Crude Oil and Natural Gas Outlook

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Special Report
Oil & Gas Outlook

September 20, 2007

You'd have to go back 63 years to see a world as starved for commodities as it is today.

China, India, Brazil, Mexico - even the U.S. and Japan - are outstripping reserves as fast as they can be produced. And the global bonanza is getting more intense by the day.

In just over two years alone, copper has shot up 159%… Aluminum is up over 75%… Zinc has popped 302%… Nickel has jumped 206%… Oil has climbed 111%.

Even lead has spiked 211% in the past 12 months, as China devours every available ounce to feed its ravenous factories.

If all these commodities are experiencing supply / demand problems, what of the outlook for crude oil and natural gas.

Peak oil is a turning point for Mankind. The economic prosperity of the 20th Century was driven by cheap, oil-based energy. Everyone had the equivalent of several unpaid and unfed slaves to do his work for him, but now these slaves are getting old and won't work much longer. We have an urgent need to find how to live without them. It is stressed that we are not facing a re-run of the Oil Shocks of the 1970s. They were like the tremors before an earthquake, although serious enough, tipping the World into recession. Now, we face the earthquake itself. This shock is very different. It is driven by resource constraints, not politics - although of course politics do enter into it. It is not a temporary interruption but the onset of a permanent new condition. The warning signals have been flying for a long time. They have been plain to see, but the world turned a blind eye, and failed to read the message.
Our lack of preparedness is itself amazing, given the importance of oil to our lives. The warnings were rejected and discredited as if they were words of soothsayers and prophets. But the warning was not prophecy - it simply recognised two undeniable facts:

  • You have to find oil before you can produce it
  • Production has to mirror discovery after a time lag

Discovery reached a peak in the 1960s - despite all the technology we hear so much about, and a worldwide search for the best prospects. It should surprise no one that the corresponding peak of production is now upon us. This simple reasoning has, however, been rejected by flat-earth economists and others with a blind faith in technology and market forces. Worse still, governments have listened to bad advice. There are many vested interests bent on confusion and denial.
It is worth briefly recalling what occurred in Europe in late 2000, as a foretaste of what happens when oil supply becomes short and expensive. The French fishermen blockaded the Channel Ports because their fuel costs had doubled, even though their fuel was already tax-free. The dispute spread rapidly to England and other countries. Schools were closed. Hospitals had red alerts because staff and patients could not reach them. Supermarkets started rationing bread. Trade and industry was seriously interrupted: the cost was huge. People lost confidence in their governments, whose popular support fell sharply. If an interruption in supply lasting only a few days could cause such havoc, it surely demonstrates how utterly dependent on oil we have become.

The emerging economic giants of Asia, combined with the realization of "peak oil" predictions worldwide, are beginning to create chronic energy shortages which will impact the world economy in ways never before seen. As prices remain stubbornly high, there is now a growing recognition of the critical need for new sources of domestic oil and natural gas production.

Western Capital, Inc., is actively pursuing a strategy of developing overlooked and bypassed domestic sources of oil and natural gas, predominantly in areas of already proven production. This is proving to be both profitable for joint venture partners in Western's projects, and good for America, as it contributes to reducing our reliance on foreign oil. Visit the contact page on Western's web site, www.oilandgasjointventures.com for further information on investment opportunities, and how to participate.




August 13, 2007

In the year 1900, America used no natural gas, very little oil, and a small amount of coal. Oil was used in the production of Vaseline, and gas derived from coal was used to light the cities and towns. Great Britain was the leading producer of coal, which became key to the Industrial Revolution. During this time period, the rest of the world used manual labor, animals, wind, wood and dung, as their energy sources. Over the ensuing 100 years, dramatic changes were about to unfold. Fossil fuel became king, and every modern miracle we take for granted today, became possible because of the growth in fossil fuel usage. During the twentieth Century, oil use grew over one hundred fold, and natural gas use which began some thirty to forty years later than oil, grew at an even faster rate.

The availability of electricity spread around an increasingly prosperous world, and the twentieth century could be dubbed the hydrocarbon era. Technology, food, health care, globalization, global travel, clean air and water, are all byproducts of the hydrocarbon era. Indeed, atomic energy, was the only new commercial energy source created in the twentieth century.

So now that we have created a world almost totally dependent on fossil fuels for its energy source, what lies in store for us in the near future. Let’s examine some of the salient facts surrounding energy usage, which may help determine the logical path of progression from this point.

In 1980, global energy usage totaled 145 million barrels of oil equivalent per day. By 2004, energy use grew by 54% or 79 million barrels of oil equivalent per day. The IEA states that by the year 2030, energy use is estimated to grow to 342 million barrels of oil equivalent per day. This represents a growth factor equal to 81% of the entire global energy use in 1980. In order to meet this demand, the IEA envisions all energy sources to grow.                                                       

Million Barrels of Oil Equivalent / Day

  1980 2004  2015   2030  Growth Factor (2004 to 2030)
Coal 35.7 55.5  73.3 88.8   1.6 x
Oil 62.1  78.8 95.0 111.50   1.4 x
Natural Gas 24.7  46.0 60.3 77.4 1.7 x
Nuclear 3.7 14.3  16.2 17.2  
Hydro 3.0 4.8  6.3 8.2  
Biomass 16.0  24.2   30.2    38.8  
TOTAL  145.2 224.6 281.3 341.9  

Global oil usage is now highly interdependent, as evidenced by the following chart.

Thousand Barrels / Day

Region Total Usage Local Production  Imports Exports 

Net Exports / <Imports>

USA 20,655 6,830  13,526 1,129   <12,396>
Europe 14,716 5,894 13,261 2,149   <11,112>  
Japan 5,360   5,225   <5,225>
China 8,157 3,267 4,890   <4,896>  
Other Asia 10,440 4,375 9,032 2,967 <6,065>
FSU 5,634 11,685 1,025 7,076 6,051
Canada 2,241                  3,047 1,395 2,201 806
Mexico 1,978 3,759 284 2,065 1,781
S. America 4,776 6,964 1,340 3,528 2,188
Middle East 5,739 25,119 441 19,821  19,386
Africa 2,763 9,835 356 7,428 7,072
TOTAL  82,459 80,775 50,775 48,364 <2,410>

Until 30 years ago, the USA was the world’s largest energy producer, #1 in oil, natural gas and coal. Now, the USA is the world’s largest energy importer, and America’s top seven energy consuming states, California, New York, Florida, Texas, Illinois, Ohio and Pennsylvania, import 29 Quadrillion BTU’s of energy. That is to say, they produce 13.57 Quadrillion BTU’s, but consume between them, 41.9 Quadrillion BTU’s.

What’s a Quadrillion BTU’s ?
1 Quadrillion BTU’s = 185 billion tons of coal, or 790 million barrels of oil. All the nuclear energy produced in 2006, equaled 8.2 Quadrillion BTU’s . The other 33 states between them, produce 6.29 Quadrillion BTU’s, and consume 48.1 Quadrillion BTU’s, and therefore import 41.81 Quadrillion BTU’s. That’s a total import for all states of 70.71 Quadrillion BTU’s.

One has to ask the question, how can we sustain this appetite for energy, and in particular fossil fuel. Let’s take a look around the world. Saudi Arabia’s giant Ghawar Field is in decline, Kuwait’s giant Burgan Field is in decline, Iran’s six giant oil fields are in decline, Iraq’s two super giant fields are in decline, the oil fields of Syria, Yemen and Oman are in decline. In the FSU, most of their giant fields are in steep decline. In Canada, conventional oil production is in decline. Venezuela, Argentina and Colombia’s oil fields are in decline. Mexico’s Cantarell Field (60% of Mexico’s production), is in steep decline. The North Sea production, is in decline, as is onshore African production. US domestic production of course, peaked in 1970.

Yes, the world still has ample non conventional oil and gas, but the quality is poor, cost to extract high, and the energy input to convert into usable energy, extremely intensive. World crude oil supply, is flattening out. Growth in supply has been coming from natural gas liquids, and refinery processing gains. For example, in 1980 global petroleum consumption was 63,114,000 barrels/day. Crude oil production was 59,558,000 barrels/day, and LNG and refinery processing gains amounted to 3,556,000 barrels/day, or 6% of total production. In 2005 however, petroleum consumption was 84,035,000 barrels/day. Of that, crude oil production was 73,653,000 barrels/day, and LNG and refinery processing gains amounted to 10,382,000 barrels/day, or 12% of total production.

Here’s another stark reality, worldwide onshore crude oil supply, peaked decades ago, actually in 1970, at 55 million barrels/day, and is currently around 40 million barrels/day. Growth in supply has been from the offshore sector, which is almost 36 million barrels/day. Onshore natural gas liquids and non conventional oil, now account for about 10 million barrels/day.

US natural gas production history, indicates a 28% decline rate in 2003. Many key natural gas basins are now in decline, including the USA, Canada, Western Siberia, The UK, and Indonesia. Gas wells deplete much more rapidly than oil wells. Of the 1,770 or so drilling rigs currently operating in the continental US, approximately 85% of them are drilling gas wells, and yet domestic natural gas production is declining. Around 1981, there were over 4,500 drilling rigs operating in the US.


Some Conclusions

  1. Oil prices are still unbelievably inexpensive when compared to other commodities. At $65 per barrel, for example, oil is 10 cents per cup. That’s less than a Yuan, and in China you can’t buy much of anything for under 1 Yuan. Gasoline at $3.20 per gallon, is 20 cents per cup.
  2. Demand keeps accelerating, and new finds cannot keep up with increasing demand, and declining older fields. Prices will be forced higher, and because oil is still relatively inexpensive, the increased costs will be absorbed by the economy.
  3. The search for potential new production, has shifted offshore around the world. Offshore West Africa, Outer Continental Shelf of the Gulf of Mexico etc. The current fleet of 600 or so offshore drilling rigs, is 25 years old on average. About the age most equipment is scrapped. 80% of the drilling fleet is between 24 and 27 years old.
  4. The declines in North Sea oil production, and Mexico’s Cantarell Field alone, will reduce worldwide production by 800,000 to 1,000,000 barrels per day by the end of 2007, effectively neutralizing new sources of production coming onstream.
  5. Companies unwilling or unable to pass on the cost of higher energy, will see their margins squeezed. Highly inefficient energy products will become obsolete.
  6. Energy companies with very mature assets will shrink.
  7. Energy, the world’s largest industrial activity will increase.
  8. Small exploration and production companies, with active drilling programs, will be good places to invest.
  9. Engineering and construction companies who rebuild rusty infrastructure, will do well. In all these areas, refineries, pipelines, well heads, storage tanks, casing, etc., we see the evidence of age corrosion and decay.
  10. Oil service companies, who retain their most experienced people, and rebuild an old asset base will do well.
  11. Companies who create sustained new forms of efficient energy sources and products, will do well.


CRUDE OIL & NATURAL GAS OUTLOOK
Continued Upward Pressure On Oil Prices

 

January 05, 2007

Crude oil futures for February delivery on the NYMEX, closed yesterday at $55.59 per barrel. The fall was attributed to milder than usual weather, particularly in the northeast, and a third week of rising distillate and gasoline inventories. Crude oil supplies actually fell by 1.3 million barrels to stand at 319.7 million barrels for the week ended Dec.29, 2006. The DOE reported that inventories have fallen by a total of 21.4 million barrels over the last six weeks.

But rather than become mesmerized by the weekly trading figures on crude oil contracts, on the NYMEX, one has to look past the short term data, and consider the forces in play affecting the long term trends for energy prices. This is the best way to formulate a profitable investment strategy, in the oil and gas arena.

When we look at oil production globally, it becomes evident that a sustainable peak in crude oil production, may have already been reached, setting the stage for declining output that could lag demand. Some analysts see inescapable similarities between the steady depletion of the world's most coveted energy source, and foraging for berries. The goodies, the big ones have already been picked. This is true globally of crude oil reserves. The big ones were discovered first, and subsequent finds have been smaller, and smaller.

Each day the world consumes over 82 million barrels of crude oil, virtually the same amount as is produced. The US Energy Information Agency, projects consumption to rise to 103 million barrels per day by 2015, and 119 million barrels per day, by 2025.That means global production must rise by 45 per cent, or about five times the maximum annual output available from Alberta's oil sands, and that's just to keep pace with ordinary economic growth, and not accounting for depletion of existing fields. So here's the dilemma. Where's all that oil going to come from. It seems certain that we are looking at a future of increasing demand, and decreasing supply. In that environment, upward pressure on the price of the commodity will continue. So where does the investor put his money now. In our opinion, an investment in oil and gas should be both profitable and timely at this juncture, and should occupy a position in most investment portfolios. But wait, there's more. In addition to being a timely investment, there are major tax advantages associated with working interest in oil and gas projects. Talk to one of the seasoned professionals at Western Capital, Inc., to further explore opportunities in this area. It may very well be the most prudent call you'll ever make. 

January 26, 2005

Two of the world’s most populous countries, China and India, continue their insatiable thirst for energy. The continued rapid development of China’s economy, has led to an astonishing consumption of raw materials and energy sources. China’s Ministry of Commerce reported that last year, the country relied on imports for 35% of its crude oil, 36.2% of its iron ore, 47.55% of its aluminum oxide, and 68.24% of its natural rubber. China has now become the world’s second biggest consumer of crude oil, behind the US, importing more than 100 million tones last year. China’s urgent desire to import oil is startling. After Hu Jintao took over as president, strategy has been transformed from a great nation diplomacy, to an oil nation diplomacy, and China’s oil grab is now reaching across the globe.

In January last year Hu visited four nations, three of which, Egypt, Gabon, and Algeria are all oil exporters. The purpose of the visits was to sign energy agreements. Last November he signed a US$ 19.7 billion investment agreement with Argentina, US$ 5 billion of which is earmarked for exploration. In December 2004, President Hugo Chavez of Venezuela visited Beijing, and signed an agreement allowing China to drill for oil, set up oil refineries, and produce natural gas. China exported large amounts of arms to the Sudan, in exchange for the right to import oil from that country. China has also opposed submitting the issue of Iran’s nuclear program to the UN Security Council for discussion, in exchange for the right to drill for oil in Iran. In December 2003, representatives of China’s oil company went to Calgary, the energy capital of Canada, to discuss a joint investment plan aimed at undermining the US oil position. Canada is the biggest provider of oil to the US in the Americas. China’s oil company is even going to buy the Asian assets of California based Unocal Corp. China is also actively dealing with Russia, and is building a pipeline from Kazakhstan.

More than 70% of India’s oil requirements are met by imports. The cost of oil constitutes more than one fourth of the country’s imports. Although oil prices have shot up over 40% this last year, India’s economy seems relatively unaffected, in comparison to the oil shocks of the 70’s, and economic growth this year should be around 6.5%. With the Indian economy straddling a higher growth path, the country’s thirst for oil can only be higher. Add to this the fact that countries such as India and China require more than twice the amount of energy to generate the same amount of GDP as member countries of the Organization for Economic Cooperation and Development. The level of technological efficiency in oil intensive economies is not very high. There are also indications that there may be a pick up in manufacturing activity in India on a sustainable basis, further fueling energy demand. So what’s the message? Oil and gas are the prime asset classes to own going forward, and everyone should allocate a portion of their investment dollars in this direction. Looking forward, this is a great time to be positioned in oil and gas.

John R. Welsh
713-471-9727

August 5, 2004

On Tuesday U.S. light crude for September delivery, rose to an all time high of $44.15 per barrel, on the NY Mercantile Exchange. Most analysts believe oil could reach $50 per barrel by year end, as the world’s growing thirst for crude stretches supplies thin and uncertainty abounds in petroleum producing nations.

Before we expand on the out look for energy, let’s take a look at the competition in the way of alternative investments. Let’s start by comparing four other places to put your money, stocks, bonds, cash, and objects. We are going to consider total returns, and the effect of taxes and inflation.

Cash: This is the money we keep in money market mutual funds, Treasury bills, and other highly liquid forms of investment. Right now, money market mutual funds yield about 1%. Taxing this yield adds insult to injury. Assuming a 25% tax bracket, the 1% yield now becomes 0.75%. The official inflation rate for the 12 month period ending June 30, was 3.3%. But the trailing three month rate was 4.8%. Let’s pick a number in between, say 3.9% as our inflation estimate for 2004. The return on cash instruments is now a negative 3.15%, meaning we are losing purchasing power. So cash is trash.

Bonds: So let’s buy bonds and take the risk that interest rates will rise. If they do, our return on bonds may well net to the return on cash, as it did for most investors over the last 12 months. In the 12 months ending July 23, according to Morningstar, the average total return on PIMCO Total Return, Vanguard GNMA and Vanguard Total Bond Market funds, the three largest fixed income taxable bond funds, was 2.98%. But not to worry, we can get a 4% yield on an intermediate term treasury right? After taxes our yield is down to 3%, which means our after tax, after inflation yield is a loss of 0.9%. If interest rates rise it gets even worse.

Stocks: According to Ibbotson Associates, large capitalization stocks appreciated on average 5.9% per year from 1926 through 2003. Add in the current dividend yield on the average stock of 1.5%, and we’ve got a return of 7.4%. Taxable at a bargain 15%, it nets us 6.3% before inflation, and 2.4% after inflation. What a deal. Better than losing money or breaking even, until we consider the risks. Stocks don’t rise that much every year like clockwork. Sometimes they go down, SUBSTANTIALLY.

Objects: Stuff! We can hoard stuff, in the hope that we keep up with price inflation. That way we can at least break even.

OIL & GAS JOINT VENTURE INVESTMENTS: Here the trend is our friend. Our whole economy is dependent upon a continued uninterrupted flow of oil and natural gas. Virtually nothing works without it. Pricing trends are looking strong years into the future. If prices go up, our income stream from the investment goes up in tandem, insulating us from the ravages of inflation. Here returns on investment can be potentially spectacular, in the hundreds of percent. And the icing on the cake, we can enjoy tremendous tax advantages while getting those high returns (see heading under tax advantages). The International Energy Agency, based in Paris, is recently quoted as saying that oil companies will have to invest a whopping 5.3 trillion dollars over the next 30 years to supply the world’s increasing demand for oil and natural gas. Does anyone think they are going to spend this huge sum because it’s a bad investment? Oil and gas is most assuredly the place to put a good portion of your investment dollars over the next few years.

July 7, 2004

While it is difficult to forecast what will happen to oil prices in the very near term, due to the threat of possible oil disruptions, and security issues in the Middle East, the intermediate term picture remains one of increasing demand worldwide, and the possibility of supply demand imbalances exerting upward pressure on prices.

OPEC recently announced production increases by key OPEC members amounting to about 1 million barrels per day in the third quarter. This is about even with the second quarter average of 28.5 million barrels per day. As a result the trajectory of oil prices has been one of down slightly, just recently. What the news media failed to mention however, was that the OPEC-10 production quotas effectively incorporated production that had been running above quota, and therefore did not add any additional oil production beyond that already announced. Prior to the OPEC meeting on June 3, Saudi Arabia and the United Arab Emirates announced their intention to increase OPEC production by an estimated 800,000 barrels per day above May levels. At this meeting OPEC10 (excluding Iraq), raised its crude production from 23.5 million barrels per day to 25.5 million barrels per day effective July 1, and then to 26 million barrels per day effective August. Only problem is folks, OPEC 10 had already been producing an estimated 26.2 million barrels per day in May. So the psychological effect has been to reduce crude prices near term (after all it is an election year), but there’s no real meat here. In actuality currently low world oil surplus capacity levels, provide an extremely limited cushion in the event of unexpected disruptions in supply. Petroleum inventories in the countries of the Organization for Economic Cooperation and Development (OECD), particularly the United States remain at relatively low levels. U.S. petroleum demand is expected to increase by 330,000 barrels per day or 1.7% in the current year, and by an additional 420,000 barrels per day or 2% in 2005.

Available data also suggests a strong recovery in domestic airline activity. Annual growth rates for both utilization (passenger miles and cargo miles flown) and capacity (passenger miles and cargo miles available in scheduled flights) are projected to average about 5 per cent per year between 2003 and 2005, contributing to a 3% average annual growth rate in jet fuel demand by commercial airlines. World petroleum demand is set to look as follows : 2002 – 78.2 million barrels/day , 2003 – 79.5 million barrels/day , 2004 – 81.6 million barrels/day , 2005 – 83.8 million barrels/day.

NATURAL GAS OUTLOOK

Based on reports from underground storage facilities through May 28, net injections of natural gas into storage during May totaled 374 bcf. The previous 5 year May average was 346 bcf. This left natural gas inventory levels at the end of May about 1% below the five year average. Natural gas inventory levels should remain near the norm, as long as weather conditions remain normal. In 2004 natural gas demand is expected to increase by 1.4 %, due to increased economic growth, a lack of fuel switching options, and a continued rise in electricity demand. Domestic natural gas production is estimated to have increased by only 0.6 % in 2003. Growth of 0.9 % in 2004 is expected as new natural gas well completions, estimated at 20,000 in 2003; remain high at over 24,000 wells per year for the next 2 years. However because of high decline rates from existing wells, drilling rates are not expected to yield more than modest net gains in U.S. production. Therefore as demand continues to grow, continued supply tightness will keep upward pressure on pricing. Even though inventories appear normal, strong demand for natural gas, coupled with high petroleum prices, has lifted the ceiling for natural gas prices quite considerably.

So what does all this mean to the average investor? It means that the writing is on the wall. If you are not invested in oil and gas, you definitely risk missing a major opportunity to profit. In my 23 years in the business worldwide, in my opinion, there has never been a better opportunity to profit from the trend in pricing.

Please click the images below to view crude oil and natural gas futures charts:

June 2008 - NYMEX Natural Gas Futures

NYMEX Gas Futures

June 2008 - NYMEX Crude Oil Futures

NYMEX Crude Oil Futures


Natural Gas Futures - Jan. 2007

natural gas futures

Crude Oil Futures - Jan. 2007

crude oil futures

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