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Eric Fry, getting ready to fill up his car with cheap gasoline, reports...
Sean Brodrick is The Oxford Club's resident natural resources expert. He's traveled the world investigating various types of resource properties and investment opportunities. And when he returns from one of his many far-flung forays, Sean usually has good things to say about what he has just seen.
In fact, as a hard-core "resource guy," Sean often has good things to say about resource investments. But not always. So whenever Sean has something not-so-good to say about a particular resource sector, it deserves attention.
In today's column, Sean explains why he is bearish on oil... and why he expects the price of oil to move lower once again before it moves higher.
But even while issuing a downbeat forecast for crude oil, Sean suggests a way to profit. Read on...
Exposed: Blowing the Whistle on Bush, Clinton and Obama
Most Americans haven't heard about this... But over the past decade, Presidents Bush, Clinton and Obama have all been making millions from a very unusual cash source... Billionaires and their powerful friends have collected huge amounts of income from this too. Problem is, 99% of all American citizens typically can't access this extremely profitable market. But now, we've found a perfectly legal backdoor way for ordinary investors to get in... for as little as $15. Details here.
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A Race to the Bottom in the Oil Price War
If you're looking for weapons of mass destruction, then look no further than the oil war raging between the U.S. and the oil sheiks of OPEC. The war has hit a lull... for now. Oil prices are stuck in a range... for now.
But there are forces afoot that could open a new front in the oil war, and send prices careening lower until someone cries "Uncle!"
The good news is that there are potentially extraordinary opportunities for shrewd investors.
First, let's acknowledge that oil prices are range-bound. That fact is easily visible in the chart below.
 You can see that the price of Brent crude briefly poked its head above $65 a barrel, but then drifted lower. It's been effectively stuck in a channel since February. (I'm using the international oil price because this is where the oil price war is being waged. The benchmark U.S. oil price was recently at a 5% discount to Brent.)
Now, oil bulls will point out that the U.S. drill rig count keeps falling. And that's true. The rig count was recently at 857, falling for 28 straight weeks and way down from the 1,931 working rigs at the peak last year.
And when you take out the rigs that are drilling for natural gas, the number of rigs drilling for oil is even smaller - 631. HOWEVER - and this is a biggie - U.S. oil production keeps climbing.
 U.S. oil output in the first half of June reached a 44-year high of 9.6 million barrels per day (bpd). That's the highest level since May 1971.
So how is that possible? How can U.S. oil production go up when the number of drill rigs keeps falling? The answer is changing technology. Oil producers are getting better and better at squeezing more oil out of every well.
In fact, thanks to rising efficiency, the costs of drilling and production are going down. They're expected to go down even more next year.
Now, let's add rising efficiency to the growing trend of drilling new wells, but not completing them. In other words, oil production companies have drilled lots of new wells, but have yet to turn on the spigots.
In a recent analysis, Bloomberg estimated that drillers in oil and gas fields from Texas to Pennsylvania have yet to turn on the spigots at 4,731 wells they've drilled. When/if those wells begin producing, that will bring an extra 322,000 barrels a day online.
Add in new drilling that is going on in the Gulf of Mexico, and the U.S. could produce close to 10 million barrels per day. Note that this massive potential production takes into account falling production in Alaska and some of the big shale fields.
With oil below $60 a barrel, it is not financially feasible to produce at that high level right now. But costs are going down and any rise in the price of oil will likely be met with a flood of new production.
So our side of the Atlantic seems to be loaded for bear. How are things on the other side?
OPEC Production Is Booming
OPEC is producing nearly a million more barrels of oil each day than the cartel's stated target. In total, OPEC said its 12 nations produced 30.98 million bpd in May - the highest level since September 2012 and a nearly 4% increase since May 2014.
Iraq and Saudi Arabia lead the way in opening the taps.
Iraq is pumping about 3.8 million bpd, a new national record. What's more, Iraq has stated that it intends to increase oil production throughout the year.
Saudi Arabia is pumping 10.3 million bpd. That's up about 600,000 barrels since its pivotal decision last year to abandon its usual strategy of defending oil prices by cutting production. The "central bank of oil" is expected to raise crude oil production to 11 million bpd in the second half of the year.
Iran holds the world's fourth-largest proved crude oil reserves and the world's second-largest natural gas reserves. Its production is up 92,000 bpd year over year.
Other OPEC members that have raised production include Libya, Angola, the United Arab Emirates, Venezuela and Ecuador. Only four OPEC members - Nigeria, Algeria, Qatar and Kuwait - have seen production go down. And two of them have good reason: they're on the brink of civil war.
Of course, there are other players in this oil price war. Russia is maintaining a high production level of 10.7 million bpd.
The bottom line is that there is a surplus of oil in the world. The U.S. Energy Information Administration pegged that surplus at nearly 3 million bpd in its recent Short-Term Energy Outlook.
So Why Are Traders So Bullish?
Despite all this surplus of supply, you'll see plenty of calls for $80 oil by the end of the year. What are the bulls looking at? I see three factors supporting the bullish argument.
Less Money for Exploration. Exploration and production companies in the U.S. and Canada have cut budgets by an average of 41% for 2015 compared with 2014 budgets, Moody's analysis showed. Exploration and production companies could cut spending even more later this year if oil prices continue downward. These exploration cuts could reduce future supplies.
Demand Is Up. U.S. drivers have driven up demand for gasoline by 4.2% in the past year. Vehicle miles driven are up. And total U.S. petroleum deliveries grew 5.3% in May year over year to 19.5 million barrels per day. That's the highest level of the year.
Chinese Demand. China is the main force supporting oil prices. The country became the world's top oil importer in April. And in the first three months of 2015, sales of SUVs soared an eye-popping 48% in China over last year.
But vehicle sales cannot account for the surge in Chinese demand for oil. So what is China doing with all the oil it's importing? It's storing it!
China has already built out about 150 million barrels of extra storage, with more capacity planned through the end of the year. The goal is to build out to about 500 million barrels, compared to the U.S. capacity of 700 million to 800 million barrels.
But China doesn't have storage for all that oil on land. So the Chinese have also rented the biggest oil supertanker in the world, the TI Europe. This ship is a 440,000-metric ton behemoth that can hold 3 million barrels of oil. And it's doing just that, parked in the Strait of Malacca off the coast of Malaysia.
And that's not the only one. Details are murky, but according to industry watchers, China has rented 17 or so ocean-going tankers for oil storage.
But here's what the bulls don't seem to realize. At some point, China will have rented all the oil tankers it can. The tanker market is already tight, with rental costs way up year over year.
When China reaches the limits of its storage - both on land and at sea - its imports will start to slack off. In fact, we may have seen that in May. China's refiners imported the least crude in 15 months. Overseas purchases slumped to 5.5 million barrels a day, down from a record 7.4 million a day in April.
So what happens if China doesn't keep buying hand over fist at the same time that oil producers in North America, Russia and OPEC seem to have pumping fever?
Then we might see the next leg down in oil prices. My target would be $50, as the U.S., Russia and OPEC furiously try to cut each others' throats with an oily knife in a furious race to the bottom.
Now, I don't think we'll see low oil prices forever. The best cure for low prices is low prices. But a brief, yet big, leg down? That would not surprise me at all.
How You Can Trade This
On the bright side, there's a way you can play the ongoing surge in oil production. Consumer and travel-oriented stocks will benefit big time, just like they did the last time oil prices plunged.
Importantly, all that oil has to be transported. And the Guggenheim Global Shipping ETF (NYSE: SEA), which tracks the Dow Jones Global Shipping Index, is portioned 35% toward the energy sector. That is, oil tankers.
The ETF also isn't a bad bet if you think the global economy is shifting into higher gear.
Volume in the fund is light, so be careful getting in. Use a limit order. And do your own due diligence before buying anything.
All the best,
Sean Brodrick
For The Non-Dollar Report
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