DaveinHackensack

$125 Oil Not Sustainable for the Time Being

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$125 Oil Not Sustainable for the Time Being

Red Baron,

Read my post again: I agree with you about global demand.

The U.S. Department of Energy's Energy Information Agency just released its new Short-Term Energy Outlook today. Here are some highlights:
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<b>Global Oil Demand</b>
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<br><blockquo... oil consumption is projected to grow by 1 million barrels per day (bbl/d) in 2008.</blockquote&g...
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<b>Global Oil Supply</b>

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Non-OPEC Supply:
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<br><blockquo... supply growth remains weak despite 6 years of rising prices. Non-OPEC production is expected to rise by 310,000 bbl/d in 2008, down sharply from last month's Outlook.</blockquot...
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OPEC Supply:
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<br><blockquo... crude oil production is projected to average 36.9 million bbl/d in the second quarter, 140,000 bbl/d higher than first quarter levels.</blockquote...
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[...]
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<br><blockquo... crude oil production is expected to increase during the third quarter of 2008, although this is dependent upon how the security situation in Iraq and Nigeria evolves. Iraq plans to raise exports from the north by about 100,000 bbl/d in June if security conditions permit.</blockquote...

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Let's say all of that Iraq comes through with those 100,000 extra barrels per day. Add that to the 140,000 per day increase in OPEC production and the 310,000 increase in non-OPEC production. That's 550,000 additional barrels of supply per day, according to my math. What was the projected global increase in demand again? 1,000,000 barrels per day.
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$125 Oil Not Sustainable for the Time Being

"The absolute denial of the current reduction in demand amazes me."

No one is denying that Americans are driving less; the issue is that the growth of global demand is still exceeding the growth of supply. Yes, Americans are driving about 4% less after a doubling in the price of oil, but in its last short-term energy outlook, the EIA estimated that global demand would still grow by 1.2 million barrels per day this year, despite the decline here. They also estimated taht global supply would increase by about .6 million barrels per day (net).

The EIA will publish its next short-term energy outlook on Tuesday. Give it a look-see.

$125 Oil Not Sustainable for the Time Being

"For instance, if oil were to hit $200 per barrel in a year, you would estimate the BPT yield to be over 17%!!!"

If you bought BPT a year ago (admittedly, a little late to the party) and reinvested the dividends, like I did, your current yield would be 17% now already. And your position would be worth about 50% more than when you bought it, including those reinvested dividends.

If you want an intelligent, detailed explanation of the factors affecting BPT's distributions (and predictions about the next one) go to its Yahoo! message board and read the posts of "roundrobinjack" ( messages.finance.yahoo... ).

"Doesn't everyone know it is going to $200? Apparently not because the units are trading as if the distributions should be more in line with $80 oil."

Most oil stocks, not just royalty trusts, are trading as if oil were at $80 per barrel. That's because of two things, in my opinion: most of those who were most bullish on oil have been buying the commodity itself (as Jim Rogers had been suggesting) instead the stocks, and because most stock market money still agrees with the writer of this piece that oil is heading back to $80 per barrel any day now. Look at the multiples on oil stocks. That's why there's probably more upside in selected oil stocks at this point than in oil itself, due to the inherently leveraged relationship of commodity-producing company profits to increases in the prices of the commodities themselves.

A simplified example: consider a hypothetical oil production and exploration company that had costs of $40 per barrel last year. When oil prices were at $70 last year, its profits were $30 per barrel. What happens to those profits when oil doubles in price to $140? Do they double also? Assuming costs remain the same (they don't really, but this is a simplified example) the E&P's profits go from $30 per barrel to $100 per barrel, so they more than triple. When the market starts pricing in $120 and higher oil into oil stocks, you will see earnings estimates start going up and share prices rising accordingly.

Six Positions I'm Bullish On

I bought BPT last year too. I've been reinvesting the big dividends in an IRA. No complaints.

Have you looked at this oil stock: EGY?