[BigTex]

delete

[BigTex]

$this->bbcode_second_pass_quote('BigTex', 'T')here were some great stocks on sale this morning. Red all over the place. I picked up some GSF.

[Mechler]

Hey guys,

I'm in Brazil at the moment, but I've been reading the posts whenever I get a chance.

Big action today - makes me wish I had moved into cash before I left! Anyway, it looks like my GSF gains were mostly given back today. (BTW, my GSF/RIG call was pure luck)

Anyway, BigTex, this type of reaction is what I have been worrying about. I haven't read about Exxon's earnings (they missed by 1%, or something?) but I'm sure you agree that none of the fundementals have changed. So, this is just a big yardsale for us energy bulls. Unfortunately, I got a little cut up in the process.

Anyone see any reason not to buy this dip?

Ciao for now...

Mech

[BigTex]

$this->bbcode_second_pass_quote('Mechler', 'H')ey guys,

I'm in Brazil at the moment, but I've been reading the posts whenever I get a chance.

Big action today - makes me wish I had moved into cash before I left! Anyway, it looks like my GSF gains were mostly given back today. (BTW, my GSF/RIG call was pure luck)

Anyway, BigTex, this type of reaction is what I have been worrying about. I haven't read about Exxon's earnings (they missed by 1%, or something?) but I'm sure you agree that none of the fundementals have changed. So, this is just a big yardsale for us energy bulls. Unfortunately, I got a little cut up in the process.

Anyone see any reason not to buy this dip?

Ciao for now...

Mech

[cube]

Is it my imagination or did I just saw a "dark cloud cover" candlestick pattern for nymex crude oil today?

[MrBill]

$this->bbcode_second_pass_quote('cube', 'I')s it my imagination or did I just saw a "dark cloud cover" candlestick pattern for nymex crude oil today?

[Bas]

What about the OPEC statement's role in the fluctuations we have seen this week?

PS what do you think about the gold market MrBill? With rising oilprices, a weak dollar and a possible longer term decline in the stockmarkets all indicators seem to point to higher goldprices.

[MrBill]

$this->bbcode_second_pass_quote('Bas', 'W')hat about the OPEC statement's role in the fluctuations we have seen this week?

[Bas]

$this->bbcode_second_pass_quote('MrBill', '')$this->bbcode_second_pass_quote('Bas', 'W')hat about the OPEC statement's role in the fluctuations we have seen this week?

[MrBill]

$this->bbcode_second_pass_quote('', 'P')S what do you think about the gold market MrBill? With rising oilprices, a weak dollar and a possible longer term decline in the stockmarkets all indicators seem to point to higher goldprices.

[MrBill]

GS sticks by its bullish commodity outlook despite wobbles in the US economy. They are probably right.
$this->bbcode_second_pass_quote('', '
')Commodities evade credit contagion

Fallout from the US credit contagion for commodities is likely to be
relatively limited in our view.

The global economy has substantially decoupled from the US

The global economy remains relatively healthy, with Europe and Japan showing solid demand growth and China surprising to the upside in the recent GDP release. The credit problems in the US will create a further headwind to the US recovery, but our Economists do not believe this will precipitate a sharp slowdown. Moreover, even if the US recovery does stall, the impact on
commodities would likely be relatively limited as it is emerging markets demand that has taken over as the main driver for commodities.

Physical fundamentals, not financial flows, are the main determinant of commodity prices

Commodity prices reflect primarily underlying supply and demand fundamentals. Inventories in many markets are low (e.g. base metals) or declining (e.g. crude oil) while physical demand is firm, thus supporting prices. Further, a mitigating factor is that investors are unlikely to be in both the subprime and commodities space in significant size, and thus an investor in subprime assets looking for cash would be unlikely to have large commodity investments to sell, which reduces the likelihood of contagion to the commodity markets.

Commodities have outperformed and still have upside from here

The strong global economic growth has continued to generate strong returns in commodities, with the S&P GSCI up 2.5% in July to date versus a similar sized decline in the S&P 500 equity index. In addition, the WTI forward curve has transitioned into backwardation due to strong demand and weak supply. We
believe that any credit contagion sell-off should be viewed as a buying opportunity.

[MrBill]

OPEC producers exerting pricing power over crude markets and taking a bigger slice of the pie at the expense of European and Asian refiners.
$this->bbcode_second_pass_quote('', 'E')uropean Refining Weekly:

Reasons for Report: Industry Overview

Margins slide further to a new 7-month Low

European refining margins were down a further 2% this week on the back of weakening NW European gasoline margins, now at their lowest levels since December 2007. Margins in Europe have now shed over 85% of their value since the peaks observed in May. As we highlighted in our sector report last week, (please refer to It's not just seasonality: OPEC squeeze on refiners) refining
margins have suffered from the twin effects of OPEC exerting tighter control on the crude markets and seasonality in product prices (particularly gasoline).

Looking forward, we believe European refining margins are likely to remain subdued in the coming weeks as (1) refinery utilisation rates in the US trend higher as refineries come back on stream following planned/unplanned maintenance and (2) demand for transportation fuels falls seasonally lower. With margins running materially below our forecasts for 3Q07, we continue to see
further earnings risks in the sector, and thus recommend investors tread with caution. Our only Buy recommendations remain Galp Energia and Petroplus.

Simple refiners face most pronounced earnings risks

The sharp pullback in refining margins has been most pronounced for those operating simple refineries. More specifically, given diesel & gasoline margins have retracted sharply and fuel oil margins remain well below seasonal averages, simple (topping) margins have moved firmly in to negative territory. Consequently, refiners operating lowly complex assets are now being incentivised to reduce production (cut runs) in order to minimise losses and thus face the most pronounced earnings risks. Indeed Hellenic Petroleum (amongst others) has recently reduced output at its Elefsina refinery (complexity of 1.5) in response to these trends, providing support to our view. We reiterate our Sell recommendation on the shares.

European refiners down 4.4% absolute, up 0.3% relative

Last week’s global equity meltdown put further pressure on the European refiners with the sector down another 4.4% in absolute terms. In relative terms, the sector outperformed the broader European market by a modest 0.3%. Regionally, the US was again the worst performing region (down 13.5%), on the back of continued weakness in gasoline cracks and heavy shorting. Conversely, the Asian market was the best performing region (up 0.3%) largely driven by improved fuel oil crack spreads. At the stock level, MOL (Neutral B-2-7) was the best performer (up
0.8%) with the company continuing its aggressive share buyback program and local newspapers reporting an imminent take-out by OMV. Conversely, ERG (Neutral B-2-7) was the worst performer (down 11.9%) following a series of earnings downgrades and mounting concerns around 2Q07 results.

[MrBill]

Last week's steep three day sell-off certainly has had no lasting effects. It took crude out of over-bought territory and has set it up for this last rally that is knocking at all time highs set in 2006 of $78.40 per barrel in the benchmark WTI contract.

$this->bbcode_second_pass_quote('', ' ')U.S. crude-oil inventories probably declined last week as refineries increased operating rates, a Bloomberg News survey indicated.

Crude-oil supplies dropped 1.13 million barrels in the week ended July 27 from 351 million barrels the prior week, according to the median of responses by 14 analysts before an Energy Department report tomorrow. Eleven of the analysts expected a decline and three said there was a gain.

``More refineries are coming back on line,'' said Brad Samples, commodity analyst for Summit Energy Services Inc. in Louisville, Kentucky. ``They still have every incentive to increase runs.''

Refineries operated at 92 percent of capacity, up 0.3 percentage point from the week before, according to the survey. U.S. refiners increased operating rates the five previous weeks to meet gasoline demand, which peaks during the summer months.

Analysts were split over whether gasoline supplies rose or fell last week. Inventories climbed 125,000 barrels from 204.1 million the prior week, according to the survey. Seven of the analysts expected supplies to increase, four said there was no change and three forecast a decline.

Inventories of distillate fuel, a category that includes heating oil and diesel, rose 1.33 million barrels from 123.7 million last week, according to the survey. All of the analysts said stockpiles increased.

The Energy Department is scheduled to release its weekly report on petroleum inventories tomorrow at 10:30 a.m. in Washington.

[BigTex]

Mr. Bill,

I watch CAT and DVN pretty closely. DVN is volatile. Any bad news will hit it twice as hard as the larger integrateds and good news (like today) will give it a big pop. I think this is a stock a lot of traders play with, because it always seems to move more than it should in relation to its peers.

I think there is solid demand for CAT. It has performed exceptionally well this year, in part as a weak dollar hedge and in part because the world needs lots of bulldozers. CAT got sold off after they missed earnings and again last week, but it seems to be holding up very well. I think there are a lot of energy investors who are moving into CAT along with a larger weighting in the drillers after looking closely at the declining production figures/forecasts for the big integrateds.

I think CAT is a good overall play. Good brand, high barriers to entry, solid earnings, benefits from weak dollar, product service creates annuity stream, will benefit generally from devloping countries building infrastructure. Presumably, demand for infrastructure (and heavy equipment) in developing (and developed) countries will weather lots of economic storms that demand for flat panel televisions won't. I think there is a lot of revision in investors' thinking occurring right now in relation to CAT as well.

I continue to like DRQ. It's held up very well since things got ugly last week. It's hard to tell what a thinly traded stock will do when the rest of the market is going wild. They announce earnings on 8/7, I believe, and I am interested to see how that goes.

[MrBill]

Thanks BigTex. I like John Deere as well as CAT.

It is hard to go into foreign competitors because so many of them are not pure plays. I would not mind their expertise in engineering and manufacturing par excellence in cheaper countries, but why would I want that diluted by their forays into consumer electronics and banking for example?

Looked at some that are quite expensive, even by Japanese standards.

Tokyo stock exchange (TPX) P/E = 29

Komatsu (6301 JP) up 56% YTD 68 YOY P/E = 45
Mitsubishi (7011 JP) up 55% YTD 78 YOY P/E = 68
Sumitomo (6302 JP) up 21% YTD 53% YOY P/E = 72
Daikin (6367 JP) up 6-7% YTD 17-18% YOY P/E 44

and I found this in the TOPIX Machinery Index

Kubota (6326 JP) down 11-12% YTD -6-7% YOY P/E 29
beta to TPX 1.49
current price 974 yen
RES 1120
SUPP 963
RSI 37.12

Which if you think either the TPX or the yen could rally vis a vie the USD then this would outperform given its high beta. With Japan (and especially China) you need to get used high P/E ratios or you would never buy anything! ; - )

RE DVN. Its beta is 1.17 vs the SPX. I am trying to find out what weighting the S&P Energy Index for the SPX as a whole? Anyone?

Crude is down, but I have cried '[s]Wolf [/s]Bear!' too many times now. Brent broke through daily support to the downside, but WTI is still at support levels that have held so far.

$this->bbcode_second_pass_quote('', ' ')Commodities including oil and metals will probably ``evade'' losses in equities and bonds that were sparked by the U.S. subprime mortgage-market rout, Goldman Sachs Group Inc. said.

Goldman commodity analyst Jeffrey Currie said he's sticking with a previous forecast for strong oil prices, predicting $95 a barrel by year-end if OPEC keeps production unchanged and $73 if the group starts pumping more.

``Fallout from the U.S. credit contagion for commodities is likely to be relatively limited,'' Goldman's Currie, James Gutman and Allison Nathan said in a July 27 note. ``Even if the U.S. recovery does stall, the impact on commodities would likely be relatively limited as it is emerging markets demand that has taken over as the main driver for commodities.''

A global stock market benchmark, the Morgan Stanley Capital
International World Index, fell for the fifth day out of seven as defaults among subprime mortgages spill over into credit and
equity markets. Crude oil futures traded in New York rose to a record closing price of $78.21 a barrel yesterday, and traded at $77.80 at 10:15 a.m. local time today.

``Investors are unlikely to be in both the subprime and commodities space in significant size, and thus an investor in subprime assets looking for cash would be unlikely to have large commodity investments to sell, which reduces the likelihood of contagion to the commodity markets,'' Goldman said.

OPEC Restrictions

The Organization of Petroleum Exporting Countries, which supplies about 40 percent of the world's oil, meets next on Sept. 11. The group has been restricting supply since late last year and OPEC ministers have so far contended there's no need to boost output again, saying crude inventories in consuming nations are ample.

Crude may rally above yesterday's close in coming days, Ed Morse, chief energy economist at Lehman Brothers Holdings Inc., said in an interview from New York today. How far it rises will depend partly on OPEC and on the broader financial markets, he said.

``Is there going to be another OPEC statement saying `we don't want to see $80 oil,' and is there going to be more news coming in from the credit markets that will shift money out of oil?'' Morse said. ``We are at a point where we're going to see a lot more volatility over the next month than we've seen over the last month and a half.''

It's also too soon to write off the chance of hurricane- related disruptions to oil supplies in the Gulf of Mexico, he said. There have been no hurricanes so far this season in the Atlantic, and only three named tropical storms.

``It's so far so good, but we should remember that the hurricane season really kicks in in the last week of July,'' and ``the peak is always the second week of September,'' he said.

Lehman meteorologists predict 14 named storms this season,
including tropical storms and hurricanes.

[BigTex]

DRQ posted good earnings today (not great and below estimates), and it got a 10% haircut. I may be foolish, but it looks like a good buying opportunity at a PE of 18 and earnings growth at 38%. Their orders backlog is almost double what it was a year ago. The rule right now seems to be if you miss earnings, YOU DIE.

CVX and XOM are just getting mauled. I understand the concern about their reserves and production numbers, but under a PO scenario one would expect production to be flat or declining, but the consolation is the price per barrel is very high. The trick is not to prevent a flat or declining production curve, the trick is to have a better looking production decline curve than your competitors. If SA's decline curve is steep and XOM's is gentle, then XOM should be VERY profitable.

It does look like the problem of nationalization is going to be chronic going forward, though. However, in the aggregate, this nationalization trend SHOULD accelerate production declines (which is kind of scary), which should in turn cause the price per barrel to increase at an even greater rate, which will benefit the companies that are most skilled in exploration and production (and thus have flatter production decline curves).

I think investors are not appreciating that production declines won't make a company less profitable, so long as the increase in the price per barrel is staying ahead of their rate of production decline. The name of the game here is not to stop declines, but to find a way to make your decline slower than the rest of the market (it's kind of like that joke about not having to outrun the bear, but just outrun the slowest person).

One of my professors in college told me we would never run out of oil, but we might run out of money to buy the oil. If that's true then controlling even a small amount of reserves in the future might be more profitable than controlling huge reserves today.

I think more of this kind of thinking will start to work its way into the market when it becomes clear that SA has peaked. I don't know if that's now or some time in the future, but the reality of a shrinking pie for everyone is much different than the reality of one company having its slice of an expanding pie reduced.

Any thoughts on this analysis?

[Mechler]

Big Tex,

Here's my take...

I think that peak oil will not be accepted by the masses for some time to come. I can't put a time line on that, but let's just say for arguments sake that it will be at least three years. (Please tell me if you think it will be any sooner than that)

If this is true, and production continues to decline, I think that a couple of things will happen:

1) The majors will continue to make massive amounts of money but that will be tempered by increased exploration and production costs as well as by the decreased production. Share prices could suffer, relatively, because of the perception that the company is poorly run (because they can't continue to grow their reserves, or even keep their production steady). Nationalization will only add to the negative press as companies are forced to leave more and more areas.

2) Slipping production and rising oil prices will be all over the media and oil producing companies and nations will be scrambling like mad to increase/maintain reserves and production. Again, this will cut into their profits even as oil prices are rising. The oil service companies, conversely, will be raking in the money.

So, I guess my conclusion is that the majors may not be the best investment, especially in relation to the oil services. Personally, I can't really see a downside in that sector. Maybe if there is significant demand destruction - but I'm not holding my breath for that to come into play.

Now, if by some miracle, SA and the majors admit to peak oil, then that would change a few things. Exactly how, I'm not sure.

[MOCKBA]

Reading you guys I dug out my "shopping list"... On one hand, yeah some issues got sold out more then 10% despite reporting great earnings and such, on the other... I couldn't find anything I would like to own even 10+% off from recent highs

There is absolutely nothing wrong with some on my list, in fact I was waiting and waiting for some developments to come thru and they are coming thru as I thought they might and overall everything looks great, but with all I found little something that in other times I wouldn't care about, but now it stops me from buying.

I don't know, probably I would miss year-end rebound, but what if we would have further sale at the year end? Then entering at these levels would be entering tech or whatever in 2000-01. Neah, I will probably pass and put my shopping list back to dig out again in couple of years.

For that matter, I am also affraid to enter the other side of the market, like going negative on oil, spreading and such... I guess I will wait for the market to pick either side first... I think though we've just seen the top judging by how fast we went there, how little we stayed and how fast it went back... next on the menu is a massacre and several years of pain... I think... but I read peakoil.com too

[MOCKBA]

$this->bbcode_second_pass_quote('Mechler', 'S')o, I guess my conclusion is that the majors may not be the best investment, especially in relation to the oil services. Personally, I can't really see a downside in that sector.

[BigTex]

Mechler,

I think you are thinking in similar terms to me. Oil services should do very well, so long as they can control their costs.

As for the larger question of how the PO story will seep into the market, this is a fascinating question to ponder (to me anyway; my wife would disagree). If one accepts the idea that the market has already priced in all available information, there is no explanation for the PO resistance other than the idea of "cognitive dissonance" at the market level. People (investors) just aren't equipped mentally at this juncture to fully digest PO and its ramifications (there's nothing special about me; it took me about two years to fully digest it, and the market will figure it out in time as well). There will be a lot of background noise obscuring the reality of what is occurring. There will be corrections in the price of oil, and perhaps some demand destruction, which will all serve to make people think things have reached a new equilibrium at various points as prices continue to go up.

I think that SA peaking will be the wake up call. I'm not sure anything else will do it. If you had asked me a few years ago if $80 a barrel oil would make people wake up and start asking what's going on, I would have said absolutely; but here we are, and people seem to be blaming the price runup on a combination of speculators and refinery issues, and PO is still mostly on the fringes. I'm sure SA will never admit they have peaked. They will be doing that Baghdad Bob routine about having between 200 and 400 years worth of reserves whenever they decide to pump it, but the numbers, over time, will begin to paint an unmistakable picture.

Will the peak occur in three years? I have no idea, since everyone seems to agree that the peak is only visible in the rear view mirror. I do think it's crazy to hear all the OPEC chatter about how there is plenty of oil, no supply issues, plenty of spare capacity, etc. It's odd to hear such counterintuitive things coming out of the mouths of smart people. Last year, we had fighting in Lebanon and the perception that an attack on Iran was imminent and oil prices were about where they are now, and things are pretty quiet in the Middle East at the moment. It seems obvious to me that OPEC is laying the groundwork for no production increase in September. The announcement in September that there will be no production increase will make OPEC appear incredibly greedy, but I don't think the market will seriously question whether the decision not to increase quotas will be because there is no spare capacity. If, on the other hand, a production increase is announced, that could cause oil to drop $15-$20 a barrel, but it would probably be worse in the long run because I don't think that OPEC could deliver higher production quotas, and that would REALLY spook the markets.

How do you trade this? I think the integrateds will find a floor somewhere (though I don't know where--maybe in the 7-11 P/E range) and start to build back from there as they continue to post superb earnings. Over time (20 year timeframe), surely the integrateds will be invited back into some of the nationalized spots to share their expertise (especially if oil prices are significantly higher than right now) and that will be profitable.

The drillers and equipment providers will do well. I have trouble imagining an overinvestment scenario like the 1980s when we've got people wanting to drill at the North Pole, so I don't see a drilling rig glut (though I wonder why GSF has had the ecrap kicked out of it the last week or so).

I fear that alternative energy companies are going to have a boom and bust, as people get very excited about the potential (ala tech boom) and then get very disappointed when they realize that many exciting alternative energies are more expensive and inefficient than the prospectus said.

Coal and the rails should do well, though you've got that counterforce against the rails in the form of a slowing economy.

It seems like there should be an opportunity for GE to make a lot of money as all of this unfolds, since they are in pretty much everything I am mentioning, from trains to oil field service to nuclear reactors to alternative energy.

Heavy equipment and defense contractors seem like great long term plays. I used to be too optimistic to think the defense contractors were really a good long term PO play, but I am beginning to realize that literally the only oil you can depend on in the future may be the oil you can pump within your own borders or defend or capture in other countries (see nationalization in some countries and attacks on infrastructure in others for examples). I predict there will be oil pirates in Jolly Roger flagged tankers robbing drilling platforms, other tankers and tapping pipelines (the leader of these pirates will be someone like Dennis Hopper's character in Waterworld). Terrorists will realize that the best targets have been in their own backyards all along and begin to exploit them in a much larger way (USS Cole-style attacks will begin to occur regularly, much like roadside bombs Iraq--kind of like in the movie Syriana (sp?)). I don't look forward to the first supertanker that gets a huge hole blown in its side by a jihadist-of-the-sea.

The interaction of the U.S. military and the U.S. integrateds will be interesting to watch. Dick Cheney may be a more pivotal figure in history than people realize right now, in that he seems to have a subtle (and incredibly cynical) vision of the way the military and oil industry can work in symbiosis. Maybe someone should set up an ETF to hold U.S. integrateds, oil field service providers and defense contractors. It could be called the Cheney Doom Fund.

Sorry if the rant was a little light on trading ideas.