Energy & Commodities
It’s been a grueling two year bear market in the junior resource market and previous lights ended up being the bear market train running even further down the line. But we now have a potential “double-bottom” (Point A) and a two year downtrend like being challenged once again.
I’m crossing my fingers and toes while holding my rabbits foot and horseshoe.
You have to continually think outside the box when you’re investing. That’s because, too often, thinking inside the box is a good way to get nailed into a coffin.
When you follow along with everyone else, you risk jumping in too late and your potential profits getting nailed flat. But if you try to think about profit possibilities BEFORE the mass herd of investors catches on, you can find yourself walking on sunshine while the other guy is pushing up daisies.
For example: How many investors know that America’s oil-and-gas boom is also causing a railroad boom?
That might seem counter-intuitive. After all, oil travels by pipeline, not railroad—right?
Not necessarily.
First of all, it takes a long time to build pipelines. So, energy producers are shipping a lot of product by rail while they wait for new pipelines to be built.
She Canna Take Any More, Cap’n;
She’s Gonna Blow!
Second, pipelines, especially the ones coming from Canada, are stuffed to the gills.
Swelling output from Alberta’s oil sands and shale fields in North Dakota’s Bakken region and Eagle Ford in Texas is overwhelming current capacity.
Enbridge Energy Partners (EEP), which controls a big bunch of pipelines shipping oil and gas from Canada to the U.S., says that those pipes can’t take one more barrel than they’re already carrying.
“All of the crude oil export pipelines are pretty much full, running at maximum capacity,” Vern Yu, a vice-president of business development and market development for Enbridge, told a Petroleum Technology Alliance of Canada conference in November.
That was November. Now, it’s SO BAD that Canadian crude recently traded at a $41 discount to West Texas Intermediate. That’s near the record discount of $42.50, which was hit in December.
Why is Canadian crude so cheap? Because there is so much of it, there’s no way—rather, no easyway—to move all of it to market.
And that brings us to railroads.
Check out this chart showing weekly rail carloads of petroleum and petroleum products …
It costs about $10 more per barrel to move oil by railroad compared to pipeline. But when Canadian crude is trading at a $41 discount, that’s not a steep price at all!
More than 200,000 train cars of oil will be shipped in 2013, the most since World War II, according to forecasts from the Association of American Railroads. About 1 million barrels a day of rail-unloading capacity is being built in the United States. That’s more than DOUBLE the current level of shipments, the AAR says.
In fact, it’s getting so lucrative to move oil by railroad that oil and nat-gas pipeline operators are getting into the act. A group of them spent $1 billion on rail-depot projects recently to help move crude from inland fields to refineries on the coast.
Are they moving too late? Heck, no. We won’t see any new pipeline capacity until the end of this year, and no SIGNIFICANT new pipeline capacity until the end of next year.
Speaking of what’s coming, here’s …
The Oil Production Chart You’ve Got to See!
Meanwhile, you’ve seen what’s happening to U.S. oil production, right?
That’s right, U.S. oil production topped 7 million barrels per day for the first time since March 1993, a figure that is nearly 20% above the amount produced at this time last year.
How much oil do you think we’ll be producing by the end of this year? Or the end of next year?
I don’t know the exact number, but we can assume that it will be more.
I do know that the International Energy Agency says the U.S. will produce more oil than Saudi Arabia by 2017 … and I think they’re being rather conservative.
2 Ways to Play It … And
What to Stay Away From!
If the pipelines are full, obviously pipeline operators are going to be rolling in dough. Plus, we can expect that there’s going to be consolidation in that industry.
Also, railroads are an obvious play.
One thing you should consider staying away from (at least for now): oil producers.
I do think there are some real values out there. But the producers have to be able to move their product to the refineries on the coast. And unless you’re willing to do the homework to find out which companies can do that, you’re better off staying out of that sandbox. After all, you don’t want it to be your investing coffin.
However, I’m doing this legwork all the time …even literally, as I make it a point to visit the companies and the people behind them to make sure what looks like a solid investment from afar looks just as good up-close.
So if you’re willing to get ahead of the herd … if you’re curious about the global transformation in energy and how you can cash in … you can get my buy and sell alerts sent straight to your inbox. All you have to do is make the trades and grab the gains!
Click here now to see how you can secure your risk-free trial to my Red-Hot Global Resourcesservice today for a very special price!
Yours for trading profits,
Sean
P.S. Energy stocks are moving up. But making money on them means grabbing the right companies, at the right time, to get the biggest-possible return.
Frankly, that’s why I think the best investment you can make right now is to join my Red-Hot Global Resources service. It’s a small purchase now that can pay off easily in just one strategically placed trade. Don’t wait—claim your membership spot today for a special introductory price!
Chinese demand for commodities has been buoyant over the last 2 decades or so. In fact, it is believed that the current commodity price boom is a result of Chinese demand. But what exactly drives the demand for commodities? Once we get to know the demand drivers we can link it to the Chinese demographics and try to understand why the demand potential is so high from this dragon nation.
Basically, there are 3-4 factors that essentially drive commodity demand. First is increasing urbanisation. Second is rising population and third is decreasing poverty. It is common sense that rapid urbanisation leads to increasing commodity demand. And we all are aware about the rapid urbanisation that took place in China in the past. In the last two decades, China also witnessed huge population expansion which drove the demand for agricultural commodities. Poverty rates have also been on a decline (drives agricultural commodities and promotes urbanisation). All these factors created a perfect scenario for a commodity bull run driven by China.
But will this run continue in the future as well? In other words, will the Chinese demand remain intact?
In order to answer this question let’s once again re-visit those very factors that drove commodity demand for China. Then we can analyse how China’s demographics have changed now for the commodity demand to witness any shift. For one, it may be noted that most of the urbanisation has already taken place in China. Further, population has also been brought under control. Also, with poverty rates eradicating at a fairly decent pace in the recent past the scope of further eradication seems limited. This will have a direct impact on prices of agricultural commodities.
Thus, it appears that the China factor will longer be enough for the commodity bull run to continue from here on. May be, other countries like India, will have to witness a paradigm shift with respect to the internal architecture on policy making. This can lead to rapid urbanisation and eradication of poverty. Only then can the commodity prices regain their north bound journey.
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– Keith
Master Limited Partnerships Defined
By and large, master limited partnerships are just that – limited partnerships that happen to be highly liquid, and tradable on U.S. stock exchanges, just like traditional stocks.
Instead of shares, MLP’s offer investors “units,” and payouts aren’t called dividends, they’re called “distributions.” In essence, MLPs offer the tax advantages of limited partnerships with the asset growth benefit associated with common stocks.
Tax-wise, MLPs are treated differently from stocks and bonds, and are generally treated more favorably by the Internal Revenue Service. Taxes are paid by MLP unit-holders, on a pass-through basis.
That means MLPs, unlike common stocks, don’t face double taxation on distribution payouts to investors. However, non Americans (like Canadians, eh) do face double taxation—there is a withholding tax by Uncle Sam and they are not part of the Canada US tax treaty. All MLP investors should check with their tax accountants.
Master Limited Partnerships are often referred to as an “investor’s dream.” Why? Because some MLPs really do make that true – at least from a historical sense. Statistically, MLPs offer…
There’s no sure thing on Wall Street, but MLPs may be as close as a “sure thing” as possible. Since MLPs generally invest in relatively stable midstream energy companies – think pipelines, storage tanks, and oil and gas terminals – investors benefit from high demand for the services those midstream oil and gas companies provide. In other words, it doesn’t matter where the price of oil stands – $150 or $75 – as long as global consumers use oil and gas, MLPs benefit from that steady demand.
Master limited partnerships have proven resilient against down stock market cycles. In the immediate aftermath of the economic collapse of 2008, 39 of 50 MLPs actually raised their distributions to investors to, on average, 10%. In addition, as MLP’s invest in “high demand” midstream oil and gas companies, MLP’s provide investors with stable, reliable.
While MLP’s do offer stable, dependable yield growth, significant tax advantages, the tax situation is complicated, and you may need to bring in a tax advisor to handle the MLP portion of your investment/tax portfolio. In addition, exposure to small-cap oil and gas stocks – a common investment for MLPs – can lead to higher-than-normal volatility.
Some master limited partnerships are riskier than others. For example, larger pipeline MLPs are relatively stable – they generate a steady cash flow, as they’re not significantly impacted by oil and gas prices. Larger pipelines are also difficult to replace, making them more valuable for MLP investors.
That’s not the case for smaller pipelines that move natural gas from processing plants to suppliers. Since natural gas is more vulnerable to commodity price fluctuations, MLP investors should proceed with caution when it comes to evaluating various MLP investments.
According to the Interstate Natural Gas Association of America both the U.Ss and Canada will shell out an estimated $84 billion to build new midstream oil and gas platforms, pipelines, storage tanks, and other necessary infrastructure that meets the needs of skyrocketing domestic energy production.
That demand will generate big revenues to MLPs, who are expected to provide that entire infrastructure. In turn, those revenues should fatten up distributions, and boost MLP performance for years – and maybe even decades to come.
MLPs are exactly the product of the Wild, Wild West. In fact, the U.S. Security and Exchange Commission regulates MLPs, just like it regulates stocks. As a result, MLPs must file annual and quarterly reports, and keep investors apprised of any changes to its business model, and any developments that may impact the MLP. In addition, MLPs must also comply with the accounting requirements mandated by Sarbanes-Oxley.
What are the top reasons why regular, everyday investors are so attracted to MLP’s? Here are four big reasons why:
– Brian O’Connell, guest editor
Publisher’s Note: My top yield play for 2013 stems from a very simple premise: a sector that I strongly believe is best positioned to benefit from North America’s surging energy production. Click here to find out how I’m playing it for profit, and how you can as well.
Investing for me is about identifying long-term trends, and then investing in companies whose business I understand, that will benefit from those trends. For more than a decade, my own investment strategy has focused on two major trends: (1) I believe that as the massive demographic of Baby Boomers moves into post-retirement, a tremendous amount of money will flow into the healthcare sector, and (2) oil is generally undervalued.
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