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U.S. Oil's Big Potential

A Different Way to Play the U.S. Oil Comeback

Written by Keith Kohl
Posted August 16, 2010 at 6:01PM

I know it's easy to get distracted by China.

After all, Chinese demand is on the rise. China has officially passed Japan as the world's second largest economy. During the second quarter of 2010, China's GDP totaled $1.337 trillion — thanks to the country's 10.3% quarterly growth.

Yes, there are some tremendous opportunities is Asia right now. My office cell-mate Christian DeHaemer has proven that to me time and again. One of his latest oil gambits has banked 727% gains for readers.

Today, however, I want to focus on an investment strategy a little closer to home...

Slowly but surely, U.S. demand has been rising. Although we're more than two million barrels below our peak of 21.2 million barrels per day — set back in June 2005 — it's still good news.

And there's even more good news for investors, if you know where to look.

When things hit the fan in 2008, oil prices plummeted. The price for a barrel of crude oil — the sweet Texas kind — fell as low as $33 per barrel. There was nothing to be done. If you're having nightmares from the collapse, I won't hold it against you to step away for a minute.

Thankfully, I know how to cheer you up...

Since our demand has started to recover, one thing has stuck out like sore thumb. And if you take a closer look at U.S. oil import data, you'll see it, clear as day.

We're no longer relying on our old go-to countries for oil imports. (I'm talking about Venezuela, the Saudis, Nigeria, and Mexico — four of our largest sources for foreign oil.)

Call it what you want, but the cold, hard truth is the United States is reducing its dependence from those highly-volatile oil producers. For the first time in decades, daily oil imports from Saudi Arabia and Venezuela have fallen below one million barrels. Saudi imports have fallen 40% in the last seven years.

Let's face it: As our demand recovers, what are the chances we'll hear an outcry for more Saudi oil?

We won't.

Perhaps the U.S. has finally learned its lesson. At least we can hope so...

And if the U.S. continues to lower its dependence on foreign oil, we're going to have to get it from somewhere else.

The most expensive oil mistake you can make

I can't even count how many times I've seen people make this mistake... Even you might have been tempted to fall for the trap.

People hear about trillions of barrels of oil buried beneath Colorado, and they immediately lose their wits. They're told that nearly three trillion barrels of oil can flow out of the Green River formation, satisfying U.S. demand for thousands of years.

You probably remember my rant on the Green River oil shales. Simply put, developing that resource is too energy intensive. I believe one of my readers put it best: “Shale oil is not even close to the crude oil that feeds our refineries.”

What's worse is that folks hear "shale oil" and connect the wrong dots. It's not the same as the shale plays making headlines. Besides, waiting four to five decades on a possible chance of developing the Green River oil shales is waste of time and money — your money.

I have a better idea...

Trading ahead of the herd

Last week, I was happy to write about the bright side of U.S. oil production.

If you're just now learning about the Bakken oil play, I'm sorry to say that you're late to the party. It's been two years since the USGS released their last Bakken assessment, which reported the oil formation held up to 4.3 billion barrels of technically recoverable oil.

Since then, the state's oil production has jumped more than 100,000 barrels per day. Despite that 76% increase, officials expect production levels to grow to more than 350,000 barrels per day next year.

Sure, you can still find a number Bakken drillers worth a closer look... Or, you can look down the road and see the obvious hurdle which must be overcome first.

The one drawback to North Dakota's good old fashioned oil boom is the lack of infrastructure. The rush to drill the Bakken was so great, the infrastructure simply couldn't keep up.

In other words, producers had a difficult time bringing their production to market, which means they were forced to sell their crude at a discount.

At one point, Lynn Helms, director of the State Department of Mineral Resources, stated that North Dakota sweet crude was selling at a 28% discount to the daily price.

This year alone, the state added approximately 110,000 barrels a day of pipeline capacity... and there's more on the way.

Here are three infrastructure plays to stay ahead of the game:

  • ONEOK Partners L.P. (NYSE: OKS) - The company recently announced plans to spend up to $550 million to build a 615-mile NGL pipeline to transport NGLs from the Bakken Shale.

  • TransCanada (NYSE: TRP) - Once completed, the company's Keystone XL project is a 1,959-mile 36-inch pipeline that  will start in Alberta and connect with the Keystone pipeline that will be built through Kansas to Cushing, Oklahoma. The pipeline will hit the best up-and-coming oil plays, including the Bakken producers in Southeast Saskatchewan, Montana, and North Dakota.

  • Enbridge (NYSE: ENB) - Last month, Enbridge announced plans to double its pipeline export capacity in North Dakota. Even though the company hasn't spilled the details yet, Enbridge is certainly worth a second look.

Until next time,

keith kohl

Keith Kohl
Editor, Energy and Capital

P.S. Although BP's well is no longer leaking oil into the Gulf of Mexico, the damage has been done. Now it's time for the election-seeking politicians to come in and make a huge mess of the situation. But Congress' knee-jerk reaction to ban offshore drilling and completely overhaul the system comes with a profitable silver lining — and I've laid out all the details for you right here.

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