Energy Markets Surging with Overseas Turmoil

While Americans celebrate Presidents’ Day, energy markets are surging with a new wave of turmoil overseas …

Nigeria, a main source of U.S. oil imports, has just exploded into what could become a violent civil war.

Hamas, one of the worlds largest terrorist organizations, has now taken over the Palestinian parliament.

Iran, already careening toward a major showdown with the West over its nuclear program, is now likely to jump into the Palestinian conflict, boosting its support for Hamas in its own looming showdown with the West.

Muslim anger, protests and riots, initially triggered by twelve cartoons in an obscure Danish newspaper, have now spread to virtually every major city in the world that has a substantial Muslim majority or minority.

To casual observers, perusing holiday bargains at the mall and catching sound bites on the evening news, these events may seem disconnected, even random.

But they are all converging toward a single series of overarching consequences:

A new surge in the cost of energy …
An explosion in the price of gold and other precious metals, plus …
A burst of global inflation that could shake Wall Street to its core.

This weekend, the events have been snowballing. And in the days ahead, they could reach critical mass. So it behooves you to connect the dots to the key issue that underlies the crisis for our country:

Americas Over-Reliance on
Foreign Oil About to Backfire

You know that the United States, once largely self-sufficient for its energy needs, now relies mostly on imported crude oil.

What you may not realize, however, is that most of those oil imports are coming from countries that are, or could be, highly vulnerable to the turmoil sweeping the globe.

This is not past history or future fantasy. Its here and now.

Just this past Friday on the New York Mercantile Exchange, while many traders were leaving early for the holiday weekend, the price of crude oil (March futures) surged $1.42, or 2.4 percent. Gasoline jumped more than 6 percent, the biggest gain in five months. Energy stocks also surged.

The triggering event: Nigerian militants declared total war on foreign interests in the oil-rich Niger Delta.

And late tonight, when oil markets reopen in New York, expect more of the same.

The trigger: This past weekend, those same Nigerian militants captured nine foreign hostages … damaged two pipelines … and attacked a major offshore oil terminal run by Royal Dutch Shell.

Fact: U.S. Oil Imports from Sub-Saharan Africa
Exceed Oil Imports From Any Other Single Source

Money and Markets readers should not be surprised by any of this. Weve been warning you about the crisis in Africa for a long time.

Unfortunately, however, most investors pay little attention to foreign politics let alone politics in Africa.

Africa, in their minds, conjures the image of safaris. Or they identify it as the continent of poverty and AIDS. They dont realize that the United States now imports more oil from sub-Saharan Africa than from Venezuela, Saudi Arabia, Mexico or even Canada!

Hard to believe? Just look at the data.

According to the Energy Information Administration (EIA), in the 11 months through November 2005, the United States imported 601 million barrels of oil from sub-Saharan Africa, with Nigeria alone providing over 58% of that amount.

Meanwhile, oil imports from Canada, Americas single largest source, were 541 million barrels; imports from Mexico were 513 million; from Saudi Arabia, 480 million; and from Venezuela, 413 million.

So never let it be said that Africa doesnt matter or that its a sideshow on the world economic scene. I repeat: Only two African countries combined (Nigeria and Angola) are more important to the U.S. oil markets than each of the four largest U.S. suppliers in the world.

And now Nigeria is bursting onto the financial scene, threatening to cause havoc in New York oil markets … which, in turn, could spill over into gold, bonds and stocks.

If Nigerias militants were a rag-tag force with few guns, this matter might not be worthy of your serious attention. But theyre armed to the teeth and highly organized, already cutting off 21 percent of the countrys oil output … and likely to sever up to 50 percent as they escalate their attacks.

If the crisis in the Niger Delta were a one-time event, it might also be an issue you could set aside. But the fact is, this crisis is just the latest in a decade-long war that continues to escalate:

In 1998, a military group from the Ijaw, the largest ethnic tribe in the Niger Delta, stormed Shell pipelines and platforms, cutting off one-third of the country’s oil exports.
In 2003, just before Nigerian elections, an ethnic uprising shut off 40 percent of the countrys oil exports.
Since September of 2004 alone, there have been nearly 600 cases of pipeline vandalism, according to the EIA.

Meanwhile, the worlds leading oil companies underestimating the unrest and complacent about its consequences have plowed ahead with oil exploration and development in the region.

If Nigeria were the only major U.S. oil supplier vulnerable to political upheaval and production cutbacks, the fallout could probably be contained. But alas, that, too, is not the case.

Venezuela, Saudi Arabia and
Mexico Are Also Vulnerable to
Major Oil Supply Disruptions

Venezuela’s Hugo Chavez may not be at the top of the news this weekend. But below the radar screens of most investors, hes continuing to move toward an all-out confrontation with the United States.

Just 48 hours ago, in a Saturday meeting in Caracas, he warned that he would cut off oil exports to the U.S. if the U.S. crosses the line. He didnt say exactly what that might involve, but he added: They think I cannot take these steps because we will not know where to place our oil. They are mistaken.

Condoleezza Rice responded with her sharpest verbal attack on Chavez since the crisis began. She declared that Venezuela and Cuba are sidekicks of Iran. She said they are imminent threats to Latin American democracies. And she warned of retaliatory steps.

This is not idle talk. Its the loudest saber-rattling weve heard since the exchanges between president Bush and Saddam Hussein that ultimately led to war with Iraq.

Saudi Arabian politics are also off most investors radar right now. But theyre continuing to simmer and boil.

The most immediate threat to stability: The growing restlessness and ambition of the nearly two million Shiites in Saudi Arabia.

Although some Shiites live in Mecca, Medina and Riyadh, most Saudi Shiites are concentrated in the two oases of Qatif and al-Hasa in the Eastern Province, a region that also happens to hold most of Saudi Arabias massive oil reserves.

In the last couple of years, Saudi leaders have given lip service to measures ending the centuries-old oppression of Shiites. But the most severe forms of discrimination remain firmly intact: The government restricts the employment of Shiites in government and private business. Equal justice for Shiites is a pipe dream. And even official textbooks have unabashedly lambasted the Shiite religion.

Now, in neighboring Iraq, a Shiite majority with close ties to Iran has come to power. Iraq is slipping into a Shiite-Sunni civil war. And the Iraqi insurgency is continuing to actively recruit Saudi Arabian Sunnis. So there is a real fear that its just a matter of time before Shiite-Sunni violence spreads to Saudi Arabia.

The biggest fear of all: A populist Islamic revolution against the royal family, transforming Saudi Arabia with all its oil reserves and modern weaponry into a full-fledged rogue state.

Impossible? Thats also what they said about Iran, once a staunch U.S. ally. Now, its not only a powerful rogue state, but one that seems ready and willing to destabilize the planet.

Mexico’s presidential election may also pave the way to oil supply disruptions.

Indeed, for the first time since the Mexican Revolution of 1910, the next likely president promises to radically change Mexicos relationship with the United States.

His name: Andres Manuel Lopez Obrador, a leftist candidate now enjoying a runaway lead in the polls, and even rising popularity in the mostly conservative north.

Just this weekend, crowds in Monterrey, one of Mexicos most conservative large cities, welcomed his message to break with two decades of free market reforms … to bridge the growing gap between rich and poor … and possibly to reduce Mexicos cooperation with the giant to the north, including oil exports.

Only Canada Stands Out as a Major,
Stable Source of U.S. Oil Imports

Canada is a stable foreign source of oil. But its largely alone in that respect.

Look at it this way: In the first 11 months of 2005, the United States imported nearly 3,361 million barrels of crude oil, according to EIA data. Among those oil imports,

1,756 million barrels, or over 52%, came from Nigeria, Venezuela, Saudi Arabia and Mexico four countries where supplies are, or could be, reduced due to political changes and turmoil.
An additional 251 million barrels come from other sub-Saharan nations outside of Nigeria, most of which are also politically unstable.
An equal amount came from other Persian Gulf countries outside of Saudi Arabia, where shipping could be disrupted by a widening conflict in the region.
All told, 2,258 million barrels or about two thirds of Americas oil imports are currently or potentially shaky.

Naturally, oil prices reflect global supply and demand. So any disruptions to other oil-exporting nations will also impact the United States, even if they dont export a single barrel to America.

Iran is a case in point. It doesnt export any oil to U.S. ports. But if it makes good on its recent threat to cut off its oil spigots to the West, it would immediately drive up the cost of our oil imports from every other country.

So you can see why the turmoil spreading across the globe is so important. And you can see how all the dots connect back to Americas heavy reliance on foreign oil:

The crisis in Nigeria, threatening one of Americas largest sources of crude …

The rise of Hamas, threatening to undermine the already-fragile alliance between the United States and the worlds largest oil producing nations …

The rebellion by Islamic fundamentalists across the globe, also destabilizing major oil producing nations …

Iran, Venezuela, Nigeria …

And more!

These forces cannot be contained. Theyre moving toward collision, step by step, week by week. Theyre going to blow up. And I see no alternative to dramatically higher prices for energy and other critical resources.

Energy and Gold Stocks Already
Beginning to Bounce Back Sharply

After taking a bit of beating this month, energy stocks started jumping sharply last week, and gold stocks did the same.

One of our favorites, Enerplus (ERF), which traded as low at $45 per share on Tuesday, closed the week at one penny short of $50 on Friday.

The Oil Service Holders (OIH) also rebounded from a low of 132 on Wednesday to a close of 136.51 on Friday.

Natural gas prices, which had been battered more than any other energy sector, followed suit.

And not coincidentally, a utility and major distributor of natural gas, KeyStone (KSE), confirmed buy-out talks, driving its shares up 11.7%. It was, by far, the stocks biggest one-day move in over three years.

These are signs of a sector waking back up after a couple of weeks of slump and slumber. Indeed,

New Energy Investors Now Have
Three Timing Factors in Their Favor

For the long term, you have a dramatic but consistent trend toward higher prices going back at least three years.

In the short term, you have a February correction, reducing your entry cost.

And right now, you have signs of a bounceback getting under way, propelled by rising demand, tight supplies and spreading world turmoil.

No one can know for sure what the future will bring. Nor can anyone pinpoint the ideal timing with precision. But to us, the evidence of a new upward wave in energy is overwhelming.

To ride it with relative caution, we like Enerplus (ERF), which has consistently paid near-double-digit yields.

We like alternative energy investments, which, in the final analysis, are far better solutions for America than military intervention or alliances with oil despots.

We also think this is a good time for the mutual funds weve been telling you about, such as U.S. Globals Global Resources (PSPFX), Fidelity Select Energy (FSENX), Scudder Gold and Precious Metals Fund (SGLDX) and others.

But to jump on the wave with maximum leverage, the best vehicles are the LEAPS on undervalued oil shares that Larry has picked out. They give you the potential to achieve up to 16-to-1 gains. And they strictly limit your risk to the amount you invest (plus any commissions you pay your broker).

The deadline for joining in time to get his next set of LEAPS recommendations is tomorrow. So if youre interested, I wouldnt dilly-dally. You can call 877-719-3477.

And never forget: In a world of spreading turmoil, always keep a nice chunk of cash far away from the dangers, while earning a guaranteed yield with Treasury bills or a Treasury-only money market fund.

Good luck and God bless!

Martin

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, Beth Cain, Amber Dakar, Michael Larson, Monica Lewman-Garcia, Julie Trudeau and others.

Sign Up Free