Matt Insley

Don’t blink! The price of oil is secretly creeping higher.

In the face of U.S. supply gluts and recession talk, the price of crude has made a steady, month-long run above $93 a barrel.

Today I want to show you why this general rise in the price per barrel may not be a blip on the radar. Instead, it could be the beginning to crude’s next big move. Let’s take a look…

Looking at the oil price action for the past few months it’s clear that there are several key trends controlling the price of oil. Today I want to cover three of the four most important trends.

Off the bat, I’m not going to cover the U.S. economy in this article. We all know the impact a recovery or recession can have on the price of oil – but for now we’ll just assume the U.S. will keep plodding along like it has for the past 24 months.

That said, let’s get to the good stuff. There are three trends that I believe will control the price of oil in 2013. In fact, if what I’m seeing is correct we’re staring at the biggest oil opportunity of the year.

Arab Spring 3.0?

The first important oil trend that’s re-emerging, as it did in 2012, is the latest installment of the Arab Spring. This year, let’s call it Arab Spring 3.0.

The past two years were host to an early-year run-up in the price of oil. Both times, Arab uprisings led to higher than $100 oil here in the U.S. Take a look:

The reason is simple. If we run into another situation like Libya, where oil production simply shuts down, the world oil supply could quickly tighten up — especially if you’re talking about a big player like, say, Saudi Arabia

This year is already following the same bottoming pattern we saw in 2011 and 2012. With oil prices out of the gate strong in 2013 only a mere bit of turmoil in the Middle East could hurl prices into triple digits.

But “mere” may not be the word that describes the next round of turmoil. Two big players in the area are still on the chopping block.

First up is Iraq. Although 2012 and the beginning of 2013 have been a coming out party for Iraqi production, civil war between the Kurdish region to the north and Bagdad could put the oil flow on hold. We’ll see how this turns out – but our good friend, and oil maven, Byron King has gone on record saying this could be the year we see and official country form as “Kurdistan” in northern Iraq. That type of thing won’t happen quietly, of course.

The other big player that could soon find its tookus in the fire is Saudi Arabia. We’ve covered this Saudi-time bomb before, but to be clear there are several things that could impact the production flow from the world’s largest oil producer.

Simply put, with more oil production coming from the U.S., Saudi is losing its monopoly power by the day (for a refresher on this, click here.) Combined with that, the country is using much more of its own oil AND government budgets are rising. Add it all up and the government could face some serious hardships in the months to come. If Saudi can’t keep the ever-growing welfare system rolling, turmoil will ensue.

Plus, as an added wildcard, all bets are off with a changing of the guard when King Abdullah passes. Prolific oilman, T. Boone Pickens has gone on record saying this could be the next big reason for a spike in the price of oil.

Will turmoil strike Saudi in 2013? Your guess is as good as mine, but we both know which way oil will head if turmoil strikes. Stay tuned for Arab Spring 3.0 and a potential run to $100.

Forget The Never-Ending China Chatter…

I’m sure by now you’re sick of the China chatter. That is, everyone has their opinion on whether China can keep growing or if a slowdown is in the cards.

Well without getting into any opinions, the data out of China continues to tell the tale of growth.

For the oil side of the story, take a look at the chart below:

Just following the data from the chart, China (dark blue) has enjoyed seven straight years of oil consumption growth – and the trend remains strong through 2014.

Add to that the rest of the emerging world and you’ll start to see that demand from oil is set to soar (note the black line indicating total global oil consumption.) Or said another way, even with all of the China chatter and recession talk, global demand for oil is still headed higher.

This brings our discussion to another simple fact about the Chinese economy/government (I use the slash there because in the People’s Republic the economy and government are one and the same!)

The Chinese know the importance of secure resources – commodities like gold, iron, copper, coal, natural gas and oil are all strategically vital to the Chinese. One point to this story that you may not know is that Chinese citizens and manufacturers don’t actually see a real price for the price of oil. That is, government subsidies and price controls abound.

So when prices rise to $110 a barrel Chinese end users consume as much oil as if the price were $50 a barrel. That’s one of the key points to the whole China growth story, without “real” prices consumption will continue to grow. It’s simple, government-controlled economics!

Keep the people happy, keep the growth engine rolling. And with their stash of U.S. cash the Chinese can play this game for decades. Let alone 2013!

A Homegrown Oil Trend – And Why It Doesn’t Matter (Much)

The last important oil trend to spy for 2013 is the growth in U.S. production. As we know, the U.S. is enjoying an energy renaissance no one could have predicted.

“U.S. oil production exceeded 7 million barrels a day for the first time since March 1993” Bloomberg report, “as improved drilling techniques boosted exploration across the country.”

Oil and gas are flowing from America’s shale patch and creating a boom from Texas to Pennsylvania to North Dakota (and don’t look now, but California could be next!)

And when you put this boom in global perspective, you’ll realize the U.S. stands alone. Take a look:

Other than an increase in Iraqi production that helped push OPEC higher in 2012, the U.S. stands alone as the mega growth story for the foreseeable future. This is especially true this year.

At the risk of sounding like a broken record, the shale boom isn’t happening anywhere else.

So on one hand you have a godsend for the U.S. – where we’re producing more natural gas than ever and oil production is the highest it’s been since 1993 (and surely there are ways to play it.) But while that’s well and good for our investments and our economy it’s not the type of windfall oil production that could change the global oil game. That is, when you put America’s shale boom in perspective it’s not having any profound impact on global oil supply.

The proof is in the pricing. By now, if the U.S. growth in production had a major impact on production we’d have seen it in the price per barrel. On a global scale, that’s just not happening! Instead, while the U.S. is producing more oil each month, prices are steadily climbing.

That’s a telling statistic. And combined with the demand data out of China and the potential for an Arab Spring 3.0 I know where I’d stack my chips for oil.

Now’s the time for a bullish bet – so far, it looks like one heckuva oil opportunity.

Keep your boots muddy,

Matt Insley

Original article posted on Daily Resource Hunter 

Matt Insley

The Managing Editor of the Daily Resource Hunter, Matt is the Agora Financial in-house specialist on commodities and natural resources.  He holds a degree from the University of Maryland with a double major in Business and Environmental Economics.  Although always familiar with the financial markets, his main area of expertise stems from his background in the Agricultural and Natural Resources (AGNR) department.  Over the past years he's stayed well ahead of the curve with forward thinking ideas in both resource stocks and hard commodities. Insley's commentary has been featured by MarketWatch.

  • Irwin

    Be cautious when investing in Canadian oil companies that have a high percentage of their production in the oil sands or anywhere in the west for that matter. Lately, the Premier of Alberta has been whining about the low price of Western Canadian Select (WCS); she claims the price recently went as low as $45 per barrel, and that’s why gov’t won’t have a balanced budget this year. Sure, sure, whatever Premier.

    If a lot more pipeline capacity isn’t built in short order, invest in rail companies; an increasing amount of oil is finding it’s way out of Canada via rail.

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