Category: Energy

Gold is entering a tenth straight year of gains, and if we're going to be honest with ourselves, that trend should give us pause before we add to a position in gold.

But don't sell your gold just yet. According to recent article from Bloomberg, there's still plenty of upside.

From the article:

"Dan Brebner, an analyst at Deutsche Bank in London who is the most accurate forecaster so far this year, says the metal may reach $1,550."

Listen, I just bought some gold a couple weeks ago, and I'll likely buy some more over the coming weeks and months, but I'm looking out over the horizon for the asset to buy today, to benefit from the next decade long uptrend.

I think I've found what I'm looking for.

There's a lot of buzz in the oil markets these days, and while we've been kind of lulled into complacency with oil in the $75-$80/barrel range, this situation won't last forever.

It might not even last for long, and right now there's a unique opportunity to buy a highly specialized mid-cap oil company. I'll get to this company in a bit...

In the meantime, the United States currently has one of the largest stockpiles of oil it's ever had, with over 1.13 billion barrels of petroleum inventory - or about 60 days worth of supply at current rates of consumption.

The news immediately caused oil futures to dip - briefly below $75 a barrel.

That'sabout the average price for 2010, year to date:

Yesterday I discussed the overwhelming importance of oil and its implications for your investments.

My most important advice in yesterday's issue was buried down at the bottom, so you might have missed it. Here it is to recap:

"if I can leave you with one thing to keep in mind, it's to remember the importance of oil - even for non-commodity investments. You need to look at all of your investments, from stocks even down to bonds and savings accounts, and think about how oil price fluctuations could affect the bottom line of the underlying assets and businesses you're invested in."

I also promised that I would look into some specific oil investments to buy under the assumption that the recession has resumed or is on the horizon.

During a recession, oil prices tend to sag due to decreased demand for oil, which doesn't usually bode well for most types of oil companies.

The most important thing for your investments isn't gold or the dollar, or the consumer price index or Treasuries or even the stock market.

It's energy. More specifically, it's crude oil. Oil absolutely dwarfs everything else.

As I wrote back on June 3:

"...in April of this year, a new daily volume record was set on the Intercontinental Exchange (ICE) for West Texas Intermediate Crude (WTIC) contracts - with an astounding mark of 464,381 contracts traded in just that one day. Each contract trades 1,000 barrels of oil.

With oil prices around $84 that day, each contract was worth about $84,000. So, it means that over $38 billion worth of oil contracts traded hands in that one day alone.

We might quietly scoff at the Toyota (NYSE: TM) Prius drivers - after all, the car only gets slightly better mileage than the average car in its class, so it's not all that special as far as environmentalism goes.

But don't scoff too hard, because it just might be that we'll all be driving hybrid cars in the not-so distant future.

You might be thinking that we simply don't have a model of fuel-source change for automobiles - so we really don't know what the future will hold - and whether our cars will be powered by natural gas, lithium-ion, or even solar power - or perhaps some combination.

And you're right - there's basically no model for automobile fuel conversion.

But there is a very robust model for home heating conversion.

Today there are at least as many heating technologies as there are fuel types, but 100 years ago, most people used coal and wood.

The headline reads "Oil falls to near $82 on weak US crude demand." As if that's some kind of revelation. The better question is "why is crude oil $82 a barrel when U.S. crude demand is weak?"

The latest round of economic data for the U.S. is pretty much the same as it has been: not disastrous, but not strong by any means. June consumer spending was flat and household purchases rose just 1.6% in the second quarter.

Many analysts still seem to think that oil prices are driven solely by demand in the U.S. But a report from Sander Capital sums up the reality: "The underlying fact is the emerging markets are still growing and so is their consumption of energy…"

Do you own the world's biggest oil company? Of course I'm talking about Exxon (NYSE: XOM) - and odds are if you've invested in a mutual fund or broad index, you do own Exxon.

But what if you could go back in time and buy Exxon in 1996, at under $20 a share?

Nearly 15 years ago, Exxon had yet to merge with Mobil, the largest industrial merger ever.

But they were still a huge company with a long track record of profits.

Buying Exxon Mobil at $20 a share would let you lock in a near-triple at the company's current share price of nearly $60. Okay, so a triple over 15 years isn't going to sail any ships.

There's lots going on in the news cycle right now, between the new finance regulations and BP (NYSE: BP) capping its well, every news site from Barron's to Yahoo! is covering those stories, and little else.

But no one is telling this battery commodity story, even though it's hugely important to anyone who thinks the world will keep driving personal automobiles.

President Obama's stop in Holland, Michigan to announce a $303 million lithium-ion battery production plant scarcely received a day's attention in the media.

So I'm talking about lithium vs. lead again - especially because I received a great reader question on the topic, and because you absolutely need to be aware of this story.

Oil companies working the Bakken oil pool are rapidly growing revenues and earnings as new wells come on line at a rapid pace.

But now, the Bakken and other shale natural gas and oil areas (Eagle Ford, Marcellus) are becoming a hot real estate play.

Over the last 9 months, the price of natural gas climbed off the floor of $2.75 per thousand cubic feet up to nearly $4.25 today. That's a 55% gain. However, over that same time period, this widely held natural gas investment lost 27%.

But, how can that be? How can a natural gas investment lose value as the price of natural gas rises?

I'll tell you...

Today I want to talk about why I think the next couple weeks will be your last opportunity to buy inexpensive oil stocks this summer, and possibly all year.

The reason? Seasonality. Oil prices tend to hit their yearly highs in the third quarter. That's largely due to increased demand from millions of Americans and Europeans driving more for their summer vacations.

This tendency seems to fly in the face of one of those investor "rules" we've all heard a million times before: past performance does not guarantee future results.

It's a mantra for mutual fund managers, financial advisers and newsletter editors. It has an almost Shakespearean meter to it, and if you say it enough you become numb to opportunities on the basis that all of the information you have is from the past - and therefore, unhelpful when it comes to making decisions about the future.

Are you sick of hearing about a double-dip recession yet? There seems to be a consensus that the recession is back, or almost back - and although I do so without relish, I happen to agree.

It's this kind of investment atmosphere that makes me want to crawl back to the basics. And nothing is more basic and important than coal. In the United States we get about half of our electricity generation from coal. China, the #1 largest consumer of coal gets about 70% of its electricity from coal.

Every time I mention coal, my wife inevitably gets a phone call from my father-in-law Ron, telling her to remind me, "Don't forget about the railroads."

And he's right, the railroads are vital to transport coal from mines to population centers.

According to the Energy Information Administration the railroads account for 64% of all domestic coal shipments in the U.S.

Lithium! As a newsletter editor, I'm bound by law to type an exclamation point after lithium at least once anytime I talk about the topic.

That's because people are rabid about lithium and lithium stocks - and for very (seemingly) good reasons. With hybrid and zero emission vehicles in the news every day, it's hard to imagine that lithium stocks won't continue to experience fantastic growth forever and ever. Just take a look at this gorgeous new lithium powered car that hybrid car manufacturer Tesla motors is selling for $109,000.

I've seen one of these cars driving through Stowe, Vermont a few times, and when you see one zip by it's hard to argue against the idea that lithium is awesome.

Incidentally, Tesla is going public next Tuesday. It could be a huge sentiment-driven profit opportunity. I haven't done too much digging into the fundamentals of Tesla, but if you have any insight into this company, please send me an email at editorial@resourceprospector.com.

Given that my job is to focus on investments based on tangible assets, it's somewhat outside of my area of expertise to wade into the muck of foreign exchange. You might say that trying to lever your capital and make gains on the price swings of currency fluctuations would be the opposite of resource investing.

Resources need to be produced by the sweat and sometimes blood of someone's brow, whereas world currencies, for the most part, are based on nothing but a government's ability to print them. Ben Bernanke doesn't shed a single drop of sweat, and certainly no blood, when he prints another $1 trillion into existence. And you can bet he doesn't shed a tear for those folks unfortunate enough to hold dollars when he turns on the printing press.

So I'm somewhat loathe to discuss currencies - but they do have a real effect on the price of resources - so I must.

And to prod me along, I received a very relevant and tough question yesterday after my long-winded self congratulatory issue on my correct natural gas call.

This afternoon a Federal Judge overturned President Obama’s offshore deepwater drilling ban, calling it an “invalid agency decision” in his commentary on the case.

The moratorium on deepwater drilling in the gulf came immediately after the April 20th BP spill began, but on May 27, President Obama extended the ban for six months.

The move sparked immediate criticism from Louisiana Governor Bobby Jindal, along with corporate leaders, and oil workers whose livelihoods depend on deepwater offshore drilling.

Natural gas prices have risen 25% since I started urging my Resource Prospector readers to buy natural gas stocks almost three months ago. While the early gains have already been made, it’s still not too late to profit from this long-term trend.

On April 1^st I told readers,

“today, you can buy natural gas companies for extremely cheap. I’m talking cheaper than you’ll likely ever see them again.”

And I recommended picking up some shares of Hugoton Royalty Trust (NYSE: HGT) a company that collects royalties from natural gas production and sales from XTO Energy Inc. (NYSE: XTO) - one of the largest natural gas companies in the United States.

Since then, the stock is up 26% and it has paid two monthly dividends to folks who bought before April 30^th. And the company is still paying an 8.8% dividend. Compared with what you’ll earn in your money market account or a CD, the yield is pretty attractive.

I’m generally suspicious of “green” energy investments - mostly because they seem to be political constructs rather than actually good opportunities. To differentiate: a good investment doesn’t require huge subsidies from the government in order to succeed. Right now, there are precious few alternative energy companies that can turn a dime of profit without massive subsidies from governments around the world.

For me, the investment implication of green energy has been to leave it out of my portfolio entirely.

But then yesterday, I received a very good question from reader Bill M. who brought up an interesting idea about actually shorting such companies:

“I have a question for you. Governments are spending a ton of tax dollars supporting all manner of "green" initiatives: wind, solar, ethanol, electric cars, curly-cue light bulbs, green roofs, LEED certifications, housing insulation, etc. etc. Governments have passed all sorts of quotas for renewable energy. All sorts of companies, from start-ups to GE (NYSE: GE), have attracted billions in government dollars and private investment to capitalize on this green wave. How does a cut-throat, uncaring, capitalist monster (like me) make money off what I expect to be the balloon popping on these over-inflated green companies who, when forced to compete on their own without their government sugar daddies, are going to sink like a rock? Are there funds out there making contrarian bets?”

It finally happened. Yesterday, BP (NYSE:BP) announced that it would suspend its dividend for the remainder of 2010. After that, it will probably depend on how much the oil spill costs as to whether, and at what rate, the dividend is reinstated.

Cost estimates for the spill are rising. One analyst was out with a $63 billion estimate. That’s based on the $7,942 a barrel Exxon paid for clean up and fines for the Valdez spill. To put things in perspective, the Valdez leaked 257,000 barrels of oil. BP’s Gulf of Mexico spill is expected to reach 5.3 million barrels.

BP has annual cash flow around $30 billion. It will also have to lower spending and sell off some assets. And it will hit the bond market to raise cash.

BP finally bowed to political pressure and announced it would cancel its quarterly dividend for the remainder of 2010.

While this may be the prudent move to lessen the political pressure on the company, it's not good news for BP shareholders who depend on the company's dividend for income, many of them retirees with funds that hold BP shares.

Last night, President Obama delivered his first speech in the Oval Office. I’m guessing he chose the Oval Office to give his speech about the BP (NYSE: BP) oil spill because he hoped to evoke a sense of authority and intimacy for such an important and prickly topic.

After nearly two months of oil spilling into the Gulf of Mexico, this speech felt a bit flat. I think Obama might now realize that his skill in delivering powerful, inspiring platitude-filled speeches about America and hope and change, etc. doesn’t really transfer to the somber task of discussing plans for oil spill cleanup and reparation.

Full disclosure: I didn’t vote for the guy and while he’s certainly an accomplished speaker and quite possibly a perfect politician, I think his ideas about energy policy are completely useless if not outright wrong.

Forget last night’s disappointing speech for a second - here’s a quote from Obama after he received the Democrat Party’s nomination for Presidential candidacy:

While I would love to tell you that I’m bullish on stocks, the fact is that we remain in a secular bear market. For this reason, investors should heed caution, avoid speculation, and focus their investments on great companies in the commodity sector at cheap valuations.

Why? It’s very simple: commodities tend to do well during a bear market for stocks.

So what are the big certainties as far as I can tell? Sovereign debt problems aren’t going away, and the world’s politicians and central bankers are dedicated to the idea that they’d rather inflate their currency than default on that debt. They’re staking their currencies on the reputation that their currencies are still sound money. It’s a losing bet for central bankers and a boon for folks who trade in paper currency for real money: gold and silver.

But I’ve talked about gold and silver plenty over the past few weeks, and I’ve been neglecting a commodity that my father-in-law Ron Blackwell calls “the king of all resources.”

At this point, BP has lost around $100 billion in market capitalization. Yet even the wildest estimates for the cost of the Gulf of Mexico spill are far below that amount. The Exxon Valdez spill cost around $9 billion in inflation adjusted dollars. Even if this disaster costs triple the Valdez, it's still far below the $100 billion that's already been priced in to BP stock.

One month ago, I wrote about the sudden downtrend in oil prices. Of course at that point BP Plc (NYSE: BP) had already been in the news for a few weeks thanks to the oil spill in the Gulf of Mexico. At the same time, the broad market was still reeling from the near -1,000 point flash crash.

Out of all this bad news it seemed as though oil stocks were among the worst hit.

I also predicted that prices might drop lower. I wrote:

“This 13 company index could test the year-to-date lows of 990 – but there are also the sub-800 lows of just over a year ago to contend with as well. I won’t pretend to know which lows the index will test, but I’ll look for any reversal at these key numbers as a time to buy.”

Since then, this index blew by the 990 level, and fell even further, down another 12% since May 10:

Yesterday, I wrote to let you know that it is a great time to buy natural gas stocks. In fact, I'm devoting the next issue of Ian Wyatt's $100k Portfolio to the natural gas opportunity.

But I also need to let you know that not all natural gas investments are the same. In fact, there's one very popular natural gas investment out there that's virtually guaranteed to lose you money, every time.

When the Deepwater Horizon oil rig caught fire and sank in 5,000 feet of water in the Gulf of Mexico, it started a chain reaction that will mean strong long-term gains for forward-thinking investors.

Already, the President Obama has placed a moratorium on deepwater drilling. After all, if we don't drill, there won't be accidents right?

Unfortunately, it's just not that simple.

If you were within earshot of a television yesterday, you might have heard President Obama talking about how the United States needs to end its addiction to crude oil. He outlined some of the more obvious problems of using 20% of the world’s oil, while only possessing 3% of the world’s oil reserves.

I’ll let him speak for himself:

“Without a major change in our energy policy, our dependence on oil means that we will continue to send billions of dollars of our hard-earned wealth to other countries every month — including countries in dangerous and unstable regions. In other words, our continued dependence on fossil fuels will jeopardize our national security. It will smother our planet. And it will continue to put our economy and our environment at risk.’’

He makes many fine points. But none of them are very timely. America has run an oil deficit for decades, and we’ve been buying oil from dangerous and unstable regions for at least that long. Our national security hasn’t just been jeopardized, it’s already been breached!

Crude oil is arguably the most important commodity in the world. It’s easily the most traded commodity. Every other sector, business and commodity in the world depends on oil. Simply put – the market is huge.

So when you get the chance to buy oil companies at cheap valuations, you should pounce early, often and with unwavering decisiveness. Oil’s not going anywhere – it’s going everywhere.

That’s why it’s important to get your portfolio in front of the long, inevitable trend of higher oil prices. It’s the biggest and most important market. That’s why I sincerely hope you think about buying today’s cheapest oil company in the stock market.

But before I tell you about this company whose shares are currently selling close to its 2009 lows, I’d like to answer the question: Exactly how huge is oil?

These platitudes about oil’s importance and size frequently get passed around by members of the popular media like bottles of Gallo Rosé wine at a Grateful Dead concert – so indulge me to show you the exact numbers to help you wrap your head around the sheer magnitude of the situation.

Oil investors are looking for any reason for oil to go up in price these days.  We all tacitly know that much higher oil prices are coming. But with the economy in a perpetual cycle of stagnation, continued bad news from Europe, and concerns that growth is stalling in China, oil can’t seem to find a foothold. 

But I believe that oil is one minor war-action away from higher highs this summer. 

That brings me to something my wife and I encountered yesterday. 

I should note, I’m writing today’s issue from a hotel room in Boston.  My wife and I are celebrating our first wedding anniversary this week. 

After spending yesterday afternoon ferrying between Boston’s harbor islands, we encountered what I believe may be the catalyst for higher oil prices this summer. 

In Boston Common, amid the hot dog stands and balloon vendors, hundreds of pro-Palestinian protesters greeted us on our walk back to our hotel in Back Bay. 

It's getting ugly for BP (NYSE:BP). The company's latest attempt to plug the well that's gushing oil into the Gulf of Mexico has failed. And the "back-up plan" – a relief well drilled to relieve the pressure from the leaking well – will take two months to complete. That's two more months of oil gushing unfettered in to the Gulf waters, two more months of damage to Gulf Coast businesses, two more months of damage to BP's reputation and share price.

I have to say right out of the gate that I am extremely skeptical of investments in general. That’s the only way to be if you value your investment capital and hope to make it work for you in the markets. Being generous and trusting are good qualities in a boy scout, but not an investor. We need to be skeptical misers.

So when it comes to an industry that’s largely unprofitable, filled with failure, buoyed only by government grants and lots of hopeful talk from environmentalists, I’m wont to be even more skeptical, if that’s possible.

It’s been said before, but it bears repeating: wind and solar only work when it’s windy or sunny. You simply can’t rely on these two technologies as they are and get anything close to the electricity generation that’s required to power today’s infrastructure.

I’m confident that solar power will one day come into viability on a large scale, but there’s still the problem of what to do if the sun doesn’t shine. You hear environmentalists throw around the word “sustainability” a lot. It’s actually kind of humorous, because there’s NOTHING sustainable about getting our electricity generation from ANY of the current green alternatives.

Let me back up and define sustainability from an environmentalist’s perspective.

I’ve been teasing a full write up on why I think the United States Natural Gas ETF (NYSE: UNG) may have been designed to lose money. If you’ve had the misfortune of owning this ETF, you are keenly aware of this tendency. In the past 9 months, the price of natural gas climbed off the floor of $2.75 per thousand cubic feet up to nearly $4.25 today. That’s a 55% gain. In that same time period, UNG lost 27%.

As a reminder, UNG is NOT a double inverse ETF, but you wouldn’t know it from looking at those results. That brings me to crux of why this ETF does not perform the way you might expect it to, and how you can avoid making investments in similar ETFs that are more tar-pit than gold-mine. After all, the first rule of investing is “Don’t lose money.”

Investors typically think of ETFs as baskets of equities, with performance naturally reflect the rise or fall of the value of those stocks. The United States Natural Gas Fund (UNG) ETF is structured a bit differently than other ETFs available to the public. According to the United States Natural Gas fund website:

One of the top oil exploration companies drilling in North Dakota’s Bakken oil pool released results for two new wells today.

Initial flow results showed a peak rate of 3,171 and 5,035 barrels of oil equivalent a day (BOEPD). With these results, this company now has the two top producing wells in the entire Bakken play.

My general prediction for a low coming after the next 10 days is in line with research from Energy Analyst Gregor Macdonald, who contributes to Energy World Profits. 

Gregor has been looking at seasonal tendencies going back 25 years, and it’s normal for crude oil to hit an initial high in April, and then bottom in June before hitting a new, higher high later in the summer. 

So my point is that if you’re currently a shareholder in oil stocks, don’t sell.  But you should look for opportunities to add to your positions.  I believe the time will come between now and the last week in June.

To take advantage of these lower prices, which may never be this low again, I’ve talked about buying BP (NYSE: BP).  Seasonally low oil prices are the last of this company’s worries, as the spill in the Gulf of Mexico seems to be snaking its way towards the Florida Keys.  I don’t know how much more hated this company can get. But regardless of what happens, I’m confident that BP will still be in the business of selling oil for many years after this disaster is just an unpleasant memory. 

I’ve long advocated that responsible citizen-investors should eat their own cooking.  If you go to McDonalds (NYSE: MCD) three days a week, it only makes sense to be a McDonalds shareholder.  If your lifestyle choices are reflected in your portfolio, then you’re already in a good position to understand the fundamentals of the companies you own.  Conversely, if you’re buying companies that you don’t understand, then you’re setting yourself up for failure.

And there are other benefits.  If you’re a consumer of, say, crude oil, why not invest in companies that reap the reward of your diligent consumption of gasoline, heating oil, and other petroleum products?

According to AAA, the average car uses 533 gallons of gasoline every year.  At $3 a gallon that means it costs about $1,600 a year to run the average car for a year.

So the question is: how can you get $1,600 a year from oil companies?

Before I answer that question, I’d like to revisit my thesis for owning commodity stocks in general, as well as owning energy stocks in specific.

European debt concerns pulled stocks lower today, as investors sought safety in U.S. treasuries.

Gold moved higher as well, though it's still just shy high of record nominal highs from earlier this week.

According to a report from Goldman Sachs (NYSE:GS), the outlook for commodities in general is "strikingly positive."  This news arrived yesterday, and Goldman projected a 12% return in 2010 for the S&P GSCI – one of the largest traded general commodity indexes. 

As the world watches the dreadful scenes coming from the BP oil spill, the blame game ratchets up and now it's reported that over 100 lawsuits have been filed in relation to the spill. Tough times for BP, Transocean, and Halliburton.

Given all the attention to the Gulf Coast scant attention is being paid to one of the fastest growing oil regions in the nation. I'm sure you've heard of it. It's called the Bakken. It's a region in the upper Midwest of the U.S. and lower Canadian Plains. Unlike much of the continental oil development fields that rely on extracting oil from sand and shale deposits, the Bakken produces light sweet crude: the preference of most oil refiners.

As I said yesterday, I don’t like telling you to buy something when it’s at or above its nominal highs. So, I won’t. With gold now selling for over $1235 an ounce – above its all time previous highs of $1224, there’s no reason to ring the bell right now. If you were among the lucky few to buy gold and gold stocks in the past, then I wouldn’t sell either – but I wouldn’t advise building or adding to a position in gold right this hot second.

By the way, I’d like to hear from you – where do you think gold is headed? What percentage of your portfolio is in gold? Drop me a line at editorial@resourceprospector.com

I believe gold will likely move higher, but buying at the highest highs in hopes that it will immediately move higher is just not good investment sense.

Instead, I’d like to draw your attention to a commodity that’s not making headlines today. It’s not on CNBC, or gracing the front page of the Wall Street Journal. Once a story is well-covered by the mainstream media, it’s not really my job, or in your best interest, for me to continue shining a light on it.

There’s nothing like a haircut to make you feel better about yourself. I was long overdue for one until this past weekend. When my hair gets too long I can always brush it back or mat it down, but there comes a day when I say enough – it’s time. For me, the motivating factors were a few sideways looks and subtle hints from my wife.

I’m not the only one to get a haircut this past week. The first week of May proved disastrous for oil prices, and by direct correlation, oil stocks. The motivating factor was a lack of price support. I’ll describe this in detail in a moment.

The largest index of oil companies, called the NYSE Arca oil index (AMEX: XOI), fell nearly 10% last week. This index tracks the 13 largest oil companies in the production, exploration and development sectors.

The spill in the Gulf Coast near Louisiana is nothing short of a tragedy.  And for certain, it’s a man-made phenomenon.  There’s really no telling how bad this leak will be.  There’s concern that it will severely damage fisheries along the Louisiana coast.  It’s already disrupted shipping in the area.  And there’s no doubt, it’s not a good thing. 

Some analysts estimate this leak will cost BP (NYSE: BP) upwards of $3 billion in cleanup costs alone.  BP owns the drilling rig that exploded and caused the leak. That’s baked into the cake – BP stock fell nearly 10% last week and another few percent today.

President Obama was quick to blame BP.  They deserve the blame, but I think it’s a bit disingenuous of the President to angrily point his finger. On March 30^th, less than a month before this leak, President Obama announced his desire to allow additional offshore oil and natural gas exploration and drilling in the Gulf of Mexico.

I’ve been waiting for the Energy Information Administration to release their updated natural gas estimates. I thought – as did many other analysts – that their new methods for gathering those estimates would reveal less natural gas supply.

I got it wrong. But instead of trying to smooth it over, or denying the obvious, it’s much better for our reader-writer relationship if I come clean.

The EIA’s numbers released this morning show that supply increased 1.6% from January to February.

Obviously, this news is the exact opposite of what I predicted would happen – and in some ways it’s the opposite of what the market expected. Natural gas futures immediately fell over 8% - down to $3.96 per thousand cubic feet from $4.30 levels earlier this week.

I’m always on the lookout for parables in the investing world – and a snowstorm in late April is a great metaphor for unexpected phenomenon in the markets. 

Many investors view each unexpected action in the market as an opportunity to learn and adjust – which is fine if you’re a day-trader, but disastrous if you’re a long-term investor.  I don’t plan on giving my shorts and t-shirts to the Salvation Army after one rogue snow storm.  That would be foolish.  And it would be equally foolish to sell all of my oil positions just because crude oil dropped $2.50 a barrel yesterday. 

The long-term trend for oil – a trend that’s obvious even to school children and Congressmen – is for prices to increase.  A dip in oil prices is an opportunity to buy more shares of oil companies, not sell.  Just like a mid-spring snow storm is an opportunity to go sledding or cross-country skiing not ditch the charcoal grill and golf clubs.  The point is: seize opportunities as they come, but don’t change your long-term plans because of short-term abnormalities. 

Speaking of opportunities, one of my favorite oil and gas companies is about to pay out a quarterly installment of their 7.7% dividend yield.  This company has raised its dividend an average of about once a year – and they've never lowered it or missed a payment.  You can click here to request a free report all about this company. 

I set a timer on my laptop calendar to go off today, because I had to remind myself of important news from the Energy Information Administration coming out in exactly one week.

If you read my April 6 issue of the Resource Prospector a few weeks ago, you know what I’m talking about.

From that issue:

“On April 30, the EIA is scheduled to release its natural-gas monthly report for February. In the report, the agency will use the new methods to estimate gas supply and revise its January numbers.”

I believe these new methods will reveal significantly lower natural gas reserves than the marketplace currently expects. And more importantly, I believe this news will move natural gas prices much higher in the near future.

And while I’m content with my analysis, sometimes it’s nice to get some support from another contrarian viewpoint.

There are always at least two sides to every commodity story, the biggest being supply and demand.

In yesterday’s issue of the Resource Prospector, I talked about demand for uranium. After following and untangling the threads, it seems like demand is slated to rise. That’s according to two of the biggest authorities on the subject, the World Nuclear Association, and the Nuclear Energy Agency.

Today, I’ll tackle the supply side of the equation – and I’ll show how current annual production of uranium falls well short of annual consumption.

I unearthed a WNA chart to better show this contrast, which I believe will be the real catalyst for higher uranium prices.

There’s nothing better than a well articulated question to get the juices flowing on a Monday morning. To that point, I was glad to see a question from John B. of the UK in my inbox today.

John’s main point: uranium production numbers can be confusing. I agree.

There’s a few main issues that, for the most part, are largely unknown.

John asked,

“Mining Weekly (RSA) has just quoted NEA [Nuclear Energy Agency] DG Luis Echavarri, ‘By 2030, there will not be a very significant change in the number of NPPs [Nuclear Power Plants] in the world’.

You quote WNA [World Nuclear Association] reckoning on 5 times more uranium demand than at present in 2030!

Have you researched the schedule of closures and new build openings? It is all very confusing.”

John raises a good question that certainly merits further research.  It is confusing when two authorities on nuclear power seem to be in disagreement over how many plants will be built in the next 20+ years and how much that might affect demand for uranium. But upon closer inspection, I don’t think they are really disagreeing.

In some parts of Vermont, you can walk down the street with a loaded .357 magnum on your hip, in plain view, and no one will bat an eye. Vermont is also the only state in the country where you can hunt fish with a gun. I’ve heard northern pike can be vicious, but seriously? We also don’t have any restrictions on concealed carry. As long as someone hasn’t been convicted of a felony, they can pack heat in Vermont. Are we politer for it? I can’t tell.

Yes, Vermont is probably the best place to go skiing on the East coast – but it’s also gorgeous and extremely livable in the summer. To that point, it does get pretty darn cold during the winter – usually there’s a week or two where we dip into the negative 20s. But the hottest days of the summer will scratch into the low 100s on occasion.

The biggest contradiction might be that Vermont gets a good chunk of its electricity from a nuclear plant called “Vermont Yankee.”

I know…you’re thinking: “liberal state” and “nuclear power” do not go together very well. And you’re right. It seems that Vermonters have been trying to close Vermont Yankee ever since it opened. Lately, the calls for its closure have grown much more shrill and frequent after a small amount of nuclear waste water *may* have leaked into the Connecticut River – the river that separates Vermont and New Hampshire, passes through the middle of Massachusetts and eventually outlets into the ocean on the Connecticut coast.

I hear lots of people saying that while commodities have had a nice run, the bull market in “stuff” is nearing its end. That begs the question: how long can a commodity bull market last?

It’s a valid and important question.

I’m a commodity investor, but not for sentimental reasons. As much as I value gold as a hedge against inflation, or oil’s ability to make my car go vroom – I invest in commodities for fundamental reasons – largely because I believe they are still cheap and undervalued from a historical perspective.

So, back to the question at hand. How long can a commodity run last?

Coal is awful. When the black rock burns it pollutes, spewing metric tons of carbon dioxide in the atmosphere every day. Most investors will tell you it’s a dead resource: “we’re moving towards renewables,” they’ll say. Coal is an anachronism; a blight. It’s an atrociously dirty energy source that will soon be relegated to the same place we put lead paint, asbestos insulation, and shoe-store foot x-rays – buried deep down in the ground.

In the news this week alone, there are two stories about coal miners trapped in mines – one coal mine in China, and one in West Virginia. There’s also a story about a coal tanker that ran aground on Australia’s Great Barrier Reef. My point is that coal is largely hated.

Not by me, of course. I like having a warm house during cold winters. I like air conditioning in the summer. I like cheap goods produced so cheaply, in part, thanks to inexpensive and plentiful coal. I also like the idea of buying stock in companies that mine such a cheap, hated commodity.

Yesterday the Wall Street Journal reported that the Energy Department will be making sweeping changes to how it reports natural gas production in the United States. In short, the Energy Information Administration (EIA) – the data-gathering offshoot of the Energy Department – believes that it might be over-reporting production of natural gas.

Independent analyst Ben Dell with global wealth management firm Sanford C. Bernstein says the EIA might over-report by as much as 12%.

That’s extremely good news for shareholders of natural gas companies. Even better news is that it’s not too late to become a shareholder.

Last Thursday, April 1, I talked about how inexpensive natural gas was getting. If you bought natural gas last week, it was the equivalent of buying gasoline for 48 cents a gallon.  Prices had to go up. 

It’s good to know I wasn’t alone in my proclamation, as both the Daily Profit editor, Ian Wyatt and Trademaster Daily Stock Alerts editor Jason Cimpl noticed the same trend. Ian is my boss and CEO of Wyatt Research – as well as one of the best fundamental analysts I’ve ever met or worked with. Jason is a wunderkind technical analyst and is frequently one step ahead of the market. They don’t always agree, just because they have different time-lines and different investment philosophies - so when they do agree, it’s a good idea to take notice.

And in Friday trading, gas prices bounced off their 6 months lows.

You probably remember when gasoline cost 48 cents a gallon. It was in 1974 – not so long ago, really.

Inflation adjusted for 2009 dollars, gas was never that cheap though. It bottomed in 1999 at about $1.40.

So I realize it sounds too good to be true to suggest that you can buy gas for 48 cents today. With most of us paying close to $3/gallon it’s just a ridiculous claim.

And of course, there is a catch. Consider it a small April Fools day hoax.

Today, I’m going to discuss one of the most elemental ways that “they” hedge their bets, and how you can use it in your own portfolio to profit every time.
First, there are a few important facts you should know about crude oil and the petroleum products we get from it.
You might notice that spikes and dips at the gas pump don’t necessarily track exactly with spikes and dips in the price of crude oil. That’s because only half of all crude oil gets turned into gasoline. The other primary products are diesel fuel, jet fuel and heating oil.
As you might imagine, demand for different petroleum products fluctuates seasonally. Heating oil prices rise in the winter. You might think that the southern hemisphere’s “winter” would even out the fluctuations, but the northern hemisphere has 90% of the world’s population – so it’s the northern winter that drives heating oil prices.

Happy St. Patrick's Day! In honor of the holiday, the stock market is in the green. The Fed reiterated its pledge to keep interest rates low for an extended time. The promise of cheap money is clearly helping to support stock valuations.

Also helping move prices higher, and supporting the Fed's stance, is the 0.6% drop in the Producer Price Index. The drop was led by food and fuel prices. Excluding those, the so-called "core" rate climbed 0.1%.

You wouldn't know fuel prices were lower looking at the price for a barrel of oil. Despite the relative strength of the U.S. dollar, oil has staged a month long rally that's got it within spitting distance of its 52-week highs. And I expect we'll be seeing those highs in the very near future.

The first revision to fourth quarter GDP is out this morning. And amazingly enough, it was revised higher, from 5.7% to 5.9%. This is the first time I can recall a significant piece of data being revised higher in the last year.

Of course, we know that much of the strength in the economy is a direct result of government stimulus policies. Real growth may be running around 2%. But the bottom line is that the government has, and will continue to, support the economy. That should keep us looking for upside for stocks, even though the economy is basically treading water.

Oil and the U.S. Dollar

Investors seem to think it's now a law that oil and other commodity prices will trade in tandem with the U.S. dollar. In other words, because oil and other commodities are priced in dollars, as the relative value of the dollar falls the price of oil and other commodities will rise.

The relationship makes sense. And for much of last year, it was actually working. But times have changed…

To keep things simple, we're going to have a look at just two charts today – the U.S. dollar index and the light, sweet crude oil futures chart, the WTIC. As we'll see, the relationship between oil and the dollar changed in early December 2009.

On December 7, the dollar started to rally. You may recall that at the time the bearish talk for the dollar was rampant, and in good contrarian fashion, I had been anticipating a rally for the dollar.

Somewhat more unexpected was that oil rallied right along with dollar, as we can clearly see on the WTIC chart...

Even now, as the dollar sits at a 6-month high, oil also remain near its 6-month price high. It should be clear that the accepted inverse relationship between the U.S. dollar and oil prices has changed. The relative value of the U.S. dollar holds much less sway over prices now than it did even a few months ago.

We could make the argument that the global economy has improved and so oil demand should pick up. But at present, most estimates for oil demand have not increased. And likewise, OPEC has not made an attempt to cut production and ramp up prices. Something else is in play...

It was just last Thursday that we discussed "talking one's book" and made special mention of George Soros. If you missed that issue of The Daily Profit, talking one's book means advocating a belief in public that supports one's trading position, regardless of whether you actually believe it's true.

So it's interesting that Soros has a piece in today's Financial Times where he states that "The survival of Greece would still leave the future of the euro in question." He goes on to say that the aid package for Greece won't work for Spain, Italy, Portugal or Ireland.

Now, if we check the chart we can see that the U.S. dollar has been rallying. Part of the reason for this has been weakness of the euro due to debt problems in European countries.

The recent spike higher by the dollar was a response to the Fed's discount rate hike. And quite frankly, it looks unsustainable. I think we can assume that Soros is short the euro, and he may even be trying to cover that short right now, in anticipation of a rally for the euro.

Of course, a rally for the euro would send the U.S. dollar lower. That, in turn, will be good for U.S. stocks, gold, and oil.

It's quite a conundrum. America spent around $475 billion for foreign oil in 2008 (2009 numbers are not complete yet, although the total is certainly projected to be lower). It's clear that electric powered battery technology for cars would allow us to keep more U.S. dollars at home, improve the trade deficit and provide manufacturing and other jobs, too.

We have enough sunlight, wind, natural gas, and coal to generate the power it would take to transition to domestically supported power generation. The long-term benefits are obvious. Wind and solar installations have an upfront cost, but pay for themselves over time. Natural gas and even coal are domestic resources that can and should be leveraged to allow us to be more energy independent.

But getting to the point of energy independence is a difficult path.

It's easy to look at that $475 billion figure and say if we invested that into the power generation economy, we'd have efficient battery technology for electric cars and plenty of new manufacturing jobs.

However,...