Jim Rogers: Time to buy natural gas.

Here's an interesting trade.

Jim Rogers, former hedge fund manager, on Cavuto on Business this weekend:

"Two hedge funds have collapsed recently, have driven down the price of natural gas. Two things:

It's gonna be cheaper to heat your house if you use natural gas; if you don't use natural gas, switch to natural gas.

But secondly, buy natural gas, you'll make a fortune."

[Note: The transcript on Foxnews.com contains only the first comment about using natural gas in your house. The quote above is more accurate.]

------

One of the funds he's referring to is Amaranth which hasn't collapsed and is trying to stay open, though that seems a little unlikely given the circumstances, so ultimately he'll probably be right. Using borrowed money to gain serious leverage, they played natural gas futures for early 2007, in the process basically cornering the market for themselves. When they ran out of money to keep buying, it turned out everybody else had taken their toys and gone home (quite possibly on purpose), and the market plunged, leaving Amaranth holding the bag.

The other fund he's likely referring to is MotherRock LP which also incinerated itself with natural gas trades. The notable thing about MotherRock is that one of the managers was a former President of the New York Mercantile Exchange (a major commodities exchange) who probably had a little bit of experience with trading commodities before trying his hand at running a hedge fund portfolio.

So, justifiably, natural gas is considered the most volatile commodity of all, and it has certainly proved it recently, burning even those with experience. After spiking last year to $15, it's now down to under $5.

Jim Rogers is probably counting on three things to support this trade: First, that the blowup of these two hedge funds has created a temporary dislocation in the price of natural gas to the downside, and secondly that natural gas is now trading at the low end of it's range in it's normal relation to oil. This idea is also supported by energy analyst Kurt Wulff, who recently wrote "Natural gas may not have positive price momentum, but it has value at near the lowest ratio to crude oil in the 00's decade." Finally, we are just ahead of winter and natural gas has a tendency to spike sharply if you get a period of very cold weather during the winter.

A couple of things to keep in mind: This is a trade he is recommending, so you need to keep a watchful eye on your position to sell into a spike. Predictions for this winter suggest it will be warmer than normal.

If you don't trade the commodity, you could take a look at stocks that generally trade along with natural gas, some of the ones I found correlated are EGN, PXP and WMB. The larger producers of natural gas include COP, ECA, EOG, APC, XTO, CHK.

Pickens: It's the fundamentals.

I dunno, maybe he's a Star Wars fan too.

Dallas Business Journal: Pickens: 'Fundamentals' driving oil price.

Quotes:

Dallas oilman T. Boone Pickens says "fundamentals" are the reason the spot-market price of oil has fallen recently to $61 per barrel from nearly $79.

....

"What's happened is you have enough oil now to satisfy everyone's needs," he said. "The demand is dropping off; the economy is slowing down. You don't need as much oil as you needed 30 days ago or 60 days ago, so the price came down. And that's it in a nutshell."

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All kidding aside, the 50/50 case for recession is tilting here heavily. In the recession of 2001, oil prices dropped from roughly $40 (inflation adjusted) to around $23, or 42%. In 1990, they dropped from roughly $56 to around $33, or 41%.

So, let's see... $78 - (78 * .41) = $46.

OPEC wanted a floor of $60, they're going to have to pull oil off the market to get that one to stick. That will be interesting to watch.

What's missing from these charts?

Chart of the Day: Oil, Inflation Adjusted.

The Big Picture: The Car Dealers Doldrums Indicator.

Econbrowser: Watching housing slide.

Grey shaded areas on all of the above charts are recessions.

Oil prices, car dealer sales, building permits, housing starts, and the yield spread - suggesting the possibility of recession.

Unemployment, corporate profits, the market averages - generally not suggesting recession.

Retail sales - ?

Could go either way, just as Liz Ann Sonders said. (Her case was built on oil, housing, and the yield curve, btw.)

How's real estate doin'?

Barbara Corcoran is founder of The Corcoran Group, which is listed on it's web site as the largest residential real estate firm in New York City.

So perhaps she can give us a sense of how exactly real estate is doin'.

Not so good, apparently.

FoxNews Cavuto on Business, Recap of Saturday, September 16:

Quote:

Barbara: Home prices falling; you ain't seen nothin' yet!

Coincidentally, I happened to be in one of Corcoran's regions this weekend outside of NYC and I was struck by just how many FOR SALE signs I saw. (This was before I saw her comment, btw.)

Another casualty of a rough year.

CNBC via MSN Video: Hedge fund blows $5 billion in one week.

NY Times: A Hedge Fund’s Loss Rattles Nerves.

CNBC via MSN Video: The man who lost $5 billion in one week.

CNBC via MSN Video: Mistakes at Amaranth.

This is the third hedge fund that I can recall that blew up this year due to bad commodity bets, the others being Ospraie Point Fund and MotherRock LP. In this case it was apparently a result of a bad bet on natural gas, which spiked up during the heat wave in the summer then turned around and plunged as the rest of the summer turned mild and no serious hurricanes threatened Gulf production. MotherRock also blew up due to natural gas, I believe they had been leaning bearish when the price shot up. In this case, the trader was playing spreads on natural gas futures, which turned on him. This has shades of the Long Term Capital Management situation, where they were also heavily concentrated, leveraged, and playing spreads between various fixed income instruments based on historical tendencies, which also turned on them.

I haven't recommended buying futures and options here for the simple reason that the volatility can be very intense, even for traders with years of experience, and when things go wrong money can disappear very, very quickly. Amaranth, according to the reports, had been up 22% for the year in August, and is now down something like 35%, which is a 57% turnaround in one month, with the worst damage suffered last week.

P.S. Brian Hunter - no relation.

What's missing from this chart?

Chart of the Day: Oil, Inflation Adjusted.

The greyed areas on this chart are recessions. Notice that when we had a large rise in oil prices in a short time (circa 1974, 1979, 1991, 2000), we generally encountered a recession shortly thereafter.

Will it be different this time? The rise this time came over 3 years, rather than in a short period, but this is also the second largest rise on the chart.

Also, one other thing to note: Most of these rises were followed by sharp breaks in oil prices as demand faltered.

Stay tuned..

The real estate wildcard.

Why delve into real estate and mortgages on a blog about energy? Because the situation developing in real estate is a wildcard that can't be ignored in trying to figure out what could happen to the economy in the future.

The real estate boom of the past few years was really one for the ages. By various measures, real estate values got significantly above long term trend lines, particularly in hot areas like Florida, California, parts of the Northeast and Washington D.C. areas, and Las Vegas. Additionally, ostensibly to help people afford homes at these valuations, various forms of exotic adjustable and interest only mortgages were peddled and came into much wider use. Which makes you wonder: since fixed rates were so low during most of this period courtesy of the US Fed, why bother using these mortgage timebombs that ensure higher future payments? They were used because they made payments look affordable to people as they mostly focused on the early payments, not the potential for upward adjustments in the future. Now that people are seeing these adjustments upwards, often fairly significantly upwards, many of these mortgages are now causing people much grief, and in some cases pushing people into foreclosure as they find themselves unable to keep up with the payments.

As the articles below indicate, this is a growing issue, and will likely contribute to the cool off in housing. And an accident in housing will likely affect consumer psychology negatively.

Keep an eye on this story.

BusinessWeek: Nightmare Mortgages.

CNNMoney.com: Foreclosures spiked in August.

Courtesy of Calculated Risk, a blog I read for housing info:

USA Today: More fall behind on mortgages.

A plug for Google Reader.

Totally off topic, for those of you who read a lot of blogs, I highly recommend using Google Reader.

Clean, elegant, simple; I love it.

Liz Ann Sonders explains her 50/50 odds of recession call.

As a follow up to this earlier post, here is an interview from Friday where Charles Schwab Chief Investment Strategist Liz Ann Sonders explains her call for 50/50 odds of recession.

I think this is a pretty logical call.

CNBC via MSN Video: Charles Schwab Liz Ann Sonders.

ECRI: Premature to call a recession.

The Economic Cycle Research Institute, or ECRI, was one of the first outfits to identify the economic trouble brewing after the Internet bubble. They look at a variety of economic data, some of which is explained in the Bloomberg video below. Right now their indicators have broadly softened, but are not at a level suggesting a recession. [...yet. But we can keep an eye out and try to spot which way things are tilting.]

New York Times: A Forecast for a Fork in the Road.

Quotes:

At the Economic Cycle Research Institute, the forecasters have noticed that the last six months bear a striking resemblance to two different kinds of periods: the run-up to a gentle slowdown, like those of the mid-1980’s and mid-90’s, and the run-up to recession. In both situations, consumer expectations fall while interest rates and inventories rise, which has already begun to happen. But the two paths — slowdown and recession — historically diverge sometime after the six-month mark. Starting Friday, with the August employment report, we will begin to get a sense of which road we’re going to take.

Globe & Mail: Housing Reports a Bad Omen?

Quotes:

In a further sign of trouble, an index that foreshadows turning points in the U.S. economy suggests things will get worse before they get better. The Economic Cycle Research Institute's weekly leading index annualized growth rate fell to a 179-week low yesterday, its worst level in more than three years.

"The growth rate has been falling steadily since January," said Anirvan Banerji, director of research at the independent forecasting group, based in New York. "That suggests that as far as the eye can see, the U.S. economy will keep slowing, at least through early 2007."

Mr. Banerji said it is too early to tell if the index is pointing to an actual recession, but would not rule out that possibility. "We are certainly not seeing any indication of a revival in economic growth."

Bloomberg: Achuthan of Economic Cycle Calls Recession Fears `Premature'.

Today, Bloomberg. Tomorrow, the world.

Bloomberg with a very long article on the Peak Oil debate that hits all the highlights, and features all our favorite characters: Boone Pickens, Charles Maxwell, Matthew Simmons, Peter Thiel, Canadian Oil Sands, et al.

Bloomberg: Peak Oil Forecasters Win Converts on Wall Street to $200 Crude.

To quote Han Solo: "I've got a bad feeling about this."

Bloomberg: U.S., German, Japanese Bonds Rally as Inflation Eases.

Quotes:

The spread was 28 basis points today. U.S. two- year yields exceed 10-year yields by 8 basis points, the most since March, producing an inverted yield curve.

A yield curve is a chart of bonds of the same quality and different maturities. Inverted yield curves have preceded each of the past four U.S. recessions.

Bloomberg: Business Spending May Languish, Raising Risk of U.S. Recession.

Quotes:

``Most of the people forecasting a soft landing are counting on a boost from capital expenditures,'' says Liz Ann Sonders, chief investment strategist at Charles Schwab & Co. in New York. ``I would be careful about that.'' She puts the odds of a recession at more than 50-50, ``and it could happen relatively quickly.''

Ledger Dispatch: One stock market analyst speaks her mind.

Despite the recent rally, some stock market analysts are still concerned about a possible economic slowdown that could lead to a recession. You can count Ms. Liz Ann Sonders, Chief Investment Strategist for Charles Schwab & Co. Inc., in that camp.

In a letter sent to Schwab Institutional clients, she makes several interesting points that might give concern to stock market bulls. She is not impressed that most economists surveyed by the Wall Street Journal are still predicting economic growth between 2.7 and 3 percent for the next three quarters and none of these experts are predicting negative growth for any one of those quarters.

She also points out that in late 2000 the consensus of economists for the first quarter of 2001 was for the GDP (gross domestic product) to grow at a 3.3 percent rate. In fact, that quarter turned out to have a -0.6 percent growth rate. Her point is that recessions usually do not reveal themselves, making them difficult to predict.

She has three major economic concerns that when added together (in her opinion) increase the chances of this country entering a recession in the near future. Her first concern is the inverted yield curve, when the 3-month Treasury bill has a higher yield than the 10-year Treasury bond.

Historically, an inverted yield may be a pre-cursor to a future economic slowdown or in a worse case scenario, a recession. However, Ms. Sonders also points out that when the Fed knowingly inverts the curve like they did in late June, the odds of a recession happening increase dramatically. There have been six such inversions in the last 33 years with five of them resulting in a recession.

Ms. Sonders also points out that the last five recessions have been preceded by spikes in oil prices and the longer we go before oil prices settle down, the harder it will be for the economy to ward off an economic slowdown. The third major concern, in Ms. Sonders' view, is this country's slowing real estate market. For this July, mortgage applications were down by almost 30 percent from a year ago. In the last several years, mortgage equity withdrawals have basically replaced wage gains as the main source of income gains, thereby becoming the main driver of our strong economy. With consumer spending accounting for two thirds of the GDP, any pull back in that area will result in some form of an economic slowdown.

FoxNews: Recap of Cavuto on Business August 26.

Quotes:

Home sales slowing down big time from last year, but so far no noticeable drop in the price of those homes. Is that next?

Sara Nunnally: In certain parts of the country you are going to see price drops. Certainly in those areas where there were sharp run ups like California, New York and Florida, which are already starting to come down. But overall, national median prices are up.

Jim Rogers: Prices in Nevada, California, Arizona, Florida, Massachusetts are going to go down a lot – thirty, forty, fifty percent. But in some parts of the country prices are going to go up. When these bubbles break, prices go down a lot. In California fifteen years ago people were mailing their keys back to their bankers because they couldn't pay the mortgage. That's going to happen again. But in other parts of the country, prices are going to be going up. If you are in a place that's got a good economy – in agriculture or mining – your house is going to go up.

....

Jim Rogers: America's in recession, and the recession is going to get worse.

The New York Sun: Dorfman: Housing Bust Could Leave Market In State Of Agony.

Quotes:

Addressing himself to the latest delirium - the biggest real estate bubble in history - the chief investment strategist of Raymond James Financial, Jeffrey Saut, is warning clients that the ongoing collapse of residential real estate has far-reaching implications for both the economy and the stock market.
As evident, though, by last week's rosy showing in which some stock indices rose 3% to 6% and turned more positive on the year, the market is essentially saying it doesn't give a hoot.
But Saut certainly does, noting that real estate has been chiefly responsible for much of the nation's economic and job growth.

....

The associate editor of Safe Money Report, a monthly investment letter in Jupiter, Fla., Michael Larson, tells me the market is on the verge of realizing the third phase of the housing bust, which he believes has very negative implications for stock prices.The first two were the stiff declines in homebuilders and suppliers of home products. Next on the list, Larson says, are the financial institutions, notably those banks and sub-prime lenders that provided the financing for super high loans on inflated properties.
Such lending practices, he believes, will invariably lead to a rash of failures among these companies and the stock market will soon begin reflecting this risk. "We could be in for a rough few months ahead," he says.

....

That's also the view of former money manager, now private investor, Neil Weisman, who thinks it will take the housing industry at least five to seven years to work off its excess inventories, rather than the one to two years many Wall Streeters are projecting.

Whiskey & Gunpowder: Increased Recession Risks!

Quotes:

In June, Red Lobster's same-store sales were down 5%, Ruby Tuesday (RI) was down 2.3%, and P.F. Chang's (PFCB) was down 1.1%. In May, the last month reported, Applebee's same-store sales were down 1.9%, and Outback was down 2.6%. High-flying and fast-growing P.F. Chang's, whose stock had risen more than six-fold from 2000 until last summer, has now tumbled by over 50% (see Figure 4). At the same time, Cheesecake Factory reported a 1.3% same-store sales decline in the first quarter and has warned that the second quarter will be flat to slightly negative. According to Cheesecake's chief financial officer, the chain has never had two negative quarters in a row. USA Today also reported that, according to Lynne Collier, restaurant analyst at Stephens Inc., in the 12 years she has covered this industry she has never seen a "downturn of this magnitude". Nine out of the ten casual restaurant chains she follows have seen traffic decline in the past three months.

San Francisco Chronicle: Williams-Sonoma cuts outlook for year.

Quotes:

Williams-Sonoma Chief Executive Officer Howard Lester said he is pleased with the company's second-quarter performance but concerned about economic issues that could put a damper on future earnings. Pottery Barn, which caters to middle- and upper-income households, has already seen a drop in demand and is particularly vulnerable.

"When we last updated our guidance in mid-July, we believed that the softness we were seeing was specific to the execution of our Pottery Barn summer merchandising strategy," Lester said in a statement. "Today, however, after five weeks in home with our new Pottery Barn fall catalog, we believe there is a greater macro-economic issue also affecting this business. To date, the consumer response in Pottery Barn is continuing to trend well below our expectations, causing us to approach the third and fourth quarters with an extremely cautious outlook."

1500 days to peak oil, give or take.

Mr. Skrebowski collects a wide variety of data on large projects to come up with his estimate. It's interesting to contrast his 2010 date, calculated from basically a ground up view, with the more bird's eye calculation of Kenneth Deffeyes which suggests 2006. Four years is a small difference, not enough to quibble over.

Adelaide Now: Oil crisis by 2010.

Quotes:

Visiting Adelaide, Chris Skrebowski, a trustee of the Oil Depletion Analysis Centre and editor of the Energy Institute's Petroleum Review in Britain, said "peak oil" was real and imminent.

"Peak oil is when flows can't meet the required demand," he said. "This will cause an economic tsunami." Mr Skrebowski, addressing a Committee for Economic Development of Australia gathering, said that of the world's 18 largest oil fields, 12 were in production decline.

Few large discoveries were being made, with the prediction of even less new oil in coming years.

"Oil supply will peak in 2010-11 at around 92 to 94 million barrels a day," he said. "We have just 1500 days to peak. Collectively, we are still in denial."

The Tipping Point..... tipped.

Ford recently announced that in July SUV and light truck sales were down 44.1% versus the prior month. GM, which fared the best of the Big Three, had a 19% decline.

Now a Consumer Reports poll indicates that the top factor in new vehicle purchases is gas mileage, which, until now, was a factor that had ranked something like 7th. One auto analyst is quoted in the story as downplaying this result, as consumers often say one thing then do something quite different. I happen to think she's wrong.

AP: Poll: Fuel Economy Big Car-Buying Factor.

And while we're focusing on cars:

NY Times: A Car-Sales Indicator Suggests a Recession Is Near or Already Here.

One indicator is not enough to go by, but the tottering housing market, high energy prices, this...

One small step for GM..

I was pretty harsh on GM last year ('Dead Man Walking'), but I am very gratified to see they have redesigned their smallest offering, the Chevy Aveo, to make it more competitive and improve the gas mileage. The older model, which only lasted 2.5 years here, was tiny in size but got rather blah gas mileage and was not competitive with the Toyota Yaris or Honda Fit. GM still has a lot of work to do, and they won't make much money off these, but I'll take this as a sign that they are waking up.

I'm still not a fan of the stock, though I do like their CFO, Frederick Henderson. Maybe if they let that guy run the show..

USA Today: GM improves fuel efficiency with new Aveo.

The Case for Natural Gas.

This clip is supposed to be about natural gas, but for whatever reason, Ian McDonald of the WSJ has chosen to highlight 3 Canadian stocks which are both natural gas plays as well as Canadian oil sands plays. Hey, I won't argue, I rather like the way he's thinking.

Maybe he's been reading a bit of Henry Groppe, who loves Canadian energy producers, or Matthew Simmons, who lauds natural gas as "the single best energy source we've ever had", or even Boone Pickens, who believes natural gas will be used as a transportation fuel as the oil gets tight. (He most certainly hasn't been reading me, but my contribution is here.)

The interview highlights stocks Encana (ECA), Canadian Natural Resources (CNQ), and Nexen (NXY).

CNBC: The Case for Natural Gas.

Stephen Leeb of "The Coming Economic Collapse" interviewed.

Dr. Stephen Leeb, author of "The Coming Economic Collapse, How You Can Thrive When Oil Costs $200 a Barrel" was interviewed by thestreet.com on the topic of his book.

His view is that unless we start getting very serious, very quickly on alternative energy, we are in for disaster as oil demand growth will outpace supply growth, particularly from China and India, and as a result, oil prices will skyrocket. He also thinks that oil is "the exact opposite of the Internet" (bubble) and there is "no end in sight" to the rise in energy companies. He's also a fan of precious metals.

StreetWatch Video: Stephen Leeb interviewed.

Help Jane, Stop This Crazy Thing!

One of the analogies that Boone Pickens likes to make relates back to when he worked in the oil industry: As an oil field got a little long in the tooth, you ended up on a treadmill of working harder and harder to try to keep production flat. Mr. Pickens believes that global oil production is now on exactly such a treadmill at around 85 million barrels a day.

Whether that ultimately proves to be to highest production figure, only the future will tell for sure, but the oil industry is certainly having a heck of a time these days, and looks an awful lot like George Jetson in the opening sequence of The Jetsons.

The latest:

Reuters: Dubai to take control of offshore oil resources.

Financial Times: BP shuts down Alaska oil field.

Boone Pickens: "$100 oil within the next year"

Top 10 Alternative Titles for this Post:

10. Got Oil?

9. Boone Pickens Declares War on Belgium.

I digress..

Video interviews today on:

CNBC: Boone Pickens.

Bloomberg: Boone Pickens.

Important points:

- Believes oil will reach $100 a barrel within the next year, "unless you go into a global recession".

- Does not buy the idea of a terror/geopolitical/risk premium in oil prices, instead he thinks high prices are simply a function of supply and demand being close to or out of balance at roughly 85 million barrels a day.

- Does not believe we are at the point of substantial demand destruction, and he isn't sure where it is.

- Believes natural gas will be used as a transportation fuel on a large scale.

- Prefers "oil sands" to "tar sands".

- Doesn't believe Saudi Arabia's figure of 250 billion barrels of reserves.

- Does believe there is 250 billion barrels of reserves in the Canadian oil sands.

- Recognizes the increase in costs of new oil sands production, but still talking about Suncor.

- Working to close slaughter houses that slaughter horses for export consumption.

"June absolutely fell off the Richter scale for us"

CEO of homebuilder D.R. Horton in Q&A session on the company earning's conference call, about 01:37:15 in.

D.R. Horton Earnings Conference Call July 20, 2006.

The stock market is telegraphing a fairly serious slowdown. Lots of bad news out there and several smart investors calling for caution. (See 'Jim Rogers: "Be very careful.") I would post the chart of a homebuilding stock, but I run a family friendly blog.

Peter Thiel predicted a housing nuclear winter leading to a recession, and uh-oh, recently long bonds are outperforming stocks, even with the idea that the Fed is still in a raising mood. (See 'Man cannot live by energy stocks alone.')

And Barry Ritholz pointed out how important housing was to the economy over the past couple of years. (See 'Half of New Jobs Are Real Estate Related' and 'Housing is Dominating Economic Activity, part 3.')

Energy stocks are cheap, oil prices are high, oil futures prices are high, demand has not yet declined to any substantial extent, but technically energy stocks are weak (See '200 Days Later' and 'Crude oil to $100?').

Caution may be the better part of valor here.

Oil Analyst Charles Maxwell on Peak Oil.

On June 3rd 2006 Weeden & Co's Senior Energy Analyst Charles Maxwell appeared on Bob Brinker's Moneytalk radio show as a guest. Charles Maxwell has been involved in the oil industry since 1957 and has solid credentials. One of the callers [Mitch in Des Moines] asked Mr. Maxwell a rather involved question about the state of Saudi Arabia's production and it's place as the dominant oil producer in the world and in OPEC, the peaking of world oil production, and how this might relate to an earlier era when the Texas Railroad Commission was running the show and US oil production peaked.

Mr. Maxwell's answer:

There's always been too much oil around the world that could be produced, and to get a reasonable return in the industry somebody had to bring supply and demand into balance.

In the early days that was John D. Rockefeller, and then of course that was stopped with the anti-trust action of Theodore Roosevelt and so on, and then we went to the Texas Railroad Commission which was a government group that did the same thing in the name of supporting the oil industry, and then we went to the Seven Sisters who tried to regulate the oil industry in the same way - not very successfully - and finally we've ended up here with OPEC trying to do the same thing.

But that 147 year history is now likely to be broken, because the problem that each of these famous organizations have tried to do, is to bring supply and demand into balance effectively by creating some kind of a monopoly that would limit the amount of supply. It was necessary because we had too much supply. Now the world is completely changed. Completely changed.

And I don't think that the majority of governments, or the majority of analysts, or the majority of the public really understand the face of the energy crisis that we're coming in to, is that there is not enough supply.

This is the first time in the history of the world that that problem has arisen; there isn't enough supply. And the reason that OPEC is now opening up their quota system and producing pretty much as much as they can, is that they too are caught up in this problem. There is just a finite amount of oil, we are using up the oil in the great fields that we've had in the past that was cheaply brought in, and we are finding a good deal less each year than we are actually using, and we will gradually reach that peak, probably in about 7 to 10 years, and the Saudis have a critical role to play.

Now you're bringing the issue up, how much oil do the Saudis have? And I think it is more, perhaps, than some analysts have recently suggested, but probably a lot less than the Saudis have been given to believe in the past that they had.

Oil industry people are notoriously unreliable in terms of their own reserves, they tend to make a political statement about reserves instead of a geological statement about reserves. The Saudis want us to believe that they have almost limitless reserves.

I've looked at the situation carefully, and I think the Saudis can produce a bit more oil, maybe 15 or 20% more oil than they're producing today, but when they reach something in the order of 12 to 15 million barrels a day - they're at 9.5 million now [note- those numbers don't appear to add up, perhaps he meant 13 million, but that's still more than 20% higher]- I think they're going to run into the inability to proceed any higher. They're going to reach a peak and they're going to hold it for a while, but they're not going to be able to help us with incremental barrels. I think that will happen in about 10 to 12 years.

So I think you're bringing up a very important point; Mr. Bush says that we're addicted to oil, and we will be hurt terribly when the Saudis are unable to produce more, because they have been the main hope that the world's oil supplies would go on a long, long time. When it becomes obvious that the Saudis can't carry higher and higher production, the world will recognize that peak oil is here.

Answering a follow up question from Bob Brinker on Hubbert's Peak and the fact that the major oil discoveries date back 35 years:

We had these great oil finds in the past, and now we're finding smaller and smaller fields, many of them, but not enough to make up for the loss of these great fields and they continue to be depleted, that is, used up, and the production from them is falling, so we can begin to forecast that without a lot of new production, and with the old production falling, we're in a pickle.

"A fundamental imbalance between supply and demand growth."

CIBC World Markets Chief Economist Jeff Rubin and Banc of America Securities Oil and Gas Analyst Bob Morris debate the possibilities of $80+ oil.

CNBC Video: CIBC's Rubin & BoA's Morris.

Jeff Rubin has been a quite bullish on oil for the last few years, for reference see 'CIBC', and 'CIBC: Conventional oil seems to have peaked in 2004.'

Boone Pickens on CNBC.

Understatement of the decade: "This whole thing is going to be very, very interesting."

Boone Pickens of BP Capital interviewed this morning on CNBC regarding his predictions for oil prices for the rest of 2006, his views on natural gas, and his investment ideas.

CNBC Video: Boone Pickens, July 5, 2006.

Unconventional Success in Gas Production (No Yale Degree Required).

The term 'unconventional' resources refers to things like oil sands, coal bed methane, tight sands gas, and various forms of shale gas, the key being that these are not the usual oil and natural gas drilling operations. Unconventional resources take different equipment and techniques, take longer to develop and are generally more capital intensive than 'conventional' oil and gas production, and yet tend not to produce at the same high initial velocities, and thus, for most of the oil industries' history have been sort of the ugly (and somewhat neglected) stepchildren.

There is a flipside to the slower production of unconventional resources though: Production tends to be more even over the life of the resource, and the lifespan tends to be longer than that of conventional resources.

Though much of the focus these days is on oil and the possibility of peak oil, it's interesting to note that the last three major US takeovers in the energy industry revolved mainly around gas resources, including unconventional resources. This reflects both the fact that most of the easy oil and gas is already either gone or spoken for, and the fact that the US natural gas market, though well supplied at the moment, over the longer term will likely reflect increasing tightness as demand rises and US production struggles to keep pace, and so far at least, the much ballyhooed rise in LNG imports appears to still be a ways off.

Unocal, which was taken over by ChevronTexaco, owned some nice natural gas assets in Asia. ConocoPhillips purchase of Burlington Resources (BR) revolved around onshore US based production of natural gas, and BR had both conventional natural gas and unconventional gas production. Anadarko is now about to purchase both Kerr-McGee and Western Gas Resources (WGR), two deals which again focus on natural gas, with a mix of deepwater production and unconventional gas production (coal bed methane from WGR).

The focus on gas resources in recent deals, together with recent insider buying at gas producers Chesapeake Energy, XTO Energy, McMoRan Exploration, and a bit at Quicksilver Resources, are a clear signal that energy insiders are bullish that gas production is going to be a profitable enterprise in the future, and that unconventional resources have really come of age.

For further info on the recent deals:

The Oil Drum: Drilling on Wall Street.

For further info on the recent deals and some stock ideas:

Jubak's Journal: What $21 billion can teach you.

CNBC Video: Jim Jubak on Anadarko Deals.

Jubak highlights the stocks KWK, EOG, and UPL. ECA, SWN, and XTO are other possibilities to look at.

Unforgettable.

Some spectacular moves today, particularly in the coals, the refiners, and oil service.

I highlighted the positive comments of the CFO of Halliburton a little while ago, and now a couple of coal CEOs have issued a similar set of bullish forecasts.

Reuters: New long-term contracts to boost coal miner profits.

Quotes:

Soaring electricity demand and sky-high oil prices are driving up the price of coal and producers are set to benefit as they negotiate new long-term supply contracts, two major U.S. coal miners said on Wednesday.

"A lot of legacy contracts are expiring soon and that has great implications for our bottom line," said Steven Leer, chairman and chief executive officer of Arch Coal Inc.

....

Considering the prospects of long-term global energy shortages with oil at $70 per barrel, "this is the best environment I have ever seen in more than 20 years.

"I have never seen the coal industry in such an enviable position as a producer. Coal will be the backbone of electricity generation for the next 25-30 years," said Leer.

Canadian Oil Sands - the Next El Dorado in North America?

Dr. Michael Economides, a petroleum engineer and Professor at the University of Houston, has recently suggested that the Canadian oil sands could be the next El Dorado in North America.

This comment comes, interestingly, from a gentleman who believes peak oil won't hit until roughly 2050 and that both Saudi Arabia and Russia will eventually increase production substantially. His other views: He's bullish on natural gas, believes that Venezuela's Hugo Chavez is the biggest threat to the United States and it's oil needs, and is convinced that Chinese demand, geopolitics and OPEC's inability to raise production in the short term are the main cause of high oil prices, not an imminent Hubbert's Peak of global production.

While his views thus differ substantially from peak oil proponents including Boone Pickens, Kenneth Deffeyes and Matthew Simmons, in seeing huge potential in Canadian oil sands, Dr. Economides joins a chorus of oil industry types, analysts, and investors.

On the potential of Canadian oil sands I highlight, in no particular order, the comments of:

Boone Pickens, Jim Rogers & Charles Maxwell
Donald Coxe
Peter Thiel
Raymond James
CIBC
Leigh Goehring
Stephen Leeb
Martin Whitman
Henry Groppe
Jim Cramer
BMO Nesbit Burns
CERA (yes, them)
China

For a list of stocks and a little bit of back story, here's my take.

In terms of technical analysis, the main oil sands stocks [Suncor, Canadian Natural Resources, Canadian Oil Sands Trust, Nexen, Imperial Oil, as well as to a lesser extent Encana, PetroCanada, Opti Canada, Husky Energy] held up well recently and continue to have some of the stronger charts in the energy sector.

For Dr. Economides' recent viewpoints, please see:

Resource Investor: Peak Oil Debate Digresses Into Global Warming Argument.

Resource Investor: Energy GeoPolitics: The Impact on Prices and Supply of Oil and Gas.

PS. After posting this, I went over to The Oil Drum and the top article turned out to be the con argument on oil sands, the problem of the natural gas input requirements. This is a legitimate concern. If you are worried about that, then I would focus on Encana, Canadian Natural Resources, Nexen and Opti Canada. The first two have substantial natural gas production themselves [not necessarily in the same region, but it helps offset the cost pressures if they produce the same product], and the last two are working on a project where they should be able to produce gas they can use from the oil sands itself, thus reducing their need for natural gas input and lowering their costs substantially.

PPS. There's also a water issue, but that never stopped anybody. For reference, see Chinatown.

Quotes:

Noah Cross: Either you bring the water to L.A. or you bring L.A. to the water.

....

Walsh: Forget it, Jake. It's Alberta Chinatown.

Kunstler now 'not calling for the end of the world as we know it'.

James Kunstler is the author of "The Long Emergency, Surviving the End of Oil, Climate Change, and Other Converging Catastrophies of the 21st Century", which I consider to be one of the more Apocalyptic peak oil books.

For whatever reason he backpedaled in this interview, saying he is neither calling for an energy Armagedeon, nor calling for the end of the world as we know it.

Perhaps I'm an idiot, but his book and his blog writings appear to call for exactly that. But hey, sit down to be interviewed by a beautiful young lady, and the whole peak oil scenerio doesn't look quite so bad. And heck, the Asian pirates are gonna have a heck of a time making it to Syracuse anyway.

Anyway, on with the show..

James Kunstler, as interviewed by CNBC's Erin Burnett:

CNBC: "With oil prices hovering around $70 a barrel, it's clear the words 'cheap oil' may be a thing of the past. But what would we do in an age where we can't get our hands on expensive oil either? Our next guest says 'Brace yourself. That may be what's in store for Americans within a matter of years.' James Kunstler is the author of "The Long Emergency, Surviving the End of Oil, Climate Change, and Other Converging Catastrophies of the 21st Century" and he joins us now. We appreciate your joining us, James."

Kunstler: "Nice to be here."

CNBC: "Alright, I was reading your book, and I wasn't sure what to expect, and I have to say, I've had difficulty putting it down. One thing that you say though, here, on page 20, 'Two hundred years of modernity can be brought to it's knees by a worldwide power shortage.' Is it fair to say you're calling for an energy induced Armagedon?"

Kunstler: "Oh gosh no! What I'm saying is that we're facing a discontinuity in regular life, but I'm not calling for the end of the world as we know it. That's not true at all."

CNBC: "Alright. So what are you calling for though; you are saying that we're gonna run out of oil?"

Kunstler: "Well, I'm saying that we're gonna run into big problems with the complex systems that we depend on, not when we run out of oil, but as we go over the world production peak. That's when the trouble starts."

CNBC: "So, here's what I want to follow up with you on. Because this whole issue of a peak is highly controversial. I mean, last week, here on Street Signs we were listening to Ben Bernanke talk in Chicago, and he said at the end of 2005, in terms of proved reserves of oil on this planet, we had 15% more than we did a decade earlier, at about 1.2 trillion barrels, and he says that doesn't even count the Oil Sands up in Canada."

Kunstler: "Well, that's just not reliable information that he's getting. The US Department of Energy is considered to be the most unreliable source of this information. In fact, global production has been flat since 2004. We've found no significant amounts of oil. The Saudi Arabians have had tremendous trouble producing more oil, in fact, they've failed, even though we've requested them to do it innumerable times. Their own giant oil fields, the Ghawar oil fields, which represent more than half of their production has been in deep trouble for several years now, they're producing more sea water than oil, because they have to pump so much sea water into the ground."

CNBC: "Right."

Kunster: "And you know, it's generally evident that the giant oil fields of the world, the Burgan field in Kuwait, the Cantarell field in Mexico, the Daqing field in China are all past peak and are now entering depletion, and we've got a serious problem."

CNBC: "So obviously, as we've said, it's controversial. But let's just assume that your numbers are right, and that you're right. Is it fair to say, that we have enough time to come up with what obviously the new energy bill here in the United States directly encourages, which is alternative sources of energy, whether it be hydrogen, or nuclear, or solar."

Kunstler: "There's tremendous wishful thinking around this subject, just tremendous. No combination of alternative fuels, or systems for running them, is going to allow us to continue running Walt Disney World, Wal-Mart and the Interstate Highway System. We're going to try everything we possibly can, but it's not even going to make up for a substantial fraction of what we're going to lose from oil. So this is for real."

CNBC: "Alright. Well, anyone who wants to find out more has got to read the book. We appreciate your joining us, thanks so much."

Kunstler: "You're welcome."

Boone Pickens putting his money where his mouth is.

I guess he didn't hear the one about "never give 'em both a time and a price; just one or the other." And maybe he doesn't need to worry, he's been pretty much nailing it so far.

The Dallas Morning News: Pickens predicting $80 oil.

Quotes:

Boone Pickens, the legendary Dallas oil and gas investor who seems to peer at markets through a crystal ball, issued a new prediction Monday: The price of a barrel of oil will rise to $80 by the first of next year.

Reuters: Legendary investor Boone Pickens likes oil not gas.

Quotes:

Pickens, a long-time backer of companies operating in Canada's oil sands, said he's been buying shares of oil-sands miner Suncor Energy Inc. (SU.TO: Quote, Profile, Research) (SU.N: Quote, Profile, Research) as that company's stock price slipped in recent weeks along with those other energy companies.

"I've been a buyer of Suncor recently on the pullback from $85" a share, he said.

200 Days Later.

If you bring up the XLE [energy ETF] or OIH [oil service ETF] on your favorite charting site (BigCharts is one) and draw 100 and 200 day simple moving averages on them, you will see that for the first time in a long time (about 3 years, but who's counting..) the XLE in particular has violated the 200 day moving average, while the OIH is basically right on it.

In addition, both of these ETFs would, given further moves down, violate the 'higher highs, higher lows' precept that is the foundation of most people's definition of an uptrend.

The next couple of days and weeks are therefore crucial in terms of these longer term signals.

Jim Rogers: "Be very careful."

From this weekend's Cavuto on Business on FoxNews:

Ben Stein: "The world economy is slowing, the growth of demand for oil is slowing dramatically. I think the long term trend of demand for oil is very, very strong, but in the short run, inventories are piling up, even the Saudis can't find anyplace to store the oil, they're putting it in old oil tankers. There is a disconnect here, the price has got to fall with this huge overhang of supply. When it does, it knocks the props out of inflation, the interest rate rising cycle will stop, and stocks will rally."

Jim Rogers: "Well, Ben may be right, the market should rally after this collapse it's had recently, but Ben, we may already be in recession and the markets are gonna be down this year, and probably down into next year, so be very careful."

The ingredients are certainly there: rising interest rates, high energy costs, and what is increasingly smelling like a housing bust. And the whole stock market is stinking up the joint.

Jim Rogers, as far as I am concerned, has good gut instincts. He also ran one of the early hedge funds with George Soros.

It's Hammer Time!

I'm seeing a fair number of hammer candlesticks in energy land, and, coming after a strong sell off like the one we're having, hammer candlesticks tend to be a good sign that a bottom has been 'hammered' out. You can read more about this particular candlestick formation here ('Bullish Hammer'). Note that we still need confirmation tomorrow, which I'm thinking we'll get.

Update: I was wrong, the hammers went unconfirmed. It looks rather sickly out there.

In the longer run, well, it's nice to read something like this:

Reuters: Halliburton sees earnings doubling in coming years.

An argument for uranium.

From Sprott Asset Management, a peak oil aware asset firm based in Canada, comes a new paper entitled "Investment Implications of an Abrupt Climate Change" which argues that an increase in the use of uranium for nuclear power will be one way humans will try to mitigate the introduction of more CO2 into the atmosphere. CO2, or carbon dioxide, is a byproduct of burning carbon based energy (oil, coal, natural gas, etc), and is a greenhouse gas, which is to say that when increasing amounts are introduced into the earth's atmosphere, CO2 leads to increased heat retention.

Cameco (CCJ) is a Canadian producer of uranium with large reserves, and a good entry point these days looks like $36-39.

Boone Pickens plays up the aw shucks bit on TV, but when you get to the part in this paper about water shortages, and you remember that Mr. Pickens other big investment these days is in water rights..

Boone Pickens: One word - Up.

Boone Pickens was interviewed on CNBC last week on his favorite topic, oil.

CNBC: Pickens' Predictions.

Q: Where are oil prices headed from here?

A: "Up. We could still back off a little bit, but it's trend is up, and we'll be back up in the mid 70's pretty quick."

Q: Where will be around the end of the year, still $70s?

A: "You know last year, I believe we backed off right at the end of the year and then picked up again. The trend is always up, because we're dealing with a limited supply of oil, which I think is 85 million barrels a day, and that's it, I don't think we can get any more out of the system, I'm talking about globally. And when I see the fourth quarter projected for 86.5 million barrels a day, it's gonna get tight."

Q: Will high prices solve high prices? Will we ever hit that point and get back down?

A: "You don't want it back down."

Q: Will demand eventually slow down due to high prices?

A: "Absolutely you will. That's the way you win the game, is that the price gets up high enough that it chokes you, and you start conserving, and you'll cut back on usage, and then you've solved the problem; you start to live with a changing energy picture forever after."

Q: You think that gasoline prices are too low in the US, that they should be higher?

A: "Gasoline prices around the world are a good $5 to $6, and so why are we here at $3? We're here because we haven't taxed our gasoline so much. But oil is the same, pretty well the same, Brent/North Sea, WTI, are basically the same product. Gasoline is different, there should be a global price for gasoline."

Q: What do you say to people who say you are talking your own positions up?

A: "I even had a Congressman come to see me, and said I was doing just that. I said I'm not. I said the fundamentals are the fundamentals, it doesn't have anything to do with my book. I don't think anybody can talk the market up for more than 2 minutes, that's it."

On Second Thought: The Super Duper Spike Theory.

Arjun Murthi of Goldman Sachs was responsible for the original $105 super spike call ('Buy early. Buy often. Repeat.') that caused so much controversy in early 2005. He's apparently now thinking that $105 may be too conservative if something happens in a major oil exporter.

AME Info: Oil could go above $105 a barrel.

He didn't apparently mention hurricanes, but it sure is hot.

Update: More information is in this article 'Oil could top $105 in major supply outage: expert'.

Bottom?

With the caveat that I still have some things to learn about technical analysis, it looks to me like today or tomorrow might see a bottom for crude oil prices. If that finds it's footing, I'm thinking the equities also stabilize.

I was thinking of trying to trade it via the USO oil ETF, but right now I'm on vacation and it's tough to make good trades when your mind is on other things.

If they were to find a floor here or close, that would support the idea that we had a medium term top in energy ('Q: The difference between a correction and a crash.'), but if the declines continue in size.. then obviously something more serious is developing. In specific, I'm wondering if perhaps high prices are having effects we don't recognize clearly yet.

I had suggested $3 a gallon was going to be trouble [('Three is the magic number.') and "I think $3+ gasoline on a sustained basis (4+ months) is going to alter the universe." ('Buy early, buy often, repeat.')], but it seemed this year that $3 a gallon was not so bad after all. Maybe my first instinct was right?

Enter the Dragon Grand Poobah.

"ConocoPhillips" sung to the tune of "Green Acres".

Starring Warren Buffett and Bill Miller.

Eddie, er, Warren:
ConocoPhillips is the oil stock for me.
Oil production is the life for me.
Oil reserves spread out so far and wide
Keep Manhattan, just give me that oil upside.

Eva, er, Bill:
New York is where I'd rather be.
I don't want no stinkin' commodity.
I just adore a penthouse view.
Dah-ling I love you but give me Citigroup on Park Avenue.

Warren Buffett appeared to suggest that oil was a bubble a month ago at the recent Berkshire Hathaway shareholders meeting, but maybe he'd had one too many cheeseburgers and Cherry Cokes Budweisers, or maybe he was just trying to headfake Bill Miller, another well known value manager (though with a different philosophy).

Motley Fool: Berkshire on Bubbles.

Quotes:

Q. Do you think that we are in a commodity bubble?

A. Not in agricultural products, but yes in metals, oils -- the most extreme being in copper.

....

Buffett's concerns were recently echoed by Legg Mason's Bill Miller, who said, "Today people want commodities, emerging market, non-U.S. assets, and small- and mid-cap stocks. Those were all cheap five years ago, and had you bought them then, you would be sitting on enormous gains ... [But] [g]iven the choice of buying Commodities with a capital C, or buying capital C -- Citigroup (NYSE: C) -- at current prices, I'll take the latter."

And now, Mr. Buffett's Berkshire Hathaway reveals:

AP: Berkshire reveals stake in ConocoPhillips.

Bershire already held an investment in Petrochina, which to some degree can be looked at 4 ways: an oil play, a China play, an anti-dollar play, and a 'maybe they find something in the South China sea' play ('Investment Advice from Kenneth Deffeyes.'). In addition, he bought a utility that wants to build a large wind farm ('What would Warren do?'), and talked about the idea that he might invest in nuclear power ('LOBG Sing Along w/ Warren Buffett.').

Now he's bought a stake in ConocoPhillips [COP] and GE.

COP is thus officially certified as the oil stock for the value crowd. It also happens to be well diversified oil major, having investments in tar sands projects in Canada and Venezuela, in oil production in Russia via a stake in Lukoil, large US oil operations including refining, and, having just bought Burlington Resources, extensive North American land based natural gas production.

But let's not forget GE also has a large energy business which has been targeted for expansion by CEO Jeff Immelt, producing items for natural gas, clean coal, wind and nuclear power generation.

So apparently Warren Buffett knows a little something about energy.

And in something I missed, so does Charlie Munger, his partner:

thestreet.com: Buffett Bets on Oil.

Quotes:

The ConocoPhillips stake also fits Buffett's game plan. He has experience in the energy sector, having made high returns by investing in PetroChina (PTR:NYSE - commentary - research - Cramer's Take), and he has long said publicly that he views energy as an attractive area.

Still, the move seems bound to raise some eyebrows, particularly after Buffett's longtime sidekick, Charles Munger, made some controversial comments at the recent Wesco Financial (WSC:NYSE - commentary - research - Cramer's Take) conference. He suggested that future generations will curse present-day Americans for consuming fossil fuels at such a high rate, since the supply of oil will be greatly diminished.

"Those were pretty strong words," says Tongue's partner at T2 Capital, Whitney Tilson. "You rarely see Buffett and Munger investing in something that's just had its biggest run in history in the last five years, [like the oil and gas market] . One reason may be that they believe oil prices are going to be high, if not higher, for a long time."

Q: The difference between a correction and a crash.

A: A correction is when it happens mostly to the other guy's portfolio, a crash is when it happens mostly to yours.

About a month ago I mentioned that the introduction of the various commodity related ETFs could be a signal of a top ('Lessons from the Internet bubble.'), and that's looking like a reasonable call these days.

Again, I tend to think in energy stocks that we may see a medium term top, with more upside ahead, but there are no guarantees.

In terms of watching my stocks, I am looking for them to find support levels at the 20 or 50 day moving average, and I am keeping an eye on volume.

I also have a shopping list which I'm watching to see how they behave and if I find an entry point I like. Candlesticks are a helpful way to identify possible reversal points.

Leggo my Diamond Offshore.

Q: What's trading roughly 38% under fair value?

A: Um, lemme think... Dell [DELL]?

Q: No.

A: Um.. Microsoft [MSFT]?

Q: Nope.

A: Wait, wait, I got it. United Healthcare [UNH]?

Q: Ugh. Give up?

CNBC via MSN Money: Manager targets Diamond Offshore, Grant Prideco.

Quotes:

Investors seeking bargains within the energy sector should bore down to companies that drill for oil and gas or provide equipment and services to drillers, said J.C. Waller of Icon Advisers.

Shares of companies in the drilling sector are “still trading, in our estimate, about 38% below fair value,” Waller said Tuesday on CNBC’s “Squawk on the Street.”

Waller arrives at his conclusions via a quantitative analysis that’s focused on company earnings and ignores energy-price fluctuations. “Oil companies are making money (whether) oil’s trading at 50 or 60 bucks a barrel,” he said.

[P.S. Actually, Dell might have washed out today.]

Jim Cramer starring in "Raging Energy Bull".

Two thumbs way up on Suncor.

Ethanol stocks.

More ethanol.

The late stage drillers.

5/3/06 - "Tonight's show is all about oil."

Though they don't mention it in the transcript, I am pretty sure I heard Jim Cramer say recently on his show that he thought oil would not trade below $70. I don't agree with that. We're having a sort of quasi-Murphy's Law moment, where everything that could go wrong looks like it will go wrong, and that's levitating oil, but I wouldn't want to bet anybody that we might not dip back down in the 60's this year. I can't tell you whether these problems get better or worse, if we get a sense of that you know which way you want to play it.

Also, I am skeptical of the ethanol stocks Cramer recommends. I can't argue with success - they have mostly skyrocketed - but the underlying fundamentals of ethanol aren't very good.

Ethanol from corn, which how it's produced in the US, is not efficient, currently requires subsidies (and likely will for a while), and generates a product that contains less energy than the equivalent gallon of gasoline. Unless something changes there, the story leaves me skeptical, and has a bit of a PT Barnum feel.

Mr. Stewart Goes to Houston.

James B. Stewart is a columnist for the Wall Street Journal and SmartMoney, as well as the author of a number of books on business and investment topics, and has a lot of financial experience under his belt. I have no idea what his track record is on investments, but his columns reflect a lot of saavy and intelligence.

So I feel rather less pseudo Internet bubblehead-ish when I read his new column, which suggests investing in oil service, among other things.

Note: For some reason this column has a different title in the WSJ than SmartMoney, but it appears to be the same article. The SmartMoney version is free.

WSJ: Prospecting in the Energy Sectors Is Likely to Pay Off in Long Term. [$]

SmartMoney: Playing Energy.

Quotes:

Eventually demand should ease and production increase, which is the only long-term solution to high oil prices. Needless to say, this would knock energy stocks from the lofty perches they've recently been occupying.

....

One of the savviest investors in the oil and gas arena I know is a Houston-based executive who recently told me he's been aggressively buying stocks in the oil-services sector. In the past, his suggestions have been impeccable. Among the stocks he mentioned are BJ Services, which specializes in pressure pumping, and Noble Corp., which focuses on deep-ocean drilling. I recently sold Noble in some premature profit-taking but still own Smith International, which makes a wide array of oil-field equipment, including drill bits. There are also oil-services exchange-traded funds, such as the Oil Services HOLDRs.

[By the way, it's possible his source is John Olson.]

Dan Rice's Words of Wisdom.

WSJ (via Post Gazette): The No. 1 energy fund's wild (but energizing) ride.

Dan Rice runs the excellent Blackrock Global Resources fund, which I'd recommend, but it has a load.

My suggestion: Print the article out, read it, put it up on your wall, read it again in a week.

The main points:

- The best scenario is that oil trades in a range of $60 - $70; not too high, not too low. And if you've been reading along, that's clearly where OPEC wants it too.

- He believes there's still substantial upside, particularly in coal, but also in oil production and oil service.

- He highlights the fact that since 2000, there have been 20% corrections roughly twice each year in the energy sector. Be aware of this, use it to your advantage; let cash build during the surges and try to jump in on the corrections.

- He suggests a small portion of the average investor's portfolio be allocated to the energy sector, but admits to having 90% of his own money in it.

Oh Lord, Please Don't Let Ben Be Misunderstood.

Some days I wonder if I know anything about investing at all.

It seems there's a bit of a conundrum going on about what Ben Bernacke might have said the other day, what exactly he meant, and did he know what he meant, etc, etc. And you know what, I thought he was pretty clear.

This is the important bit of his testimony:

The FOMC will continue to monitor the incoming data closely to assess the prospects for both growth and inflation. In particular, even if in the Committee's judgment the risks to its objectives are not entirely balanced, at some point in the future the Committee may decide to take no action at one or more meetings in the interest of allowing more time to receive information relevant to the outlook. Of course, a decision to take no action at a particular meeting does not preclude actions at subsequent meetings, and the Committee will not hesitate to act when it determines that doing so is needed to foster the achievement of the Federal Reserve's mandated objectives.

Does it mention a timeframe? No. Just the possibility of pausing. Some people apparently took it as hinting at an imminent pause. Um... I dunno, I guess I'm too unsophisticated to see that. It rather seems like that would be reading something into it that isn't there. The rest of the testimony goes into the usual suspects; inflation, housing, energy, etc.

Perhaps people are so used to the circular talk of Greenspan, they were thrown off by the plain speak of Bernacke. In fact, unlike Greenspan, you don't even have to try to parse it or paraphrase it, it's pretty clear on it's own. Which is why I'm a little perplexed by the whole issue. And I think we've got more interesting things to worry about.

Bernacke has a rather nasty job ahead of him, and I don't mean in guiding the markets to exactly what he's doing every step of the way.

No, he gets to try to do the economic equivalent of driving a semi out of control fire truck from the back end, which is to say he has to use short term rates to try to move long term rates enough to thread the needle, just enough to put the brakes on inflation, which nobody really has a great read on, while not inadvertantly triggering a crackup of some sort, perhaps in housing, which nobody really has a great read on either.

Keep an eye on that, that's the real issue, not whether the market or various participants think he is or isn't handling communicating with them well.

Anyway, on a more important topic, Leggo my Diamond Offshore..

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.

Quotes:

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

$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.

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. [$]

Quotes:

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.