Market Overview

Traders Fear Oil Bubble

The rocketing costs of oil and gas shales", which in one case has shot up 10-fold in five weeks, is raising concern of a bubble, according to Bloomberg.

Bloomberg said that, “Chinese, French and Japanese energy explorers committed more than $8 billion in the past two weeks to shale-rock formations from Pennsylvania to Texas after 2011 set records for international average crude prices and U.S. gas demand. As competition among buyers intensifies, overseas investors are paying top dollar for fields where too few wells have been drilled to assess potential production, said Sven Del Pozzo, a senior equity analyst at IHS Inc. (IHS).”

Japanese commodity trader Marubeni agreed to pay up to $25,000 an acre for a stake in Hunt Oil's Eagle Ford shale property, located in Texas. “The price, which includes future drilling costs, exceeds the $21,000 an acre Marathon Oil Corp. (MRO) paid last year for nearby prospects owned by KKR (KKR) & Co.'s Hilcorp Resources Holdings LP. In the Utica shale of Ohio and Pennsylvania, deal prices jumped 10-fold in five weeks to almost $15,000 an acre, according to IHS figures.”

“I don't feel confident that the prices being paid now are justified,” Del Pozzo said in a telephone interview from Norwalk, Connecticut. “I'm wary.”

The big boys of energy production, including Exxon Mobil (NYSE: XOM) and Royal Dutch Shell (NASDAQ: RDSA), will be revisiting previously ignored U.S. prospects, as new drilling techniques have made these sites worthy of a second look.

According to Bloomberg, “The U.S. holds an estimated 2,543 trillion cubic feet of gas, enough to meet domestic demand for more than a century at current rates of consumption, according to the Energy Department in Washington. Shale accounts for 862 trillion of that total, or 34 percent. In China, shale formations hold an estimated 1,275 trillion cubic feet of gas, 12 times as much as the nation's so- called conventional fields.”


ACTION ITEMS:

Bullish:
Traders who believe that oil prices will continue to rise might want to consider the following trades:
  • Exxon Mobil remains a giant and will always be worth a look.
  • Ditto Royal Dutch Shell.
Bearish:
Traders who believe that the bubble might burst soon may consider alternative positions:
  • Gold and silver might be safer commodities right now.
Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

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