Oil-price lull a buying opportunity for investors. not a clause for alarm

Crude oil prices slumped Monday as civil unrest eased in Egypt, and bulging U.S. inventories hovered at their highest level in more than six years.

Oil for March delivery dropped $1.55 US a barrel to close at $87.48 in New York. That's more than $5 below the recent peak of $92.84 for the benchmark U.S. grade, its loftiest level in 28 months.

The price of Brent crude -- the main North Sea grade, and the key measure of global crude prices -- also fell Monday, dropping 54 cents to $99.29 a barrel in London. That's more than $4 below the recent high of $103.37, a level last seen in September 2008.

The nearly $12-per-barrel spread between West Texas Intermediate (WTI) -- the main U.S. grade -- and Brent is a record high. It reflects America's economic decline and Asia's ascendance, as well as the threat of supply disruptions in the Suez Canal, the key link between the Red Sea, the Mediterranean Sea and the oil markets of Europe.

"This big differential between Brent and WTI is something very new in the markets," Adam Sieminski, chief economist at Deutsche Bank, told Bloomberg TV. "There's too much oil in Cushing (the main U.S. storage hub in Oklahoma), and it's holding prices down there."

Oil supplies at Cushing rose 1.8 per cent to 38.3 million barrels for the week ended Jan. 28, the U.S. Energy Department reported last week. That marks the highest level since April 2004.

"There's a lot of oil at Cushing, which is going to keep WTI depressed, while the unrest in the Middle East and North Africa has a bigger impact on Brent," Phil Flynn, research chief at PFGBest in Chicago, told Bloomberg.

With U.S. fuel demand softening, gasoline supplies south of the border are also on the upswing. Although the peak summer driving season is still nearly four months off, supplies currently sit at the highest level since early 1993.

"There's no fundamental reason for the market here to show strength," Gene McGillian, an analyst at Stamford, Conn.-based Tradition Energy, told Bloomberg. "Gasoline supplies are at an 18-year high, there's a large amount of crude oil at Cushing and fuel demand is tepid."

All true. But it's also true that global demand for crude continues to rise as recovery takes hold, and that's bound to limit any price declines to a few dollars per barrel.

Most analysts expect crude prices to remain in a fairly tight range for 2011, swinging between roughly $80 and $100 per barrel.

There's also no guarantee that current talks between the beleaguered Egyptian government and its political foes will end the country's political crisis, or ease tensions elsewhere in the Middle East. Rest assured, speculators will pounce on any sign of renewed conflict to drive the "risk premium" back up.

On the other hand, it's also clear that the 190-kilometre-long Suez Canal and the adjacent Sumed oil pipeline are not as critical to global oil markets as they once were, says Patricia Mohr, Scotiabank's respected commodity guru.

"The Suez Canal is less of a strategic bottleneck to European or U.S. oil supplies than in the past. The advent of large supertankers offering economies of scale has substantially reduced the cost of shipping (crude) via the Cape of Good Hope" at the southern tip of Africa, she notes in a recent research report.

Although the Suez Canal has been shut down twice in its 141-year history -- for 17 months in the mid-1950s, and for nearly eight years following the 1967 Six-Day War between Egypt, Jordan, Syria and Israel -- a repeat of that scenario doesn't seem likely, at least not immediately.

Egyptian, U.S. and NATO forces have been dispatched to maintain security and keep the canal operating. And even in the unlikely event that canal traffic is brought to a halt, the impact on global supplies would be far more muted than in the past.

"During the two previous crises, flows through the Suez Canal accounted for more than 60 per cent of Europe's total oil supplies, but are now only around 15 per cent," says Mohr.

"This reflects the development of North Sea oil supplies (recently declining in the U.K.) and very large crude tankers. Nevertheless, the closure of both the Suez Canal and the Sumed Pipeline would have a significant impact on short-term oil prices. Tanker, bulk-carrier and containership rates would also shoot up due to increased demand."

The bottom line? Despite the most recent bout of weakness, Mohr expects oil prices to move "irregularly higher" for the remainder of 2011. The key reason for her bullishness: robust demand in China (where oil consumption rose 12 per cent in 2010) and from the rest of Asia's emerging economies.

Mohr's upbeat outlook echoes that of the International Energy Agency, which recently hiked its global oil demand forecast to 89.1 million barrels per day for 2011, up from 87.7 million barrels a day last year.

Unless the global demand picture changes, therefore, any weakness in oil prices should be viewed as a buying opportunity for investors in energy stocks.

glamphier@edmontonjournal.com

Read more: http://www.edmontonjournal.com/business/price+lull+buying+opportunity+investors+cause+alarm/4241144/story.html#ixzz1DkpwQ8Mc

Community Talk

Re: Oil-price lull a buying opportunity for invest ...

Good article Lloyd, I can't add anything . I agree with Aarons long term approach to investing in oil companies.Not too many good ones out there but they do exist at great prices ,mainly because of their obscurity. For not commonly known production look at DELTA OIL&GAS.For large potential reserves look at DAYBREAK OIL and for both look at DEJOUR ENTERPRISES.All companies under 50 cents and will rise expotentially whether the middle east becomes as safe as Disneyland or continues to be volitile,imo

Re: Oil-price lull a buying opportunity for invest ...

I agree with the sentiment of this article. My approach with oil and my oil investments is mainly long-term. I'm looking for companies with large reserves in politically stable regions and then tucking them away for a few years. Inflation is inevitable and worldwide oil demand is going to increase for the next 10 years.