My view on energy is probably less clear than it was two years ago, when I was working in oil trading, but for what it's worth, here's what I think now.
I think we'll be in quite a wide, but higher-than-expected, range for oil (OIL, USO, BPT) for the foreseeable future. For Brent (the true global benchmark), I believe $100-$150/bbl is fair game despite the futures curve being in backwardation. This view holds unless the eurozone breaks up and there is a huge temporary risk off, or another tail risk hits and there is huge risk off. But even so, I don't think that scenario would be like 2008 when there was more leverage in the system. Even then the sell off to ~$33/bbl was only in the very front of the curve.
Energy is different from other commodities because it is consumed -- once it's gone, it's gone! I don't quite see the substitution of oil for gas for transportation in a big way, at least in the near term. Even if the technology is slowly getting there, the infrastructure available doesn't move the needle. Much of the emerging world is still subsidizing oil consumption, and although miles per gallon is improving in autos, I'm not sure it's happening at a fast enough rate as Western consumers hold on to their cars for longer as they are still generally squeezed.
If China is serious about pollution, it needs to support higher fossil fuel prices to kill demand for oil and coal. Even as China slows down the rate of urbanization and industrialization, what about emerging markets like India and Indonesia? Yes, they are not quite China, but they are probably the next drivers of global growth -- even if it's not quite at the same pace that we saw with China.
The Chinese government knows it needs energy in every form. The fact that the state-owned enterprises have made decent oil sands investments suggests to me they don't expect oil prices to come down. Maybe they don't really care, which is a risk to this thesis. But since PetroChina (PTR), Sinopec (SNP), and CNOOC (CEO) are all NYSE-listed, I guess they do care.
Something I think is very interesting is the concept of energy return on energy invested, or EROEI. Granted, this idea was created well before the shale boom was widely recognized or its effects had started to be felt, but I don't think shale oil can make up for the low levels of spare capacity in the Middle East and strong demand in emerging markets. Shale gas is indeed a blessing for the likes of Dow Chemical (DOW) and DuPont (DD) and American industry in general, but politically it's difficult for the U.S. to export this energy. This is a shame since U.S. flares a lot of spare natural gas since storage is basically full. U.S. exploration and production productivity levels are good and drilling has been switching back to oil, but does U.S. oil supply grow faster than world oil demand, given the rest of the world is in quite a fine supply/demand balance?
Back to China: China needs massive deregulation and innovation in the energy sector, otherwise it will potentially end up getting a negative EROEI simply to keep the economy moving. That would destroy returns to capital, which would then be a general risk to China's gradual adoption of market economics. Another problem is that the major SOEs control the local market and dictate the terms to put oil and gas production into their pipelines. Many small and medium-sized Chinese oil and gas companies -- despite the great pipeline of business, if you will excuse the pun, such as Hong-Kong-listed MIE Holdings, United Energy Group, and Hilong Holdings -- find funding quite difficult.
Although I think shale gas is a game changer, I believe it's more of a game changer for power generation and maybe only eases a small bit of oil demand. However, to understand the full implications for oil is quite a complex issue. My feeling is that if Brent falls to, say, sub $80/bbl Asian majors that will just send extra supertankers east. This was always the case when Brent was trading in the 70-90 range a couple years ago. Asking a crude trader friend at a major Chinese oil trading firm if she thought China is trying to get away from oil consumption, she replied "not really" as China is building more refineries and snapping up assets wherever it can. SOEs just want to ensure they can feed the domestic demand that fuels the economy and keeps the harmony. The potential in the Chinese shale industry is huge, but also very challenging. Halliburton (HAL) and Schlumberger (SLB) should, in theory, see massive growth in Chinese business as they, for now, really are the guys for the job.
Higher energy prices for Japan are very bad for it, but it can benefit from lower international gas and coal prices from Qatar, Indonesia, and Australia to some extent, which are the effects of the shale gas boom as U.S. coal and Qatari gas (among others) gets displaced. It may be that Japan, given its high levels of innovation, comes up with decent mass market electric cars before U.S. or China. I thought it would be happen in the U.S., but even superman Elon Musk's Tesla Motors (TSLA) appears to be still struggling to make a big impact. Another side question is, even if electric cars became mass market, would they be sexy to drive in China where the concept of "face" is so important?
The risk to my opinion is that due to cheaper domestic crude prices in the U.S., refining in the Americas would start to become a global hub, exporting refined products and "flooding" world markets (since crude oil exports are banned in the U.S.). From what I understand this is starting to happen, and the traditional refined product flows in oil markets have been starting to change because of this. And more West African and Middle Eastern crude goes east instead of to the U.S. and Europe. Again, there are potential political dangers to U.S. refined product exports if, say, Valero (VLO) makes huge profits and the consumer is still paying perceived high prices at the pump.
For those thinking about the long-term energy market trends, it is worth it to study EROEI because although I think shale boom slows the long-term trend of reduced EROEI, much of the world energy demand is not dictated by free markets -- so there is less natural demand destruction and efficient allocation of resources. As we have been seeing recently, Chinese energy investment and growing emerging markets demand reflects a kind of floor on oil prices for the foreseeable future.
Lower oil prices are what the Western world needs right now, but unfortunately it's just not a sure bet, despite the shape of the futures curve. As the saying goes, the cure for higher prices is higher prices.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.