October 2, 2014
- Crude breaks $90: Is $60 next?
- Why today and tomorrow are critical for stocks
- One diagnosed U.S. Ebola case, two companies scrambling for a cure
- Low precious metals prices, high precious metals sales… the perfect solution for the iPhone that bends when it shouldn’t… Readers unspool SDRs and complexity theory as Project Prophesy 2015 rolls on… and more!
U.S. crude prices broke below $90 a barrel overnight… for the first time since April 2013.
As you can see, oil sits at a make-or-break point…
Now… Imagine the blue line falling all the way to $60. It’s been more than five years since oil’s been that low.
It’s entirely within the realm of possibility, says Matt Insley of our energy desk: “Simply put, America is bursting at the seams with oil.
“Shale plays across the country are continuing to increase production. According to the U.S. Energy Information Administration’s (EIA) September Drilling Productivity Report, oil production has risen in each of the three major U.S. shale plays (Permian, Eagle Ford, Bakken) every single month this year.
“We’re witnessing a steady, relentless march higher in U.S. oil production. Not just any oil, mind you — we’re talking about light sweet crude oil — the good stuff!”
Unfortunately, “the good stuff” not what the U.S. refining industry is geared up for.
During the latter three decades of the 20th century, Houston’s refinery row scrambled to process heavy sour crude — the stuff loaded with sulfur that pours like molasses — imported from the Middle East and OPEC.
“Back then, with the expectation that America’s oil days were over,” Matt explains, “refiners went full bore into processing heavy sour crude. The chemical and physical processes to refine heavy crude are far different than those for refining light sweet crude. And by no stretch of the imagination, U.S. refiners have billions of dollars invested in heavy sour crude upgrades.”
So here’s how we get to $60 oil: “With current estimates for crude production in 2015 (heading higher as far as the eye can see),” says Matt, “the U.S. could soon eclipse its capacity for refining light sweet crude oil. There’d simply be no room at the inn.
“This is ‘America’s point of reckoning,’ the day the U.S. produces more light sweet crude than our refiners can handle.”
As you may know, U.S. law forbids the export of crude. Assuming the law stays in place, all that light sweet crude will be sloshing around the big terminal in Cushing, Oklahoma, with nowhere to go. The energy consulting firm Wood Mackenzie projects the result “could drive down domestic crude oil prices more than $30 per barrel versus their international benchmarks.”
That’s how you get to $60 oil… assuming no change in the law.
And how likely is it the law will change? “With my ear to the ground in the oil patch,” says Matt, “I think U.S. regulators will open the floodgates and allow certain types of crude exports.
“Fact is, we’ve already seen the writing on the wall,” Matt reminds us. Indeed, The 5 of June 25 this year led off with word the feds gave two companies the right to export lease condensate — very slightly modified oil that comes straight from the ground in South Texas).
Those two companies are Pioneer Natural Resources (NYSE: PXD) and Enterprise Products Partners (NYSE: EPD).
“Some folks have written this off to a government fluke or a one-off event,” says Matt, “but I believe we’re seeing the future of the light sweet crude export market (via ultra-light condensate).”
Pioneer’s CEO affirmed that outlook this week — forecasting its sales of condensate are on pace to double, with growing exports next year.
“This is a turning of the tide for American energy,” says Matt — “and potentially a beacon of hope in the dark-clouded backdrop of America’s refining sector.
“Although oil prices are under fire this week, I love the outlook for Pioneer and Enterprise. I also like any other companies working in the South Texas Eagle Ford that will have the same opportunity to command a higher price for their exported crude. Warding off America’s point of reckoning could be their point of profit!”
[Ed. note: When we launched Real Wealth Trader earlier this year, Matt’s first recommendation was call options on Pioneer. It was good for 73.5% gains in three months flat. The average closed recommendation? Up 61%.
Whether oil prices rise or fall, there’s always a way to make hay from America’s shale bounty — even doubling your money in as little as 36 days. Matt shows you how when you follow this link.]
The major U.S. stock indexes are trying to regain their footing after getting clobbered yesterday.
As we write, it’s a losing battle: The best performer is the small-cap Russell 2000, down a point, to 1,084. Doesn’t change the fact the Russell is now in “correction” territory — down 10% from its peak three months ago.
The S&P 500, meanwhile, has shed another seven points as we write — sitting at 1,938. Like crude, the S&P sits at a make-or-break point, says Jonas Elmerraji of our trading desk. We’re back at the bottom of that upward channel going back 18 months…
“The next few sessions will be very important for the health of this rally,” says Jonas, “If shares violate trendline support materially in the next couple of days, then we’ve got an important sell signal. Otherwise, a bounce off trendline support is another big buying opportunity here.”
“Ebola is spiraling out of control, with worst-case estimates rising weekly,” writes our Ray Blanco on the science-and-wealth beat.
While the diagnosis of a patient in Texas — the first confirmed U.S. case — is grabbing all the headlines, the picture in Africa is dire, says Ray: “On its current track, Ebola infections are growing exponentially — and that’s without taking into account the fact that many infections and deaths aren’t being counted.
“There’s little hope of getting much help, even at a hospital, so many people aren’t going. Bodies are being dumped out of doors and piled into mass graves. The latest estimate from the U.S. Centers for Disease Control puts a possible 1.4 million cases on the table by late January 2014.
“The FDA is worried as well, which is why it’s lowering testing barriers for drug developers here in the United States. Clinical trials are also being fast-tracked in West Africa. This creates opportunities in select biotechnology firms with programs to counter the threat.”
That includes two of his favorites in Technology Profits Confidential: One just got $1 million in federal funding to bring an Ebola treatment into human trials. The other has an Ebola therapy that’s stopped the disease in nonhuman primates. For access to the Technology Profits Confidential portfolio, look here.
Gold is holding on tight this morning — little changed from 24 hours ago, at $1,216. Silver is also steady, at $17.13.
Low precious metals prices drove buyers to the U.S. Mint throughout last month. Sales of Gold Eagles and Buffaloes doubled to 58,000 ounces, the highest since January.
Silver Eagle sales, meanwhile, totaled 4.14 million ounces — double the previous month. On the current trajectory, Silver Eagle sales will come close to last year’s record of 42.7 million ounces — and maybe exceed it.
Sure enough, someone has found a way to exploit a notorious flaw in the latest iPhone for fun and profit.
Buyers of the iPhone 6 have discovered to their chagrin that the thing has a tendency to bend if you sit down with it in your pocket. But unlike the bendy smartphone of our dreams we wrote about a while back, the iPhone does not bend back to original form. Blame it on the aluminum back — instead of glass, steel or plastic in previous models. Techno-wags, rather lacking in imagination, label the scandal “Bendgate.”
Enter the Bendgate case…
Ho ho, ha ha…
Available in a variety of colors, it’s yours from an outfit called Shapeways for only $19.99… or free if you buy a 3-D printer. Or you can go to Thingiverse and 3-D print your own case…
“I guess we are talking about the SDR,” writes a reader who’s smoked out the “Spooky New Money” that’s central to our project with Jim Rickards called Prophesy 2015.
SDR is short for “special drawing rights,” a kind of super money printed by the International Monetary Fund and then circulated among central banks and governments.
“Which was used already three decades ago,” our reader goes on to pooh-pooh. “It was used as an international accounting unit for telecommunications, for instance in ship-to-shore communications, a field in which I was involved at the time.
“Back then, radiotelephone calls and telegrams, etc., were priced and accounted for in SDRs in order to smooth out short-term currency conversion problems. The rate of various currencies versus the SDR was updated at regular intervals.
“The predecessor to the SDR was gold francs. Neither was a ‘currency’ you could hold in your hand.
“The use of the SDR did not bring about any collapse in anything back then. Maybe it will be different this time.”
The 5: As our fearless leader Addison Wiggin pointed out in yesterday’s Daily Reckoning, each of the three times the IMF has issued SDRs, the decision was linked to a crisis of confidence in the U.S. dollar…
- 1969: The French and others recognized the United States was printing too many dollars. At the time, foreigners could still exchange dollars for gold, and there was a run on Fort Knox. The IMF created the SDR to smooth the rough monetary seas, issuing 9.3 billion SDRs through 1972
- 1979: U.S. inflation soared out of control, past 14%. Oil-producing countries fretted the value of their dollar reserves was plunging. The IMF issued 12.1 billion SDRs through 1981
- 2009: In response to the Panic of 2008, the IMF issued 182.7 billion SDRs during August and September.
Yes, the dollar retained its reserve currency status after each of these episodes. But next time? As Dirty Harry said — by the way, that movie came out four months after Nixon closed the gold window — “You’ve got to ask yourself one question: Do I feel lucky?”
If you don’t, it’s best to act while there’s still time.
“Dave, without casting doubt on whatever else you might say…”
[We like this. A clever variation on the “I love The 5, but…” ploy. The reader takes issue with our assertion yesterday that Jim Rickards is one of only a dozen or so people worldwide who’ve mastered a field of study called complexity theory.]
“…please read this week’s New York Times science section. Not only is there a front-page article on complexity theory, and not only is it indicated as being applied more broadly than just academia and coastal search-and-rescue activities, but clearly, there are WELL more than a dozen people who understand it.
“Heck, they even introduced it to us back in the 1970s when I was in engineering school. It would not be surprising if a dozen members of my graduating class have better than a working knowledge of complexity theory.
“There is enough hyperbole in The 5 as is; no need to exacerbate.”
The 5: Blame it on your editor’s faulty memory, not hyperbole. To clarify: Jim is one of maybe a dozen people who understands complexity theory as applied to capital markets. And among them, Jim has the most extensive background in finance, as opposed to, say, physics.
Jim drew on an example from physics when he explained it to us last May: “Let’s say I’ve got a 35-pound block of enriched uranium sitting in front of me that’s shaped like a big cube. That’s a complex system. There’s a lot going on behind the scenes. At the subatomic level, neutrons are firing off, a lot going on. But it’s not dangerous. You’d actually have to eat it to get sick.
“But now, I take the same 35 pounds, I shape part of it into sort of a grapefruit, and I take the rest of it and shape it into a bat. I put it in the tube, and I fire it together with high explosives, I kill 300,000 people. I just engineered an atomic bomb. It’s the same uranium.
“The point is the same basic conditions arrayed in a different way, what physicists call self-organized criticality, can go critical, blow up and destroy the world or destroy the financial system. That dynamic, which is the way the world works, is not understood by central bankers.”
To the woe of us all…
Best regards,
Dave Gonigam
The 5 Min. Forecast
P.S. When you think about it, it’s downright scary, these central bankers: It’s your money, but their decisions.
Once again, you have to ask yourself if you feel lucky.