Get Ready for $75 Oil

Losing two or three countries from the eurozone is distressing enough on its own; however, the writedowns expected from German and especially French banks may require liquidity injections from the central bank to maintain solvency. Pressure on the equity markets may be mitigated by European Central Bank liquidity; however, the net result is a reduction in relative future spending/GDP growth.

By the end of 2007, the eurozone was the largest trading partner with China, surpassing U.S. In 2007, many Chinese companies not only would quote products in euros, some moved away from pricing in dollars completely.

The European economic slowdown is impacting China enough to continue speculation of monetary easing by China's central bank. On May 5, the central bank lowered financial institutional reserve requirements half a basis point.

While Europeans fret over what shoe will drop next, energy costs in U.S. continue to fall. Oil prices are now at a seven-month low reflecting economic weakness in Europe.

On Wednesday, United States oil fund USO (USO) traded under $33, a new low for 2012, as TWI oil finished today at $87.49. Oil companies trading at or near 2012 lows this week include Exxon Mobil (XOM), ConocoPhillips (COP), Marathon (MRO), BP (BP) and the S&P Energy Select ETF XLE (XLE).

Natural Gas

The Europe situation is why oil prices are falling now; however, regardless of how long it takes for Europe to regain its balance, natural gas tracked with United States Natural Gas ETF (UNG) within a few years will become the principal influence in North American oil prices. (Read my article about natural gas displacing petroleum.)

Exxon is conducting a feasibility study on exporting natural gas, according to CEO Rex Tillerson during the shareholder meeting Wednesday. While natural gas prices are currently much higher in Asia, China has large untapped natural gas reserves trapped in shale formations. New technologies are driving down the cost of production in natural gas and oil.

Marathon's recent drilling plan for expanded drilling has passed the first step, and Canadian drillers including Shell will soon add new production under $50 a barrel.

Marathon's dividend yield is 2.7% with a payout percentage of 22%. Conoco Phillips' and BP's dividend yield now stands above 5%. Conoco Phillips' shares have fallen in price from an April high of over $75, to $52 today.

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