Saturday, October 01, 2005

Items of Interest.

Jeff Matthews: Is This The Sign of a Top?

WSJ: Big Oil Firms Curb Pump Prices, Put Squeeze on Competitors. [$]


Major oil companies and refiners, under attack for their soaring profits, are restraining prices at the pump.

The result: Gasoline can be cheaper at branded gas stations operated by companies such as Exxon Mobil Corp. or Valero Energy Corp., the nation's largest refiner, than it is at independent service stations. In essence, these giants are using robust refining margins to challenge their competition.

"We've made a decision to lag [behind] the market," said Mary Rose Brown, a spokeswoman for San Antonio-based Valero. Exxon Mobil, of Irving, Texas, said retail prices are determined by a number of factors, including retail competition.

The move is both helping big oil companies deflect political flak amid record profits and putting considerable pressure on their competition, especially big-box retailers and economy gasoline chains. Consumers are unlikely to feel too grateful, because gasoline prices gained after hurricanes Katrina and Rita, which shut down about 20% of U.S. refining capacity. On top of the storms, strikes in France, a leading U.S. supplier, have dimmed import prospects.

At the same time, industry officials say, oil companies are looking to temper rising political hostility amid gasoline prices that are up nearly 90 cents a gallon from last year, according to the Energy Information Administration. This week, Democratic senators called for an investigation into alleged price gouging. "The majors are practicing de facto price regulation," said Tom Kloza, chief oil analyst for the Oil Price Information Service, an energy-research firm.

But Mr. Kloza says the move by large oil companies to take a hit at the retail level is resulting in gasoline prices "drifting up instead of spiking." In such a climate, he says, economy chains and big-box retailers have three choices: sell well above the average retail price, sell at a loss or shut off their pumps temporarily.

The number of grocers and big-box discounters, which entered the gasoline business during the late 1990s, is increasing at about 20% a year, according to Energy Analysts International, a consulting firm in Westminster, Colo. Economy chains such as Love's and QuikTrip also have experienced enormous growth.

Jenny Love Meyer, a spokeswoman for Love's, which has about 160 retail gasoline outlets, said the company so far had declined to pass all costs on to consumers.

A play to consumers and a little shot over the bow of the competition. I'm sure this will raise politicians ire too. You know how they always want it both ways..

MarketWatch: Profits after the deluge.


At least the energy sector won't have any explaining to do. Analysts are projecting oil and gas companies to generate the highest growth rates by far of any sector of the economy, adding 72% over last year's third quarter, according to a survey by Thomson Financial.

WSJ: Still Stoked About Energy. [$]


The manager of the BlackRock Global Resources Portfolio says those who fear an energy stock bubble are a bit dim. He thinks the same of those focused obsessively on short-term commodity prices and on a new U.S. energy law.

About energy bears, he says simply: "They don't know what they are talking about."

Q: Are your fund's fortunes directly tied to oil prices?
A: I don't want to be too glib, but we don't spend any amount of time -- zero -- trying to predict where oil, gas or coal prices are going to be over the next six to 12 months. That short a time period is just the incorrect way of looking at the sector.

Q: Why?
A: The only valid way of approaching energy is, what will prices be, on average, for the next five to seven years.

Q: So what do you think about long-term prices?
A: We believe that oil prices will be at least $45 per barrel, and we don't see evidence that oil would be below $55. But energy stocks are only discounting $40 oil. And the futures prices to 2011 are $62 a barrel. For every $5 increase in oil, there is roughly 25% upside for stocks.

Q: Some people think energy investing is a bubble that will burst like the technology bubble.
A: Well, they don't know what they are talking about. This is a sea-change event in the energy market. The market just can't react fast enough. Back in 2000, the long-term price assumption built into stocks was around $19 a barrel for crude oil for the infinite future. I guess people think it is a technology bubble because the stocks have acted so well. P.S., They are discounting a $40 long-term oil price.

Q: How does an investor play it?
A: I think instead of trying to rifle shoot, they have to use the shotgun approach [presuming] a bunch of takeovers in a sector discounting $40 oil. Anyone can buy a company and hedge forward at $62 oil. That is how easy it is. That's why this is not a tech bubble. This is the real-world cash market.

Dow Theory Letters: Richard Russell on Oil.


The correction in oil that "could" be coming up will provide us with an opportunity to accumulate oil and energy stocks and preferably Exchange Traded Funds (ETFs). I've already mentioned -- namely, VDE, XEL and the closed-end fund, PEO. Then there's the D-J Energy Sector IYE. I'm suggesting these funds rather than picking individual oil or energy stocks. There's another ETF that I like as a long-term holding, it's the Goldman Sachs Natural Resources ETF -- symbol IGE.

The cycles of financials and tangibles (including commodities) tend to extend for many years. I believe that the cycle of financials started around 1980 and ended around 2000. I believe we're now in the early part of the cycle in tangibles, and also at the beginning of the decline in the cycle of financials.

The cycle of financials was built on an explosion of junk paper money. Once the world went completely off gold in 1971, the platform for the bull market in financials was laid. Twenty years of an increasing ocean of fiat paper followed.

But now we see gold moving up past all paper currencies. We see commodities (without agriculturals) surging higher. Oil has now joined the parade of rising tangibles. Diamond prices are through the roof, as are many collectibles (a Picasso just sold for over $100 million). The Sotheby's and Christy's auction catalogues are stuffed with collectibles at high prices. Real estate is going wild, particularly on the two coasts. Condo-mania rules, and one sector after another shows itself as the bull market in tangibles heats up.

You can live without a Picasso or a second home or a high-priced condo -- but oil, that's another matter. The Chinese and Indians may not be wild about Matisse paintings or million-dollar condos in Las Vegas, but they are most definitely interested in gasoline with which to run their fast-expanding population of cars. So today's oil story is very different from previous oil "crises." This time one third of the population of the world has entered the battle for oil. Therefore, today's rise in the price of oil is not just another speculative spike, it's the next higher zone or level for oil, just as 450 and above represents the next higher level for gold.

So say "Bye" to the age of paper money, and say "hello" to the new age of the real, the tangible, the solid. The Fed can create $30 billion of M-3 liquidity in a week, but they still can't make a quarter-carat diamond or an ounce of gold or a lousy pint of oil. So if oil or gold corrects here or if oil or energy ETF's sink a bit, don't complain. Treat such action as an opportunity.