URS’ Flint Energy Division Lands $130 Million Oil Sands Project

Canadian oil sands output could surpass expectations

New study considers water consumption in oil sands

Photos: Cenovus Energy Christina Lake drilling site

Sinopec Group, China’s second biggest oil and gas producer, announced it has launched its first shale gas project, expecting to produce 300 to 500 million cubic metres a year by the end of 2012, said the conglomerate on Tuesday.

China's conventional gas production is stretched to the limit, revealed a study by international consultant Pricewaterhouse Coopers (PwC), published on Monday. However, project such as the one announced by Sinopec and massive reserves of shale gas and coal-bed methane might ease the shortfall.

The report predicts China’s gas shortfall will grow nine-fold by 2015. “The industry would then need to overcome major pricing, regulatory, distribution and water challenges, says PwC.

Aware of the situation, Beijing has announced that it will step up the development of unconventional resources such as shale gas, coalbed gas and oil sands, said the five-year plan released by the National Energy Administration (NDRC).

China's annual natural gas consumption will add up to 260 billion cubic metres by the end of 2015, representing 7% to 8% of total energy consumption, said the organism.

The nation's natural gas consumption expanded 20.6% to 129 billion cubic meters last year, or 4% of total energy consumption, the plan shows.

By the end of 2015, China will have to produce 170 billion cubic meters of natural gas and import 90 billion cubic meters per year to meet domestic demand.

NDRC said China would also press ahead with the shift from government-set prices to a system based on international fluctuations in a move to better regulate the industry.

Sinopec to tap into shale gas market and rescue China from growing gas shortfall

CNRL faces environmental charges

Today's story comes from Cory Mitchell, who explains how the charts of oil and the overall market are now hauntingly like the 2006-2008 period—but in the short term, that means now could be a good time to own stocks.

- Keith

Commodities and stocks have been moving closely together since the 2008 financial crash.  But this relationship is starting to hit the rocks, with stocks moving higher and commodities moving lower.

In this nervous, overall market, it might seem logical to assume that stocks will begin to drop (more so than we have seen in the last few days) with commodities…but I propose a different likelihood.

There is some strong recent chart history that shows oil and the stock market is trading a compressed version of late 2006-late 2008.  That should mean a continued love affair between the two sectors through to Q4 2012, with both rising (giving investors some love too)—but end badly, with both dying late this year or early 2013—just at slightly different times (think Romeo and Juliet).

In this article I’ll explain:

The current environment mirrors a pattern seen several years ago.
This pattern coupled with the long-term technical picture could drive the S&P 500 to 1500+ before the end of the year—a more than 10% jump from current levels. Oil is also likely to make another move higher boosting the energy sector in the latter part of the trend.

The rise is likely to create a stock market peak late in 2012, leading to a significant decline.

If this materializes (or if it doesn’t), certain price levels can be used to as guides for trading this market.

The Recent Stock and Oil Relationship

Look back at 2006: oil dropped through the latter part of the year but stocks continued to climb.  During most of 2007 stocks and oil move higher, in unison, but decoupled in late 2007 with stocks going down and oil going up. See the divergence on this chart.

Figure 1. S&P 500 (Red and Green) Vs. Crude Oil (Pink), 2006 to 2010

Source: TD Ameritrade
The times of significant decoupling are marked “Divergence." In the first divergence we have stocks up, commodities down. Later, we have stocks down, commodities up—a sign more typical of a major commodity top and nail in the coffin for equities. For example, it was that final push in oil up to $147 in mid-2008 as equities had already rolled over (peaking October 2007) that killed the equities at the end of the trend.   And then Romeo and Juliet collapsed together.

Right now, I see that we are in the same trading pattern, but only in the late 2006 part.  This means the commodity and equity top is coming…but likely not yet.

The Current Environment

Since 2009 stocks and oil have been moving in unison… until recently. Based on Figure 2 below, oil has been showing a slight divergence with stocks since hitting a high in May, 2011. The recent rally was unable to reach those heights and has started to decline once again.

Stocks on the other hand have hit new highs in 2012 — leaving the uptrend unquestionably intact up to this point.

Figure 2. S&P 500 (Red and Green) vs. Oil (Pink), May, 2010 to Current

Source: TD Ameritrade
The last few months are especially interesting — Oil has been declining since March and stocks have risen. To me this looks a lot like the occurrence which took place in the last half of 2006—at least the start of it.
Commodities overall, represented by the CRB Commodities Index, show the past and current divergences more clearly.

Figure 3. CRB Commodities Index (Blue) vs. S&P 500 (Green)

Source: Incrediblecharts
Note the similarity between now and 2006. Overall commodities and stocks are in an uptrend—but  stocks are pushing ahead as commodities decline—just like in 2006. We can see what happened in 2007 and 2008 following that divergence—in 2007 both commodities and stocks rallied until October, then an eight month divergence until the final collapse together.
Could that same scenario happen now? I believe it can, although I don’t believe we will have a massive spike in oil like we did in 2007 and 2008.

What the Current Decoupling Implies

If we are seeing another situation like 2006—with oil dropping and stocks rising (or at least holding steady)—it will be a good time to own stocks for the short term.  While markets always gyrate I continue to believe the current market environment is a favorable one for investors.

Also, the rally in stocks appears to be incomplete. If we look back to 2000 we see the market in a large expanding range as shown in Figure 4—higher highs and lower lows; the chart looks like a megaphone.

If that happens, I see the S&P 500 moving very close to upper portion of that expanding range this year. I don’t believe stocks will explode higher from current levels but rather continue making see-saw moves higher to near 1500 to 1550 on the S&P 500 (right below the expanding range threshold and near 2007 highs).  For investors that still means a lot of potential upside—likely 10%+ from current levels.

Figure 4. S&P 500 20 Year Monthly Chart (1992 to Current) – Expanding Range

Source: TD Ameritrade

What to Watch For

The situation now is similar to late 2006, leading into 2008. Oil could decline for the near term as stocks continue to rally, or at least hold above support levels (discussed shortly). The push higher in stocks presents an opportunity for investors to catch the tail end of this long-term rally which began back in 2009.

After a short-term decline (happening now) oil is also likely to follow suit putting in its high after the stocks market has already begun to decline—just like in late 2007.

Historically the energy sector shows strength late in trends, often to due to this last push higher in oil, as broader indexes such as the S&P 500 have already turned lower. Therefore, watch for the energy sector to pick up over the next several months as oil puts in a final thrust higher. I do not expect oil to rally aggressively as it did in 2008; it is more likely to peak at $120 or below.

How to Trade It

Nothing moves in a straight line and what has been discussed provides a general structure of what I believe will unfold. Short-term declines in the S&P 500 are likely to bottom out in the vicinity of 1340 or above (within about 30 points of current levels), ultimately rallying to near the 1500 region over the next several months.

Oil could continue to decline but is likely to begin moving higher, ultimately peaking after stocks have peaked—near $120 is likely to be high for oil before it too sees another significant decline (Romeo and Juliet die).

That leaves some time to buy stocks for what could be further upside. If the S&P 500 holds above 1340 look for the energy sector to be a leader late in the trend as the market continues to push higher.

In the closing months of 2012 I believe the upper band of the expanding range (the top of the megaphone) will have been tested in the S&P 500, and it will again lead to a major decline (October top again?). That stills leaves several months though that are likely to be good months for the markets, especially buying on pullbacks into support areas like we are currently seeing.

In terms of managing risk, 1340 is the level I am watching on the S&P 500; based on the technicals I believe the level should hold, for those who like to leave a bit more room 1300 is next level to watch. If the latter is breached it is a major warning signal. If support is found above these levels expect a move up to 1500 or slightly higher.

- Cory Mitchell, CMT

Editor's Note: With so much attention on companies capitalizing on the Shale Oil Revolution — it's easy to overlook the single energy services company that is bringing new life to aging oil fields around the world. Its technology is proven to increase the reserves of oil formations — often dramatically — without any drilling whatsoever. The economics are incredible. Imagine being able to produce millions of barrels of oil—for pennies a barrel — you can get all the profitable details on right here.

The recent stock and oil relationship – and how to trade it

Becky Kramer profiles oil workers in North Dakota who live in housing that allows them to focus on work:

“The man camp really simplifies your life,” said Clay Ness, 49, of Billings, who lived in an apartment before he moved into Bear Paw Lodge. “You don’t have to go shopping and prepare meals. That takes a lot of time. A trip to Wal-Mart was never less than one and a half hours.”

Spartan rooms contain a single bed, television, desk and chair. The housekeeping staff changes the sheets every other day.

Read more here.

North Dakota oil workers live in spartan ‘man camps’

Teachers from across Canada are being offered all-paid, six-day field trips to experience the Alberta oil sands.

Inside Education, a non-profit group with backing from Alberta Government and oil and gas companies, is accepting applications from students and teachers to visit the region and take a tour. All group accommodations, meals, travel, and tours that occur during the program are covered.

The program consists of indoor and outdoor sessions. Participants are required to complete the full itinerary.

Participants will tour surface and in-situ sites. There will be presentations from industry, government, academia, the environmental community and Alberta’s Aboriginal community.

Image from Inside Education

Teachers can fly to Fort McMurray for free to learn about the oil sands

Yesterday, I made a prediction that should scare a lot of investors.

I predicted a massive loss in market valuation for some of North America's largest energy producers. You might own some of these names yourself.

I'll share some specific names with you in a moment… But before we cover them, it's important you know the dynamics that will drive them lower.

I covered the first dynamic yesterday. It's called "reserve write-downs."

As you probably know, the price of natural gas has collapsed more than 60% over the past 12 months. Energy firms that carry billions of dollars of reserves on their books based on the "old" prices (around $4 per MMBtu) will have to "write-down" the value of those reserves to reflect the new prices (below $2 per MMBtu).

Natural gas reserves that were "economically recoverable" – and thus, extremely valuable – when natural gas traded for more than $4 per MMBtu back in 2010 are going to be worth much, much less… now that natural gas is below $2 per MMBtu.

The second dynamic involves "hedging."

Hedging is when one party agrees to sell a commodity to another party at a particular price in the future. This strategy helps commodity producers and consumers know in advance what their price of a given commodity will be. It gives both parties a greater ability to plan for the future.

For example, a farmer might agree to sell his corn for $6 per bushel before he even harvests it. Or an oil producer might agree to sell his production for $100 per barrel. This gives the farmer and the oilman the certainty they need to run their budgets. Even if the prices of their given commodities fall, both the farmer and the oilman are protected from price declines. They've "hedged" their production.

Hedged natural gas contracts have protected many producers from the full wrath of today's rock-bottom prices. They've been able to sell their production at relatively high prices… even while the spot price collapsed.

But… for a lot of producers, these higher-priced hedges are about to expire.

Encana, Canada's largest natural gas company, is a good example. The company had prudently hedged lots of the gas it sold over the last six months. This means it was still realizing $4 or $5 per MMBtu on its sales. Now, those hedges are expiring… and the new hedges are at much lower prices. Encana's cash flow and its economically recoverable reserves are going to plunge.

Encana isn't the only natural gas company in this situation.

In recent months, the second-largest natural gas producer in the U.S., Chesapeake Energy, removed most of its gas hedges for 2012 and 2013 based on the belief that prices are at or near a bottom.

Such a move, known as going "naked to the strip," marks a major turnaround for a company that was one of the best and most active hedgers in the sector. Now, Chesapeake has no protection if gas prices continue to slide. It's a risky scenario seeing as prices are currently below production costs in most U.S. gas basins.

For investors, the fact that many North American gas producers are seeing their high-priced hedges expire makes it more important than ever to understand a company's cash flow picture going forward.

An investor must ask the following questions…

• What percentage of production remains hedged and at what price?

• How much will a company have to sell at or near the spot price?

• What is the company's average cost of production?

• Is the loss of high hedges about to send the company into the red?

These are the questions you need to ask… But be warned: you won't find very many producers with pretty short- and medium-term cash flow pictures.I expect natural gas prices to remain between $1.50 and $2 per MMBtu for the next 12 months.

Those prices will render a lot of production uneconomic. They will force companies to massively write down the value of their reserves. Cash flows will plummet. Shares in gas producers, while down a lot over the past year, will fall more than 25%.

The bloodbath in natural gas stocks is about to get worse.

Marin Katusa

Which stocks will lose the most in the coming energy bloodbath