- Great fishing, but watch those sharks: Byron King ventures into uncharted energy waters
- The biggest beneficiary of falling oil prices (and it’s not you, the consumer)
- Commodity super-cycle over? Guenthner eyes the red metal for clues
- U.S. businesses under hacker threat… because of a Seth Rogen movie?
- An early — and profitable — victory over Ebola… Swiss reader hails the defeat of the gold referendum… oil chatter dominates the mailbag… and more!
“Is this the greatest oil-stock buying opportunity since 2009?” a reader asks our Byron King point-blank.
Back then, oil had crashed from $147 down to $33. The drop this year hasn’t been as extreme — $112 to $67.89 this morning for a barrel of West Texas Intermediate. But it’s a good question.
We brought no fewer than four of the Agora Financial editors into the mix during yesterday’s episode as we tried to make sense of the new reality in energy markets. Our investment director Paul Mampilly went on the record saying now’s the time to buy majors like Chevron and Royal Dutch Shell: You’ll collect respectable dividends as high as 5% while you wait for share prices to recover.
Byron, our resident oil field geologist, is in broad agreement. Best opportunity since 2009? “There are sharks in the water, but yes, it’s the best fishing since 2009.”
We must emphasize: These waters are uncharted. As Byron said yesterday, when OPEC decided against cutting production last week, the princes of Saudi Arabia threw away a playbook they used to push the price of oil around for 40 years.
“Now Saudi says, ‘Hey, U.S. shale operators, Canada oil sands guys, Brazil offshore players — you guys carry the ball and show us your stuff.'”
Think of it as a game of chicken: “Can OPEC’s petro-welfare states,” asks Byron, “withstand ‘low’ prices longer than shale drillers in the U.S. and Canada?”
As we suggested yesterday, the likely answer is no: Depending on whose numbers you believe, the House of Saud needs oil prices of at least $95 a barrel to balance the national budget and buy off the restive masses.
This morning, Brent crude — the international benchmark price — sits at $71.22. “Will the ‘Arab Spring’ of 2011 turn to winter bread riots in 2015?” Byron asks rhetorically.
“Longer term, the Saudis just exploded the economics for ‘alternative energy,'” says Byron, teasing out another consequence.
The day before the OPEC decision, the big solar-energy ETF — ticker symbol TAN — was trading near $38. After getting whacked on Friday and again yesterday, TAN is picking itself up off the floor, now at $34 and change.
“The Saudis just stuck a finger in the eye socket of President Obama, just back from China with his ‘historic’ agreement on climate change.”
Who’s the biggest beneficiary of lower oil prices? Byron gives you a couple of guesses…
“Who’s a large oil importer who will immediately benefit? Which nation has prospects making a nice market for Saudi oil for the next 100 years?”
We’ll put it another way: Which country surpassed the United States as the world’s biggest oil importer only a year ago?
“China is open for business for all the other losers in oil’s crash,” answers Agora Financial investment director Paul Mampilly. “Come make a deal.
“Every loser in the current OPEC bluff — Venezuela, Iran, Russia — is going hat in hand to the Chinese. ‘Those bastards in Saudi Arabia — we thought they were our friends. They promised us that they’d keep oil at $100. Please save us, China. Give us some of your $4 trillion in reserves to get through this margin call on crude oil.'”
And China is happily obliging…
- Only last week, China “loosened” repayment terms on some $50 billion in loans granted to Venezuela. “Loosened? That’s funny,” says Paul. “The only loosening you can bet happened is in the grip that Venezuela has on its oil reserves. Each loosening is a tightening noose around Venezuela’s oil by China”
- Russia? How about that 30-year deal we mentioned last month, to sell $284 billion of natural gas to China? On top of the 30-year, $400 billion deal signed last May? “Hear that sound?” says Paul. “That’s the sound of oil reserves going over from the Russian balance sheet to the China state-controlled energy companies”
- Meanwhile China’s oil imports from Iran during the first half of this year were up 48% from a year earlier. Iran now supplies 12% of China’s oil needs. “China already has a chokehold on Iran,” says Paul.
The market is already sniffing this out. While most energy stocks got smoked last Friday after the OPEC decision, the “Big Three” Chinese oil companies showed remarkable resilience.
All three trade on the New York Stock Exchange. They are CNOOC (CEO), Sinopec (SHI), and PetroChina (PTR). “All three pay dividends that are 100% safe,” Paul points out. “Heh. Safer than Exxon, safer than any other oil company.
“Even if oil goes to $40, these companies are going to pay their dividends,” Paul declares.
“Why? They’re now backed by $4 trillion of Chinese cash and now all those energy reserves in Venezuela and Russia and Iran. And soon, they’ll have everyone else other than Saudi Arabia and the U.S. in their pockets too.”
Which suggests an even more intriguing investment idea: “There’s that $4 trillion in U.S. Treasuries the Chinese own that they are now using.”
Think of it as the “petro-yuan.” Our fearless leader Addison Wiggin is teasing out the implications in today’s Daily Reckoning. Watch for it in your inbox later this afternoon… and if you don’t already get it, you can sign up in the upper right-hand corner of the Daily Reckoning home page.
“Copper is crashing,” points out Greg Guenthner of our trading desk — turning our gaze to still more smoldering wreckage in the commodity complex.
“Heck, this could be the final nail in the coffin of the commodity ‘super-cycle’ that began about 15 years ago.
“From 2001-2011, the price of copper exploded more than 620%, topping out near $4.50 a pound. That’s a huge. And the breakdown we’re seeing now could easily send copper prices to $2 or lower over the next couple of years.”
After valiantly holding the line on $3 this autumn — Greg calls it “the Wile E. Coyote moment” — the line gave way last week. Wile E. is falling to Earth…
Greg, by the way, doesn’t buy into the red metal’s “Dr. Copper” status. “A lot of folks might point to copper’s reputation as a leading economic barometer,” he explains, “since the metal is found in virtually all electronics and countless other industries.
“But this relationship hasn’t been the case for quite a while. Copper has drifted since 2011, while stocks have found new highs. So I don’t think this drop is foretelling a massive stock market event.”
This morning, all the major stock indexes are in the green. As we write, the S&P has added eight points, to 2,061.
Bonds are selling off, with yields bouncing off their lows last week. The yield on a 10-year Treasury note is up to 2.28%.
Gold reached as high as $1,220 late yesterday, but at last check has settled back to $1,198.
Among the big market movers today — a recommendation in Technology Profits Confidential that’s on the cusp of an Ebola vaccine.
“The first people vaccinated with an experimental Ebola shot,” Reuters reports, “have had no serious side effects so far.” For the last three weeks, 34 volunteers have taken the shot at a hospital in Geneva, Switzerland — a shot developed by NewLink Genetics (NLNK) and licensed recently by the pharma giant Merck.
“NewLink has been doing well to move this vaccine forward,” our Ray Blanco wrote to his readers last week, “but it’s a small company. Now Merck’s considerable resources and expertise are also going to be brought to bear. As I’ve mentioned before, this may be the first vaccine to get to market.”
NLNK is up 208% from Ray’s initial recommendation in January 2013. For access to all of Ray’s picks, look here.
The FBI has issued a frustratingly vague warning to U.S. businesses about hackers using malicious software.
“The five-page, confidential ‘flash’ warning issued to businesses late on Monday provided some technical details about the malicious software that was used in the attack,” Reuters reports, “though it did not name the victim.”
As it happens, Sony was the victim of a massive attack last week. The perp appears to be North Korea. Or at least the North Koreans aren’t denying Sony’s accusations.
Here’s where it gets really weird: Sony has a new Seth Rogen comedy in the works called The Interview. The premise is a TV host and producer go to North Korea to interview Kim Jong Un, and along the way, they’re recruited by the CIA to assassinate him.
Whoever is the culprit of the hack, operations at Sony ground to a halt for several hours last week… and no fewer than five yet-to-be-released movies were leaked online.
“Damn that Seth Rogen! Let’s download the new remake of Annie.
Cameron Diaz as Miss Hannigan — that’s hot!”
Back to the FBI warning, and the Reuters account: “It is extremely difficult and costly, if not impossible, to recover hard drives that have been attacked with the malware, according to the report, which was distributed to security professionals at U.S. companies.”
Which only means more federal dollars headed into cybersecurity, courtesy of the Pentagon’s “secret army.” If you haven’t seen our expose, it’s high time you get up to speed.
“As a Swiss citizen and voter, I enjoyed reading your comment about the Swiss gold initiative,” a reader writes.
“It deserved being thrown out for a very simple reason. How can you possibly compel the Swiss National Bank to hold 20% of its balance sheet in gold, whilst at the same time prohibiting gold sales, even when that same balance sheet slims down? Those ultra-right-wing supporters have written a rather silly text, and common sense has prevailed.
“Carry on your good work. I always enjoy reading The 5!”
“Sounds like you were in bed with the oil cartel,” reads the first of a couple critical notes in our virtual mailbag, “and Byron is a crybaby because he lost his shorts in his oil plays.
“It’s better for the U.S. economy on the whole, but apparently not for your pocketbook or portfolio.”
“To be a good analyst, one should understand underlying reality,” reads another critical (we think) email.
“I am at risk if my advisers don’t have a reasonable understanding of how managers of companies I invest in think. If I believed that ‘OPEC is filled with the dumbest, crack-smoking, stupidest oil ministers on the planet,’ and that were not true (I doubt it is true), then predictions made about oil markets based on that understanding would be prone to error.
“Understanding how key players think is fundamental; a scene from the movie Patton comes to mind. As Patton is beating Rommel in North Africa, he says, ‘Rommel, you magnificent bastard, I read your book!’ Too bad the oil ministers haven’t written a book.”
The 5: First, we’re not “in bed” with anyone. We live and die by subscription revenue from satisfied (we hope) readers.
As long as we’re invoking military references to illustrate the oil situation, Byron invoked Clausewitz in his note to Outstanding Investments readers yesterday: “No plan survives first contact with the opponent.”
“Saudi has slammed on the brakes for world oil pricing. When it comes to energy and money, everything is connected to everything else. We’ll see all manner of ripples from this Saudi action. We’ll have to invest around it, which I’ll address in future alerts and OI issues. It’s a big deal, to be sure; terra incognita.”
Byron will have another update for his subscribers before day’s end — we’ll share a couple of choice bits tomorrow.
“I lived in the Eastern Province in Saudi Arabia for 10 years,” a reader writes.
“The men don’t have a care in the world with the money the government shells out to them — for being born male, growing up to be an adult, being a member of a Muslim group, etc.
“This money will slow or stop. Who knows, some may have to go to work. There is a large part of the population that would prefer to tend goats and ride camels, don’t like any progress.
“The name of the movie to watch is Rollover.”
The 5: Indeed. Not a very good movie, but an excellent snapshot in time (1981) capturing the anxieties over a global financial collapse brought on by Arabs losing faith in the U.S. dollar. Our Jim Rickards recommends it too, as a foretaste of the alarming events he sees coming.
Best regards,
Dave Gonigam
The 5 Min. Forecast
P.S. “The OPEC decision to maintain output,” writes one more reader, “if sustained for any length of time, may be one of those snowflakes that causes the avalanche here in the U.S.
“The potential is to lead us back into recession, Arab Spring II, military actions and expansion worldwide. Just sayin’.”
We can’t rule it out. But as Jim Rickards is wont to say of the crisis he sees approaching, “Don’t worry about the snowflakes… worry about the avalanche waiting to happen… and that it’s unstable and just waiting to collapse.”
Mr. Rickards’ next exclusive online briefing for Agora Financial readers — including a chance for Q&A — is on the books for next Monday. And we’ve scheduled monthly briefings from here on out…
Click the calendar for a message from Jim.
He’ll explain how to join his next event.
Jim will no doubt address what’s going on in the energy markets, among other urgent topics. Subscribers to Jim Rickards’ Strategic Intelligence can join in next Monday at 10:00 a.m. EST. If you haven’t joined their ranks yet, you can do so at this link.