April 4, 2013
- A narrowing gap in the oil market, and why OPEC’s getting nervous
- The next gust of the “shale gale”? Why carbon dioxide injection might prove a trap for investors… and a much better sector to pursue
- Stocks tread water… jobs numbers disappoint… Japan hits the “print” button
- What’s with people getting caught moving gold bars from Italy to Switzerland?… mailbag takes aim at the reader who accused us of being “hyperinflationistas”… your last chance to watch Byron King’s exclusive oil-opportunity interview… and more!
Oil has climbed down more than 4% in two days. At last check, a barrel of West Texas Intermediate fetches a little over $93.
The big factor: Yesterday’s weekly crude inventory report from the U.S. Department of Energy. “The nation’s supply of oil is now 7.2% above year-ago levels,” reports The Associated Press, “and the highest since July 27, 1990, when it was at 391.9 million barrels.”
[Heh… The AP failed to note that Saddam Hussein invaded Kuwait six days later and oil prices more than doubled in a matter of weeks to $46.]
Still the numbers underscore a theme Byron King has been hammering on for more than a year: “U.S. oil production (and output from Canadian oil sands, too) is rising.”
Obvious, you say? Sure. But we say it anyway to set up a less obvious point…
“Every new barrel produced in North America,” says Byron, “displaces a barrel of oil otherwise imported to North America from overseas.
“Those cargoes of foreign oil that used to set course for Houston still have to go somewhere. Lately, many of those ships have moored near terminals in Europe, where they discharge crude that competes against North Sea oil. The effect is to set a cap on the oft-quoted ‘Brent’ price for crude.”
The gap between Brent and West Texas Intermediate has narrowed sharply — from more than $22 two months ago to $12 this week.
“Even with Brent at a steady $110 per barrel,” Byron goes on, “my hunch is that OPEC managers are sleeping fitfully.
“Why? Because every new barrel of WTI and Canadian oil — of which there are more and more, thanks to fracking — displaces a barrel of OPEC oil in the North American market. Thus, the U.S. is importing less and less oil, and that’s not just a temporary thing. It’s a long-term trend. Because of new technology, the ‘new’ barrels are coming.
“Yet OPEC barrels are also still coming to the surface, every day, in fields across the Middle East, Africa and elsewhere.” Those barrels have to go somewhere, and often as not, they’re going to Europe. That’s still more downward pressure on Brent.
“The bottom line is that OPEC is big and important. Collectively, OPEC players produce a lot of oil. But to paraphrase the late Paul Harvey, the ‘rest of the story’ is that OPEC is losing pricing power over its oil.
“Sure, any OPEC nation is welcome to close the valves, starve the markets for oil and help goose the Brent price upward. And then that nation is faced with selling less oil, even at a higher price. How long can that work?”
[Ed. note: OPEC could have much more to worry about any day now. As we mentioned yesterday and Friday, a drilling project off the coast of southwest Africa could prove up an enormous find worth $703 billion.
Byron completed an exclusive interview about this undertaking late last week. But events are moving so fast the interview could be out-of-date as soon as — well, tomorrow. So this is your last chance to watch it and take advantage of the opportunity while the stock still trades for under $1. Give it a look now, because we’re taking it offline at midnight tonight.]
The next chapter in America’s “shale gale” might be written by a grandson of Franklin Delano Roosevelt.
At age 76, Elliott Roosevelt Jr. plans to inject carbon dioxide into limestone beneath a lonely patch of West Texas — bringing up as much as one-third of a 1.8-billion barrel deposit.
“Roosevelt is so sure he’s on to something,” reports Bloomberg Markets, “that he has spent $10 million on additional mineral rights. Sitting near a framed collection of FDR campaign buttons, both pro and con, he declines to give the location, saying he fears others may buy competing claims.” Shades of the movie There Will Be Blood…
“The key is getting CO2,” Roosevelt says.
“That’s an understatement,” comments a skeptical Dan Amoss. “Like shale oil, projections of CO2-enhanced oil production tend to gloss over the incredible amounts of capital that must be committed upfront, and constantly be recycled into the production base.”
Dan is eyeing a more profitable sector in the energy space: “Shale oil projects are fine and predictable, but they require heavy, consistent reinvestment of cash flow to sustain production. And compared to the size of oil targets offshore, shale oil wells, each yielding just a few hundred barrels per day, are small potatoes…
“In the deep waters offshore Brazil, Africa and the Gulf of Mexico, tens of thousands of barrels per day can flow from a single well. The targets are so big, and so potentially profitable, the offshore oil and gas equipment industry has one of the most favorable growth outlooks you’ll find anywhere.” Dan points us to a graph from Barclays projecting capital spending on subsea oil production equipment will triple from 2011-2017:
“Natural gas prices have risen by 15.7% so far this year,” notes our income specialist Neil George.
“And demand is set to increase as power companies shift from other energy sources to natural gas. Dominion Resources, for instance, has sold most of its remaining coal-fired electric power generating plants, and others are doing the same.
“But the biggest news out of the natural gas sphere recently is that the United Kingdom’s Centrica PLC has a deal to import liquid natural gas from a U.S. company called Cheniere Energy.
“The story has bolstered investors’ perception of LNG, helping boost stock prices of companies that deal in the stuff” — including several Lifetime Income Report recommendations. One is up more than 13.5% and yields 7%. Another is up over 16.4% while delivering a 6% dividend.
There are two more. For access to Lifetime Income Report — including Neil’s favorite energy-themed play of the moment — look here.
U.S. stocks are gamely attempting to recover yesterday’s losses, which knocked down both the S&P and the Nasdaq more than 1%. At last check, the S&P is on the cusp of 1,560.
“It looks like commodities’ weakness is spilling over to equities,” Options Hotline editor Steve Sarnoff wrote his readers last night. “Financials and techs are under pressure. The broader market has been exhibiting somewhat less than fresh breadth, right at resistance. Are buyers tiring, losing their grip and starting to slip? Time will tell.
“There’s a lot of noise out in the marketplace. A good example is investor nervousness over military rhetoric being fired between the U.S. and North Korea. I try to tune out the noise and focus on what the character of the behavior of market price movement is saying.
“The overall negative price action tells me to look for a test of underlying support.”
It’s been a good week for Steve’s trades. This morning, he recommended readers take profits from his bearish play on a semiconductor maker — 50% gains in a month. Steve is due to issue his next recommendation this weekend. You can be assured of timely delivery in time for the open on Monday by following this link.
For the second day in a row, a key measure of the job market has confounded the “expert consensus.”
Yesterday, it was ADP’s estimate of private-payroll growth for March — worse than the most pessimistic guess among dozens of economists polled by Bloomberg.
Today, it’s the Labor Department’s weekly report of first-time jobless claims. It surged to 385,000 — the highest this year, and once again worse than the most pessimistic guess.
The sound you hear in the distance is the “experts” frantically revising their estimates for tomorrow’s big unemployment number.
The Bank of Japan is literally doubling down on money printing.
The BoJ’s new governor Haruhiko Kuroda “delivered more than almost anyone had predicted,” says the Financial Times after a long-awaited meeting wrapped up early this morning U.S. time. The central bank’s monetary base will double over the next two years as the BoJ plans to buy $78.6 billion in Japanese government bonds per month. The explicit goal: 2% inflation in two years, or bust.
“The yen jumped two full figures after the announcement,” writes Chris Gaffney at EverBank World Markets, “moving from just below 93 yen per dollar up to 95.4: almost a 3% move in a matter of a few hours.
“The danger this presents is that it may convince other central bank leaders to try to match the devaluation of the yen. All the talk of the ‘currency wars’ had quieted down a bit with the crisis in Cyprus taking over the headlines. But with this 3% move in the yen, we will undoubtedly see other central bank leaders trying to see what they can do in order to keep their currencies from strengthening too much versus the yen. I worry this move by the BOJ could spark another round of central bank interventions.”
Another day, another merciless beating for the precious metals.
Gold sank below $1,550 overnight but has since recovered to that critical technical level our Greg Guenthner has been eyeing for weeks. Silver has broken below $27.
“Object lesson about wealth preservation,” we wrote last June. “Don’t try crossing international borders with 110 pounds of gold.” Then, an Italian businessman was stopped at the Swiss border and charged with smuggling.
The lesson was lost on a man Easter Sunday, also trying to cross from Italy into Switzerland. “The car,” according to a Swiss Broadcasting Corp. report, “was driven by a 53-year-old Italian resident of the Swiss canton of Ticino, described by the police as the legal representative of a Swiss company.” He’s been charged with money laundering.
In hidden compartments beneath the floorboards were 12 gold bars worth $5.7 million. We present you the eye candy in its full glory below. You’re welcome…
Curiously, there’s nothing engraved on the bars: Let loose the speculation about fake bars with tungsten!
“The reader who charged you with being ‘inflationistas’ did not clearly define the term,” a reader writes.
“I’m old enough to remember the last run-up in prices during the Carter years, and the pain that even modest double-digit (10-14%) price increases bring at the gas pump and grocery store. Many economists consider 10% year-over-year increases in prices (or more accurately, the money supply) to be hyperinflation.
“Comparing today’s prices for staples like cigs, beer, gas, Whoppers and milk with Obama’s Inauguration Day prices leads me to be a hyperinflationista… and the best (worst) is yet to come as China unloads more U.S. debt and quietly acquires more gold. Comparing M3 money supply during the same period, any sane analyst would conclude hyperinflation is already in the hands of the banksters and Wall Street — it just hasn’t hit Main Street with tsunami force… yet.”
“The mystery writer,” another reader piles on, “had to be a certain professor at Princeton University.
“No one else understands monetary policy but a Keynesian, according to all disciples of this modern theory. My question to them is with the huge expansion of the monetary base, how do they propose to counter any unacceptable level of inflation, say 15-20% year over year? Do they propose the remedy Volcker used in 1980?
“That will be something to see, interest rates going from 0% to 15% overnight with a national debt exceeding 100% of GDP. My guess is if all the Keynesians were sure how this will end, maybe Bernanke wouldn’t have submitted his notice of resignation to the president.
“His point regarding hyperinflation being inflicted on the rest of the world if it occurs in the USA is interesting. The meeting last week among the BRICS seeking an alternative to trade outside the dollar might indicate they are worried that inflation is a very real problem facing the USA and want to reduce the dollars in their central banks.
“His other point regarding using cigarettes and matches to trade for food is valid. He can do that today. The problem is where will he get them in the future. They both expire over time, so he has to buy them with something in the future in order to trade them. Gold he can buy today.”
“I have an answer for the guy who says that nobody would accept gold for food: They will take nickel and copper instead. Gold and silver are much too valuable to be used to buy food.”
The 5: Good point. Might be time to stock up on more of these…
Best regards,
Dave Gonigam
The 5 Min. Forecast
P.S. Last call: Access to Byron King’s exclusive interview about a potential oil find worth $703 billion comes offline tonight at midnight. For a few more hours, you can still watch it here.
P.P.S. Bitcoins — which fetched $34 a mere 30 days ago — are up to $136 today. The Laissez Faire Club is about to release a special report called The Bitcoin Bible: The Safest and Easiest Ways to Buy, Sell, Store and Speculate. To get it in your inbox as soon as it’s ready, give this a look.