Some people seem to think that Katrinas impact is now mostly behind us … that the release of strategic oil reserves will solve all our problems … and that the bull market in energy is over.
Theyre wrong!
FIRST, even the massive, worldwide release of strategic reserves has failed to derail the bull market in the price of oil.
The sharp near-term uptrend in oil that began on May 23 of this year remains completely intact.
The longer-term uptrend that began in the fall of 2003 is FAR, far from being violated.
And, the price of oil hasnt even fallen below the levels it reached before Katrina hit, in the $63-$65 range. Meanwhile, gasoline prices around the country are still about 12% HIGHER than they were before Katrina hit.
SECOND, nothing has changed to alter the exploding demand underlying rising oil and gas prices. Just consider the facts:
- Over the past two years, demand for oil has grown at TWICE the average annual pace of the last decade. Nothing has happened to change that pace.
- According to the International Energy Agency (IEA), demand rose faster in 2004 than in any year since 1976.
- Moreover, the IEA says developing countries could push demand up 47% to 121 million barrels a day by 2030.
-
In
China
, oil consumption is expected to double over 15 years to more than 10 million barrels a day. - India
‘s consumption is expected to rise by nearly 30% over the next five years. - By 2030, the world will need nearly 160 million barrels of oil a day almost twice current production levels.
THIRD, there simply isnt enough oil in the world to meet that demand. The facts:
- 90% of all known reserves in the world are now already in production.
- Among these, 80% are in their depletion phase.
- 10% of all oil production comes from just four oil fields while 80% comes from older fields discovered BEFORE 1970.
FOURTH, underinvestment in refineries has created critical supply bottlenecks. In the
U.S.
, a new oil refinery hasn’t been built since 1976. And over the last quarter-century the number of refineries has plummeted by more than FIFTY percent.
These four factors alone provide all of the needed ingredients for a massive, long-term boom in energy prices. But on top of these, we also have …
FACTORS of the FIFTH KIND possible supply disruptions caused by:
- wars in the Persian Gulf, the largest source of oil reserves on the planet …
- terrorist attacks, which may very well target mission-critical oil facilities …
- hurricanes, which normally around this time of year, would be just beginning, or …
- other man-made and natural disasters that no one could possibly predict.
Investors should never bet on the factors of the fifth kind. No person in his right mind would ever plan an investment strategy based on such events let alone get into the irrational position of actually hoping for such an event.
But, unfortunately, they are a part of our world. And if they drive your investments higher, you have every right to profit from the consequences.
T. Boone Pickens:
A Treadmill You Just Cant Keep Up With
Back in 1956, T. Boone Pickens invested $2,500 in Mesa Petroleum. And since then, hes grown it into one of the world’s leading independent oil and gas producers. Heres what he said just a few weeks ago …
Global oil production is 84 million barrels a day. I don’t believe you can get it any more than 84 million barrels. I don’t care what Saudi Crown Prince Abdullah, Premier Vladimir Putin or anybody else says about oil reserves or production.
I think they are on decline in the biggest oil fields in the world today and I know what its like once you turn the corner and start declining. It’s a treadmill that you just can’t keep up with.
84 million barrels a day times 365 days is 30 billion barrels of oil a year that we’re depleting. All of the world’s (oil) industry doesn’t even come close to replacing 30 billion barrels of oil.
I agree.
Most
U.S.
Stocks
Grossly Overvalued
As I noted in my forecast issue of the Real Wealth Report earlier this year, the stock market is going to face some very difficult headwinds in 2005:
Overvaluations … rising inflation and interest rates … a weak dollar caused by massive federal and trade deficits … soaring energy prices … and more.
In my opinion, all those chickens are now about to come home to roost … despite the knee-jerk, post-Katrina rally in the stock market this week.
Lets not forget, earlier this year the Dow plunged as much as 973 points (nearly 10%), causing $364 billion in market losses for shareholders. The tech-heavy Nasdaq lost as much as 17%, with $438 billion in market cap going up in smoke.
Most investors think theyve recouped those losses over the last few months. And indeed, many have. But if I were holding any stocks other than natural resource companies, Id get the heck out of them now.
Everything I look at every indicator, every chart, every technical and fundamental factoid tells me that the great stock market rally of 2003 – 2005 is soon going to end.
Again, ignore the hype and look at the facts:
- The Dow dividend yield is currently a meager 2.27%; a level more associated with a market top than with a market bottom.
- The market cap for all
U.S.
stock exchange trades is equal to 148% of GDP, near levels seen at the excessive top of the market in 2000. - The S&Ps Q Ratio is 2.09, meaning the market is trading at over two times its replacement value a level often seen at market tops, as in 1999 and 2000 just before the market crashed.
- Using a combination of valuation indicators, I calculate that, to be fairly valued, the S&P 500 would have to fall nearly 50%.
Few analysts and investors will even think that the market could fall 50%. Fewer still will even talk about it.
But for me, if theres 50% downside risk, thered have to be upside potential of at least 100% to make an investment worth it, no matter what the time frame. Put another way, youd need a minimum reward-to-risk ratio of 2 to 1.
But I cant see the stock market doubling from here. So with the exception of stocks tied to energy, gold and natural resources, Im out. I think you should be too.
On Readers Minds
Q: How high do you think oil prices can go?
A: Minimum for oil: $100 a barrel. And thats just to get back to its inflation-adjusted peak to make up for the dollars decline in purchasing power over the last twenty years.
If theres a full blown supply crisis that envelopes other parts of the world oil could go much, much higher.
But dont focus just on oil. This is impacting every possible source of energy imaginable gasoline, natural gas, heating oil, diesel oil, jet fuel, coal and even alternatives to fossil fuels. For gasoline, I figure $4.50 minimum within the next two years.
Q: I often hear the term forward sales in connection with the oil companies. What exactly are they?
A: Forward selling is when an oil or gas company sells its future production NOW in order to lock in current prices. This allows the company to guarantee a minimum price for its products and helps guarantee a minimum level for its bottom line profits.
Its a great strategy when oil is in a long-term bear market, and its an OK strategy when prices are static.
But its a disaster when prices are moving up because it caps the companys profit potential WITHOUT capping the companys rising costs.
Even if oil prices surge, a company thats engaging in heavy forward selling will realize little or no additional profits. Thats why in the current environment for oil and gas (as well as many other assets such as gold) I focus on companies that mostly do NOT engage in forward selling.
Q: Why should I invest my money in gold now? After all, its already risen 68% from its lows in 2001.
A: That was just one of several phases of golds bull market.
FIRST, you should own gold because it is an excellent hedge against inflation, and inflation is just starting to heat up.
You can see the inflation blatantly and clearly in the prices of nearly every commodity under the sun. You can see it in the prices producers are charging. And you can even begin to see it in the prices charged by retailers.
Its starting to happen NOW, just as I said it would. In a recent Federal Reserve study, two out of three companies said they are now preparing to raise retail prices.
This alone will push the Consumer Price Index sharply higher, DESPITE the fact that the CPI, by its very nature, consistently underestimates inflation.
Second, you should own gold because its excellent insurance against political, economic, and social instability. And thats one element we have no scarcity of right now.
I wish I could say its going to get better soon. But the trend right now is, unfortunately, for worldwide instability to worsen.
Best wishes,
Larry Edelson
Editor, Real Wealth Report
Energy Options Alert
About MONEY AND MARKETS
MONEY AND MARKETS (MAM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Larry Edelson, Tony Sagami and other contributors. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MAM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MAM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Contributors include Marie Albin, John Burke, Michael Burnick, Beth Cain, Amber Dakar, Scot Galvin, Michael Larson, Monica Lewman-Garcia, Julie Trudeau and others.
2005 by Weiss Research, Inc. All rights reserved.
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