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This Crude OIl Chart Will Scare You

Commodities / Crude Oil Oct 31, 2007 - 11:18 AM GMT

By: Money_and_Markets

Commodities

Best Financial Markets Analysis Article Sean Brodrick writes : I just got back from a scouting trip to an oil and gas explorer in the Gulf of Mexico. The company I visited is small but promising. And it perfectly illustrates what the U.S. needs to do to protect itself from a massive energy crisis — drill in its own backyard.

I'll tell you more about this explorer — Bayou Bend Petroleum — in just a moment. First …


Why the Oil Picture Is Getting Scarier Every Single Day!

I can't think of a more ghastly Halloween tale than the current situation in oil and gas. Let's start with a few important facts:

Oil demand is hot and getting hotter. According to the International Energy Agency (IEA) it's averaging 85.9 million barrels per day (bpd) this year … will rise to 87.6 million bpd in the fourth quarter … and up to 88 million bpd in 2008.

Production is sliding. The IEA says the world pumped 86.13 million bpd in July 2006. Less than one year later, in June 2007, production of total liquids fell to 84.50 million bpd.

Inventories are down. Oil inventories in leading industrialized countries fell by 21 million barrels in August to equal 53.5 days of demand, below the five-year average, the IEA said. And recent estimates put the number even lower — closer to 51 days of supply.

Now, let me show you a chart that will really scare the bejeezus out of you …

This chart comes from OPEC's Monthly Oil Market Report for October 2007. As you can see, crude oil prices tapered off in September of 2005 and 2006 (the green and black lines) along with seasonal demand. But this year that's not happening. As the red line shows, global demand this September was strong and getting stronger!

As the OPEC report says, "With the approaching winter season, the momentum of the product markets may improve further, providing support for refinery economics and crude prices."

In other words, don't be surprised when oil prices hit triple digits, especially when …

OPEC Is Considering Dumping The Dollar for a Basket of Currencies

Every oil transaction around the world, save for a piddly few done by Iran, is currently paid for in greenbacks. However, that may be about to change.

Check out these excerpts from a story that Reuters ran over the weekend:

OPEC is likely to discuss creating a basket of currencies for oil pricing at its next summit due to the steady decline in the dollar, Venezuela's Energy Minister Rafael Ramirez said on Friday.

"The need to establish a basket of currencies … will probably be a point of discussion in the next OPEC summit," Ramirez told reporters during an evening event in the presidential palace.

The dollar as a benchmark currency has been weakening quite a lot and it creates distortions in oil markets.

Sure, Venezuela sometimes stretches the truth when it comes to matters of oil, OPEC, and tweaking George W. Bush. But in this particular case, plenty of other evidence points to the same idea.

As oil goes higher (black line),
the dollar goes lower (red line)!

Remember, we've already seen individual OPEC nations start to back away from the dollar. Kuwait unhooked its currency peg to the greenback … the UAE Central Bank is converting some of its reserves of U.S. assets into euros … Saudi Arabia refused to cut interest rates along with the U.S. Federal Reserve … and as I mentioned, Iran is already selling oil in euros and yen.

You really can't blame the oil sheiks. With the U.S. dollar stumbling lower, they are getting less and less real return for every barrel of oil they sell. And the lower the dollar goes, the more expensive oil gets here in the U.S.!

Consider this: While U.S. oil prices have surged 50% since the start of the year, the price rise in euros was 38%!

If OPEC does change to pricing oil in a basket of currencies, that would kneecap an already stumbling U.S. dollar and make imported oil even more expensive for U.S. citizens!

Meanwhile, America Doesn't Even Have a Comprehensive Energy Policy!

Clarence Cazalot Jr., president and CEO of Marathon Oil Corp., recently made a plea for a comprehensive U.S. energy policy. He said that as worldwide demand for fossil fuels rises, the country's biggest challenge is dealing with issues underlying U.S. "energy security." And other top CEOs have spoken out on the same issue.

Sure, the White House did roll out an energy policy in 2001 — designed by Vice President Dick Cheney's secret energy task force. But the plan was piecemeal and seemed more focused on handing out goodies to friends in high places than solving the big problems.

That's a shame, because no country on Earth is more vulnerable to higher oil prices than the U.S. We use 25 barrels of oil per person per year, compared to 12 in Western Europe … two in China … and one in India. And of those 25 barrels per person, about nine are produced domestically while 16 are imported!

Conservation is certainly one solution. It led to increased efficiency after the 1979 oil shock, and that's how Americans cut oil use 15% in six years while the economy grew 16%. I think it's something we have to try and soon.

It's a fact that the cheapest energy in the world is energy you don't use. So if we want to see oil under $50 a barrel again, we might want to consider making energy conservation our next national project.

Of course we are never going to stop using oil completely, which is why I think we also need to continue ramping up our production right here within U.S. borders. That brings me to the oil and gas explorer I visited in Louisiana last week …

An Oil & Gas Explorer That Was Born on the Bayou

Bayou Bend Petroleum (BBP on the TSX-V, BBPMF on the pink sheets in the U.S.) is listed in Canada but operates in Louisiana and the Gulf of Mexico.

Bayou Bend is a member of the Lundin Group of companies. Lundin is very smart, and it knows how to put its money to work wisely. I know this because it is connected to some of the companies in my Red-Hot Canadian Small-Caps portfolio — stocks that are doing very well indeed. So, it seemed like a good move to follow the Lundin trail down to Louisiana to see what I'd find …

The Gulf of Mexico has 20% of the U.S.'s natural gas and 28% of its oil, and Louisiana and Texas are business-friendly states. So, it's a good place for a start-up oil & gas explorer like Bayou Bend to operate. As the company's CEO, Clint Coldren, explained, "We want to buy assets with drillable opportunities and upside potential."

The company, which just started up in February of this year, has a market cap of about $400 million, and 308.3 million shares outstanding. The stock's high is C$3 per share, and it's well off that now — not unusual to see in a volatile small-cap explorer.

I went on an airborne tour of some of Bayou Bend's drilling operations and here's what I saw …

First, we flew over the company's drilling project called La Pasada, in which Bayou Bend has a 21.88% interest. There, a brand-new barge rig put together by Noble Drilling Corp is drilling furiously. There could be close to 299 billion cubic feet of natural gas in the various reservoirs around La Pasada. Just remember that none of that is proved, and a hole isn't a well until there's gas being pumped out of it.

After checking out La Pasada, we flew over to Marsh Island, where the state maintains a wildlife sanctuary. It's basically an alligator-infested swamp … the real potential is below the surface, where Bayou Bend thinks it may be onto something big.

Bayou Bend has an offshore platform at Eugene Island Block 7 where multiple wells are producing one million cubic feet of natural gas per day. You can see the helipad over one of the wells in my photo. Unfortunately, they said the pad was too small to comfortably land our helicopter (you can see our helicopter's shadow in the photo). I think they were just worried about losing their CEO if we messed up the landing. Har-har!

Anyway, Bayou Bend believes the Marsh Island project, in which it has a 35.58% interest, is sitting on as much as three TRILLION cubic feet of natural gas potential. All of this remains to be proved, of course. Still, it's quite exciting to see this project just getting under way.

Bayou Bend has plenty of other prospects, too. With one platform in production, the company has put together a nice land package and it is going to drill, drill, drill like crazy. In 2007, the company plans to spend a total of $70 million drilling seven wells. In 2008, that will rise to $108 million drilling 13 wells. The company is also using the latest technology to combine and analyze its data sets and hopefully get more bang for its buck.

Now, does that mean you should go out and buy this stock? It depends on your own investing time frame and risk tolerance. Also, be aware that the stock has low volume, which sometimes makes it harder to get in and out.

I can tell you that Bayou Bend's management has tons of experience and they wouldn't be spending their time on Bayou Bend if they didn't think they could make it work.

What's more, the price of natural gas, at $7.31, seems too low considering that oil is pushing triple-digits. I expect we'll see more substitution of natural gas going forward, where possible, as oil continues to climb. And that should put exploration and production companies like Bayou Bend on the launch pad.

In fact, I'm looking into Bayou Bend's sister company, which works in Canada, as a potential candidate for the Red-Hot Canadian Small-Caps portfolio.

Of course, small-cap, early-stage companies carry both higher risk as well as higher reward.

If you prefer lower risk and still want a way to profit from higher energy prices, you can always buy the Energy Select SPDR (XLE) or one of the other energy sector ETFs that are stuffed with larger-cap oil & gas companies.

Yours for trading profits,

Sean

This investment news is brought to you by Money and Markets . Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com .

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