This is the Oil Trade You Should be Making

Here it is, in one monumental and telling graph – the point on energy you must remember:

Yes, there is demand drop in the US, Europe and Japan but it is miniscule and even 25 years from now will amount to less than a million barrels a day of total liquids consumption. Meanwhile, demand growth from China, India and the Middle East ALONE will increase close to 20 million barrels a day.

Now, let me give you a second chart; the one that I believe most energy watchers are relying upon to offset chart number one:

Here’s the most graphic representation I’ve found of the magical, monster increase in shale oil production in the US – a fantastic revolution of technology and applied capital, but which has amounted to less than a 3 million barrel a day increase since tight oil recovery became widespread here in the US less than 5 years ago.  

And if you look at the areas of major growth, the Bakken and Eagle Ford, you’re sure to get suspicious of the trajectory of this second graph.  Already you’ve had numerous analysts and even CEO’s of oil companies (EOG’s Mark Papa being the most outspoken) saying that the great US shale plays have already been picked over and the peak of their production potential is not that far off.  This graph, in other words, is shortly about to flatten it’s top.

You’d find it hard to say the same for graph number one, unless you were an out-of-touch renewables dreamer.   

Add to that the ever rising costs of production for the average barrel of crude as conventional wells continue to run dry and oil is found in deeper and more difficult-to-drill wells and you’ve got an inevitable conclusion:  Oil prices are on an inexorable march upwards.  

My advice:  Ignore the current noise in the energy markets of $92 crude being caused by a strong dollar or a weak Chinese data point or who knows what else.

Master oil trader Andrew Hall, the Phibro alum who famously made $100m a year two years in a row with Citigroup (C), was recently profiled in Bloomberg. I had nearly forgotten about Mr. Hall after seeing his second $100m bonus unpaid after Citi’s near bankruptcy and Federal bailout.  

But it seems Mr. Hall, as legendary to oil traders as Druckenmiller, Chanos and Paulson are to equity players, has been quietly trading a ‘small’ private fund of $4 billion and making precisely the same bets that earned him such spectacular bonuses in 2008 and 2009.  He’s apparently doing precisely what I’ve been doing, that is buying far back month oil futures – only he’s been doing it several thousand times more frequently than I ever could.  

And although Andrew Hall’s fund has lost the last two years, I think he’s in for another fantastic score very soon.

It’s as simple as two charts – these two I’ve just given you.