Big Bet on Commodities

If you think the run up to July 2008 was a wild ride, you have not seen anything yet. In the next 5 years, investors who focus on medium-to-small sized producers and oil-field companies having a well-developed specialty niche will outperform the overall energy sector.

We are entering a period of rising prices. There is still some plays in the large verticals but the primary profits will be made with smaller, leaner exploration-and-production outfits, field-service companies and specialized producers such as shale gas, coal bed methane, tight gas, hydrates – heavy oil and biodiesel.

The market is rapidly approaching will be more volatile with valuation often more difficult to determine than in the past, even when prices increasing. It is tough to decide how much of the increases result from actual product margins and how much results from oil becoming a financial asset rather than just a commodity is major concern. It requires some careful homework.

As America enters an accelerating field maturity curve and an intensifying decline in well debit, the efficiency of production will decline. 60% of crude produced in the US market is a stripper wells, providing less than 10 barrels of crude a day but more than 20 barrels of water – a major by-product. Therein lies a significant area for innovation and leaner companies and that spells greater profitability at lower entry prices.

As such price rises for Westerners will occur anyway, not just because of China. Moving forward, China, India, a resurgent East Asia, Japan and even regions such as West Africa will occupy important positions in this regard.

To offset a more rapidly declining traditional production base, primarily Western Siberia, Russia must move north of the Arctic Circle, into Eastern Siberia and out on the continental shelf. As foreigners are not allow to own 50% of strategic fields under new laws this means watch out for the smaller, focused operators and oil field service companies.

Off the track little bit – do you know that under the Eiffel Tower – the French Oil Ministry has confirmed that there is a 40-billion-barrel reserve under the historical landmark – enough to fuel total US oil demand for 5.2 years, based on EIA estimates.