After surging into the end of the year, oil and oil stocks have pulled back. Why?
• It’s certainly not global economic fundamentals, which are improving, with car sales rising and unemployment dropping.
• It’s not oil inventories — U.S. oil stockpiles dropped 20 million barrels in a recent one-month period.
• It’s not expectations of global oil demand — which keep getting yanked higher for 2011.
The reason crude crumbled earlier this week was simple profit taking. We could see some more profit taking in the short-term. But all the things I’m watching tell me we could be headed for much higher crude oil prices — at least $105 a barrel in the first half of 2011, and potentially $130 or higher later in the year.
That means this pullback is a golden opportunity in sweet, black crude.
Why do I think crude oil is headed higher? Let me show you three charts. As a consumer, they scare the heck out of me. As an investor, they tell me there’s money to be made in the oil market.
Chart #1: Mexico’s Oil Production Is Lower … Lower …
Mexico’s crude oil exports dropped again in 2010, continuing a 4-year, 27% drop in that country’s oil exports, which peaked in 2006. Leading the charge lower is a cliff-steep drop in production in Mexico’s super-giant oil field, Cantarell.
This is bad news for the United States because Mexico is our #2 supplier of imported oil.
The U.S. Energy Information Administration (EIA) expects that Mexico’s oil production will drop again in 2011. At the current rate of decline, the EIA expects Mexico will become an oil importer in 2015. But other independent experts say Mexico’s oil crash is coming a lot sooner — by 2014, or maybe even 2013.
Since the oil market discounts the future, oil traders will start pushing up oil prices far in advance of Mexican exports hitting bottom.
Chart #2: Drilling Is Drying Up in the U.S. Gulf of Mexico
The Obama administration lifted its offshore drilling ban months ago, and the U.S. government is making a lot of noise over the fact that the Bureau of Ocean Energy Management, Regulation and Enforcement (BOEMRE) is going to expedite drilling approvals for 13 companies.
But the damage has been done. Many shelved projects won’t come online for a long time. Experts say the wait could continue until the second half of this year, and maybe into 2012.
It’s not only deepwater drilling that is impacted. Even shallow-water drilling rigs are cooling their heels. The combined effect brings us to the next chart:
On the far right of the chart, you can see that drill rig counts were dropping anyway. They started to climb last year, only to swoon after BP’s Deepwater Horizon explosion in the Gulf of Mexico.
It’s a trend that continues. In the last week of December, the U.S. offshore rig count dropped 4% from the previous week — but it was down a whopping 42.86% year over year. In the latest example, contract driller Noble Corp. said Monday that Marathon Oil Co. is cancelling a four-year, $752 million contract to lease an ultra-deep-water rig in the Gulf of Mexico.
If rigs aren’t drilling, those offshore fields won’t be producing. The EIA says that U.S. oil production from the Gulf of Mexico should drop by 170,000 barrels a day in 2011.
To be sure, the BP Deepwater horizon oil spill was one of the greatest environmental disasters this country has ever faced, spewing 4.9 million barrels of oil into the Gulf of Mexico. Personally, I’d be happy to see BP executives thrown in prison. But we are sacrificing our future energy security if we don’t tap the oil in the Gulf, and naturally, less supply means higher prices.
Speaking of higher prices …
Chart #3: U.S. Gasoline Prices Head for $4 a Gallon (Again)
In this next chart from dshort.com, the two-year trend in U.S. gasoline prices becomes painfully clear:
This is an ugly trend that affects nearly all Americans. I think we’re headed back to $4 a gallon gasoline, and maybe higher than that. For a nation designed around the automobile, that is downright dangerous.
But there’s one nation that is catching up to us in our car-crazy gasoline use. That country is China, which now buys more new cars per year than the United States.
China’ year-on-year oil demand rose 6.7% in the first 11 months of 2010, including a 12% rise in October and 15% in November. We don’t have the data on December yet, but as you can see, not only is China using more oil, its demand is accelerating!
And the Chinese don’t have to worry about the chart above because gasoline prices are strictly regulated by the Chinese government.
Do I mean the Chinese government will subsidize gasoline prices to keep its citizens happy? Yes, that’s exactly what I mean. And China has the cash do it — after all, we send them more and more of our money every day.
