This time around, silver has failed to match the gains that gold posted in recent months, spawning a widespread believe that silver is poised for a bull run. Such factors as a decline in supply and a weakening U.S. dollar have buttressed that bullish belief. And so has the fact that China’s government is strongly encouraging that country’s residents to buy the white metal.

With Beijing’s plan to inject $587 billion (4 trillion yuan) into China’s economy, and a growing desire to diversify away from the U.S. dollar as its key reserve currency, the Asian giant could increase its reliance on such precious metals as gold and silver – especially if global inflation takes hold.

China’s central bank “could use gold, silver or even a basket of commodities” to diversify away from the dollar, said Money Morning Contributing Editor Peter Krauth, a recognized expert in metals, mining and energy stocks. “It’s impossible to know how they’d go about it.”

This wouldn’t be the first time that silver played an important economic and transactional role in Mainland China. Nearly 2,500 years ago, the Red Dragon was the first to use silver as money. While China invented paper money in the ninth century, silver made its way back several dynasties later as legal tender until the government again prohibited its ownership in 1935.

Now, 75 years later – in the wake of the worst economic downturn since World War II – China has reversed its stance on silver.

In July, state-run China Central Television (CCTV) began a campaign that pushes the purchase of silver bullion as investment opportunity. Analysts say silver has been undervalued in the last few years, and is a good investment for individual investors, according to CCTV.

“The investment threshold [for silver] is not high, and is more suitable for the general public,” said Want Chunli, GM of Beijing’s Caibai Shopping Mall, the first to offer silver as an investment opportunity. “Silver is much cheaper than gold.”

Silver’s investment potential is best measured by the silver-gold ratio, or the price of gold divided by the price of silver. Over the past five years, the ratio has held fairly steady, requiring 55 ounces of silver to buy an ounce of gold. Earlier this year, as gold increased at a faster rate than sliver, the ratio skyrocketed to 70 to 1. It has since corrected to around 60.

Money Morning’s Krauth says that when this relative price ratio does correct, it tends to overshoot.

“I see it going to 50 at least,” Krauth said. “With gold at $1,000, that means silver could trade to $20 or even higher, which is another 20% from [the current price].”

Silver closed Friday at $16.06, while gold closed at $991.10 – implying a silver-to-gold ratio of 61.71.

Krauth sees China returning to an asset-backed currency and says ownership of silver could help the average citizen, even if its central bank is unable to diversify out of the U.S. dollar fast enough.

The more Chinese citizens who own silver, “the stronger the country will be in the eventuality that the world establishes a new world reserve currency backed by (most likely) precious metal(s).”

China’s middle class is estimated at 300 million – roughly equal to the entire U.S. population. And that consumer group in China is growing. As those incomes continue to rise, so, too, will the demand for silver.

China’s use for silver goes beyond jewelry or as a safeguard against inflation. Thanks to the antibacterial properties of silver ions, the white metal is used for everything from socks to wash machines, to name a few.

Silver Supply is Falling

The world once had 2.2 billion ounces of silver above ground, but that figure has plummeted 86% to the current 300 million ounces, according to Addison Wiggin, a best-selling author and an executive publisher at Agora Financial LLC, which, like Money Morning, is part of the Agora Inc. group of companies.

However, above-ground silver accounts for only 25% of the silver produced today, says Money Morning’s Krauth. The other three-quarters is actually a byproduct of such mined base metals as iron, nickel or lead.

When the financial markets nearly collapsed last fall, base-metals producers weren’t spared. As demand forecasts were cut, they quickly throttled back on production, expansion and exploration.

“More has to come from mine production, which can only grow so fast,” Krauth said. “The fact that base-metals producers have cut back a lot hurts silver production because it’s a byproduct of base-metal mining.”

Once the recovery begins – and it’s already under way in China – supplies will be hard to come by as demand for base metals returns, resulting in higher prices for silver.

Gold’s “Lap Dog”

The price of gold doesn’t necessarily affect the price of silver, but when other economic factors such as the U.S. dollar falter, prices traditionally rise at the same pace. But when the global financial crisis took hold last year, the silver-to-gold ratio shot up to 84.

Much like a “nervous little lapdog,” the price of silver follows gold closely, Krauth says.

Since its mid-July low of $12.46 an ounce, silver has rebounded roughly 30% to current levels. But if gold supplies run short, silver may have even more room to run.

When gold hit its all-time high of $1,033.90 per ounce in March 2008, silver prices soared as high as $20.92. But when gold hit its 18-month high earlier this month, silver stayed in check.

“Silver has lagged the rise in gold prices since 2000,” said Money Morning Contributing Editor Martin Hutchinson, a former investment banker with more than 25 years’ experience in the global financial markets. “If gold really takes off and the big money finds there isn’t enough of it, there should be spillover into silver.”

Famed commodities investor Jim Rogers also noted the lag in silver and gold’s prices.

“I’m looking at all commodities, but some commodity prices are very depressed,” Rogers told China International Business. “Silver is 70% or so below its historical highs, coffee is 70% or so, as is sugar, while gold is only 10% off its all time high.”

Making the Investment

While buying physical silver is an option for investors, the simplest way to get in, Krauth says, is via the iShares Silver Trust (NYSE: SLV) exchange-traded fund (ETF). In the three years since its inception, SLV has accumulated $3.91 billion in assets, and the share price – which is the equivalent to one ounce of silver – is up more than 50% this year.

During last fall’s market crash, SLV’s holdings remained nearly flat, around 220 million silver ounces. Since then, it has grown a further 22% to about 280 million ounces.

“That’s a testament to investor commitment,” Krauth said.

Hutchinson calls SLV “quite a good vehicle” over the big silver miners – such as Coeur d’Alene Mines Corp. (NYSE: CDE).

Coeur d’Alene has a large silver deposit in Bolivia. But Hutchinson characterizes Bolivia as a country that he “wouldn’t touch,” thanks chiefly to the Venezuela-like nationalization of the country’s other commodities, including oil and natural gas.

Source: The No. 1 Way to Profit When Silver Upstages Gold

By 1306 GMT, the pan-European FTSEurofirst 300 <.FTEU3> index of top shares was down 0.4 percent at 884.79 points after trading between 879.97 and 888.23 points.

“Morgan Stanley’s operating loss per share looks on the high side, compared to others in the sector. I think Morgan Stanley’s paying back public aid has distorted results; it is not known if this has been incorporated into analysts’ expectations of the results,” said Heino Ruland, strategist at Ruland Research.

Bank shares took the most off the index after Morgan Stanley reported its third consecutive quarterly loss and Wells Fargo reported rising credit losses.

“The continuing decline in asset quality is a worry, and whilst they are making money in other areas it just goes to show that conditions in the consumer segment are still evidencing headwinds,” said Paul Chesterton, senior sales trader at CMC Markets.

Barclays , BNP Paribas , UBS and Lloyds Banking Group were down 1.5-3.8 percent.

Miners were also heading lower. BHP Billiton fell 2.8 percent after the world’s largest miner reported a 10 percent fall in iron ore output to 27.048 million tonnes after its operations were hit by mining fatalities and flooding in Australia.

Energy stocks were down as crude slipped 1.5 percent. BP , Royal Dutch Shell , Premier Oil and Total were 0.8-2.8 percent weaker.

On the upside, drug makers added most points to the index. GlaxoSmithKline gained 0.3 percent after it beat expectations with its second-quarter earnings and said momentum in the second half would pick up on the back of flu vaccine sales.

Across Europe, the FTSE 100 <.FTSE> index was down 0.3 percent, Germany’s DAX <.GDAXI> was down 0.4 percent, and France’s CAC 40 <.FCHI> was down 0.8 percent.

July 22 (Reuters)

This from Dan:

It seems pretty obvious, that for the last ten years anyway, selling stocks and buying gold would have been a good trade/strategy. Stocks ended an 18-year bull market in 2000 and gold ended a 20-year bear market. One asset class was at a cyclical low. The other was at a cyclical high. In fact, you might even say that one was at a generational low and the other was at a generational high.

Gold is no longer as low as it once was. But it’s still not as high as we expect it to go before it starts to look foolish. Meanwhile, today’s government bond market looks an awful lot like the stock market circa 2000. You’re seeing a generational high in bonds. It’s another version of the “high-low” strategy.

This time around, though, we would add energy stocks to the mix, along with gold. Crude oil climbed to an eight-month high over $70 on Tuesday. Bloomberg says the weakness in the US dollar is, “bolstering the appeal of energy as an alternative investment.” Sell bonds, buy energy. Pretty simple.

There is probably some truth to the fact that oil’s latest move is driven by investment demand more than, say, demand growth in the real economy. But investors ARE looking for ways to profit from US dollar weakness. Oil is liquid and popular. In the long-run, it’s the smaller-than-expected oil supply growth that will drive the market.

TheDailyCrux.com editor Sean Goldsmith says one way to play commodities this year is buy going long natural gas. That’s because according to a recent Bloomberg survey natural gas prices will rise 38% this year…

Natural gas’ 31% decline in 2009 makes it the year’s worst-performing commodity. And it’s the cheapest compared to oil since the Soviet Union collapsed in 1992 and Russian supply plummeted.

Gas is down 72% in 11 months as the recession destroyed demand and drillers failed to idle rigs fast enough to contain supply. Today, stockpiles are 22% higher than the five-year average. And oil costs 18 times more than gas.

Now, the drillers are finally slowing production… Just as the economy is showing signs of strength. The number of rigs dropped 56% in the past nine months – the most in two decades – to around 700. According to Bloomberg analyst surveys, natural gas prices will rise over 38% this year.

By the way, last year at the Agora Wealth Symposium in Vancouver, one of our colleagues took the stage to point out that your editor was complete moron. In this particular case, it was for being bullish on gold.

He said that gold hadn’t done much adjusted for inflation since 1980. What’s more, he said, its worth less, adjusted for inflation that it was twenty years ago. How, he speculated, could anyone take the advice to buy gold seriously when it had performed so abysmally?

Well here are the facts. The gold price bottomed in October of 2000 at $263.80. At that time, the S&P 500 traded at 1,379. Since then, the S&P 500 has fallen by 31% (closing yesterday at 942.43) while the gold price is up 262% to $956.

We’ve asked Kris Sayce to bring this small fact to the attention of our colleague when he attends this year’s Vancouver show next month. The theme of this year’s show is “Ten Years of Reckoning,” celebrating the tenth anniversary of the Daily Reckoning. Kris will be spearheading the Australian delegation. More details on that later this month.

In any event, it seems pretty obvious, that for the last ten years anyway, selling stocks and buying gold would have been a good trade/strategy. Stocks ended an 18-year bull market in 2000 and gold ended a 20-year bear market. One asset class was at a cyclical low. The other was at a cyclical high. In fact, you might even say that one was at a generational low and the other was at a generational high.

Gold is no longer as low as it once was. But it’s still not as high as we expect it to go before it starts to look foolish. Meanwhile, today’s government bond market looks an awful lot like the stock market circa 2000. You’re seeing a generational high in bonds. It’s another version of the “high-low” strategy.

This time around, though, we would add energy stocks to the mix, along with gold. Crude oil climbed to an eight-month high over $70 yesterday. Bloomberg says the weakness in the U.S. dollar is, “bolstering the appeal of energy as an alternative investment.” Sell bonds, buy energy. Pretty simple.

There is probably some truth to the fact that oil’s latest move is driven by investment demand more than, say, demand growth in the real economy. But investors ARE looking for ways to profit from U.S. dollar weakness. Oil is liquid and popular. In the long-run, it’s the smaller-than-expected oil supply growth that will drive the market.

By the way, some Diggers and Drillers subscribers have wondered exactly which of our energy recommendations come from our “Long Aftershock” scenario. We’ll make sure to specify which oil and energy stocks we had in mind in tomorrow’s weekly e-mail update (for subscribers only).

One thing Kris will probably be making clear to U.S. dollar-based investors is just how relatively attractive Australia’s position is in the developed world. “Even as Australia’s challenges increase, it will still be the envy of the developed world,” writes William Pesek at Bloomberg. “Even in its worst moments… Australia is among the least unsightly economies anywhere,” he adds rather optimistically. We’ll see about that.

Finally, we meant to write a bit about other possibilities in China today. That is, we were going to explore collapse scenarios (financial, political, and societal). But we did not realise it would be ambitious to try that in a few hundred words. So look for something more considered later this week in the essay spot.

Dan Denning

Source: Last Decade: Buy Gold, This Decade: Buy Energy

1) Gold

David recommends investors hold 5% of their portfolio in gold to hedge against a declining dollar and an inflationary economy. He says investors can easily buy gold through the SPDR Gold Trust ETF (NYSE:GLD). This tracks the price performance of gold bullion without the hassles of finding and storing the physical metal.

2) Inflation-Adjusted Treasuries

Also known as TIPS, these government bonds are actually guaranteed to beat inflation. That’s because the bond principal and the amount of interest paid increase in step with the Consumer Price Index. David says the easiest way to buy TIPS is through the iShares Barclays TIPS Bond Fund (AMEX:TIP). This year Treasuries have lost 3.9%. TIPS have returned 3.6%.

3) Energy Stocks

Oil and gas are priced in dollars. This means they tend to rise in an inflationary economy. David says an easy way to buy into energy stocks is through the Vanguard Energy ETF (NYSE:VDE), which is up 29% since its March low. VDE includes companies that specialize in drilling; equipment provision; exploration; refining; and marketing, production and transport of oil and gas products.

4) Commodities

David recommends investors consider the PIMCO Commodity RealReturn Strategy Fund (MUTF:PCRDX) as an easy way of tapping into commodities. This fund matches the return of the commodities futures market by buying commodity-linked index notes.

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.

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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

Exxon’s Azulao-1 well tapped a reservoir that reportedly contains as much as 8 billion barrels of recoverable oil, says Luiz Lemos, a partner at TozziniFreire Advogados, a Brazilian law firm that represents foreign energy companies.

“This is very huge,” Lemos told Bloomberg News.

So is the potential benefit for Brazil. If Lemos’ estimate is accurate, this new Azulao find will rival the nearby Tupi oil field as the largest discovery on this side of the planet since Mexico’s Cantarell field was discovered in 1976.

Lemos’ estimate is unconfirmed, but Exxon Mobil Chief Executive Officer Rex Tillerson described the find in January as “a huge potential resource.”

Exxon first notified Brazilian regulatory agency National Petroleum Agency that it discovered hydrocarbons in the reservoir, identified as BM-S-22, on Jan. 16. The world’s largest oil company operates the block with a 40% stake. Hess Corp. (HES) also holds a 40% interest and Brazilian state energy company Petroleo Brasileiro SA (ADR: PBR), known as Petrobras, holds the remaining 20%.

It was Petrobras that first triggered the rush on Brazil’s energy sector when, in November 2007, the company announced the Tupi discovery – an underwater field that could contain as much as 80 billion barrels of oil equivalent.

Petrobas actually downplayed the findings of the Tupi oil field before announcing last November that the reserve contained between 5 billion and 8 billion barrels of light oil and gas.

Petrobras will begin extract its first crude oil from Tupi on May 1. Initial output from the Tupi field is expected to be around 15,000 barrels per day, then rising to 30,000 barrels a day during a later stage of testing, and eventually reaching about 100,000 barrels per day by 2010, Reuters reported.

If Tupi lives up to analysts’ expectations, it will be very encouraging not just for development of Azulao, but also the Carioca reserve, another massive field expected to hold a large bounty of petroleum.

Last year, Haroldo Lima, the head of Brazil’s National Petroleum Agency, said Carioca could hold 33 billion barrels of oil and gas. Upon hearing the news, brokers and analysts rushed to tell their clients that Brazil, as one minister put it just months ago, was about to become the “new Saudi Arabia.”

Experts say that even 10 billion recoverable barrels of oil – whether they come from Tupi, Carioca, Azulao, or a combination of all three – would be a remarkable find and enough to catapult Brazil into the world’s oil-producing elite. Brazil currently has about 12 billion barrels of proven reserves, and could soon find itself nestled between Nigeria (with 36 billion barrels) and Venezuela (80 billion).

Foreign Oil Majors Flock to Brazil

As rich and expansive as Brazil’s oil reserves may be, they are also very difficult to access. The Carioca field, for instance, is 170 miles offshore, more than 6,000 feet below the surface of the water, and trapped beneath a shelf of salt 500 miles long and 125 miles wide.

There is no question that extraction will be costly, but even at today’s energy prices there’s no shortage of domestic and foreign companies ready to invest big money Brazil’s energy sector.

In fact, Manuel Ferreira de Oliveira, chief executive officer of Portugal’s Galp Energia SGPS SA, said March 4 that production at the Tupi sub-salt oil field in Brazil is viable — despite the slide in international oil prices.

“Production at Tupi is competitive, even at the actual level of oil prices,” Oliveira told the Estado news agency, on the same day that his company released its fourth-quarter earnings. “The projects in Brazil are going to gain strength this year and the next.”

Exxon said Thursday that it would continue investing in exploration and production at “record levels,” despite the economic downturn and plunging oil and gas prices that have reduced spending by some competitors.

Exxon will invest $29 billion this year, and reiterated plans to invest between $25 billion and $30 billion annually over the next five years.

The company is currently spending $79 million a day to search for oil fields, construct platforms and renovate refineries Bloomberg reported.

China is also looking to become a long-term partner in Brazil. China Development Bank last month agreed to lend Petrobras $10 billion to help finance deepwater oil exploration off the coast of Brazil.
Oil exploration will be carried out with the participation of Sinopec (ADR: SHI), the Chinese state oil company.

The contract will be finalized within the next two months so it can be signed when Brazilian President Luiz Inácio Lula da Silva visits China in May, according to Petrobras Chief Executive Officer Sergio Gabrielli.

In addition to the exploration partnership, the deal signed between Petrobras and Sinopec includes the supply of 60,000 to 100,000 barrels of oil per day in the current year. Petrobras also signed a memorandum of understanding with state company China National Petroleum Corporation (CNPC) for the supply of 40,000 to 60,000 barrels per day.

Last month, Petrobras announced plans to invest $174.4 billion in exploration and production.

Energy demand in Brazil is “already starting to recover,” Petrobras CEO Gabrielli told Reuters during an interview at a Brazilian investment conference. “Even the fall in demand during the last quarter of 2008 was within a range we could expect for that season.”

In addition to Exxon and Petrobras, the companies that stand to profit the most from Brazil’s energy renaissance are offshore drilling companies such as Transocean Ltd. (RIG) and Diamond Offshore Drilling Inc. (DO), which was recently recommended by Contributing Editor Horacio Marquez in his weekly “Buy, Sell or Hold” feature.

Devon Energy Corp. (DVN) also made headlines last week when it notified regulators that it found traces of natural gas in the Barreirinhas Basin. Larry Nichols, chief executive officer of Devon Energy, said Monday that prices for natural gas are close to recovering from their recent drubbing.

“When the recession ends and the economy starts booming, we’re going to have less natural gas than we do today and prices are going to spike back up,” Nichols said.

Source: Is Brazil the ‘New Saudi Arabia?’

Written by Friends of the Earth in San Francisco, and distributed by BankTrack, the international network that monitors commercial and investment banks, the report offers a promising future for China’s massive and lucrative clean-up – until you reach page 15.

The report is an 18-month update of key developments on a program that China implemented to cut funding for companies that contribute to the country’s devastating pollution.

The program, China’s Green Securities policy, was launched in February 2008 by China’s Ministry of Environmental Protection (MEP) and the China Securities Regulatory Commission (CSRC). Beijing was trying to cut polluters off at the knees by making it more difficult for them to raise money.

Pollution in China is costing the economy billions, and the Communist Party knows full well that something needs to be done to maintain its blistering growth.

In 2007, the World Bank published a 151-page report that concluded the total cost of air and water pollution in China in 2003 hit $114.1 billion, or about 5.78% of its GDP.

If China continues to increase greenhouse gas emissions at the 2007 rate of 8% per year, it will double those of the entire European Union by 2020.

The destructive powers of filthy air also become apparent in acid rain. According to the World Bank report, acid rain caused over $4.3 billion in damages to crops, or about 1.8% of the value of China’s agricultural output. But it’s not just living things that suffer from acid rain. It caused over $1 billion in damages to houses and office buildings.

That’s why the clean-energy market in China is expected to generate revenues of $186 billion in 2010 and $555 billion in 2020, according to a U.S. government report.

To put that into perspective, $555 billion is what President Bush budgeted for domestic spending in 2007.

But are those huge revenue projections realistic for China?

If you get through the Friends of Earth report to page 15, you may start wondering how much money can really be made through green investments in China in the coming decade.

The Friends of Earth discovered that at the local level, banks are ignoring government mandates to verify a company’s environmental record before lending money.

The MEP has run into opposition from some local governments and banks unwilling to sanction or reduce loans for heavy polluters or high-energy consuming businesses because they are reliant on those companies for their tax base and short-term profits, according to the report.

The problem, of course, comes down to money. Locally, many provinces rely on pollution-spewing enterprises to keep the economy well-oiled. In 2008, 78% of China’s energy output came from coal, a figure that is expected to continue with no significant change until at least 2020.

Based on the Friends of Earth report, it will be another six years before the green mandate becomes national policy – and who knows how much longer after that before the local banks are forced to comply.

Advocates of alternative energy embrace the dogma “Think global, live local.” Unfortunately, that’s exactly what local bankers in China are doing today — a setback for investors contemplating green profits in China.

This from Money Morning:

Oil prices have fallen 70% since hitting a record $147.27 a barrel in July, which means in just five months, crude has given up all the price gains it made in the past four years.

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. (NYSE: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 (NYSE: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. (NYSE:XOM) and Chevron Corp. (NYSE: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 (ADR: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 (NYSE:USO), the iPath S&P GSCI Crude Oil Total Return Fund (NYSE:OIL), or the United States Gasoline Fund LP (NYSE:UGA).

Source: Why Crude Oil Will Present Investors With A Golden Opportunity In 2009

This from The Rude Awakening:

The panic in this market is incredible. It’s leading to some absurd valuations. Particularly among the smaller-cap stocks. These stocks have really been hit hard because they have less liquidity than large cap stocks.

When waves of selling sweep through the stock market, they might rock a large cap stock from stem to stern. But the same waves will capsize a small cap stock. So the conditions in the financial markets are very scary right now for any investor who’s holding small-cap resource stocks. But unless we slip into some global depression, these stocks will come back – and come back with a vengeance.

I, for one, can’t wait until earnings season, when we’ll get fresh numbers and updates on the companies I’ve been recommending to the subscribers of my investment service, Mayer’s Special Situations. I’m betting that the earnings power of many of these companies has not changed all that much in the last 90 days – at least not as much as their tumbling stock prices would have you believe.

So I’d like to highlight some stocks that look like particularly deep values right now.

NGAS Resources (NASDAQ:NGAS). Recent price: $1.47. I like the long-term outlook for natural gas. As T. Boone Pickens, the 80-year-old billionaire investor, says, “Natural gas is the fuel of the future.” It is clean-burning, and we have a lot of it in America. The estimates for U.S. shale plays are up around 840 trillion cubic feet of gas – the equivalent of more than 140 billion barrels of oil – or more than half the stated reserves of Saudi Arabia. Energy independence? Seems to me you have to look at natural gas.

NGAS has plenty of acreage. It also owns 636 miles of pipelines. It owns the critical infrastructure to bring its gas to market. The proved reserves alone – some 102 billion cubic feet of gas – ought to fetch $10 per share for a potential purchaser. The pipelines, at only 10 times pretax earnings, come in at about $65 million – or $2.50 per share. So infrastructure assets – which are becoming increasingly expensive to build – easily cover your entire investment in NGAS, since the shares trade for about $1.48 as I write. And I haven’t even put any value on the undeveloped acreage. The net asset value (NAV) per share on NGAS is somewhere north of $12 per share.

NGAS has some debt, which we have to watch. It has $95 million in debt, but it is not due until 2010 and 2011. If natural gas prices stay low for a long stretch of time, this debt could cause some problems. The value of the assets in NGAS, though, offers a lot of protection.

OM Group (NYSE:OMG). Recent price: $18.63. This is another one that baffles. OM Group had a great quarter ending June 30, and the shares surged 18% the day it announced earnings and nearly got to $40 in the ensuing rally. We got our shares for $30. Today, they are about $19. Amazing.

OM Group makes all kinds of chemicals, powders and materials, mostly from three metals: cobalt, nickel and copper. You can find the original recommendation in letter No. 25. That thesis is still intact, and I won’t rehash the whole thing here. Except I will point out that the company now trades for 3.5 times earnings. Predicting where these earnings will go from here is almost impossible. But I’m comfortable with the cobalt story and the metal’s growing use in batteries and aerospace. And at these prices, you can be wrong on earnings and still come out looking good.

Cobalt prices have tumbled to $13 per pound, compared to about $35 one year ago. As a result, earnings estimates are all over the map – ranging from $1.90 a share on the low side to $5.00 on the high side. For perspective, OMG earned $5.00 in 2007, when the cobalt price averaged $29 a pound. So maybe 2009 is a bad year. But the cobalt price will rebound eventually, and when it does, OMG will rebound as well. I should also point out that OMG has no net debt and plenty of excess cash, yet trades for less than half of stated book value.

The market is factoring in a very gloomy outlook for OMG, even though the most recent quarter gave us nothing but positive news (remember that 18% single-day gain). The market seems to have forgotten that and thrown out OM Group’s shares with all other commodity names.

Canadian Superior Energy (AMEX:SMX). Recent Price: $1.01 I was in Manhattan recently for the Value Investing Congress. The West Coast Asset Management team was there. They made a presentation on a few ideas they like. Someone asked them about Canadian Superior, which was their favorite idea about six months ago. They still like it and said that since their presentation, Canadian “has done nothing but knock the cover off the ball.”

I agree. Since we’ve owned it, Canadian has delivered good news on the exploration front and overall good results. These bits of news have, at times, sent the shares up as much as 20% in a single day. But those gains soon melted under the barrage of broader bad economic news and the market’s overwhelming sell-off.

As long as natural gas prices remain in the can, it seems as if market sentiment won’t turn much on the natural gas names. The market has just stomped on all of them and pushed share prices to really cheap levels. I think Canadian is a steal and gives you legitimate 10 times potential from its current price of only $1.00 per share. We picked up shares in June, and you can find the full write-up in letter No. 24.

Altius Minerals (TSX:ALS). Recent price: C$4.10. Altius owns a portfolio of royalties and prospects in Newfoundland and Labrador. This stock has tumbled to the sort of valuation extreme that I have rarely seen during my carreer. In fact, it is so statistically cheap that it is the kind of stock I have only read about in the dusty financial history books on the Great Depression. It’s something Ben Graham might’ve stumbled on in 1934.

The stock sells for less than its net cash!

The stock market currently values Altius at C$127 million. But as recently as June 30, the company had $187 million in cash. And that’s not its only asset. Nor is the company losing money. It’s actually adding to that cash pile. No surprise that insiders are buying. Plus, the company announced it would buy back 10% of the stock. So at the current price, in theory, you can buy the company for $127 million, drain the company treasury to get your purchase price back and still have $46 million left in cash, plus all the assets for free.

Altius, like all the stocks I have I highlighted here, look really, really cheap, with big upside.

I believe that’s really all we can do as investors. We can’t say what other people will pay for the stock or when they might pay more than they do today. We can only find these anomalies and wait for the market to correct the gaps, as it does over time.

I know that for the last couple of months, the stock market has been a very treacherous place for investment capital. On the other hand, cheap is cheap. And some of the stocks I’ve mentioned above are “Depression-style” cheap. I am not trading in and out of the market, trying to pick tops and bottoms. I believe such an effort is futile. Instead, I look for deep values and collect good bets.

Over time, we’ll get paid. But in crazy markets like this, we have to realize it might take a little while. We’ll have to be patient and build low-cost positions in these stocks. These are the times when you plant the seeds of monster future returns.

All bear market cycles turn eventually – as even this one will.

Source: Shooting Stocks in a Barrel, Part II