Insightful analysis and commentary for the US and global equity investor
Contributors: Douglas McIntyre Jon C. Ogg

Previous Posts

Thursday, August 31, 2006

The Bullish Case for Oil & It's Implications for Energy, Natural Gas & Utility Companies

By Yaser Anwar, CSC of Equity Investment Ideas

Oil has come down quite a bit from its summer highs due to the ease in hurricane fears & partly due to rise in inventories. However, these short-term trends should not sway investors from the bigger picture.

The world now consumes 28.6 billion barrels of oil in a year and that number continues to grow. According to estimates, there are just over 1 trillion barrels of oil left in the world. That's only enough to last another 35 years, as long as we keep burning it at today's rate.

With improvements in standards of living in emerging market and third world countries, we will witness increase in oil consumption at homes, for our vehicles etc.

The International Energy Agency predicts that global energy needs will surge 30-40% by 2020 & prices will skyrocket if capacity is not significantly increased. We need to build more refineries, find more oil & invest in alternate energy sources.

At the same time, we're witnessing an increase in rolling blackouts, surging heating and air conditioning bills and continuous unrest in Middle East, especially Iran & continuous attacks on oil workers in Nigeria. Don't count hurricanes out even though we've had quite a mild season. So you see, an increase in oil prices is inevitable.

Today is deadline United Nations deadline for Iran, the number four oil producer, to halt enrichment of uranium, which can be used in the production of nuclear weapons. If they don't comply, the UN could impose economic and diplomatic sanctions.
Investors remain concerned that Iran could block oil exports if sanctions are imposed. U.N. and European officials said Wednesday that Iran has persisted in enrichment until at least Tuesday.

As global competition for energy intensifies and tightening supplies leave no room in the system for unforeseen disruptions (such as the recent BP catastrophies), well run oil companies (such as Exxon, COP, Valero & Haliburton to name a few) will continue to do well.

Utility companies such as Dynergy will surge from helping America expand and modernize its aging electric grid, Devon for its exploration expertise, Valero will benefit due to lack of refinery building, not to mention the natural gas companies such as Nabors & EOG who are set to benefit from higher natural gas prices. Jacobs Engineering will see a boost due to its infrastructure & engineering expertise.

``Discovery is in long-term decline, and spending more money won't increase it,'' says Chris Skrebowski, editor of the London- based Petroleum Review, an industry journal.

In its 2005 Energy Outlook, Exxon Mobil says the combined production of non-OPEC countries will peak sometime from 2010 to 2020. OPEC will be able to fill the gap, the report says. OPEC produced about 30 million barrels a day in 2005; by 2030, OPEC would have to churn out 47 million barrels a day. That's almost 57% more than it did last year to satisfy the world's needs

Today, we consume 85 million barrels of oil a day, according to the U.S. Energy Information Administration (EIA). By 2030, the world will devour 118 million barrels a day, as China and India emerge as economic superpowers.

Even with high prices, it will be very difficult for world production of oil to exceed 90 million barrels per day within the next 10 years. That's millions of barrels a day short of what the EIA says the world will need in 2015.

IMO it doesn't matter what UN does with Iran today because long term oil is going a lot higher.

Disclosure: I don't have positions in any of the stocks mentioned above.

Powered by Blogger