Saturday Morning Musings

Disclaimer: long posts generally have typographical errors. This post has been spell-checked only once. I assume there are spelling and grammatical errors. These are my opinions only. This is for my use only. If you happen to come across this post you are free to read it and cut/paste at your heart's content. But don't make any investment decisions or life-changing decisions based on anything you read here or think you may have read here.

For an equities investor in the oil and gas sector, this may have been one of the more interesting weeks in some time.

I have been blogging daily on the Bakken since 2007. The current "milliondollarway" blog has been on-line since 2009.

I recall, in the early days, how enthusiastic I was about the Bakken. Much of that enthusiasm -- okay, ALL of that enthusiasm -- was based on almost no knowledge of the oil and gas industry, and certainly NO knowledge of the Bakken. But with the help of readers, Teegue's discussion group, and, the Bakken Blog, I have learned a lot. If I had to identify "the one thing" that got me most interested in doing a blog was another blog's subject line: "What in the world has Anschutz found?", back on September 17, 2009.

Over the years, my original intentions to talk only about the Bakken have evolved.

The first realization: I could not talk about the Bakken without following "the stock market." Folks can do a lot of talking but when their money is on the line, it speaks volumes. Over time, that fact evolved: I realize, now, how much all of this has helped me be a better investor in general, not just in the oil and gas sector. Disclaimer: this is not an investment site. This is not an investment site, but I have learned a lot.

The second evolution had to do with digressions on non-Bakken subjects, notably ObamaCare and global warming. Initially, I did this because these were "hot button" issues for me, but I've noticed two things. First, blogging only about the Bakken, regardless how exciting it might be, gets boring for me after awhile (and probably for the reader also) and blogging about "hot button" issues keeps me on edge, something that helps when blogging 24/7. (Caffeinated coffee all helps. Memo to self: insert a big "thank you" to Starbucks here.)

The second thing I've noticed is that ObamaCare and global warming put the Bakken into perspective.

My attitude, comments, feelings, etc., on both ObamaCare and global warming have also evolved over the years.

That was prologue. I said earlier: "I have been blogging daily on the Bakken since 2007. The current "milliondollarway" blog has been on-line since 2009. I recall the early days, how enthusiastic I was about the Bakken. Much of that enthusiasm -- okay, ALL of that enthusiasm -- was based on almost no knowledge of the oil and gas industry, and certainly NO knowledge of the Bakken."

I do not recall any week since 2009 that has been more exciting for me, as an investor in the oil and gas industry, than this past week.

First and foremost: some months ago, an analyst said this has been the longest stretch of high-priced oil the US has ever seen. He did not define "high-price" but I assume he means over $90. Oil has spiked much higher over the years, but on a continuous basis, this is the longest period of time it has remained at a high level. I think six months ago Joe Kernen, one of the few intelligent anchors on CNBC, opined almost daily that if oil was "fairly" priced it would be $60/bbl. For six months, we've heard how oil would drift back to $80, if not $60. And come Monday, it may plummet. Or next month. Or next year.

But right now, it is what it is. When WTI hit $98, I thought we were in an "under-$100" trading range, and was very, very surprised to see oil go over $101 this week. For all practical purposes, WTI, May, 2014, futures closed Friday at $102.

I do not think it is due to geo-politics. I did not post the story, and I may not have the link any more, but this past week a Forbes columnist, speaking about the bull market, said that everything that is "known" is priced into the market. The Crimean is a "known." We don't know how it will play out, but the Crimean is a known, which pretty much means Putin/Obama/Crimean/Ukraine/NATO/Russia is baked into the price of oil. The Forbes columnist says what is not known is NOT baked into the price oil.

So, if that's true, what is driving oil over $100? It's not the weakness of the dollar. The dollar rose slightly or remained flat, during the rise in the price of oil, so it's not the weakness of the dollar driving the price of oil.

I can go through a laundry list of likely reasons (which I recently did) but I'll cut to the chase. I think it has to do with the drawdown at Cushing. The Keystone XL 2.0 South is draining Cushing; Keystone XL 2.0 North which was meant to replenish Cushing is not on-line, and probably never will be. Bakken oil should be replenishing Cushing via railroad and existing pipelines, but operators are getting better returns shipping Bakken oil to the east coast and the west coast.

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The second thing that made this an unusual week: the accumulating data that is coming out of the daily activity reports. As of March 30 for this year and the previous two years, this many permits have been issued, and this is how many permits were projected at that time:

• 2014: 668 -- 2,740 (rounds to 2700)
• 2013: 619 -- 2,539 (rounds to 2500)
• 2012: 520 -- 2,132 (rounds to 2100)

In addition, more and more multi-well pads, all of which bring down cost/well.

Likewise, the monthly dockets have been incredible. I pretty much thought the dockets were going to be winding down a bit after a couple of dockets earlier this year, but today's docket told me how wrong I was. The frosting on the cake that was this week in the Bakken: the April, 2014, NDIC hearing dockets. And the candle on the frosting on the cake to this week: case 22272.

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This past week was also a huge week for geo-politics. I assume most of the TV chatter is on western Europe, the Ukraine, the Crimean. The sleeper is Brazil with a worsening drought and corresponding drop in hydroelectric power. Their oil industry is facing some serious headwinds. But Brazil is a bit more long-term, and not quite as important to the oil and gas industry as its neighbor, Venezuela. The tea leaves suggest Venezuela is about ready to implode. If it does, it could take its oil economy with it, turning Venezuela into the Libya of the western Hemisphere: unreliable oil exports.

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There are more and more stories coming out in the mainstream media how relatively inexpensive US energy is going to transform global economics. We've talked about that before. What's new is this: refineries are producing at well less than their capacity, and gasoline and diesel fuel exports are surging. That caught me off guard; I've only seen one analyst talk about that which means not many know about it, or many analysts want to keep it a secret. Bakken oil is not the preferred oil for Texas coast refineries. Bakken oil tends to track Brent oil at least to some degree. There are three headwinds affecting adequate oil reaching the Texas coastal bend: a) Cushing reserves are being drawn down without significant refill upstream; b) the recent Houston Ship Channel closure (albeit transient); and, a potential loss of Venezuelan oil.

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One last thing: the US driving season has yet to begin, and Californians are now paying more than $4.50/gallon for gasoline.

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It was a very exciting week. The big question: what was President Obama's real reason for visiting Saudi Arabia this week. Sure the "Syrian thing" is made worse by events in the Ukraine but one wonders if President Obama is more concerned about California politics than a Syrian civil war. Californians are now paying, as noted above, $4.50/gallon of gasoline, industries are moving out of state (mostly to Texas), and ObamaCare is taking its toll. Any interruption in Saudi oil production would be a huge pill for Californians to swallow.