Everyone’s talking about this. But with such a popular idea, you’ve got to be a little creative about the way you play it. Today we’ll show you how.
The idea is oil. The Chinese are buying it up while prices are low. The falling US dollar is making it cheaper in other currencies. That’s also boosting demand. And signs of revival for the global economy have rallied the animal spirits of the traders.
Such are the theories behind oil’s incredible 130% rally since the low point of 2009. But none of these things make a lot of difference to the long-term outlook for oil, or the plans of the oil industry. The cost of hiring a drilling rig has fallen from record levels, an indication that some of the more speculative projects have been put on the back burner. But by and large it is business as usual and the executives of Big Oil are challenged by one major question:
Where will they find the new reserves of oil to replace the millions of barrels that they are routinely pumping out every year?
Here’s the oil problem
The world needs oil. And shareholders expect oil companies to replenish their supplies. But as time goes by this is getting harder and harder. Much of the large and readily accessible reserves of oil have already been exploited.
The new Oil Report I sent you at the weekend looks at this in more detail. But the nub of the matter is this. Over 60% of the world’s known oil reserves are in the Middle East, much of which – but not all – is out of bounds to western companies. Giants like Shell and Exxon Mobile need big fields. A series of small finds is not going to be sufficient. You cannot feed an elephant on peanuts. So they have two strategies. Either they must find big new oil fields, or else they must buy them...
The first of these strategies requires huge investment in regions that are, for one reason or another, hostile. Take Russia for example. After spending billions on its Sakhalin project Shell was forced to cede control to the Russian oil giant Gazprom. And in another blatant demonstration of political opportunism, BP has also effectively had its assets seized by the government.
This is not the first time that a national government has changed the rules half way through the game. Governments do not like to see foreigners running off with their precious natural resources, and forced nationalisation of these assets is a popular political manoeuvre. Take Venezuela for example. Here President Hugo Chavez is busy appealing to the masses by seizing the assets of foreign oil companies, and he makes no bones about his intentions. ‘We are determined to regain full petroleum sovereignty’ he has said.
Political interference is not the only problem. In Nigeria militant rebels have attacked Chevron’s pumping station and damaged its pipelines. And, as if sabotage from armed wreckers is not enough, the oil industry also faces criticism from environmentalists, concerned at the damage done to the planet by oil exploration and production.
Smarter ways to play the oil theme
Against this background of hostility, off-shore drilling seems relatively attractive. Out of reach of saboteurs and green protestors, oil drillers can work in peace. But off-shore oil production is severely limited by technology. Although rigs have gradually tip-toed their way into deeper waters they are still obliged to cling closely to the shore-line, and the costs and technical challenges of going deeper are formidable.
So perhaps the easiest way of securing new supplies is to buy them. Many a small exploration company has been established to look for oil in the full understanding that, should it make a discovery, it will not have the financial or other resources to exploit it. Once it has identified a likely reserve it will invite a larger partner into the project in what is known as a ‘farm-in’ deal. This can be a good way to play the oil theme.
A good recent example of this has seen BPC (ticker: BPC), which has licenses covering a large expanse of water around the Bahamas, form a joint venture with the Norwegian giant StatoilHydro (ticker: STO). BPC is a share that is very much on my radar, but there are also others that I like right now.
The recent rise of the oil price is a reminder that this is an industry of increasing demand and falling supply – an environment in which, now more than ever, fortunes can be made.
Best wishes,
Tom Bulford
For The Right Side
P.S. Making money from the current oil boom is not just a case of jumping into any oil company. You need to be smarter than that. In the new oil report that I sent you on Saturday, I revealed my three top ways to play this trend. Each has the potential to deliver you gains of between 400% and 789%. If you missed my 3 Tiny Companies, One Big Oil Boom report, get it here now.
Note: Forecasts are not a reliable indicator of future results. Your capital is at risk when you invest in shares, never risk more than you can afford to lose. Please seek independent financial advice if necessary.
MARKET NOTES
‘Trade gauge’ drops 20% in 7 days
BY SHIVVY ARORA
Last month, we called an artificial rally in a key global economic indicator.
The Baltic Dry Index (BDI), a measure for shipping prices of dry bulk cargoes, had been enjoying a great run, clocking in gains for 11 weeks in succession. But we saw this as a direct effect of the Chinese hastily stocking up on cheap commodities. And the uptrend in the ‘trade gauge’ recently ran out of steam.
The chart below shows the BDI’s movements over the past year. You can see that the index lost a record 92% during the onset of the credit crisis last year, when trade took a severe blow. Then this year, Chinese buying meant the BDI rocketed by over 125% from 15 April to 10 June.
But on 3 June (circled), the tide started to turn again, with the BDI falling 20% in seven days. China has bought way in excess of actual domestic demand – and this is not sustainable. Already, 90 freighters carrying iron ore are lying idle off Chinese ports, because of a lack of storage facilities. As the pace of this stockpiling starts to slow, the BDI will fall.
The Baltic Dry dips as China’s commodity shopping eases
Source: Stock charts
What should we learn from the BDI? The indicator is a good one to watch since it predicts future global industrial activity ahead of official statistics, as producers need to buy raw materials in order to create final products.
The recent dip may look small against the rally in 2009, but it’s a very noticeable one over a relatively short period. And it clearly shows the impact of China’ buying spree, leading us to believe that shipping demand won’t hold up as China’s commodity shopping slows down.
We’re likely to see further plunges in the index until the global economic recovery really kicks in. The trade gauge could stand to lose most of its amassed gains from earlier this year.
The Daily Reckoning – Destined for disgrace and disaster
BY BILL BONNER
London, England
Monday, 15 June 2009
‘Committee to Save the World’ Fails Twice!
It was 10 years ago this month that TIME magazine gave us the Committee to Save the World.
Looking proud, confident... Alan Greenspan, Robert Rubin and Larry Summers proposed to save the world from the Asian debt crisis. They should have left well enough alone. Because of them, we now have a crisis that is far worse.
But the longer the rally goes on, the more people think it is permanent. They think the crisis is over already.
Last week, the Dow took baby steps... but mostly up the stairs. On Friday, the index rose another 28 points. Oil held steady at $72. The dollar rose a little, to $1.39 per euro. Gold was the big loser – down $21, but still in the mid-$900 range.
When the baby finally gets to the top of the steps, the poor lil’ fella will fall backwards... and bounce all the way to the bottom.
Why? C’mon, dear reader, you’re not paying attention. We have explained why many times. But the more we explain it, the more it doesn’t seem to be true. Stocks should be going down; but they’re not. And the more they don’t, the more people think they never will.
Feelings change. The naked fear of the crash period yields to a calmer, more ‘reasonable’ outlook... where people think ‘this isn’t so bad’, ‘we can live with this’, ‘we’ll muddle through; we’ll be all right.’
Thus does a dangerous complacency take over. Like the Donner Party, when the first snowflakes fell:
“The mountains are so pretty when it snows,” they said to each other. And while they were admiring the view, the passes filled with drifts.
“Six Flags” is broke, says the news report from the weekend. Las Vegas casinos are going broke too.
Foreclosures are still rising; they’re expected to top 3 million this year.
The unemployment rate in the US 9.4% – officially, it will be over 10% by the end of the year. Global trade is collapsing – with exports from all the major exporting nations down by double digits. Exports are even going down in the US. Remember how the dollar’s decline was supposed to be a good thing, because it made US exports more competitive. But with global trade declining, US manufacturers – along with everyone else – are finding it harder to sell on the world market.
Why all this bad news?
Read on…
To read the Daily Reckoning in full, click here.
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