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Energy Price Explosion Not a Short Term Event

by Roger Wiegand
Trader Tracks from www.miningstocks.com
June 26th, 2006

Arguments about oil and gas production and reserves will go on for years. The true story is crude oil production is on the wane and unless someone finds something new and extraordinary, prices are going higher, refinery production falls further behind, and the cater-walling about the energy business will only intensify. There is a global race to tie-up energy reserves, facilities and equipment as entire nations compete for oil and gas. So far the USA is either in last place or close to it as China leads the pack running over the globe buying existing production and reserves. Meanwhile our tree huggers and whiners have us as spectators peaking over the fence while 85,000 employees at the Department of Energy shuffle papers.

America has not built a new refinery in years and today imports 1/3rd of our annual refined unleaded gasoline requirements. Operating USA aged refineries (not one new one built in 25 years) are under severe strain to produce. BP is under investigation by authorities for oil spills, fires and accidents as they pressure very old equipment to run under extreme pressures and heat. One old facility blew-up not long ago killing several employees as this antiquated equipment cannot take the abuse. Kuwait offered to spend $5 billion on a new USA refinery and was promptly rebuffed by our government for EPA reasons, succumbing to tree huggers and the greens. In our view, they better get with it or we are all riding bikes and shivering in cold winters.

Crude oil on 6-19-06 is $69.15 for the August futures contract, currently the most active. This is on the low end of the trading range as Iran is making nice today which will probably change tomorrow. We are short 2.5 million barrels per year right now on annual consumption versus production. While this is not much in the context of total numbers, this is the new trend. We are going to have to get used to shortages and higher prices.

Are we going to run out of oil soon? No, we are not but the supply vise is starting to squeeze and the low hanging productive fruit and easy pickings are gone. Now explorers and drillers will have to scramble for smaller reserves costing a lot more to find and exploit. Prices are going up and as one analyst said this morning, “The days of $75 oil are gone and they not coming back.”

Natural gas prices dropped like a stone last winter when an unusual mild season created a substantial back-up in reserves. One observer said this morning the reserves are 41% over normal when in fact it’s more like 20%. What they are not watching is the terribly hot summer coming quickly which will cause natural gas power plants to burn up that reserve in a flash. Traders are very smart about price and value consequently they have already priced next winter’s supply at 11 when today it just moved near 7. A report this morning regarding Canada’s power plant usage of natural gas was issued as a warning. They expect their burn rate to be 10% above last year which is considerable. Since Canada exports gas to the USA in large amounts, that 10% is that much less available for export.

by Roger Wiegand
Trader Tracks from www.miningstocks.com

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