Thursday Morning Musings -- Bakken, North Dakota, USA

Flashback:

"So nothing has really changed in our thinking about the Bakken. It was just a timing thing related to the oil price shock in early 2009. Again, I’d like to remind everyone the Bakken is robust at $40. It returns the cost of capital at $40. So that’s why we feel very confident kind of pulling the trigger on the Bakken now and aggressively going after a five year program." -- Greg Hill, Hess, January 27, 2010, 4Q09 earnings conference call.

To repeat: "the Bakken is robust at $40." That was more than a year ago.

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The Bakken never ceases to surprise me.

The volatility of the oil market never ceases to surprise me.

The current price of oil really surprises me.

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Yesterday, it was reported that gasoline demand in the US has increased despite the increased price of gasoline. That is very, very remarkable. Much could be written on that.

Pundits continue to remark that price of oil at this level will not adversely impact economy of US. So far, they appear to be correct, and the market supports that view.

This a.m. I see that futures are up almost another buck for oil, now solidly over $106; and, the Dow futures are up another 45 points, coming on top of the modest rise yesterday. Natural gas is up another nickel, now up to $4.35.

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I was not surprised that shares in oil companies in the Bakken took a hit yesterday with recent concerns about NOG.

My gut feeling is that shares in Bakken companies were based on EURs, "never" hitting a dry hole, and price of oil would remain at $60. Two of those three remain intact.

The question is whether oil is at $106 today because of a) concerns about the Mideast; or, b) the Japanese nuclear disaster.

My hunch is this. I was once told that the market looks out about six months. That was before the internet. With information moving so quickly, I think the market now looks out about two or three months. If so, the Mideast tensions are driving the current price of oil. But the stories coming out of Asia suggest that there is going to be a huge shift in what Japan, China, Indonesia use to supply their energy needs. There have been several stories in the past 24 hours of China's record use of oil, and tankers moving oil to Japan.

So, when and if the Mideast settles down (again), the amount of oil being delivered to Japan and China will become the next story to support the price of oil.

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The recent pullback in shares in Bakken companies is offering another great opportunity to accumulate shares in the Bakken. It will be interesting to see what they do today if oil opens above $106.

If shares in the Bakken continue to be hit (if oil opens above $106 and the rest of the market is "green," it will suggest to me that we are being given another opportunity to enter the Bakken. 1Q11 earnings should be huge with price of oil at this level had it not been for the fact that the Bakken was shut in during the month of January. 1Q11 earnings will probably be a wash: high margins vs lack of production in January. But 2Q11 should be outstanding.

I've never been more bullish. I used to get concerned about $100 oil but when I read the story yesterday that gasoline demand in US grew, I was quite surprised, and my views have changed.

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I do remember pundits on CNBC repeating often that fundamentals do not support $60 oil. It was hard for me to argue; supplies at Cushing were overflowing. Deliveries of Bakken oil to Cushing were being decreased; producers were looking for other places to send their oil.