Sunday, April 30, 2006

The devil made them do it.

I caught a couple of interviews on TV with people complaining over $3 gasoline prices. One woman complained as she filled her car at a gas station. No mention was made of the fact she was filling a mid-range Mercedes. Another gentleman was rather angry about the costs to fill his brand new Range Rover, which is a $55,000+ SUV. Amusingly, it's likely the depreciation on that vehicle is costing him more than the gasoline, particularly now that large SUVs are likely to retain less value.

It would be nice if they found some people I could actually feel for, but I guess maybe those people don't get on TV.

Here's another amusing one, a comment left on the the BusinessWeek article on Boone Pickens. I like the logic here, not only is the oil industry responsible for high prices, it also screwed us by giving us low prices in the first place.

It's gonna be an interesting year.


Nickname: MT

Review: I am not willing to pay $3, $4, or $5 per gallon as T. Boone states. I have to. The industry conditioned me to build a lifestyle around $1 per gallon gas. Now that they have us locked into using so many gallons of gas per month, they begin the extortion. I can't react fast enough. They know this. By the time I can get a more efficient car, or move closer to work, or whatever, they have extorted thousands of extra profit from each one of us. I am all for a free world economy. US distribution infrastructure is far more efficient and ubiquitous than in other countries. Because we have more volume and efficiency our gas prices have been much lower than other countries, not because they were somehow being kept down artificially. Now the oil industry is simply gouging consumers because they can. They know our current government will not protect its citizens from the unethical or unlawful behavior of the rich and powerful.
Date reviewed: Apr 27, 2006 8:47 PM

Thursday, April 27, 2006

$800 before $60.

Calm down, just having a little fun. We've been steadily climbing the price ladder on predictions, I figured I'd cut to the chase and save myself a few posts.. [Just to be explicit: Nobody, including me, is predicting $800 oil. At least not this week..]

Boone Pickens actual quote was "$80 before $60". And he's still firm in his belief in Canadian oil sands and coal as investments. As production of conventional oil plateaus, the thought is that natural gas can be switched to a transportation fuel, leading to more demand for coal for electricity production. Nuclear eventually will kick in too, but that will take a while.

BusinessWeek: T. Boone Pickens: Still Courting Controversy.

Columnist Jim Jubak has a slightly different angle, but ends up in the same neighborhood as Boone Pickens.

MSN: Oil substitutes? Try these 5 stocks.

A couple of side thoughts of my own:

ICO, or International Coal Group, which is a turnaround play of Wilbur Ross, may finally have found it's footing. Note that Boone Pickens has never recommended this stock. He has recommended coal stocks BTU, CNX, and MEE.

JOYG is a sort of coal and oil sands equipment play that has done well for a while now.

Wednesday, April 26, 2006

There's a new addict in town.

Maybe a few.

China's oil demand - growing. India's oil demand - growing. And even for oil exporters, demand is growing.

WSJ: Oil Minister Asserts Iran Won't Cut Exports Despite Nuclear Standoff. [$]


That plan doesn't account for another problem: soaring domestic consumption, which is eating into the amount of Iranian oil available for export. Mr. Vaziri said his country's gasoline use is growing at an eye-popping rate of 10% a year. Already, Iran is importing 25 million liters a day of gasoline, equivalent to nearly 160,000 barrels a day. Plans to add new refining capacity could gobble up another 500,000 barrels a day of Iranian crude production -- leaving no new crude to export to the rest of the world.

"We have a problem in the use of gasoline," Mr. Vaziri said.

MSN: How China is winning the oil race.

Sunday, April 23, 2006

Man cannot live by energy stocks alone.

Energy is making most of the headlines, but I think it's time to keep a closer eye on this housing boom/bubble bursting question.

The homebuilders look like they're up for another leg down, and the news reports and anecdotes out of real estate seem to suggest a rapid slowdown developing in sales.

Spiking gas prices, rising interest rates, and a sickly real estate market, it's certainly looking like an interesting year, or, as Boone Pickens put it 'not one of our best years'. Though of course the stock market as a whole doesn't appear to care right now.

Peter Thiel of hedge fund firm Clarium Capital has suggested the real estate bubble is going to burst and along with rising interest rates and consumer debt levels, it would blow the US consumer to smithereens and lead to a serious slowdown in the economy. His suggested play: long term US bonds which will benefit as interest rates are lowered by the Fed once this develops.

Interestingly enough, Jim Rogers, the former hedge fund manager and long term commodities bull, also believes we had a real estate bubble that will burst, admits to shorting Fannie Mae and certain homebuilders, yet has also shorted the US long bond, which is the diametric opposite of Peter Thiel's suggestion. Jim believes that inflation is much higher than US government figures are suggesting, thus interest rates will have to go higher to reign in inflation, not lower.

Two great investors with serious money making credentials and with generally the same starting hypothesis, yet reaching opposite conclusions.. Now that's a real conundrum!

The rise in virtually all the other commodities with oil suggests that inflation is the issue, but the bond market generally does not appear convinced of that. But there are two obvious signs of inflation, the rise in housing prices and gas prices, which are the exact items the US government has decided in their wisdom to try to filter out. Too volatile, they decided. There are a couple of other pieces to throw into the mix: the labor market appears to be strong, wages are rising, and companies appear to be starting to pass along rising energy prices.

I can't ignore the evidence, so I must lean with Jim Rogers, but I can't bring myself to short long bonds; oil and commodities contain quite enough inflation bets for me.

But something tells me to keep a sharp eye out for signs of Peter Thiel's thesis developing, and that is what I am doing.

[Both Peter Thiel and Jim Rogers both made good calls on oil and continue to be bullish. Peter Thiel here, and Jim Rogers here. Those stories are old but their thinking is still along those lines.]

Update: In hindsight, I realized I oversimplified Peter Thiel's argument somewhat above. Part of his scenario is that the Fed will likely overshoot in raising interest rates, as has happened in the past.

Friday, April 21, 2006

An energy investor more nuts bullish than me.

A hedge fund manager with 80% of his portfolio in energy service? Sounds nuts, right?

But here's the kicker: He is a former energy analyst who, when he couldn't understand Enron, refused to put a buy rating on it, and stood his ground until Merrill apparently forced him out as a result.

Who looks nuttier on that one?

Energy Tribune: Energy Tribune Speaks with John Olson.


John Olson never made any friends at Enron. But he’s made a name for himself as one of the savviest energy analysts in the United States. As an equities analyst at Merrill Lynch, Olson refused to put a buy rating on Enron, a refusal that led Merrill to offer him early retirement – he wasn’t given another option. Olson left Merrill but it hasn’t hurt his career one bit. During his 30 plus years as an energy analyst, he has worked at Drexel Burnham, First Boston, and Goldman Sachs. He got his first job in Houston with Rotan Mosle in 1979. He spoke to ET’s managing editor, Robert Bryce.

ET: Your hedge fund did very well in 2005. But it appears the energy markets have cooled off during the first quarter of 2006. What do you see happening for the rest of the year?

JO: The expectation is that oil prices will hover around $60 to $65 until next January. However, gas prices are down to about $6.75 and are expected to go to $4.70 or $4.80 and recover to $7.40 by next January. So the stock market for natural-gas related companies and service companies has come under a lot of pressure…. [But] the earnings trends of this industry remain very, very strong. Earnings trends for big oil companies were up about 59% in 2005. For oil service companies, they were up about 142%. Most of the growth money is going to end up in oil service companies because of their earnings growth prospects. Our portfolio is 80% in oil service companies.

Life is going to be very good. What can go wrong is that gas goes down to $4.80 and stays there or crude goes down to $50 and stays there.

ET: What’s the most important trend you see developing in the energy sector?

JO: The increasing difficulties with oil and gas consumption and supplying that consumption are going to force a rearrangement of priorities. But no place needs more reform than America. We are using 22 million barrels per day of the world’s 85 million barrels per day, and over 15 years, we may go to 25 to 27 million barrels per day versus the world’s 105 to 110 million barrels per day. We can ill afford it already. The trade deficit on oil imports was $100 billion last year and there’s no end in sight.

Tuesday, April 18, 2006

Rich Son's Brave New World.

Robert Kiyosaki is the author of the "Rich Dad, Poor Dad" series of books. I expect a new book, say maybe "Rich Dad's Guide to Canadian Oil Sands" at any moment. But, generally, my observation is that the peak oil/oil crisis meme is spreading to more mainstream types.

Yahoo Finance: The Coming Oil Crisis.


Oil Prices Will Keep Heading Up

My reason for taking you on this trip down memory lane is because I believe we're approaching a repeat of that 1973-1974 crisis. Once again, oil prices are going through the roof. During the mid-70s, oil went from under $3 a barrel to over $35 a barrel. And in 1974, we were stuck in an unpopular war in Vietnam, a war we would not win.

In 1998, oil was just $10 a barrel, and today it is over $60. We're also stuck in a war we may not be able to win.

The difference this time is that things are actually worse than they were in 1974, at least in my opinion. One difference is that the oil crises back in 1973 to 1974 and again in 1978 were political problems. Today, the oil crisis is a problem of diminishing supply and increasing demand. In other words, this time, there really is an oil crisis.

Many people today believe that oil will once again return to the $35-a-barrel level and aren't concerned. Or they believe that with better technology, energy companies will find more oil, and happy days will be here again.

I believe differently. Not that I'm an oil expert, but in 1966 through 1968 I was hired as an apprentice by Standard Oil of California, where I learned a lot about oil and the oil industry. Although I did see oil prices slide back down in the 1970s, this time, I believe they will go higher, not lower. I wouldn't be surprised if we soon see oil at over $100 a barrel and gasoline at $5 to $12 a gallon at the pump.


An Alarming Gap

While many environmentalists, concerned with global warming, are thrilled that oil supply is on a decline (and we truly do need to replace oil with more renewable forms of energy, such as wind and solar power), there's another concern that must be considered. If energy costs continue to rise and our economy stops growing and starts shrinking, many stocks will crash, older Americans will not be able to retire, inflation may skyrocket, businesses will close or cut back, and jobs will be lost. Not only will we be facing global warming, we'll be facing civilized chaos.

The problem today is that oil companies are too short-sighted, the environmentalists too far-sighted, and politicians only concerned with being elected. As a result, there will be a gap between the end of oil and a conversion to less destructive forms of energy. In this gap, all hell may break loose.

In my next article, I'll go into what I'm doing to prepare for the gap, as well as why I believe the gap can't be avoided. In other words, it will not be 1973-1974, or stagflation, all over again. I believe it will be the end of civilization as we know it -- and possibly the birth of a brave new world."

Thursday, April 13, 2006

Mammas don't let your babies grow up to be oil service workers..

Cause they ain't gonna be gettin' a lot of sleep, at least not for the next few years.

MSN Money: Oil drillers drowning in cash.

You can see Jubak's picks here.

Jubak is clearly on top of the story, so I'm not going to argue with him in terms of picks. I am playing the sector more broadly with a sector fund because I am not sure which service companies are going to get hit with higher material and labor costs and which will more fully reap the rewards of this cycle.

Boo-yah peak oil, skee-daddy.

I dunno but I think my version was funnier.

I would be lax if I didn't point out that Jim Cramer and Pat Dorsey have now both waxed poetic on THX and EPL [see link and below].

What is the world coming to?

LOBG: Obligatory Jim Cramer Homage.


"You smell that? Do you smell that?...

Napalm, son. Nothing else in the world smells like that. I love the smell of napalm in the morning.

You know, one time we had a hill bombed, for twelve hours. When it was all over I walked up. We didn't find one of 'em, not one stinkin' [ short's ] body.

The smell, you know that gasoline smell, the whole hill.

Smelled like... victory."


Oil is a precious resource. Not only that, but oil runs the world. Everybody needs oil. Now there are hints we are nearing a peak in oil production. Oil may in fact be getting a little harder to find.

versus: Cramer's 'Mad Money' Recap: Crude Awakenings.


Hitting Pay Dirt

Jim Cramer had a hunk of burning love for all things oil on his "Mad Money" TV show Thursday, pressing the issue that the price of crude is sky-high but that all the stocks aren't rising with it.

The crude price being used is way too low and Cramer wants to help you "get revenge for how much you're paying at the pump."

Right now we are drilling twice as much as we were a few years back, but we're finding the same amount of oil that we used to, Cramer said. We are running out of the easy oil to find, and oil will be going higher.


Swing Your Partner

In other oil plays, Cramer said that Energy Partners (EPL:NYSE - news - research - Cramer's Take) is one of the greatest buy opportunities since he started "Mad Money."

Energy Partners is a company that is most levered to finding new oil, and there's nothing more important than getting to new oil.

Tuesday, April 11, 2006

Power to the people!

Interesting article on uranium, worth reading. Precious Metal.

I am surprised that there is no mention of BHP, the Australian conglomerate, because it's an interesting stock that pretty much covers all your bases: precious metals, uranium, coal, oil and natural gas. Plus, as the story mentions, Australia is selling a lot of resources to China, which is on a longer term growth path.

Sunday, April 09, 2006

Chris Skrebowski's Rorschach Test.


1.) Open the below link.

2.) Print the contents (4 pages).

3.) Stare deeply at the pages.

4.) Write down the first thoughts that come to mind.

Petroleum Review: 2006 Megaprojects.

You can see some other people's reactions at the Oil Drum.

My initial thoughts are that I have to look a little harder at Petrobras (PBR), which I've been eyeing for a while but don't own at the moment. A relatively cheap company, a number of projects scheduled to come on-stream in the next couple of years, in a fairly stable part of the world, and though their projects are offshore and fairly challenging, they are reputed to have the expertise to manage them, with an added bonus that extreme weather events are less of a factor for them than in the Gulf of Mexico. On top of that is the fact that Brazil is increasingly able to export oil as it produces plenty of ethanol from sugar for internal markets.

In terms of the rest of the report, it seems to have ruffled some feathers that it's more optimistic than last year's. That strikes me as a tad of a strange reaction. I say the more info, the better.

Friday, April 07, 2006

Lessons from the Internet bubble.

Wall Street has discovered the oil and commodities story and is busy introducing new instruments (especially ETFs) that invest in these areas, including an oil ETF (ticker USO), a broad commodities ETF (DBC), and an upcoming silver ETF (SLV). Considering the attention ethanol is attracting, I expect a corn ETF at any moment. (I'm kidding.. I think. Though let's check if 'COB' is available.)

Traditionally, when Wall Street introduces an abundance of investment options for 'the little guy' that aim to allow concentrated investments in a certain segment of the market, it is a very clear warning sign that this particular investment trend is nearing a top.

As an example, when the Internet bubble of the late 1990's really got going, there were a large number of mutual funds introduced that focused on technology and internet stocks. Within a few years, as that particular fad ran it's course, people who put their money in these concentrated funds saw their investments essentially decimated.

I happen to think we are not at a significant top (ala the Internet bubble), as energy stocks and commodity stocks still represent a fairly small portion of the overall market, don't have the kind of valuation extension you saw in the Internet bubble, and we don't have quite the same trading frenzy seen then. Also, the Munder Netnet fund, one of the poster children mutual funds of the Internet bubble, was actually introduced very early (1996), and made some people a nice amount of money if they exited before it all blew up.

I happen to think we're not at a significant top, but I wouldn't rule out a short term, or maybe even an intermediate term one.

As a result, I'll be keeping an eye on what I own, why I own it, and my sell discipline a little more intensely than usual.

MSN: Leave the new oil ETF to the pros.

Monday, April 03, 2006

The latest from Arjun "Spike" Murti.

I dunno, maybe he's a big Buffy fan or something.

MarketWatch: Oil stocks up on crude, Goldman note.


"With refining capacity gains expected to just about meet trend demand growth over the next several years, we believe that our view of an extended strong cycle is intact," Goldman Sachs analyst Arjun Murti wrote in a note. "We continue to believe that we are in the early part of the middle phase of a 'super-spike' period for commodity prices."

For a pure refining play, Murti said he continues to like Valero, citing its "diversified asset base, complex refinery system, and track record of acquisition integration." He said Valero stock has the potential to spike 39% higher to $84 a share.