Tuesday, November 27, 2007

Goldman: Sell Smoke 'em if you got 'em.

Goldman Sachs basically downgrading the US economy, saying there's a 45% chance of a US recession next year, and turns neutral on integrated oil and oil service ['oil service' corrected from earlier 'refiners' sorry.], among other things.

Oh, but they figure everybody will be stressed out enough that they'll smoke more. Think MO. Actually, that stock just makes money no matter what happens, even as they kill their best customers. I digress..

CNBC: Goldman Turning Bearish on US.

More available here.

The fat lady gets a Prius.

Note the prediction of an oil price drop to $60 to $80 over the next several years as consumption actually declines. Note also that Henry Groppe has a track record of solid predictions. (search for his name, I'm in a rush right now).

The Aspen Times: Where virtue, market meet.


And it's happened. Americans have responded. People who don't need trucks to visit the mall are looking for more fuel-efficient vehicles, and the guzzlers are sitting on the lots. Seems to be a recent change.

To find out how recent, I consulted an oil-price analyst — not just any energy expert, but Henry Groppe, a Houston-based veteran and independent thinker. "All our work indicates consumption has actually been flat these three years," he said.

In 1980, when the Iranian revolution sent oil prices soaring, everyone else — Exxon, Shell, the U.S. Department of Energy — predicted that a barrel of oil would soon cost $80, $85, $100 a barrel. In a contrarian forecast, now legend, Groppe said that oil would fall below $15 a barrel. And that's what happened.

Why did his firm, Groppe, Long & Littell, expect the price collapse? "We thought there would be a significant drop in consumption," he said.

Groppe sees consumption dropping now. "Everybody is still in denial about the magnitude of the changes." He predicts the annual average price of oil will fall back to $60 to $80 a barrel in the next several years.

The faulty forecasts, Groppe says, reflect a reliance on the flawed work of the International Energy Agency. His group gathers its own data.

For example, the IEA last year forecast a major rise in production by nations outside of the Organization of Petroleum Exporting Countries. The actual increase was tiny.

"The Saudis made a mistake taking the IEA forecast seriously and cutting production when they should not have done it," Groppe said.

That raised prices to the point where consumers started using less energy. The Saudis want us hooked.

As for the Americans' part in this, Groppe thinks that "the most important thing is more efficient usage — particularly greater mileage performance of our vehicles."

Monday, November 26, 2007

Please God, not the cover.

Making the cover is usually a great contrarian signal. Not there yet, but if oil slices through $100 too easily, look out for the Man of the Year (also a contrarian signal) to be oil or alternative energy related.

Time: Peak Possibilities


In July 2006, the world's oil rigs pumped out crude at a rate of nearly 85.5 million bbl. a day. They haven't come close since, even as prices have risen from $75 to $98 per bbl. Which raises a question of potentially epochal significance: Is it all downhill from here?

Sunday, November 18, 2007

Page A1, with a bullet.

It's not really polite for me to quote the whole article, so I suggest you buy a copy to read. And for posterity, of course.

The Wall Street Journal: Oil Officials See Limit Looming on Production.


A growing number of oil-industry chieftains are endorsing an idea long deemed fringe: The world is approaching a practical limit to the number of barrels of crude oil that can be pumped every day.

Some predict that, despite the world's fast-growing thirst for oil, producers could hit that ceiling as soon as 2012. This rough limit -- which two senior industry officials recently pegged at about 100 million barrels a day -- is well short of global demand projections over the next few decades. Current production is about 85 million barrels a day.

The world certainly won't run out of oil any time soon. And plenty of energy experts expect sky-high prices to hasten the development of alternative fuels and improve energy efficiency. But evidence is mounting that crude-oil production may plateau before those innovations arrive on a large scale. That could set the stage for a period marked by energy shortages, high prices and bare-knuckled competition for fuel.


The emergence of a production ceiling would mark a monumental shift in the energy world. Oil production has averaged a 2.3% annual growth rate since 1965, according to statistics compiled by British oil giant BP PLC. This expanding pool of oil, most of it priced cheaply by today's standards, fueled the post-World War II global economic expansion.


Compounding the problem: Most of the world's biggest fields are aging, and production at them is declining rapidly. So, just to keep global production at current levels, the industry needs to add new production of at least four million daily barrels, every year. That need is roughly five times the daily production of Alaska, with its big Prudhoe Bay field -- and it doesn't assume any demand growth at all.

Rate of Decline

Mr. Simmons scoffs at estimates that production from proven fields will decline only 4.5% a year. He thinks a more realistic rate of decline is 8% to 10% a year, especially because modern technology actually succeeds in depleting fields faster.

If he's right, the industry needs to add new daily production of at least eight million barrels -- 10 times current Alaskan production -- just to stay even.

Tuesday, November 13, 2007

Will the wolf bull survive?

A very serious question. Trendlines, support lines, and the next week or two are very important, as are stop losses.

Barron's: Are Energy Stocks Out of Energy?


THE AMAZING RUN IN THE ENERGY SECTOR has hit a ceiling. While the much-ballyhooed $100 per barrel price for oil is very near, it looks as if it is going to have to wait just a while as the market shakes out some of its excesses.


The questions now are, "How far down can the ETF fall?" and "Is the energy bull market over?"

The answer to the latter question is "no." The long-term trend is still very much in place and the trendline that defines it can help us answer the former question. A correction of another five or six points would place the ETF squarely on that trendline, as well as on key chart support from last summer. In other words, a drop to the mid to high 60s should be viewed as a buying opportunity at this time.


If we make the fundamental assumption that energy demand is not going away and the technical assumption that long-term trends are still intact then we have a sector to watch for bargains in the near future. The only caveat is that energy stocks are still stocks and will be affected by the major trend in the stock market. If you don't think the market is heading into a bear then energy stocks should provide opportunity soon.

CNBC: Commodities Bubble?

Louise Yamada, Louise Yamada Technical Research Advisors.


We think that commodities are still in structural bull markets, so, I would say correction at this point, because the overall market has been looking like it's wanting to correct.

On the bear case, Jim Melcher, up 175% this year on bets against subprime and housing:

NY Sun: Talk of Worst Recession Since the 1930s.


Mr. Melcher, a market bear, had some pretty discouraging words. "What I think is not good for the country, but good for me." he says. His basic advice to the country's roughly 80 million stock players: Run for the hills — the worst is far from over. An investor's stock portfolio now, he believes, should be only about half of what it might normally be.

With the housing market in a state of collapse — and he says he believes it is far from over — Mr. Melcher argues that average homeowners will not be able to withstand the kind of recession he sees, given the added burdens of rising energy and food costs, and continued deterioration in the credit markets.


Asked how he could conceivably give credibility to such an ominous forecast, Mr. Melcher observes: "I've never seen a market with more risk and what's significant is that risk is not yet priced in."

Given his grim expectations, he says there is no equity market in the world he would play right now. "When the American market goes down, other equity markets around the world should follow," he says.

As of now, his portfolio is pretty much devoid of stocks, save for an exchange-traded fund focused on leading companies in oil services, which he regards as an ongoing growth industry. The ETF, the Oil Services Holders Trust, trades on the American Stock Exchange under the symbol OIH. Although enthusiastic about the industry's growth prospects, Mr. Melcher says he would be reluctant to recommend oil services stock because he believes the price of oil could easily drop 50% in the recession he envisions.

Thursday, November 08, 2007

See Dick Run [From the Financials].

In case you get the urge to buy the financials. He's not advocating shorting, but he sure isn't buying them either.

Bloomberg: Dick Bove of Punk Ziegel.

Tuesday, November 06, 2007

John Roque: Oil Good, Financials Bad.

Bill Miller of Legg Mason called the other day for buying the financials. That was a call he must have placed from his yacht off a very sunny coast somewhere. Though some of them may have seen the worst of their downside, I'd say financials have a long road ahead of them. Jim Rogers says avoid the financials like the plague, and apparently he's still short.

John Roque of Natexis Bleichroeder is a technical analyst, he looks at charts to try to determine trends.

CNBC: Fast Money Chartology.


"We agree that the financials now, and this might be a bold call, are actually akin to what the semis were in 2000 when they broke. The Street wasted a lot of energy and time trying to pick the bottom, the better thing to do is just to leave them alone, they're going to be underperformers for a long time."


"The trend for oil, for gold, for silver, for all commodities remains up. The last three major commodities cycles are 14 years in length. You could start this one in 1999, this is the eighth year, if history is some guide, we still have some time."

Monday, November 05, 2007

$94 oil? Still sorta cheap..

Somebody forgot to mention that:

- crude oil, natural gas or coal is an input to some (many?) of the 'alternative' fuels.

- most of them don't scale well, particularly not to the volumes we use (currently..)

- the current infrastructure was built for and around oil; if you need to build an infrastructure for an alternative, you're going to have to factor that into the cost too

There's always the possibility of dramatic breakthroughs, but oil is still amazingly useful and relatively cheap, as Matt Simmons would be quick to point out.

Wall Street Journal: Biofuel Costs Hurt Effort To Curb Oil Price.


Rising costs of biofuels and other alternative energies are making them less viable as substitutes for crude oil, a development that could frustrate efforts to bring oil prices down in the years ahead.

A few years ago, many energy economists predicted that higher oil prices would ensure the success of alternative energies such as biodiesel or wind power by making them more financially attractive. In many cases, though, the opposite has occurred: Even as crude-oil prices approach $100 a barrel, some alternatives look less attractive than in the past.

One reason: Energy demand is now so intense that supplies of just about every kind of fuel are in short supply, driving up prices of the raw materials involved in making many alternative energies. Some biofuels also rely on agricultural commodities that already are facing higher demand as foodstuffs, a situation which drives up prices further.

The problem is most acute for crop-based alternative fuels, like ethanol and biodiesel, though it has also proved true to some degree for solar power, nuclear power and other competing energy sources.

Biodiesel, a fuel made from farm crops like soybean oil and palm oil, was in some cases supposed to be economically competitive with crude-oil prices as low as $50 a barrel, according to analysts who studied the industry.

But a sharp rise in the price of biodiesel raw materials -- including a more than 90% jump in palm-oil prices over the past three years -- has dramatically altered the economics of the industry. M.R. Chandran, former head of the Malaysian Palm Oil Association, says crude oil would now have to be as much as $130 a barrel before palm-oil-based biodiesel is competitive.

Supply constrained = peak?

This Bloomberg article is about coal, but what I find interesting is the comparisons between coal and oil use and prices dating back to 1998 and 2002.

Both coal and oil are energy sources, but they are not perfect substitutes for one another; coal is used mostly for generating electricity, while oil is mostly used for transportation. However, a growing world economy would (and has) demanded more of both.

Economics tells us: With demand up, prices or supply should rise. If prices get too high, demand will likely fall.

While apparently coal use (demand) has grown 27% since 2002, or three times faster than crude, oil prices have risen much more than coal; according to this article, from roughly parity in 1998 to where oil is now 5 times as expensive as coal.

So coal supply is growing in response to the price rise.

With oil on the other hand, we are seeing a much larger price response (rise). This suggests supply is a problem (i.e. supply has not risen in response to much higher prices), and demand is, so far, not backing off much.

Those pundits who believe the oil price rise is unjustified/temporary suggest that the oil price rise is due to (pick any 3):

- speculators
- terrorist/war premium
- oil companies manipulation
- oil companies refusing to invest

We can't rule those out, and they all probably add a little something to the mix, but these facts suggest that supply is the constraint, just as it would be as we get closer to a global peak in oil production.

Bloomberg: Gore Nightmare Wins as Europe Pays to Ship U.S. Coal.


Now that the price of coal is at a historic low relative to oil, there's no stopping consumers and producers alike from embracing Al Gore's nightmare.

A ton of U.S. coal is so cheap at about $47 that European utilities will pay $50 to ship it across the Atlantic, according to Galbraith's Ltd., a 263-year-old London shipbroker. While oil and coal cost the same as recently as 1998, West Texas Intermediate crude is five times more expensive after climbing to a record $96.24 on Nov. 1.

Peabody Energy Corp., Consol Energy Inc. and Arch Coal Inc., the three biggest U.S. coal companies, forecast the largest increase in exports in 20 years, degrading the call for a moratorium on coal plants by former U.S. Vice President and this year's Nobel Peace Prize winner Al Gore. Coal use worldwide has grown 27 percent since 2002, three times faster than crude, said BP Plc. U.S. East Coast coal has risen 71 percent, while oil tripled on the New York Mercantile Exchange.

``Coal is by far the cheapest fuel because there's no price on how much damage it causes,'' said John Holdren, a Harvard University professor of environmental science and director of the Woods Hole Research Center in Falmouth, Massachusetts. ``Unless you get policies to put a price on carbon dioxide and other emissions, no other plants can compete.''

U.S. coal prices are equal to $1.98 for each million British thermal units of energy, compared with $12.51 for fuel oil and $6.91 for natural gas, data compiled by Bloomberg show. A million British thermal units is the equivalent of eight gallons of gasoline.

Sunday, November 04, 2007

It's Hard Out Here for a Peak Oil Pimp.

Actually, with $90+ oil, and articles like these, it's not so hard anymore. I used to make a proactive effort to try to explain the concept of peak oil and the possibilities of oil investing at work, in personal conversations, at dinner parties, but I found people were rather blase about the idea, for a variety of reasons. [Though some co-workers did eventually invest and make some nice money. Though at that point it could be more attributed to trend following.]

Now I just blog and generally keep my mouth shut, unless somebody else brings it up.

International Herald Tribune: IEA says oil prices will stay 'very high,' threatening global growth.


The rapidly growing appetite for fossil fuels in China and India is likely to help keep oil prices high for the foreseeable future - threatening a global economic slowdown, a top energy expert said Wednesday.

The unusually stark warning by Fatih Birol, chief economist of the International Energy Agency, about the impact of Asia's emerging giants comes as the agency prepares to issue its influential annual report next week, which will focus on China and India.

In preparing the report, Birol said he had experienced "an earthquake" in his thinking.

"China plus India are going to dominate growth in the oil markets," Birol said during an interview at an oil industry conference. During the past 18 months, he noted, more than two-thirds of the growth in global oil demand came from China and India alone.

Demand for oil in China, he added, would eventually equal the entire supply from Saudi Arabia.

Friday, November 02, 2007

Crude Realities with Matt Simmons.

Interesting interview, particularly the fact that the CNBC anchor, Becky Quick, keeps overtly referring to "peak oil".

Sea change? I think so.

$100 oil will do that to you, I suppose, as will Matt Simmons' calculations that fair value for oil is, oh, around $300 a barrel or so.

CNBC: Crude Realities.

Energy is early in the cycle.

CNBC: Jerry Castellini

Jerry Castellini, President/CIO at CastleArk Management talks about the Fed, housing and then oil.


"This oil move, it's ironically still in that debate phase, where people are still trying to debate where $50, or $30, or $60; the reality is the stuff has to be priced at $100 to $200 over the next 10 years to attract enough capital to keep it flowing."


"It's still way early, Mark. This is no different than the retail/consumer space in the 80's, or the tech space in the 90's. This is a 10+ year cycle. We haven't even found that price point yet where consumers will stop using it."

[Maybe soon enough we will..]

Kenneth Heebner, CGM Capital Management, highlights one of his favorite stocks, Petrobras.

CNBC: Kenneth Heebner.