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“I want to jump into this oil Or … “Im making a fortune in gold stocks. Each time, we told them: “Dont chase the market! Wait for a pullback! Be patient. Its coming soon.” Now, weve got it! The pullback weve been patiently waiting for in gold, energy and their shares is here: Copper dropped more than 2% yesterday. Oil and gold fell more than 3%. Mining and oil stocks got hit even harder. Good. I just talked to some guys who trade in New York and Chicago. Theyre expecting some more follow-through on the sell-off. But then they expect the markets to snap back. Why? Because the fundamentals of supply and demand that are driving this bull market are just too strong. I agree. What were seeing is a market thats washing out some froth. But occasional short-term wash-outs are a normal and necessary part of any bull market. Todays sellers will likely be tomorrows buyers. Beware: In the Next Couple of Days, the Gold Theyre going to try to convince you that this temporary pullback is really a “fundamental change.” Theyll dredge up all the reasons why they think oil, gold and natural resources are really “not in short supply.” Dont believe them. Case in point: The so-called “silver bullet” to solve the worlds big energy shortages.
Canadas oil sands used to be known as “tar sands.” Now theyre called “oil sands.” The not-so-subtle change is that technology advanced enough that engineers and scientists realized we could recover perhaps 175 billion barrels worth of oil in Alberta alone. Oil sands are actually deposits of bitumen, a tar-like viscous oil. But bitumen is not the magic pot at the end of the rainbow many people think it is. The problem: While Albertas oil sands deposits may indeed contain lots of oil, about two tons of that sand must be dug up, heated and refined to make a single barrel of oil. In other words, to supply the oil that the U.S. used last year alone, wed have to dig up and process over 40 BILLION tons of Alberta sand. Never mind the Herculean, miraculous task that would entail! Where do you put all that sand once you squeeze the oil out of it … and before youre ready to fill up the hole again?
A big part of the cost is all the energy needed to boil the sands and unlock the crude oil. And the most commonly used energy source to help unlock the oil from the sand is none other than natural gas. In practice, thats the most efficient approach. But in a broader sense, its also the most illogical: It means we have to take one of the cleanest forms of energy (natural gas) and use it to make one of the dirtiest (oil from tar sands). According to the National Energy Board of Canada, depending on the process you use, it takes from half a million to 1 million cubic feet of natural gas to produce a barrel of bitumen. When you add up all the energy used in the process, the basic rule of thumb is this:
But theres a shortage of natural gas looming, too! In fact Production from Existing Natural Gas Last year, ExxonMobils chief executive, Lee Raymond, told a Reuters Energy Summit that “natural gas production has peaked in North America.” Other experts say well reach the peak in 2007/2008. Either way, the underlying problem is the same: Natural gas wells deplete very quickly. And most existing natural gas wells in North America are seeing production declines of 15% to 30% per year. That fact may come as a surprise to anyone who saw natural gas prices tank this winter. But right now, the main reason natural gas prices are falling in North America is because its been a very mild winter on this side of the Atlantic. Just how warm was January? A friend from Canada sent me the following stats. Weve had the warmest January on record in Oklahoma, South Dakota, Green Bay, Wis., Kansas City, Mo., and Riverton, Wyo. … the second-warmest January in Maine and in Milwaukee, Wis. … and the third-warmest in Memphis, Tenn., and Detroit. Minneapolis and St. Paul had the warmest January in 160 years. Ice sculptures at the St. Paul Winter Carnival melted and broke up nearly as quickly as they were carved. Several big ice-fishing contests in Minnesota were canceled or moved because of thin ice. A Nation of Oil-Aholics I dont think Minnesota is the only place on thin ice. I think any region, company or individual that depends on energy is on thin ice in other words, all of us. Were a nation of oil-aholics. Nearly everyone in America can go a lot longer without consuming alcohol than they can without using oil. In his State of the Union speech, President Bush even said we were addicted to oil. He also pledged to replace 75% of U.S. oil imports from the Middle East with ethanol and other alternative energies. The next day after Saudi Arabia har-rumped loudly both his energy secretary and national economic adviser rushed to say that the president didnt mean it. I hope the President has a sense of humor about this, but saying “I didnt mean it,” is precisely what alcoholics say after first promising theyre going to quit. Hes right, though: We truly ARE a nation of oil-aholics. Sure, a warm, warm winter let us off the hook energy-wise for now. Thats why interruptions to natural gas customers all over Europe are regular events … despite the resolution on the Ukraines spat with Russia over natural gas. So, yes, the mild winter in North America helped us dodge one bullet. But we cant count on that luck holding next year. It might not even hold out until next month. Forecasts call for much colder weather to move across the country in the next week. And what if an extremely warm winter is followed by an equally warm summer? Natural gas is used to produce 17% of Americas electricity. As air conditioners crank higher, so will natural gas use. And never forget hurricane season, just a few months away. It gives me no pleasure to say well likely see more monster hurricanes this year. I live in Florida! But I invest for the factual conditions as they are, not the conditions as I want them to be. And the facts are clear: The natural hurricane cycle is in an upswing, aggravated by global warming. Americas natural gas production is still 3% below last years levels, due mainly to the damage caused by last years storms. If severe hurricanes cause more damage in the Gulf of Mexico, we could see natural gas supply impacted sharply this summer. And that, in turn, will increase the balance for petroleum. With Friends Like These, Iran is sitting on 16% of the worlds natural gas reserves. Altogether, Bahrain, Iran, Iraq, Kuwait, Qatar, Saudi Arabia and the UAE account for 42% of the worlds proven gas reserves. And these countries are busy making deals to sell as much of it as possible to customers outside the U.S., including India and China. That brings me back to our old friend, Venezuela. Its 150 trillion cubic feet of natural gas reserves is the worlds eighth largest. Warning: A new “energy alliance” is coalescing around Chavez, and it includes the leftist leader of natural-gas-rich Bolivia, as well as other resource-wealthy South American nations, such as Brazil, Argentina, Uruguay and potentially Chile. On January 22, Chavez and other South American leaders met in Brasilia to draw up an agreement for a webwork of pipelines that would link oil and gas fields across the continent. Important point: These pipelines would not bring oil and gas to ports for U.S. consumption. It would take it West to ports that serve shipping routes to the East, especially China. Venezuela already exports 140,000 barrels per oil per day to China. Yes, thats much less than the 1.5 million bpd it exports to the U.S. But its growing fast. Indeed, Venezuelas energy exports to China are scheduled to surge as part of a series of deals signed between the two nations last year. You can bet those exports will include natural gas, too. In other words, we may find that just like our supplies of oil, our supplies of natural gas are controlled by foreign powers who dont like us. Add in declining production in existing wells PLUS the potential for monster hurricanes and natural gas prices could rise quite fast indeed. That would make it even more expensive to tap the oil sands in Alberta. Heres What to Do Right Now First, for alternatives, I think you should concentrate on whats working now and what has the strongest chance of working even better with technologies we already have or see coming. That includes conservation, coalbed methane, solar power, wind power and other energy sources. Second, invest in natural gas. I think this is THE time, right after a big decline in its market price and before the next surge. And I especially like Fidelity Select Natural Gas Portfolio (FSNGX). The fund invests in stocks that produce and distribute natural gas, as well as companies that provide equipment and services to natural gas drillers, including Burlington Resources, Valero Energy, Chesapeake, Halliburton and more. The fund racked up a 45.7% return in 2005, and 38% average returns over the past three years. And it did it with a low expense ratio of 0.96% (compared to the group average of 1.49%).
Whats more, Enerplus pays a hefty dividend between 8% and 9%. After the correction, I think this fund is heading higher in a hurry. Fourth, gold. Gold and oil are interconnected, joined at the hip because: Rising energy costs drive up inflation, which drive up gold! The same supply-demand pressures that push up oil prices also push up gold prices! The same worldwide political instability that prompts investors to invest in energy also sends investors scurrying into gold! Most important, petrodollars are pouring into gold billions of dollars in crude oil revenues in the Middle East. Indeed, among the worlds top 10 oil-exporting nations alone, the revenues are approaching $700 billion. Just a small fraction of those funds rushing into gold markets are enough to keep the gold freight train running at uncontrollable speeds. Thats why, just a month ago, I published a special report that detailed how to make the most of the coming rally in precious metals. As of Monday night, individual positions in that portfolio were up 7% 13% 18% 37% in just one month! And you aint seen nothin yet! Everything I see and know tells me this correction in gold prices is the prelude to parabolic moves to the upside. To buy and download a copy of my report right now, The Gold Rush of 2006, click here. Or call 800-400-6916. Good luck and good trades! Sean Brodrick 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. 2006 by Weiss Research, Inc. All rights reserved. |
Pullback in Oil and Gold! Here's What to Do …
Martin and I just got back from the World Money Show in Orlando. Everywhere we went, investors corralled us and said:
Im talking about the oil sands of Alberta. Some people think that will be the ultimate solution to our energy problems. I wish it were true! 
Bitumen represents about 10-15% of the actual oil sands found in Alberta. The remaining 80-85% is clay, rock and ordinary sand, along with just enough water to make it a pain in the butt to handle. In short, 
Third, Canadian royalty trusts. Our favorite remains, as before, Enerplus Resources Fund (ERF). It has nearly 3,000 natural gas wells and 2,000 oil wells. Previous post: More Oil Turmoil! Google Fish Story!
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