• Pfizer Inc. (PFE), the world’s No. 1 drug maker, said yesterday (Monday) that it would acquire U.S. rival Wyeth (WYE) for about $68 billion in a strategic buyout that diversifies its revenue base. To help finance the deal, Pfizer said it would cut its dividend and use about $22.5 billion in debt that it raised from a consortium of global banks. The deal is key because it will help Pfizer cope with a major revenue gap that will emerge in 2011, when its blockbuster cholesterol-treatment drug, Lipitor, will begin to face U.S. generic competition, Reuters reported. Next year, Wyeth loses patent protection on its own top drug, the anti-depressant Effexor XR.

• Two measures of U.S. economic performance unexpectedly turned positive in December Bloomberg reported.  The National Association of Realtors said sales of existing homes rose 6.5%, propelled by the biggest slump in prices since the Great Depression. Also, the index of leading economic indicators increased 0.3% reacting to an expansion of the money supply, the Conference Board said.  The positive numbers are a sharp contrast to the tens of thousands of layoffs announced yesterday (Monday) which may accelerate the pullback in consumer spending and deepen the longest recession since 1982.

• McDonald’s Corp. (MCD) reported softening in some overseas markets, but still managed to produce a quarterly profit that handily topped Wall Street estimates, Reuters reported. The company posted a 5.8% rise in worldwide sales in December at restaurants open at least 13 months, despite a U.S. recession that has spread to global economies.  The world’s biggest hamburger chain reported a slowdown in its German business due to price hikes and slower same-store sales in China, where growth has been red-hot. McDonald’s said it was also hit by a stronger dollar in foreign markets, including Canada, Europe, Britain and Australia.

• Plummeting metal prices led Freeport McMoran (FCX) to lower projected copper and molybdenum sales targets for both 2009 and 2010 as it posted a gigantic net loss of $13.9 billion, or $36.78 per share yesterday (Monday), Reuters reported.  But its shares rallied on Wall Street as the losses were primarily blamed on $14 billion in noncash charges, including writedowns of inventory values and goodwill from the acquisition of rival Phelps Dodge. Still, citing the worldwide construction slump, Freeport lowered its forecasts for copper sales by 9% and cut its outlook for molybdenum production by 25% for 2009.

• After posting five straight declines in quarterly profit, Lincoln National Corp. (LNC), the Philadelphia-based life insurer, said yesterday (Monday) that it is cutting 5% of staff, or about 540 jobs. North American insurers have announced more than 5,000 job cuts over the past two years as the industry reported at least $125 billion in losses and writedowns tied to the collapse of the U.S. mortgage market, Bloomberg reported. The insurer’s third-quarter net income plunged 55 percent to about $148.4 million. Fourth-quarter results are scheduled to be released Feb. 9.

• General Motors Corp. (GM) said it will eliminate shifts in the second quarter at Ohio and Michigan plants, a move that will shed about 2,000 jobs. The carmaker will also cut production at 13 other U.S. and Canadian plants, Bloomberg reported.

• Brazil’s state-controlled oil company, Petroleo Brazileiro SA (ADR:PBR), said it will seek to cut costs by as much as $4 billion annually. Officials said the move is necessary for its plans to double output and develop the Americas’ largest oil-field discovery in the past three decades, Bloomberg reported.

• Halliburton Co. (HAL) will pay $559 million – $382 million to the Department of Justice and $177 million to the Securities and Exchange Commission – to end an investigation into its KBR Inc. unit. The unit allegedly bribed Nigerian officials for as much as 20 years, Reuters reported.

Source: Global Investment News Briefs, Tuesday, January 27th, 2009

It will be interesting to see how the FOMC approaches this meeting. The current Fed Funds target rate is 0-0.25%, which in and of itself is rather strange. It is a moving target, not a fixed rate. Who determines which rate is used? My guess is this meeting will be used to clarify what the rate is. The Fed will either officially reduce it to 0% in a continued effort to resuscitate the economy, or lock it in at 0.25%. This would at least leave the Fed with one perceived bullet in the gun.

The rest of the week has a full slate, which starts this morning with the December Existing Home Sales report. Expectations are for a slowdown of 40k units versus the previous month, and I think that is overly optimistic. The housing reports last week both fell flat on their face so I don’t think this report, or the New Home Sales report on Thursday, will come anywhere close to expectations.

Tuesday morning sees the release of the Consumer Confidence report for January, and this one is a tough read for me. It is expected to be the same as the December reading of 38. I am not sure which one will have a bigger impact on the reading: consumers getting excited about a change in leadership, or fearful of more job cuts. I guess it all depends on when the reading was taken.

Earnings:
Mon: AXP, AMGN, CAT, HAL, MCD, TXN
Tues: BMY, DD, GILD, JAVA, YHOO
Wed: PFE, SBUX, WFC
Thurs: MMM, AMZN, CELG, CL, LLY, JNPR,
Fri: CVX, XOM, HON, PG,

Source: Fed Counts Bullets, Earnings Dominate Calendar

Don’t expect oil prices to remain at these low levels for long, says Byron King. Demand weakness for crude is temporary. And oil-producing nations cannot sustain their own economies unless oil prices are close to $100 a barrel. Byron says it could be time for investors to slowly build up a position in oil service stocks.

This from Whiskey & Gunpowder:

Along with the market decline, the price of oil has fallen. It’s down 50% within three months. Back when oil hit $147 per barrel in July, I said that the price “ought” to be in the range of $100-110, with the possibility of a drop into the $90s. That’s what the fundamentals told me back then.

Most of the decline in oil price from $147 down to about $100 was directly related to the strengthening of the dollar. So the oil price slide in July, August and the first part of September was mostly a monetary phenomenon.

Then we had the mid-September credit crunch and market meltdown. That dragged the price of oil from $100 or so per barrel down into the $70s (with price excursions down into the $60s). The demand weakness for oil has become clear in the past six weeks or so. Everybody just sort of woke up and figured out that the world was entering into a recession. The flip side is that inventories are building back up.

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The Fed’s Handout Line Open to All Failing Companies

Who will be the next failing company to come to the Fed with hands out ready for a handout? It’s hard to tell…unless you have the right information.

One quick look at the secret 100-F document of Lehman Bros. and AIG would have predicted their collapse. Find out which company will be next by clicking here.

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This has taken down all of the oil and oil-service companies. Among the latter, Superior Energy Services (NYSE:SPN), Halliburton (NYSE:HAL) and Baker Hughes (NYSE:BHI) have all tumbled. Even the perennially “too expensive” Schlumberger is way down.

The thing about the oil service companies, though, is that a lot of their business is all but recession proof. And much of the oil service business is immune even to wide swings in oil prices. That is, many oil company capital budgets are drawn up a couple of years ahead of time. So oil service companies should have work despite the macroeconomic situation. Not as much as in the boom times, maybe. But it’s not going to be as bad for the oil service companies as a lot of people seem to think.

There are many reasons for this. Sometimes an oil company has leases that are going to expire if it does not drill within a certain time frame. So the oil company has to drill. Or maybe the oil company has a rig under contract. So it has to drill before the contract expires and the rig moves on to other sites. Or maybe there is maintenance or a major workover on a well or field that just plain has to get done for reasons of safety or the environment. As I said, there can be a lot of reasons.

So keep an eye on the oil service companies. As Monty Python once said, they are “not dead yet.” The oil service companies are way down from previous high prices. I believe that this is a time to nibble. Don’t blow your whole wad of cash, but begin to accumulate a position while we watch how the larger economy unfolds. I think we’ll see stronger oil prices sooner, rather than later.

Oil Exporters Surprised, and Waiting at the Rope Line

Speaking of how the larger economy unfolds, some of the most surprised people on the planet are the folks who run oil-exporting countries. Hey, they believed their own press releases. They thought that oil prices would continue to rise upward, ever upward. All they had to do was figure out what to do with all the money that was going to pile up in their bank accounts. No waiting at the rope line for these worthies. But right now, demand destruction trumps even market manipulation by OPEC, not to mention the inexorable effects of depletion.

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Gold is giving you another chance to get in for the inevitable ride up at a bargain.

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So what are the OPEC people thinking? They are hopping mad. The OPEC folks sure got used to high oil prices in a hurry. They don’t like these low oil prices. It costs money to run a petro-welfare state.

According to the International Monetary Fund, Iran, Venezuela and Nigeria need oil prices above $95 per barrel just to cover their respective national budgets. Saudi Arabia requires oil prices above $75 to cover its budget. Well over half of the revenues of the Russian Federation come from taxes on hydrocarbons. Mexico gets over 40% of its federal revenues from taxes on Petroleos Mexicanos (Pemex), the national oil company.

So low oil prices are causing problems for the oil-exporting states of the world. No major oil exporting country can long afford to see oil prices where they are now. Come what may, OPEC is going to turn valves and reduce supply. It’s just a question of how soon this will occur, how much oil OPEC will take off the market and what that will do to pricing. No less an authority than Hugo Chavez of Venezuela recently stated that “Venezuela can live with a price of $90 to $100 per barrel. But not less than that.”

“The Era of Cheap Oil Is Finished”

According to Iranian Oil Minister Gholamhossein Nozari, “The era of cheap oil is finished.” When a reporter from the New York Times asked Nozari what price Iran would want for its oil, Nozari declared, “The more the better.” Nozari stated that he is urging his fellow OPEC members to cut production by up to 2.5 million barrels per day.

How much oil is 2.5 million barrels? By comparison, the $6 billion BP (NYSE:BP) Thunder Horse Platform — 20 years in the making in deep water in the Gulf of Mexico — should produce 250,000 barrels per day by the end of 2009. So with one move by OPEC, there goes the equivalent of 10 Thunder Horses.

OPEC representatives are touring national capitals, urging non-OPEC oil producers, such as Russia, Mexico and Norway, to follow the cartel’s lead and cut production, according to Reuters news services. OPEC is trying to engineer a coordinated move to drive oil prices back up over $100 per barrel.

Most OPEC nations have already reached their own version of “Peak Oil.” Traditional oil-export powerhouses like Iran and Kuwait have admitted as much. Aside from Saudi Arabia, most OPEC exporters see a window of less than 20 years for significant international oil exports. By then, internal rising demand and falling output (due to depletion) will severely constrain the world oil markets. So all OPEC nations are interested in selling oil now for as much as they can get.

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The End of Cheap Oil

You wouldn’t think so. After all, oil prices just plummeted…

But the fundamentals are clear as day. Oil is destined to get a lot more expensive.

It’s going to change life in the U.S. and the world…forever…but you can protect yourself and prosper… Click here to take advantage of oil’s temporarily lower prices.

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“We Want the Money Now”

Last May, I attended the Offshore Technology Conference in Houston. I had a revealing discussion with an oil manager who works for the national oil company of an African country. He told me this:

“The Saudis think there is an ‘optimum’ price for oil. They don’t want to raise prices too much, too fast. They say it will kill the economies of the West. But for my nation, we disagree. There is no ‘optimum’ price for oil. We don’t care about the economic effects on Western consumers. If Western consumers want to drive, they will pay. Or they can walk, like millions of people do where I come from. So we pump oil every day. We want to get as much as we can for the oil. We want the money now so we can fund the priorities of our national government. We cannot tell the people that they have to live in poverty for another generation because we are afraid that Westerners will not be able to drive their Mercedes-Benzes.”

So you can see why the odds favor rising oil prices within a few months.

Source: Oil Prices Down…for Now

• Halliburton Co. (HAL) yesterday (Monday) announced a third quarter loss of $21 million, or 2 cents per share, compared to a gain of $727 million, or 79 cents a share, for the same period in the prior year. The Houston, Tex.-based oil and energy services firm attributed the loss to financing expenses including $693 million in costs related to the redemption of convertible bonds, Bloomberg News reported.

• Toymaker Hasbro Inc. (HAS) posted a gain of $138.2 million, or 89 cents a share, for its fiscal third quarter, compared with a profit of $161.6 million, or 95 cents per share, which included a tax benefit of 17 cents per share for the same period in 2007. Due to its popular Star Wars action figures and Playskool line of toys for preschoolers, Hasbro beat analyst expectations of 86 cents per share, despite the tough retail environment, Reuters reported.

• The Conference Board yesterday (Monday) announced its U.S. index of leading economic indicators gained 0.3% in September, after dropping 0.9% in August. “The extreme volatility in the financial market, and the near freeze-up of credit, will no doubt weaken the economy further,” said Ken Goldstein, labor economist at the private research group, MarketWatch reported. “But latest data suggest that conditions in the non-financial economy are not falling apart.”

• Jet Airways Ltd., India’s largest private airline, decided to cancel plans for a layoff of 1,900 workers after the plan received harsh criticism from the Indian government and local labor unions. The airline said it would reinstate the 800 flight attendants already let go, The Financial Times reported, and discontinue plans to fire an additional 1,100 workers. Praful Patel, India’s aviation minister, called for a reduction in jet fuel taxes to help the struggling carrier.

• Netflix Inc.’s (NFLX) third-quarter profit surged 30% the company said yesterday (Monday) in a statement. Netflix earned $20.4 million, or 33 cents per share, for the three months ending in September, compared with $15.7 million, or 23 cents per share, in 2007. Revenue rose 16% to $341 million, from $294 million last year.

• U.S. home prices will fall 8%-10% further before they show signs of stabilizing, Fitch Ratings Inc. said yesterday (Monday). National home prices have declined a full 22% from the peak hit in 2006, the agency said in a note. Fitch has a peak to trough forecast for prices to decline 30% according to Reuters.

• A U.S. jury yesterday (Monday) found Parmalat SpA guilty of defrauding Citigroup Inc. (C) in a case stemming from the Italian dairy company’s 2003 collapse, Reuters reported. Citi was subsequently awarded $364.2 million in damages.

• Merrill Lynch & Co. Inc. (MER), the biggest U.S. brokerage, plans to cut about 500 jobs in its trading division, people with knowledge of the situation told Bloomberg News. The cuts equate to about 1% of the company’s 60,900 employees, and include traders and institutional salespeople in the firm’s fixed-income and stock departments.

Source: Global Investing Roundups Tuesday, October 21st, 2008

Bear in mind that each new economic report, earnings statement, news report or trading session represents a new opportunity for fear and uncertainty to reemerge.

Fortunately, next week’s economic calendar remains quite light, although retailers may just weigh in with “doom-and-gloom” holiday predictions.  Earnings season may be weak as well (with even more pessimistic outlooks), so investors should not overreact even if Texas Instruments Inc. (TXN), Halliburton Inc. (HAL), Amazon.com Inc. (AMZN) and others fail to meet expectations.  Volatility should continue and the days of triple-digit index moves (often up and down in the same day) may be here for a while.

So try not to get so overwhelmed with the seemingly never-ending challenges and uncertainties: The credit crisis, weak economy, plunging stock market, presidential election, etc.  Take everything one day at a time. The government actions are starting to thaw out the credit concerns and lending/borrowing should return to a somewhat normal level in due time. Declining energy and commodities prices should improve the inflation picture, which will help the consumer and allow the U.S. Federal Reserve to better focus on the struggling economy. Stocks tend to be leading indicators and often begin to rise even when the economy remains in the midst of a recession. The election (regardless of the victor) represents a new beginning, a new direction, a new attitude, and hopefully renewed confidence.

Market Matters

So much for less government.  With the presidential election at the homestretch, the candidates pushed their respective plans to rescue the economy in an attempt to appeal directly to Main Street folks like Joe the Plumber (basically more tax cuts vs. “spread the wealth”).  The bailout moves continued as U.S. Treasury Secretary Henry M. “Hank” Paulson Jr. (a self-proclaimed free-market capitalist, if there ever was one) announced that the government would invest $250 billion into the nation’s banks to stabilize the financial system.  Proponents refused to label it as”nationalization.” But don’t tell that to the pundits on Fox News this past weekend: Some went as far as to question whether the U.S. government is embracing full-fledged “socialization.”

The Federal Deposit Insurance Corp. (FDIC) will be expanding its insurance program on non-interest bearing accounts, a move designed to assist small businesses. Throughout Europe and Asia, similar moves also were approved, as the global efforts appeared to be well coordinated.  The Swiss National Bank took over about $60 billion of bad assets from UBS AG (UBS), leaving the institution with one of the cleanest balance sheets around.  Morgan Stanley (MS) received a $9 billion investment from Mitsubishi Bank UFJ Financial Group Inc.  (ADR: MTU), giving the Japanese giant a 21% interest in one of the last remaining domestic financial super-powers (and at better terms than initially negotiated).  JPMorgan Chase & Co. (JPM) posted an 84% decline in third quarter profits (which still somehow bested analysts’ pessimistic expectations).  Likewise Wells Fargo & Co. (WFC), Citigroup Inc. (C), and Merrill Lynch & Co. Inc. (MER) (still under its pre-Bank of America Corp. (BAC) brand) suffered through “challenging” quarters, to say the least, and their short-term outlooks do not look any better. (Bring on those direct government investments).

While the technology sector struggles from dire expectations of future corporate IT expenditures, eBay Inc. (EBAY), Google Inc. (GOOG), Intel Corp. (INTC) and International Business Machines Corp. (IBM) all announced relatively strong quarters – IBM even “pre-announced” its strong results – and chipmaker Advanced Micro Devices Inc. (AMD) reported a narrower-than-expected loss.

Intel, IBM and AMD were all three topics of Money Morning’s new “Hot Stocks” feature, which chronicles the prospects of companies that are in the news.

Microsoft Corp. (MSFT) apparently still thinks a deal to acquire Yahoo! Inc. (YHOO) would make “economic sense,” though that $33 a share offer most likely would no longer apply for a stock trading below $13 a share.  General Motors Corp. (GM) intensified its merger talks with Chrysler Corp. and continued to explore sale options for its Hummer unit. But does $70 a barrel oil make those cool gas-guzzlers look attractive again?

Speaking of oil prices, the “black gold” plummeted to its lowest level in 13 months as prospects for a recession – or worse – continued to dampen energy demand.  Goldman Sachs Group Inc. (GS) became the first to predict a decline as far as $50 a barrel, ironically just a few months after its analysts called for $200 oil over the next two years.  The 50% percent slide in prices has prompted a panicking Organization of the Petroleum Exporting Countries (OPEC) to schedule an emergency meeting on Friday in Vienna, Austria. It will be the cartel’s 150th meeting. Gas prices are following in step as they pushed downward – in some areas through $3 a gallon, a 25% drop from the $4.11-per-gallon highs set in July.

Even so, as Money Morning reported, Merrill Lynch sees oil at $150 a barrel and gold at $1,500 an ounce, though its analysts provided no time frame.

Volatility continued as triple-digit-daily moves remain the norm.  Last Monday, the Dow Jones Industrial Average broke its eight-day (2,400 point) losing streak with a 936-point gain, its largest ever recorded.  Profit-taking and hedge fund redemptions followed, though bargain hunters reemerged at week’s end (until the final hour of trading).  The limited investor confidence was a welcome sign after the mass hysteria of the past weeks.

The credit markets seem to be slowly (but surely) recovering with the government actions, though some banks remain hesitant to lend and businesses and consumers have been slow to borrow.  Then again, given time, more government just may work.

Economically Speaking

At this point, there should be no real surprises in terms of weak economic data.  However, when September retail sales was reported as down 1.2% (for the third consecutive month) and the Philly Fed survey plunged to its worst showing in 18 years, investors were surprisingly caught off guard.  While the “official” definition of a recession is two consecutive quarters of negative growth, many analysts claim the country is already mired within one’s midst and the numbers will continue to reflect such weakness well into 2009.  The Fed Beige Book depicted that each region of the country is struggling and U.S. Federal Reserve Chairman Ben S. Bernanke did not rule out an additional rate cut at (or before) the Fed’s late October meeting.  Housing starts fell to the lowest level in 17 years and many believe that any recovery must start with a rebound in this long-suffering sector.  In fact, construction activity has plunged over 30% since September 2007.  (Could the next government intervention involve some direct mortgage relief for ailing homeowners?).

Now for some positive news (for a change).  The inflation picture is starting to look more promising as falling energy and other commodity prices begin to work their way through the U.S. economic system.  The wholesale inflation gauge – known a the producer price index, or PPI, fell for the second straight month, and consumer prices remained flat from August as gasoline prices slowly retreated.  Bear in mind, just a few short months ago, inflation was high on the Fed’s radar screen as Bernanke and friends were forced to tackle a weak economy and rising prices.  While the Fed’s “challenges” are far from over, talks of higher rates have disappeared and policymakers can focus all their energies on repairing the sluggish economy. 

Source: Here’s Why the Stock Market Relief of Late Last Week May Not Last

Many in the mainstream press are calling an end to the “commodities bubble.” But oil and energy expert Byron King warns investors against betting against cheap oil and gold.

Byron says what we are seeing now is a short- to medium-term correction in the trends for energy and resources. Investors who buy beaten-up oil service stocks and gold miners now stand to make major profits…

Back when oil was in the $140s, I said – in both print and broadcast interviews – that oil prices were running up too far, too fast. I predicted that oil prices would decline to $100-110, based on the fundamentals. Well, we’ve seen the decline and we’re almost there.

High oil prices have caused big changes in patterns of consumption. Indeed, the U.S. Department of Energy just announced that U.S. oil demand fell by about 800,000 barrels per day during the first half of 2008, compared with the same period last year. This is the biggest volume decline in 26 years, since the recession of the early 1980s.

Sure, some headlines describe what’s going on as something like the “oil bubble” or “commodities bubble” popping. Some people are talking and acting as if we were going back in time to the last era of cheap energy, cheap gold and cheap commodities. But don’t believe it. Don’t bet on it. And don’t play the markets that way.

A Gold And Oil Correction Was Due

What’s going on? We are in the midst of a short- to medium-term correction in the trends for energy and resources. Keep this in mind: This is a CORRECTION, not a fundamental change in the long-term correlation of things.

The long-term trends are still upward, in terms of value and pricing. But for now, the money is leaving energy and resources for pastures that look greener.

What pastures are greener? Well — speaking of green — the U.S. dollar is strengthening. It turns out that the euro is not the powerhouse currency that a lot of people believed it was. So the dollar has been strengthening against the euro for the past couple of weeks.

The Euro Can Go Down

And it turns out that euroland has its own economic problems. In fact, the euro can go down against the dollar, as well as up. That’s exactly what has happened. Euro down, dollar up. So in consequence, we are seeing the dollar going up, and oil and gold going down.

There is more to the equation. The economists are describing a recession occurring in parts of the euroland economic space. Germany — with Europe’s largest economy — has been hard hit, so there’s been quite a bit of drag on the euroland economy.

And then there are indications that the long-awaited U.S. recession is finally just around the corner. Really, we are just in the middle innings of the banking meltdown and housing crash in the U.S. The recent stock market turnaround may just be the seventh- inning stretch. I expect to see more large banks and investment houses either fail or get bailed out before the end of 2008.

So with two of the world’s largest economies about to enter the doldrums, world markets are seeing demand for energy and commodities slacken.

Thus, we have monetary issues with the dollar. And there are demand issues with economic slowdown in two of the world’s largest economic blocks. Prices for benchmark items like gold and oil are falling.

Stocks to be looking at…

And this is taking the stuffing out of energy and gold stocks. The mining stocks are down. The oils and service companies are down. It’s painful to watch. But it’s not a reason to give up.

As I said, this is a correction. This is an August swoon. Share prices are down, so it’s time to look at your shopping list. You can pick up shares in 2008 and pay 2005 prices. You can build a portfolio for the next five years with some prudent stock picking in the next couple of months.

Some of the most beaten-up oil and oil service companies are Apache (APA: NYSE), Halliburton (HAL: NYSE), Baker Hughes (BHI: NYSE) and Superior Energy Services (SPN: NYSE).

Some of the most beaten-up miners are Kinross Gold Corp. (KGC: NYSE), Yamana (AUY: NYSE), Hecla Mining (HL: NYSE) and the development-stage NovaGold (NG: AMEX).

When oil and gold turn around – which they will – all of these companies should do very well.

Source: The Gold and Oil Correction

Despite this recent drop in oil prices, BP (BP: NYSE) reported a 28% increase in second-quarter profits, led by surging energy prices. BP also announced that it would continue to fight for its interests in its troubled Russian partnership, TNK-BP. All of this bodes well for the tenure of CEO Tony Hayward and his efforts to get more out of BP than his predecessor John Browne.

Don’t panic if oil falls and the oil stocks follow. Depending on where you got into the oil run-up, you ought to be sitting on some nice gains. If you have gains, don’t be shy about selling a portion of your shares and taking the gains off the table. Build up some cash reserves for other opportunities.

Long term, over the next three-five years and longer, the price of oil is headed back up. So keep an eye out for any bargains in the oil patch and nibble. Don’t feel compelled to spend down all your cash just because a stock has a bad day. In this market, there will be more bad days ahead. So be patient and careful.

Meanwhile, don’t be afraid to take advantage of any oil declines to build your positions in great companies like Halliburton (HAL: NYSE) or Baker Hughes (BHI: NYSE).

Where Is Oil Headed?

Even Hugo Chavez of Venezuela conceded an important point last week. Chavez said that the price of oil ought to be about $100 per barrel. Hmmm… What does Hugo Chavez know, and when did he know it?

So will oil back down to $100? That’s a definite “maybe.” The supply-and-demand fundamentals point to an oil retreat in the short term. But then again, oil is a traders’ commodity. The slightest bad news can spike the price.

A senior official at Russia’s Gazprom (LON:GAZP) predicted not long ago that he expected oil to sell for $250 per barrel in “the near future.” How near? He did not give an exact date. Then again, was this just a case of the Russians “talking their book”?

So in the short term — the next few months — oil OUGHT to go down in price. But there are many things (hurricanes, accidents, war) that could spike the price. But don’t worry, I watch the events and trends every day – I’ll keep you in the loop.

Until we meet again,

Byron King

Note: Byron King is a frequent contributor to the free e-letter Whiskey & Gunpowder. To receive daily insights into energy, oil, commodities and other natural resources sign up here!

Source: Where Is Oil Headed?

This piece is taken from The Growth Stock Wire. It’s in the form of a questions and answers session. But it’s well worth the read if you’re interested in the ins and outs of shale oil.

The Commodity Investor

Matt Badiali

Q: I’ve read some articles on shale gas. What is the big deal with this stuff? – H.B.A: Shale is the world’s most common rock, formed from mud and clay deposited at the bottoms of lakes and ocean basins. Shale looks like the slate you see in chalkboards or on roofs, (slate is actually shale that was “cooked” in the earth).

Clay and mud are tiny -– much smaller than sand. So it’s hard to tap shale deposits. (See the next question, about the Bakken Shale, for more details.)

Some shale is full of old plants and animals. These shales become the source rocks for oil and natural gas. In the past, it didn’t make sense to drill shale for either oil or gas. Shale presented technical challenges that were beyond most of the industry. However, that began to change in 1990, when oil-service giant Schlumberger began focusing its attention on the natural gas in shale.

The company estimates that shale contains 500 billion to 780 billion thousand cubic feet (MCF). We consume about 23 billion MCF per year, so that’s about 20 to 34 years worth of natural gas. Today, one MCF sells for more than $13. So the reward is in the trillions of dollars.

The Barnett Shale became the proving ground for shale technologies. Barnett is in the Fort Worth Basin of Texas, which underlies the entire region west of the city of Fort Worth. The Barnett Shale holds between 25 billion and 250 billion MCF.

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I’m not targeting companies that are just Barnett players for investment. However, I am interested in companies that learned how to drill the Barnett and are now leasing land in the many new shale regions.

Investors can take a look at companies operating in the Huron Shale in southern Ohio, the Fayetteville Shale in Arkansas, and the Ootla in Canada.

Q: Why can’t we pump all the oil out of the Bakken Shale? – D.S.

A: The Bakken Shale, the granddaddy of the shale oil fields, underlies northeastern Montana and western North Dakota. A recent government report put the amount of oil in the Bakken Shale between 200 billion and 400 billion barrels: enough to eliminate our oil imports for at least 45 years.

However, the report also says we can only recover about 3 billion to 4 billion barrels of that oil with current technology. That’s a terrible recovery rate… around 1% or 2%.

The problem with the Bakken Shale – and with many of the shale deposits around the world – is “permeability.”

Some reservoirs are like a glass of grape juice and ice cubes. You stick in a straw and suck up the juice around the ice cubes. That’s a permeable reservoir.

However, some reservoirs are like clusters of grapes. You know there’s a lot of juice in there, you just can’t get it out. You have to stick the straw in each grape, suck a little, and then move to the next one. That’s an impermeable reservoir.

Impermeability is one of the problems facing by companies working in the Bakken Shale and other “unconventional” oil fields. You need a way to put the straw through as many grapes as possible.

It took a long time for oil companies to realize that drilling straight down wasn’t the best way to do that. The solution is directional drilling. In directional drilling, the well is drilled at an angle using a computer to help guide the drill bit.

I visited a well in south Texas where the bit went down deeper than a mile, then turned west and drilled horizontally for more than a mile. I was amazed… Here was this thick steel drill casing, steered by an engineer in a truck miles away. Now nearly all the big drilling and service companies, like Schlumberger (SLB), Halliburton (HAL), and Baker Hughes (BHI), offer steerable drilling in three dimensions.

In 1990, only about 40 rigs, or 6% of all the rigs in the U.S., were drilling horizontally. As of last month (according to the Department of Energy), 519 rigs, or 28% of the total, were drilling horizontally.

That makes it much easier for oil companies to get more out of their shale deposits. And as this technology advances, I think more of Bakken’s “grapes” will yield oil.

Some excellent companies are drilling in Bakken, including XTO Energy (XTO). But while XTO is adding reserves, you’re going to have to pay up for the growth these days. I told readers of the S&A Oil Report about the company last July, and we’re up 41% so far.

Good investing,

Matt

Source: The Commodity Investor Q&A

NEW HIGHS OF NOTE LAST WEEK

Halliburton (HAL)… oil services
Patterson-UTI (PTEN)… oil services
Carbo Ceramics (CRR)… oil services
Atwood Oceanics (ATW)… oil services
Key Energy Services (KEG)… oil services
National Oilwell Varco (NOV)… oil services
Spectra Energy (SE)… gas pipelines
U.S. Steel (X)… you guessed it
Schnitzer Steel (SCHN)… scrap steel
Fluor (FLR)… infrastructure
Quanta Services (PWR)… infrastructure
Crude oil, Natural gas, Gasoline, Corn, Soybeans, Cocoa

NEW LOWS OF NOTE LAST WEEK

JetBlue (JBLU)… airline
US Airways (LCC)… airline
Continental Airline (CAL)… airline
MGM Mirage (MGM)… casinos
Boyd Gaming (BYD)… casinos
Wynn Resorts (WYNN)… casinos
Las Vegas Sands (LVS)… casinos
Monarch Casinos (MCRI)… casinos
Winnebago (WGO)… RVs
Thor Industries (THO)… RVs
Fleetwood Enterprises (FLE)… RVs
Goodyear Tire (GT)… tires
News Corp (NWS)… media
Hershey (HSY)… candy
Playboy (PLA)… eye candy
American Express (AXP)… credit cards
Capital One Financial (COF)… credit cards
International Gaming (IGT)… gambling machines
Circuit City (CC)… landfill stuffing continues to suffer
Veolia Environnement (VE)… world’s largest water stock
Honeywell (HON)… conglomerate
General Electric (GE)… conglomerate
United Technologies (UTX)… conglomerate
XM Satellite Radio (XMSR)… satellite radio
Legg Mason (LM)… asset management
Callaway Golf (ELY)… golf equipment
Whole Foods (WFMI)… expensive groceries
General Motors (GM)… read the letter from the Chairman
Lead, Nickel

Source: Brian Hunt’s Market Notes Monday, June 30, 2008

The counter bid – announced mid-afternoon today (Friday) – was made necessary after Halliburton trumped Candover’s bid earlier today. The Candover-led consortium’s original $3.2 billion bid had been launched on April 17.

The Halliburton bid represented a 6.2% premium over that original offer. Analysts said they expected Candover would respond with a higher bid – a correct assumption, as it turns out – but noted that they ultimately expected Halliburton to be the winner.

“I expect then Halliburton to top Candover’s bid and become the winner, unless there’s another industrial player,” Jane Coffey, head of equities at Royal London Asset Management, said earlier today in a telephone interview with Bloomberg News.

What analysts such as Coffey hadn’t counted upon, however, was the speed with which Candover came back with a new bid. That quick response is now leading some analysts to predict that Expro will take the slightly higher offer without waiting for a possible counteroffer from Halliburton.

“If I’m Expro, I’m like, ‘No, you had four weeks doing due diligence,’” James Wicklund, of Carlson Capital LLC in Dallas, told Bloomberg. “‘If you want to raise your bid, raise your bid. How many times do you need to go through the underwear drawer to know what you have?’”

Surging demand for oil from developing economies such as China and India have pushed oil to record levels over the past year. Just this week, West Texas intermediate crude crossed the $135-a-barrel threshold.

With oil commanding such a high price, Halliburton and its larger rival Schlumberger Ltd. (ADR: SLB), have profited as oil-rich nations have turned to the oil-services firms for help with excavation and exploration, forgoing the assistance of international oil majors, in hopes of keeping a larger chunk of revenue for state coffers.

At the same time oil demand is skyrocketing, some of the easy-to-reach oil deposits are starting to dry up, forcing the oil majors to experiment with more-challenging and – and much-more costly – deep-sea drilling expeditions. Oil at $135 a barrel can cover the cost of hard-to-reach sites that were previously considered financially unfeasible, making a company with Expro’s technology and experience a valuable asset.

Such heavy-hitters as Exxon Mobil Corp. (XOM), BP PLC (BP), Total SA (TOT), Chevron Corp. (CVX), ConocoPhillips (COP), and Royal Dutch Shell PLC (RDS.A, RDS.B), will spend a record $98.7 billion this year on exploration and production, according to Lehman Bros. Holdings Inc. (LEH).

And some of that almost $100 billion in exploration and production fees is bound to end up in the pockets of Expro, given that it’s among the leaders in deep-sea oil exploration. The firm’s experience with underwater wells at levels deeper than 1,000 meters (3,281 feet) would be a nice complement to Halliburton’s existing services.

Many analysts feel the deal makes too much sense for Halliburton to pass up.

“The consortium is private equity, with returns that need to be made – the higher their bid, the lower their returns,” Phillip Lindsay, an analyst with ABN Amro Holding NV (OTC: ABNYY), told Forbes. “I would say Halliburton is in a stronger financial position. I certainly think Halliburton could bid higher.”

Source: Halliburton Offer Sets Off Bidding War for Deep Sea Oil Expert