Agora Financial’s Rude Awakening

Jump to Comments

Pittsburg, Pennsylvania

·      An 11% intraday rally to turn those frowns upside down,
·      Oil stocks soar near 16% since yesterday’s lows – more on that,
·      The IEA’s “patently unsustainable” warning and plenty more…

Eric Fry, reporting from Laguna Beach, California…

There’s nothing like a little 11% intraday rally to bring a few smiles back to investors’ faces! But let’s not pry too deeply into yesterday’s delightful rally…or ask too many probing questions. We wouldn’t want to turn those smiles upside down. Yesterday was nice, but the Dow is still trading below where it ended last week, not to mention 33% below where it ended last year!

In case you missed all the action, the Dow Jones Industrial Average soared 869 points from its mid-day low of 7,966 to its closing price of 8,835. So anyone who happened to have purchased stocks at yesterday’s lowest point, and then sold everything at the close, would have netted 10.9%, before commissions. (This theoretical return would have topped six of the last eight ANNUAL performances by the Dow). On the other hand, if you did NOT sell all your stocks at the close of yesterday’s trading, you might be wondering – and worrying – about what’s coming your way next. So are we…

First, the good news: Up is better than down. No matter how flimsy and/or unsustainable this rally might be, most investors are grateful for it.

Now the bad news: Dramatic, one-day rallies are usually the stuff of bear markets, not the stuff of bull markets…as recent experience testifies.  The spectacular 936-point rally on October 13 led to an equally spectacular sell-off two days later that erased the entire gain. Likewise the 890-point rally on October 28 produced little more than false hope and frustration, as this advance completely vanished during subsequent trading sessions.

So as much as we enjoyed yesterday’s trading action, we trust it like a chicken trusts a poultry farmer. But let’s not dwell on the negatives. Let’s enjoy our respite from the agonies of bear-market investing and look around for a rose to smell.

Ah…here’s one: Oil stocks performed even better than the overall market yesterday, as the Energy Select ETF (NYSE: XLE) soared nearly 16% from its lows of the session to its closing price.

Conveniently, oil stocks started rallying just minutes after we dispatched yesterday’s Rude Awakening, which urged readers to buy beaten-down energy stocks. (If only Mr. Market would be so compliant all the time, our task here at the Rude Awakening would be quite a bit easier).

Even after yesterday’s move, energy stocks are still beaten-down…especially if one believes that $57 oil is a greater aberration than $147 oil. In yesterday’s column, our colleague, Greg Guenthner, remarked, “The [long-term] allure of oil is hard to refute…Now is the time to buy oil. The second quarter of 2008 saw the largest drop in oil prices in 17 years. But with OPEC slashing its production outlook for the rest of 2008 and 2009, it’s unclear just how long prices will be able to stay under $100…much less under $57.”

In today’s column, our resident geologist and man of letters, Byron King, reinforces Greg’s bullish outlook for the oil sector. “$60 oil is simply too cheap,” says King, “This price is below the cost of most new sources of production. So if you’re thinking that $60 is the new market price for oil, you might want to stand a little farther away from your gas tank when you fill up your car…because you’re obviously inhaling fumes.”

Byron details his bullish argument in the column below…

— Energy & Scarcity Investor Insider’s Report —

Urgent Notice For American Energy Users: Introducing…

The Breakthrough That Could Put Oil Refineries Out of Business

This tiny company’s private technology refines crude oil as it’s pulled out of the ground…And you can get in on it today for a potential 250% gain this year . For the rest of this must-read report, click here

—————————————–

$60 Oil…And Why it Won’t Last
By Byron King

I’ve been getting a lot of calls and e-mails from people asking about the falling prices for oil in recent weeks. The immediate explanation is that world economic activity is decelerating. Demand is falling. OPEC announced cuts in output. But the markets still believe that economic decline will trump the ability of OPEC to prop up the price of oil.

Enjoy cheap oil while it lasts.

Just over the horizon, things are about to become dicey. This week, the International Energy Agency (IEA) will release a new report on the future of world energy. In its World Energy Outlook, the IEA will state categorically: “Current global trends in energy supply and consumption are patently unsustainable.”

There’s not much wiggle room in that statement. According to the IEA, despite the recent fall in oil prices, the medium- and long-term outlooks for energy supplies are grim. Conventional oil output is destined to decline. Demand will still grow, however, especially in the developing world. And the twain shall only meet by prices rising to clear the market.

The IEA performed a comprehensive study of 800 of the world’s largest oil fields. And it concluded that depletion in conventional oil fields is occurring at a rate in excess of 9% per year. (That’s an average. We see depletion rates in excess of 15% in Mexico’s Cantarell field, for example.) This means that absent large amounts of new drilling, new investment in enhanced recovery and new discoveries, the current worldwide oil output will decline by over 9% per year. And if it keeps going along this trend (there’s no reason why it won’t), the base of world oil output could conceivably dry up within seven-10 years.

Don’t get me wrong. The world won’t run out of oil in seven-10 years. That’s not how it works. It’s just that volumes of conventional oil are declining. The takeaway point is that the energy markets will tighten up, like a hangman’s noose around the collective neck of the oil-consuming world.

So how long will we have to wait for this “future” to show up? Well, how long will the current worldwide recession last? I don’t know. But I do know that if you can afford to be patient with your funds, you should be buying at this very moment the companies that own oil reserves in the ground, and the oil service companies that extract oil and natural gas. These firms should eventually stage a comeback as oil prices rise again.

According to the IEA, even with massive levels of investment in the oil patch, the best estimate is that the global oil industry can reduce the rate of depletion to perhaps the 6% range. So the world energy industry will have to run faster just to keep from falling too far behind the demand curves.

Again, you need to keep in mind that current energy prices are just too low to support the level of energy investment that the world needs going forward. (Meanwhile, the U.S. government is spending trillions of dollars just to bail out the banks and bankers, not one of whom runs pump jacks.)

The IEA estimates that the oil industry will have to invest over $350 billion per year to counter the steep rates of decline in output. And even that will not be sufficient to maintain levels of output for traditional forms of crude oil. Thus, much of the future investment will have to go toward extracting other kinds of hydrocarbon substances. And these “other kinds” tend to be very expensive to develop.

There are many different kinds of hydrocarbon molecules in the world. The total worldwide carbon base actually adds up to a very big number, and that is NOT including the carbon that is part of the current living biology of the planet. For now I’m just discussing the fossilized carbon like oil, natural gas, bitumen in tar sands, oil shale and coal.

The big problem for the non-oil forms of carbon is the cost of converting it into a viable fuel. We see that, for example, in the Canadian tar sands projects. Lots of steel, concrete, labor, machinery, water and energy input — all to extract this thick, gunky crud that has to be upgraded to something that looks like diesel fuel.

The tar sands are full of hydrocarbons, but they are not inexpensive to extract. The same goes for every other non-convention hydrocarbon source.

The nearby chart shows the total hydrocarbon resources in the world and the relative costs to convert them into a barrel of oil or oil equivalent. This is my summary, based on several different government and academic compilations:

These are big numbers, right? And they can supply a lot of energy over a long time…at a price. But that price will almost certainly be more than $60 a barrel…much more.

[Joel's Note: As you saw yesterday, when oil stocks rallied almost 16% off their intraday lows, there is still plenty of upside “wiggle room” in the energy sector. Byron has spent the past few years scouring the planet from Alaska to South Africa to find the very best energy plays for his Energy & Scarcity Investor readers. If you are interested in this explosive sector, you might like to check out his service now, while oil is still hovering around $60 and stocks are relatively cheap. Read on here to learn how to get involved.

—————————————–

[Rude Endnote: There’s plenty of green on the screen this morning, for a change. Hong Kong, Japan and the Aussies all posted gains overnight in the range of 1.5-2.7%. Europe, too is surging higher. London’s FTSE is up 3.2% as we write while France’s CAC and Germany’s DAX are up 2.5 and 3.5%.

Investors in this peaceful little pond, the Persian Gulf, must be salivating on the sidelines as they watch the rest of the world’s gains.

GCC indexes copped a absolute pounding this week with the Dubai Financial Market and the Kuwait Stock Exchange the worst hit. So much trouble was a brewin’ in downtown Kuwait City yesterday that the government closed the bourse down and told protesting traders to take the rest of the day off and cool down a bit. Still, at “only 31%” down for the year, Kuwait’s index is nursing losses not even half that of Dubai.

Either way you look at it, it’s enough to send a cool breeze up your dishdasha.

Until next time…

Cheers,

Joel Bowman

P.S. Those complimentary I.O.U.S.A. DVDs are flying out the door. If you haven’t grabbed one yet, you can do so here. Pre-release giveaways are limited.

The Rude Awakening
aussiejoel@the-rude-awakening.com