“The latest oil price increase to over $70 a barrel is not justified by current fundamentals, [although] it cannot be ignored that the oil market has improved,” wrote analysts at Commerzbank. “The underlying demand remains week.”

In a potentially positive development the Movement for the Emancipation of the Niger Delta, or MEND, say they are studying an amnesty offer announced by Nigerian President Umaru Yar’Adua, but will turn in their heavy weapons by the August 4th deadline stipulated in the document.

The group, however, objects to the term “amnesty,” saying that, “We are not criminals. Amnesty is offered to criminals and people that have been convicted. We are fighting for our rights, carrying guns fighting to protect our fathers’ land. What we are suffering from is marginalization, slavery, oppression. We accept the peace, and are ready to lay down our arms, so the amnesty itself is just a mix of language.”

In the natgas arena, the fuel continued its forward and back movement, posting a loss on the week, with July futures shedding 2% to finish at $3.949 per million British thermal units.

Source: Crude Slips

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.

Crude flirted with the $70 mark yesterday, briefly topping it for the first time in six months, at $70.32, in a rush of optimism immediately after the jobs data came out.

Despite the slippage, crude ended the week up 3.2%.

“Crude turned around to the downside because of the strength we are seeing in the U.S. dollar,” said Tariq Zahir, of Tyche Capital Advisors. “More importantly, the fundamentals of crude oil are still bearish … Demand is down, and inventories are up.”

Credit Suisse analysts concurred, saying that, “Demand destruction is still a topic in the market … At the same time, OPEC production has started to grow again. We think price risks are skewed to the downside.”

In the natgas arena, the fuel was higher on the week, with July futures gaining 10%, to $3.868 per million British thermal units.

Source: Crude Tops $70

Traders were looking ahead to OPEC’s scheduled meeting Thursday in Vienna, at which the cartel will discuss production and oil prices. OPEC raised its production in April, for the first month in the previous eight.

Most analysts are not expecting another cut in production quota, but believe the talk will center on member compliance.

In the natgas arena, natural gas concluded another dismal week by falling 8.8 cents, to $3.515 per million British thermal units. For the week, natgas was off more than 14%.

Source: Oil Moves Higher

Natural gas prices have tumbled by about 30% this year, as a steep drop in industrial consumption has undermined demand. However, many of the traders and hedge funds that placed speculative bets on the price decline are beginning to reverse course and bet on a price spike, as dwindling production is starting to outpace slumping demand.

Traders trimmed their net short positions on gas by 11% to 114,064 in the week ended March 10, the smallest since last July, Bloomberg News reported. Also, natural gas futures for delivery in January 2010 are trading at a 49% premium to the April contract, which means speculators are anticipating a price surge.

In its short-term energy outlook – released on March 10 – the Energy Information Administration said that total natural gas consumption is projected to decline by 1.3% in 2009 and then increase by 0.4% in 2010. But many energy companies have idled rigs, scaling down production and increasing the chances of a supply crunch if the economy starts to recover.

Just as natural gas prices have plunged below $3.90 per million British thermal units (btu) from a record-high $13.694/btu on July 2, the number of natural gas exploration rigs in the United States has fallen to 884 from a record 1,606 in September, according to Baker Hughes Inc.

U.S. natural gas rigs fell 15% to an average 1,037 in February, their fifth consecutive monthly drop, Baker Hughes said.

With so many rigs coming offline, fourth-quarter gas production could decrease by 5.2%, Bloomberg reported. That would outpace the relatively acute decline in natural gas demand forecast by the Energy Department.

“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,” said Larry Nichols, chief executive officer of Devon Energy Corp. (DVN). “The drop in supply will be so steep, it could easily catch up to where demand has dropped to before the recession ends.”

It’s also likely that more exploration projects will be shelved, and more rigs idled, as economic turbulence continues to linger. The cost of drilling and servicing is double what it was just four years ago, and in that time credit standards have tightened and the cost of borrowing money has increased substantially.

“When everybody sobers up after the first quarter and sees what their real cash flow is going to be, people are going to be very discouraged about how much capital they have to spend and that will depress the rig count even further,” G. Steven Farris, chairman and chief executive of the energy company Apache Corp. (APA), told The New York Times.

Theresa Gusman, head of equity research for Deutsche Bank AG’s (DB) DB Advisors unit, told Bloomberg that spending on U.S. exploration and production will drop an estimated 40% to $22.5 billion this year.

Stephen Schork, president of the Schork Group Inc. in Villanova, Pennsylvania is among the analysts who believe natural gas will soar back above $7/btu in the next 12 months.

“The next big move for gas is obviously going to be up,” said Schork. “If we are higher, I’d expect to see us at $7 by the start of next winter.”

Source: Natural Gas Prices Could Double as Energy Majors Scale Down Supplies

Many are valued like they are depleting assets (like energy trusts or master limited partnerships), when, in fact, they are growth companies.

Many of them have been expanding gas production too quickly until recently, because they were accessing outside capital in the form of debt. But ever since natural gas prices tanked, most have announced that they will “spend within cash flow,” or limit drilling activity to reinvesting the cash flow that they generate.

I’ve spent a lot of time in recent weeks reviewing E&P capital spending plans, and I think the market is underestimating just how quickly U.S. natural gas inventories could contract, given the recent collapse in drilling activity.

The Jan. 23 natural gas inventory report from the EIA revealed a 176 billion cubic foot inventory draw despite severely depressed industrial demand.

E&P companies were financing new drilling projects with debt in 2007 and early 2008, but it did not lead to an inventory glut. This reflects just how intensely the industry needs to drill to meet demand. Now that debt-financed projects are a thing of the past, we can expect to see a significant negative supply response.

For the most part, the E&P industry in the U.S. is very disciplined — perhaps more so than OPEC. E&P companies are responding to the lower natural gas price by slashing drilling and well completion activity in this depressed gas price environment. At $4.50 per thousand cubic feet, the spot price of gas is below marginal cost for most producing fields.

At today’s low prices, it makes economic sense for E&P companies to defer new projects. The U.S. natural gas supply originates from thousands of wells scattered all over the country.

Decline rates of these wells are very steep. Consider that most new production comes from shale plays — where production can decline 70% in the first year after well completion.

So low natural gas production should balance the market later in 2009 — prompting a rebound in natural gas prices. E&P stocks should rebound even faster than gas prices, since they are already discounting years of unattractive prices.

Source: Natural Gas E&P Stocks Should Rebound Quickly

Back in October, while the world was busy putting out the fires of a financial crisis that still burns, little-thought-of Turkmenistan made a bombshell of an announcement. It seemed to gather little notice at the time. But it could become much more important as the Russian-Ukraine dynamic gets worse.

Gaffney, Cline and Associates, a British consulting firm, completed an audit of Turkmenistan’s Yoloten-Osman natural gas deposits. Based on GCA’s first results, the fields have a minimum of 4 trillion cubic meters of gas… and as much as 14 trillion cubic meters of gas, a truly staggering sum. The announcement put Yoloten-Osman among the four or five largest natural gas fields in the world.

The country’s biggest field was Dowalatabad, a rich and extraordinary field in its own right. Yoloten-Osman is at least five times as large.

And Turkmenistan has many gas fields not yet explored.

“Without doubt,” the Asia Times weighed in, “Turkmenistan is closing its gap with Russia and Iran, hitherto listed as having the world’s largest and second largest gas reserves… If the GCA results are confirmed, Turkmenistan will have reserves just 20% lower than that of Russia and outstrip Iran by far.”

Turkmenistan has the potential to rival Russia’s clout in natural gas and provide an alternative for Europe. By creating a pipeline from Turkmenistan, through Azerbaijan, Georgia and onto Turkey, the EU could bypass Russia entirely.

You can be sure the Russians won’t like that. Again, from the Asia Times : “[Russia] is no longer the superpower in the world of natural gas, as was widely regarded… Turkmenistan is, unquestionably, also a gas superpower of comparable muscle power to Russia.”

The effort to bypass Russia via a southern route is an old game. Tamerlane, the 14th century conqueror of Central Asia, wanted to do the same thing when he sought to divert trade from the northern Silk Road — controlled by the Golden Horde — to a more southerly course through Bukhara and Samarkand (in present-day Uzbekistan).

Today, the five Islamic republics that were once part of the Soviet Union are back on the center stage of geopolitics. Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan — all have huge oil and gas reserves. The names sound odd today, perhaps. But Americans will get to know their names as well as they know those of Iran, Iraq and Afghanistan.

The race is on to court these countries of the steppe, taiga and desert. In this, China may already have a lead, as it often seems to when it comes to securing energy supplies. Beijing is financing a $2.6 billion pipeline through which natural gas will flow from Central Asia to China. It’s doing its best to cozy up to the fab five.

Russia, too, is already close to them. Russia relies on Turkmen gas to meet its obligations to Europe, for instance. Russia and Turkmenistan have an agreement in place through 2009. But the powers that be in old Ashgabat have been sticking it to Russia. They’re making Russia pay up for its gas supplies. In 2007, Ashgabat raised the price to $100, from $65, per 1,000 cubic meters. Then in 2008, the price went to $130… and then to $150 in June 2008.

As the Asia Times remarked, “Russia will have to rework its bonding with its Central Asian partners.” It’s as if Turkmenistan just drew an ace face up — and now Moscow is starting to sweat it a bit. Turkmenistan now has even more clout to peddle with eager Americans, Europeans and the Chinese — all who want Turkmen gas and the opportunity to build out the infrastructure. Russia will have to play the game like everyone else. Turkmenistan is in the driver’s seat.

Source: Turkmenistan Emerges as Serious Natural Gas Player

This from The Rude Awakening:

The last time I recommended T-3 Energy Services (NASDAQ:TTES) to the subscribers of my investment letter, Capital & Crisis, the stock tripled over the ensuing months. And even after I issued a “Sell” recommendation on the stock, it continued to move higher. But that was WAY back in July…and nothing is like it used to be.

From a high of $84 a share in July of this year, the stock has come all the way back down to $17. I issued a “Buy” on the stock in April of 2007, when it was selling for $21.60. We sold our final half at $63.60 — it’s now more than 70% below that price. And you know what? Not much has really changed…except the stock’s valuation. TTES is selling for about 6 times earnings now and about 5 times next year’s guess…and the company is enjoying huge macro-economic tailwinds.

T-3 makes something absolutely critical to drilling rigs. It’s called a blowout preventer (BOP). BOPs protect the crew — and preserve the rig — in the event of surges in the well. You absolutely have to them. Crews won’t work rigs without BOPs and anybody concerned about safety would never put a crew on a rig without them.

T-3 has about 15% of the market for new BOPs. If you count refurbishing older rigs, T-3 has about 30% of the market. It’s a small company, but a key player in this niche. BOPs make up about 70% of T-3’s business.

The remaining 30% includes a variety of other services for wellhead equipment and onshore pipelines. T-3’s customers are drilling contractors, exploration and production companies and pipeline companies.

Demand for T-3’s services follows drilling activity. Over the years, we’ve had to drill more and more gas wells, just to maintain current levels of production. That’s because the newer wells tend to deplete much more quickly that the old wells used to.

That trend has only continued. According to Baker Hughes, the number of working rigs rose to 1,782 at the end of 2007 to 1,906 today. As we exploit the more unconventional shale basins, which are more drilling intensive, the number of working rigs ought to keep rising.

The shale plays I’ve written about before – the Barnett, Fayetteville and in the Appalachian regions – all take a lot of drilling. Since 2001, for example, drilling in the Barnett is up nine-fold by rig count. These prolific plays now make up 12% of the total rig count according to Raymond James.

Drilling activity is what really drives T-3’s business. And energy prices dictate drilling activity. So, as the price of oil and gas has come down a bunch, the market has crushed T-3’s stock price. I think, though, that it’s been overdone. Drilling activity may slow, but we’re not rolling back to 2002 levels, which is how the market is pricing T-3.

I also especially like the rig equipment and infrastructure market. Since 2004, this market has grown 27% annually, which tops the broader oilfield services group. (The latter grew about 17% annually.) T-3 serves a good niche in this sub-market.

The company is also expanding overseas. Already 60% of the company’s sales come from overseas markets. New orders from West Africa and Russia, new subsea orders and new orders from its joint venture in the Middle East could all be catalysts for the stock price beyond just solid execution of its existing business. Earlier this year, T-3 won a contract for work in West Africa, which was the biggest single award in the company’s history. As of the last conference call, T-3 said it had $320 million in outstanding bids and 60% of that was for international markets.

Last quarter, the company reported a backlog of $81 million, a 36% increase from the prior quarter and a 31% increase from a year ago. T-3 should grow earnings at a 25% clip, yet it’s trading for 7 times earnings. You got a lot of room for error when you buy something for 7 times earnings that’s growing 25% per year.

T-3 will probably earn $40 million in free cash flow this year. Next year, the company should generate $50 million in free cash flow and earn close to $4 per share. At current prices, therefore, you’re paying less than 5 times next year’s guess for a 21% free cash flow yield. Those are bargain numbers for a healthy, growing business with little debt.

Another way to look at the stock’s value is to look at past acquisitions. Last year, acquirers paid 11 times EBITDA (earnings before interest, taxes, depreciation and amortization) for companies in this sector. Even this year, if you could pull off an acquisition at 8 times EBITDA in this sector, you were a hero. Analysts would praise you for making a good deal. Now the sector is in the toilet. T-3 trades for a bit more than 4 times EBITDA. So again, there seems to be plenty of room on the value spectrum here. The world did not change so much in the last 90 days as stock market prices seem to indicate.

Right now, multiples across the resource sector have just collapsed. If T-3 were to regain a reasonable multiple of only 10 times earnings — well below what it commanded even months ago — T-3 could be a $40 stock by next year. That’s more than double.

If we get some more juice from oil and gas prices, we could go much higher. Some of the research I’ve read on the company puts the value much higher, in the range of $72 to $90 per share. Remember, the stock hit $84 this year.  So, I think my numbers are quite reasonable. We’ve got a good shot to do a lot better than $48 per share, perhaps getting back to around $60 and tripling our money again.

I’d buy the stock up to $25 a share.

Source: Fallen Angels

One of the major energy facilities in the Gulf is the Louisiana Offshore Oil Port, or the LOOP. The LOOP is basically an oil terminal located at sea, south of Port Fourchon. The LOOP is designed to handle ultra-large oil tankers up to 750,000 tons — about 10 times the size of a Nimitz-class aircraft carrier.

These huge oil tankers get built (most of them in Korea), and after launch, they hardly ever pull into port again. They’re just too big (over 1,500 feet long.) They don’t fit into most of the world’s harbors. So the big tankers load up on oil at offshore terminals in oil-exporting nations and offload at places like the LOOP.

At any rate, the LOOP handles about 1.2 million barrels of oil per day of U.S. imports. That’s about 13 percent of total U.S. imports. So if the LOOP goes down? Houston, we have a problem.

And where does that LOOP oil go? It gets pumped ashore, of course, and that requires electricity. Once the oil comes ashore, it gets stored in subterranean salt caverns. (The LOOP storage facility holds about 50 million barrels of oil.) Again, lifting and moving all this oil requires lots of pipelines, pumps and electricity.

So there is a lot of worry about any damage to the LOOP or its associated pipes, pumps and electric power. If we lost the LOOP, U.S. oil markets would suffer greatly. And anticipating this, with our last hurricane threat (Gustav), the U.S. Minerals Management Service announced that it would release oil from the Strategic Petroleum Reserve in case of any significant loss of output from the Gulf offshore. So if the LOOP went down, the MMS was ready to turn the valves on the SPR. That’s pretty serious stuff, eh?

Concern About Other Damage

In addition to the surface structures south of Louisiana, that part of the offshore energy patch has many thousands of miles of underwater pipelines and other installations. So if the water column got churned up? That could lead to seafloor scouring, underwater mudslides or slumping. Really, it could have become a total mess.

And what about the oil industry ashore? What about the electrical infrastructure? The big problem with Katrina for the oil industry was that a lot of power lines went down. There was not enough electricity in the wires to run pumps, both to drain water and to run refineries. And without pumps, the pipelines don’t work too well, either. So oil, gas and refined products cannot move.

OK, this whole hurricane in the Gulf of Mexico thing could have been a mess.

No Disaster, Oil Falls, Dollar Rises

But there was no hurricane energy disaster. Gustav rolled right down the center of the alley. By rights, it should have been a strike. Gustav had the aim. Gustav followed the right track. But Gustav didn’t knock down any pins. Gustav went over, under, around and through some of the most densely packed drilling infrastructure on the planet. And Gustav caused very little damage — at least based on what we know so far. It’s a credit to the robust design and construction of the offshore facilities and equipment.

So lacking severe damage, the price of oil fell. And the price of natural gas fell. And even the price of gold tanked, below $800 per ounce.

But are these price changes just because the Gustav winds didn’t blow hard enough? Or because the waves were not high enough to damage the energy platforms? No, not at all.

The other side of the energy story is the dollar story. The U.S. dollar has been rising lately, since mid-July. And that’s actually the larger story. The dollar is up against the euro, the pound and numerous other world currencies.

The strengthening dollar means that prices for energy, precious metals and commodities are weakening. But that does not mean that the long-term bull market in energy, precious metals and commodities is over.

It’s not as if the energy industry is finding large, new areas of oil and gas deposits. That’s not happening, and it’s worse for the West because resource nationalism is placing more and more of the world off-limits to the established firms.

And it’s not as if there are vast new deposits of precious metals being discovered, let alone mined. Indeed, South African gold production is on track to fall 10 percent this year, due to power shortages and exhaustion of high-grade reserves.

Part of the world (Europe) is in a recession. Part of the world (Asia) is starting to show signs of a slowdown in growth rates. And the U.S. banking system is broken, so the credit market has seized up like an engine without any oil in the crankcase.

As all of this goes on, it’s frustrating to watch energy companies decline in value. These are good companies, with solid business models and fine management teams.

Firms that control deposits of energy resources, precious metals or other minerals or unique technology OUGHT to be doing well. But in this market, a lot of good firms are getting taken down with the bad ones.

Here’s something to keep in mind. When the turnaround comes, it will be the good firms — with control over resources or technology and with good management — that should turn around first.

Until we meet again…
Byron W. King

Source: Oil Takes a Hurricane and Stays on Its Feet