[BigTex]

I wonder what they are buying. I understand the Chinese and Japanese buying our debt. I sort of understand OPEC members buying lots of things in the U.S. just to have a place to spend their petrodollars. I understand foreign investment in U.S. real estate (there are parts of the U.S. that are still amazing bargains, despite all of the "housing bust" talk).

But if I were a European investor, I would not be impressed with U.S. market returns in light of the falling U.S. dollar against the euro. In that situation the risk would seem to be doubled: the inherent equity risk, plus the currency fluctuation risk which seems to be headed in only one direction.

I'm sure there is someone on here who knows more about this than me and can explain it.

[Bas]

$this->bbcode_second_pass_quote('BigTex', '
')
But if I were a European investor, I would not be impressed with U.S. market returns in light of the falling U.S. dollar against the euro. In that situation the risk would seem to be doubled: the inherent equity risk, plus the currency fluctuation risk which seems to be headed in only one direction.

I'm sure there is someone on here who knows more about this than me and can explain it.

[Mechler]

BigTex,

I like your analysis of the energy stocks and I hope it works out that way. We haven't had any big corrections lately, but in every one of the smaller corrections, energy has been dragged down with the whole market. That makes me a little nervous.

But I'd be a lot more nervous owning a tech stock with a 30, 40, 50, or 100 P/E. And what about something like First Solar (FSLR) - it has like a 500 P/E. I don't care how good future growth prospects are - I'm not touching it. Of course I said that when it's P/E was 400 and I missed a big gain. Anyway, it just perplexes me how energy companies with single digit P/Es are being outperformed by these high P/E stocks. Can anyone explain that? Maybe investors really do think that oil is going back to $30. If that's the mentality, then your analysis of a big run-up holds more credence.

[BigTex]

$this->bbcode_second_pass_quote('Mechler', 'B')igTex,

I like your analysis of the energy stocks and I hope it works out that way. We haven't had any big corrections lately, but in every one of the smaller corrections, energy has been dragged down with the whole market. That makes me a little nervous.

But I'd be a lot more nervous owning a tech stock with a 30, 40, 50, or 100 P/E. And what about something like First Solar (FSLR) - it has like a 500 P/E. I don't care how good future growth prospects are - I'm not touching it. Of course I said that when it's P/E was 400 and I missed a big gain. Anyway, it just perplexes me how energy companies with single digit P/Es are being outperformed by these high P/E stocks. Can anyone explain that? Maybe investors really do think that oil is going back to $30. If that's the mentality, then your analysis of a big run-up holds more credence.

[Mechler]

$this->bbcode_second_pass_quote('BigTex', '
')What do you think about the idea that oil (and the whole fossil fuels industry), in addition to being very profitable during good times will also be a more appealing safe haven than gold during bad times?

[MrBill]

BigTex, I do not disagree with any of your analysis. Good work. But an oil company's net present value, its stock price, does not depend on oil scarcity and higher future prices. It depends on its reserves and its ability to replace those reserves. Just like an oil refinery earns a margin by buying raw crude and transforming it into products. Those margins can be eroded by higher prices for the raw crude or higher production costs.

Maybe part of the problem is my time horizon and my investment strategy verus someone else's. I am very much into the energy sphere, but I am buying and selling to keep improving my average. If the market does not dip then I am screwed as I am selling out part of my long on each rally to rebalance my portfolio. It is a trading strategy, not necessarily a long-term buy and hold investment.

RE Warren Buffet. Remember he bought stocks like CPR BEFORE they shot up 38-39% year to date. That is his return, not the poor sucker that buys now because WB bought 6-months ago.

I remember a great article in The Economist a few years ago. "Charlie Contrarian joins Felicity Foresight and Henry Hindsight" I wish I would have kept it.

Basically, every year for one hundred years Felicity Foresight invested all of her money in one asset and that asset class outperformed every other asset for one year. After a hundred years she had more money that God Himself.

Henry Hindsight followed Felicity's investment strategy, but always one year later. He invested each year in last year's number one asset class. His returns after one hundred years were slightly better than putting the money in risk free government bonds.

It was a theoretical exercise, but one with a great lesson for all investors. Everything at the right price. But maybe I am just Charlie Contrarian? ; - )

UPDATE: found it (from 1999 so I must be getting old)
$this->bbcode_second_pass_quote('', 'A')t the start of each year, Ms Foresight would predict which asset and which market around the world—shares, bonds, cash, property, precious metal, etc—would experience the highest total dollar return (income plus capital gain) over the following 12 months. Then, ignoring all the usual rules about risk diversification, she would invest all her wealth in that single asset and not touch it for a year. This she has done on the first trading day of each year throughout this century, allowing all dividend and interest income to be reinvested. The lucky lady thereby enjoyed large gains, but never suffered any losses, such as the 89% plunge in American share prices in the three years after the 1929 crash.

[BigTex]

$this->bbcode_second_pass_quote('MrBill', 'B')igTex, I do not disagree with any of your analysis. Good work. But an oil company's net present value, its stock price, does not depend on oil scarcity and higher future prices. It depends on its reserves and its ability to replace those reserves. Just like an oil refinery earns a margin by buying raw crude and transforming it into products. Those margins can be eroded by higher prices for the raw crude or higher production costs.

[Mechler]

$this->bbcode_second_pass_quote('MrBill', 'B')ut an oil company's net present value, its stock price, does not depend on oil scarcity and higher future prices. It depends on its reserves and its ability to replace those reserves.

[KCFrog]

first time poster here: enjoy the forum, talk and insight from everyone.

Got into PO after reading Leeb's The Coming Economic Collapse about a month ago.

as a small-time investor, not exactly sure where to go or have much insight to offer, but do believe I need to get in somewhere.

Was thinking about buying shares of PXE (would like SLB, but don't have enough cash to get very many shares). However, like the talk on here, I'm not sure if I'd be buying at the top of a big run.

Wondering if oil will decline from mid-August through January like last year?

Hello to all, and glad to be here.

[MOCKBA]

$this->bbcode_second_pass_quote('MrBill', 'H')aving missed the opportunity to add to my long energy company positions, I am not going to chase it now. At least not in the western oil companies, although some Russian oil stocks are starting to look cheap by comparison. Lukoil which is down 12% YTD looks like a good buy in the low $70s with a P/E ratio of just 9. Yes, there is plenty of Russian risk at the moment, but this one seems to be trending, so I am more likely to buy into a dip on it having sold part of my long in the $80s.

[Mechler]

$this->bbcode_second_pass_quote('KCFrog', '
')as a small-time investor, not exactly sure where to go or have much insight to offer, but do believe I need to get in somewhere.

Was thinking about buying shares of PXE (would like SLB, but don't have enough cash to get very many shares). However, like the talk on here, I'm not sure if I'd be buying at the top of a big run.

Wondering if oil will decline from mid-August through January like last year?

[KCFrog]

Thanks for the welcome and thoughts Mechler. I'll definitely take a look at OIH and PXJ.

[NTBKtrader]

http://www-personal.umich.edu/~kathrynd ... htsaga.pdf

[MrBill]

Thanks for everyone's comments. Boy! Talk about timing? The PO news is getting out. This in the papers over the weekend.

$this->bbcode_second_pass_quote('', ' ')Global oil and gasoline supplies probably won't be able to keep up with world demand, a U.S. petroleum industry draft report said, according to the Wall Street Journal.

In the study, industry leaders accept that the world will need to develop all the alternative sources of energy available to meet rising demand, the newspaper said. Still-rising consumption in the U.S., plus demand from developing countries such as India and China, will lead the surge, the Journal said.

Demand may rise by as much as 60 percent over the next 25 years, according to the draft report by the National Petroleum Council, which advises U.S. Energy Secretary Samuel Bodman.

The report concludes that world will need all the nuclear power, biofuel and oil-sand technology oil extraction that it can muster, the Journal said.

[MrBill]

Someone wrote:
$this->bbcode_second_pass_quote('', 'I') would love to hear your coments on that and not so much from daily positioning like with futures, but more long-term "annual cycles"... Say, crude could eventually and likely go to $90+ due to weak dollar, unstopable economy, too much cash, etc. but on the other hand $90 is a lot of money not to stop the economy, etc... And thus crude is likely to go back to $60 but unlikely to go significantly bellow... So what are "long term" expectations and expected cycles?

Gauging from last year, could any information be extracted from contango/backwardation in futures or contango/backwardation moves to fast with price moves? I am trying to find an indicator that might tell that say over 3-6 months the odds of going one way is significantly higher then going the other. What was on the screens say last December in anticipation of January correction?

[MOCKBA]

$this->bbcode_second_pass_quote('MrBill', 'B')ut last summer crude markets were in a steep contango of $1.50-2.00 per barrel in the front futures months over the next, etc. The curve was in contango for about 2-years out (2007 in 2005 and 2008 in 2006) and then dropped off steeply as the market discounted high, long-term prices. ... The spot market has to rise by at least $18-24 per barrel per year just to break-even.

[MrBill]

When the market dropped 36% from $78.40 to $49.80 the market was in contango, which helped the shorts, as they could close their near month futures position at say $60 and open it up again in the next futures month at say $61.50-62.

If I recall correctly there were actually some months where the spread was even wider, like $3-4 per barrel between months, so it punished the paper longs even more, while paying the producers and physical players almost full-carry to store crude oil.

I do not think that 'contango' or 'backwardation' tell us much about future price expectations with regards to absolute direction, but are more an prediction about supply & demand constraints reflecting either over supplied physical markets or shortages. At least in the front months.

The shape of the forward curve however should tell us whether the market expects $45 or $75 crude in the future. You cannot really have a 'short squeeze' in the December 2015, if you understand what I mean, but you can in the August 2007 if it is expiring next week.

$this->bbcode_second_pass_quote('', 'O')PEC raised its estimate of demand for its crude oil this year because of lower-than-expected supply from producers outside the group.
The Organization of Petroleum Exporting Countries raised
its estimate of demand for OPEC crude by 500,000 barrels a day for the second quarter and increased third- and fourth-quarter
estimates by 100,000 barrels a day. Daily demand for OPEC crude
will average 30.7 million barrels in 2008, versus 30.8 million in 2007, Vienna-based OPEC said in a monthly report today.
OPEC, which supplies about 40 percent of the world's oil,
cut its estimates for oil supply from outside the group, including the North Sea, where field maintenance helped boost Brent crude futures above $78 a barrel in London today for the first time in 11 months.
OPEC said Norway's oil production dropped to a 13-year low
in May and June because of ``early and heavier than normal
maintenance as well as the shut down of the Ekofisk and
Kvitebjorn fields.''

[pup55]

$this->bbcode_second_pass_quote('', ''')a high risk/low probability' correction to the price of crude

[BigTex]

Mr. Bill,

I mentioned this in another thread, but one company I am long on right now is Dril Quip (DRQ). It's a Houston based provider of deep sea drilling equipment for harsh drilling environments. They've been around since 1981 and insiders own something like 40% of the outstanding shares. Their growth in recent years has been awesome. It's daily volume is low, but I notice that it doesn't seem to get hit as hard as other sector members when the sector has bad days. I find this interesting and encouraging.

It seems like the deep sea game is going to be where all the action is in coming years and a small company with strong growth like DRQ seems like it could expand its market share significantly if the whole sector is going crazy.

What do you think? I like GSF as well, but the insider stake in DRQ just really impresses me.

On another note, I read somewhere that it's best to get out of energy around August 25 and get back in some time in the early spring every year. This makes absolutely no sense to me, but the fellow saying it seemed to be speaking from experience. I understand sitting out the hurricane season, but it seems like there is just as much money to be made as lost during a hurricane, depending on which company's equipment gets torn up. Does this strategy of sitting out August through early spring ring any bells with you?

[MrBill]

Hello Pup55/BigTex,

thanks for your comments.

RE investment advice. Yes, this is just infotainment, folks. See all caveats and disclaimers one page one of Trader's Corner.

RE market timing. There is an old saying, 'sell in May, go away' to avoid the dog days of summer.

Year-end seems to be when everyone seems to lock-in profits, while January is when fresh money is committed.

But I think these anomalies should have been well arbitraged away by now, especially in the age of programme trading that automatically looks for patterns and takes advantage of any price discrepancies.

I do not think markets are perfectly efficient, but free meals do not last either. After the fact it is always painfully obvious what happened and who were the winners and losers. And the market fundamentals are never so clear for everyone to see as at the very top and the very bottom.

We used to say that, 'when the taxi driver in Chicago is telling you that now is the time to buy corn that it is probably time to sell.' By that time all the news is already reflected in the price.

So I think the whole energy sphere is a screaming buy from the fundamentals, but always at the right price. And keeping in mind that all these industries are not only cyclical, but they are all drawing on a relatively small pool of talent in terms of expertise in engineering, project management, skilled workers, etc. So when the sector is booming they are short materials and labor, and that puts the squeeze on their margins or profits. Not to mention sunk costs in projects that then become take-over targets by governments that want a bigger chunk of the revenue pie when prices go higher.

RE offshore drillers. I agree 100%. I just cannot find one on the cheap. Thanks for your suggestions.

Production in Mexico is plummeting. PEMEX has been systematically bled dry by the state. Now they are teaming up with Petrobras, the Brazilian National Oil Company, to drill offshore where PEMEX lacks the deep water technology. Cuba also needs that foreign expertise to access its oil & gas reserves in the Gulf. I do not think there is a lack of work for those willing to look for new reserves in hard to get to places. But it is nice to get paid for your hard labor as well.

RE free float. It is nice to see senior management has a nice stake in the company. But two things. One you have to be very careful about insider deals and transfer pricing that benefits one class of owners/managers at the expense of ordinary shareholders (i.e. Gazprom for example). And secondly, if the free float is too small then the share price movements can become extremely volatile by even small block transactions. AREVA, the French-German nuclear company is a good example. The free float is a measely 5% and therefore its share price could swing wildly due to political interference or insider actions.

That is what gets me with all these junior oil companies and gold mines for example. Investors take a huge risk when they take an early stake in these start-ups. One they might be unsuccessful and then it is money down the drain. And second the risk of asset stripping is ever present. There is nothing basically stopping management from selling off a promising property to a separate private legal entity leaving existing shareholders high and dry. The Vancouver Stock Exchange was rampant with such abuses in the past.

But back to crude. Brent is below its hourly moving averages, so the two day sell-off is still underway this morning at least. In the WTI the daily moving averages at $72.69 and $71.29 are still rising. We have a new high two days ago, but the last two days the close has been weaker than the opening. Today would be the third day if we close on a weak note. Although not quite a reversal, yet, that indicates to me that upward momentum is failing for lack of fresh inputs.

US crack margins for September are $12-13 a barrel. September RBOB and heating oil are almost at par now. It was the gasoline rally and wide refining margins that lead the charge higher. European refining margins have already gone negative. Another contributing factor to the likelyhood of a correction.

$this->bbcode_second_pass_quote('', 'S')hares of European refiners including Neste Oil Oyj and Petroplus Holdings AG fell more than 3 percent after refining margins in northwestern Europe narrowed to their lowest in five months.
North Sea dated Brent, the benchmark used to price nearly
two-thirds of the world's oil, climbed above $78 a barrel
yesterday. Brent cracking margins in northwestern Europe are at
minus $1.93 a barrel, after shrinking to minus $1.96 a barrel
last week, the lowest since Feb. 2.
``Sometimes during the summer months you can have a climate
of declining margins,'' Christine Tiscareno, an equities analyst
with Standard & Poor's in London, said by telephone today.
``We've had several shutdowns in the U.S. and closures of
pipelines in the North Sea. If prices get very, very high, it
starts eating into profits.''
The higher cost of Brent and other North Sea crudes has
prompted refiners to reduce runs at some units. Many North Sea
varieties fetch a premium to other crude blends because their low
sulfur content makes them easier and cheaper to refine into
diesel and gasoline.