Sunday, October 30, 2005

Observation on service vrs producers debate.

From the New York Times Business section, mutual fund performance listings today:

Fidelity Select Energy

1 year = +53.6
YTD = +43.3
4 weeks = - 8.4
1 week = + 5.0

Fidelity Select Energy Service

1 year = +50.7
YTD = +40.2
4 weeks = - 6.7
1 week = + 7.0

Notice that in the past month, Service has started outperforming the Energy fund.

If you read one peak oil article all week..

make it this article:

Robert L. Hirsh: The Inevitable Peaking of World Oil Production.

Monday, October 24, 2005

Oil prices are headed... that-a-way <--->

Reuters: Oil guru says crude could hit $190 this winter.

The title should really point out that he talks about natural gas or oil.


Consumers should brace for crude oil and natural gas prices possibly doubling or tripling this winter, Matthew Simmons, a best-selling author and oil-supply bear, said on Wednesday.

"Prices are really cheap today and they need to go a lot higher, and they probably will go a lot higher," Simmons said in Ottawa.

"I am very concerned, given the destructive damage done by (Hurricanes) Katrina and Rita, that the United States must be closer to starting to see significant product shortages than we've seen since 1979."

Too much got destroyed and too little has been brought back on stream, the Houston-based analyst said.

He also said that cold weather this winter could bring a very high risk of natural gas curtailment in the United States.

"Either one of those events (oil product shortage or natural gas shortage) could send prices two to three times higher than they are today," he said after a speech in Ottawa.

That could translate into natural gas prices of $40 per million British thermal units from more than $13 now, he said. Doubling or tripling crude would put it in the range of $125 to $190 per barrel.

"Everyone keeps thinking there is a (price) ceiling...There is no ceiling," said Simmons, who wrote in his book "Twilight in the Desert" that Saudi oil output is at or near its peak.

He said he has seen little sign that higher prices so far have done much to reduce consumption.

Simmons said supplies of heating fuel oil were in okay shape, but could drain fast if the weather turned cold. Diesel is tight and shortages of jet fuel had caused some planes to be diverted from some airports.

"It's going to be painful for people to get used to actually paying real money for a really valuable resource," he said.


WSJ: Slowing of Demand Means Crude May Stay Below Peak for the Year.


With so much oil and gas production still offline in the Gulf of Mexico and refineries working to restore operations, crude-oil prices remain subject to considerable daily volatility. Still, many oil analysts say prices are much more likely to fall to the mid-$50s before rebounding to the $60-$65 area for the rest of the year, than retest record highs.

"We could remain weak into early November," said Jim Ritterbusch, president of Ritterbusch & Associates, a consulting firm in Galena, Ill. "By late November and December, crude should move back toward the mid-to-lower $60s."

The main force behind the pullback has been sluggish demand. Just as robust global demand sent oil prices soaring in the past two years, signs that consumption has started slowing in the aftermath of Katrina-influenced $3-plus gasoline prices at the pump have driven prices down, both for oil and refined products. Essentially, high energy prices have hurt high energy prices.

"The theme is ongoing -- you're starting to see consumer resistance to higher prices," said Mike Fitzpatrick, vice president for risk management at brokerage house Fimat USA in New York. "Maybe you weren't seeing it at $45 or $50, but at $60 and higher you start to see a ripple-out effect."

There is little disagreement among analysts that demand has slowed in recent weeks, as some motorists have cut back on discretionary driving or have switched to alternative means of transportation, including mass transit. Just how deep-seated this so-called destruction of demand remains open to debate.

"We're already seeing gasoline demand start to bounce back," said Phil Flynn, an analyst at Alaron Trading Corp. in Chicago. "I think once we get over the seasonal weakness, people will start to realize that supplies are still tight and the market is still very vulnerable to big rallies."

Mr. Flynn, one of the most consistently bullish market analysts, predicts oil prices setting a record of $75 before the year is out, putting him in the minority camp. Mr. Ritterbusch, of Ritterbusch & Associates, while not as bullish, said the onset of winter will push prices higher again.

"We're getting set up for a strong heating-oil market," he said. "Recently, we have seen gasoline push the market lower. By next month, I expect heating oil to pull the market higher."

Mr. Ritterbusch thinks crude oil has seen its highs for the year, although he added: "I can't say the same about next year."

Seasonality doesn't favor the bulls. In 12 of the past 16 years, heating-oil futures have peaked in early October and then sold off into March, noted technical strategist Walter Zimmerman of brokerage house United Energy.

"This is an extremely unlikely time of the year to be thinking about new highs," he said. "By far the most common occurrence is that your winter-demand rally does not exceed the preseason-rally peak."

Resource Investor: Oil Forecasting Legend Discusses Peak Oil, Share Prices.


Unlike some other well-followed thinkers on the subject, Groppe doesn’t see prices exploding to over $100 a barrel, nor is he quite so concerned about the reserves of OPEC members such as Saudi Arabia.

Groppe believes that, “we are at the point where production is peaking and the price required to restrain consumption to match this future available supply is in the 50-60 dollar range on an annual average basis…This or next year might very well be the all time peak year in world liquid petroleum production.”

His view is that, “it’s going to be essential to achieve reductions in consumption because we're forecasting no continual increase in total world oil supplies in the future.” Groppe estimates that, “a price range of $50-$60 a barrel is going to be required in order to in effect cause no growth in total world oil consumption. That we think will be the composite of continuing but slower growth in transportation fuel use of oil, because that consumption grows essentially with the vehicle population in the world. With higher prices there will be pressure toward more fuel efficient vehicles and we’ll see actual consumption decreases in fuel oil where all you’re after is a source of heat, and that’s the way the system will balance itself.”

Groppe finds himself sort of in the middle in terms of the prevailing views on the future, both optimistic and pessimistic. He stated that, “Matt Simmon's view is that we're just on the verge of seeing very significant depletion decline rates and total world oil production will then decline precipitously and were approaching the end of the world economy as we've known it. Major oil companies take the view that it will be relatively easy to continually expand oil production, specifically, they all agree that world oil production can be expanded 50% in the next 25 years and we disagree very strongly with both of those viewpoints. We think there will be a flattening of total oil supply and the high prices needed to constrain consumption to match that available supply.”

From an investment standpoint the answer still seems clear – energy stocks should continue to move higher despite corrections and volatility along the way. Groppe thinks investors need to hold their ground and not be phased by short-term price swings such as those we’ve experienced recently. His advises that, “if you believe in these fundamentals and the type of future pricing environment that I’ve described you need to ignore these short-term variations in equity prices with the fluctuations in oil and gas prices. I've given you my view on the average annual long-term prices, but since you have both of these very important industries [oil and gas] essentially operating at capacity and you've got all kinds of unpredictable events that occur all year long...there will be significant continuing volatility from this point forward and that just needs to be ignored as long as fundamentals remain intact.”

Groppe has 90% of all his equity investments in energy, and 65% of that is in Canadian energy stocks.

P.S. I tend to agree with Matthew Simmons on natural gas - it could possibly spike this winter, and Henry Groppe on oil - $50 - $60 seems to be a range the market 'likes', meaning it's not high enough to bring everything to a halt (like $190 would), but is high enough to curtail some amount of demand. And don't forget, OPEC's president said months ago that $53 was an 'ideal' price.

Sunday, October 23, 2005

Anybody get the number of that truck?

Energy stocks have certainly taken it on the chin in October.

Lots of questions: is is Refco, the shoulder season, real demand destruction, speculative positions blowing out, or even fears of what Avian flu could lead to?

I suspect it's some measure of all of the above.

Will stellar earnings turn it around?

It certainly seems like it should stablize energy stocks, if not bump them up somewhat, but at a moment like this, things don't always work the way you expect, particularly in the short term. But hey, we won't have to wait long to see!

On an administrative note, I'm going to be busy with a few other projects over the next few months, so the posting will be somewhat infrequent during that period.

Some articles of interest:

theStreet: Is Refco Burning Oil?

RIA Novosti: Abolishing Gazprom's 'ring fence' and Russia's big bang.

Motley Fool: Oh, Canada's Oil Sands.

Barron's: Suncor's Oil Patch Advantage.


Reuters: Expert lambastes Canada's massive oil sands play. [Matthew Simmons saying oil sands waste natural gas. He's right..]

Sunday, October 16, 2005

A puzzle wrapped in a mystery inside an enigma.

The company with the the largest hydrocarbon reserves on the planet?

No, not Taco Bell.

Actually, I'm not sure who it is, but Gazprom is way up there. I believe they might be #1. There are two main problems:

A.) What the %&*^ is Putin up to?

B.) The shares available for overseas investors trade at quite a premium to the shares available to domestic investors (Russians) because of certain restrictions on the shares. In the US, they are available via the pink sheets, OGZPF. In theory, Putin Gazprom intends to remove these restrictions once they have rolled up the ownership of most of Russia's hydrocarbon reserves, which should result in the premium disappearing. They are all kinds of swindles going on as overseas investors try to invest at the cheap domestic price via local entities, front companies, etc in anticipation of this move.

Is it something to throw a little speculative money at? Your guess is as good as mine. Probably yes, a small amount.

But you didn't hear that from me.

P.S. This company is sometimes referred to as "The Saudi Arabia of natural gas." Yes, that big.

P.P.S Gotta love those Slovakians.

LA Times: As Gazprom Grows, So Does Russia's Sway.


The government has acted to take firm ownership of 51% of Gazprom. Meanwhile, it is pushing through legislation allowing foreign investors full access to the remaining 49%. Moreover, an initial placement offer of a minority of Rosneft shares is contemplated for mid-2006, according to the Russian Economy Ministry.

"From an economic standpoint, they're liberalizing in a quite dramatic way, compared to any other country in the world," said William F. Browder, CEO of Hermitage Capital Management.

"A lot of people have characterized the Sibneft deal as being some kind of renationalization, or the government stepping into the oil sector. But if you look at it economically, instead of Roman Abramovich owning Sibneft, foreigners and minority shareholders are going to end up being able to indirectly own 49% of Sibneft via that share liberalization of Gazprom," he said. "It seems to me that foreigners are getting more access, rather than less, through this combination of deals."

Yet state control means the Kremlin calls the shots, and Gazprom continues to be available as an instrument of Russian foreign policy.

Thursday, October 13, 2005

Oil producers vrs oil service.

Someone asked the following question a little while ago:

What is your opinion about investing to oil companies vs. oil service companies? During 70's oil service companies were better bet than big oil companies, but do you think history will repeat itself during next decade?

I learned the same thing reading Stephen Leeb's book, The Oil Factor, but unfortunately, he didn't provide much detail behind the statistics. The numbers, according to his book, for 1970's real returns (after inflation) per year:

Big oil cos= 6.8%
Oil service= 23.6%
Independent oil producers= 11.8%

That is some significant outperformance. I have some guesses as to why it happened:

1.) The picks and the shovels argument from the gold rush, i.e. the real winners are the folks selling to the prospectors (oil producers), some of whom end up spending money and find little or nothing, and earning little or no return.

2.) I suspect there are probably fewer oil service companies and they are probably smaller cap than the oil producing companies they service. With fewer stocks and smaller caps, you get a more concentrated, volatile portfolio, and thus probably more 'juice' in a long term upcycle.

3.) I also believe that service is even more boom and bust (i.e. risky) than the rest of the industry. When times get bad for oil producers, they can still sell oil and gas (perhaps very cheaply, but at least money is coming in), but when things dry up for the service co's, they have some very expensive equipment that lies around producing no revenue. So the bad period kills off competition, and when the good times arrive, it takes time for the competition to form, as they both need to buy expensive equipment and hire employees that will demand premium pay. Since stock returns are correlated with risk, the higher risk of oil service can result in higher returns.

In terms of whether I think history will repeat, I don't have a strong opinion. There is an argument that says that since drilling opportunities are now (apparently) depleting, that in total, less oil service will be needed. On the other side of that is the idea that although oil companies are not welcome to participate in all opportunities around the globe as countries retain more ownership, oil service companies, at least for now, are still participating. Additionally, because new technologies tend to be expensive, oil service may benefit as smaller companies lease/rent it rather than buy it to keep capital costs down.

So while I have no strong opinion, my sense is that yes, history could well repeat. But do I feel strong enough about that to own only (or even mostly) oil service? No.

One further point: I was looking at the Vanguard Energy Fund's (which I think is a reasonable proxy for energy mutual funds) semi-annual report the other day. The record for the recent past is:

2004 +36.5
2005 +38.9
2006 +28.7 (this is actually 2005 through July 31)

Those are very big numbers over a 3 year period. We probably need a pause. It could last a while. If you think that's likely, you may just want to set up your dollar cost averaging with a 2-3 year time horizon and take advantage of the pause.

Monday, October 10, 2005

Clear and Present Danger.

Jack Ryan aside, it's probably not the time to be a hero.

John Hussman: Wednesday's Breakdowns.


Seriously, although CNBC inexplicably blamed last week's decline on the hawkish comments of a fairly obscure Fed governor, my impression is that investors were expressing a distinct loss of confidence on a variety of fronts. Wednesday was particularly decisive – to an extent that I closed the bulk of our remaining exposure to market fluctuations in the Strategic Growth Fund about mid-afternoon. There has to be a lot wrong with market action to provoke me to increase hedges when the market is down rather than up. There was a lot wrong on Wednesday – it was singularly the worst technical showing I can recall in years.

Other veteran market-watchers had similar comments. The Dow was down 123 points, which wasn't in itself so unusual, but the internal action was terrible. Richard Russell commented after the close that the action was “a really mean mark today, with my PTI close to a bear signal, and Lowry's also close to a major sell signal. I still get the feeling that complacency rules. Today was what I call a semi-crash day.” On the subject of complacency, Investors Intelligence reports that the majority of investment advisors have been bullish now for 154 weeks, which is the longest bullish stretch in the 42 years the figures have been tracked. Joe Granville described Wednesday as having “the most bearish reversal patterns that I have ever seen in one day,” which is an interesting statement even for a perennial bear.

In short, there was a lot of information in market action indicating that investors have fairly abruptly adopted a skittish view of risk taking.

If you look at how the Russell 2000 has behaved, the speed of the shift is also of concern. Market declines that start with sharp, seemingly relentless vertical declines often turn investors into bag-holders all the way down. Those initial declines often tempt investors to say “the market is already down so much, I can't sell now. How much lower can it go? No, really, how much lower can it go? Sweet Mother of Joseph! How much lower can it go?!??”

At this point, a poor continuation would involve a spike in the CBOE volatility index (VIX) and breakdown in the Dow Transportation index below its August-September lows, which would occur slightly below 3600 on that index.

That said, what I've just described is a combination of what I view as unfavorable and informative market action. It still does not ensure that the market will decline, however. It only suggests that given the current evidence, we don't have sufficient reason to accept broad market risk. Both valuations and market action are unfavorable here.

(Hat tip: US Market Blog)

Alan Abelson of Barrons via the Big Picture:


"Where does that leave the market? Probably right where it was -- namely, shaky. But since that has been our diagnosis for it seems like an eternity, we thought it might be worthwhile getting a second opinion. So we did, from an old pal who has been keeping tabs on the market ever since he was a pup (and that was quite a few years ago). Not the least of his virtues is that he shuns publicity, which means that only his clients (a select, savvy and rich bunch) and the occasional accidental kibitzer (like us) are privy to what he thinks.

OK, OK -- we hear you -- what does he think?

We should note, incidentally, that he's the last of the great contrarians (while just about everyone else was beating the drums for a burst upward, he cautioned that September would see a weak rally -- and so it did). Our friend is one of those strange people with the capacity to read the entrails of the market -- new highs, 200-day moving averages, that sort of arcana -- and what he sees is a mean shakeout this month, followed by a rally that might carry into next year.

Friday, October 07, 2005

The question.

I'm not much of a chart guy, but many of the energy stocks I looked at appear to be right at what I would consider to be the closest support level (they had gotten extremely extended over the past few weeks, which is always dangerous), so hopefully they find support today. But keep an eye on demand.

USAToday: Oil Pumps Up Returns.

AP: US Consumer Apprehensive About Economy.

MarketWatch: Crude bounces back over $62.


Traders are worried that "rising prices are eating into demand, or worse, may have already tilted the global economy toward contraction," said John Kilduff, an analyst at Fimat USA.

"Our view is that the demand destruction we are seeing is real, but it is too early to say whether it will last or not," Ed Meir, an analyst for Man Energy.

Thursday, October 06, 2005

Plunge Protection Team - Activate!

Blame it on the Fed, the drop in gasoline demand (and it's implications), the general droopiness in the indicators, whiffs of stagflation, whatever.. but obviously it's resulted in a rough week.

Let's hope tomorrow doesn't end badly, because it is, after all, October.

Wednesday, October 05, 2005

Of Mice and Men.

As the stock market wobbles it's way into October..

Trader Mike pointing out the fact we've slipped under the 50 day moving averages in the Nasdaq and Dow.

Barry Ritholtz lists the negative headlines building.

Whiskey and Gunpowder predicting the recession of 2006.

Investor's Business Daily counts distribution days [$]: "7 for S&P 600, 5 for S&P 500, 5 for NYSE composite, 3 for Nasdaq since 9-6 market follow through".

Mark Hulbert explains the Hindenburg Omen and appears to be the first media type to use the 'c' word. ['crash']

Jim Cramer on his radio show and on his MadMoney TV show calling for buying more oil and natural gas stocks.

Chris Edmonds explains "What $50 Oil Means for Energy Stocks". [It's good.]


Mouse # 497

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.