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Oil Prices Will Rise Regardless Of Middle East Unrest

Oil Prices Will Rise Regardless Of Middle East Unrest

Oil Prices Will Rise Regardless Of Middle East Unrest

Oil investors have benefited from the rise of the price of a barrel of crude over the past several years. The price was in the mid-40s during the 2008 crisis, and has risen to around $110 per barrel today.

That’s quite a move, and, if you listen to the mainstream press, you’ll get one explanation for the current high price. But Rick Rule, Chairman of Sprott U.S. Holdings Inc., offered a different perspective in a recent oil and gas commentary to clients.

“The mainstream pundits will tell you that oil is expensive now because of the unrest in Syria and Egypt,” Rick begins. “But the truth is that Syria and Egypt don’t produce much oil.”

So why are Oil Prices high?

“The real reason is that there are expectations of a slowdown in oil exports brought about by the lack of sustaining capital investments in certain countries in South America.”

In our last note, we promised to expand on Rick’s case for higher oil prices, because of the long-term consequences of governments’ interference in the oil industry in certain South American countries.

Rick argues that higher demands from governments for a share of the revenue from oil operations, especially in Venezuela and Mexico, led to lesser re-investment in these countries by oil companies.

As a consequence, Rick explains, oil production in these countries is in decline.

“The lack of sustaining capital deployed by oil companies led to current production problem,” he says. And this problem will only get worse, Rick believes.

In fact, according to Rick, the only reason oil hasn’t spiked much higher is because of big production improvements made by Saudi Arabia, which has helped compensate for the loss from South America:

“It is the Saudis who have protected us, ironically, from 130, 140, or 150 dollar oil, because of incredible upgrades undertaken by their oil industry over the past ten years.”

What about Natural Gas?

There’s another interesting commodity in energy right now, Rick explained on the call: liquefied natural gas.

“The only way that the Japanese could make up for the power they lost after shutting down their nuclear industry was by burning liquefied natural gas. The Japanese became competitors for every seaborne shipment of natural gas in the world. Liquefied natural gas roughly doubled as a consequence.”

But the consequences of Fukushima will be less long-lasting to the nuclear energy industry than many believe, Rick says. Japan will likely switch back to nuclear in the long term, and in addition, liquefied natural gas prices will probably suffer when new infrastructure allows massive new supplies of cheap liquefied natural gas from the US to enter the worldwide market.

Meanwhile, the price of dry natural gas in the US has plummeted, even as liquefied natural gas has stayed high. Supply has shrunk in response, but we are beginning to see signs of life in the market, Rick believes, as dry natural gas begins to replace other energy sources such as coal.

Rick concludes that natural gas will begin to be used more and more to run automobiles, starting with major trucking routes and trains. It will be increasingly used to meet the need for energy, because of its low price and high availability, he says.

Rick believes that oil will remain high, because the price is driven by long-term supply issues, not short-term disruptions in the Middle East. Global liquefied natural gas prices will eventually face downward pressure as new export infrastructure is built in North America. Dry natural gas, meanwhile, could do well over time.

Rick adds: “It is still too early for us to play the possibility of a much bigger natural gas industry from an equity perspective. But we’ll be looking into these opportunities as we see developments occur on that front.”


Courtesy: Sprott Group

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