Saturday, June 28, 2008

The consequences of higher oil prices.

This is an interesting discussion of the impact of higher oil prices from the newspaper of record in the heart of car country, the Los Angeles Times.

While I don't feel sorry for Ms. Carver and her Palmdale to Commerce commute (that was a bad idea even with cheap gas), lots of other assumptions from a world of cheap oil are going to be turned on their heads. India and China's stock markets have both been clobbered this year as being oil short (and generally food and resource tight) and manufacturing, export, and remote service long maybe doesn't look so good. Russia and Brazil, on the other hand, are holding up pretty well. As, until recently, was the US.

Los Angeles Times: Envisioning a world of $200-a-barrel oil.

Friday, June 20, 2008

There's a little black spot on the sun today.

There's a little black spot on the sun today.
It's the same old thing as yesterday,
That's my soul up there.

I have stood here before in the pouring rain
With the world turning circles running 'round my brain.

The Police: King of Pain.

Floods in Iowa, a record cold winter in China, global temperatures suddenly dropping in the last year, it's all quite possibly linked to sunspots.

The Market Oracle: Solar Sun Spot Cycles Impact on Crop Yields, Energy Use and Weather Patterns.


Last month we listened to Donald Coxe's weekly presentation to institutional investors. Coxe is the Chairman and Chief Strategist of Harris Investment Management. He has been a bull on the commodity markets for some time now and has correctly pointed out numerous investment opportunities in the energy, metals, and grain markets.

Since the performance of so much of our portfolio is driven by the weather – especially companies in the energy and agricultural sectors – and since Coxe notes the current sunspot cycle may point to lower global temperatures, we decided to examine the issue. Other long term forecasters we follow have not raised the issue to date.


Coxe pointed out that we are at the low-point of the 11 year solar cycle (see chart above) – at the end of solar cycle 23 and at the start of solar cycle 24. Sunspot activity was expected to pick up significantly the last few months, with experts concerned about the impact of the powerful bursts of radiation on satellites, the electrical grid, and telecommunications systems.

But according to Coxe solar activity has been almost nil. He points out this has happened in the past. From 1645 to 1715 very little solar activity occurred after a normal series of cycles. Solar activity also declined from 1790 to 1830.

It is normal for the sun to have quiet periods between solar cycles, but some experts claim we've seen months of next to nothing activity-wise. While the start of solar cycle 24 seems to have materialized it “then abruptly disappeared.”

These historical periods of solar inactivity – dubbed the Maunder Minimum and Dalton Minimum after the astrologists who studied them - coincided with an irregular periods of rapid climate shifts. The climate cycles brought intensely cold winters, although periodically intense summer heat waves would also appear. The Maunder cycle is often referred to as the "Little Ice Age" – but climate experts claim the period is punctuated by both cold weather and rapid climate shifts.

These periods of low solar activity were also periods of sustained weather driven crop failures. Coxe notes that solar scientists strongly suspect there is a link between the Maunder and Dalton Minimums and the cold weather - but the exact mechanism remains elusive.


The question Coxe raises, and one we cannot answer, is whether the lack of sunspot activity in this cycle portends a trend to cooler weather, shorter growing seasons, and increased space heating demands – or is it just a statistical fluke?

Investment Implications

Coxe argues that if the lack of solar activity is not a statistical fluke natural gas would be a ‘pure play' on this event due to the huge amount of natural gas used for space heating in North America . Natural gas is a very efficient and non-polluting heating fuel.

We would tend to agree with his assessment, but note that the incremental use of natural gas as a summer electrical generation ‘peaker plant' fuel may decline if air conditioner loads are significantly reduced.

The Daily Galaxy: The Sunspot Enigma: The Sun is “Dead”—What Does it Mean for Earth?


Athough periods of inactivity are normal for the sun, this current period has gone on much longer than usual and scientists are starting to worry—at least a little bit. Recently 100 scientists from Europe, Asia, Latin America, Africa and North America gathered to discuss the issue at an international solar conference at Montana State University. Today's sun is as inactive as it was two years ago, and solar physicists don’t have a clue as to why.


Dana Longcope, a solar physicist at MSU, said the sun usually operates on an 11-year cycle with maximum activity occurring in the middle of the cycle. The last cycle reached its peak in 2001 and is believed to be just ending now, Longcope said. The next cycle is just beginning and is expected to reach its peak sometime around 2012. But so far nothing is happening.

"It's a dead face," Tsuneta said of the sun's appearance.

Tsuneta said solar physicists aren't weather forecasters and they can't predict the future. They do have the ability to observe, however, and they have observed a longer-than-normal period of solar inactivity. In the past, they observed that the sun once went 50 years without producing sunspots. That period coincided with a little ice age on Earth that lasted from 1650 to 1700. Coincidence? Some scientists say it was, but many worry that it wasn’t.

Geophysicist Phil Chapman, the first Australian to become an astronaut with NASA, said pictures from the US Solar and Heliospheric Observatory also show that there are currently no spots on the sun. He also noted that the world cooled quickly between January last year and January this year, by about 0.7C.

"This is the fastest temperature change in the instrumental record, and it puts us back to where we were in 1930," Dr Chapman noted in The Australian recently.

If the world does face another mini Ice Age, it could come without warning. Evidence for abrupt climate change is readily found in ice cores taken from Greenland and Antarctica. One of the best known examples of such an event is the Younger Dryas cooling, which occurred about 12,000 years ago, named after the arctic wildflower found in northern European sediments. This event began and ended rather abruptly, and for its entire 1000 year duration the North Atlantic region was about 5°C colder. Could something like this happen again? There’s no way to tell, and because the changes can happen all within one decade—we might not even see it coming.

More at a later time.

Prisoners of the Sun I.
Prisoners of the Sun II.

Wednesday, June 18, 2008

Ken Heebner hearts Petrobras.

Ken Heebner is a mutual fund manager at CGM Funds and was recently dubbed "America's Hottest Investor" by Fortune Magazine.


"How do you explain genius?" muses Douglas Pratt, a former Invesco fund manager who was an analyst at Loomis. "Ken just sees things others don't."

A league of his own

Spend some time with Heebner, and it becomes clear why. His brain is wired differently. His ideas come faster, his focus is more intense, and his ability to sift through massive quantities of information and zero in on what matters is downright spooky. Pity the Salieris of the investing world who have to compete with this guy.

CNBC: Market Outlook Part 2.


I like companies that are benefiting from an environment where there is a short supply of key commodities, and the big one is energy. I think that, whether it's oil stocks or gas stocks or oil service stocks or coal stocks, they're all benefiting from the fact that demand for energy is growing faster than our ability to find it and deliver it to the marketplace.


I think in a world where the oil price is in an uptrend, this company, Petrobras, which has 12 billion barrels of reserves today, the discoveries that they're developing in the pre-salt, deep offshore Brazil are gonna add between 30 and 100 billion barrels to their reserve base, and five years from now we're gonna be looking at a company 5 to 10 times the size the company is today

P.S. The ticker is PBR.

Monday, June 09, 2008

The horror.

We sure had it nice for a while, didn't we?

Still a lot of conservation to go, apparently.

WSJ: Gasoline Hits Average of $4 a Gallon.


"It's just gotten out of hand," said 53-year-old Yvonne Brune of Des Moines, Iowa, referring to the rising cost of gasoline. Because of higher gasoline prices, Ms. Brune, who works for a printing company doing marketing on weekdays and separately as a bridal consultant on nights and weekends, no longer makes the drive home at lunchtime -- a 30-mile round trip -- to spend time with her dogs.

Tuesday, June 03, 2008

Please God, give us one last shale boom.

We promise not to miss it this time.


Haynesville: CHK, GDP, HK, GMXR, PVA.

Marcellus: CHK, ATLS, RRC, ATN.


Service: HP, CRR, WFT, etc.

Bloomberg: Dakota Oil Fields of Saudi-Sized Reserves Make Farmers Drillers.


His new wealth springs from the Bakken formation, a sprawling deposit of high-quality crude beneath the durum wheat fields of North Dakota, Montana and southern Saskatchewan and Manitoba. The Bakken may give the U.S. -- the world's biggest importer of oil -- a new domestic energy source at a time when demand from China and India is ratcheting up the global competition for supplies and propelling average U.S. gasoline prices to almost $4 a gallon.

And unlike the tar from Canada's oil sands, Bakken crude needs little refining. Swirl some of it in a Mason jar and it leaves a thin, honey-colored film along the sides. It's light - -almost like gasoline -- and sweet, meaning it's low in sulfur.

Best of all, the Bakken could be huge. The U.S. Geological Survey's Leigh Price, a Denver geochemist who died of a heart attack in 2000, estimated that the Bakken might hold a whopping 413 billion barrels. If so, it would dwarf Saudi Arabia's Ghawar, the world's biggest field, which has produced about 55 billion barrels.

Thin Deposit

The challenge is getting the oil out. Bakken crude is locked 2 miles (3.2 kilometers) underground in a layer of dolomite, a dense mineral that doesn't surrender oil the way more-porous limestone does. The dolomite band is narrow, too, averaging just 22 feet (7 meters) in North Dakota.

The USGS said in April that the Bakken holds as much as 4.3 billion barrels that can be recovered using today's engineering techniques. That's a fraction of the oil that Price said should be there, but it's still the largest accumulation of crude in the 48 contiguous U.S. states. North Dakota, where Bakken exploration is most intense now, won't become Saudi Arabia unless technology improves.

``The Bakken is the biggest thing in oil in the lower 48 right now,'' says Jim Jarrell, president of Ross Smith Energy Group Ltd., a research firm in Calgary. ``And among the least understood.''

Sunday, June 01, 2008

To Fadel Gheit, with love.

Something to think about, though I'd cite Tim Evans as a bigger skeptic, and so far, totally wrong.

MSN Money: The end of the oil stock rally.

When everyone agrees that oil stocks are the thing to own, where is the supply of new buyers going to come from? And without new buyers, oil stock prices will stagnate and then fall.

Fortunately, not everyone is convinced yet. Oppenheimer oil analyst Fadel Gheit, for example, continues to write that, fundamentally, oil shouldn't trade at more than $55 a barrel. To which I say, God bless. The minute the last skeptic turns into a believer and bellies up to buy oil shares, the rally in oil stocks is doomed.

Still, I'm worried there aren't enough skeptics left. Oil stocks have looked increasingly frothy this year. One sign of that is the huge gains being racked up by obscure small-cap stocks in the sector. These are exactly the kinds of stocks that attract the extreme momentum traders as a sector nears a top.


Here's some advice
So what does all this mean to you? Five things:

* If you haven't bought oil stocks yet, I'd wait for a correction rather than chase them here.

* If you own oil stocks, you might want to take some profits in the sector. There's no need to sell everything, but check to see whether your portfolio is out of balance, and trim back your exposure to the sector.

* If you need to add energy stocks to your portfolio, take a look outside oil. Natural-gas stocks, for example, haven't had nearly the run that oil stocks have, and natural gas is still well below its historic peak of $15 per million British thermal units. If you need a suggestion or two in the sector, check out Chesapeake Energy (CHK, news, msgs) and Ultra Petroleum (UPL, news, msgs) in Jubak's Picks. Devon Energy, in that portfolio, is a big natural-gas producer, although not a pure play like Chesapeake and Ultra.

* Remember that the key to making money in the stock market is to buy low and sell higher. It's time to start looking around for unloved stocks in other sectors.

* We're by no means near the end of higher oil prices or of higher prices for oil stocks. Just wait. If oil drops to $110 -- the new floor, in my opinion -- you'll hear a huge chorus of doom saying that $50 a barrel is just around the corner.

That, of course, will be the time to buy.


At the time of publication, Jim Jubak owned or controlled shares in the following companies mentioned in this column: Chesapeake Energy, Devon Energy, Joy Global, and Ultra Petroleum. He did not own short positions in any company mentioned.