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Latest Comments58 Comments
Economic Outlook: Cut Out the Noise
When I study the charts on how small vs big cap stocks behave in bull/bear transitions, I see something that disagrees with my feeling.
In the past bull/bear/bull in '00, the small stocks led the turn down as well as the turn back up. In '07, it was the small stocks, especially small cap value, that led the turn down by a few months. Well don't look now, but the Russell and other small caps are starting to lead a turn back up! And for the Dow theorists, the transports have stubbornly refused to make a new low from the January low. Could the end of this bear be coming into view? Naaaah. That just doesn't feel right.
Profiting from the Pickens Plan: FAN, Clean Fuels, Fuel Systems
Peters & Co. Analyst: Shale Plays Could Benefit Drillers
XTO Energy: Natural Gas Can Expect Over 100% Further Upside
Gold vs. Oil
Not Calling Crude Oil Prices a Bubble For Now
Per the model, which simulates a hypothetical land where about half of all produced oil is exported around the time of peak (roughly the global condition now), exported oil goes to zero in just 9 years after the global production peak. So we must destroy all demand for imported oil in 9 years to keep oil where it is! If we did a switch to electric cars so fast that half of all vehicles on the road in five years were electric, we could not match this demand destruction rate.
Destroying demand for imported oil is what needed to be done 30 years ago when Carter and Ford tried to get a build out of CTL (coal-to-liquids) plants going along with nuclear power plants, OCS drilling, solar and other things. But nobody believed or understood the math of Hubbert and others about the global production peak even though his modeling of the U.S. oil production peak in 1970 had just been proven stunningly accurate. In his 1956 work projecting the U.S. peak for early 70s, he predicted the global peak for shortly after 2000. So instead of listening to these people, we developed energy policy dictated by environmentalist airheads who reckoned that we needed to ban the needed changes to protect the natural habitat of the yellow speckled squirrel.
Well, here it is 30 years later, and America's natural habitat is about to be destroyed. But thank God, the yellow speckled squirrel is OK.
The Long Case for Sugar-Based Brazilian Ethanol Producer Cosan Limited
If sugar has been taking just 0.6% of Brazil's land when 12% could support sugar expansion, then the increasing correlation between oil and sugar must not be very strongly influenced by land availability. Sugar prices have been controlled by other crop popularity and what not, latching onto whatever oil is doing instead. Sugar is at a huge, anomalous lag behind oil. It's one of those things, like silver, gold, and nat gas that follow the big moves in oil but haven't moved that much - yet. Of all the things that follow oil, sugar is by far the cheapest.
Oil: A Slippery Risk Premium
Oil must be stored in vast amounts to be speculated on for any significant length of time. Back in the 70s, it was bought and stored as an import days-of-coverage safety measure - a lot of it. Besides the birth of the SPR back then, commercial storage climbed to historical highs - a speculation "element". This had its downside in 1986, when the Mid-East chaos of the 70s had cooled down for awhile and oil prices had eased thanks to the death of the 15 mpg land barge in the U.S. and a bad recession. Much of the inventory oil was put on the market aggravating a $30 to $15 slide in oil.
But today, the speculation element is nothing like it was back then, Import days-of-coverage are at historical lows, in fact. In the 70s, it was a combination of embargos, speculation, and a huge demand surge (cause in large part by the birth of carefree land barging) that drove a 900+% climb in the price of oil. The main cause was the demand surge; there was no embargo that lasted the whole decade. As Matt Simmons points out in his book Twilight, the brief embargo of '73 was merely the lit match that ignited the climb that would have happened anyway. Today, we have a vastly larger demand surge from India, China, and their like. Back in the 70's, we had much spare production capacity to deal with a surge, and prices went up 900% anyway. Now we have essentially no spare capacity in light sweet and dialing demand back down will be far more difficult than switching size of car or having a U.S. recession. Every barrel of destroyed U.S. demand will be gladly bid on by those BRICs who can afford it with much more robust economies. Oil demand destruction could be a blessing in disguise for BRIC - a sort of Fed type brake pedal to moderate their growth to stable, sustainable levels. This would be at the cost of the U.S. economy, of course, which needs a gas pedal so bad, it's president mails out tax money to spenders. BRIC can gladly take the oil we can't use, trade amongst themselves, and leave America to drown in its energy policy (and other policy) stupidity. They have been the global village idiot of energy policy for too long now. The first letter of BRIC, Brazil, embarked on the energy moves that political idiocy killed in the U.S.A. soon after the 70s.
Petrohawk and Chesapeake Fly on Haynesville Shale News
It's Still All About Oil
Of course, it's very dangerous buying any one commodity. But a reasonably safe way of buying sugar is with it equally packaged with 3 other food crops - say wheat, corn, and soybeans. All these other 3 are in high demand as food and 2 of the 3 are also fuel crops! Do they make such an investment vehicle? Yes, it's called DBA, an exchange traded fund. And there's even a 2X version called DAG that moves twice as much as the commodity prices.
Bear Market Rally ETFs: Is Capitulation Close?
The oil stocks will likely be the most bouyant off the low. They seem to be still priced for $70-$90 oil and have started a strong repricing for $120 and beyond. Oil could plateau for awhile at $120-$140, and these stocks would still probably experience a strong climb.
Oil and the Futures Market
Saudi Arabia cranked up production in the 70s to try to keep up with the demand surge of that era (yes, it was demand, not an embargo that lasted a whole 10 years) to the point of field damage and a set of Congressional hearings into the American oil companys' production of the Saudi fields before they were taken over by the Saudis. Matt Simmons details these hearings in his book Twilight in the Desert. Russia in the 70s and 80s was busy taking over the world and making it a Marxist Empire. They produced little of interest to global trade other than oil and lots of it. So their prolific fields were produced at gunpoint by the dictates of the generals more than by geology 101.
If you look at a production profile of these two giants (together they pump nearly a quarter of the world's oil) you see a collapse of production in the 80s and 90s followed by a relatively weak recovery that has now fizzled. This was due to having to rest the fields in Saudi Arabia and by the collapse of the Soviet Union in the late 80s. Just when we really need all that bypassed oil that was left behind in the ground of the damaged fields as we approach global peak production, the poor past management of these fields is now denying this crude to the world market.
Russia, which had been producing 9.9 mbpd (as compared to the Saudis' 9.5) was really the swing producer in control of world oil prices the last few years just barely able to keep up with the demand growth from India and China barrel for barrel. But last October, their production stopped climbing, in accordance with Hubbert analysis done at the Oildrum about 2 years ago on Russia. Raw production has dropped 2.3% since October, but more significantly, their exported oil has dropped by about 5% since then. It is net exported oil that is bid on and sets the oil price. Last October is when the present price climb began to gather steam, and that may be more than just a coincidence.
The Current Bear Market: Death by a Thousand Cuts
Though I still think we're in a bear market, as I explained months ago, there are many signs that we're probably near the end of this selloff that made June such a historic bad month. Cramer is screaming "Play defense. Sell everything and buy the cereals and medicals." (he usually says that when you should be backing up the truck for the other stuff). Also, the VIX (the fear index) has spiked nearly to a trend line you can fit through the end of each selloff this year. The VIX seems to want to form an upsloping channel going into January '08 and a slightly downsloping channel coming away from that pivotal month.
I don't mean to criticize Cramer - well, OK I do. I enjoy his show, but he can lead you astray. His strong point is scoping out the good and bad areas of the market; but his day-to-day market calls seem to be wrong more often than right. Yesterday he said the oil inventories would be up and oil would be down big. Oil was up big today. And in an article today here at seeking alpha (The Most Bullish Thing), he said of yesterday's market action that the shorts had better cover. The shorts made a mint today. His show would be much better if he ceased the short-term pontification on the random noise and just did the bull and bear market area analysis, which he is pretty good at.
Barron's Banks on $100 Oil
As for what the dollar does, the price of oil has been charted in the other major currencies, and the big climb happens there too (just a little more moderate).
What is really behind the price climb is not total oil production versus demand. It's total exported conventional crude - and this is severely lagging total production and has been falling since '05. As global peak production is approached, a much higher portion of total liquids is unconventional and consumed by the enriched producing nation (see the Export Land Model ELM). This presents two big problems few consider. The unconventional oil (oil sand, shale, deep water) all must be ground up, heated up, or manufactured with massive amounts of fossil fuel as opposed to conventional oil, which traditionally comes spewing out of the ground already made up for us and ready to put into a pipeline! This produces a net energy math problem such that you net only about 1 out of every 3 barrels added from all these sources that have EROI around 3-5. This means it takes 3 barrels of deep water or tar sands oil to replace each barrel of declining conventional crude production! Compound this with the math of ELM, and you have a much sharper decline in net energy supplied than just the total "oil" production numbers indicate. And net exported net energy is what is setting oil prices. This is becoming more and more detached from what has always been considered "oil production", but nobody seems to understand this.
General Steel Holdings: Building an Impenetrable Future