URA was a new kid on the scene at the time - but appeared to be a reasonable proxy for playing this radioactive bull market:
URA just began trading in early November, so we have a limited sample of historical results. But so far, the ETF has trended up, in tandem with uranium's spot price, as expected. With its not-unreasonable 0.69 percent management expense, I see no reason offhand why it shouldn't serve as a reasonable proxy for the price action of uranium stocks at large.
Green, green, green. We need to be green this, and green that. With the government this focused on green energy, I'm becoming more and more convinced that this whole green energy thing is turning into a giant circus. When was the last time the government was ahead of any trend, after all?
Although government may be "the ultimate herd" - buying high, selling low, and coming to the party in the 9th inning - there is one source of energy that is, actually, economically viable.
Guest author, and mathematician/poker extraordinaire Marin Katusa, digs into the whole green energy movement/farce here, separating the hype from the smart money in the energy sector.
This summer, there's been a flurry of new green announcements from the world's major oil firms. ExxonMobil, Chevron, Valero, Statoil, Marathon, and Sunoco have all thrown their hats into the green ring.
According to an article published September 19, 2009, in Newsweek:
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The list [of Big Oil investors] goes on. And this time it's the real deal. It's not just that these projects involve bigger money... it's that companies are actually beginning to think about alternatives not just as a tool for greenwashing (throw up a few solar panels here, sponsor a conference on wind energy there) but as real businesses that might turn real profits – or at least help make fossil-fuel production more profitable. The catalyst is that governments are moving to force industry to cut carbon emissions, creating a new "long-term regulatory reality" that favors alternative energy, says PFC Energy Chairman J. Robinson West. Meanwhile, President Obama's green-stimulus efforts and China's massive investment in alternatives have created a serious market for green technologies.
The fact that nations like Russia and Venezuela are pushing out big oil companies also gives CEOs an incentive to consider green alternatives. So does the fact that oil companies are among the world's biggest energy users, and will ultimately need to offset emissions. "I believe the large integrated oil firms will eventually become major players – perhaps even the dominant players – in alternative energy," says Don Paul, a former Chevron executive who now runs the University of Southern California's Energy Institute.
Big Oil is taking a closer look at how [renewable energy]might be used to increase efficiency internally, or to free up increasingly profitable fossil fuels, like natural gas, for commercial sale. When you consider that the top 15 oil and gas companies have a market capitalization of $1.9 trillion, it's clear that these firms themselves have the potential to be major renewable customers.
Oil companies are also taking a harder look at how to make their own business models work in the alternative sector. Companies like Chevron are capitalizing on geological expertise to build large geothermal businesses.
Big Oil is going to be an increasingly important investor in alternative energy. Venture-capital money has dried up. But with oil at $70 a barrel, the internal venture arms of the major oil firms are increasing the amount and percentage of investment going to alternatives. Historically, when Big Oil spends a dollar on research, it will spend many hundreds more to bring a product to market. If the new projects coming online this summer are any indicator, alternatives may soon be awash in black gold.
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U.S. government subsidies into renewable energy are forming a green bubble. One that's steadily inflating. But the catch is, only one alternative energy is currently economically viable before subsidies... and that's geothermal.
That would explain the interest Big Business has in the sector.
Another member of the oil community, Statoil, has formed StatoilHydro, to focus on advanced geothermal development.
Google.org — the charitable wing of the search engine giant — has become the largest funder of enhanced geothermal research in the country, outspending the U.S. government.
Alcoa, the world's largest producer of aluminum, is actively participating in the geothermal Iceland Deep Drilling Project (IDDP).
And then there's the mining industry.
Lihir Gold has already used geothermal resources to build a power plant, which today provides green electricity for the company’s mining operation in Papua New Guinea.
BHP Billiton is currently investigating the potential for using geothermal heat in the Olympic Dam region of Southern Australia.
The smart money likes geothermal.
Investing in the growing green bubble could earn you very handsome returns, if you know which companies to choose. Marin Katusa, Casey’s energy strategist, does. Every single one of his 22 latest picks has been a winner, with gains from 44% to 860% – that’s a 100% success rate. To find out how you can profit from winner #23, click here.
What's the real story? Is there too much oil out there, or not enough? Seems like it's tough to get a straight answer on this question - or at least an answer that experts agree on.
In this guest piece, Marin Katusa of Casey Research takes a look at the Strategic Oil Reserves of the world's leading energy consumers. I look forward to Marin's work each month as a subscriber of his, so I'm fortunate to be able to share this piece with you here.
I can't say that this will clear up the energy confusion, but I can say that you should always listen to what Marin has to say.
Read on to get an insider's view at what's going on behind the scenes with Strategic Oil Reserves, and how stockpiling, and/or unloading, could affect the price of crude oil going forward...
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A Look at Strategic Oil Reserves – Who's Buying Oil?
As the U.S. strategic petroleum reserve (SPR) approaches capacity (721.5 million barrels filled out of a total possible 727 million, and will be filled by January 2010), the federal government will fade out of the oil-buying business. Some bearish traders believe that this factor can weigh in on prices, since most petroleum stocks in the United States are government-held rather than private. Bullish traders have also used the filling of the Chinese SPR as a reason that oil should go much higher.
The team at Casey’s Energy Opportunities believe that planned government buying or selling of crude oil for SPRs actually have very little impact in the overall market. However, an overall drawdown of worldwide inventory could put downward pressure on the price of oil. The various countries also have their particular reasons and influences in decisions to tap their reserves.
So which countries are executing preparedness plans to fill their strategic reserves with $70 oil now (as opposed to $140+)? Below are the 10 countries that consume the most oil in the world, as of 2008, the latest figures available from the BP Statistical Review of World Energy:
Russia, Canada, and Saudi Arabia can leave the list, as they are net exporters of oil and thus do not actually require a strategic reserve, at least in the short term. We'll also bump Brazil, because its balance of imports is dwindling every year, and it should become a exporter before it requires a reserve. That leaves six countries to examine.
The United States
Not surprisingly, America has the largest strategic reserve in the world in an absolute sense. Its 727 million barrels are stored in four hollowed-out salt domes (and one pending) along the coastline of the Gulf of Mexico. These add up to some 62 days' worth of imports, according to government sources. The United States government currently has plans to push this to 1 billion barrels, or about 85 days' worth of imports, which would make the reserves equivalent to those of Japan and Korea.
The SPR build-up will be accomplished by expanding two of the current facilities, for an additional 113 million barrels, and (probably) building a new one in Richton, Missouri, for 160 million barrels. The Richton project has met local opposition, because it would require pumping 50 million gallons of freshwater per day from the Pascagoula River to dissolve enough salt to open up another subterranean cavern. The total cost of the program is estimated at US$3.7 billion, not including the cost to fill the reserves. Oil purchases are likely to be slow, at around 100,000 bpd (barrels per day) before 2014 and 150,000 bpd thereafter.
In a real emergency, the combined American strategic and commercial reserves (the latter held by private corporations, especially refiners) may seem unnervingly thin from the perspective of energy security. Add to that the fact that the government can release them at a rate of only 4.4 million barrels per day, or about half its imports.
Still, the 108 or so days' reserve it has between government and commercial sources are considered adequate by international standards. The United States has used this reserve twice in the past 20 years (Desert Storm and Hurricane Katrina) to combat severe demand or supply disruptions. It also has the luxury of importing more oil from Canada in an emergency.
Scenarios that could force a sustained drawdown of reserves:
Sustained hyperinflation in the United States due to actions by the Federal Reserve that causes oil-producing countries to look for better markets to sell oil.
A prolonged general embargo by OPEC on the United States, forcing America to look to traditional partners such as Canada and Mexico, though they might not have sufficient oil.
Another war, potentially in North Korea or Iran, requiring a large amount of oil input from America that it simply does not have.
A particularly active hurricane season that knocks out a large amount of production capacity in the Gulf of Mexico, and the United States releases from the SPR to help.
China
China's strategic reserves began being built in 2004, when leaders in China began to realize that the country had no adequate government-controlled reserves to combat any disruptions in the supply of oil. China is a large importer and is dependent on the same sources of foreign oil as the United States. China is even more anxious to build such a reserve, as two of its neighbors, Korea and Japan, both have large strategic reserves.
China currently has four government reserves with a total reserve potential of 272 million barrels, which translates to about 30 days' consumption. Two of the four have been confirmed full, and there are rumors that all four are and that China has taken advantage of the recent precipitous drop in the price of oil to buy up. According to Chinese government sources, however, the reserves are likely not to be completely full until 2010, and 2009 buying of oil will be at around 42 million barrels.
The government has also announced plans to increase the country's reserve from 30 to 100 days of consumption. The next stage of the development will call for an additional 170 million barrels in eight storage facilities. The locations of the facilities are as yet secret.
In an emergency, China would likely turn to Russia to buy oil, though only the naive would be surprised if Russia added a premium for the privilege.
Scenarios that could force a sustained drawdown of reserves in China:
Worldwide embargo on China due to a Chinese invasion of Taiwan.
High oil prices force Chinese industries out of business, pressuring the government to keep oil prices low domestically by selling some of the reserves to domestic companies.
North Korea asks for oil from China to support military action on the Korean Peninsula, and China ships it to them on the black market.
Russia slows or stops its exports as part of the Russian "dominance via energy" strategy, leaving Chinese pipelines trickling and Chinese industries disrupted.
Japan/South Korea
We have placed Japan and South Korea's reserves together, as the two countries have a treaty that allows them to share their strategic reserves.
Resource-poor Japan has one of the world's largest strategic oil reserves, enough for 82 days of imports. State-controlled reserves are run by the state-owned Japan Oil, Gas, and Metals National Corporation. The reserves consist of 320 million barrels in 10 different locations, which makes them second only to the United States in absolute volume. Japan's island geography means that having an emergency supply of crude oil is crucial, and the Japanese government obviously has not ignored this aspect.
South Korea is in one of the global "hotspots" in the world, right beside North Korea. As the country is under an almost constant threat of war, the government has stocked up some 76 million barrels, with capacity for an additional 40 million barrels.
Scenarios that could force a drawdown of reserves:
Just one at this time, from two possible sources: political instability in the region caused by either the Taiwan or the Korea conundrums disrupts tanker transport, perhaps even forces them to port.
India
India has a small reserve it began to build in 2004. This stockpile is sufficient for perhaps only two weeks of consumption. The country eventually wants to raise this level to 45 days, though the first phase has not even been completed yet. The projects are estimated to come online in 2012, which means it has taken eight years from planning to completion. These figures imply that India will not even have a somewhat sufficient strategic reserve until 2016, given that the expansion project was approved in 2008.
Germany
Germany has the largest reserve in Europe and is among the top in the world as well. Its government has satisfied a federal law that regulates storage be at least 90 days' worth of net imports. More than half of the storage is in Southern Germany, where large salt caverns exist. Germany is well prepared in its strategic oil reserves, and there are no glaring factors that would force a drawdown of reserves, barring a global catastrophe. Furthermore, the reserves of Germany, France, and Italy are pooled and can be used by any of the three countries in an emergency.
So How Much Do the Reserves Matter?
According to the U.S. Energy Information Administration (EIA) estimates, some 2 billion barrels are held in government-owned strategic reserves around the world. Though this seems like plenty of oil, does it really impact the spot price of oil? Collectively, the answer is yes, as this volume corresponds to 23 days' worth of global consumption. If drawn down together over a short period of time, the effect on spot price could be substantial.
For illustration's sake, suppose that countries collectively draw down their entire reserves over the period of a year. This rate would make up for 10% of the daily worldwide trade of crude oil, which could certainly impact price (imagine ConocoPhillips and ExxonMobil both going under at the same time).
Individually, however, even China and the United States have a limited impact on the spot price of oil over a single year. If the United States' inventory were drawn over an entire year, it would only make for a 4% increase in supply. Under normal buying patterns of each country's strategic reserves, the impact is even smaller. Since China's 42-million-barrel purchase is over one year, their purchase would not even make a dent in the daily trade of oil.
Thus, a concerted effort by the worldwide reserves can definitely keep prices down in the short term (within a year, two at best), but cannot make for a paradigm shift in the supply/demand model of oil or the Peak Oil argument. And from the buying side, if governments plan the filling of their strategic reserves, the impact on the spot price of oil is likely to be minimal.
Perception is a tricky horse to ride, however, as we all know. Given a worldwide panic for oil à la the 1973 oil embargo, oil prices could spike in the short term, because government reserves would likely raise purchases 10% or so in a real emergency. This effect would be short lived for the foreseeable future, though, as worldwide reserves are already reaching their limits.
In short, if everything goes according to “plan” by the governments, even filling a large reserve such as the Chinese SPR would have little impact on the price of oil. For SPRs to truly impact the spot price of oil, it would have to be a global situation, with war and embargo the two most likely scenarios. Even then, the impact would be mellowed by limitations on how quickly governments can either release or purchase the oil.
Marin Katusa is a math prodigy and the chief investment strategist of Casey Research’s Energy Division. At the age of 31, he is one of the youngest self-made multimillionaires in Canada… thanks to an algorithmic system he developed that alerts him when a company with sound fundamentals has become so undervalued that it’s a screaming buy.
For years, Marin has been advising Casey subscribers on the best energy picks, generating extraordinary returns. Learn how you, too, can profit from his “secret system” – click here to read more.
It seems like these days, EVERYONE is looking a natural gas prices, wondering "how could they be so low?" As recently as a few years ago, "The Natty" was selling for over $16 - how could it now be languishing just above 3?
It's often said in the commodity world that the best cure for high prices is high prices. That's exactly what's happened in the natural gas market, as North America's "peak natural gas" situation has been reversed by the miracles of innovation.
The free market solving our energy needs - what a novel idea, huh!
So if the cure for high prices is high prices, is the reverse also true? Is natural gas destined to bounce back, as suppliers inevitably turn off production that is no longer profitable. Read on to find out in this excellent piece, shared with us by noted guest author David Galland...
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Is Natural Gas Cheap? By David Galland, Casey Research
At the height of its late 2005 rally, natural gas in the U.S. was selling for just over $16/MMBtu, 350% higher than today’s price of $3.56. The oil/gas ratio, now over 18, is an all-time high… suggesting that natural gas is dirt cheap. So, it’s a buy, right?
In a phrase, not exactly.
According to a recent report by Natural Gas Intelligence, U.S. natural gas available for production “has jumped 58% in the past four years, driven by improved drilling techniques and the discovery of huge shale fields in Texas, Louisiana, Arkansas and Pennsylvania, according to a report issued Thursday by the nonprofit Potential Gas Committee (PGC).”
According to the report, the increase in gas discoveries and production improvements means that North America shouldn’t have to be concerned about gas supplies for up to 100 years!
Dr. Marc Bustin provided an overview of the situation in the May edition of Casey Energy Opportunities.
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In the United States, the tremendous growth in natural gas resources and estimated recoverable natural gas, particularly from gas shales, just in the last two years (Figure 1) is sending tremors through the entire industry. These tremors include the risk of making obsolete the proposed $26 billion Alaskan and $16 billion northern Canadian pipelines to tap northern gas resources and a slue of proposed LNG terminals... unless they are for export!
The numbers currently kicked around are that something around 2,000 trillion cubic feet of gas are technically recoverable in the United States. At current production rates, this supply would last about 90 years.
Some analysts are predicting that even if the U.S. economy recovers in the next year, the amount of gas discovered to date in gas shales will severely dampen any increase in gas price for some time. According to a new study by energy consulting firm CERA (Cambridge Energy Research Associates), new technologies for unconventional gas fields are being applied so successfully that supply is essentially no longer a driver in either production or price in the North American gas market – whatever the market wants, North American gas fields can supply. CERA reports that natural gas production in the Lower 48 states has risen a startling 14% from 2007 to 2008, for example.
Major shale areas or formations in the U.S. and the estimated recoverable natural gas in 2006 and 2008. Modified from Daily Oil Bulletin (May 4, 2009).
Given the increase in production and the small slide in demand, the price of natural gas has fallen to around $3.50-$4.00 per MMBtu (down from $13 per MMBtu last summer). At these prices, many gas prospects are uneconomic, and thus there has been a marked decline in the number of wells being drilled. Rig activity (how many rigs are operating) is down about 50% in North America.
But here is where an interesting feedback mechanism kicks in. One of the characteristics of unconventional shale gas wells, and to a lesser extent natural gas wells in general, is that the production rate declines through time. Most shale wells’ production rates decline 60 to 90% in the first year. If you were a gas company trying to survive amidst today's low prices, the rate of return on your capital investment would also be painfully low for a significant amount of gas if this were your initial year of production.
Another complementary fact is that over 50% of natural gas consumed in the United States today is from wells drilled less than three years ago, and 25-30% of the gas produced today comes from wells drilled last year (Figure 2).
Hence it follows that if there are 50% fewer wells drilled this year (from the drop in rig activity), new production will decline about 35-40% by the end of the year, so there will be gas shortages. Those will in turn lead to higher North American prices, which in turn should lead to additional drilling.
Historical gas production in the U.S. showing the percentage of production from vintage of well (modified from Chesapeake April 2009 Investor presentation from original data of HIS Energy)
Everything else being equal (which it's not, this being the real, not the mathematical world), gas prices and drilling will see-saw until an equilibrium is reached. In detail, of course, things are more complicated, but it is pretty clear that gas prices will have to rise within the year, and the big losers will remain the more expensive plays that require higher gas prices to be economic.
Where will the gas price end up in the short term? A poll of analysts by Reuters suggests $6 MMBtu in 2010 (Daily Oil Bulletin, May 4, 2009), but I don’t think I would bet on a gas price based on a vote by analysts. At the same time, it's an interesting coincidence (or not – coincidence, that is) that many prospects become economic at around the $6 MMBtu range. Among them are the Haynesville and Marcellus shales – and it's no large leap from there to see their tremendous gas production potential acting as a buffer to gas prices going much higher in the near term.
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Thus, while there may be some seasonal and relatively short-term trading opportunities in natural gas, the overhang of ready supply places a fairly firm cap on the price. Which begs the question, which big-trend energy opportunities should be getting our attention today?
Marin Katusa, who heads the Casey Research energy team, answers the question by, correctly, cataloging the opportunities according to geography.
In North America:
Geothermal -- the most interesting of the alternative energy sources, by a wide margin.
Nuclear.
Oil.
In Europe:
Unconventional gas has, by far, the most upside.
Unconventional oil.
Small hydro (such as run of river).
In Africa:
First and foremost, you want to avoid infrastructure plays (pipelines, refineries, etc). Then you want to look for areas with huge oil potential, which have been held off the market by concerns over political risk. I like what Lukas Lundin is doing in Ethiopia, Somalia, and Kenya, hunting for “elephants” with the idea of eventually selling the discoveries off to the Chinese.
In Asia:
Liquid Natural Gas (LNG)
Coal Bed Methane (CBM)
Lessons to Learn
There are a couple of useful lessons to be derived by investors looking to tap into the virtually unlimited opportunities in energy.
First, just because something is “cheap” doesn’t mean it can’t stay cheap, regardless of historical ratios -- if there has been a fundamental shift in the supply/demand equation. Which is very much the case with North American natural gas.
Secondly, geological and transport considerations make much of the energy complex a “local” market.
For example, while North America enjoys an abundance of natural gas, Europe is forced to rely on the heavy-handed Russians for the bulk of supplies. As you read this, there are companies looking to break the Russian grip by applying the same unconventional gas technologies that have so successfully built gas supplies in the U.S. -- technologies that are only just now being applied in Europe. Early investors could reap huge profits.
In short, the real opportunities are not found by simply “investing in energy” but rather by taking the time to understand the structural differences within the energy complex and cherry picking the special situations that invariably exist in a sector this large.
David Galland is the managing director of Casey Research, LLC., a private research firm providing independent analysis and investment recommendations to individual and institutional investors in North America and over 100 other countries around the globe. To learn more about the monthly Casey Energy Opportunities advisory, including a special three-month, fully guaranteed trial subscription, click here now.
Global oil producer BP reported that oil reserves fell for the first time in 10 years...from 1.261 trillion barrels to 1.258 trillion barrels. Enough reserves for about 42 years at current production rates, according to the company.
Last week, with oil pushing $60/barrel, CNBC asked the question: Is oil going to $300?
On cue, crude fell this week, to close at $56. CNBC can have an uncanny ability to signal short term tops.
Where is crude heading from here? Some folks believe the bullish supply/demand fundamentals that drove crude north of $140 still in place, while other experts say there is plenty of crude on the market right now, and no reason for crude to be north of $40 right now.
In this guest article, Casey Research's Marin Katusa takes a stroll down memory lane to review where crude has been, and analyze where it may be going from here.
I think very highly of Marin's work, and am a subscriber myself to his Casey Energy Opportunities publication...if you like his analysis, there's a special link at the end of the article where you can grab a free trial.
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The Price of Oil How did it get here, and where is it going?
While March lions and April showers were at work in 2008, so were these factors in the U.S. and global economies:
The Dow Jones Industrial Average remained steady above 12,000.
The leading indicator of existing home sales was down over 21% from the previous year, and the official unemployment rate was just beginning its upward creep by crossing the 5% mark.
The first official admissions of the “R” word. In early April 2008, the International Monetary Fund (IMF) declared a 25% chance of a global recession, and Federal Reserve Chairman Ben Bernanke told Congress that gross domestic product “could even contract slightly.”
The novelty of bailouts began. Bernanke also assured Congress that the Fed's emergency authorization of a loan against $29 billion of Bear Stearns assets wasn't putting taxpayer money at risk: “I feel reasonably confident that we'll be able to recover all the principal and indeed some interest, and there is some chance of even upside beyond that.
The dollar's six-year slide against the euro, hitting its lowest ever at $1.60 in late April. It also fell below the 7-yuan mark in China for the first time.
And oil, comfortably above $100/barrel, was heading for its summer crest of $147.
A scant 12 months later, the Dow is trying to stagger back from a plunge to 6,500. Home sales are hinting a possible turnaround, unemployment (even the official, conservative figures) is expected to reach double digits before long, “recession” and “bailout” are household words (often accompanied by four-letter ones), the dollar is recovering... and a barrel of oil is worth half that hundred dollars. Hardly worth pulling out of the ground.
What happened? And even more important for us as investors, what's going to happen?
The Casey Energy Opportunities team pulled together the pieces of the oil sector picture that other sources tend to scatter or ignore. We’ll give you a broader understanding of the drivers within the oil industry, the markets in which they operate, and how you can use that knowledge to push your profits upward.
The Oil Industry Now: A Rock, a Hard Place, and a Supply Glut That Isn't
Everyone who drives a car or heats a home with petroleum has welcomed the fall in oil prices from their high in the summer of 2008.
While it's hard to argue that filling your tank at $2 per gallon is a lot easier on the wallet than $4 or $5 per gallon, the broader economic effects of such low oil prices are troubling.
Leading the concerns is the drop in oil exploration and drilling that accompany a drop in price. Below the $50/barrel mark – and for many companies the bar is closer to $65 even for conventional fields – oil producers typically spend more money getting oil out of the ground than they can recoup by selling it. At the same time, turbulent financial markets have tightened credit. These two factors have pressured producers to allocate exploration budgets away from drilling projects and toward meeting debt obligations and day-to-day operating costs instead.
The plunge in prices has consumed the cash buffers of even the major oil companies. ConocoPhillips, for example, announced in January that along with eliminating 1,300 jobs and writing down $34 billion in assets, it was also planning to cut its 2009 investment budget by 18%. Exploration projects are part of both writedowns and spending cuts. The results of curtailed exploration are two-fold. First, some oil companies will be simply unable to survive the economic crisis. Second, supply in the longer term is being sacrificed to stay afloat now.
Storage facilities are bulging. The chart below shows the contents of the Cushing, OK, storage facility — where NYMEX deliveries take place — have recently doubled from their average 2008 volume. Along with a host of other facilities around the world, it got this way because of an unusually dramatic contango at the beginning of 2009. (A contango is a kind of market inversion, when the current [spot] price dips lower than the future price.)
In January, the spot price of oil plummeted as low as $37/barrel, while futures for July delivery were trading for $52. That meant if an oil company could buy and store product for seven months, it could lay out $37/barrel and be guaranteed a profit of $15 – or 40%, minus costs – in July. And indeed the buying frenzy took off, reinforcing the decision to turn off the drills.
So for the moment, we are artificially flush with oil, and demand has dropped as the global economy will likely shrink for the first time since World War II. It’s no surprise that oil prices have been staying down.
Many analysts say we won't feel the effects of declining exploration for a few years. But the numbers are emerging already. According to the U.S. Energy Information Administration (EIA), non-OPEC countries demonstrated an average annual growth in supply of 570,000 barrels/day from 2000 through 2007. In contrast, they recorded a drop last year of some 300,000 barrels/day.
At the same time, OPEC appears to be conforming to its production cuts of 4.2 million barrels/day, begun in September 2008. The oil cartel is known to announce cuts that its members don't actually follow; it's in their economic best interest, if only in the short term, to sell all they can. But this time, oil has plunged far below levels to sustain their economies. Even Saudi Arabia expects to run a budget deficit this year.
OPEC, which produces about 40% of the world's oil, would like to see prices around $75/barrel, at least. But the fragile global economy would have a difficult time absorbing such a price at the moment, and the cartel decided against further production cuts when it met in March. In fact, some three weeks later, Saudi Arabia actually announced a price cut on all its grades of crude to European, North American, and Mediterranean markets – a dramatic attempt to spur demand amidst high inventories.
So, entwined as it is with the economy, the oil industry is currently in a conundrum. The fix it requires – higher prices for its product – will choke the framework in which it operates.
At the same time, we've got supply problems ahead.
How Did We Get Here Anyway?
Like many aspects of the markets, movements in price are driven partly by real factors and partly by perception. Rags-to-riches-to-rags-to-riches Texas oilwoman Sue Sanders summed it up when she noted wryly in her 1940 autobiography that “nothing succeeds like reports of success.”
Last year's run-up of oil was no exception: part real, part report. Some of the real factors:
The weak U.S. dollar. The United States is not the only country that buys oil in U.S. dollars. The price per barrel is pegged to it, in fact. When the dollar is weak, the cost of U.S. exports drops; and indeed by December 2008, the U.S. trade deficit had fallen to its lowest in nearly six years ($39.9 billion, according to U.S. Commerce Department data). However, a weak dollar means it takes more dollars to buy a barrel of oil. Global concerns over the strength of the U.S. economy, including America's ever-rising level of debt, had undermined the dollar to the point that OPEC members began to murmur about dumping it for the euro or a basket of currencies.
Geopolitical turbulence in oil-producing countries. The Iraq war, oil-related militancy in Nigeria, and Iran-Israel-U.S. posturing over nuclear issues were hotspots in the first half of 2008. The average nightly news covered casualties in Iraq, but industry watchers tracked attacks on pipelines and oil facilities. Likewise, in Nigeria, sabotage and oil worker kidnappings by militant groups such as the Movement for the Emancipation of the Niger Delta (MEND) regularly shut down facilities to repair, negotiate, or improve security. And as spring warmed up, so did the war of words between Iran and Israel. By early July, Iran had gone so far to indicate it would move against shipping in the Persian Gulf if attacked. The United States would have moved next, of course... thus driving up the price of oil in the jittery oil markets, which depend on Persian Gulf shipping lanes.
Unusually low crude and gasoline supplies entering the 2008 summer driving season. In early April, the EIA reported significant drops in supply – gasoline declined by 4.53 million barrels and crude oil by 3.2 million barrels, a one-two blow that surprised and worried industry watchers. Behind the gasoline slump were lower refinery margins, called crack spreads. In mid-March, when refineries would normally be coming off their maintenance schedules to churn out gasoline for summer driving, the margin for turning a barrel of crude into gasoline was negative for the first time in three years. Refineries sought profits in other oil products, and the markets responded to the expected imbalance in supply and demand.
High demand. China is a stand-out here, and for more than its usual energy appetite. China has a penchant for aiming to break records – from its goals in five-year plans and building projects to its haul of Olympic medals – and in the first half of 2008, it was visited by some dramatic examples: a great earthquake and major snowstorms, events that disrupted the country’s energy industry. Combine that with the fact that China was also preparing for the Beijing Olympics in August, and it’s easy to understand why it was buying oil very heavily until mid-summer.
On the perception side of price drivers, it's hard to overlook the fact that the market push stayed strong in the face of increasingly gloomy economic data. Casey Research was earlier than most in predicting the economic crash (we published reports such as “The Coming Currency Crisis” in June 2006), but by spring 2008, even officialdom was dancing around the word recession.
Normally, news of burgeoning foreclosures, plummeting home sales, spiking personal and business bankruptcies, rising unemployment, and other economic indicators would tend to exert a bearish influence. After all, consumers generate 70% of U.S. economic activity, and if they stop or cut back on driving to work or the shopping mall, telephone relatives or business partners instead of flying out to see them, reduce purchases of items containing plastics, turn down the thermostat, and other weather-the-storm measures, oil consumption should decline.
It took months for all these drivers to realign – but as we all know, they did, and then some. The chicken-and-egg debate, whether oil's sky shot triggered or portended the economic debacle in the closing months of 2008, will require more distance and data to resolve. But it's true that the dollar had started its comeback by mid-summer, supply had caught up, geopolitics had settled a bit, China backed off on its buying, no major hurricanes hit – but economic realities did.
Meanwhile, Congress jumped up and down and cried “Speculators!” “OPEC!” “Oil producers!” in tidy sound bites.
The Next Big Plays: Where You Need to Be
Oil companies are influenced by the range of market drivers and economic conditions according to size. The junior oil producers, those with market capitalizations of $250 million or less, have the small-business advantage of flexibility when times are good. These times aren't good, of course, and even well-managed juniors with good projects are in trouble. Their vulnerability is in the credit market. You’ve likely heard of credit lines being revoked and refinancings denied to people with impeccable credit. Now imagine pitching a drill project without a wallet full of assets ready to lay on the table.
Mid-tier producers, with market caps between $250 million to $2 billion, will look to mergers and acquisitions to survive. The majors ($2-20 billion market cap) and Big Oil (over $20 billion) will also be shopping. With low oil prices shutting down exploration, development, and even production, these companies will be looking to replace their reserves instead by purchasing smaller, solid companies with proven production. It's simply cheaper.
We see two ways to profit from this trend.
First, we buy shares in undervalued, producing companies that are profitable even below $40/barrel, are best of peer, and own large reserves. These are the companies that Big Oil will be looking to acquire. One such company, an oil sands producer, is currently a part of the Casey Energy Opportunities portfolio.
Second, we believe that owning a potential consolidator is the best position. As debt load and low commodity prices overtake them, junior producers will be forced to consolidate their projects. We currently own one such candidate, and are scouting for others with such muscle. Consolidators will be purchasing projects from the bank at 25 to 30 cents on the dollar.
Our tactics have already paid off handsomely in the last six months: all our recent recommendations have been on fire. A few tripled their value, and one generated a return of 540%.
As we’ve seen, supply problems are looming, no matter what timetable of Peak Oil you may believe in. With increased demand inevitably come higher prices. Our approach at Casey Energy Opportunities positions us to take advantage of the trend in both the short and longer term. And we guide our subscribers not only when to buy or sell, but also when to take profits and a “Casey Free Ride” to eliminate risk.
We’d like to offer you the opportunity to kick the tires of Casey Energy Opportunities RISK-FREE for 90 days, with 100% money-back guarantee. Click here to give it a try.
Natural gas often rallies this time of year, but has not moved up thus far. Matt cites record recent production - with nat gas reserves at record highs - as another factor that may keep prices down for some time.
It's been a tough tumble for "The Natty".
We advise traders focus on this Natty for the foreseeable future.
Which energy plays will win, and lose, under the Obama Administration? The Casey Research Energy Team breaks it down for us here, in this exclusive piece. Note: I subscribe to their regular publication, Casey Energy Opportunities.
One might think the United States would be charging hard on energy security as well as border and other kinds of security in its Global War on Terror campaign. Not so. For example, America imports some 12 million barrels of oil per day, yet maintains a Strategic Petroleum Reserve (SPR) whose maximum is 727 million barrels (and its inventory is currently lower, 701 million barrels, because the government cut off shipments to it last year in an effort to modulate gasoline prices.) The math gets even more discouraging when you work in the fact that the SPR's daily drawdown capacity is only 4.4 million barrels – so America is completely unprepared for any worst-case scenarios, or even the bad-case ones.
It's not that the United States doesn't have the capacity for domestic energy production. Administration after administration, Republican as well as Democratic, is simply choosing to legislate it away. Designate the land above one of the biggest, cleanest coal deposits in the world a national monument, rope off huge swaths of offshore waters to drilling, threaten stringent new mining laws, derail hydroelectric projects, and America is handing foreign suppliers its own barrel for the country to crawl under.
Speaking of administrations... how about the new one? Will President Obama's promised green policies make a difference? As we laid out in the November 2008 edition of Casey Energy Opportunities, the short answer is no. In fact, we believe that if Obama pushes through the goals as he's outlined, the United States is actually headed for a more, not less, dangerous path. Green energy isn't enough to offset the pressure he plans for the “dirty” energies. A bull market will come for the traditional energies in the long run; the problem lies in the shorter term, in the instability of America's energy portfolio before the Obama administration realizes that nice girls don't wear that much paint.
With this in mind, let's look at each power generation technology from an investor's view.
Coal. However you slice it, the coal industry is in for a hard time under Obama. He proposes a tough 100% cap-and-trade system that will make coal plants uneconomical to run at almost any electricity or coal price around now. This goes for existing as well as new plants, and installing the latest-generation scrubbers will just be another route into the red for many companies. Did we mention that coal generates almost half of America's electricity?
As a result, we expect coal prices and coal utilities to trade well below their worth for the next few years. We're closing our position on a coal ETF in our portfolio, which we recommended in February 2007 and took a free ride on in June. But as time goes on, America will realize how overambitious Obama's targets are and come back to the tried and true. With the help of the coal industry's powerful coal lobby in Washington – not to mention all the voters the coal industry employs – coal will catch fire once more, and we'll reevaluate our position then.
Natural Gas. While a thermal-generation technology like coal, natural gas is less likely to feel pain under Obama because of its cleaner burning. And as natural gas is already one of the cheapest power technologies available, the industry would weather a cap-and-trade system better than coal. Natural gas is set to push to the forefront of the electric world.
So far, so good. The next factor changes things a bit for the savvy investor, however. Without Russia's heavy hand on the tap to deal with, prices should shadow market patterns in United States. Due to the country's large natural gas reserves and resources in both gas shale and coal bed methane, we predict natural gas prices will drop in the near term. Thus we're avoiding all but the best U.S. natural gas plays in the Casey Energy Opportunitiesportfolio.
Nuclear. Obama's stance on nuclear energy is decidedly neutral. He appears to recognize its benefits for domestic energy security as well as its carbon-reducing qualities. He's also aware it's still a touchy subject for many Americans, even with the Yucca Mountain waste disposal site moving forward. We add this up to mean that nuclear reactors currently in planning stages are likely to go ahead unimpeded by federal or state meddling. This is good news for our uranium picks.
There's another bullish influence coming for uranium: the sunset of America's current Highly Enriched Uranium (HEU) agreement with Russia in 2013. At best, Moscow will demand to renegotiate the bargain-basement price it's now obligated to offer under terms of the agreement. More realistically, it will threaten to shop its converted weapons-grade uranium elsewhere – another barrel over the land of the free – and Russia actually has several incentives to do so. Sooner or later, the United States will return to sources within its own borders, then from Canada.
Wind. Wind energy has much to gain from Obama's plan, which, as it stands, has some $15 billion slotted for clean energy initiatives. His target of “25% by 2025” would require roughly double or even triple growth for the wind industry. Obviously this growth is achievable only through government subsidies, which may or may not be sustainable. Only a few areas of the United States, such as around the Great Lakes and offshore in territorial waters, enjoy the steady stiff breeze that wind farms require to be viable.
Offshore projects raise another hurdle: transmission lines. For fun, let's run some numbers for President Obama. For wind power to supply 20% of America's power by 2030, the country would need to build an estimated 12,000 miles of 765 kV transmission lines. At a cost to generate power of US$0.06 – about the same as geothermal – the transmission lines would cost $2.6 million per mile (in today's money), or $31 billion total. That figure would account for 21% of the total budget for clean energy alternatives, or to put it another way, two years' funding for NASA.
A company with projects bearing very good wind reserves near an existing transmission line is the only kind of investment we'd consider here. For now, however... like T. Boone Pickens, who recently announced he's putting his giant Texas wind-farm project on hold because of the credit crunch and falling energy prices – we, too, are steering clear of wind energy.
Solar. Sun-powered electricity is a great long-term energy provider. Despite advances in the technology, however, it continues to be one of the highest-cost producers; and there will always be the issue of what to do when the sun doesn't shine (and not just on cloudy days – there's every night). And while the Mojave Desert isn't as remote as China's Gobi, the incoming administration still needs to consider cost of infrastructure when promoting solar farms. That said, we still believe that our investment in two hand-picked solar stocks will return good profits in the next few years.
Geothermal. Many projects generating electricity from hot water would run into trouble if oil were to go below $50 per barrel. True still, but geothermal continues to appeal nonetheless. First, oil is unlikely to stay this low for long; and more fundamentally, geothermal's load factor – as high as 95% -- pushes it far to the head of the renewables class and comparable to natural gas and nuclear.
Its limitation is geographical. At the very best, only 10% of the United States could be supplied with geothermal power, according to the Department of Energy, and we find that figure optimistic. Geothermal currently represents 0.35% of America's power generation.
We're willing to invest in geothermal companies because of the robust economics and the fact that they're likely to do well under the cap-and-trade system that appears inevitable. We want to pick those that have not only good resources but also customers, so two top-quality geothermal companies are currently in the Casey Energy Opportunities portfolio.
Hydroelectricity. On the scale of energy generation technologies, hydroelectricity tends to rate as reliable, and generally cheap and environmentally benign. Like Europe, however, the United States has little hydroelectricity left to exploit, and even the newer run-of-river technology is unlikely to bump its contribution up much from hydropower's current 10%.
Biofuels. Unlike the Casey Research Energy Team, Obama is fond of this stuff. Biofuels are both heavily subsidized and currently high-cost alternatives to reducing carbon – second generation (from non-food organic material) and third generation (using algae) included. However, the White House is soon to hold a former senator from Illinois, one of the largest ethanol producers in the United States, so biofuels are likely to hang around in some form or another. We'll keep our eye on research, as well as industry developments in the near future.
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As Casey Research Managing Director David Galland likes to say, “There has never been an economy so heavily politicized as the current one.” Therefore, anticipating how a market sector will be faring is not enough anymore… you also need to be able to foresee what Washington and/or the Fed is going to do to influence that industry.
To that end, Casey Research offers you a brand-new FREE special report, Obama’s Newer Deal, a short but comprehensive guide on the policies and stances you can expect from the new administration… and how it affects you as an investor. Plus, test Casey Energy Opportunities risk-free with this special offer… clicking here.
As our Fed prints money to battle this current "deflationary spiral", the economically pragmatic Girl Scouts are bracing their sales force for the very real effects of inflation.
Here are some "Fingertip Facts for Girls and Families" listed on the Girl Scouts website, so these brave girls can educate their neighbors about the very real effects of inflation on Girl Scout Cookies.
A decision by Girl Scouting • The national Girl Scouting office said it was okay to change the weight of some licensed Girl Scout cookie packages. • Rising costs of food and gas have made baking cookies more expensive.
It costs more to make a cookie than it did one year ago • You probably know that your family’s grocery bill is rising. The same is true for the bakery’s food bill for ingredients like flour, baking oils and cocoa. • It’s expensive to fill a car’s gas tank nowadays. Imagine the cost of filling the tanks of all the trucks that transport ingredients and deliver baked cookies.
Some things never change • The taste is as great as always! • The average consumer is still expected to buy 2-4 packages according to national consumer insights research. • The number one reason consumers do not buy Girl Scout cookies is simply because they are not asked.
Why the new sizes are the right sizes • Even if money is tight, consumers want to support you! Share your goal with customers when asking themto buy Girl Scout cookies.
What if a customer asks: Is this cookie package smaller? • Always tell the truth. Here’s a great way you might respond: Yes, the packages are a little smaller. That’s because the cost of baking cookies has gone up along with food and gas prices. Of course, the delicious taste of your favorite Girl Scout cookie is exactly the same!
Brett again - I'm wondering if some of the TARP funds could have been better spent subsidizing girl scout cookies. These tasty delights were already quite expensive!
We'll let CBM readers weigh in - has anyone bought the "newly sized" Girl Scout Cookie Box this year?
Why create wealth when you can just redistribute it?
When my wife handed me this letter from our local utility company, I exploded.
I have an idea for you, SMUD - how about YOU take a look at YOUR internal processes, and figure out how YOU can become more efficient! It is a recession, after all.
Then YOU are welcome to pass on YOUR savings to the customers YOU deem to be in need.
That way, you won't have to bother customers like ME - just a small time entrepreneur working his ass off to get a business or two off the ground.
You want new jobs to bring us out of this crap?
Then just leave us alone - please, everyone - I'm looking at you too, Federal government! Just let us be - we'll figure out ways to create new jobs - innovation comes from the ground up, NOT from the top down.
And SMUD - don't EVER send a socialist letter like this to my house again. God help me, if I actually had children, and my hypothetical son or daughter opened this letter, and was exposed to this level of mind pollution. Might as well send us an envelope laced with anthrax.
So I, Brett the Commodity Blogger, am hereby calling for all SMUD customers to turn down their thermostats, or just turn them off altogether, and let us unite to combat socialism by freezing our collective asses off.
And with that, I sign off from my home office, where the current indoor temperature is 51 degrees.
I joked last week that cotton futures were heading towards zero - apparently oil took exception to my joke, and has accelerated it's speed towards the basement.
Can you spot the trend in the oil chart?
Many folks, myself included, thought we'd never see sub-$50 oil again. The speed of this decline has been absolutely breathtaking.
What's next? I wouldn't try to pick the bottom yet. But there will be a bottom eventually. This is a result of forced selling. None of the supply/demand imbalances have been corrected.
They say the cure for high prices is high prices - and high prices sure did the trick when oil topped $140. The global economy basically stopped working, and demand dropped.
Well the flip side of that coin is that the cure for low prices is low prices. Unfortunately all of our energy conservation and alternative energy efforts take a back seat in our minds when gas is back under two bucks ($2 gas again! I almost dropped my bottle of beer as we walked our dog around the neighborhood last night and saw 1.97 unleaded on the sign down the street.)
Demand will come back eventually, provided the world is not ending - and the world does have a habit of not ending. And when demand comes back, we'll see oil above $150 or even $200...likely sooner than we think.
It's worth a quick look, I think, to appreciate the speed and magnitude of this recent decline. And also a good reminder why trying to pick the exact bottom is a fool's game. But, we're all guilty of it - it's so tempting, and you think it just CAN'T go any lower!
Also a side note, this is the 1st video I've posted from INO.com, so I would be interested to hear feedback on this. I deemed it worth a look, but probably only for the 1st minute or 2 - then it turns into more of a sales pitch, in my opinion.
Jim Rogers lays the smack down on some CNBC poindexters.
I really enjoy these types of nitwit commentators getting toasted by Jim - it reminds me of late 80's wrestling, where they'd trot our some no name guy on Saturday afternoon WWF Superstars to get destroyed by the Ultimate Warrior in 15 seconds.
Check out the 5:40 mark for the really good stuff.
Quick hits from Jim:
This is not deflation. Stocks are going down, and there is forced selling in commodities. He believes this is temporary.
He's of the view that "the world is going to recover someday, and with all the money that is being created, history has shown this has always lead to inflation."
The current environment is fundamentally different from 1929. The Great Depression was a result of a lack of bank liquidity. The current crisis is the result of bad bank decisions - and right now, the bad banks are being propped up.
