Sunday, February 26, 2006

The bombing begins in 5 minutes.

File under humor: Canadian readers react to Jon Markman's post, "O Canada, Can We Have Alberta?".

Good thing he didn't let on about Operation Alberta Freedom or they'd really be ticked.

It would be interesting to see whether in terms of actual dollars, there is more American or Canadian money invested in Suncor. There aren't a huge number of large cap Canadian stocks, so I assume Canadians themselves have a lot of money in Suncor, but it could be close.

P.S. Hopefully everybody can tell the title is a joke..

60 Minutes' Disco Inferno.

Satisfaction came in a chain reaction - Do you hear?
I couldn't get enough,
so I had to self destruct,
The heat was on,
rising to the top
Everybody's goin' strong
That is when my spark got hot
I heard somebody say

Burn baby burn!
Disco inferno! (Aah yeah!)
Burn baby burn!
Burn that mother down

Lyrics: The Trammps.

CBS News: Montana's Coal Cowboy.

First they did an optimistic piece on Canadian oil sands, now CBS' 60 Minutes does another relatively optimistic piece on a proposal by the Montana governor on massive coal to liquid conversion.

I don't know about you, but it sure sounds like somebody at 60 Minutes read a peak oil book or two, freaked a little, and got on the stick. I don't think this coverage was prompted simply by $60 oil. If there was any mention of peak oil (I don't recall any, but I could be wrong), it sure wasn't highlighted. In fact, it seemed rather more like 60 Minutes is making the case we're covered, what with these various alternatives.

And while I'm a believer that the ride over Hubbert's Peak will be mitigated by solutions/alternatives like conservation [nee demand destruction], gas to liquid, coal to liquid [i.e. basically anything we can get our hands on that we can burn..], high efficency diesel vehicles and eventually electric vehicles of some sort, I think we have some serious questions that will need to be addressed about the increased CO2 output of some of these alternatives.

And on that topic, a sidenote unrelated to 60 Minutes:

A couple of times now I have read comments along these lines:

"Who would have thought that after a severe hurricane season that disrupted oil and gas production in the Gulf Region so severely, we would experience one of the warmest winters on record which would cut our natural gas use and save our butts!"

Hmmm.. Warmer than usual Gulf.. Powerful hurricanes.. Warmer than normal winter..

Is there a connection? I don't know. I don't think anybody really knows for sure, but if we are in some kind of pattern (whether it's due to cycles or global warming or both) and have another hurricane season like that last one, we are in for a heap of trouble.

Thursday, February 23, 2006

55 is the new 30.

MSN Money: 5 stocks for the new oil reality.

I have a slightly different view than Jubak on why there is a price floor in the low 50's: I think OPEC wants the floor there, and has the power to maintain it due to the tightness in the market currently. So I don't think oil in the 50s is about a risk premium. On the other hand, in terms of the volatility in oil prices, that I attribute to the market uncertainty over what the risk premium should be above the mid 50s.

I agree though that the price appears likely to stay in this higher range, unless demand gives in.

Sunday, February 19, 2006

Jubak: This too shall pass.

An article from Jim Jubak with much valuable insight on the seasonality of the oil sector and current dynamics. It's well worth reading in it's entirety.

On a sidenote, throw APC into his list of stocks at the end, and I think you have a reasonable starting list of future potential takeout candidates.

MSN Money: Hard winter for the oil sector.


If it's February, the price of crude oil must be tanking -- and taking down oil stocks with it. Over the last 26 years, according to, on average crude oil prices have peaked in late January and plunged to a low at the end of February or the beginning of March. (There's another seasonal peak in October and another seasonal low in December.)

So it really shouldn't come as a surprise to investors that the AMEX Oil Index ($XOI.X) peaked on Jan. 31 and has been tumbling ever since. There's certainly no reason to panic and abandon this sector of the stock market. On average, a seasonal drop like this is followed by a strong seasonal rally that lasts into May.

But while the general seasonal pattern is familiar, I think this drop will be deeper than usual and the rally will arrive later than expected.

Stocks of oil producers, oil drillers and oil-service companies will bounce back. The energy rally isn't over by a long stretch. If you've held onto your energy stocks through the decline to date -- already 11.5% on Feb. 15 from the Jan. 31 high -- I think you should continue to hold. If you've been looking to buy on the dip, I think it's time to start building positions. But only if you have the patience to wait out a drop that could be over in two to three weeks or that might stretch well into the second quarter of 2006.

Friday, February 17, 2006

Bob Marcin's Daddy is Bigger Than Your Daddy. The Dumb Money Slips on the Oil Trade.


I don't mean this to be offensive. But a lot of money in the oil futures market must be dumb. Let me explain.


I believe it's long/short equity hedge funds looking for juice! And for the most part, these funds are technically based, momentum traders. Dumb money, they know the sound bites but not the facts. They took natural gas to $15 in December and it hit $6.98 yesterday. Enough said.

A big part of my thesis on $45 oil this spring is the same dynamic. Momentum hedgies bail on the commodity as we approach the soft season for oil demand. Fundamentals get a bit soggy short term, and the technical traders get stopped out on the way down. Dumb money.

These are not dumb people, they're simply uninformed about the fundamentals of oil. To them, it's only a price on a Bloomberg terminal.

And I risk being very wrong if a geopolitical event occurs. But just as the dumb money drove natural gas to unsustainable prices in the short run, it did the same with oil.


At the time of publication, Marcin was short oil, although positions may change at any time.

I may turn out to be dumb, but:

a) I know OPEC is going to try to hold the line at $53.
b) I can count to 4, which is the number of potential geopolitical events that are currently in progress: Iran, Iraq, Nigeria, Venezuela. Note that these are all oil exporting nations. [And with the gas supply thing in Russia, maybe you go to 4.5]
c) I've noticed some people get snippy when their positions go against them.
d) Marcin is a smart guy, but as Pickens said, it doesn't make sense to be short oil now.

Boone Pickens on CNBC 02-16-2006.

CNBC via MSN Video: The Oracle of Oil.

This interview covers basically the same ground as the Bloomberg TV interview, though, amusingly, in this one he suggests $53 as the floor for oil prices, which happens to be exactly the price that the OPEC president last year suggested as an 'ideal price'. So it sounds like Boone Pickens believes that OPEC will be successful in defending their price floor, should they need to. [Makes sense to me, given what I see.]


"Let me say this: I would not be short oil."

"If you're not short, if you're giving me a forced question Melissa, I have to either go up or down on the oil market, I'll take it up; I'd rather buy it than sell it. Am I in there buying today, no. I think you could see some more weakness here. I think it's probably gonna go back up and I think you're gonna be back up in the 60s again."

[View all posts on Boone Pickens.]

Thursday, February 16, 2006

Boone Pickens on Bloomberg TV 02-16-2006.

From my hastily scrawled notes on his appearance:

- On the recent pullback in oil prices, he observed that there is too much oil right now and that prices could go down into the lower $50's, but that prices would be back up again before long.

- He predicted he won't see $50 again in his lifetime, and he believes the floor for oil prices is around $55. [Could this have something to do with that prediction?]

- In terms of demand, the numbers are not showing much of a drop, though the mild winter helped. Gasoline demand will come back up and oil too, and so perhaps in six months or by the end of the year he predicts oil prices will be back up in the $60's.

- On natural gas, he noted that it had topped out at $15 or so, then recently dropped as low as $7, and he believes it could drop further, as low as $5 or $6. We will come out of this winter with record high storage levels, which will be good for the consumer.

- On alternative energy, he said it "has to be" part of the solution, but "not quick". Ethanol is not a primary fuel, meaning it has to be manufactured, and it is expensive to do so. Alternatives will help, he believes, but will not prevent the general trend higher in oil prices.

- The issues regarding Iran are out of his field of expertise, but he believes the market has come to accept the situation as it stands currently. If the situation changes, the market will react.

- His investment recommendations continue to be the same: Suncor [SU], Canadian oil sands stocks, coal [mentioned BTU and MEE], and natural gas plays CHK ['always good'], DVN, and KWK. These have all been big winners, but he continues to believe they are still good investments. Though the market has been very good to energy stocks, he still believes they are underpriced. The E&P stocks, as an example, he believes are priced for $40 a barrel oil, and as mentioned, he doesn't believe he'll ever see $50 again.

- On the supply/demand balance for oil, further supply is now limited, production is at 85 million barrels a day and in his view can't go higher, demand continues to rise, thus oil prices will have to rise, which will trigger some falloff in demand.

- He has been asked many times what price will hurt demand. He doesn't know, but perhaps $75-85.

- His view is that if there is no event driven spike in oil prices (say over Iran, Venezuela, Nigeria, etc), prices will rise to $90-100 possibly over the next two years, but if something goes haywire, we could get there very quickly.

[View all posts on Boone Pickens.]

Monday, February 13, 2006

Kenneth Deffeyes: Meet the Flintstones..

You and me...

Kenneth Deffeyes, author of "Hubbert's Peak, The Impending World Oil Shortage" and "Beyond Oil, The View From Hubbert's Peak", in a web post from February 11, 2006, calculates that we hit the peak oil point on December 16, 2005, and that, as a result of not beginning our preparations for this moment earlier, we could be back in the Stone Age by 2025.

Kenneth Deffeyes: Join us as we watch the crisis unfolding. February 11, 2006.


In the January 2004 Current Events on this web site, I predicted that world oil production would peak on Thanksgiving Day, November 24, 2005. In hindsight, that prediction was in error by three weeks. An update using the 2005 data shows that we passed the peak on December 16, 2005.


Could some new discovery come along and reverse the global oil decline? The world oil industry is a huge system: Annual production worth 1.7 trillion dollars. I don't see anything on the horizon large enough to turn it around.

So what are the policy implications? Numerous critics are claiming that the present world economic situation is a house of cards: built on trade deficits, housing price bubbles, and barely-adequate natural gas supplies. Pulling any one card out from the bottom of the pile might collapse the whole structure.


Since we have passed the peak without initiating major corrective measures, we now have to rely primarily on methods that we have already engineered. Long-term research and development projects, no matter how noble their objectives, have to take a back seat while we deal with the short-term problems. Long-term examples in the proposed 2007 US budget (Feb. 9, 2006 New York Times page A-18) include a 65 percent increase in the programs to produce ethanol from corn, a 25.8 percent increase for developing hydrogen fuel cell cars, and a 78.5 percent increase in spending on solar energy research. The Times reports that solar energy today supplies one percent of US electricity; the hope is to double that to 2 percent by the year 2025. By 2025, we're going to be back in the Stone Age.

Ethanol, fuel cells, and solar cells are not the only shimmering dreams. Methane hydrates, oil shale, and the Yucca Mountain radioactive waste depository would be better off forgotten. There are plenty of solid opportunities. Energy conservation is by far the most important. Initiatives that are already engineered and ready to go are biodiesel from palm oil, coal gasification (for both gaseous and liquid fuels), high-efficiency diesel automobiles, and revamping our food supply. Every little bit helps, but even if wind energy continues its success it will still be a little bit.

That's it. I can now refer to the world oil peak in the past tense. My career as a prophet is over. I'm now an historian.

Note: I tend not to publish views from the Peak Oil Dark Side, particularly ones from people I believe have other agendas. I don't lump Deffeyes in with those folks.

Sunday, February 12, 2006

Free Week of Barron's Online.

If you're a person who invests in stocks, there are two sources I highly recommend: Barron's and Investor's Business Daily. They each represent completely different philosophies, but, hey, that's what makes a market. They're both great at what they do, and sometimes I wonder if reading anything else really matters. [It does, but those two are great places to start.]

Barron's Online is free to everyone this week, so I might as well take advantage. I recommend you read Michael Kahn's column this week in Barron's Online, which examines some of the recent trading in energy from a technical perspective and it's possible meaning for the overall market.

Barron's: Are Weak Commodities Good for Stocks?

The quick take: We are enduring what appears to be a short term correction in commodities. The longer term bull market trend is still intact, but should be monitored. Since commodity stocks are currently the leading stocks in the market, this is doubly important.

Thursday, February 09, 2006

Page A4, with a bullet.

The world's second most productive oil field might be about to cause a big problem with oil supply, and the WSJ puts this on page 4?

WSJ: Mexico's Oil Output May Decline Sharply.


Pemex Study Points to Possible Drop At Major Field, Which Would Strain Global Supply

MEXICO CITY – Mexico's huge state-owned oil company may be facing a steep decline in output that would further tighten global oil supply and add to global woes over high oil prices.


An internal study reviewed by The Wall Street Journal shows water and gas are encroaching more quickly than expected in Cantarell, Mexico's biggest oil field, and might cause output to drop precipitously over the next few years. Currently, Cantarell produces two million barrels of oil a day, or six of every 10 barrels produced by Mexico. It is the world's second-biggest-producing field after Saudi Arabia's Ghawar.

Pemex, Latin America's biggest company by assets and employees, says it is confident it can make up for any decline at Cantarell by squeezing more output from other fields, but some analysts outside the company are far less sanguine.

The study, carried out last year by Pemex experts, offers a rare glimpse inside the traditionally secretive oil company. It outlines five scenarios for a decline at Cantarell, four of which are more pessimistic than the company's current public forecasts.


Mexico has been bracing for a decline in Cantarell for years, and previous predictions of imminent decline have turned out to be wrong. But the internal study is the most complete look at the field to date.


"In my mind, this report suggests a collapse scenario is the most likely," says David Shields, an energy consultant in Mexico who first published the study's findings. Mr. Shields doubts Pemex can make up for lost output at Cantarell because it only discovers one new barrel of oil for every 14 it extracts at the moment, leading to falling reserves.

Other analysts agree with Pemex's official assessment, however. Matthew Shaw, head of Latin America research for Scotland-based oil consultancy Wood MacKenzie, says he has never heard of a major field declining as fast as the worst-case outcomes outlined in the study.

Wednesday, February 08, 2006

Army reports record enlistments ahead of Operation Alberta Freedom.

Enlistments up 100%, year over year! That's right; me and Jon Markman. (Actually, the list is long and getting longer: Boone Pickens, Peter Thiel, Charlie Maxwell, Jim Rogers, Gary Kaminiski, Jerry Castalini, Martin Whitman.)

msn Money: O Canada, can we have Alberta?


Last month, Canada threw out its namby-pamby liberal government and ushered in a new era of conservative rule. Thank goodness for small favors. Now when we run out of crude oil and natural gas down here in the United States, we won’t have to invade our neighbors to the north to make sure the lights stay on. We can just arrange a friendly annexation.

O Canada! We love your beer, your funny accents, your flag with the botanical theme. Now be a dear and just let us have Alberta. Hey, it’s just one province. You have 12 more. You can keep the ones named after a dog (Labrador) and an SUV (Yukon) and all the rest. We just want the one with those nasty, dirty tar sands. We’ll practically be doing you a favor.

Why the tar sands? It’s not just that it sounds like "Tarzan" after a couple of Molsons. (Funny, eh?) It’s just that, well, we think all that sticky, gooey mess up in the Athabasca region is North America’s answer to Saudi Arabia, as I explained back in mid-2004. And most of North America is already chez nous anyway, as they say in Quebec. So hand it over. Or else.

Stable, with a capital C
You may have heard that President Bush, in his State of the Union address last week, mentioned that the U.S. must slash its dependence on oil from “unstable nations” in favor of cute little science projects like ethanol, nuclear plants and solar panels. But surely you knew that was sort of an inside joke. Most of those projects are a decade away from viability.See the news
that affects your stocks.

What he really meant was that we’d rather strip-mine our BTUs from the perfectly stable Alberta tar pits, which are so close to home that they might as well be ours.

Scientists believe another 315 billion barrels will be recoverable when new technology comes online, which would expand Canada’s conventional oil reserves by a factor of 70x. If that works out as expected, Canada could ultimately produce as much as 25 million barrels of oil per day and leapfrog ahead of Iran, Mexico, China and Norway to become one of the world’s top three energy producers.

Worth taking?
It’s little wonder that Alberta opened up an office of its own in Washington recently, headed by former energy chief Murray Smith. All the easier to negotiate a peaceful surrender.


Victory, without firing a shot
If our play to put the Great White North under the Red White and Blue doesn’t work out -- and maybe it shouldn’t, come to think of it -- we could always just invest in the top tar-sands companies. The top Canadian oil sands pure plays rose more than 200% on average in 2005, and there’s probably still a long ways to go. Companies with a lot of exposure to oil sands will generate tremendous free cash flow for at least 20 years, judging from the current estimates of reserves and rates of production, even if they have to invest another $10 billion or more to get the job done. The projects break even when the world crude-oil benchmark is at $20 per barrel, or one-third the current price.

So if turns out we can’t take 'em, you might as well buy 'em (or pieces of 'em, anyway). This is going to be a long, long secular story: something like investing in Saudi Arabia in the 1940s. But I really do hope the State Department works out a friendly merger with our neighbors on the Athabasca plains one day, if for no other reason than it will give us a chance to shout, “Tar nation!”

Read the full story for the stock ideas.

Monday, February 06, 2006

Still the one.

CNBC: Manager targets Diamond Offshore, Barr Pharmaceuticals.


The impressive run-up in shares of oil and gas drillers has some on Wall Street wondering whether it’s time to take some money off the table. That would be a mistake, according to J.C. Waller of Icon Advisers.

“Drilling is the most attractive industry in the market,” Waller said Friday on CNBC’s “Squawk on the Street” “We have the average stock in the drilling sector trading 40% below fair value. If there’s one industry group in the market that I would want to be in, that’s the group.”

Drillers are among the holdings in the Icon Energy Fund ICENX Waller manages. He also oversees a health-care fund, the Icon Healthcare Fund ICHCX.

P.S. We're still having fun, right?

Saturday, February 04, 2006

My caution flags are up.

Though I will continue to post the usual stuff re: oil, personally my caution flags are up and though I will let the energy and oil service run, I am also letting cash build right now. These are my thoughts:

- The way energy stocks and oil service raced up in January, while profitable, makes me nervous, particularly since gold came along for the ride.

- I watched Jim Cramer's MadMoney show from Harvard and the first thought that came to my head was "Market Top". These are in theory America's best and brightest, with amazing futures ahead of them, entranced to a cult-like state by, as Mark Haines of CNBC accurately calls him, "Reverend Jim of the Church of What's Working Now" and his traveling show, which is admittedly entertaining. [Note that I don't mean to criticize Jim Cramer personally; he has a style that works for him and he is a smart guy, but I think of the show as more entertainment and market weather show than anything else.]

- I have noticed some very speculative stocks just skyrocketing.

- Some messy stuff is on the horizon: Iran, the Fed head transition, what the yield curve suggests, the possible ramifications as the housing boom slows, the slow burn of high energy prices.

- Finally, three smart investors have similar ideas about caution and/or cash: Jim Rogers, Peter Thiel (article to come..), and in this weekend's Barron's, Jeremy Grantham.

Barron's: An Asset-Class Act.


Barron's: Who is Hyman Minsky and why are you quoting him in your latest letter to clients?

Grantham: He was a serious economist. His thesis of stability being unstable was not at all mainstream. In fact, he had the good sense to keep writing and rewriting the point for 20 years. There is ironclad logic involved. If you have a wonderful stable world and, better yet, it is growing nicely and nothing is going wrong, you are likely as the years go by to take more risk and more risk and more risk, and the cost of taking it gets less and less because interest rates come down, and you can imagine that people will get carried away into thinking such conditions are permanent and take on record levels of debt. They think conditions will always be safe, they will always be good. And then all it takes is some small event to create instability.


Where are you funneling money to?

Cash -- plus anything that can do a little bit better than cash.

Which would be?

Conservative hedge funds.

Friday, February 03, 2006

Ali Baba and the Forty Thieves.

AP: Foreign Companies Eye Oil Reserves in Iraq.

Tickers I could find, in order of speculative from high to low:

Heritage Oil - HRTIF
Western Oil Sands - WTOIF
Woodside Petroleum - WOPEY

I believe these two are hoping to do something in Iraq also.

Lukoil - LUKOY
ConocoPhillips - COP

The Iraqi oilfields: A safe place for your lotto ticket money.

Wednesday, February 01, 2006

Smoke 'em if you got 'em.

To follow up on the post re: Sam Stovall's top 10 sectors, these were the top 10 sectors from the Fidelity Select Funds for January.

Energy service: 19.53
Natural resources: 17.07
Energy: 16.92
Natural gas: 16.05
Gold: 15.97
Networking and infrastructure: 11.06
Electronics: 9.49
Developing communications: 9.05
Brokerage & Investment: 7.93
Environmental: 7.23

If you aren't already invested in energy, I wouldn't be jumping in with both feet now, no matter what this theory suggests. The charts look very extended, they ran too far too fast, they need a pause/consolidation, etc.

And if you like to trade, this may be the time to consider letting some go, selling covered calls, etc, depending on what you think the charts tell you. In particular, I would point out the candlestick charts appear to show reversal signals.