firms. ExxonMobil, Chevron, Valero, Statoil, Marathon, and Sunoco have all thrown their hats into the green ring.

According to an article published September 19, 2009, in Newsweek:

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The list [of Big Oil investors] goes on. And this time it's the real deal. It's not just that these projects involve bigger money... it's that companies are actually beginning to think about alternatives not just as a tool for greenwashing (throw up a few solar panels here, sponsor a conference on wind energy there) but as real businesses that might turn real profits – or at least help make fossil-fuel production more profitable. The catalyst is that governments are moving to force industry to cut carbon emissions, creating a new "long-term regulatory reality" that favors alternative energy, says PFC Energy Chairman J. Robinson West. Meanwhile, President Obama's green-stimulus efforts and China's massive investment in alternatives have created a serious market for green technologies.

The fact that nations like Russia and Venezuela are pushing out big oil companies also gives CEOs an incentive to consider green alternatives. So does the fact that oil companies are among the world's biggest energy users, and will ultimately need to offset emissions. "I believe the large integrated oil firms will eventually become major players – perhaps even the dominant players – in alternative energy," says Don Paul, a former Chevron executive who now runs the University of Southern California's Energy Institute.

Big Oil is taking a closer look at how [renewable energy]might be used to increase efficiency internally, or to free up increasingly profitable fossil fuels, like natural gas, for commercial sale. When you consider that the top 15 oil and gas companies have a market capitalization of $1.9 trillion, it's clear that these firms themselves have the potential to be major renewable customers.

Oil companies are also taking a harder look at how to make their own business models work in the alternative sector. Companies like Chevron are capitalizing on geological expertise to build large geothermal businesses.

Big Oil is going to be an increasingly important investor in alternative energy. Venture-capital money has dried up. But with oil at $70 a barrel, the internal venture arms of the major oil firms are increasing the amount and percentage of investment going to alternatives. Historically, when Big Oil spends a dollar on research, it will spend many hundreds more to bring a product to market. If the new projects coming online this summer are any indicator, alternatives may soon be awash in black gold.

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U.S. government subsidies into renewable energy are forming a green bubble. One that's steadily inflating. But the catch is, only one alternative energy is currently economically viable before subsidies... and that's geothermal.

That would explain the interest Big Business has in the sector.

• Another member of the oil community, Statoil, has formed StatoilHydro, to focus on advanced geothermal development.

• Google.org — the charitable wing of the search engine giant — has become the largest funder of enhanced geothermal research in the country, outspending the U.S. government.

• Alcoa, the world's largest producer of aluminum, is actively participating in the geothermal Iceland Deep Drilling Project (IDDP).

And then there's the mining industry.

• Lihir Gold has already used geothermal resources to build a power plant, which today provides green electricity for the company’s mining operation in Papua New Guinea.

• BHP Billiton is currently investigating the potential for using geothermal heat in the Olympic Dam region of Southern Australia.

The smart money likes geothermal.

Investing in the growing green bubble could earn you very handsome returns, if you know which companies to choose. Marin Katusa, Casey’s energy strategist, does. Every single one of his 22 latest picks has been a winner, with gains from 44% to 860% – that’s a 100% success rate. To find out how you can profit from winner #23, click here.

Who's Buying Oil Today? The Answer May Surprise You

Peak Oil. Sometimes it sounds sooooo 2008.

What's the real story? Is there too much oil out there, or not enough? Seems like it's tough to get a straight answer on this question - or at least an answer that experts agree on.

In this guest piece, Marin Katusa of Casey Research takes a look at the Strategic Oil Reserves of the world's leading energy consumers. I look forward to Marin's work each month as a subscriber of his, so I'm fortunate to be able to share this piece with you here.

I can't say that this will clear up the energy confusion, but I can say that you should always listen to what Marin has to say.

Read on to get an insider's view at what's going on behind the scenes with Strategic Oil Reserves, and how stockpiling, and/or unloading, could affect the price of crude oil going forward...

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A Look at Strategic Oil Reserves – Who's Buying Oil?

By Marin Katusa, Senior Editor, Casey’s Energy Opportunities

As the U.S. strategic petroleum reserve (SPR) approaches capacity (721.5 million barrels filled out of a total possible 727 million, and will be filled by January 2010), the federal government will fade out of the oil-buying business. Some bearish traders believe that this factor can weigh in on prices, since most petroleum stocks in the United States are government-held rather than private. Bullish traders have also used the filling of the Chinese SPR as a reason that oil should go much higher.

The team at Casey’s Energy Opportunities believe that planned government buying or selling of crude oil for SPRs actually have very little impact in the overall market. However, an overall drawdown of worldwide inventory could put downward pressure on the price of oil. The various countries also have their particular reasons and influences in decisions to tap their reserves.

So which countries are executing preparedness plans to fill their strategic reserves with $70 oil now (as opposed to $140+)? Below are the 10 countries that consume the most oil in the world, as of 2008, the latest figures available from the BP Statistical Review of World Energy:

Russia, Canada, and Saudi Arabia can leave the list, as they are net exporters of oil and thus do not actually require a strategic reserve, at least in the short term. We'll also bump Brazil, because its balance of imports is dwindling every year, and it should become a exporter before it requires a reserve. That leaves six countries to examine.

The United States

Not surprisingly, America has the largest strategic reserve in the world in an absolute sense. Its 727 million barrels are stored in four hollowed-out salt domes (and one pending) along the coastline of the Gulf of Mexico. These add up to some 62 days' worth of imports, according to government sources. The United States government currently has plans to push this to 1 billion barrels, or about 85 days' worth of imports, which would make the reserves equivalent to those of Japan and Korea.

The SPR build-up will be accomplished by expanding two of the current facilities, for an additional 113 million barrels, and (probably) building a new one in Richton, Missouri, for 160 million barrels. The Richton project has met local opposition, because it would require pumping 50 million gallons of freshwater per day from the Pascagoula River to dissolve enough salt to open up another subterranean cavern. The total cost of the program is estimated at US$3.7 billion, not including the cost to fill the reserves. Oil purchases are likely to be slow, at around 100,000 bpd (barrels per day) before 2014 and 150,000 bpd thereafter.

In a real emergency, the combined American strategic and commercial reserves (the latter held by private corporations, especially refiners) may seem unnervingly thin from the perspective of energy security. Add to that the fact that the government can release them at a rate of only 4.4 million barrels per day, or about half its imports.

Still, the 108 or so days' reserve it has between government and commercial sources are considered adequate by international standards. The United States has used this reserve twice in the past 20 years (Desert Storm and Hurricane Katrina) to combat severe demand or supply disruptions. It also has the luxury of importing more oil from Canada in an emergency.

Scenarios that could force a sustained drawdown of reserves:

• Sustained hyperinflation in the United States due to actions by the Federal Reserve that causes oil-producing countries to look for better markets to sell oil.

• A prolonged general embargo by OPEC on the United States, forcing America to look to traditional partners such as Canada and Mexico, though they might not have sufficient oil.

• Another war, potentially in North Korea or Iran, requiring a large amount of oil input from America that it simply does not have.

• A particularly active hurricane season that knocks out a large amount of production capacity in the Gulf of Mexico, and the United States releases from the SPR to help.

China

China's strategic reserves began being built in 2004, when leaders in China began to realize that the country had no adequate government-controlled reserves to combat any disruptions in the supply of oil. China is a large importer and is dependent on the same sources of foreign oil as the United States. China is even more anxious to build such a reserve, as two of its neighbors, Korea and Japan, both have large strategic reserves.

China currently has four government reserves with a total reserve potential of 272 million barrels, which translates to about 30 days' consumption. Two of the four have been confirmed full, and there are rumors that all four are and that China has taken advantage of the recent precipitous drop in the price of oil to buy up. According to Chinese government sources, however, the reserves are likely not to be completely full until 2010, and 2009 buying of oil will be at around 42 million barrels.

The government has also announced plans to increase the country's reserve from 30 to 100 days of consumption. The next stage of the development will call for an additional 170 million barrels in eight storage facilities. The locations of the facilities are as yet secret.

In an emergency, China would likely turn to Russia to buy oil, though only the naive would be surprised if Russia added a premium for the privilege.

Scenarios that could force a sustained drawdown of reserves in China:

Worldwide embargo on China due to a Chinese invasion of Taiwan.

• High oil prices force Chinese industries out of business, pressuring the government to keep oil prices low domestically by selling some of the reserves to domestic companies.

• North Korea asks for oil from China to support military action on the Korean Peninsula, and China ships it to them on the black market.

• Russia slows or stops its exports as part of the Russian "dominance via energy" strategy, leaving Chinese pipelines trickling and Chinese industries disrupted.

Japan/South Korea

We have placed Japan and South Korea's reserves together, as the two countries have a treaty that allows them to share their strategic reserves.

Resource-poor Japan has one of the world's largest strategic oil reserves, enough for 82 days of imports. State-controlled reserves are run by the state-owned Japan Oil, Gas, and Metals National Corporation. The reserves consist of 320 million barrels in 10 different locations, which makes them second only to the United States in absolute volume. Japan's island geography means that having an emergency supply of crude oil is crucial, and the Japanese government obviously has not ignored this aspect.

South Korea is in one of the global "hotspots" in the world, right beside North Korea. As the country is under an almost constant threat of war, the government has stocked up some 76 million barrels, with capacity for an additional 40 million barrels.

Scenarios that could force a drawdown of reserves:

• Just one at this time, from two possible sources: political instability in the region caused by either the Taiwan or the Korea conundrums disrupts tanker transport, perhaps even forces them to port.

India

India has a small reserve it began to build in 2004. This stockpile is sufficient for perhaps only two weeks of consumption. The country eventually wants to raise this level to 45 days, though the first phase has not even been completed yet. The projects are estimated to come online in 2012, which means it has taken eight years from planning to completion. These figures imply that India will not even have a somewhat sufficient strategic reserve until 2016, given that the expansion project was approved in 2008.

Germany

Germany has the largest reserve in Europe and is among the top in the world as well. Its government has satisfied a federal law that regulates storage be at least 90 days' worth of net imports. More than half of the storage is in Southern Germany, where large salt caverns exist. Germany is well prepared in its strategic oil reserves, and there are no glaring factors that would force a drawdown of reserves, barring a global catastrophe. Furthermore, the reserves of Germany, France, and Italy are pooled and can be used by any of the three countries in an emergency.

So How Much Do the Reserves Matter?

According to the U.S. Energy Information Administration (EIA) estimates, some 2 billion barrels are held in government-owned strategic reserves around the world. Though this seems like plenty of oil, does it really impact the spot price of oil? Collectively, the answer is yes, as this volume corresponds to 23 days' worth of global consumption. If drawn down together over a short period of time, the effect on spot price could be substantial.

For illustration's sake, suppose that countries collectively draw down their entire reserves over the period of a year. This rate would make up for 10% of the daily worldwide trade of crude oil, which could certainly impact price (imagine ConocoPhillips and ExxonMobil both going under at the same time).

Individually, however, even China and the United States have a limited impact on the spot price of oil over a single year. If the United States' inventory were drawn over an entire year, it would only make for a 4% increase in supply. Under normal buying patterns of each country's strategic reserves, the impact is even smaller. Since China's 42-million-barrel purchase is over one year, their purchase would not even make a dent in the daily trade of oil.

Thus, a concerted effort by the worldwide reserves can definitely keep prices down in the short term (within a year, two at best), but cannot make for a paradigm shift in the supply/demand model of oil or the Peak Oil argument. And from the buying side, if governments plan the filling of their strategic reserves, the impact on the spot price of oil is likely to be minimal.

Perception is a tricky horse to ride, however, as we all know. Given a worldwide panic for oil à la the 1973 oil embargo, oil prices could spike in the short term, because government reserves would likely raise purchases 10% or so in a real emergency. This effect would be short lived for the foreseeable future, though, as worldwide reserves are already reaching their limits.

In short, if everything goes according to “plan” by the governments, even filling a large reserve such as the Chinese SPR would have little impact on the price of oil. For SPRs to truly impact the spot price of oil, it would have to be a global situation, with war and embargo the two most likely scenarios. Even then, the impact would be mellowed by limitations on how quickly governments can either release or purchase the oil.

Marin Katusa is a math prodigy and the chief investment strategist of Casey Research’s Energy Division. At the age of 31, he is one of the youngest self-made multimillionaires in Canada… thanks to an algorithmic system he developed that alerts him when a company with sound fundamentals has become so undervalued that it’s a screaming buy.

For years, Marin has been advising Casey subscribers on the best energy picks, generating extraordinary returns. Learn how you, too, can profit from his “secret system” – click here to read more.

Natural Gas Falls Below $3! Why This May Not Be The Bottom.

Raise your hand if, a few years ago, you thought you'd see Natural Gas trading below $3 ever again. I never expected it. Yet here we are, just a few years after there was talk of "Peak Nat Gas" in North America, with the Natty sliding below $3.

And what a slide it's been!

Turns out the cure for high prices was high prices.

(Source: Barchart.com)

This is why I don't have a hard time seeing crude oil back in the $20's or $30's at some point. Peak Oil guys will get red in the face, saying how it's impossible. In fact, check out the angry commenter on this $20 Oil post, who called me a Moron!

Now he may very well be right - but I can't help but wonder that if high prices can bring so much Nat Gas on the market, what's so different about oil?

What's the downside on Natural Gas here? Obviously pretty limited - at most it's $2.90! Not a bad lottery ticket to think about playing with hurricane season rolling around. Though I'd like to see some more negativity on this as a speculation, before I think about trading it myself.

Ever since the Natty broke $5, we've been hearing how cheap it was, how it's a great speculation at these prices. Then it broke $4. Now it broke $3. Let's see it break the back of a few more bulls before we take a look at this as a speculation.

Huge Oil Inventories Just Reported

This morning, the US Department of Energy reported, well, HUGE inventories in oil. Oil's decline hastened on the news.

I'm wondering if oil has placed in its short term top, on it's way back down to the $40 range, or perhaps lower (maybe even $20 as predicted here?)

After rallying north of $140 last summer, oil will post a decidedly "lower high" if we have indeed already seen the short term top in the black goo. Whether or not it posts a lower low remains to be seen, but I wouldn't rule it out.

Many folks get outright pissed if you suggest that oil could fall...in fact a recent outraged commenter referred to me as a "moron."

Now that very well may be the case, but let me ask, who could have pictured $3 natural gas, when prices looked like they'd never dip below $10 again, and everyone was talking about Peak Drilling in North America?

Peak Oil is not as scary when demand evaporates faster than supply comes offline. Sure, things may get ugly again if and when the global economy actually recovers, but that won't help your portfolio in the interim. If you're thinking long term, I commend you, that's just not for me any longer.

And remember that the last time oil rolled over, the equity markets were soon to follow. It will be interesting to see if a top in oil again precedes a stock market collapse.

Further reading: An energy executive shares his insights on where the price of oil should be.

Hat tip to The Daily Crux for digging out this link.

What's the Deal With Natural Gas - Is It Cheap, or Not?

It seems like these days, EVERYONE is looking a natural gas prices, wondering "how could they be so low?" As recently as a few years ago, "The Natty" was selling for over $16 - how could it now be languishing just above 3?

It's often said in the commodity world that the best cure for high prices is high prices. That's exactly what's happened in the natural gas market, as North America's "peak natural gas" situation has been reversed by the miracles of innovation.

The free market solving our energy needs - what a novel idea, huh!

So if the cure for high prices is high prices, is the reverse also true? Is natural gas destined to bounce back, as suppliers inevitably turn off production that is no longer profitable. Read on to find out in this excellent piece, shared with us by noted guest author David Galland...

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Is Natural Gas Cheap?
By David Galland, Casey Research

At the height of its late 2005 rally, natural gas in the U.S. was selling for just over $16/MMBtu, 350% higher than today’s price of $3.56. The oil/gas ratio, now over 18, is an all-time high… suggesting that natural gas is dirt cheap. So, it’s a buy, right?

In a phrase, not exactly.

According to a recent report by Natural Gas Intelligence, U.S. natural gas available for production “has jumped 58% in the past four years, driven by improved drilling techniques and the discovery of huge shale fields in Texas, Louisiana, Arkansas and Pennsylvania, according to a report issued Thursday by the nonprofit Potential Gas Committee (PGC).”

According to the report, the increase in gas discoveries and production improvements means that North America shouldn’t have to be concerned about gas supplies for up to 100 years!

Dr. Marc Bustin provided an overview of the situation in the May edition of Casey Energy Opportunities.

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In the United States, the tremendous growth in natural gas resources and estimated recoverable natural gas, particularly from gas shales, just in the last two years (Figure 1) is sending tremors through the entire industry. These tremors include the risk of making obsolete the proposed $26 billion Alaskan and $16 billion northern Canadian pipelines to tap northern gas resources and a slue of proposed LNG terminals... unless they are for export!

The numbers currently kicked around are that something around 2,000 trillion cubic feet of gas are technically recoverable in the United States. At current production rates, this supply would last about 90 years.

Some analysts are predicting that even if the U.S. economy recovers in the next year, the amount of gas discovered to date in gas shales will severely dampen any increase in gas price for some time. According to a new study by energy consulting firm CERA (Cambridge Energy Research Associates), new technologies for unconventional gas fields are being applied so successfully that supply is essentially no longer a driver in either production or price in the North American gas market – whatever the market wants, North American gas fields can supply. CERA reports that natural gas production in the Lower 48 states has risen a startling 14% from 2007 to 2008, for example.

Major shale areas or formations in the U.S. and the estimated recoverable natural gas in 2006 and 2008. Modified from Daily Oil Bulletin (May 4, 2009).

Given the increase in production and the small slide in demand, the price of natural gas has fallen to around $3.50-$4.00 per MMBtu (down from $13 per MMBtu last summer). At these prices, many gas prospects are uneconomic, and thus there has been a marked decline in the number of wells being drilled. Rig activity (how many rigs are operating) is down about 50% in North America.

But here is where an interesting feedback mechanism kicks in. One of the characteristics of unconventional shale gas wells, and to a lesser extent natural gas wells in general, is that the production rate declines through time. Most shale wells’ production rates decline 60 to 90% in the first year. If you were a gas company trying to survive amidst today's low prices, the rate of return on your capital investment would also be painfully low for a significant amount of gas if this were your initial year of production.

Another complementary fact is that over 50% of natural gas consumed in the United States today is from wells drilled less than three years ago, and 25-30% of the gas produced today comes from wells drilled last year (Figure 2).

Hence it follows that if there are 50% fewer wells drilled this year (from the drop in rig activity), new production will decline about 35-40% by the end of the year, so there will be gas shortages. Those will in turn lead to higher North American prices, which in turn should lead to additional drilling.

Historical gas production in the U.S. showing the percentage of production from vintage of well (modified from Chesapeake April 2009 Investor presentation from original data of HIS Energy)

Everything else being equal (which it's not, this being the real, not the mathematical world), gas prices and drilling will see-saw until an equilibrium is reached. In detail, of course, things are more complicated, but it is pretty clear that gas prices will have to rise within the year, and the big losers will remain the more expensive plays that require higher gas prices to be economic.

Where will the gas price end up in the short term? A poll of analysts by Reuters suggests $6 MMBtu in 2010 (Daily Oil Bulletin, May 4, 2009), but I don’t think I would bet on a gas price based on a vote by analysts. At the same time, it's an interesting coincidence (or not – coincidence, that is) that many prospects become economic at around the $6 MMBtu range. Among them are the Haynesville and Marcellus shales – and it's no large leap from there to see their tremendous gas production potential acting as a buffer to gas prices going much higher in the near term.

***

Thus, while there may be some seasonal and relatively short-term trading opportunities in natural gas, the overhang of ready supply places a fairly firm cap on the price. Which begs the question, which big-trend energy opportunities should be getting our attention today?

Marin Katusa, who heads the Casey Research energy team, answers the question by, correctly, cataloging the opportunities according to geography.

In North America:

1. Geothermal -- the most interesting of the alternative energy sources, by a wide margin.
2. Nuclear.
3. Oil.

In Europe:

1. Unconventional gas has, by far, the most upside.
2. Unconventional oil.
3. Small hydro (such as run of river).

In Africa:

First and foremost, you want to avoid infrastructure plays (pipelines, refineries, etc). Then you want to look for areas with huge oil potential, which have been held off the market by concerns over political risk. I like what Lukas Lundin is doing in Ethiopia, Somalia, and Kenya, hunting for “elephants” with the idea of eventually selling the discoveries off to the Chinese.

In Asia:

1. Liquid Natural Gas (LNG)
2. Coal Bed Methane (CBM)

Lessons to Learn

There are a couple of useful lessons to be derived by investors looking to tap into the virtually unlimited opportunities in energy.

First, just because something is “cheap” doesn’t mean it can’t stay cheap, regardless of historical ratios -- if there has been a fundamental shift in the supply/demand equation. Which is very much the case with North American natural gas.

Secondly, geological and transport considerations make much of the energy complex a “local” market.

For example, while North America enjoys an abundance of natural gas, Europe is forced to rely on the heavy-handed Russians for the bulk of supplies. As you read this, there are companies looking to break the Russian grip by applying the same unconventional gas technologies that have so successfully built gas supplies in the U.S. -- technologies that are only just now being applied in Europe. Early investors could reap huge profits.

In short, the real opportunities are not found by simply “investing in energy” but rather by taking the time to understand the structural differences within the energy complex and cherry picking the special situations that invariably exist in a sector this large.

David Galland is the managing director of Casey Research, LLC., a private research firm providing independent analysis and investment recommendations to individual and institutional investors in North America and over 100 other countries around the globe. To learn more about the monthly Casey Energy Opportunities advisory, including a special three-month, fully guaranteed trial subscription, click here now.