Monthly live chats are my favorite feature on The Energy Strategist website. Since we added this capability in late June, I’ve hosted seven chat sessions, during which subscribers can submit questions and receive my answers in real time. 

Each chat is slated to run for an hour, but as longtime readers can attest, brevity isn’t my forte; the Dec. 2, 2010, session went on for over three hours and included a record number of participants. This installment of The Energy Letter focuses on seven of the most frequent questions readers asked during the marathon chat session. (Click here to read an archived transcript of the chat.) Below you’ll find each query and my expanded response.

What’s your outlook for crude oil prices in 2011?

Oil prices will enjoy a solid 2011, breaching $100 per barrel and likely spiking even higher on occasion. Supply and demand conditions support this price action.

Global oil demand took a hit during the 2007-09 recession, with developed markets accounting for much of the decline. But that trend is reversing. For one, oil consumption continues to bounce back in the US and other developed economies. According to the International Energy Agency (IEA), oil demand has increased dramatically, up by 1.5 million barrels per day from the third quarter of 2009.

Meanwhile, developing nations consumed 1.6 million more barrels of oil per day over the same 12-month period. Oil demand in these countries should grow by an additional 1.5 million barrels per day in 2011.

Rising demand is beginning to reduce inventories of oil and refined products in the developed world. For example, US petroleum inventories peaked in the week ended Sept. 17, 2010, before declining by nearly 38 million barrels. Still bloated by historical norms, US petroleum stockpiles should continue to normalize in 2011.

To maintain current price levels, increased supplies will need to offset rising global demand for oil. OPEC would be the primary source of this supply growth, cutting into the group’s spare capacity–additional production that can be brought online quickly and sustained for some time. Similar trends were at play when oil prices skyrocketed in 2007-08.

Investors should also monitor the spread between the cost of Brent and West Texas Intermediate (WTI) crude oil. Brent is the European benchmark for crude oil prices, while WTI is the US standard. WTI has historically traded at a slight premium to Brent because it’s a higher-quality oil. But in recent weeks Brent has pushed above $90 per barrel, even as WTI has hovered in the high $80s per barrel.   

Why is this longstanding price relationship beginning to break down? The price of Brent crude oil provides a better indication of global supply and demand conditions, while WTI tends to reflect the state of the US oil market. As the US is no longer the primary source of growth in global oil demand, expect the price of Brent crude to lead WTI throughout 2011.

To what extent does the recent run-up in oil prices stem from increased demand, rather than a declining US dollar?

To put the US dollar’s price movements in context, we must establish a benchmark; currencies don’t rise or fall on their own but in relation to other currencies or assets. When investors speak of a falling US dollar, they’re usually referring to the dollar’s performance relative to the euro. Another common benchmark is the US Dollar Index, which compares the dollar’s value to a basket of foreign currencies that’s heavily weighted towards the euro.

Whenever oil prices rise or fall, the talking heads on TV usually attribute the move to a shift in the dollar’s value relative to the euro. This explanation is ridiculous.

Since late August, the price of WTI crude has increase by more than 25 percent, from $71 per barrel to nearly $90 per barrel. But the euro has appreciated just 5 percent relative to the US dollar. Want further proof? Oil prices are up roughly 10 percent since early November, while the euro has declined relative to the US dollar, from $1.42 per euro to about $1.32 per euro.

The same story holds over the long term. Although the euro-dollar exchange rate is at roughly the same level as in early 2005, oil prices have more than doubled since then, from the low $40s per barrel to about $90 per barrel.

Supply and demand expectations are the primary drivers of oil prices.

What’s your outlook for the price of natural gas?

Natural gas has lagged oil throughout 2010 in terms of price, though the former commodity has improved modestly since its fall low. Natural gas prices should remain relatively depressed for at least the first half of 2011, but 2012 could bring some upside. I don’t expect natural gas prices to collapse out right; rather, the commodity should trade within a range of $3.50 to $6 per million British thermal units.

The recent strength in natural gas stems primarily from the onset of colder weather in North America and the beginning of the gas withdrawal season. The fundamental headwind for gas isn’t lack of demand but excess supply from US shale gas plays.

The normal mechanism that links gas prices to drilling activity has deteriorated in recent years because producers have been forced to drill wells in order to secure leased acreage. In addition, the hottest US unconventional gas plays are also rich in oil or natural gas liquids (NGL), high-value commodities that offer superior economics, regardless of natural gas prices.

By the mid-2011 most producers will have finished drilling to hold leases, at which point activity in dry-gas basins–for example, the Barnett Shale and Haynesville Shale–should moderate. This trend should help to bring to bring the supply and demand balance back into alignment over time.

Over the long haul, natural gas is likely to be a big winner, which explains why so many major integrated oil companies have acquired producers operating in key shale gas plays. Natural gas is by far the cleanest fossil fuel, has major cost advantages compared to oil or alternative energy and plays well with the current electricity grid. However, this is a theme for the next five to 10 years, not the next six to 12 months.

But there are near-term opportunities in the natural gas space. Firms with exposure to gas processing, for example, can benefit from big difference between dry-gas and NGL prices. In addition, some North American oil-services names will continue to benefit as rigs deployed in US shale gas plays are shifted to shale oil plays such as the Bakken Shale, Niobrara Shale and Eagle Ford Shale.

I produced a detailed report covering all of these plays in the Oct. 20, 2010, issue of The Energy Strategist, Rough Guide to Shale Oil.

What’s your outlook for uranium prices?

Spot uranium prices have rallied sharply from the low $40s per pound in midsummer to above $60 per pound. Activity in the spot market has been robust, and uranium prices could hit an all-time annual high in 2010.

Although a number of factors are behind the recent uptrend in uranium prices, major buyers–particularly the Chinese–have worked out deals with leading producers to secure long-term supplies, moves that suggest concerns about the availability of fuel. This makes sense. A large number of new reactors are scheduled to start up over the next decade, especially in emerging markets. Moreover, traditional sources of secondary supply–for example, a Russian program to reprocess nuclear warheads–will wind down in the near future. At this point, there aren’t enough new mines to fill the gap.

As the supply of uranium has tightened, utilities, investors and producers have all been active in the spot market, pushing up prices. Uranium could command north of $70 per pound in 2011, and shares of uranium miners should rally sharply. My favorite plays already produce uranium and/or have the scope to ramp up output over the next few years.

At what point will higher oil prices begin to reduce global consumption and weigh on economic growth?

A little over a decade ago, Americans paid roughly $1 for a gallon of gasoline; at the time, gasoline prices of $2 per gallon would have tempered demand. Today’s consumers have grown accustomed to paying $3 to $4 per gallon of gasoline, so it would take even higher prices to reduce consumption.

Demand destruction is much harder to envision in emerging economies. As I pointed out in Eight Reasons to Buy Oil-Related Stocks, oil is more affordable to the average Chinese consumer, despite higher prices. Not only has China’s currency appreciated relative to the US dollar, but fast-rising disposable incomes also ensure that oil is more affordable.

Bottom line: Oil would need to jump to more than $120 per barrel for demand destruction to occur on a global scale. At the same time, any meaningful uptick in oil prices will slow global economic growth to some extent.

What’s your take on tanker stocks? Some analysts have downgraded these names. Why do you continue to recommend them?

Spot market rates for oil tankers remain weak for two main reasons: weak demand growth for oil and significant growth in new tanker supply.

Both headwinds will abate over time. Oil demand should continue to pick up through 2011, increasing the need to transport oil from the Middle East and other producing regions to end markets around the world. At the same time, supply growth should be held in check. Operators continue to scrap older tankers, while some have postponed or canceled construction of new vessels. Slow-steaming, or running ships at reduced speed to conserve fuel, should also help the industry. In short, I expect the supply-demand balance to become more favorable in late 2011.

Still, investors should be selective about which tanker stocks they buy. Look for two key traits: high time charter coverage for 2011-12 and an attractive dividend yield. Time charters are long-term deals that lock in fixed rates for tankers for years into the future. Companies with time charters covering much or all of their available 2011 capacity will continue to enjoy stable cash flows, regardless of the path of spot rates. These cash flows, in turn, allow the best in the business to maintain their dividend payouts.

The only tanker stock I currently recommend in my Fresh Money Buys list has heavy time charter coverage over the next year and limited exposure to spot rates. Since recommendation, the stock has returned more than 25 percent. It also pays a sustainable yield in excess of 8 percent. That’s not bad for a supposedly “weak” tanker market.

The same basic strategy applies to dry-bulk shipping companies, firms that transport commodities such as coal and copper.

Enterprise Products Partners LP (NYSE: EPD) recently issued new units, and the stock has taken a hit. Should I buy or sell?

Buy the dip that often occurs after solid master limited partnerships (MLP) issue additional units. Investors often sell when an MLP issues new units because this move ostensibly dilutes the value existing shareholders’ stakes.

But new unit issues aren’t dilutive when the proceeds are used to acquire or build cash-producing assets. These cash flows will eventually will make its way to unitholders in the form of higher distributions. For the best MLPs, the growth in distributable cash flow trumps any near-term dilution in the value of units.

Roger Conrad and I performed a study of the MLPs we recommend in MLP Profits. Over the past 18 months every recommended MLP that sold off after issuing new units has eclipsed its pre-issue price within six months.

Winter Warmer

For me, winter hasn’t truly arrived until I set a fire in the fireplace. I guess there’s just something about that smell of burning wood that reminds me of wintertime, or perhaps it’s the taste of the traditional cognac I pour while enjoying the first fire of the season. Winter finally came this week with just enough of a chill in the air to justify buying a small bundle of wood from my local grocery store for the exorbitant price of $10.

The first few months of winter are always a welcome change of pace, and I always enjoy that first fire. But winter gets old quickly. By early January I’m usually yearning for spring.

But this year I won’t have to wait long–I’m headed to sunny Orlando, Florida for the World MoneyShow, which will take place Feb. 9-12. Better yet, immediately thereafter I’m sailing to even warmer climes on the Money Answers Investment cruise. 

I’d like to extend a special invitation to all Personal Finance Weekly readers to join me in Orlando in February. I also hope you’ll all decide to make a longer trip of it and follow me south for the cruise. To sign up for the World MoneyShow as my guest (it’s free of charge), click here. And for more information about the Money Answers Investment cruise, including a detailed itinerary, www.MoneyAnswersCruise.com or call 1-800-707-1634.