RESERVES - - PETROLEUM OIL - - MIDDLE EAST vs. OTHERS
- - comparing technical data vs. political data - -

http://mwhodges.home.att.net/energy/energy-b.htm

scroll part way down for charts.

If futures markets thought peak oil had a 50% chance of happening by 2009 then the price for Dec 2010 oil would be well over $100, since the price of oil after peak will probably be $200 and accelerating. The markets have not even begun to price in peak oil.

Today's (and recent) increases in price are despite a reasonable supply picture and high stocks (within the US anyway). The increase is partly due to an oversold state of the oil market in early December, seasonal factors, a bit of supply constraint in Russia and Nigeria, and a general jittery feeling. Any significant supply disruption (of maybe 2mbpd) or geopolitical event in the next few days could bring $100 oil in a blink. Barring that we could see the price get close to $70 but it will then retrace to near $66 and await the next mood or event.

"First the cash market went up, reflecting the reality of a very tight supply-demand situation," said Robert Barbera, chief economist of Investment Technology Group, a trading concern. "Then the futures went up, making the case this was an enduring change in energy prices."

Now the stock market has come to believe the issue will remain with us for a long time.

Lots of times you don't get either one or the other, but some combination of both, which is separated using various process equipment. Gas, produced primairily in an oil field is termed "associated" gas, visa versa, oil from a gas field is associated oil.   <Even if a well is producing "all" oil, gas(es) will come out of solution in the first holding tank it lands in.>

In many Gulf of Mexico salt dome formations, gas is produced in the center of the field, with oil being produced in outlaying areas.  That due to the lighter gas being above the oil, both being held in an inverted bowl-looking geologic structure.  Fill the sink with water, pour cooking oil on top then get a glass bowl, invert it and place it in the sink trapping some air too.  Air will be the CH4, cooking oil will be the crude.
            gas well
           |    | oil well
         ..|.   |/
       .  gas  .|
      .   oil   |.
      .  water   .
      ............

Depends on the shape of the trapping geologic formations.  Now try the same with a rectangular glass baking pan and then vary the angle of the "bottom" of pan with the horizon.  See what's going on now?

If you drill a shallow well in the center of the bowl, you get gas.  If you drill a deep well in the center, you get gas from a shallow producing zone, oil from a deeper producing zone.  If you drill into the outlaying areas, you only get oil, maybe some water.

If you have some idea of the underlying geology, you go first for the center of the formation, then later the more marginal areas towards the outside.

Most of the time, the gas pressure above is affected by the oil pressure below and there is an optimum production rate of both for any given field due to rock porosity.. da..da..da, So, overproduction of one versus the other will cause an overall loss of the total that can be produced during the field's lifetime.  Hence not much flexibility is available to chose one over the other.

If you have the luxury of choosing between A or B, you go for maximizing the expected payoff (ROI).  Evaluating your expected ROI must consider your expected purchase price, which for gas could be less than oil if the gas needed to reach far away market areas via LPG, which could and probably does skew the drilling rig distribution somewhat in some areas, but given equal expected ROI, there would not be a driving factor causing you to chose one over the other.

Most of the Gulf of Mex is XXX with pipelines and market access of one product over the other is not much of an issue.  If there is no pipeline, construction of a new one is not an obstacle, provided the reserve is large enough to finance one.  In the old days, associated gas that could not be loaded on a small tanker and ferried to shore, was flared off as it was produced with the oil, but now its illegal in most places and unmarketable associated gas is reinjected back into the depths to be re-produced at a later date when a pipeline or LNG facility is built near the field.  

Then there are the producers like the one I worked for once, that, when the wellhead price of gas went down sooooo low in the mid 80's .... $1.20/mmcfd, they just opened more wells to get the cash flow up high enough to pay the bills again.  I know some countries were doing that from time to time too.  That's price-demand inversion.

Anyway. To finish this story.  They look at all the possibilities from the portfolio of leases they have, chose their best probability of a hit and schedule the rig.  

My old plan was to just have a stockpile of canned goods and a gun to defend them, then use the food to get whatever I needed after the grocery stores have no more inventory. But it was pointed out I'd have better luck by joining up with a group of like minded people working towards a goal of self sustainability, and I'm tending to agree that is a better plan.

It depends on your age, risk profile, horizon, do you have children, how many assets you currently have, etc. The answers are different for everyone but if you believe in Peak Oil and subsequent decline in energy availablity, you inherently realize that energy is all that really matters - it is the limiting resource that gives us food, transport, industry,etc. Therefore at sometime, you would want to turn 'abstract' wealth (dollars, euros, gold, stocks, bonds) into real wealth (food, water, land, biomass, solar panels, windmills,friends, community).

As far as particular investments, the huge market cap at Exxon and other majors will have a hard time increasing at multiples of today - probably better to own smaller companies that have more leverage and less capex. Regarding futures, I feel oil is going to triple digits, but could drop to $30-$40 easily if there is a recession/depression. If you use margin to buy oil futures and such a drop occurs you could be wiped out, even if oil goes to $200/bbl eventually.

Since I havent really seen an oil futures example explained here before I will do so briefly:

Lets say you buy a futures contract that expires in December 2009 - fridays close of this contract was $65.75. This contract 'controls' 1,000 barrels of crude oil of the following quality:

"Specific domestic crudes with 0.42% sulfur by weight or less, not less than 37° API gravity nor more than 42° API gravity. The following domestic crude streams are deliverable: West Texas Intermediate, Low Sweet Mix, New Mexican Sweet, North Texas Sweet, Oklahoma Sweet, South Texas Sweet.

Specific foreign crudes of not less than 34° API nor more than 42° API. The following foreign streams are deliverable: U.K. Brent and Forties, for which the seller shall receive a 30 cent per barrel discount below the final settlement price; Norwegian Oseberg Blend is delivered at a 55¢-per-barrel discount; Nigerian Bonny Light, Qua Iboe, and Colombian Cusiana are delivered at 15¢ premiums."

Ok, so you control 1,000 barrels of oil at $65.75 - the futures exchange currently requires $4,725 initial margin on this 'investment'. Lets do 2 quick examples of putting up different amounts of margin and looking at what happens with an increase to $80/barrel vs decline to $50/barrel.

a) if you put up the full notional price of contract (not necessary) in cash or T-bills, of $65,750 then you will make $80-$65.75=$14.25 *1000 Barrels or $14,250 on your initial investment of $65,750 or 21%. If oil drops to $50, your account is now worth $50,000 or a decline of $15,750 (excluding interest). Basically you make or lose $1,000 for every dollar increase/decrease in futures price.

b) if you put up the minimum allowed of $4,725 and oil goes to $80, the same increase in value of $14,250 brings your account value to $18,975 which is a 300% increase in portfolio value. (sounds great!) However, there is a 'maintenance margin' of $3,500 per contract which if your acct value falls below, your broker will ask you to wire in money to bring it back up to original margin level - if you dont, they will liquidate the position at the market (nasty spreads in backdated futures). If oil goes from $65.75 to $63.75 in one day, your account is now worth $2,000 less, or $2,725. Since this is below the maintenance margin of $3,500 you will get a call. A series of such calls will occur if oil drops to $50/bbl and the overall '$' amount of your loss will be equal to example a), thought the % return will be very different. Basically, futures give you lots of leverage.

Essentially, investing in futures is glamorous and appealing to some, because investing in stocks allows a maximum leverage of 1:1, but futures gives you many multiples of that. There is no free lunch however and higher rewards are obviously offset by higher risk. I always am way overmargined so even if my positions go south I am never near getting margin calls. If you do invest in futures, I recommend putting up at least triple if not quadruple what the required margin is - if you cant, then you shouldnt be trading in futures. (unless youre fabulously rich or certifiably insane)

note: if youre only slightly rich, or half-insane, the NYMEX now has 'mini' contracts on crude, nat gas, heating oil and gasoline that are only 50% of the size of the regular contracts.

Most oil companies, certainly the biggest, are running down their reserves. A few small ones are actually growing them, and have got to the point that they are also adding drill rigs, increasing production, reserves, revenue and net income. Three fairly similar ones are ard, gmxr and gpor, all of which doubled their net income from 2q to 3q. However, the latter was damaged by Rita, and will not recover until 2q06. The first two are extremely profitable at current resource prices, and would still be if prices declined substantially. I think ard and gmxr stock will at least double over the next twelve months, gpor may be a good buy mid-year (unless hit again by hurricanes - their properties are in LA, on the edge of the gom.)

Futures make no money if the price stagnates or declines, regardless of how much or how little you put up.  In my view canadian trusts buy their reserves at too high a price - much higher than US E&P's do - and therefore depend on prices continuing to rise to continue paying out their dividends - which, at 15-18%, is lousy compared with stock increases of the best smaller E&P's. See
http://finance.yahoo.com/q/bc?t=1y&s=GMXR&l=on&z=m&q=l&c=ard%2C+gpor.ob

After Katrina not only did crude go up but refining took a hit and there was a shortage of gasoline (or a least a tightening of supplies).  Deliveries to stations were reduced, forcing them to purchase more often, causing the price to go up faster.  Now the price of crude is going up, but not on the refined products (yet).

The predominant consensus from TOD folks is that the actual threat to the US$ from the IOB is minimal, I'm inclined to agree but think it could contribute to $ problems.

Attack Iran just because of the IOB? It would be daft since the downside risks probably far outweigh any real benefit, but I could believe it of this US regime if it is thinking like William Clark.

If nothing happens on/b4 20 March 2006 <or shortly thereafter>, I promise you won't have me to kick around any more.  If it does, I'll be the first to say I told you so.  I don't think its totally priced into the USD=EUR=JPY yet, because too many people don't think it will be a big deal.  But if it is, I know which side of the see-saw I'll be on.