It’s very early a.m., Saturday morning. The only sounds I hear are the blue herons and egrets awakening in my backyard.
I’ve been up through much of the night watching Rita wreak its destruction on the Texas and Louisiana coasts. My thoughts turn to my wife and kids sleeping peacefully and safe. That makes me feel like the luckiest man in the world.
Then I wonder how my friend in Houston is faring. He’s a petroleum geologist for Schlumberger, and he was going to ride the storm out in his home. I think about my friend, Ray Knight, who fled to Texas before Katrina hit his home in the French Quarter of New Orleans. He has no idea where he’s heading next.
Like you, all I can do is pray that any loss of life is minimized, hope the property destruction is not as bad as Katrina’s, and then lend a helping hand via the Red Cross.
No one Knows the Extent of the Damage
to the Energy Infrastructure in the Gulf
It’s simply too soon. As Rita made its way across the Gulf, its hurricane force winds have probably affected up to 1,200 rigs and platforms. They were evacuated Thursday and Friday. And it will take days, maybe weeks, before the full extent of the damage can be assessed.
Cameron, just south and west of Lake Charles on the Texas/Louisiana border, appears to be among the hardest hit.
Over 380 platforms, including 19 “jack-up rigs” are in the area; and, as the name connotes, they’re inherently weak structures.
Even worse is the unknown damage to the refineries. Rita plowed right over the country’s largest refineries in Port Arthur, Baytown, and Beaumont.
ExxonMobil, British Petroleum, ConocoPhillips, Valero Energy, Premcor — all have major refineries in the vicinity. These refineries are not as strongly built as you would think. They can suffer extensive damage with winds of just 84 miles per hour.
Only time will tell exactly how much production has been lost and how much refining capacity is being knocked off line. For now, let’s take a look at what we DO know:
First, at this juncture, nearly all Gulf oil production is offline. That’s almost 26% of this country’s energy needs. Of that, long-term loss of production and/or refining capacity could be as high as 7% of our country’s oil and gas supplies.
That’s not the worst-case scenario. But it’s still a DISASTER. Period.
Second, as we’ve already seen, the release of strategic oil reserves is NOT alleviating the problem. The reason: It’s just a shell game — shuffling around supplies that will have to be replaced no matter what.
Third, although there’s no disputing that Katrina and Rita are disasters, I repeat my recent warnings: These storms are not the real thrust behind rising energy prices.
The real thrust comes from global demand that is outpacing Mother Nature’s ability to produce oil, and a worldwide lack of supplies. Period.
As Martin pointed out yesterday,
Saudi Arabia
’s targeted oil production has been falling for three decades, and their reserves could be as little as HALF of what they claim they are.
On top of that, I believe some oil companies may be overstating their reserves as well. Shell has already admitted that its proven oil reserves are 23% — or 4.4 billion barrels less — than previously reported. If a company like Shell doesn’t have as much oil as it thought, imagine how many other oil companies are in the same situation!
Bottom line:
A) The energy crisis is just beginning.
B) It will be with us for years to come.
C) Oil and gas prices will likely double over the next two years. Yes, that means as much as $130 per barrel of oil, and up to $5 – $6 per gallon of gasoline.
Those are the price levels where we will finally begin to see demand choked off. It’s only then that we can begin to talk about a possible end to the energy boom. And it’s only with that kind of price pressure that we will see alternative sources of energy begin to substantially replace fossil fuels.
But that’s still years away. Between now and then, you can expect continuing upward pressure on oil and gas prices, interrupted only by normal and temporary price corrections.
Fourth, the energy crisis will impact all markets for years to come.
Its collateral affects can already be seen in the bankruptcies of Northwest and Delta. Its impact can be seen in Ford and GM, being pushed over the edge as consumers dump SUVs and start buying more fuel efficient vehicles.
The energy crisis will drive inflation higher. It is one of the major forces behind the persistent bull market in gold. It’s why
China
and
India
are now in a mad dash to secure energy supplies.
The energy crisis is transforming the world and will continue to do so.
Looking forward, here’s what I recommend …
1. Continue to Keep a Large
Portion of Your Funds Safe
The swings you’ve been seeing in the markets are only going to get more intense. Storms come and go, but their impact on the markets could last for a long time.
With the majority of your funds safe in money markets, you can sleep at night. Plus, because they are short term, you automatically get the benefit of rising yields as rates continue to move higher.
2. Move out of Vulnerable Stocks
Don’t be fooled by the Dow at 10,400. It’s starting to show major cracks. There is simply no way it can hold up with what’s happening to companies like Ford, GM, Delta, Northwest and dozens more.
Same for the S&P 500 and the Nasdaq. Oracle’s shares have just gotten hit hard on lower than expected earnings. More of these surprises lie ahead.
The only stocks I personally like right now are those rooted in gold and natural resources. They control assets that are in great demand and are available only in limited supplies.
3. Steer Clear of Long-Term Bonds
This is also a no-brainer in my opinion. Washington is going to have to pump $200 billion or more into rebuilding the Gulf Coast. They are going to effectively “print the money” by issuing bonds. This is going to cause inflation to accelerate higher as the U.S. dollar weakens, and it’s going to send bond prices lower as long-term rates rise.
4. For Speculative Profits,
Apply Maximum Leverage
to the Oil and Gas Markets
If you’re like me, you love markets like we have now in oil and gas. They represent a terrific opportunity for speculators to aim for dramatic profits.
They’re also tailor-made for options. With the purchase of stock options, you can apply maximum leverage on the upside, without the corresponding downside risk. You CAN lose money. But your risk of loss is always strictly limited to the amount you invest.
The key is the virtually unlimited profit potential. To me, that’s a win-win combination: Strictly limited risk, great profit potential.
Monday Morning We Will Be Looking
To Make Our Next Moves in Oil and Gas
But they aren’t going to be companies with large operations in the Gulf. Those are hurting bad, and many could incur billions in costs to rebuild.
Instead, the focus right now in my Energy Options Alert is on:
- Energy companies with production OUTSIDE the Gulf, and
- Energy services companies that are going to profit from helping oil and gas companies rebuild in the Gulf.
Right now, for instance, you can buy a bundle of call options on three oil companies for $3,825 plus your broker’s commissions.
Those options represent 500 shares of each company. If you were to buy the equivalent shares outright, it would cost you at least $102,500.
Your risk is the $3,825 plus broker commissions. But if I’m right on how these companies stand to make out, I figure that $3,825 could be worth as much as $24,500, in as little as six months.
The First Company Has over 2.37 Billion Barrels of
Oil-Equivalent Reserves in 12 Different Countries
It should thrive in this environment. Its balance sheet is a gem to behold. Hardly any long-term debt and plenty of cash on hand.
The real clincher for me is how the company’s oil reserves are valued. Based on the current market value of this company’s shares, its oil is being valued at a mere $7.76 a barrel, or just 12 cents on the dollar.
The Second Company Controls 2.1 Billion
Barrels of Oil-Equivalent Reserves
But its market cap — at $28 billion — is also puny in comparison to the value of its reserves.
At $64 oil, I figure its reserves are worth $134 billion. But, based on the company’s share value, those reserves are valued at a mere $10.52 per barrel, or just 16 cents on the dollar. A bit more than the others but still dirt cheap, in my view.
The Third Company: 1.4 Billion Barrels
It’s also an international oil explorer and producer. But the oil is being valued at a mere 17 cents on the dollar!
That’s just three companies. There are dozens more where big gains can be had …
For example, one of the companies I’m looking to recommend next week is a company that provides engineering logistics for oil companies around the world, including engineering services, geological studies, rig construction and repairs, and even housing for oil company employees. I think this one is a no-brainer.
Another one specializes in underwater construction and repair of pipelines. Another no-brainer.
There are many more like this where substantial profits can be made. And the markets are ripe for the picking.
Already, subscribers to Energy Options Alert are enjoying the profits. The closed out recommendations during its first two months: 7 winners and 2 losers. That’s a 77% win rate. The biggest loser was 38%, while the gains have ranged from 40% to as high as 161%.
I think we’re just warming up. And I hate to see you missing out on all these profits.
Our next set of recommendations will likely go out early next week. That’s when I’m expecting a temporary pause in the market while traders try to figure out the extent of the damage.
Naturally, because these are moving swiftly, we have to adapt to the changing conditions as we go. That sometimes can mean the options may not be the exact same ones I mentioned here, or that we may have to adjust the timing to help you get the best prices we can. But either way …
To Be Part of It,
You Need to ACT NOW
The price of the service is normally $5,000. But if you subscribe now you get two years for the price of one.
Once the last membership slots are taken, the service will be closed to new members.
Unless you want to go on a waiting list, pick up the phone, call Annette at 877-719-3477 and mention your personal code of p446-56628.
An Energy Options Alert representative will be here most of the weekend.
But if you want to be on board in time for my next recommendations, your order must be in before Sunday midnight.
Yours truly,
Larry Edelson
Editor, 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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