Silver Soars, Dollar Plunges

Jim Brown
Printer Friendly Version

Amid this economic firestorm the IEA warns that the era of cheap energy is over. The dollar sank to a new 16-month low against the Euro last week and that prompted price spikes in every commodity from silver to oil.

The International Energy Association (IEA) released a statement saying "the age of cheap energy is over." IEA Director Nobuo Tanaka said the increasing demand from the growing world population will force a dramatic need for additional oil production.

The IEA said the world will need another 50 million barrels per day of production from NEW FIELDS by 2035 in order to meet expected demand. Over that same period the existing 68 mbpd of conventional oil from existing fields (2009 numbers) will decline to only 16 mbpd by 2035.

He said crude oil production is not increasing but the need for additional capacity continues to grow. Demand for all liquids is expected to rise to 90 mbpd in 2012. That represents a large increase in natural gas liquids to offset the flat production of crude.

The price of oil rose on Sunday to $112.81 for WTI and $124.50 for Brent thanks to the rapid increase of violence in the MENA countries. Oil facilities were attacked by government forces in Libya and hundreds of protestors were killed in Yemen, Syria and the Sudan plus new demonstrations broke out in Saudi Arabia. The revolutionary wave in the MENA countries is not just a local phenomenon but is spreading to the entire region. This represents a growing danger to crude oil production and delivery throughout the region.

Saudi Arabia has been the recipient of numerous negative articles after they announced they reduced oil production by 800,000 bpd last week due to lack of demand. Numerous authors and analysts are disputing that claim saying there is plenty of demand and the real problem was a lack of production capability by Saudi Arabia and the sudden need to produce a lot of cash.

Saudi's kin Abdullah has announced over $135 billion in stimulus for the people in order to keep peace in the country. That means they will have to abandon their $75-$85 is a fair price claim and join with other price hawks in pushing prices higher in order to pay for that stimulus. At current prices Saudi receives a little more than $300 billion a year in oil revenues. That $135 billion in stimulus would be a major bite to revenues even paid out over multiple years. This means Saudi must help push prices higher.

In the U.S. where gasoline prices hit an average of $3.87 this weekend the president has taken up the gauntlet against those evil speculators and price gougers that are taking advantage of the consumer. I know in this newsletter we all get a good laugh at this obviously political ploy when he and his administration are the biggest obstacle to producing cheaper gasoline in the U.S. by failing to approve the more than 300 permit applications for drilling in the gulf. Production from the gulf is expected to decline by more than 375,000 bpd in 2012 as a result of his moratorium. Unfortunately his words on gas prices are hollow.

Futures Magazine had a good article in an open letter to the president. Mr President Give Us A Break

The U.S. rig count hit a milestone last week with 1800 active rigs. There were 913 drilling for oil and 878 for gas. That is the first time oil rigs outnumbered gas rigs since 1995. The increase in oil rigs of 33 was the largest in any week since 1990.

There is a growing pool of technical analysts that believe oil prices are setting up for another significant move higher. They claim a move over $113 on WTI could cause another wave of short covering and program buying. This move higher could see $125 and this would guarantee a move in gasoline prices over $4 nationwide.

On the fundamental side there are many who believe the Libyan crisis is developing into a stalemate and production from Libya could eventually be halted for over a year. This deficit in light crude will slowly erode stockpiles around the world and by year-end could force prices significantly higher.

Add in the decline in the dollar and we could be setting up for a retest of the highs sooner than previously expected. Silver is trading at $47.75 Sunday night and gold $1511.80.

Jim Brown

This newsletter is only one of the newsletters produced by OilSlick each day. The investment newsletter is also produced daily and contains the current play recommendations in the energy sector. Stocks, options and futures are featured. If you are not receiving the "Play Newsletter" please visit the subscribe link below to register.

Subscribe to Energy Picks Newsletter

See a list of our closed plays from 2010 here: Closed Positions

The OilSlick Newsletter is based on the expectations for global oil production of light sweet crude to peak and begin to decline in the 2012-2014 timeframe. I am calling this "Peak Sweet™" instead of Peak Oil. This is the point where global production of conventional light sweet crude supplies can no longer be supplemented by enough oil sands production, deepwater oil production, biofuels and natural gas liquids to offset the decline in existing fields. The roughly 6% annual decline of existing production due to depletion is larger than the rate of new discoveries and new production being added each year. The Peak Sweet™ countdown clock is ticking and time is growing short. Peak Oil will arrive shortly thereafter. Are you prepared?