Exxon: #@&% the Police.

Sure, the margins aren't that high versus pharma or banks, but $116 million a day or 80k a minute still attracts attention. The wrong types, unfortunately, from, to use McCain's term, "wackos". Ours and theirs..

One Senate hearing not enough? You couldn't have put a little away for a rainy day, Rex? [I guess you're not supposed to do that anymore, but geez..]

Let the political grandstanding begin!

USA Today: ExxonMobil amasses record $36B 2005 profit.

Quotes:

ExxonMobil (XOM) reported the largest annual profit in U.S. corporate history Monday, a $36.1 billion jackpot that included a record-setting fourth quarter.
Exxon earned $10.7 billion, or $116 million every 24 hours, in 2005's final quarter, up 27% from the same period one year earlier.

Quarterly revenue of $99.7 billion was 19.5% higher than last year's fourth quarter. For the year, Exxon took in $371 billion — equal to the total annual economic output of Argentina and Thailand.

It's not going to make negiotiations with the "wackos" any easier though.

IHT: Exxon adds it all up: $36 billion.

Quotes:

Production at Exxon's oilfields around the world declined 1 percent in 2005, excluding stoppage at platforms in the Gulf of Mexico from last year's hurricanes, illustrating an industry-wide dilemma: an inability to tap into the world's richest oil exploration areas in the Middle East and Venezuela because of political limitations.

"Lack of access to new reserves is the most important problem Exxon and the other large oil companies are facing," said Michael Economides, a professor of chemical engineering at the University of Houston. "It should make them paranoid about the future."

Major oil producers like BP and Chevron are exploring more remote areas of the globe and drilling wells to record depths to bolster production as older fields in North America and the North Sea near exhaustion.

Exxon will this year tap new oil fields holding an estimated 1.75 billion barrels, or 34 percent of all the new projects by publicly traded oil companies scheduled for 2006, according to analysts at Deutsche Bank.

Tea time in oil service or tee up time in oil service?

There are lots of recommendations on oil service these days. I would normally take that as somewhat of a bad sign, except:

- The loudest on oil service are the analysts, who have been long suffering and mostly ignored for their tech brethren.
- The second loudest are some fairly savvy investors.
- The earnings in oil service have been very good.
- I suspect that oil service is underweighted in the average investor's portfolio.

FoxNews: Cashin' In, January 21.

Quotes:

Wayne's Slick Pick: Oil Service HOLDRS (OIH)
Friday's close: $151.75
52-wk High: $151.75
52-wk Low: $84.16

Wayne Rogers: HOLDRS has about 18 different companies in it, most of which are in the oil service business, like Halliburton (HAL), Baker Hughes (BHI), and those kinds of companies. They constitute between 5-10 percent of the total fund and it's a bet on the whole thing. I've owned that for over a year. It's doubled in the last 15 months. I'm still holding it, and like Jonathan and I always talk, I've got a stop-loss in there and if it hits it, it hits it. In the meantime, it's running.

Barrons: Bold Views, Heavy Mettle.

Quotes from Barron's Roundtable member Felix Zulauf:

Thank you, Abby. Felix, you're next.

Zulauf: Every decade has its winner. In the 1960s it was the rise of multinational companies. In the 'Seventies it was gold. In the 'Eighties it was Japan. In the 'Nineties it was technology and in the current decade it is everything geared to the rise of China, India, the emerging economies and the industrialization process. Natural resources is the candidate for the mania, particularly oil and probably precious metals. Emerging markets should do well, along with capital-goods companies around the world. The loser is the middle- and lower-class consumer in the old industrial countries. That's the long-term structural set-up.

This is the second year in the U.S. presidential-election cycle, which historically has been a bear-market year. There is a reason for that phenomenon. The government stimulates the economy in the two years prior to the election, and withdraws the stimulus in the two years after. This time it will probably work a little differently.

Why is that?

Zulauf: The economic cycle globally is de-synchronized. A slowdown is beginning in the U.S. that will accelerate during the year. We have an acceleration in Asia and Europe -- Japan and Europe, in particular. Consumer inflation is held in check due to the forces of intense globalization, so there is no reason for central banks around the world to get harsh on monetary policy. U.S. monetary policy, which has been the most restrained globally, will change this year, becoming accommodative. If Bernanke [incoming Federal Reserve Chairman Ben Bernanke] wants to improve his image, there is a risk he goes further than expected in raising rates, provoking a correction between spring and fall. After, the market should do well. I'm pretty constructive on equity markets around the world.

With the underlying trend bullish, I'll stick to natural resources. Last year I recommended crude oil, as I did the year before, and Transocean [RIG]. This year crude could pause in the range of $50 to $70 a barrel. After the pause, it will run up more, hitting $100 before the decade is over. I'm recommending an ETF, the Oil Service HOLDRS Trust, which is traded on the American Stock Exchange.

What does it consist of?

Zulauf: It's a basket of 18 drillers, service and equipment companies. It's an easy way for investors to participate in an ongoing bonanza in this industry. Investments in oil infrastructure declined from their 1981 peak for 20 years. Supply does not respond quickly to rising demand, as investments are capital intense. Rising replacement costs have slowed the process of bringing new supply on stream. In 2004 -- the '05 numbers are not out yet -- oil companies could replace only 66% of the reserves they had lifted. They're continuing to deplete their reserves rapidly. As companies find new oil and gas, they are enjoying excellent cash flow. In recent months, the industry has increased its exploration budget dramatically.

Schafer: Felix, isn't it amazing how the major oil companies look in the rear-view mirror as far as what they expect oil prices to be?

Zulauf: They can't believe in a higher oil price because to some extent it hurts them. There are a lot of production-sharing agreements with governments in Africa, the Caucuses and such. If oil goes higher, a rising share of future production goes to these governments, and the portion of reserves booked for the companies isn't theirs any more. That is going to be a problem next year. Some large, integrated companies could run into shocking problems when they disclose they have to reduce reserves.

Neff: À la Royal Dutch?

Zulauf: Yes. The bullish thing about the oil-drilling, service and equipment industries is that all the money spent by the oil producers flows through the service providers. A few years ago it was a buyer's market, and drillers accepted multiyear contracts at low prices. Today the drilling industry still has about 70% of its fleet contracted at rock-bottom rates. Most of these contracts are ending this year, and '07 will see a dramatic jump in earnings and cash flows when capacity is contracted at spot rates. Transocean, for example, earned 27 cents per share in '04. It probably earned $1.70 a share in '05. Consensus estimates for '06 are $5 and for '07, $8. This is based on contracts ending and new ones signed at current spot rates. Based on '07 earnings, the stock trades for nine times earnings, which is really cheap. It closed Friday at 75. Book value is $36 a share, but replacement book is probably $60. The company is buying back 10% of its shares. I recommend buying the industry through an ETF, but Transocean is a great investment.

Lies, damned lies, and oil reserves.

Oops.

MarketWatch: Repsol cuts proved reserves by 25%.

Quotes:

Oil and gas explorer Repsol YPF on Thursday cut its proved-reserves estimate by 25%, citing new laws in Bolivia that make it more costly to extract gas as well as more field information from Bolivia and Argentina.

A re-run: No Limit WTI Hold 'Em.

Kurt Wulff on Bloomberg TV 01-25-2006.

Kurt Wulff, a former oil analyst with DLJ, currently has his own firm, which publishes research at www.mcdep.com.

Points covered during the discussion yesterday on Bloomberg TV:

ConocoPhillips' (COP) earnings were highlighted. Kurt believes they were exceptional, higher than investors are giving the company credit for, and believes that COP is a cheap stock. Currently, COP is priced as if oil were trading at roughly $38, while the 6 year forward oil futures, which Kurt believes are a reliable indicator, are at $66.

Kurt discussed his outlook for the energy market in 2006. He doesn't know exactly how the year plays out, but believes that investors are behind the curve. His view is that we are in the middle of a decade long uptrend in energy prices, and that oil will be around $150 in 2010, based on the idea that our energy situation is now worse than it was in the 1970's, energy continues to be relatively cheap, and in the 1970's the price of oil increased by 10 times.

Kurt has a particular fondness for natural gas, as it deserves a premium as a cleaner fuel. At the 5 to 1 conversion rate he uses, he sees the possibility of natural gas at $30 in 2010.

What could end the price gains for energy?

As in 1980, a worldwide recession of some sort.

Kurt, however, is optimistic on worldwide growth, and believes that it continues to be strong.

Back to the Future for Coal.

msn Money: 6 ways to invest in the coming coal boom.

Jim Jubak is riding the commodities boom pretty well, so I make it a point to read his articles.

What's the reserves, Kenneth?

Say what!? 8x?!!

A sweet endorsement of Operation Alberta Freedom, er, Canadian oil sands stocks via 60 Minutes on CBS tonight. There's a mention of possibly (emphasize 'possibly'), 8x the reserves of Saudi Arabia. Wait, is that the real reserves of Saudi Arabia, or the "we're not so sure about those reserves" reserves?

This report is positively gushing. Somewhere, Dan Rather is arranging for two guys to rough up Bob Simons in an elevator, I'm sure of it.

How's this for a quote:

It may look like topsoil but all it grows is money.

Or this:

Pickens is one of those investors. He runs a hedge fund in Dallas and is now a true believer.

"We’re managing $5 billion here. And, about 10 percent of it is in the oil sands. So, it’s the largest single investment we have," Pickens says.

And if oil sands are the answer for investors, does Pickens think the oil sands are the answer for the United States?

"Oh, I think so," he says.

Anyway, an article and video at CBS' site. More info and stock ideas in a prior post, but I'd be wary of buying on Monday.

CBS: The Oil Sands of Alberta.

Quotes:

Twenty-four hours a day, 365 days a year, vehicles that look like prehistoric beasts move across an arctic wasteland, extracting the oil sands. There is so much to scoop, so much money to be made.

There are 175 billion barrels of proven oil reserves here. That’s second to Saudi Arabia’s 260 billion but it’s only what companies can get with today’s technology. The estimate of how many more barrels of oil are buried deeper underground is staggering.

"We know there’s much, much more there. The total estimates could be two trillion or even higher," says Clive Mather, Shell's Canada chief. "This is a very, very big resource."

Very big? That’s eight times the amount of reserves in Saudi Arabia. The oil sands are buried under forests in Alberta that are the size of Florida. The oil here doesn’t come gushing out of the sand the way it does in the Middle East. The oil is in the sand. It has to be dug up and processed.

Rick George, the Colorado-born CEO of Suncor Energy, took 60 Minutes into his strip mine for a tour. He says the mine will be in operation for about 25 years.

The oil sands look like a very rich, pliable kind of topsoil. Why doesn’t oil come out when squeezed?

"Well, because it’s not warm enough. If you add this to hot water you’ll start the separation process and you’ll see the oil come to the top of the water and you’ll see sand drop to the bottom," George says.

It may look like topsoil but all it grows is money.

It didn’t always. The oil sands have been in the ground for millions of years, but for decades, prospectors lost millions of dollars trying to squeeze the oil out of the sand. It simply cost too much.

T. Boone Pickens, a legendary Texas oil tycoon, was working Alberta’s traditional oil rigs back in the '60s and remembers how he and his colleagues thought mining for oil sands was a joke.

"Here we are sitting there having a drink after work and somebody said this isn’t going to, it isn’t possible. It’ll all have to be subsidized to a level, said, before they’d make money you’d have to have $5 oil," Pickens says laughing. "We never thought it would happen."

But then $40 a barrel happened and the oil sands not only made sense, they made billions for the people digging them.

....

Asked if the processed oil is as good as that pumped in Saudi Arabia, Mather says, "Absolutely as good as. In fact, it even trades as a, at a premium because it’s high quality crude oil."

....

A million barrels a day are now coming out of the oil sands and oil production is expected to triple within a decade. It won’t replace Middle Eastern oil but at that point it will be the single largest source of foreign oil for the United States, even bigger than Saudi Arabia, which sends a million and a half barrels a day to America.

Greg Stringham, who works for the Canadian Association of Petroleum Producers, says surprisingly, that Washington has only been paying attention for the "last couple of years."

Stringham often lobbies for the oil sands in Washington. He says that in Alberta you don’t have to look for the oil sands — the earth moves.

"When it comes to exploration in the oil sands, you can’t drill a dry hole. It’s there," he says. "We know where it is. They’ve outlined it. You don’t have any risk. But other conventional sectors around the world, there’s a huge exploration risk."

The exploration risks are the least of it. Much of the world’s crude is in the Middle East where the instability is deeper than the oil. When Alberta’s blue-eyed sheiks took to Wall Street last summer in their Stetsons to drum up support for the oil sands, their message seemed to be, "If you can’t trust Alberta, who can you trust?"

"Alberta is a very good place to do business. It’s a very stable environment," says Mather.

....

Asked what he thinks about the Chinese interest in the oil sands up in Alberta, Pickens says, "At first I thought they were tire kickers. But I think they’re serious buyers."

....

But unless the Chinese go back to bicycles and Americans trash their SUVs, there will be buyers — for oil anywhere, no matter how it’s found or mined. Right now, Canada has become the land of opportunity for oilmen. They will tell you there is little else on the horizon.

"Bob, if you take a tablet and put on it where is supply gonna come from that we don’t know about today. And you put down all the optimistic points, that tablet will basically be blank," says Pickens.

As blank as the landscape around Fort McMurray, where the world of oil exploration ends.

Does Pickens think the days of cheap oil are gone?

"They’re gone," he says. "From what we knew as cheap oil, when I pumped gasoline in Ray Smith’s Sinclair station on Hinkley Street in Holdenvale, Oklahoma, 11 cents a gallon, that’s gone."

Will we ever again see $1.50 a gallon? "We won’t ever see $1.50 a gallon. No, that’s gone," says Pickens.

Lunch time in oil service.

RBC Capital Markets analyst Kurt Hallead appeared on CNBC Friday morning. He's bullish on the oil service sector and thinks it goes up 30% this year.

That's great, except it's already up 17% or so.

Quotes:

It’s hard to find a better place to invest today than in shares of oilfield-services companies, according to Kurt Hallead, who analyzes the sector for RBC Capital Markets.

“Oil services are now attractive to many different investment styles, from value to growth to momentum,” Hallead told CNBC’s “Squawk Box” on Friday. “We expect to see substantial new money flow into oil services.”

Two more weeks! Two more weeks!

S&P's Sam Stovall finds yet another way to slice and dice the sector data, and we've got ourselves a &*^%@$ horserace!

Keep in mind it's about momentum and historical performance and probabilities - not to mention we're only half way through January - but maybe it's gonna be Africa hot baby! [Sam Stovall's idea is in the last paragraph of that link.]

The below data is not from S&P, but from the Fidelity Select sector funds, which I use to keep track of sector performance.

Top 10 performing Fidelity Select Sector funds so far in 2006:

Energy service: 10.44
Gold: 9.45
Networking and infrastructure: 9.36
Electronics: 8.80
Energy: 8.75
Natural resources: 8.45
Developing communications: 8.40
Natural gas: 7.93
Technology: 7.27
Software and Computer Services: 7.24

Those won't correlate exactly with what S&P has, but they're something to work with.

Let's see how we close 'em out at the end of January.

Stock ideas.

The below video is ostensibly an interview with the CEO of Hornbeck Offshore Services [ticker: HOS], but it also features a number of stock ideas from Chris Edmonds, who is the oil commentator on thestreet.com.

CNBC via msn Video: Hornbeck Offshore Services CEO Todd Hornbeck.

Jim Jubak from msn Money with some interesting ideas in alternative energy:

Invest in Europe's alternative energy leaders.

An administrative note: I'm going to be working on some personal projects for a while, so my postings here may slow down.

CIBC: The Time of Sands.

Via The Oil Drum and Peak Energy Australia, the latest CIBC World Markets research letter that is rather positive on Canadian oil sands.

CIBC World Markets: The Time of Sands.

This report doesn't go into the related stocks, but if you read through the archives on this blog, you'll find mention of various oil sands related stocks. Two places to start, the Raymond James report on oil sands, and an earlier post of mine, Blame Canada.

RBC: Sunrise in Oil Service.

CNBC via msn Video: RBC Capital Markets Oil Services Analyst Kurt Hallead

Full Matt Simmons Interview Available.

The full Barron's interview with Matt Simmons has been posted below.

JapanFocus: Twilight in the Desert: an interview on peak oil with Matthew Simmons

CIBC: Conventional oil ''seems to have peaked in 2004.''

Resource Investor: Oilsands to Be World's Largest New Energy Supply by 2010.

Quotes:

As conventional oil reservoirs deplete rapidly around the world, Canada's oilsands will be the biggest contributor to new global supply by the end of the decade, predicts CIBC World Markets [TSX:CM].

And in an energy market where state-owned firms control a major portion of global daily production, the oilsands provide one of the few remaining growth opportunities for investors, chief economist Jeff Rubin said Tuesday.


''All of the net increase in oil production this year is expected to come from non-conventional sources,'' Rubin said in a release.

''While deepwater oil is the primary source today, we forecast that Canadian oilsands will become the single biggest contributor to incremental global supply by 2010.''

The Toronto-based bank said a study of 164 new oil fields and projects around the world shows that the price of oil will continue to rise over the next three years if global demand does not begin to wane.

As such, Rubin believes oil prices this year will eclipse last year's record high of $70.85 per barrel, reached as major oil and natural gas infrastructure in the Gulf Coast was being pounded by two major hurricanes.

Rubin also predicts that oil could rise to as much as $100 per barrel by 2007, giving energy companies a vast amount of cash in which to invest in large but expensive projects like the oilsands.

''Not only is depletion significant, but it is also accelerating, forcing more and more reliance on non-conventional sources of supply, such as Canada's vast but largely undeveloped oilsands,'' said the report.

The CIBC study says once depletion rates are factored in, global conventional supply ''seems to have peaked in 2004.''

Lehman Brothers: Sunrise in Oil Service?

Reuters: UPDATE 1-RESEARCH ALERT-Lehman ups Halliburton, 18 others.

Quote:

Lehman Brothers on Tuesday raised its price targets on Halliburton Co. (HAL.N: Quote, Profile, Research) and 18 other oil service and equipment companies.

There's Something About Henry.

Of the various oil prognosticators I follow, Henry Groppe of oil analysis firm Groppe, Long & Littell is one of the more even keeled in his predictions. As an example, I can't remember hearing a call for $250 oil from him, any mention of an 'oil crash' scenario, or even the kind of swashbuckling pinpoint oil price predictions that Boone Pickens has, at various points, swooped in and made (and mostly nailed). Which isn't to say Groppe has not had some impressive calls of his own, he just has a different style.

So what is Groppe's prediction for this year? Oil prices may trade in a range of $45 to $75, which seems entirely reasonable to me, if not as sexy as Boone Picken's daring calls, or as eye catching as Matthew Simmons' recent calls.

For more insight on Groppe, I have a prior post here and a more recent one here. There's also this recent interview from an ASPO peak oil conference. All well worth reading for what I think is an informed and balanced view on peak oil.

There's an interesting kicker: As even keeled as Groppe's views are, he admits to having 90% of his investments in energy and 65% in the Canadian energy group.

China reserves.

China signaling again that they want to keep some of their reserves in something other than the dollar, say, perhaps commodities.

FT: China signals reserves switch away from dollar.

Quotes:

China indicated on Thursday it could begin to diversify its rapidly growing foreign exchange reserves away from the US dollar and government bonds – a potential shift with significant implications for global financial and commodity markets.

...

In a brief statement on its website, the government's foreign exchange regulator said one of its targets for 2006 was to “improve the operation and management of foreign exchange reserves and to actively explore more effective ways to utilise reserve assets”.

It went on: “[The objective is] to improve the currency structure and asset structure of our foreign exchange reserves, and to continue to expand the investment area of reserves.

...

However, according to Stephen Green, economist for Standard Chartered in Shanghai, although the language was “vague”, Thursday's statement was the first time Safe has publicly indicated a shift away from dollar assets.

“It is a subtle but clear signal that they are interested in moving away from the US dollar into other currencies, and are interested in setting up some kind of strategic commodity fund, maybe just for oil, but maybe for other commodities,” he said.

The end justifies the means?

Following up on the post about Sam Stovall and investing in the prior year's best sector, here is an article from Mr. Stovall explaining Standard & Poor's research on this topic.

Businessweek: Go for Momentum or Recovery?

A couple of notes: The article discusses investing in the top 10 sectors versus the bottom 10 sectors, rather than just the top sector, which is what I have examined [hey, I've got limited resources..]. Using historical data, the results are that over the time period studied, investing in the top 10 sectors led to almost twice the return of the S&P500, while also increasing the risk adjusted return, which is basically investment nirvana. [And before you go crazy with this, remember it is historical data and backtesting. But you are betting on the strongest horses, and they have a tendency to keep their strength for a while.]

I found similar results when looking at just the top performing sector. Well, mostly. But picking one versus ten leads to much more volatility, and the occasional train wreck when a high flying sector craters. Caveat emptor.

Looking at S&P's list of 2005's best performing sectors, 4 of the 10 are energy related, which seems to bode well for the energy sector in 2006, according to this study.

Here's the problem though: Two of those energy sectors were also top performers in 2004, so they are now on a multi-year winning streak. And they not only outperformed, they hot dogged it. So it is time for caution, folks.

I have another way of slicing the sector data that I haven't had a chance to look at yet. If it gives a strong signal on something, I'll probably mention it later.

Powerful the Dark Side Is.

It looks like Stephen Leeb has gone over to the Dark Side. Darth Kunstler will be pleased.

Leeb's new book:

The Coming Economic Collapse: How You Can Thrive When Oil Costs $200 a Barrel.

By the way, it would be cool to make enough from the site to pay for the book, so if you were going to buy it anyway (or make another Amazon purchase), consider going through the above link and I'll get a commission on your purchase. [If you do, thanks.]

But we can probably guess roughly what he's going to say:

Buy oil companies with long lived reserves [oil sands, unconventional resource plays, selective foreign producers (say PBR, STO, LUKOY, OGZPF, last two if you're daring)], selective oil service, uranium, coal, selective growth companies (at least that's what he recommended in his last book), and be prepared to swing from gold to zero coupon bonds as we cycle from inflation to deflation.

Trade along with Boone Pickens.

Not sure what's up with that title. The stocks he likes are SU, COSWF, EOG, KWK, and XOM. First two Canadian oil sands, next two natural gas, the final is the biggie. I am pretty sure Boone Pickens is also hot on coal, BTU and CNX, I believe.

Star-Telegram: SHLACHTER, PEROTIN, FUQUAY, & CO.

Quotes:

Pickens: Demand for energy will stay strong

Billionaire Boone Pickens, who forecasts a drop in oil prices next year after predicting 2005's rally, told Bloomberg News that he plans to retain his favorite energy stocks: He expects demand to remain strong.

His faves include Suncor Energy of Calgary, Alberta; Canadian Oil Sands Trust; EOG Resources of Houston; and Quicksilver Resources of Fort Worth, according to Bloomberg.

Pickens correctly predicted in 2004 that oil prices would top $60 a barrel this year. Crude-oil futures in New York have jumped 40 percent this year and briefly traded at $70.85 a barrel Aug. 30. Pickens said in Nov. 9 and Dec. 20 interviews that oil would drop toward $50 in the first half of 2006 because supplies are abundant and high prices are crimping demand.

"It'll be slow in the first half for energy stocks," Pickens, who also owns shares of Irving-based Exxon Mobil, told Bloomberg.

Gains should resume in 2006's second half for exploration and production companies and other energy stocks as demand strengthens, Pickens told Bloomberg. "I don't believe this downturn's going to last for very long," he said in the interview.

P.S. There's a piece on Rainwater in there too. Joining the Dark Side, he is. For more on that, read Fortune's "Energy's Prophet of Doom."

[List all posts on Land of Black Gold on Boone Pickens.]

Has Aubrey McClendon lost his mind?!

Has Aubrey McClendon lost his mind?!

Maybe not.

WSJ: U.S. buyers are outbid in the natural-gas crunch.

Quotes:

Even with natural-gas prices surging to new heights and heating bills soaring across the U.S., much of the nation's import capacity remains idle.

The U.S. has four onshore terminals for receiving and processing imported gas, and they are processing only about half the volume they can handle. The reason: U.S. buyers are being aggressively outbid by Europeans and Asians for the limited number of cargoes available.

The supply crunch means natural-gas prices will stay high -- and sensitive to weather changes -- for years, even as the U.S. builds more terminals to handle overseas gas.

"There will be continued competition for supply, certainly through the end of the decade," says Martin Houston, president of North American operations for BG Group PLC, the largest importer of liquefied natural gas into the U.S.

...

High prices are one reason big producers are looking to boost North American gas production. This week, ConocoPhillips said it would pay $35.6 billion to acquire Burlington Resources Inc.. Eighty percent of Burlington's assets are North American gas.

But imports also are key. While the majority of natural gas consumed in the U.S. comes from North American wells, many aging fields can't produce more.

...

With U.S. production leveled off, the energy industry expected to compensate with imports from the Middle East and Africa, where excess supplies of the fuel are never brought to market. Instead, a pressing global shortage has developed, in part because of overseas competition. As the price of liquefied natural gas fell, a building boom began. While supply increased and the number of cargoes available for purchase on the spot market grew, so too did the number of new import terminals in other countries.

Global production capacity for natural gas, in liquefied form, is about 20 billion cubic feet, or about 600 million cubic meters, a day, but there are enough terminals around the globe to eat up twice that volume, according to the Federal Energy Regulatory Commission.

A global shortage has developed in recent months, amid supply glitches, cold weather in the U.K. and a drought in Spain, which has been turning to liquefied natural gas to make up for a shortfall in hydroelectric power.

In an extreme example of the situation, a tanker carrying liquefied natural gas last month arrived from Nigeria and idled in the Gulf of Mexico for a week -- during which prices in Europe rose -- before sailing on to Spain to unload its cargo. Recently, the Spanish have been willing to pay $2 to $3 per million BTUs above Gulf Coast spot prices, according to PIRA Energy Group, a New York consultant. South Koreans, meanwhile, are paying a premium of about $2 and the British a premium of $2 to $6.

Tom Ward too..

This has to be the most aggressive insider buying I've ever seen.

Matt Simmons: Sunrise in Oil Service?

A nice interview of Matthew Simmons in this weeks Barron's. Consider buying a copy, it's worth reading in it's entirety.

Barron's: Twilight for Oil? [$]

Quotes:

Q: Can the Saudis keep their current production where it is for quite a while?

A: That is certainly a likelihood. But there is a real but unquantifiable risk that it starts into the same type of decline we've seen in the North Sea.

Q: This is Barron's, so how do people profit from this?

A: If oil prices don't collapse, energy will be the best place to invest in 2006.

Q: Even though the stocks have had such a run-up?

A: Yes. Maybe they will be only up 1% and everything else will be down 10%, but I doubt that. The current prices we have for energy stocks are finally high enough to start some really significant spending on badly needed projects that have been ignored for a long, long time. The major oil companies can't spend money fast enough. The average E&P budget this coming year is up 35% to 50%. The problem is there are no more drilling rigs. So the backlog in the petroleum-equipment sector is starting to build.

Q: What kinds of companies will benefit?

A: Engineering. Valve companies. Flange companies. Pipe companies. Construction companies. The oil-service industry. Recently our analysts were updating our year-end earnings models. There were about three instances in a row in which earnings were expected to go from $2 in 2005 to $8 in 2007.

Q: Why does ExxonMobil have a different view of where the oil price is headed?

A: I don't have the vaguest idea why they could ever think we are going back to $25 oil other than their business model desperately needs that to happen to have their long-term strategy work. High oil prices are very bad news for big oil. The higher the price, the more proven reserves they've already booked they lose in these foreign concessions, because once their projects hit their payout targets, then the host government's share rises. I think the major oil companies are lost in the wilderness right now.

Royal Dutch Shell PLC tells it like it is.

After reading this:

WSJ: Center Stage in '06: Natural Gas, Iran, New Cancer Tests

Quote:

Jeroen van der Veer, chief executive of Royal Dutch Shell PLC, says natural gas now accounts for 40% of Shell's hydrocarbon output and is rising. "In a decade, we will be close to being 50-50," he says. "One day, the question will be whether we should be [called] an oil-and-gas company or a gas-and-oil company."

Gas use is expected to grow 50% faster than oil consumption in the next 25 years, says the International Energy Agency. Gas is expected to pass coal as the No. 2 energy source by 2020, accounting for nearly a quarter of the pie, with oil first at more than a third. One element favoring the use of gas is that it's clean burning, producing fewer so-called greenhouse gases.

I was amused to see that when I googled an article from Barron's last week, the number 1 hit was Royal Dutch Shell's web site where it has been posted. Read the article and you'll understand.

Barron's (via RDS PLC): Bullish and Fully Fueled.

By the way, the subject of that interview, Kurt Wulff, makes some of his research available on a delayed basis for free, and it is worth reading. Check out www.mcdep.com.

Play it again, Sam.

Sam Stovall, Chief Investment Strategist at Standard & Poor's, appeared on CNBC a few minutes ago and suggested that overweighting the prior year's most successful sector often leads to further outperformance over the S&P 500 the following year. The top performing sector in 2005 was... hmm, let me take a look here... hey, whaddya know - energy. His statistics suggest this outperformance occurs in 7 out of 10 years, or 70% of the time, which is a rather impressive track record.

I have looked at this also as a trading strategy, and I agree with him.

There is one key though: You must avoid a sector that has completely overheated and is about to crash land.

To be perfectly clear, I am not sure if energy is an entirely safe bet for 2006 based on Sam's idea. Energy has done well over the past 3 years, and very significantly outperformed in 2005. On the other hand, many people are still quite skeptical of the energy story and are underweighted (and may need to buy..). Thus, we may have room to run until everybody thinks energy is the place to be. Keep an eye out for that, it's when you'll know to sell everything.

The key, I think, is to watch your energy holdings very closely and not be afraid to take some off if they trade poorly in 2006. You can always buy them back if you were early.

Additionally, Tom McManus of Bank of America, who had recommended energy at the beginning of 2005, feels that energy may still have some life left in it. He is rather bearish on the rest of the market though.

Have a healthy & happy New Year.

Room to Rally.

ICON Energy Fund manager J.C. Waller appeared on CNBC this morning and offered his opinion on energy stocks.

Currently, Mr. Waller believes energy stocks in general are trading at 16% below what he considers fair value, and thus his view is that there is "room to rally".

Drilling down (so to speak..) he believes that the most promising sector of energy is oil and gas drilling, which he believes is trading 36% below fair value. He noted that this sector has also shown recent price strength, particularly over the past six weeks. Thus, based on this combination of value and strength, he believes oil and gas drilling to be a "good place for an active bet".

He highlighted three names in oil and gas drilling which he feels are not being recognized as bargains:

DO - believes it to be 38% under fair value
CDIS
NBR - he has a fair value target of $97

Energy Service in 2006?

When I read things like this, I think so.

MSN: Stocks for the 2006 commodities crunch

Arjun Murti Eyes the Red Pill.

Bloomberg: Goldman's Murti Says `Peak Oil' Risks Sending Prices Above $105.

Quotes:

Goldman Sachs Group Inc. analyst Arjun Murti, who roiled oil markets in March by saying crude may reach $105 a barrel, now says that may be conservative if the ``peak oil'' theory is right and world supplies are running out.

The belief that the world's oil supply is close to an irreversible drop is no longer ``on the fringes'' of the market, said a research report by New York-based Murti, who forecasts oil of $50 to $105 a barrel until 2009. UBS AG analyst James Hubbard, a former oil engineer at Schlumberger Ltd., said an inevitable decline in supply will start sooner and be worse than expected unless investment increases for many years.

A jump above $105 a barrel ``is possible if we don't invest the right amount of money,'' Hubbard said in an interview in London. ``There will be a peak in production earlier than expected, and that post-peak decline will be more dramatic than currently assumed unless there is a sustained increase in investment in oil and gas production, greater consumer efficiency and alternative energy sources.''

Goldman's Murti in March skirted the peak oil debate. In a report last week, the analyst said it's something to monitor.

``It is possible that the peak oil theorists are correct,'' he wrote. ``If so, we think that the duration and magnitude of energy commodity price increases would be likely to far exceed what we are contemplating.'' He couldn't be reached for comment.

Without a peak in production, Murti expects the price of New York oil to fall to about $35 a barrel in New York between 2010 and 2014. That matches forecasts from Schroders Plc for $35.50 by 2010 and is lower than Merrill Lynch & Co. predictions for $40 to $45 by the end of the decade.

The debate and high prices are contributing to an increase in investment in new technologies that will help keep oil flowing, said UBS's Hubbard, who wrote in October that some 3 trillion barrels probably remain to be pumped.

Murti ranked third last year among researchers who cover oil and gas companies, according to Institutional Investor magazine.

Goldman, the second-biggest U.S. securities firm, estimates about $50 billion is invested in its commodity index, where crude oil has largest weighting. The bank's view is that oil will average $68 a barrel in New York next year. Prices may stay close to $60 for ``three to five years'' before falling to ``$45 at the most'' by 2010, Jeffrey Currie, the bank's head for commodities research in London, said in August.

Four more years! Four more years!

MSNBC/Reuters: Goldman Sachs: Oil prices to stay high for years.

Quotes:

LONDON - Oil prices, which hit record levels this summer, have entered a "super spike" phase that could last for four more years as global demand booms and supply growth slows, Goldman Sachs analysts said on Tuesday.

"We disagree with what appears to be a growing consensus that crude oil prices reached their peak levels earlier in 2005," said the firm's Global Investment Research.

The analysts said oil demand remained resilient and supply growth lacklustre, prompting them to keep their average U.S. crude price forecast for next year unchanged at $68 a barrel.

They predicted oil prices could see 1970s-style price surges to as high as $105 a barrel during this period.

"With WTI oil prices on-track to average about $57 a barrel in 2005, we think the past phase will be remembered as the first of what could be a four-to-five-year 'super-spike' phase," their report said.

Goldman Sachs first mentioned a super-spike phase in March, five months before U.S. oil prices skyrocketed to a record $70.85 a barrel. Prices have since eased.

U.S. oil futures on the New York Mercantile Exchange have averaged $56.59 so far this year.

SUPPLY CONCERNS

The bank expressed doubt that OPEC producers, which supply a third of the world's crude, would be able to quench booming demand.

"It is the seeming insurmountable challenge of OPEC's needing to add real new capacity on a just-in-time basis that gives us so much confidence that we are in the super-spike phase," it said.

OPEC, which has been pumping at the highest rate for 25 years, is set to boost its spare capacity to 3.1 million bpd by the end of the 2006.

Despite hurricanes, high fuel prices and increased conservation, energy consumption in the United States remains strong, as does China and India, the bank said.

"Ultimately, we agree that the energy bull market will roll over once demand destruction really begins," it said. "We simply do not believe we have arrived at that point."

The International Energy Agency, the West's energy watchdog, estimated world oil demand ould grow at an average of 1.8 million to 2.0 million barrels per day through 2010. Last year's demand growth of 3 million bpd was the highest for a generation.

BusinessWeek: Where the Action Is in Energy.

Quotes:

"A good buying opportunity for many investors." That's what Standard & Poor's analyst Tina Vital sees in many oil and natural gas stocks at the moment.

Q: What portfolio weighting does S&P currently recommend for energy stocks?

A: The current sector emphasis for energy is market-weight. Energy as a segment of the S&P 1500 is 9.9%. It had broken 10% some months ago, and several years ago had been down around 6%. So we've seen it increase as a percentage as energy becomes a greater portion of our market. It's S&P's opinion that energy still has legs.

Q: Tina, can you give us your top picks? You mentioned a few earlier.

A: Yes. Starting with the integrated oils, my 5-STARS picks are Chevron, Conoco, Exxon Mobil, Total (TOT ), a French company with big plays in frontier regions, and Valero Energy (VLO ). These integrated oils all offer dividend rates of 2% to 3%.

Now, as far as the exploration/production companies go, there are 5-STARS ratings on Canadian Natural Resources (CNQ ), Chesapeake Energy (CHK ), Devon Energy, and Occidental Petroleum (OXY ). These four E&Ps have dividend rates of between 0.5% and 2%.

We also have some pipeline companies that we're very bullish on, having a 4-STARS rating on Amerigas Partners (APU ), Buckeye Partners (BPL ), Enterprise Products Partners (EPD ), Kinder-Morgan Energy Partners (KMP ), and Magellan Midstream Partners (MMP ). All of these pipeline companies that Roy Shepard covers have dividend rates of 6% to 8%, very high.

Last but not least, there are three 5-STARS oil and drilling companies: GlobalSantaFe, Nabors, and Superior Energy Services. Only GSF has a dividend, around 1.3%.

LOBG Quiz.

When Fadel Gheit of Oppenheimer & Co. was quoted as saying "It's an excellent deal, a fantastic deal," he was referring to:

1.) The fact that you bought lots and lots of energy stocks in 2004 and 2005.

2.) The Tom Cruise / Katie Holmes hookup, of which he is a huge fan.

3.) ConocoPhillips purchase of Burlington Resources.

P.S. More mergers to come?

Wanted: Cheap, disagreeable investors for LTIR.

NY Times: Today's Energy Stocks May Well Be Tomorrow's.

Quotes:

"Over the near term, I think it's going to be kind of a struggle because we have a lot of uncertainty in the marketplace in terms of G.D.P., consumer demand, geopolitical considerations, rising interest rates," James D. Wineland, manager of the $4 billion Waddell & Reed Advisors Core Investment fund, said of the sector's share-price performance.

But he pointed to the continuing imbalance of supply and demand and added, "If we look beyond that, I think there's a huge future for energy stocks because this is an issue that isn't going away." He has made a big bet on that future, placing about 20 percent of the fund's assets in energy, double the market weighting.

David Spika, investment strategist at Westwood Holdings in Dallas, an institutional portfolio manager with large energy holdings, has similar hopes for the sector.

"Even though we have seen a significant decline in crude, the structural supply-demand imbalance remains," he said. "Obviously you have to expect corrections from time to time."

A chronic imbalance would set energy apart from other commodities, whose prices tend to fall over time when adjusted for inflation, said Jeremy Grantham, chief strategist at the portfolio manager Grantham, Mayo & Van Otterloo. While ephemeral factors can cause cyclical gluts and scarcities of commodities, new production methods help to ensure that supply outstrips demand over the long haul - except in the case of energy, Mr. Grantham has come to believe.

"We're gung-ho about regression to the mean, so when prices rise a lot, we are expecting to go short and underweight," he said about most commodities and the stocks of their producers. Since the shortages of the 1970's, the average price of a barrel of oil has been $36 in today's dollars. Mr. Grantham said he expects the average price to keep climbing as what is left of the earth's supply of oil becomes harder to extract.

"I'm offering oil as an exception to the principle" of mean reversion, he said. "Having hunted high and low and never found a major asset class that went through a paradigm shift, I think oil is it."

If a paradigm shift is occurring, the investment masses are barely noticing. Tim Guinness, who manages the Guinness Atkinson Global Energy fund, among the best-performing equity funds this year, with a return of 61.4 percent through Thursday, points out that energy stocks as a group have doubled since crude oil reached a trough in 1998 at less than $10 a barrel.

At the bottom, he recalled, energy accounted for a mere 6 percent of the valuation of Standard & Poor's 500-stock index, compared with 27 percent at the peak of the oil boom in the early 1980's. Today, with crude around $60, energy accounts for less than 10 percent of the index.

Kiplinger.com: Who's a Contrarian? Not Me!

Quotes:

The pilot of Fidelity's huge Contrafund excels by focusing on companies with visionary executives.

With little fanfare, Fidelity Contrafund overtook its sister fund, Magellan, sometime this past September to become the largest stock fund in Fidelity's vast stable. It should have come as no surprise. In contrast to Magellan, Contra has prospered, despite assets that now exceed $56 billion. The record is compelling: Contra easily topped Standard & Poor's 500-stock index over the past 15 years. What's more, it outpaced the index in nine of the past 15 calendar years, including 2005 to October 1. An investment of $10,000 in Contra 15 years ago would be worth $97,400 today, versus $54,000 for Vanguard 500 Index.

We dwell on the 15-year benchmark because the man behind the sterling record, Will Danoff, celebrated his 15th anniversary at the fund's helm in September. A salty product of Harvard and the Wharton School, Danoff claims he's no contrarian -- that Contrafund is just a name. So what accounts for his stock-picking success? And how will he keep Contra moving forward under the weight of all those billions of dollars? For the answers, listen in on our conversation, conducted one fine autumn afternoon above the streets of Boston's financial district.

Q: Where are we in the energy-stock cycle?

A: It's still early. Maybe we're in the fifth inning. We're starting to see the industry raise money, and we're starting to see some speculative deals, such as Norsk Hydro buying Spinnaker. But we haven't yet seen full capitulation by institutional investors. That's when people say, "If you don't own energy, you underperform, and if you underperform, you lose your job."

Q: Now you're starting to sound like a contrarian again.

A: My style is to own what I would call best-of-breed companies. So I'll be slightly contrarian when I move to de-emphasize energy and to emphasize groups that are improving, but I think we're still in the improving stage for the energy sector. Until you see irrational capital spending in the industry, I think we're okay.

Everyone's talking about how big-capitalization stocks are due for a comeback. The surprise may be that the stocks to own are ExxonMobil and Chevron, which are underowned, rather than General Electric and Microsoft, which everybody and his brother owns.

Q: Who has the vision in the energy business?

A: EnCana, a Canadian exploration-and-production company, is one of my biggest holdings. In May 2000, I show up at a meeting of Alberta Energy management. So I start talking with the CEO, a guy with gray hair who looks very experienced. I ask some basic questions, such as "How do you make money in the energy business?" and he starts talking about how it's a capital-intensive business. You want long-life reserves because if you're going to plunk down $1 billion up front, you want that $1 billion to work for you for 20, 25 years. Anyway, I liked the guy -- his name is Gwyn Morgan -- and the company had some good growth prospects, and I bought a little stock. Eventually, Gwyn merges Alberta with PanCanadian, which had this massive acreage in Canada, and creates EnCana. Gwyn is a visionary explorer who's looking for elephantine energy fields that allow him to leverage all his capital and his expertise. He does another acquisition and another, and now he's sort of on top of the world as gas prices go through the roof.

P.S. LTIR = Long term investment relationship.

Investment Advice from Kenneth Deffeyes.

And Warren Buffet too, the sneaky &*%^. You thought he bought PTR only for the currency play, didn't you? (Me too..)

dailybulletin.com: World oil production doom scientist decries editors.

Quotes:

PASADENA - There it was, laid out in a simple linear graph for everyone to see: the end of the age of oil.
For anyone who fears oil companies run the White House, fumes at the thought of drilling in the Arctic National Wildlife Refuge or deems global warming doubters deranged, there had to be something perversely gratifying about the picture of doom on display Thursday at Caltech's Beckman Auditorium.

"The peak of world oil production is happening right now," Ken Deffeyes, professor emeritus at Princeton University, confidently declared. "Here is the most important story since the Industrial Revolution."

And when Deffeyes said "right now," he meant it.

According to his calculations, world oil production reached its peak on Thanksgiving Day 2005, and now starts on a steady decline until it reaches zero near the end of the century. Deffeyes, a geologist, bases his conclusions on a production chart developed by M. King Hubbert, a Shell Oil Co. geophysicist who, in the 1950s, accurately predicted the rise and fall of U.S. oil production.

Despite the assuredness with which Deffeyes delivered the news, he is not without his critics.

The U.S. Geological Survey, for one, says Deffeyes has underestimated the world oil supply by roughly one trillion barrels -- roughly equal to the supply of oil that has been pumped so far.

Even among the scientists who accept the Hubbert system, there is disagreement about exactly when the production peak will hit. And there are others who dismiss the entire method as unscientific, unreliable hogwash.

"When you assume changes are due simply to geology, you're going to get it wrong," said University of Texas politics professor Michael Lynch at a conference last year.

One man who attended the lecture Thursday panned Deffeyes' use of a linear graph to chart the production peaks, saying a logarithmic scale is much more accurate.

"Your charts are factually misleading," the man charged.

But Deffeyes remained steadfast. He went so far as to attack news articles for including critical voices, saying attempts at being fair have obscured the truth.

"Editors are one of the great enemies of the people right now," he said.

David Goodstein, Caltech provost and professor of physics, defended the Hubbert method, calling it scientific and devastating in its implications.

"The halfway point is going to be very soon," Goodstein said. "So very soon we are going to start running out of oil."

Goodstein is the author of "Out of Gas: The End of the Age of Oil," a book that challenges the notion that markets will drive the transition to alternative fuels. He has proposed a new Manhattan Project to find a suitable substitute for fossil fuels.

Deffeyes agrees that the world must prepare for the change-over to avoid mass shortages and possible armed conflict. He said the world cannot rely on so-called "blue sky" technologies, such as hydrogen-powered cars, biodiesel or a Manhattan Project.

"How about some old technology?" he asked.

To the dismay of some alternative-energy acolytes, Deffeyes endorsed nuclear power, coal gasification and high-efficiency diesel as intermediate options to wean the world off oil dependence.

"We are going to have to reconfigure things and reprioritize things," Deffeyes said, although he noted he has personally invested in PetroChina Co. in case some new oil deposits are found in the South China Sea.

"That is the last major place on Earth that has not been explored," he said.

Peak Oil Now.

Kenneth S. Deffeyes: Join us as we watch the crisis unfolding.

Quotes:

The profits of major oil companies are piling up by the tens of billions of dollars per quarter. They are hoarding cash, buying back stock, and declaring dividends. They are not investing heavily in new facilities. If oil production has ceased growing and is about to decline, nobody needs new refineries, new pipelines, or new tanker ships. Most telling of all, the majors are not increasing their investment in exploration drilling. What I hear all around the oil patch is, "There are no good prospects out there." Of course, there is agitation to open areas for drilling that are currently closed. The implication of the plea is that additional drilling access will "solve" our oil problem. Every little bit helps, but it is incumbent on the companies to show that these are something more than a little bit.

What can we do? I have three categories: actions that we can take immediately, methods whose engineering is already done, and futuristic dreams.

Immediate: A 55 mph speed limit (they’ll hate me in Montana), teach the kids to turn out the lights when they leave a room, open the house windows for cooling or heating when the weather is not extreme.

Engineered: Nuclear power, high-efficiency diesel automobiles, wind turbines, coal gasification (with the carbon dioxide sold for enhancing oil recovery).

Dreams: Hydrogen fuel cells, alcohol from corn, solar cells. Don’t pin your hopes on a Manhattan Project or an Apollo program.

I see no reason to retract my Thanksgiving, 2005 prediction.

Energy Stocks For The Long Run.

Jeremy J. Siegel, professor at the Wharton School and author of Stocks For The Long Run, weighs in, suggesting that energy stocks are not in a bubble and still have room for appreciation.

Kipplinger's Personal Finance: Black Gold Still Glitters

Quotes:

Nuts! That's my response to those who say the recent run-up in energy prices is a bubble. Prices for oil, natural gas and oil derivatives, such as gasoline, will remain high for some time. With rising demand worldwide, we've ascended Hubbert's Peak, named for geophysicist M. King Hubbert, who predicted that oil production would peak around the year 2000, causing the world economy to deal with a diminishing supply of black gold.

Does this spell disaster for the U.S. economy, hooked as we are on cars, air conditioning and other energy burners? The answer is no, although there certainly will be pain in the short run. I believe that retail Christmas sales could be soft, and I estimate that falling consumer spending could pare as much as two percentage points from economic growth in the fourth quarter.

But in the long run, the outlook is rosier. Because the recent price surge has hit us where it hurts, we have more time to solve the energy crunch. Remember the spurt in energy prices in the 1970s? That caused a burst of conservation and efficiency improvements that lowered the energy content of U.S. output by 50%. So to produce a dollar of economic output, we need use only half the energy we did a generation ago. That will happen again.

What does this mean for the average investor? The prices of oil and natural-resources stocks, as well as exploration and technology-oriented firms, are already up sharply. The energy sector now makes up 10% of Standard & Poor's 500-stock index, versus just 6% a few years ago. But that is still far shy of the 30% reached during the energy crisis of the 1970s and early 1980s.

We won't see a 30% share again, nor should we. Energy stocks, especially those related to oil exploration, became dramatically overpriced in the '80s and subsequently collapsed (the large integrated oil companies, such as ExxonMobil, did much better).

But I don't believe energy stocks are overpriced, as a group. Earnings are high and will remain high as long as oil prices stay firm, which appears likely. You should not dramatically overweight the sector, but it is not unreasonable to hold 10% to 20% of your stock portfolio in energy and natural resources.

Tis the season.

TheStreet.com: Winter's Chill May Warm Energy Stocks.

If you look at this chart from the article, it looks like, on average, the time to be in energy service stocks is December 1 through April 30.

Which corresponds pretty well with the "Sell in May, and go away." seasonal timing theory that some people use for the market as a whole.

Amusing, but, as they say, your mileage may vary.

Always a good time at The Oil Drum.

A great interview with Matt Simmons, an article about a petroleum engineer arguing Matt's wrong about Saudi Arabia, and a further article from Resource Investor that goes into greater detail.

A rig shortage till 2010? Thinking oil service?

MS: We won't bring on that new capacity, we're out of drilling rigs. It's too bad people didn't realize we're running out of rigs and we won't resolve the rig problem until well after 2010. But to call it a field-by-field bottoms up and then just have a notional idea... if a field does not have a name today, it won't be done by the end of 2009. We just would not have time. The whole thing is typical of the analysis they did when they assured all of their clients that we had abundant robust natural gas, all these pessimists about natural gas are just flat wrong. And they did a bottom-up study then too. And they did the bottoms up story then, too. And they turned out, unfortunately, to be as wrong as me promising that there is a Santa Claus, and you finding that there wasn't.

Raising GM Rating.

I'm raising General Motors (GM) from Dead Man Walking to Bye Bye Bye.

Why is this thing in a death spiral?

Let me count the ways:

- Company perpetually unable to combat, nee, even contain it's shrinking market share.

- Demographics of GM buyers versus it's competitors are not promising.

- Product is improving, but the competition continues to remain firmly a generation or two ahead.

- Junk debt rating means no cheap financing, thus dealers are hamstrung. GM can only continue to sell cars by selling them cheaper and cheaper, while it's costs inexhorably rise.

- The "healthy" part of the business? GMAC mortgage lending.

AP: GM Bankruptcy Fears Rising on Wall Street.

Boone Pickens says prices headed lower.

Dallas Morning News: Pickens says prices headed lower.

Quotes:

One of the oil market's most prominent bulls, Boone Pickens, has turned bearish – at least for the coming months.

Mr. Pickens said Wednesday that oil is headed toward $50 a barrel and natural gas may have hit its peak even before the winter arrives.

A weaker economy and mild weather so far this fall could translate into falling demand. Though Mr. Pickens doesn't expect a recession in 2006, "it's not going to be one of our better years," he said.

Mr. Pickens, who manages more than $2 billion in investments at his Dallas-based BP Capital, has accurately predicted trends in commodity prices since oil was around $40 a barrel in the spring of 2004.

His latest projection, that oil would hit $70 before $50 again, proved true in August when crude reached $70.85 a barrel.

Oil for December delivery fell 78 cents Wednesday to $58.93 on the New York Mercantile Exchange.

Demand should pick up in the next nine to 12 months, pushing oil back toward $60 a barrel, Mr. Pickens said.

Over the long term, Mr. Pickens remains bullish on oil because of what he sees as a peak in global oil production.

"I don't think you can get supply much beyond 85 million barrels," he said, which is just above the daily global oil production today.

For Whom The Bell Tolls.

MarketWatch: Bell 'Toll-ing' for housing market?

This is kind of an obvious observation, but large plots of land are generally only available these days further out from most cities, thus many of these homebuilders are building where length of commute (and thus gasoline prices) becomes a factor. Then add in the size of these new homes; say, I wonder how much it costs to heat or cool that?

So with those thoughts and higher interest rates to boot..

Charles Maxwell's latest.

From 321 Energy: The blood of capitalism -- oil.

Quotes:

Next, what about the blood of capitalism -- oil? I just received a report from my old friend, Charlie Maxwell (Maxwell@Weeden). Charles is one of the top, of not THE top, oil analyst in the nation. Here are some of Charlie's latest comments.

"Today, we are in a new period of tightening oil supplies along with correspondingly-high oil prices. Our situation is now seen to have its principle origin in geologic realities that have been only recently recognized. This 'energy crisis' may not go away in a year or even in five years. Perhaps not in my lifetime. Crude oil is more difficult and more costly to find every year because easy-to-access oil has already been exploited. Demand around the world keeps rising, some 1.5% to 2.5% per year. We are using 31 billion barrels annually now, and finding 8-10 billion barrels at the most.

This is the old crisis story -- made permanent. We are in a new era, all right, and I project that one will support a continued average WTI (West Texas Intermediate)crude oil price above $50 per barrel going out in time. And I anticipate prices will move (generally) higher until we reach Hubbert's Peak perhaps in the 2015-2020 period.

"Closer to home, what should we expect as a pattern of oil price over the next five years? It can only be a guess. My rounded WTI numbers are set out below. A = average, E = estimate.

2003A $31
2004A $41
2005E $57.
2006E $54.
2007E $56
2008E $62
2009E $68.
2010E $75.

"No forecaster can be confident about figures as exact as the ones displayed above. But they are presented, nonetheless, because they constitute what I consider to be a likely trend. I assume that by 2015, WTI oil will be in the $130-160 range. Oil will be too valuable by then to be consumed in many of the common tasks that it is called on to perform today.

"I see energy conservation as not just a way out of our energy dilemma, but at least for the next 20 years, the main way out. No other "source" of energy is proportionately large enough or flexible enough to handle the size of our problem. . . . Crude oil is our largest source and about 39% of our country's energy needs are met through oil products derived from it."

Big Oil May Heat Up Again This Winter.

I've generally liked what I've heard from Paul Sankey when I hear him on TV or the radio, so I'm willing to give his call here a shot.

Barrons: Big Oil May Heat Up Again This Winter.

Deutsche Bank Securities
60 Wall St.
New York, NY 10005
(Tel) (212) 469-5000

WE PREDICTED UNDER-PERFORMANCE and got a stampede for the door. A vicious rotation made our prediction of a 10% fall in integrated oils between October 1st and December 5th come roaring home in a flat month.

This October just passed was the worst October for integrated-oil stocks performance since "Black" October 1987. If you are feeling a little beaten up, you should be – the stocks fell 8% in a month, with the overall oil group losing around $100 billion of value.

Now we are likely to drift until snow arrives, at which point we expect a ripping performance from the oils into the January fourth quarter earnings-per-share reports.

After a third quarter which saw no impact on our earnings-per-share numbers for 2006 for any name, we have revisited valuations and investment cases.

Particularly, in this note we highlight net asset values (NAVs) that are in line with current equity valuations. That is, the integrated oils are now trading in line with break up value. Corporate raiders should take note. More simply put, the group is discounting $36 oil against a $60 strip. Buy.

Some of the fundamental reasons that the oils sold off:

1) Concern that we highlighted on the arrival of Hurricane Katrina, that high prices would destroy the demand driver which has been the essence of the oil bull call. The international demand case may well be more important, and anyway we are modeling weak demand in our bullish outlook. We only look for 0.5% gasoline demand growth next year, suggesting 1% gross domestic product growth.

2) Windfall taxes that would take away excess profit if demand does not collapse. We do not see windfall taxes as likely although pressure will remain. Watch for a hearing next week called by Senator Frist.

3) Rotation from an oil group, which was up 40% year-to-date with the market, is down 7% by the start of October. The snowball of money leaving the sector has now bottomed out. Major oil stocks are at or around their break-up value. Chevron, ConocoPhillips, Marathon and Hess are now all potentially worth more broken up – trading at or below NAV. We recommend investors buy these under- valued names before the first snow of winter.

Nearly 70 degree weather in New York should continue to pressure the commodity for the next fortnight. Arguably the equities have predicted this move already. We are raising Hess and Marathon to Buy as we expect 20% gains in the next 12 months for the integrated oil group.

Top picks are Occidental Petroleum, ExxonMobil, and ConocoPhillips. These are the names with the highest leverage to high oil prices (yes, ExxonMobil) and best managements.

-- Paul Sankey

Observation on service vrs producers debate.

From the New York Times Business section, mutual fund performance listings today:

Fidelity Select Energy

1 year = +53.6
YTD = +43.3
4 weeks = - 8.4
1 week = + 5.0

Fidelity Select Energy Service

1 year = +50.7
YTD = +40.2
4 weeks = - 6.7
1 week = + 7.0

Notice that in the past month, Service has started outperforming the Energy fund.

If you read one peak oil article all week..

make it this article:

Robert L. Hirsh: The Inevitable Peaking of World Oil Production.

Oil prices are headed... that-a-way <--->

Reuters: Oil guru says crude could hit $190 this winter.

The title should really point out that he talks about natural gas or oil.

Quotes:

Consumers should brace for crude oil and natural gas prices possibly doubling or tripling this winter, Matthew Simmons, a best-selling author and oil-supply bear, said on Wednesday.

"Prices are really cheap today and they need to go a lot higher, and they probably will go a lot higher," Simmons said in Ottawa.

"I am very concerned, given the destructive damage done by (Hurricanes) Katrina and Rita, that the United States must be closer to starting to see significant product shortages than we've seen since 1979."

Too much got destroyed and too little has been brought back on stream, the Houston-based analyst said.

He also said that cold weather this winter could bring a very high risk of natural gas curtailment in the United States.

"Either one of those events (oil product shortage or natural gas shortage) could send prices two to three times higher than they are today," he said after a speech in Ottawa.

That could translate into natural gas prices of $40 per million British thermal units from more than $13 now, he said. Doubling or tripling crude would put it in the range of $125 to $190 per barrel.

"Everyone keeps thinking there is a (price) ceiling...There is no ceiling," said Simmons, who wrote in his book "Twilight in the Desert" that Saudi oil output is at or near its peak.

He said he has seen little sign that higher prices so far have done much to reduce consumption.

Simmons said supplies of heating fuel oil were in okay shape, but could drain fast if the weather turned cold. Diesel is tight and shortages of jet fuel had caused some planes to be diverted from some airports.

"It's going to be painful for people to get used to actually paying real money for a really valuable resource," he said.

But..

WSJ: Slowing of Demand Means Crude May Stay Below Peak for the Year.

Quotes:

With so much oil and gas production still offline in the Gulf of Mexico and refineries working to restore operations, crude-oil prices remain subject to considerable daily volatility. Still, many oil analysts say prices are much more likely to fall to the mid-$50s before rebounding to the $60-$65 area for the rest of the year, than retest record highs.

"We could remain weak into early November," said Jim Ritterbusch, president of Ritterbusch & Associates, a consulting firm in Galena, Ill. "By late November and December, crude should move back toward the mid-to-lower $60s."

The main force behind the pullback has been sluggish demand. Just as robust global demand sent oil prices soaring in the past two years, signs that consumption has started slowing in the aftermath of Katrina-influenced $3-plus gasoline prices at the pump have driven prices down, both for oil and refined products. Essentially, high energy prices have hurt high energy prices.

"The theme is ongoing -- you're starting to see consumer resistance to higher prices," said Mike Fitzpatrick, vice president for risk management at brokerage house Fimat USA in New York. "Maybe you weren't seeing it at $45 or $50, but at $60 and higher you start to see a ripple-out effect."

There is little disagreement among analysts that demand has slowed in recent weeks, as some motorists have cut back on discretionary driving or have switched to alternative means of transportation, including mass transit. Just how deep-seated this so-called destruction of demand remains open to debate.

"We're already seeing gasoline demand start to bounce back," said Phil Flynn, an analyst at Alaron Trading Corp. in Chicago. "I think once we get over the seasonal weakness, people will start to realize that supplies are still tight and the market is still very vulnerable to big rallies."

Mr. Flynn, one of the most consistently bullish market analysts, predicts oil prices setting a record of $75 before the year is out, putting him in the minority camp. Mr. Ritterbusch, of Ritterbusch & Associates, while not as bullish, said the onset of winter will push prices higher again.

"We're getting set up for a strong heating-oil market," he said. "Recently, we have seen gasoline push the market lower. By next month, I expect heating oil to pull the market higher."

Mr. Ritterbusch thinks crude oil has seen its highs for the year, although he added: "I can't say the same about next year."

Seasonality doesn't favor the bulls. In 12 of the past 16 years, heating-oil futures have peaked in early October and then sold off into March, noted technical strategist Walter Zimmerman of brokerage house United Energy.

"This is an extremely unlikely time of the year to be thinking about new highs," he said. "By far the most common occurrence is that your winter-demand rally does not exceed the preseason-rally peak."

Resource Investor: Oil Forecasting Legend Discusses Peak Oil, Share Prices.

Quotes:

Unlike some other well-followed thinkers on the subject, Groppe doesn’t see prices exploding to over $100 a barrel, nor is he quite so concerned about the reserves of OPEC members such as Saudi Arabia.

Groppe believes that, “we are at the point where production is peaking and the price required to restrain consumption to match this future available supply is in the 50-60 dollar range on an annual average basis…This or next year might very well be the all time peak year in world liquid petroleum production.”

His view is that, “it’s going to be essential to achieve reductions in consumption because we're forecasting no continual increase in total world oil supplies in the future.” Groppe estimates that, “a price range of $50-$60 a barrel is going to be required in order to in effect cause no growth in total world oil consumption. That we think will be the composite of continuing but slower growth in transportation fuel use of oil, because that consumption grows essentially with the vehicle population in the world. With higher prices there will be pressure toward more fuel efficient vehicles and we’ll see actual consumption decreases in fuel oil where all you’re after is a source of heat, and that’s the way the system will balance itself.”

Groppe finds himself sort of in the middle in terms of the prevailing views on the future, both optimistic and pessimistic. He stated that, “Matt Simmon's view is that we're just on the verge of seeing very significant depletion decline rates and total world oil production will then decline precipitously and were approaching the end of the world economy as we've known it. Major oil companies take the view that it will be relatively easy to continually expand oil production, specifically, they all agree that world oil production can be expanded 50% in the next 25 years and we disagree very strongly with both of those viewpoints. We think there will be a flattening of total oil supply and the high prices needed to constrain consumption to match that available supply.”

From an investment standpoint the answer still seems clear – energy stocks should continue to move higher despite corrections and volatility along the way. Groppe thinks investors need to hold their ground and not be phased by short-term price swings such as those we’ve experienced recently. His advises that, “if you believe in these fundamentals and the type of future pricing environment that I’ve described you need to ignore these short-term variations in equity prices with the fluctuations in oil and gas prices. I've given you my view on the average annual long-term prices, but since you have both of these very important industries [oil and gas] essentially operating at capacity and you've got all kinds of unpredictable events that occur all year long...there will be significant continuing volatility from this point forward and that just needs to be ignored as long as fundamentals remain intact.”

Groppe has 90% of all his equity investments in energy, and 65% of that is in Canadian energy stocks.

P.S. I tend to agree with Matthew Simmons on natural gas - it could possibly spike this winter, and Henry Groppe on oil - $50 - $60 seems to be a range the market 'likes', meaning it's not high enough to bring everything to a halt (like $190 would), but is high enough to curtail some amount of demand. And don't forget, OPEC's president said months ago that $53 was an 'ideal' price.

Anybody get the number of that truck?

Energy stocks have certainly taken it on the chin in October.

Lots of questions: is is Refco, the shoulder season, real demand destruction, speculative positions blowing out, or even fears of what Avian flu could lead to?

I suspect it's some measure of all of the above.

Will stellar earnings turn it around?

It certainly seems like it should stablize energy stocks, if not bump them up somewhat, but at a moment like this, things don't always work the way you expect, particularly in the short term. But hey, we won't have to wait long to see!

On an administrative note, I'm going to be busy with a few other projects over the next few months, so the posting will be somewhat infrequent during that period.

Some articles of interest:

theStreet: Is Refco Burning Oil?

RIA Novosti: Abolishing Gazprom's 'ring fence' and Russia's big bang.

Motley Fool: Oh, Canada's Oil Sands.

Barron's: Suncor's Oil Patch Advantage.

but..

Reuters: Expert lambastes Canada's massive oil sands play. [Matthew Simmons saying oil sands waste natural gas. He's right..]

A puzzle wrapped in a mystery inside an enigma.

The company with the the largest hydrocarbon reserves on the planet?

No, not Taco Bell.

Actually, I'm not sure who it is, but Gazprom is way up there. I believe they might be #1. There are two main problems:

A.) What the %&*^ is Putin up to?

B.) The shares available for overseas investors trade at quite a premium to the shares available to domestic investors (Russians) because of certain restrictions on the shares. In the US, they are available via the pink sheets, OGZPF. In theory, Putin Gazprom intends to remove these restrictions once they have rolled up the ownership of most of Russia's hydrocarbon reserves, which should result in the premium disappearing. They are all kinds of swindles going on as overseas investors try to invest at the cheap domestic price via local entities, front companies, etc in anticipation of this move.

Is it something to throw a little speculative money at? Your guess is as good as mine. Probably yes, a small amount.

But you didn't hear that from me.

P.S. This company is sometimes referred to as "The Saudi Arabia of natural gas." Yes, that big.

P.P.S Gotta love those Slovakians.

LA Times: As Gazprom Grows, So Does Russia's Sway.

Quotes:

The government has acted to take firm ownership of 51% of Gazprom. Meanwhile, it is pushing through legislation allowing foreign investors full access to the remaining 49%. Moreover, an initial placement offer of a minority of Rosneft shares is contemplated for mid-2006, according to the Russian Economy Ministry.

"From an economic standpoint, they're liberalizing in a quite dramatic way, compared to any other country in the world," said William F. Browder, CEO of Hermitage Capital Management.

"A lot of people have characterized the Sibneft deal as being some kind of renationalization, or the government stepping into the oil sector. But if you look at it economically, instead of Roman Abramovich owning Sibneft, foreigners and minority shareholders are going to end up being able to indirectly own 49% of Sibneft via that share liberalization of Gazprom," he said. "It seems to me that foreigners are getting more access, rather than less, through this combination of deals."

Yet state control means the Kremlin calls the shots, and Gazprom continues to be available as an instrument of Russian foreign policy.

Oil producers vrs oil service.

Someone asked the following question a little while ago:

What is your opinion about investing to oil companies vs. oil service companies? During 70's oil service companies were better bet than big oil companies, but do you think history will repeat itself during next decade?

I learned the same thing reading Stephen Leeb's book, The Oil Factor, but unfortunately, he didn't provide much detail behind the statistics. The numbers, according to his book, for 1970's real returns (after inflation) per year:

Big oil cos= 6.8%
Oil service= 23.6%
Independent oil producers= 11.8%

That is some significant outperformance. I have some guesses as to why it happened:

1.) The picks and the shovels argument from the gold rush, i.e. the real winners are the folks selling to the prospectors (oil producers), some of whom end up spending money and find little or nothing, and earning little or no return.

2.) I suspect there are probably fewer oil service companies and they are probably smaller cap than the oil producing companies they service. With fewer stocks and smaller caps, you get a more concentrated, volatile portfolio, and thus probably more 'juice' in a long term upcycle.

3.) I also believe that service is even more boom and bust (i.e. risky) than the rest of the industry. When times get bad for oil producers, they can still sell oil and gas (perhaps very cheaply, but at least money is coming in), but when things dry up for the service co's, they have some very expensive equipment that lies around producing no revenue. So the bad period kills off competition, and when the good times arrive, it takes time for the competition to form, as they both need to buy expensive equipment and hire employees that will demand premium pay. Since stock returns are correlated with risk, the higher risk of oil service can result in higher returns.

In terms of whether I think history will repeat, I don't have a strong opinion. There is an argument that says that since drilling opportunities are now (apparently) depleting, that in total, less oil service will be needed. On the other side of that is the idea that although oil companies are not welcome to participate in all opportunities around the globe as countries retain more ownership, oil service companies, at least for now, are still participating. Additionally, because new technologies tend to be expensive, oil service may benefit as smaller companies lease/rent it rather than buy it to keep capital costs down.

So while I have no strong opinion, my sense is that yes, history could well repeat. But do I feel strong enough about that to own only (or even mostly) oil service? No.

One further point: I was looking at the Vanguard Energy Fund's (which I think is a reasonable proxy for energy mutual funds) semi-annual report the other day. The record for the recent past is:

2004 +36.5
2005 +38.9
2006 +28.7 (this is actually 2005 through July 31)

Those are very big numbers over a 3 year period. We probably need a pause. It could last a while. If you think that's likely, you may just want to set up your dollar cost averaging with a 2-3 year time horizon and take advantage of the pause.