Oil rose towards $71 a barrel on Friday after Nigerian rebels said they blew up a wellhead in a Royal Dutch Shell oilfield and as equity markets rallied on perceptions the global recession was easing.

The move followed a 2 percent gain on Thursday and put oil on course for a 7 percent gain this week, buoyed by prospects for an economic recovery that has lifted prices from below $40 over the past four months.

The release of the June consumer sentiment index by the Reuters/University of Michigan Surveys of Consumers later on Friday was expected to reflect a mildly improving outlook for the U.S. economy, auguring well for ailing world energy demand.

U.S. first-quarter gross domestic product shrank less than estimated, suggesting the downturn was easing.

By 1110 GMT, benchmark August U.S. crude oil was up 50 cents per barrel at $70.73, having hit a high of $71.29, up $1.06. London Brent rose 46 cents to $70.24.

Nigeria’s Movement for the Emancipation of the Niger Delta (MEND) said it attacked the wellhead in the Afremo oilfield because the military had gone on a “punitive expedition” in Delta state shortly after President Umaru Yar’Adua announced an amnesty offer for rebels.

SHUT IN PRODUCTION

The military denied carrying out any such campaign.

Shell said it was investigating reports of an attack on its Afremo platform B facility, which had already been shut down following an attack on the Trans Escravos pipeline in February.

Afremo was one of the sites MEND also said it had attacked in a triple raid on Sunday. It described the field as being 14 miles from an export terminal through which crude oil from Shell’s Forcados fields is pumped.

Pipeline bombings, attacks on oil and gas installations and the kidnapping of industry workers over the past three years have prevented Nigeria from pumping much above two thirds of its installed oil output capacity of 3 million barrels per day.

The intensity of recent attacks in Nigeria have taken the oil market by surprise and tightened West African oil supplies.

“Attacks by the MEND have forced foreign oil companies to shut at least 133,000 barrels per day of Nigerian production in the last month,” MF Global said in its daily note to clients.

Iranian tension has also supported oil. About 20 people have died in protests after Iran’s June 12 presidential election, the most serious unrest since the 1979 Islamic revolution.

Fuelling oil’s rise, Exxon Mobil said its huge Baytown refinery suffered an operational glitch that triggered flaring, sparking worries the largest U.S. oil refinery could tighten gasoline stockpiles during this summer’s peak demand driving season.

Firmer Asian stocks on the back of Wall Street’s rally also lent support, with shares outside Japan climbing 1.4 percent and Japan’s Nikkei up 0.8 percent.

European shares advanced in early trade.

A further boost came from a fall in the dollar against most major currencies on Friday as investors shifted funds back into risky assets after the Federal Reserve this week appeared to confirm it would keep interest rates low for a while.

The Reuters/University of Michigan final June consumer sentiment index, due at 1355 GMT, is expected to show a reading of 69.0 compared with 68.7 in the May report, a Reuters poll of economists showed.

LONDON, June 26 (Reuters)

If you grew up in the United States, you know that English literature is one of those subjects they foist upon you in 10th grade or so. I recall very little from English Lit 101. Most of the stories and poems we read (or pretended to read) have become a hazy blur.

But after all these years, one poem still stands out. Due to its oddness and simplicity, I have never forgotten it. The poem is “Red Wheelbarrow” by William Carlos Williams, and it goes like this:

so much depends

upon

a red wheel

barrow

glazed with rain

water

beside the white

chickens.

That poem comes to mind as I ponder the odd yet powerful simplicity of this global market rally. If you take a look around, it is quite impressive how everything has moved higher. And I do mean just about everything. Commodities are up. Currencies are up. Emerging market equities (and bourses around the world) are up. Dead duck U.S. consumer retail stocks are up. Crude oil, which has moved twice as far in half the time in comparison to all previous rallies of the past two decades or so, is way, way up.

So what’s going on? With apologies to William Carlos Williams, here’s the poetic take:

so much depends

upon

a red China

stockpile

paid for by

stimulus

beside the massaged

data points.

Translation for all you non-poetic types: China has taken the “industrial inflation hedge” concept and gone to town with it. It has been stockpiling raw materials and hard assets like crazy, and this in turn has popped the Baltic Dry Index (lots of shipping required) and driven commodity prices up.

At the same time, a steady stream of rosy data points on the Chinese economy has convinced investors that all is well, that “decoupling 2.0″ is at hand, and that the dragon shall boldly lead us into the land of milk and honey (i.e. global economic recovery).

Stockpilin’

The “industrial inflation hedge” concept was introduced in these pages some time ago (and originally to Macro Trader members some time before that). On April 22nd we observed the following:

Hard assets like copper and nickel and zinc are immune to the whims of the printing press, and China will need all those metals and more, in substantial quantities, to build out the vision of economic prosperity it holds for the coming years. And what better time to stock up than in the quiet period before a stimulus- and debt-fueled inflation tsunami returns?

We further observed, in that April 22nd piece, that China would employ three specific strategies in its “stealth abandonment” anti-dollar campaign:

1. Speak to those with ears to hear (i.e. test the waters with subtle trash talk against the dollar).
2. Quietly circulate the yuan (start small, with the intent of later challenge once strength has accrued).
3. Embrace the industrial inflation hedge (buy boatloads – literally! – of raw materials and hard assets).

All three elements have come to pass, as predicted and expected, with one major caveat. Your humble editor expected these strategic moves to be deployed gradually and quietly. Instead they have been deployed rapidly and loudly, to a shocking a degree.

The dollar trash talk has become anything but subtle… Chinese officials are now making aggressive, vocal demands that the yuan be used in more transactions, even going so far as to call for the issuance of yuan-denominated U.S. debt (!)… and, last but not least, the dragon has gone absolutely hog wild with the industrial inflation hedges.

In an eye-opening piece titled “China’s Commodity Buying Spree,” The New York Times chronicles just how much of a hoarding groove China has gotten into:

At least 90 large freighters full of iron ore are idling off Chinese ports, where they face waits of up to two weeks to unload because port storage operations are overflowing, chief executives of shipping companies said in interviews this week. Yet actual steel production from that iron ore is recovering much more slowly in China, and Chinese steel exports remain weak.

Commodities and shipping executives describe Chinese stockpiling in recent months of a range of other commodities as well, including aluminum, copper, nickel, tin, zinc, canola and soybeans. Starting in April, China began stockpiling significant quantities of crude oil.

No wonder commodities have been ripping and snorting like the good old days. And no wonder traders are looking around and starting to see inflationary pressures everywhere.

The Page One Problem

We went on record expecting this to happen, and it did. Man oh man, did it ever… and it’s still happening, right now. Copper and oil are breaking out to fresh highs as I write. The commodity currencies, too, are flying higher than a kite (great news for all of you who took our table-pounding currency diversification advice some months back). That’s all a reason to be happy, right?

Yes, but to be honest, for me it also creates a reason to be nervous. I look at some of these incredibly extended trends and I think about an old Yogi Berra line: “Nobody goes there anymore, it’s too popular.” Trends are like people – they can get frail with old age. Trends can also get winded. They need to breathe.

What’s more, China has been so blunt and upfront in its “down with the dollar, up with hard assets” campaign that I’m starting to wonder how far we are from the “page one” problem.

By page one I mean page one of the newspaper. The idea being, you don’t make money from news stories that are splashed above the fold in bold headline type. You make money from the story buried back on page sixteen, where few have really cottoned onto it yet.

It’s the process of migration from page sixteen to page one that produces the profits. By the time everybody and their brother know the deal, it’s pretty late in the game.

Then, too, I wonder how many checks China can write. Ninety freighters full of iron ore! Damn! Where are they going to put all that stuff? When it comes to hard assets, are they going to just buy everything available… or only buy as much as they can afford? Is there any distinction between the two?

It’s very tough to say, of course. We know little about China’s hidden intent, and Beijing likes to play it close to the vest. China-watcher energy analysts are so data starved, for instance, some of them are using the free satellite capability of Google Earth to make guesses about where China might (or might not) be storing crude. (Apparently there is a way to interpret building structures and ground movements with oil in mind.)

China’s strategic intent and spare buying capacity thus become key factors here. If the dragon intends to throw another couple hundred billion directly at hard assets, then maybe the page one treatment won’t matter. A buying spree with that kind of aggressive depth and duration could drive a move for quite a long time, regardless of how many caught wind of it… sort of how oil soared to triple digits and beyond even as the world gaped in awe.

But one has to wonder… could even cash-rich China find itself tapped for funds at some point? I mean, how much aluminum, copper, tin, canola, soybeans and so forth can a country sit on? And beyond a certain point, when the stockpiles pile up to the sky, aren’t there more pressing uses for the funds?

Dubious Data Points

The other disconcerting thing is the lack of visibility when it comes to China’s economy. We are told that China is doing amazingly well, and the official statistics seem to back this claim. Investors certainly seem to believe this, as China’s health is the rationale for bidding up emerging markets like gangbusters.

But there are all kinds of weird discrepancies on the ground. For example, China’s electricity usage has gone down when it should have gone up. That doesn’t make sense if factories are humming.

And then there’s this, via Grant’s Interest Rate Observer. In a recent Morgan Stanley fact-finding trip, the analyst who led the trip reported 11 out of 12 investors left Chinese soil with fresh concerns. “It’s not that the stimulus is not working,” the analyst noted, but more that “the trip exposed massive levels of excess capacity…”

So it sounds like China indeed has a leg up on the United States in terms of putting their half trillion bucks or so to immediate and aggressive work. But while the mandarins in Beijing know how to move fast, they aren’t necessarily the greatest at figuring out what to spend the dough on.

One might further think Western investors, as acquainted with the ills of government as they are, would be more skeptical than Chinese locals in regard to anticipating positive effect. But no… the outsiders buy the China recovery story hook, line and sinker, while the insiders maintain their doubts. “The local Chinese are clearly skeptical,” the same Morgan Stanley analyst tells Grant’s, “as savings rates are rising despite government incentives to consume.”

So Much Depends…

And now we come full circle back to the William Carlos Williams poem.

What we are experiencing now, I believe, is a massive sentiment-led rally (or bull move, or whatever you wish to call it)… and it is almost all pure sentiment so far, with buying rooted in hopes for the future rather than actual improvements reported. “So much depends” on China as savior – the cornerstone and lynchpin of the decoupling 2.0, turn-the-clock-back mentality that has now gripped the globe.

My slim hope is that the Chinese really and truly know what they are doing, because, in fueling investor optimism with such flair, they are playing a high stakes game. My worry is that they drop the ball, somehow, and the result shows up as a violent wake-up call for “high beta” assets… emerging market equities, energy, commodities and the like.

What happens next is far from clear. The huge stockpiles could continue to grow at a breathtaking pace – after all, Beijing has plenty of greenbacks to work through – and the dragon’s data points could continue to impress, or at least not frighten.

But with that said, a stumble from the dragon… and the shock of a sharp, swift deflationary contraction immediately following… does not feel like a far-fetched scenario at this point. It would certainly have profit potential as a surprise event, given how far the notion seems to be from Mr. Market’s mind.

Source: The Fate of This Rally May Rest in China’s Hands

• Crude oil yesterday (Wednesday) rose above $62 a barrel, a six-month high, after the U.S. government released a report that showed inventories fell below forecasts. “The big drops in both crude and gasoline are very bullish,” Nauman Barakat, senior vice president of energy at Macquarie Futures USA Inc., told Bloomberg. “If people were surprised by how fast crude oil moved from $50 to $60, they will be really shocked by how quickly the market will hit $70.”

• The courtship of General Motors Corp.’s (NYSE: GM) Opel unit is down to three potential suitors – Italy’s Fiat SpA (OTC ADR: FIATY), Canadian-Austrian car parts group Magna International Inc. (NYSE: MGA) and investment firm RHJ International, Reuters reported. GM has a June 1 deadline to restructure and raise capital if it wants to avoid a forced bankruptcy.

• Brazil is on the mend from its biggest economic drought and may grow as much as 4% in the second half of the year, Itau Unibanco Banco Multiplo SA’s (NYSE ADR: ITU) Chief Executive Officer Roberto Setubal said at a conference in New York. “Our economy is showing very strong signs of recovery,” Setubal said, Bloomberg reported.  “The pace of growth is already there, and I believe we will see a very strong second semester in Brazil.”

• Target Corp. (NYSE: TGT) and BJ’s Wholesale Club, Inc. (NYSE: BJ) reported better-than-expected earnings for the first quarter. Target did so by reining in expenses and inventory. BJ’s – which raised its first-quarter forecast earlier this year – cited higher-than-expected merchandise sales and margins, Reuters reported.

• President Barack Obama is expected to quickly sign a bill imposing sweeping new limits on the credit card industry passed by Congress yesterday (Wednesday), Reuters reported.  The House of Representatives voted 361-64 to approve the bill as adopted on Tuesday by the Senate, in a major win for the president and congressional Democrats.  The so-called “Consumer’s Bill of Rights” would strictly limit credit card issuers’ ability to raise interest rates on cardholders’ existing balances and to charge certain fees.

• California voters yesterday (Wednesday) struck down five measures backed by Republican Governor Arnold Schwarzenegger and the Democrat- led legislature that were intended to shore up the state’s finances. With the governor expecting California to have $21 billion less than it needs over the next 13 months, the most-populous U.S. state is on the verge of running out of cash for the second time this year after the ballot measure defeat added $6 billion to the budget deficit, Bloomberg reported.

• Wall Street securities brokers are not expected to rehire many of the workers let go during the global financial meltdown, a New York City fiscal monitor said in a gloomy report released yesterday (Wednesday). The Wall Street firms will replace only a small number of the lost jobs by 2013 even if the industry returns to profitability next year, the city’s Independent Budget Office said in the report, according to Reuters.

• A group of Indiana pension funds filed court papers late yesterday (Wednesday) objecting to a plan to auction Chrysler LLC’s assets and said a U.S. District Court judge should rule on the legality of the sale, Bloomberg reported.  The pension funds, which hold first lien debt of the automaker, asked U.S. Bankruptcy Judge Arthur Gonzalez in New York to block the sale, claiming the plan is illegal and infringes their rights.  The funds are also asked for appointment of a trustee to run Chrysler.

Source: Investment News Briefs  Thursday, May 21, 2009

And as Adam Lass points out in Taipan Daily, “for most of this year, $50/barrel has been one of those psychological ‘lines in the sand,’ much like Dow 8,000 for a while there.”

There can only be two reasons for this, according to Adam:

First of all, there is the obvious: if the global economy recovers even in the slightest, the ensuing increases in manufacturing, shipping and travel will require energy, and despite the best of green intentions, for now energy still means oil.

Second, despite all the rumblings about finding a new world currency, oil is still priced globally in dollars. And while it may be taking Washington an agonizingly long time to actually disburse all the dollars it has promised, it is finally getting around to it.

Eventually, an increase in GDP might soak up enough of those dollars to make a difference. Just as eventually my wife’s dog will grow thumbs and learn to open his own food. Could happen: he’s a pretty smart little guy and all. Still, I am not holding my breath – on either front.

Gold is also likely to benefit from inflation. What many investors – even gold bugs – don’t realize is that small gold ‘explorers’ always produce the biggest gains in gold bull markets.

But what’s really interesting is that they typically explode in price after the price of gold has already jumped. In the late 1970s, for example, the price of gold skyrocketed from around $200 in 1979 to over $800 in January 1980. But it wasn’t until after the price of gold peaked that the best exploration companies saw their biggest gains.

What kind of profits are we talking about? Carolin Mines up 1,739%; Lincoln Resources up 2,464%; Copper Lake Expl. up 13,025%; David Minerals up 1,726%; Eagle River Mines up 3,479%; Silverado Mines up 3,987%; Wharf Resources up 2,779 %

A simple $500 invested in just 11 of these companies would have given you $172,585. $1,000 invested in each would have given you about $350,000.

Mining guru and friend Doug Casey has written a special report about today’s gold exploration companies, Toronto’s Secret Gold Investment. You can get the details here.

So far over the past several columns, I have written to you about cars and tires. So today, let’s talk about something completely different. How about oil?

Damn it!

Okay fine: it’s the American obsession, and last I checked, my passport said I am an American too, so why should I be any different? Besides, there’s some interesting stuff happening with oil futures and energy stocks.

Crossing the Line

Let’s start with crude oil setting its 2009 high at $54.83 in New York intraday trading. For most of this year, $50/barrel has been one of those psychological “lines in the sand,” much like Dow 8,000 for a while there.

View Larger Image Here

Now that traders have firmly stepped across both lines, interest is perking up from all quarters, both in stocks and in oil. One really must follow the other for two reasons.

The Cost of Doing Business

First of all, there is the obvious: if the global economy recovers even in the slightest, the ensuing increases in manufacturing, shipping and travel will require energy, and despite the best of green intentions, for now energy still means oil.

Second, despite all the rumblings about finding a new world currency, oil is still priced globally in dollars. And while it may be taking Washington an agonizingly long time to actually disburse all the dollars it has promised, it is finally getting around to it.

Eventually, an increase in GDP might soak up enough of those dollars to make a difference. Just as eventually my wife’s dog will grow thumbs and learn to open his own food. Could happen: he’s a pretty smart little guy and all. Still, I am not holding my breath – on either front.

It’s Baaaack (cue the creepy music)

Yeah, yeah, I know: the Fed claims that inflation is actually “below rates that best foster economic growth and price stability in the longer term,” and plans to keep rates at or below zed for the foreseeable future. That’s their story and they are sticking to it.

Traders, on the other hand, are already starting to act on the idea that inflation IS creeping back into the picture. Taken a gander at 30-year T-Bonds lately? Last December, futures were hovering around 142 and change with yields under 2%. Now we were looking 122, a drop of some 14%, forcing yields to just about double.

Best part is, you really don’t have to say which argument is your favorite, as they are not mutually exclusive. Beyond that, they are value arguments: we could tussle over which one is driving oil futures up till the cows come home.

The Heart of the Matter

What truly matters is that oil futures are up, and are likely to keep moving up. While many analysts are having a blast tussling over the penny changes caused by weekly rises and falls in stored reserves, most all concede that crude will be in the vicinity of $65-$70 by year’s end.

With oil’s downside risk clearly defined by a rounding bottom, and a strong upside story playing out both in the news and charts, interest is also returning to oil and energy stocks.

Looking to the Energy Select Sector SPDR (XLE:NYSE) – which still contains the world’s most profitable companies – we see that investors have crossed that same line in the sand. The recent price recovery has put the XLE up over the resistance node at $46.65 and firmly on the path through $55.25 and $63.74 as it moves towards the attractive node at $74.32.

View Larger Image Here

Simply buying shares of XLE could net you a reasonably satisfying gain just shy of 50%. But if we are seeing the return of inflation and the demise of the dollar (and we really, truly are), then you might want to make your very own dollars multiply a tad faster than that.

If so, then you could consider speculating on the XLE January 2010 50 Calls (WHA AX). That same move would allow these calls to rise from $621/contract to as much as $2,091 for a gain of some 237%.

Source: What Bond and Oil Traders Know About Inflation – and How You Can Make 237% Off It

So much for history.

It makes more sense to focus on the present – and that means taking what the market gives us. With commodities, that’s a hearty dose of volatility…

Another Chance To Go Long On Natural Gas

The natural gas market giveth and then taketh away.

We’ve been bullish on the natural gas market since the price hit a long-term support level near the $4.500 per MMbtu mark a few months back. Since making a new low price of $3.740 (based on the May 2009 futures contract) on March 18, the futures blasted higher by 1,000 ticks and reached a high of $4.750.

But with a surprise Energy Information Administration report last Thursday, which showed a much larger buildup of underground natural gas supplies, the market has sunk right back to its lows of $3.750 per MMBtu.

Although we’re a little disappointed with the current state of this market, we continue to like natural gas for the very long-term – particularly as hurricane season creeps closer and the risk of damage to natural gas operations in the Gulf heightens.

If you’re thinking of initiating bullish trades, you can do it through the natural gas futures options market on the NYMEX, or on the market’s main ETF – the United States Natural Gas Fund (NYSE: UNG).

A Wide Range For Crude Ahead

Crude oil continues to swing in large ranges.

The May futures contract just hit a near-term high of $54.66 per barrel – a significant jump from its low of just under $40 last month. But with a bout of profit-taking in the mix, the contract’s 20-day moving average has moved to support near $49 per barrel.

Depending on the mood of the market, we could see oil hold at this level and head higher again. If it doesn’t hold, though, we could see a drop back down to $40 very quickly.

Regardless, our near-term trading range for oil continues to fall between $30 and $60 a barrel.

Metals Pause For Breath… But Get Ready For The Next Move Higher

With gold and silver having recently tagged highs ($1,000 per ounce for gold and $14.50 per ounce for silver), both have taken a bit of a breather and retraced some of their gains.

This kind of profit-taking is perfectly normal – and is actually a good thing, as it gives the markets a chance to consolidate in preparation for the next leg higher. We still believe this will happen.

For gold: We don’t see the front-month futures contract (June) trading much below $870 per ounce after the current pullback is over.

For silver: We shouldn’t see a price much below $12 an ounce for the May contract.

With the stock markets still unsteady, many investors are sticking with metals as part of a diversified portfolio.

Aside from using limited-risk option strategies to play gold and silver futures options on the COMEX market, you can buy outright shares of the ETFs that track the price performance of gold and silver – the SPDR Gold Trust (NYSE: GLD) and iShares Silver Trust (NYSE: SLV) respectively. You can also play options on these ETFs.

Could Winds Whip OJ Into A Bullish Frenzy?

Keep an eye on the orange juice market. It’s definitely bounced off its yearly lows near $.65 per pound and has trended higher to its current price of $.77 per pound.

Orange juice is a market that heats up towards the late spring/early summer – and is then on full “hurricane watch” from June until November. We’ll continue to post the monthly chart of orange juice as a reference point of where it’s been before – and could potentially go again.

That’s all for this edition. Catch you next time.

Source: Natural Gas: Another Chance to Profit As This Commodity Takes a Tumble

After such a wrenching plunge, many analysts believe the outlook for the “black gold” remains bleak – and in the short term it certainly is. In the long run, however, dwindling supplies, resurgent demand, and a lack of investment will cause crude oil to double, triple, or even quintuple in price over the next few years.

In fact, the Paris-based International Energy Agency (IEA) – energy advisor to 28 industrialized nations – says oil will rise to $100 a barrel by 2015, as a result of a major “supply crunch,” and will ultimately soar to $200 a barrel.

But before it does, prices are likely to sink even further, perhaps falling as low as $20 a barrel in the first quarter of the New Year.

Indeed, much of Wall Street expects oil prices to average about $50 a barrel in 2009. Some of the firms and their specific forecasts include:

• Deutsche Bank AG (DB, which says oil prices will average $47.50 for all of next year.
• Merrill Lynch & Co. Inc. (MER), which predicts that prices will average $50 even.
• Moody’s Investors Service (MCO) also says crude will average $50 a barrel in 2009, but says that average will increase to $55 a barrel for 2010.
• Goldman Sachs Group Inc. (GS) is slightly more bearish, predicting that prices will average $45 for all of next year – after falling as low as $30 in the 2009 first quarter. (It’s worth noting that Goldman – just five months ago – predicted oil prices would hit $200 a barrel in 2009).

But analysts also agree on something else: When the recessionary tide finally recedes, all of the factors that drove oil to its record high last summer will once again be exposed, and crude again will again soar to record highs.

“We may see prices drop lower – into the twenties, even – but there’s a better-than-average chance that they’ll be back over $70 a barrel by the end of next year,” says Money Morning Investment Director Keith Fitz-Gerald. “That’s where firms like Goldman and Merrill are getting all of these ‘middle-of-the road,’ $50-a-barrel estimates. And it’s why investors who buy in through the first quarter could enjoy compelling returns at the end of the year.”

In the meantime, however, low oil prices are crimping investment in new capacity, a reality that will lead to much higher prices down the road.

Just ask the IEA.

IEA: Rising Demand + Lack of Investment = ‘Supply Crunch’

According to widely respected energy advisor, global oil demand will slide 0.2%, or 200,000 barrels per day (bpd), this year, falling to an average of 85.8 million bpd. But the IEA also says that oil demand will advance by an annual average of 1.6% between 2006 and 2030.

The bottom line: Regardless of any short-term pullback, daily demand will rise from the current level of 86 million barrels to 106 million barrels in 2030. In other words, daily demand in 2030 will be 23%.

To meet that demand, the agency estimates that the world needs $26.3 trillion in supply-side investments over the next 21 years.

China, India and other developing countries, alone, will need investments of $360 billion a year through 2030, the agency said.

About 7 million bpd of additional capacity needs to be added to the market by 2015. And right now – because of marketplace changes – the financial incentives to make that happen just don’t exist.

Exploration costs have more than quadrupled since 2000, as oil producers have been forced to take on more complex projects, and the costs of both labor and materials have skyrocketed. At the same time, the steep drop in oil prices has put even more pressure on energy companies to curtail their investments rather than increase them.

Earlier this year, for instance, ConocoPhillips (COP) and Saudi Arabia Investment Co. (ARAMCO) were forced to postpone bidding on the construction of a 400,000 bpd export refinery at the Yanbu Industrial City.

“We see and hear about energy investments being delayed … this is a major worry and could lead to a supply crunch and much higher oil prices than we’ve seen before,” said Fatih Birol, the IEA’s chief economist.

The IEA predicts that, by 2015, a lack of investment and rising demand will create a “supply crunch” – that will once again send oil prices up into the triple digits.

“There remains a real risk that under-investment will cause an oil supply crunch in that time frame,” the IEA said in an executive summary of its “2008 World Energy Outlook.” “The gap between what is currently being built and what will be needed to keep pace with demand is set to widen sharply after 2010.”

The agency predicts that crude will average more than $100 a barrel from 2008 to 2015 and rise above $200 a barrel by 2030, as demand far outpaces supply.

“While the situation facing the world is critical, it is vital we keep our eye on the medium to long-term target of a sustainable energy future,” Nobuo Tanaka, the Paris-based agency’s executive director, told reporters in London. “While market imbalances will feed instability, the era of cheap oil is over.”

While it’s probably true that the “era of cheap oil” is in our rearview mirror, a new question has arisen: Just how high do oil prices go?

According to some analysts, the IEA’s target price of $200 a barrel is far too conservative.

$500 Oil?

The lack of exploration and development is certainly a problem. But a much bigger issue is the fact that output from the world’s existing oil fields has sharply declined.

“The future rate of decline in output from producing oilfields as they mature is the single most important determinant of the amount of new capacity that will need to be built globally to meet demand,” the IEA says.

And output from the world’s oilfields is declining faster than previously thought.

In its “2007 World Energy Outlook,” the IEA estimated that output from the world’s existing oilfields was declining by 3.7% a year. But in its latest report, published in November, the IEA revised that estimate to an annual decline of 6.7%. (The November report was based on the first major study of the world’s 800 largest oil fields.)

Unfortunately, the IEA is behind the curve.

For nearly a decade, Matthew R. Simmons has said that the world’s oil production was nearing – or already at – an “inflection point.” While his book “Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy,” was scoffed at when it was originally published back in 2005, Simmons is now viewed as perhaps the preeminent expert on the so-called “peak oil” movement.

“Like most people who ignore conventional wisdom, he was scoffed at, ridiculed, and denied,” commodities guru Jim Rogers told Fortune magazine. “And now, of course, people are starting to say, ‘Oh, well, I thought of that.’”

Simmons, chairman of the Houston-based investment bank Simmons & Co. International, poured through hundreds of technical documents submitted by Saudi oil geologists to the Society of Petroleum Engineers over the past 50 years.

“I finished reading the last paper on a Sunday afternoon,” Simmons told Fortune, “and I sat back and thought, ‘Holy crap, this is unbelievable. I’ve just discovered the biggest energy illusion ever in the world. We’re in big trouble. I’m going to write a book.’ ”

Much of the alleged Saudi Arabia subterfuge has to do with a complete lack of transparency with respect to the Organization of Petroleum Exporting Countries. After OPEC decided to base its production quotas on reserve figures in the 1980s, several of the cartel’s producers suddenly raised their levels of  “proven reserves” by 40% or more.

Back in 1988, for instance, Saudi Arabia raised its proven-reserve figure from 170 billion barrels to about 260 billion barrels. That figure has remained more or less constant since then, despite the fact that billions of barrels of oil have been pumped out of the ground.

“Saudi Arabia has announced for 20 years in a row that they have 260 billion barrels of oil in reserve,” Rogers told Money Morning during an exclusive interview in Singapore recently.  “It’s astonishing.  The figure never goes up and it never goes down.  They have produced dozens of millions – billions – of dollars of oil in that period of time.

“Every oil country in the world has declining reserves except Saudi Arabia,” Rogers said. “And I know that every oil company has declining reserves.  So unless somebody discovers a lot of oil very quickly in very accessible areas, the surprise is going to be how high the price stays, and how high it goes.”

Simmons thinks oil prices could hit $300 a barrel – and could possibly even surge as high as $500 a barrel – during the next several years.

“Black Gold” Profit Plays

When it comes to investing, the oil sector poses some very clear risks, especially given the murky near-term outlook. However, there are a number of large-cap integrated oil companies that may offer some truly compelling values at current prices.

Exxon Mobil Corp. (XOM) and Chevron Corp. (CVX) are currently trading at multi-year lows, making them exceptionally cheap in both relative and absolute terms. These companies also have strong balance sheets (Exxon is “AAA”- rated and has more cash on its balance sheet than debt), generate strong cash flows, and have traditionally increased their dividends on a regular basis.

Chevron was actually recommended as a “Buy” by Money Morning Contributing Editor Horacio Marquez in his “Buy, Sell or Hold” column earlier this year.

“Chevron is the kind of company that is capable of continuing to post large profits – propelling its share higher from current levels – even if oil-and-gas prices were to drop from current levels over the next three years,” Marquez said. “That’s because Chevron’s business is well cushioned, since refining, marketing and chemicals margins would expand dramatically if market ‘spot’ prices were to decline. Also, the company’s production is poised to expand strongly and Chevron uses some selective hedging that works very well in downside oil markets.”

Offshore drillers, particularly those capable of drilling in the deepest waters, also offer value at current levels. Petroleo Brasileiro (PBR), also known as Petrobras, is particularly appealing, as it recently discovered one of the largest offshore oil fields on earth off the coast of Rio de Janeiro. Known as Carioca, the field could hold 33 billion barrels of oil and gas, making the world’s largest discovery in at least 32 years.

Fitz-Gerald, the Money Morning investment director, suggests investors look at China National Offshore Oil Corporation, or CNOOC Ltd. (ADR: CEO). The Hong Kong-based company recently got approval for a $29 billion exploration project in the South China Sea. The company expects to produce 50 million tons of oil equivalent per year from that region during the next 10-20 years. That would equal the production of China’s biggest project, the Daqing Oil Field.

Petrobras and CNOOC are also attractive because, as foreign companies, they will also get a boost from any devaluation in the U.S. dollar.

All of these companies have been hit hard by the combination of commodity-price weakness and credit market turmoil. But these operators do not require peak-cycle commodity prices to generate stellar results and have little or no credit-market exposure.

For a more direct play on oil prices, you might also try an exchange-traded fund (ETF), such as the United States Oil Fund LP (USO), the iPath S&P GSCI Crude Oil Total Return Fund (OIL), or the United States Gasoline Fund LP  (UGA).

Source: Why Crude Oil Will Present Investors with a Golden Opportunity in 2009

Editor’s Note: This is the ninth installment of our “Outlook 2009” series, which looks at the global investing outlook for the New Year.

True, a big barrel of West Texas Intermediate crude oil might be hard to fit under a Christmas tree. And it’s probably a fire hazard. But it also makes an excellent end table or lectern. However, we would wait for the post-Christmas sale, or maybe even until 2009, for a lower price.

Speaking of Christmas, just a reminder that our third annual Doomer’s Ball is tomorrow night. The location is BLVD Bar, located at 6 Queensbridge Square on Southbank in Melbourne, from 6:30 p.m. until later. There will signs directing to the right room and even be a red carpet, we hear. If you’ve RSVPd, there will be a check in desk where you can pick up a name badge at your ticket for a free drink . See you then!

Today’s AFR reports that Australia has a funding gap. The credit crisis is causing foreign banks to pull up stakes, pack up their cash, and head back to wherever they’ve come from. The AFR reckons about $50 billion in lending will have to be replaced by Aussie banks.

Those banks, by the way, may not be so keen to make new loans. ANZ boss Mike Smith was in Melbourne Friday swinging the axe. Eight hundred heads toppled from their shoulders by the time he was done. If the banks do as good a job deleveraging their balance sheets, things might start to look better in 2009.

You’d expect job losses and a bad year for stocks to impact consumer confidence and spending habits. You’d be right. Australia had a $20 billion current account deficit in March, according to David Uren in today’s Australian. That was seven percent of Aussie GDP and pretty remarkable for a country in the middle of an export boom.

Now, though, consumers are rolling back their spending ways. The weaker Aussie dollar makes imports more expensive. The current account deficit has halved to 3.2% of GDP. This probably isn’t great news for retailers. But if household’s rebuild their balance sheets on savings, it’s not a bad development.

Over the long run, in fact, an increase in the savings rate increases the amount of credit banks can lend to businesses. Household savings are the source of bank deposits. And in a fractional reserve banking system, every new dollar deposited is multiplied into ten dollars that can be lent. If the banks are lending, that is.

Christmas has come early for Leighton Holdings (ASX:LEI). Dubai’s Department of Civil Aviation awarded Leighton’s Middle East operation a $1.3 billion airport contract. At $21.31, Leighton is not selling for much above its 52-week low of $18.68. It trades at just 10 times earnings. Is it a buy?

That depends on whether you think countries like Dubai are going to keep building and spending. Dubai has the money, generated from the oil trade. And it’s in the middle of an ambitious project to turn oil money into the capital stock of a new economy, via tourism, finance, and trade. But it could also be just another example of the credit bubble.

Take away Western demand fueled by credit, and the world needs less oil. Ironically, this actually accelerates the rate of depletion in global oil fields. How? When a good falls in price, people tend to use more of it. The cheaper it is, the more you use it. But wait. There’s more.

While cheaper oil prices in 2009 accelerate the depletion rate by encouraging more use (and lulling us all into a false sense of oil security) they also discourage smaller firms from going out and finding more. The majors are always looking for oil. They have to constantly replenish reserves to match production, or the stock price falls. But what about all the other searchers and explorers. Will they keep looking for oil with the price at $40?

In America, Barrack Obama is already busy spending money America doesn’t have. And he hasn’t even officially taken office yet. Impressive. Obama is dusting off construction plans for bridges, highways, and schools that he says are “shovel ready.” That means all the blue prints and plans are drawn up. They just need men, machines, and money.

America doesn’t have the money. But that has never stopped anyone with a can-do attitude. Obama says we can’t worry about the deficit in the short term. Right. It doesn’t look like anyone has been worried about the deficit in America for a long time.

Dig a hole. Fill it up. We’re not sure where we heard that. Maybe it’s a Buddhist way of dealing with stress, and realizing…something. But we get the feeling a lot of holes are about to be dug across the world. And most of it will be paid for with borrowed money.

But who will be doing the lending? So many new government bonds are going to hit the market in the next year from the U.K. and the U.S. that you wonder if the world’s creditor nations aren’t starting to get a bit nervous. What happens if they balk? Interest rates should rise.

That’s not happening yet. Just the opposite. “Yields on two-, 10- and 30-year securities fell to the lowest levels since the Treasury began regular sales of the debt,” reports Bloomberg. And get this. The yield on three month T-bills is a sparkling 0.01%.

Hear that sound? It’s the sound of the bond bubble stretching to historic levels. Cover your ears.

Source:$40 Barrel of Oil for Christmas

There are about 12,000 gas stations with the Exxon sign at the entrance, though the company owns about 2,220 of them. And Exxon plans to sell those over the next few years, Reuters reported.

Texas leads the states with the most company-owned gas stations with 190. Florida has 170, the Associated Press reported.

“We are in a very, very challenging market. Margins are reduced,” Exxon spokeswoman Prem Nair said in a statement. “We feel the best way for us to grow and compete is through our distributor network.”

Exxon stations may be everywhere but retail gasoline sales are only a small portion of the company’s revenues. And with gasoline costing 31% more than a year ago and crude oil prices at record levels, it’s also one of the most unprofitable.

This doesn’t mean we’ll stop seeing the ubiquitous blue signage across the country. Exxon will continue selling fuel to station owners who pay to use the company’s brand name.

Oppenheimer & Co. (OPY) analyst Fadel Gheit estimated the stations’ profit margin was between 10% and 15% (the company doesn’t release margins for its retail division), which is about one-third of its margin for crude oil production.

“I think the decision came that it’s more of a headache than it’s worth,” Gheit said.

Gas stations can’t pass higher prices onto consumers as easily as oil companies pass prices onto them. On top of that, car owners nationwide are taking serious steps to curb gasoline and energy usage, doing everything from using other forms of transportation to buying more fuel-efficient vehicles such as hybrids.

Exxon’s decision follows that of competitors Royal Dutch Shell PLC (ADR: RDS.A, RDS.B) and BP PLC (ADR: BP), who are also moving away from station ownership.

“They can actually point their attention to some other area where you can make money,” Jeff Lenard, a spokesman for the National Association of Convenience Stores, told The AP. “Retail is incredibly volatile. This way, they can (sell gasoline) wholesale and count on a fairly predictable income.”

Source: Exxon Plans to Sell 2,220 Profit-Squeezed Gas Stations

The Guara exploration well struck oil in the BM-S-9 concession area – the same block as September’s Carioca discovery, which could contain as many as 33 billion barrels of oil.

“There are those who will tell you that oil is a cyclical business and a global fungible commodity,” says Christian DeHaemer in Taipan Daily.

It rises and falls with the business phase. If you look at a hundred-year chart, it is as obvious as a sidewinder on a sand dune. A sine wave through time — up and down in seven-year cycles.

But there are others who believe in the “Peak Oil” argument, the ultimate end-game, like a Suburban crushing a Subaru at the end of a long hill. Peak Oil enthusiasts will point to long lists of numbers, detailed maps of known reserves, past prognosticators of genius, and declare with tinfoil-hat fervor that “we are running out of oil.”

I’ve read these books and listened to the speeches. The idea that there is a finite amount of oil on the planet, and we are near the point where we will extract less in the next hundred years than we did in the past. Makes sense to me, as does the business cycle. I don’t know if the hundred-year history of the oil cycle is over. There is always a “this time it’s different” ideology at the peak. But then again, sometimes, it is different.

What we do know — what isn’t in dispute — is that oil is expensive, and that by all accounts the easy oil has already been found and is being extracted at a furious pace.

And this has led the industrial countries on a desperate search for this ever-scarcer commodity.

Russia, China, India, Brazil, Canada, Europe and the U.S. are fighting an anxious and diminishing struggle for the last of the world’s hydrocarbons. Russia is sending submarines to plant national flags at the bottom of the Arctic Ocean. China has moved aggressively to acquire oil holdings from Kazakhstan to Somalia. India has gotten in bed with the genocidal regime of the Sudan to the tune a $45 billion natural gas pipeline. The U.S. is spending trillions in treasury and thousands in lives to make sure the oil flows from the Middle East.

The Guardian of UK fame recently reported that “money is no object as the big players grab what is left of a diminishing resource.” (This was after China’s Sinopec paid $1 billion for the right to explore for oil in deep water off Angola.) Just a few years ago, such a deal would have sold for a mere $35 million. But competition is fierce over the last remaining frontiers where vast quantities of oil might be found.

Martin Spring in Money Morning UK reports on another Brazilian energy find:

The newly-discovered Sugar Loaf field under the Atlantic off Brazil, claimed to be one of the world’s biggest, is primarily a natural gas resource. The Shtokman development in the Barents Sea off Russia’s Arctic coast, and several projects off the coast of north-west Australia, focus on production of gas, not oil.

There is also increasing interest in exploiting hard-rock resources that have been neglected in the past because it’s difficult to tap their gas. On the western slopes of the US Rockies, Exxon Mobil is starting to employ an explosive fracturing technique three times more effective than conventional technology to unlock the riches of the Piceance Basin.