High Potential, High Risk

August 18, 2014

  • What’s holding up development of a world-class energy deposit?
  • Correction, what correction? S&P back within 20 points of record close
  • A looming shortage in the Northern American energy industry… and how to play it
  • Self-preservation: The central bank that’s dumping Treasuries, buying gold
  • An American export whose demand has doubled in 30 years
  • David trucker versus Goliath state government: An update

   Crude prices are losing ground as the week begins. A barrel of West Texas Intermediate is down well over a buck as we write, to $95.97. The ever-present “geopolitical tensions” have settled back to a simmer this morning — Ukraine, Iraq, Gaza.

Of course, things can change on a dime. A five-day cease-fire between Israel and Hamas expires at 4:00 p.m. EDT.

As we wrote three weeks ago, there’s an energy subtext to the decades-long conflict in the Holy Land. With only hours to go before that conflict might reignite, it’s worth revisiting.

   Before we go any further, a disclaimer.

The last time we tackled this subject, we took flak from a few readers. One fellow cancelled his paid subscription, thinking we were trying to make some sort of political statement. “An article on the war in Gaza,” he wrote, “definitly does not belong to any financial information which a subscriber might expect to receive [sic].”

Never mind our purpose that day — and today — was to tease out the investment implications of the war. The reader also hinted at the presence of “incorrect” information. Alas, he didn’t specify what that information was.

In rereading the issue, your editor has no idea what served to offend, other than perhaps the subject line of the email — “The Real Reason for War in Gaza.”

A bit hyperbolic, I’ll concede. But “A Less Commonly Cited Reason for War in Gaza” isn’t as punchy. Heh…

“I won’t go so far as to say that the Israel-Palestine conflict is ‘all about oil,'” chimes in our resident oil field geologist Byron King. “That’s a simplistic view, and Israel-Palestine is much more than that, to be sure.”

   “Still, it’s fair to say that recently discovered, massive offshore energy resources add stupendous monetary — and strategic — value to territorial claims by both sides,” Byron adds.

“There’s immense hydrocarbon potential in and around Israel, including Gaza. Both onshore and offshore, drilling has confirmed vast, proven reserves of natural gas. There’s potential oil, too, based on early-stage drilling, geochemistry and geophysics. These gas and oil deposits are part of the Levant Basin, which is geologically related to other oil basins that spread across the Middle East.”

For perspective, here’s a view of the region from the U.S. Energy Department. If you have any quibbles with the lines or the labels on the map, take it up with them, not us…

“Hydrocarbon deposits include one of the largest gas discoveries in the world, in the past 25 years — and it’s the largest gas discovery in the Mediterranean, ever,” Byron goes on.

“It’s called Leviathan, located about 80 miles offshore Israel in 4,900 feet of water. The discovery well was drilled by Noble Energy in 2010. Currently, Noble and Israel eagerly await arrival of a brand-new drilling and production vessel, being constructed in Korea. It’s purpose-built to develop the Leviathan field.

“Closer to the shoreline of Israel, and also offshore Gaza, geologists have identified other promising gas and (potentially) oil deposits. In fact, Palestinian politicians have worked with Western and Russian oil companies to come to terms and deals to develop energy offshore Gaza. That’s all on hold now during the current fighting.

   “What does the future hold for energy offshore Gaza, and generally offshore Israel?” asks Byron. “More and more development, if trends continue.

“The gas and oil resource is certainly there, with astonishing discoveries to back up claims. We’re looking at large resources, near markets, developable with current levels of technology, for the most part.”

But there’s still that decades-old conflict. “Offshore energy complicates Israeli-Palestinian diplomacy, now and into the future,” says Byron. “There’s that much more over which to argue and fight. Plus, for all the energy value awaiting the drill bit, exploration and development operations in the region are high-risk to potential players.”

Which brings us back to a point Byron’s been making for two years: Avoid energy stocks with exposure to the Middle East. There are plenty of companies making good money from the shale energy revolution stateside.

In fact, it takes only six simple steps to achieve the kind of energy riches that could mean early retirement. The “shale gale” is minting 2,000 new millionaires each year… and as you’ll see at this link, there’s no reason you can’t be one of them.

   Major U.S. stock indexes are leaping higher this morning for no obvious reason. (CNBC cites “global concerns easing.” Whatever it takes to fill airtime…)

At last check, every index was up at least three-quarters of a percent, with the small-cap Russell 2000 up more than 1%. The S&P 500 sits at 1,971 — less than 20 points away from its all-time high last month.

Bonds are selling off, the 10-year Treasury yield rising to 2.38%. Gold has once again slipped below $1,300, if only by a hair.

The lone economic number of the day is a good one, and it reflects recent activity: The August Housing Market Index from the National Association of Home Builders (NAHB) clocked in at 55, the strongest reading since January. The NAHB reports a “noticeable” rise in what it calls serious buyers. Go figure…

   Back to the North American energy patch… where a shortage is developing.

Not in oil or natural gas… but in rail cars to transport it. The energy industry needs 52,000 tank cars this year. The rail car industry can deliver only 35,000. “If you wanted to buy a new railcar today, it wouldn’t be ready for a drop of crude until 2016 or later,” says our income specialist Neil George.

Part of the reason can be traced back to the disaster last year at Lac-Megantic, Quebec. That’s when train hauling crude derailed and exploded, killing 47 people.

“When I learned of the tragedy,” says Neil, “I knew that pipelines were going to start getting a lot more attention as a safer and more economical way to get oil from there to here.” And indeed, his readers have profited handsomely from some of his pipeline income producers.

   “But transporting oil by train isn’t done yet,” Neil adds. “The railways remain a core part of the system, particularly for the crude oil production coming out of North Dakota.

“And the U.S. DOT and the Canadian government continue to try to make transporting oil by train safer. They plan to monitor tanker trains, limit speeds, work with local first responders and update the regulations on acceptable tanker cars beyond the current standard, known as DOT-111.”

It turns out the focus on safer rail cars is great news for one company Neil’s following — sales are rising, and so is the stock price, but it’s still undervalued.

It pays a paltry yield — last than 1% — but last week, Neil clued in his premium subscribers to a method with the potential to deliver a 14.8% annualized payout. It’s one of Wall Street’s best-kept secrets… revealed when you click here.

   Russia is dumping Treasuries and buying gold: The “de-dollarization” plan we described in May is proceeding apace.

“Russia is taking steps to ensure that it protects itself from any future dollar or euro sanctions,” says an article at website of RT, the state-run English language TV network. It points out Russia’s central bank shrank its foreign currency reserves 2.5% during the first half of 2014.

“Due to the worsening geopolitical situation, the central bank actively redistributed foreign exchange reserves, replacing U.S. Treasury bonds with gold,” says Alfa Bank chief economist Natalya Orlova. Russia’s gold stockpile is now valued at $45 billion.

Meanwhile, the central bank is also replacing its dollar and euro holdings with Chinese renminbi and Japanese yen.

No, the dollar won’t collapse tomorrow. But news items like this remind there’s no shortage of causes behind the dollar’s slow-motion erosion we described on Friday…

   You know what kind of U.S. paper foreigners really want? $100 bills.

Thirty years ago, less a third of U.S. $100s were held overseas. Today, it’s more than two-thirds, according to the Federal Reserve and the Secret Service, whose duties include tracking down counterfeit currency.

$100s are “the currency of choice in places where people have no faith in their own country’s government and the money it prints,” says the Consumerist. “Twenty years ago, officials from both government agencies went to former Soviet countries and discovered that people were storing their money in U.S. dollars, with exchange posts located even in department stores so people could do last-minute exchanges for whatever the local currency was worth at the moment.”

A store of value overseas, if not at home…

Some pundits — like Harvard economist Ken Rogoff — say it’s time to stop producing the $100 because it’s favored by drug runners and pimps worldwide. But even within the Fed there’s resistance, one of its own economists confessed to NPR the Fed has no idea how many of the $100s are used “legitimately” and how many not.

Besides, the eurozone pumps out 100 and even 500 euro notes. That’s up to $670 in a single piece of paper…

   Now for a “new taxes and weird fees” follow-up, courtesy of an alert reader…

“Last December, I wrote to you about a friend of mine who owns his own car hauling business, using a five-axle tractor-trailer to move cars from auctions to dealers’ lots. SunPass (the group who runs the toll roads in central Florida) was charging him for anywhere from five-11 axles each time he drove through a toll booth, with each additional axle adding to the amount he owed for using that portion of the toll road.

“For several years, he has been battling them about overcharges, and for several years, they have been promising to address the issue, but all they have done so far is continue to overcharge him and, presumably, all the other trucking companies that do business in Florida (and probably more than a few individual users as well).

“So several months ago, he filed suit against SunPass and the state, alleging fraud, negligence, etc. Yesterday was the hearing on the defendant’s motion for summary judgment. The court advised defense counsel he had several questions he needed answered, and apparently counsel for the state (and SunPass) lacked any answers.

“The court instructed the state to have an answer on file in 20 days, but he also advised plaintiff’s counsel to amend the lawsuit and name every other toll agency in Florida as additional defendants. Apparently, he’s heard enough about this problem that he wants it resolved on a statewide basis once and for all.

“So chalk up the first round to the taxpayers, who have been getting screwed on a daily basis by our own dear government and their agents. Still a long way to go, but from the sound of things, the court is serious about shutting down this scam once and for all.

“Love The 5. Keep up the good work, no ‘buts’ about it.”

The 5: Thanks for the update. We see your account confirmed by a story at WFLA-TV in Tampa. “This litigation isn’t just about truckers who stand to lose thousands of dollars,” it says, proceeding to describe the plight of a woman who owns a black Hummer with Florida plates… and got billed for a silver Toyota with Alabama plates.

Oy…

Best regards,

Dave Gonigam
The 5 Min. Forecast

P.S. The Dallas suburbs are just one place where Internet service providers are goosing speeds as much as 100 times what you and I are used to.

But speeding up the Web that much requires a massive buildout of infrastructure to support all that video, voice and data.

Yes, it’s a lucrative trend… and here’s the best way to capitalize on it.

rspertzel

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