Tom Bulford (Penny Sleuth):

Joseph Stalin does not sound like a very nice man to have worked for.

He had this idea that digging up coal from underground in order to burn it as soon as it reached the surface was a bit of a waste of time and effort. Why not simply burn it while still underground and then simply draw up the heat and gases through a pipe?

Convinced that this was a smart idea he set his scientists to work on the problem. Unfortunately for twelve of these scientists, they failed to do so and Stalin had them executed.

But to be fair to Stalin, his idea was right but just a little ahead of its time. Last week the UK Coal Authority granted a license to Clean Coal, a subsidiary of the quoted Anglo-American (ticker: AAL) to put Stalin’s theory into practice.

Under the North Sea, within ten kilometres of the coast, is enough coal to satisfy UK demand for at least ten years. The difficulty is getting it out.

But thanks to a new technology called Underground Coal Gasification this is no longer necessary. Let me show you how it will work.

How to make hard-to-reach coal fuel a power station

A drill will bore its way through the ground at somewhere, on land, close to perhaps Grimsby. Having reached the required depth it will then take a ninety degree turn and head out sideways underneath the coastline until it hits the coal seam.
Next a second bore hole will be drilled into the coal seam. Once that is done the coal will be set alight underground, and will be constantly fanned by oxygen fed down one of the pipes. Up the other pipe will come a methane-rich synthetic gas able to fuel a power station.

This will not be the first time that this has been done. Similar projects are already up and running. In the course of investigating a penny share company last week, I came across another such plan.

This was Strategic Natural Resources (ticker: SNRP), and I managed to catch up with chief executive Jeremy Metcalfe, a man whose enthusiasm and energy defies his seventy years. . .

Click here for the rest of Mr. Bulford’s report at Fleet Street Invest, UK.

David Fessler (Money Morning):

By the time 2009 is in the books, the record will show that solar energy stocks endured a tough year. That’s hardly a surprise, given that so many Wall Street analysts (yours truly not among them) lambasted the sector for much of the year.

Analysts also expect the carnage to continue into 2010, and are predicting losses for as many as half of the world’s solar companies.

The “thought process” of a Wall Street analyst – and I use that title loosely – goes something like this:

• Analysts first suggest that a “huge” oversupply of polysilicon (the raw material used to make silicon-based panel assemblies) exists. But this is only partially true, as increasing panel sales are rapidly eating into this oversupply.
• The analysts’ next miscue is over new thin-film panel technologies. They predict companies producing panels based on the new thin-film designs are doomed because the oversupply of polysilicon will keep poly-based panel prices too low for the thin-film guys to compete.

Talk about a myopic view if there ever was one. I suspect many of these analysts will be eating crow instead of turkey for Thanksgiving dinner next year.

In the meantime, allow me to outline the real story on the solar energy sector…

Click here for the rest of Mr. Fessler’s analysis at Money Morning.

Dr. Marc Bustin (Casey’s Energy Report):

Over the last couple of years, consideration of the effect of climate change has become increasingly important in analyzing a company or market trend — particularly in the energy sector. For example, our very bearish view on the thermal coal producers in North America is due exclusively to the high levels of carbon dioxide that coal-fired power plants generate, and the widely held belief that these emissions contribute to global warming.

As researchers who like to chase down facts, we know that credible scientists continue to debate whether and how much humans really do contribute to global warming. However, it’s the rare politician who acknowledges this controversy. Instead, they join the herd of scientists and pseudo-scientists who tend to cherry pick among the findings to fit their preconceived conclusions. An unfortunate state of affairs, but, alas, a consequential one, because these same politicians are awfully fond of regulation — and they’re becoming more so.

So it’s not surprising that we are on course for a real mess in terms of government regulations concerning carbon emissions, taxes, tariffs, and such. Detrimental results are likely for certain sectors of the economy, such as the oil and coal sectors and associated refiners, heavy industry, and the transportation sector.

As a scientist, I currently accept the near-unequivocal evidence that Earth is in a warming spell, but I also know that in past geological times, there have been many such periods of warming and cooling. I remain on the fence as to what impact anthropogenic (human-sponsored) emissions are having on the global trend. Perhaps more importantly, at some level I am haunted by the belief that even if we are responsible for global warming, we are too late, and there is nothing we can do about it.

Pragmatically, our job at Casey is to point our subscribers toward prudent investments, and it is pretty clear that there is opportunity and danger in industry that is regulated, subsidized, and penalized by government. It’s also clear we are just now at the beginning of what will be pronounced government intervention — for example, the U.S. House of Representatives bill (H.R.2454) aimed at reducing U.S. greenhouse gas emissions 17% from 2005 levels by 2020 and 83% by 2050. The bill allows tariffs on carbon-intensive goods (such as steel, cement, paper, and glass) if they are produced in countries the United States judges to be shirking their responsibility in reducing greenhouse gas emissions.

Herein lies the problem, even if you believe cutting emissions will make a difference: the new big greenhouse gas emitters (i.e., China, whose growing use of coal recently pushed it to the #1 spot in greenhouse emissions, with India rushing to catch up) must curb their emissions… but in doing so, they will be denied the standard of living that in theory those of us who screwed up the atmosphere in the first place enjoy. This is hypocritical, and the hypocrisy is not lost on the developing nations. That’s why I think that global accords on emissions are not going to work.

Going forward, I see the impact of climate change regulations – tariffs, taxes on emissions, subsidies, carbon credits, and carbon trading – becoming a major factor in not only the energy sector but also the associated technology sector. And since governments tend to be rather fickle and make decisions that defy logic, our job at Casey Research has gotten that much more titillating.

Every month, we’ll bring you analysis of everything that’s pulling at the energy sector — logic-defying governments included —in Casey’s Energy Report. With a subscription, you’ll also get Casey’s Energy Opportunities and, until December 18, a free subscription to Casey’s Extraordinary Technology. To top it off, you get all this at 40% off the regular price and with a no-risk 90-day trial. Click here to learn more — and be sure to do it before or on December 18!

And so it begins. Just yesterday, we here at the TFN offices got into a late-day discussion about the fate of the nation’s natural gas markets.

With prices remaining low and entirely removed from the recent commodities bonanza, the nation’s expanding natural gas drilling industry is headed for trouble.

Today we got the news that proves our theory.

ConocoPhillips (NYSE:COP), the third largest of the nation’s Big Oil players, announced it is cutting its capital spending budget by nearly 10% and is selling some $10 billion worth of assets.

Why the drastic moves? Thanks in part to stubbornly low natural gas prices, the company needs to make the cuts to shore up a leveraged balance sheet.

If you recall, just last week the company warned Wall Street to expect reduced earnings figures thanks to a 67% reduction in natural gas prices.

There was similar news yesterday from nation’s second-largest producer, Chevron (NYSE:CVX). The California-based company quietly announced all drilling has stopped at its Piceance Basin facilities in Colorado.

I bet you can guess why they plugged the well. Yep, you betcha, low natural gas prices.

Drill, baby, drill

So if the natural gas price conundrum is having this effect on the nation’s largest companies and their multi-billion dollar cash flows, what is it doing to the tiny, marginal players?

Early last month, Trident Resources gave us a glimpse of what is likely to come. Citing liabilities of nearly a billion bucks and assets worth just $10 million, the Canadian gas driller was forced to walk into bankruptcy court and ask for protection from its creditors.

Indeed, the same companies investors were pumping their money into when gas was soaring to record highs are now failing under the weight of massive debt.

Here’s the kicker that is really going to tear the gas industry apart.

That massive debt that was picked up over the past few years doesn’t simply go away now that prices have plummeted. Drillers still have to pay their bills. That means any bit of cash flow available is direly needed.

That is how we got to where we are today, with natural gas inventories across the country at record high levels and growing by the minute.

With bills to pay, drillers simply refuse to close the valves on their producing wells. If they do, they’ll go bankrupt. But until they slow the flow, the price they get for that gas will sink lower and lower.

Eventually, prices will get so low the weak will be shaken out of the market whether they like it or not. They won’t be able to produce enough gas even to make their weekly payroll.

One of many

I could pick on dozens of small drillers that are facing gale-force headwinds, but since Rex Energy Corp. (NASDAQ:REXX) recently expanded its drilling in the Marcellus Shale formation, which is the chief cause of the current market glut, I will put their issues in the spotlight.

With $70 million in liabilities, the $330 million company is one of the better positioned drillers in its category. But much of that debt is focused on bringing the company to the Marcellus Shale region. If the move does not pay off, Rex could be forced to pay on a dud for quite some time.

Common estimates put the break-even price for Marcellus Shale drilling somewhere around $3.70 per 1,000 cubic feet of gas. Right now, drillers are able to get that price from the futures market, but the overfilled spot market is not willing to spend so much.

With nearly $1.50 difference between spot and future prices, something has got to give. With inventories about to overflow, the spot price won’t budge an inch.

The common argument throughout the market is that typical winter demand will reduce supplies and bring the markets back in equilibrium. But remember, the markets rarely go with the crowd.

The speculators have gas prices going higher over the next two months, but the facts and economic laws show prices will be going lower.

If it happens, it won’t be good for drillers. ConocoPhillips knows it. Now so do you.

Source: Natural Gas Industry Braces for Impact

The team at Casey’s Energy Opportunities believe that planned government buying or selling of crude oil for SPRs actually have very little impact in the overall market. However, an overall drawdown of worldwide inventory could put downward pressure on the price of oil. The various countries also have their particular reasons and influences in decisions to tap their reserves.

So which countries are executing preparedness plans to fill their strategic reserves with $70 oil now (as opposed to $140+)? Below are the 10 countries that consume the most oil in the world, as of 2008, the latest figures available from the BP Statistical Review of World Energy:

Russia, Canada, and Saudi Arabia can leave the list, as they are net exporters of oil and thus do not actually require a strategic reserve, at least in the short term. We’ll also bump Brazil, because its balance of imports is dwindling every year, and it should become a exporter before it requires a reserve. That leaves six countries to examine:

The United States

Not surprisingly, America has the largest strategic reserve in the world in an absolute sense. Its 727 million barrels are stored in four hollowed-out salt domes (and one pending) along the coastline of the Gulf of Mexico. These add up to some 62 days’ worth of imports, according to government sources. The United States government currently has plans to push this to 1 billion barrels, or about 85 days’ worth of imports, which would make the reserves equivalent to those of Japan and Korea.

The SPR build-up will be accomplished by expanding two of the current facilities, for an additional 113 million barrels, and (probably) building a new one in Richton, Missouri, for 160 million barrels. The Richton project has met local opposition, because it would require pumping 50 million gallons of freshwater per day from the Pascagoula River to dissolve enough salt to open up another subterranean cavern. The total cost of the program is estimated at US$3.7 billion, not including the cost to fill the reserves. Oil purchases are likely to be slow, at around 100,000 bpd (barrels per day) before 2014 and 150,000 bpd thereafter.

In a real emergency, the combined American strategic and commercial reserves (the latter held by private corporations, especially refiners) may seem unnervingly thin from the perspective of energy security. Add to that the fact that the government can release them at a rate of only 4.4 million barrels per day, or about half its imports.

Still, the 108 or so days’ reserve it has between government and commercial sources are considered adequate by international standards. The United States has used this reserve twice in the past 20 years (Desert Storm and Hurricane Katrina) to combat severe demand or supply disruptions. It also has the luxury of importing more oil from Canada in an emergency.

Scenarios that could force a sustained drawdown of reserves:

• Sustained hyperinflation in the United States due to actions by the Federal Reserve that causes oil-producing countries to look for better markets to sell oil.

• A prolonged general embargo by OPEC on the United States, forcing America to look to traditional partners such as Canada and Mexico, though they might not have sufficient oil.

• Another war, potentially in North Korea or Iran, requiring a large amount of oil input from America that it simply does not have.

• A particularly active hurricane season that knocks out a large amount of production capacity in the Gulf of Mexico, and the United States releases from the SPR to help.

China

China’s strategic reserves began being built in 2004, when leaders in China began to realize that the country had no adequate government-controlled reserves to combat any disruptions in the supply of oil. China is a large importer and is dependent on the same sources of foreign oil as the United States. China is even more anxious to build such a reserve, as two of its neighbors, Korea and Japan, both have large strategic reserves.

China currently has four government reserves with a total reserve potential of 272 million barrels, which translates to about 30 days’ consumption. Two of the four have been confirmed full, and there are rumors that all four are and that China has taken advantage of the recent precipitous drop in the price of oil to buy up. According to Chinese government sources, however, the reserves are likely not to be completely full until 2010, and 2009 buying of oil will be at around 42 million barrels.

The government has also announced plans to increase the country’s reserve from 30 to 100 days of consumption. The next stage of the development will call for an additional 170 million barrels in eight storage facilities. The locations of the facilities are as yet secret.

In an emergency, China would likely turn to Russia to buy oil, though only the naive would be surprised if Russia added a premium for the privilege.

Scenarios that could force a sustained drawdown of reserves in China:

• Worldwide embargo on China due to a Chinese invasion of Taiwan.

• High oil prices force Chinese industries out of business, pressuring the government to keep oil prices low domestically by selling some of the reserves to domestic companies.

• North Korea asks for oil from China to support military action on the Korean Peninsula, and China ships it to them on the black market.

• Russia slows or stops its exports as part of the Russian “dominance via energy” strategy, leaving Chinese pipelines trickling and Chinese industries disrupted.

Japan/South Korea

We have placed Japan and South Korea’s reserves together, as the two countries have a treaty that allows them to share their strategic reserves.

Resource-poor Japan has one of the world’s largest strategic oil reserves, enough for 82 days of imports. State-controlled reserves are run by the state-owned Japan Oil, Gas, and Metals National Corporation. The reserves consist of 320 million barrels in 10 different locations, which makes them second only to the United States in absolute volume. Japan’s island geography means that having an emergency supply of crude oil is crucial, and the Japanese government obviously has not ignored this aspect.

South Korea is in one of the global “hotspots” in the world, right beside North Korea. As the country is under an almost constant threat of war, the government has stocked up some 76 million barrels, with capacity for an additional 40 million barrels.

Scenarios that could force a drawdown of reserves:

• Just one at this time, from two possible sources: political instability in the region caused by either the Taiwan or the Korea conundrums disrupts tanker transport, perhaps even forces them to port.

India

India has a small reserve it began to build in 2004. This stockpile is sufficient for perhaps only two weeks of consumption. The country eventually wants to raise this level to 45 days, though the first phase has not even been completed yet. The projects are estimated to come online in 2012, which means it has taken eight years from planning to completion. These figures imply that India will not even have a somewhat sufficient strategic reserve until 2016, given that the expansion project was approved in 2008.

Germany

Germany has the largest reserve in Europe and is among the top in the world as well. Its government has satisfied a federal law that regulates storage be at least 90 days’ worth of net imports. More than half of the storage is in Southern Germany, where large salt caverns exist. Germany is well prepared in its strategic oil reserves, and there are no glaring factors that would force a drawdown of reserves, barring a global catastrophe. Furthermore, the reserves of Germany, France, and Italy are pooled and can be used by any of the three countries in an emergency.

So How Much Do the Reserves Matter?

According to the US Energy Information Administration (EIA) estimates, some 2 billion barrels are held in government-owned strategic reserves around the world. Though this seems like plenty of oil, does it really impact the spot price of oil? Collectively, the answer is yes, as this volume corresponds to 23 days’ worth of global consumption. If drawn down together over a short period of time, the effect on spot price could be substantial.

For illustration’s sake, suppose that countries collectively draw down their entire reserves over the period of a year. This rate would make up for 10% of the daily worldwide trade of crude oil, which could certainly impact price (imagine ConocoPhillips and ExxonMobil both going under at the same time).

Individually, however, even China and the United States have a limited impact on the spot price of oil over a single year. If the United States’ inventory were drawn over an entire year, it would only make for a 4% increase in supply. Under normal buying patterns of each country’s strategic reserves, the impact is even smaller. Since China’s 42-million-barrel purchase is over one year, their purchase would not even make a dent in the daily trade of oil.

Thus, a concerted effort by the worldwide reserves can definitely keep prices down in the short term (within a year, two at best), but cannot make for a paradigm shift in the supply/demand model of oil or the Peak Oil argument. And from the buying side, if governments plan the filling of their strategic reserves, the impact on the spot price of oil is likely to be minimal.

Perception is a tricky horse to ride, however, as we all know. Given a worldwide panic for oil à la the 1973 oil embargo, oil prices could spike in the short term, because government reserves would likely raise purchases 10% or so in a real emergency. This effect would be short lived for the foreseeable future, though, as worldwide reserves are already reaching their limits.

In short, if everything goes according to “plan” by the governments, even filling a large reserve such as the Chinese SPR would have little impact on the price of oil. For SPRs to truly impact the spot price of oil, it would have to be a global situation, with war and embargo the two most likely scenarios. Even then, the impact would be mellowed by limitations on how quickly governments can either release or purchase the oil.

Regards,

Marin Katusa

Source: Who’s Buying Oil?

Unfortunately, that’s not the case. And that means Constellation will have to clear a number of hurdles if it’s going to fulfill its long-term promise.
Last year, the company bet big on higher energy prices and paid the price dearly when the economy collapsed.

Constellation’s very high level of debt, with large bond maturities in 2009 and 2012 at that time meant they were flirting with financial disaster.  That forced the company into a deal with Électricité de France SA (EDF), in which the European energy giant agreed to inject $4.5 billion into Constellation in exchange for almost 50% ownership of its nuclear plants.

That includes a brand new plant, Calvert Cliffs 3, that’s still subject to pending regulatory approval. Maryland Gov. Martin O’Malley has convinced the Public Service Commission (PSC) to hold open, public hearings to determine if this new deal is in the public’s best interest.

One of the main points of contention is the two energy companies’ demand to access the cash at distributing subsidiary Baltimore Gas & Electric Co. (BGE).

“We know that BGE is a cash cow for Constellation Energy,” said Gov. O’Malley. “We know that BGE pays more than half of all dividends paid into Constellation Energy and has a huge impact on Constellation’s bottom line.  We also know that Constellation Energy has had a tumultuous history over these last few years.”

The Maryland governor also noted that Constellation last year lost 80% of its stock value and was just hours away from bankruptcy before EDF stepped in.

Potential construction costs associated with the new nuclear plant are another large uncertainty. Nuclear plants have the tendency to run over budget, and that means the utilities then come back to regulators asking for rate increases in order to fund the cost overruns.

On the other hand, EDF Vice President John Morris recently testified to the PSC that “a decision denying EDF’s application or imposing conditions on the approval of the application that cause it to fail, would bring an end to the development” of the project.

And the company’s Chairman and Chief Executive Officer, Pierre Gadonneix, told French lawmakers that EDF expects to get all the necessary approvals for this transaction by the end of the year.

The approval would generate strong economic gains for the state of Maryland, where EDF’s U.S. headquarters are based.

Électricité de France, a firm owned 84% by the French government has its own challenges.  Having bought British Energy Group PLC and embarked in other growth-oriented investments, it too got caught with too much debt. Like Constellation, EDF is in debt-reduction mode.  The company is rumored to be pondering the sale of another 20% stake in British Energy, a swap of electricity assets with German utility E.On AG and the possible float of another 14% of its own stock.

We must also factor in the possibility that destructive protectionism will affect the deal.  The Obama administration recently levied special import duties on Chinese tires.  When governments are forced to confront the tough realities of high unemployment, the likelihood that they resort to protectionism to boost local employment is high.  And this always conspires against efficiency and global growth.

Fortunately, there is no evidence of any such pressure playing a role yet.

In addition to the many uncertainties about the EDF deal and the Calvert Cliffs plant, we have to deal with regulatory uncertainties that are plaguing the industry.  Evolving environmental regulations will require large increases in capital investments.  These eventually are passed on to consumers, reducing demand.  In the months and years ahead, we might see so-called “cap-and-trade” legislation, smart grid systems and renewable portfolio standards that will complicate things even more in unpredictable ways.

The cap-and-trade legislation, should it pass, could benefit Constellation greatly.  If the United States made a stronger commitment to reducing carbon emissions, nuclear would have to be a big part of the equation. And Constellation already is well positioned to take advantage of this.  But while such regulation would be good for the company in the long run, right now it is just another uncertainty.

We also need to remember that a new nuclear power plant in the United States hasn’t been built in 20 years, so a new labor force and supply chain is needed.  And despite the fact that with the support of EDF, Constellation is the largest nuclear operator in the world, these challenges cannot be achieved overnight.

We are not going to go into the Constellation results in detail.  Demand was down in the United States in general, the summer was mild, and industrial demand – which is down between 3% and 7% in different regions – is not coming back yet.

Constellation has indeed taken steps to reduce its trading and other risks and divested several non-profitable operations.  The vast majority of Constellation’s June 30 earnings were due to special items that boosted GAAP (Generally Accepted Accounting Principles) earnings.  The special one-time items from divested earnings accounted for about 60% of the strong upside adjustment. But they are not likely to recur, and in this complex business, some other one-time items have the unfortunate trait of appearing out of nowhere – just when it is least convenient to shareholders.

I love Constellation’s strong operating performance, its strong position in nuclear energy, and its focus on growing alternative energy.  These strengths are likely to play out well over the long term, and could even lead this company to superior profits down the line.  But there are too many uncertainties weighing on an already damaged balance sheet, which makes the risk for this company too large to bear in the short term.

If Constellation is hit by any one of these risks, another big hit to the stock could lead to another equity infusion.  And the traditional argument for buying utility stocks as an income investment does not work well either, given its low dividend yield and the company’s need to conserve cash.

So, with so much left to chance, I would not buy Constellation at this time. But there is enough long-term potential, that if I already owned Constellation stock, I would hold it for a while to see if those uncertainties are resolved. But be aware that holding the stock is an overly speculative position that needs to be monitored constantly for the developments that we outlined above.

Shares of Constellation Energy closed Friday down 1.45%, or 47 cents, at $31.84. The stock earlier this month hit a 52-week high of $33.37 after falling to a 52-week low of $15 in March.

Recommendation: Hold Constellation Energy Group Inc. (NYSE: CEG) (**).

Source: Constellation Energy Group Inc. Has Long-Term Potential, But Short-Term Problems

The dollar gave up most of its earlier gain against a basket of currencies, boosting the appeal of oil and commodities to investors. European stocks firmed and U.S. equity futures pointed to a higher opening.

“It’s making some progress back up, largely due to the dollar,” said Rob Montefusco of Sucden Financial. “At the same time, we haven’t seen demand pick up and we need that to draw strength back into this sector at the moment.”

U.S crude was up 8 cents to $66.10 a barrel by 1308 GMT, after earlier falling as far as $65.41. London Brentwas down 11 cents to $65.00.

Iran test-fired a type of missile on Monday which defence analysts have said could hit Israel and U.S. bases in the Gulf region, state television reported.

The drills coincide with increased tension in Iran’s nuclear dispute with the West, after last week’s disclosure by Tehran that it is building a second uranium enrichment plant.

Tensions over Tehran’s nuclear programme have supported oil prices in recent years. The country is the second-largest oil producer in the Middle East.

In late 2008, Iran threatened to block the Strait of Hormuz, through which about 40 percent of the world’s globally traded oil passes, when tensions rose in another row with the United States around the nuclear work.

Even so, sluggish oil demand, reinforced by some lacklustre economic data from the United States last week, continued to command investors’ attention.

“The Iranian situation is not having much influence. If it was, we’d be back towards $70 again,” said Christopher Bellew, a broker at Bache Commodities in London.

Oil prices posted their largest weekly decline in around 2-3 months last week, pressured by government data showing U.S. crude oil inventories had risen, suggesting demand remains weak.

U.S. durable goods orders dropped by the largest amount in seven months while a rise in new home sales was less than forecast, according to data from the U.S. Commerce Department on Friday.

Sept 28 (Reuters)

Oil peaked at $147 per barrel in July 2008 — right before the house of cards came crashing down on the global economy. Once banks started to fail and credit dried up, other businesses slowed production and laid off workers. This created a massive trickle effect on the overall economy.

Big corporations and individual consumers alike were using less energy. That meant the prices of every energy-related commodity plummeted.

This spring, things started to turn around… The unemployment rate quit falling at such a rapid rate. Inventories were too low in many industries, creating a ramp up in production again. Energy prices climbed…

Since the start of this year, the price of crude oil has nearly doubled. In just the last six months, heating oil jumped as much as 90%. These two commodities are still cheap as far as we can tell. But they aren’t the real story…

Two other commodities are still low, but won’t be for long…

Coal and Natural Gas Are Commodity Buddies

Back in June, Greg Guenthner told you about coal’s recent history. Coal, being the most widely used fossil fuel in the U.S., took an extra-hard hit during the past several months. It’s down nearly 70% and hasn’t recovered in the slightest.

Demand will flood back into the system. In fact, that’s already happening. We have no doubt that the coal play we let our Penny Stock Fortunes readers in on is the best way to take advantage of the coming coal boom. But there’s another energy commodity about to shoot even higher, even faster…

Natural gas prices have utterly collapsed. After trading above $13 in June 2008, natural gas fell the whole way down to $2.70 today. Its decline happened as gradually as can be. Most of the financial world has been trying to time the bottom for months. But it keeps falling.

We don’t know if this is the bottom, but it can’t be far from it. It doesn’t matter to us even if it’s not. You see, we found the best natural gas seasonal laborer in the world, and we can just wait it out… no matter how long it takes.

Before we get into any specific natural gas play, we need to know how big natural gas’s recovery will be…

Why We’ll See Natural Gas 209% Higher By Year-End

Natural gas and coal go hand in hand. They are oftentimes found together in the same place. Natural gas hides beneath and between coal beds. It’s not uncommon for a coal company to come in and mine the same site an oil and natural gas driller just left.

When one of these two is no longer in demand, it usually spells trouble for the other. That’s one of the main reasons natural gas has taken such a hit. But just as they fall together, they rise together.

We already laid out the reason coal will see a price spike in coming months and years. Natural gas is just as lucrative, if not more…

Natural gas demand is continuing to increase around the world at an unprecedented pace. Many nations are starting to choose NG over traditional coal and oil in power plants. It burns about 29% cleaner than petroleum and 44% cleaner than coal.

And because of its recent price collapse, it’s now the cheapest choice for customers. Why pay more for coal or oil when you can get natural gas for $2.50 per thousand cubic feet?

The supply side of the coin is even more compelling…

The U.S. imports around 17% of its natural gas — almost all of which comes from Canada. Unfortunately, Canada’s natural gas reserves are drying up. Daily Canadian natural gas production peaked in 2001. We’re already back down to 1995 production levels, and falling.

Natural gas production here in the U.S. has also fallen off a cliff. Most drillers can’t drill for a profit at these prices. So they aren’t. We have almost no production right now. We’ll eventually burn through stored natural gas reserves. When they go too low, it will spur a panic.

This panic will be enormous. Natural gas is simply too cheap. It hasn’t been this cheap for decades. The average oil-to-natural gas price ratio is about 9.3. Now it’s at about 29.

It wouldn’t take much for prices to shoot upward from here. To reach the 20-year average natural gas-to-oil ratio, NG prices would have to climb 209%.

That doesn’t take into account the future boom in demand. It won’t take long for it to correct itself…certainly before the end of this year.

This panic is inevitable, and there are a number of penny stock plays that could take advantage of it… Union Drilling (NASDAQ: UDRL) and Pioneer Drilling (AMEX: PDC) are two that could be worth looking at right now.

Sincerely,
Jim Nelson

Source: Natural Gas’ Triple Could Give Us a 416% Gain by Year-End

Back in the 1960s and 1970s, a few major companies took out oil exploration concessions there from the government of South Africa. In 1974, Shell (NYSE: RDS.A / RDS.B) discovered a gas field off the southwest coast with the Kudu project. Early estimates were 1 trillion cubic feet of reserves, but current estimates range up to 10 trillion. Kudu was big, but nobody much cared about natural gas back then. Gas was too cheap, and southern Africa was too far away.

There was hardly any development around Kudu for the next 20 years. South Africa was under international sanctions due to its apartheid regime, so oil companies and other outside investment stayed away. Almost nothing happened with energy development until Namibia became independent in 1990.

By the early 1990s, the gas field at Kudu intrigued foreign oil companies. Kudu showed a large hydrocarbon resource. Clearly, there was significant potential. But nobody really understood the offshore geology. Plus, back then, it was tough to drill in water more than about 1,500 feet deep. Namibia didn’t make for an investment magnet.

But with the recent success of offshore Brazil, the energy exploration expectations of the world have been fundamentally altered. The same brilliant researchers and scientists that discovered the potential of Brazil’s Tupi field are now doing extensive research in offshore West Africa, in particular offshore Namibia. One researcher I’ve been following very closely believes the offshore areas of Namibia are ‘geologic analogues’ to Brazil.

Source: The Next Great Oil Frontier

Supply has outrun demand this year as a global recovery has yet to accelerate. Yet, oil prices more than doubled from February to August and are up about 50% from where they started the year.

Now, many traders are positioning themselves to profit from a pullback. The gap between prices of options betting on a decline in prices and those that would profit as a result of a rise in oil has widened to a record 10 percentage points, according to five years of data compiled by Banc of America Securities-Merrill Lynch.

Put options, which give traders the right to sell oil in December below current prices have an implied volatility of 54.3%, compared to 43.3% for options to call, Bloomberg News reported. Implied volatility is estimated volatility of a security’s price. Implied volatility generally increases when the market is bearish and decreases when the market is bullish.

Implied volatility is used in calculating an option’s premium and right now the premium for December and other put options shows “the market is worried,” Harry Tchilinguirian, a senior oil analyst at BNP Paribas SA (NYSE ADR: BNPQY) told Bloomberg.

“If puts are pricing higher than calls, we are looking at a situation where the market is more averse to the downside and is looking for more compensation” for the option, he said.

Perhaps the biggest reason the market is worried is that a generous supply of oil remains on the market, some of it piled up in offshore tankers. Meanwhile, the global economy is healing at a considerably slow pace with many analysts forecasting a so-called U-shaped recession for the United States – the world’s largest petroleum consumer.

U.S. stockpiles of crude are 14% higher than they were a year ago, according to the International Energy Agency (IEA). U.S. distillate fuel inventories – which include heating oil and jet fuel – stood at 167.8 million barrels as of Sept. 11 of this year, according to the Energy Information Administration (EIA). That’s the highest level since 1983.

As of Sept. 11, U.S. gasoline supplies are at 207.7 million barrels – 2.2% higher than they were in late May at the start of peak summer driving season, according to the EIA.

The story is much the same overseas where gasoil stockpiles – the European equivalent of heating oil -reached a record 23 million barrels on Sept. 10, according to PJK International BV, Bloomberg reported.

At the end of July, oil inventories in the 30 nations of the Organization for Economic Cooperation and Development (OECD) totaled about 2.8 billion barrels – 4.6% more than the same time last year, according to the IEA. More than 60 million barrels of oil are being held in tankers offshore.

The Centre for Global Energy Studies (CGES) in a monthly report that it expects high crude stockpiles will continue to constrain the market.

“The CGES expects little sustained upward pressure on oil prices over the remainder of this year and even next year prices are unlikely to rise much unless clear signals emerge that world is pulling out of recession in a sustainable fashion,” the CGES said. “High inventories, particularly of middle distillates, are putting a ceiling on oil prices at the moment … and this will only lift once those inventories start to be drawn down.”

The report also noted the Organization of Petroleum Exporting Countries (OPEC), which controls 40% of the world’s oil supply, sees promoting economic growth as being more important than the short-term pursuit of higher prices.

“OPEC signaled its broad satisfaction with the current level of oil prices when it met in Vienna earlier this month,” CGES said. “It recognized that sustainable upward price pressure will only come with economic recovery and rising oil demand.

Saudi Arabia’s oil minister, Ali al-Naimi weeks ago told reporters that the cartel is more concerned with reinvigorating the global economy than raising oil prices.

“Economic growth is the name of the game, that’s what’s going to drive the price,” said al-Naimi. “As long as economic growth is there, the price is going to go up.”

OPEC has last year lowered its production quotas by 4.2 million barrels per day (bpd) – about 5% of global demand – hoping to put a floor under prices that plunged more than 80% from their record high above $147 a barrel last summer. The reduction was effective in halting the fall in prices, but even with the cuts supplies continue to grow.

Additionally, some OPEC nations have not strictly adhered to the mandate. The cartel’s production exceeded its quotas by 1.2 million barrels a day in August, according to Bloomberg estimates.

The glut of oil on the market has some analysts wondering whether or not spooked speculators will hasten their retreat from the market.

“If ever there was going to be a retreat below $60 a barrel, it is now,” Stephen Schork, president of consultant Schork Group Inc. in Villanova, Pa., told Bloomberg in a telephone interview.

Light, sweet crude for December delivery yesterday tumbled $2.33 a barrel, or 3.24% to settle at $69.71.

Source: Traders Anticipate a Drop in Oil Prices as Supply Outruns Demand