Thursday, August 18, 2005

So you wanna be a Rock and Roll Star Oil and Gas Investor?

Funny how sentiment can turn in an instant, eh? I suggest either dollar cost averaging or using a technical trading discipline to keep yourself out of trouble. If we're really in a long term bull market for energy stocks due to Peak Oil, then your main objective is to avoid losing money getting caught up in the short term spikes and corrections that happen along the way.

So, let's see..

Goldman Sachs raises their oil price forecast. Note that this is another part of GS, not the 'super spike' group.

Interesting view on why, quotes from Reuters article above:

Goldman Sachs on Thursday raised its U.S. oil price forecast for the rest of this year by $13.50 to $67 a barrel as demand outstrips supply and the industry sits on billions of dollars it could invest in finding new oil.

Goldman Sachs blamed the lack of investment on uncertainties over cost.

"With the potential for costs to fall or a competing technology to prove less expensive -- driving long-term prices lower and making higher-cost investments unprofitable -- investors are motivated to delay investment and need a premium in long-dated prices to compensate for the increased investment risk," it said.

Among the factors that have added to the cost uncertainty are barriers to accessing reserves in oil-rich nations and the increasing complexity of projects as more easily extractable oil runs out.

Pulled off one of my favorite stock market focused sites, Alchemy of Trading:

"Dougie Kass, over on our sister sight SI, is forecasting the end for oil. While not his first forecast for the top, he might be correct this time. Oil is due for a pullback.However, my favorite large cap integrated stock is still too cheap to sell. I know, the stocks will follow the commodity. Blah, blah, blah. If only sound bite investing were that simple.

That stock discounts oil in the high $30's. While this is the highest implicit price for oil since the rally began, the spread between the spot price and the implied price is wider than ever! Get that? $62 per barrel spot price-$39 implied price=$23 spread. If you want to short oil, you should short the commodity, not cheap oil stocks!

When oil gets to $40, I will begin to worry. All the hand wringing over what to do with the stocks is misplaced in my opinion. Didn't these same calls about cyclicals occur last spring at the bottom?" -- Bob Marcin,, August 18, 2005

Original quote is from, and for reference, I believe Bob Marcin's favorite oil is COP.

And from Chuck Jaffe of Marketwatch: "How to tell cheap gas is gone for good."


Chatting with a friend at the checkout of the nearest gas station last weekend, we couldn't help but notice the banner headline on the August 22 issue of the Weekly World News. It reads "No More Oil! World supply will be gone in six months." The subheads read "Economy will collapse!" and "Millions will starve!"

The big concern for consumers should be that this does not appear to be any sort of bubble, or temporary spike. Events -- like the release of oil inventory numbers -- are going to push the market around, and prices at the pump could retreat back to the now lovingly-recalled time at the beginning of the month, but it's hard to find the event that is going to change the trend.

That may actually be good news for investors, who are reaping big returns from oil and energy stocks and who want that rally to continue.

If you forget the conspiracy theorists who think the price of crude oil is being entirely manipulated and controlled by hedge funds -- and I find it ironic that the Weekly World News has somehow missed that angle -- and focus on the fundamentals in the industry, you can see why things will stay as they are for awhile.

"By the end of the year, we are going to be consuming everything we produce, and having so little spare capacity to increase production adds to the risk premium that people are willing to pay," says Brian Hicks, manager of U.S. Global Investors Global Resources fund (PSPFX: news, chart, profile) . "The price is representative of the fundamentals of the oil market. ... Near-term, it is possible we could see a retrenchment for a short time, but we're heading into the peak demand period for heating oil, and we are still in the summer driving period and so you just can't expect a significant change in demand right now."

That should ease the mind of investors looking to cash in on energy's continued ride.

Many have been worried that the rally in oil and gas are about to end, and they fear the kind of crash they saw in tech stocks back in 2000, but the situations are distinctly different.

Whatever is happening with energy, it is not a repeat of the Internet stock bubble. Energy companies have real earnings and sales growth, they have proven reserves and are paying dividends, and they are trading at multiples that are normal, rather than in the defying-gravity range. That's no guarantee that the stocks won't get whipsawed, especially if crude prices and energy costs drop dramatically next spring, in the post-winter heating/pre-summer air conditioning demand period.

Says Hicks: "Maybe when the supermarket tabloid is predicting the end of the oil industry, it's the sign of a market top."

I went to the Weekly World News web site [WARNING: NOT OFFICE FRIENDLY.] to check out if perhaps Matt Savinar was quoted in the article, but I couldn't find it. I did find lots of other entertaining items though. [Sorry, it just kinda went with the post title..]