Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24
US House Prices Trend Forecast 2024 to 2026 - 11th Oct 24
US Housing Market Analysis - Immigration Drives House Prices Higher - 30th Sep 24
Stock Market October Correction - 30th Sep 24
The Folly of Tariffs and Trade Wars - 30th Sep 24
Gold: 5 principles to help you stay ahead of price turns - 30th Sep 24
The Everything Rally will Spark multi year Bull Market - 30th Sep 24
US FIXED MORTGAGES LIMITING SUPPLY - 23rd Sep 24
US Housing Market Free Equity - 23rd Sep 24
US Rate Cut FOMO In Stock Market Correction Window - 22nd Sep 24
US State Demographics - 22nd Sep 24
Gold and Silver Shine as the Fed Cuts Rates: What’s Next? - 22nd Sep 24
Stock Market Sentiment Speaks:Nothing Can Topple This Market - 22nd Sep 24
US Population Growth Rate - 17th Sep 24
Are Stocks Overheating? - 17th Sep 24
Sentiment Speaks: Silver Is At A Major Turning Point - 17th Sep 24
If The Stock Market Turn Quickly, How Bad Can Things Get? - 17th Sep 24
IMMIGRATION DRIVES HOUSE PRICES HIGHER - 12th Sep 24
Global Debt Bubble - 12th Sep 24
Gold’s Outlook CPI Data - 12th Sep 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

How to Profit from the Next Spike in Crude Oil Prices

Commodities / Oil Companies Mar 01, 2010 - 05:25 AM GMT

By: Money_Morning

Commodities

Best Financial Markets Analysis ArticleMartin Hutchinson writes: Earlier this week, British company Desire PLC (Pink Sheets: DSPMF) began drilling in an offshore block of the Falkland Islands. Immediately, Argentina President Cristina Fernandez de Kirchner let loose with a howl of rage, and the Summit of Latin American and Caribbean Unity issued a protest against the British company's drilling operations.


Argentina's claim to the Falklands had remained dormant since the war 28 years ago, yet the moment the drill bit touched seabed the years rolled away. This showed yet again that oil remains salient to international politics and the world economy in a way shared by no other commodity. So how should investors play it?

Nearly 18 months after the 2008 financial crisis, central banks worldwide still maintain the loose monetary policy they each enacted to counter the financial problems that resulted.

In the United States, interest rates remain at zero while inflation is already nudging above the 3.0% level. In Britain and Japan, interest rates are also close to zero, although in Japan's case the country has the excuse that inflation rates are negative. In the European Union (EU), the official short-term rate is 1.0%. China's interest rates are higher, but the Asian giant's M2 money supply rose 26% for the 12 months that ended in January. None of this monetary "stimulus" looks like it's being removed any time soon. So the bull market in commodities and energy is likely to continue.

Don't overlook the expansion in China and India's automobile markets. China's motor vehicle sales rose an astounding 46% last year to 13.6 million, leaving the United States - the world's second-largest market - in the dust. This year in China, motor-vehicle sales are expected to rise past 15 million vehicles - equivalent to the U.S. market in a good year.

India's motor vehicle sales have also been rising rapidly - topping 2.5 million in 2009 - and are expected to rise another 10% to 15% in 2010.  All those new cars need fuel, and that's why demand for oil has continued to advance.

Conventionally, we played rises in oil prices by buying stock in the major oil companies. The problem today is that the majors don't actually have all that much oil. Furthermore, much of the oil they produce is in difficult countries, and when prices go up, those countries tear up contracts to make sure they keep all but a thin sliver of the profits.

In country after country - including such attractive markets as Brazil - governments are continually renegotiating oil-production contracts to give themselves an ever-increasing share of the revenue.

A second possibility is to buy companies with access to high-cost reserves in stable regions. As the price of oil rises, the profits of those companies increase exponentially. The obvious example here is Suncor Energy Inc. (NYSE: SU).

Suncor is the largest producer of oil from the Alberta Tar Sands, with reserves of 1.7 trillion barrels of oil, as much as the entire Middle East. Suncor's price has dropped from its 52-week high near $40 a share. At roughly $29 a share, the company's stock is now trading at only 32 times trailing earnings, and even sports a dividend yield in excess of 1.0%. For a pure oil price play, Suncor is attractive at these levels.

A third possibility is to buy an oil-oriented exchange-traded fund (ETF). These have the disadvantage that the storage cost of oil is very considerable. So they can't just buy the physical commodity like the SPDR Gold ETF (NYSE: GLD). One ETF that's reasonably liquid is United States Oil Fund LP (NYSE: USO), which seeks to track the price of West Texas Intermediate Light, one of the main benchmark crudes. U.S. Oil has a market capitalization of $2.15 billion, so is reasonably liquid and has only moderate costs.

A final possibility is to buy shares in either one of the Canadian royalty trusts or one of the U.S. trusts whose primary function is to exploit known reserves of crude oil. These have the advantage of paying substantial dividends as the crude is extracted and sold. However, the tax regime of the Canadian royalty trusts will change in 2011. At present, it's not entirely clear what effect this have on the dividends and earnings, but it will certainly reduce them. That means the U.S. trusts are generally more attractive.

One U.S. trust that I currently like is BreitBurn Energy Partners LP (Nasdaq: BBEP). BreitBurn is an oil-and-gas producer from properties in Michigan's Antrim Shale, California, Wyoming, Florida, Indiana and Kentucky, so it's pretty broadly spread.

BreitBurn suffered cash-flow difficulties early last year, so was forced to abandon its annual dividend of $2.08 per share. In addition, it was involved with a lawsuit of staggering incomprehensibility with another company, Quicksilver Resources Inc. (NYSE: KWK). However, the lawsuit has now been settled. And, in even-better news, BreitBurn has re-instituted its dividend at a level of $1.50 per share annually. That's a yield of over 10% at the current share price, and those don't grow on trees - the company is also selling at around two thirds of net asset value (NAV). Its only disadvantage as an oil play is that it hedges a substantial portion of its output, which makes earnings statements incomprehensible and can lead to record losses when oil prices rise. But a prolonged oil price rise is still good - it enables it to hedge future production at higher prices, thereby locking in operating profits.

Unlike the increase in gold and silver prices, which is primarily inflation- and speculator-driven, the increase in oil prices rise is largely demand-driven, caused by the explosion in automobile purchases and other oil use in the emerging markets.

If you ask me, that looks to be a pretty solid basis for expecting it to continue long-term -even if interest rates rise.

Source : http://moneymorning.com/2010/03/01/oil-prices-14/

Money Morning/The Money Map Report

©2010 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in