Will Saudi Arabia, Kuwait, and other Middle East oil producers go the way of Indonesia? Reporters for Reuters Breakingviews (www.breakingviews.com) asked yesterday April 21.

Indonesia, which had exported 1.2 million barrels of oil a day in 1980, became a new oil importer in 2004. The reason? Huge domestic subsidies had made oil so cheap that Indonesians had tripled their domestic consumption.

That seems to be what’s happening in Saudi Arabia and Kuwait now, Reuters reported. In Saudi Arabia oil consumption has climbed by 50% in the last decade to an estimated 2.7 million barrels a day. Saudi Aramco, the national oil company, projects that demand could hit 8.3 million barrels a day by 2030.

In 2010 Saudi Arabia exported 7.5 million barrels of oil a day. Add in estimated spare capacity of 2.8 million barrels a day. And then to the very scary math: If Saudi consumption rises to 8.3 million barrels a day, the country will consume almost all of the 10.3 million barrels a day it has in exports and spare capacity.

Where’s all this consumption growth coming from? Read more

On January 28, I argued that the U.S. economy is still in the early recovery stage of the business cycle, and that you should overweight your portfolio toward the stocks that do best at this point in the cycle: “Sectors that do best are usually industrials, near the beginning of the stage; basic materials; and, near the end, energy.”

 The next stage for the U.S. economy is late recovery. “Sectors that have done well in this stage include energy and, near the end of the stage, consumer staples and services.” (For more on investing for the economic cycle see my post http://jubakpicks.com/2011/01/28/where-the-heck-are-we-in-the-economic-cycle-anyway-the-answer-is-important-in-deciding-what-sectors-to-overweight/ )

See any sector that those two stages have in common? So why not overweight energy right now? several readers asked. That way your portfolio can catch the sector’s outperformance at the end of the early recovery stage and the sector’s outperformance in the first part of the late recovery stage.

That’s an excellent idea. Just be careful what energy stock you pick. The sector is a little tricky to navigate right now. I’d favor being very selective on oil stocks—most of the international majors aren’t all that attractive currently. I’d favor oil equipment and service companies right now and small oil producers that are growing production and that look like acquisition candidates over the oil majors.

And I’m going to end this post with five picks of exactly those sorts. Read more

It looks like the biggest winner from the boon in natural gas production from shale formations in the United States will be the U.S. onshore oil industry.

Thanks to new techniques pioneered in the late 1970s to extract natural gas from tight shale formations from Wyoming to Texas to Arkansas and then east to New York and Pennsylvania, onshore U.S. natural gas production has soared. From 2007 to 2008, a period when production from shales took off, natural gas production from these formations increased by 71%, according to the Energy Information Administration.

Thanks to that booming U.S. supply—and an abundance of cheap natural gas on international markets– and a deep economic recession that surge in natural gas production hasn’t resulted in huge profits for natural gas producers. The price of natural gas trading on the NYMEX (New York Mercantile Exchange) has plunged to $3.87 per million BTUs (British Thermal Units). That’s down from a high of almost $14 in late 2005 and from $9 as recently as recently as August 2008. Producers such as Chesapeake Energy (CHK) and Ultra Petroleum (UPL) fell into the red in 209.

But the same production techniques developed to release natural gas from shale formations are producing what promises to be a very profitable boom in U.S. onshore oil production. And one that’s just getting started in places such as the Bakken share formation in the Williston Basin of North Dakota, Montana, and Saskatchewan. A 2008 U.S. Geologic Survey report put the amount of recoverable oil within the Bakken shale formation at 3 to 4.3 billion barrels. That’s roughly 15% to 20% of total U.S. proved reserves. Production from the Bakken share has gained North Dakota a slot as the fourth largest oil producing state.

That’s a lot of oil in terms of U.S. production, but it’s not enough to drop the global price of oil. At $70 a barrel producers in the Williston Basin are quite profitable, thank you.

Let me dig a little deeper into the oil shale story and then suggest some ways to invest in it. Read more

China disrupts the oil and gas industry–again

You wouldn’t think that anybody, especially an anybody as savvy as ExxonMobil (XOM), could overlook China.

But that may be exactly what ExxonMobil did in formulating its plan to pin the company’s growth on natural gas—and in particular on liquefied natural gas (LNG).

According to U.K. oil and gas consulting company Wood Mackenzie, China looks like it will need only half as much additional liquefied natural gas in the decade beginning in 2020 than big oil companies such as Royal Dutch Shell (RDS), BP (BP), Chevron (CVX), and, yes, ExxonMobil had projected. 

Projects such as ExxonMobil’s Qatargas Trains 4 and 5, RasGas, Al Khaleej Gas, the South Hook liquefied natural gas terminal, and the Golden Pass LNG terminal—and this is only a partial list of ExxonMobil’s planned investments in LNG in 2009 and 2010–that made investment sense when it looked like China would be importing an additional 16 million tons of LNG annually in the coming decade now face a scenario in which China will need to add only half as much to its annual imports.

 That will hit all the international oil companies hard but it will hit ExxonMobil especially strongly because the company has based its investing strategy on natural gas in general and liquefied natural gas in particular.

 What’s changed since, say, March 2010 when ExxonMobil announced that it will increase capital spending by 4% in 2010 to almost $28 billion in a big bet on natural gas on top of its purchase of U.S. natural gas producer XTO Energy for $28 billion? Read more

Deciding which company pays what in the Gulf disaster just got a little harder

A setback today for Anadarko Petroleum (APC) in its efforts to get out from under the costs of the Deepwater Horizon disaster. The company is a 25% partner with majority stakeholder BP (BP) and minority partner Mitsui (10%) in the Macondo well that continues to spew oil into the waters of the Gulf of Mexico.

Anadarko will be on the hook for a share of the costs proportionate to its ownership in the project—unless a court finds BP guilty of gross negligence in the design and/or operation of the well. With BP putting $20 billion into escrow to cover claims, the negligence/no negligence question is of intense interest to the $18 billion (market capitalization) Anadarko and its investors.

The distribution of costs will also have a huge effect on which companies can afford to keep exploring in the Gulf. If Anadarko winds up picking up its 25% share of the costs, it will deter smaller oil companies from operating in the region. And that will mean that the globe’s biggest oil companies will be able to buy assets in the Gulf at very reasonable prices. (For more on how the Deepwater Horizon disaster will reshuffle oil assets in the Gulf see my post http://jubakpicks.com/2010/06/24/oil-company-buyers-and-sellers-in-the-deepwater-gulf-of-mexico-after-bp/ )

The task of winning a finding of gross negligence against BP got a little harder today, June 30, when both BP and Anadarko confirmed to the Financial Times that Anadarko was aware of the design choices that contributed so much to the disaster. Read more