In that tiny window of just 60 minutes, the price of the black stuff made a record jump.

Now more than ever I’m encouraging my Smart Commodities UK readers to load up on our targeted oil plays. There are two in particular. I’d very much like to tell you about them.

First though, let’s look at what went on yesterday and more importantly, what caused the mayhem…

How the biggest oil price surge in history “came out of nowhere”

The first thing I do every morning when I get into the office is check what’s been going on with oil futures contracts overnight… this morning, what I saw caused my jaw hit the Bloomberg terminal.

The price of a barrel jumped $5.49 to $127.79… at the very end of yesterday’s trading.

Now $5 doesn’t sound a lot… but in the trading pits it is huge. To give you an idea of the enormity of this event it is the biggest one-day move – in dollar terms – in the history of the oil markets.

Not even during the Second World War, the 1973 oil crisis and 9:11 was there a bigger hike within 12 hours of trading.

And what’s more astonishing, reports from the Nymex trading it revealed no-one knew what caused it!

One journalist called the final hour of put trading on the futures exchange “hysterical” with the surge coming “out of nowhere”.

There was no new oil data released that could have sparked this… there was no news on supply or demand.

So what prompted oil future contracts to make one of their biggest one-day price jumps EVER?

Two factors that defy logic

Well, a number of new factors have entered the oil market over the last week.

First there is the prospect of warm weather in the US. Americans love their air conditioning and a demand surge is ahead if the temperature rise.

Less than 5% of homes in Europe have air conditioning, compared to 85% in Japan and 65% in the US. The energy consumption of air conditioning units is often overlooked, but it’s actually a massive factor.

It is one of the reasons I reckon the high oil price is not going to curb US demand by as much as some oil bears believe.

Can you imagine working in an office in Phoenix, Arizona without aircon? There’s no way employees will switch it off. Demand is not all about gasoline use and driving miles.

Indeed, according to the US Environmental Protection Agency, about ONE-SIXTH of all the electricity generated in the US is used to cool buildings. This is often overlooked; and it shouldn’t be.

However, the prospect of a warm spot in the US is unlikely to cause such historical price movements in these contracts, so I reckon we can dismiss that factor.

Then there’s the added risk now we’ve entered hurricane season. This risk is impossible to quantify and I do not believe that it is responsible for yesterday’s jump. It defies logic.

The truth that US traders don’t want to know

So, we have to look globally for the most likely explanation of what went on last night… and it all started with the European Central Bank.

The dollar has strengthened recently. But don’t expect it to keep going. Investors can see there are not many interest rate cuts left in the Fed’s armoury, and the US economy has performed better than the doomsayers expected.

However, a statement from European Central Bank President Jean-Claude Trichet shows a shift in thinking on this side of the Atlantic – and investors had to digest its implications.

Trichet indicated that the bank was shifting its attention from protecting economic growth to fighting inflation. He implied the bank may now hike interest rates as soon as next month.

This reversed the outlook for the dollar’s fortune.

US oil investors shrugged off this news – but people in Asia smelled an opportunity.

All of the action took place in the final hour of US trade, which coincides with the time early-bird Asian traders started mulling over the previous day’s trade in Europe and the US.

It looks like US oil traders missed a trick yesterday – and the wealth went to Asia instead.

Still, that’s all part of the global trend in money these days: the Americans lose it and the Asians gain. We shouldn’t be that surprised.

Whatever the reason, this is all grist to the mill for our Smart Commodities UK oil stocks. Especially now, they are both immediate buys.

If you’d like details of these shares, I’d welcome you to find out more about my service here.

Regards

Garry White
Editor
Smart Commodities UK

Source: Biggest One Day Oil Price Jump Makes These 2 Shares an Immediate ‘Buy’!

American Airlines, Continental and Delta have all announced cutbacks due to rising fuel costs.

Consumers are also being squeezed. USA Today reports that summer airfares in the US are set to rise by as much as four times thanks to spiraling oil prices.

“The sector-wide downturn is pretty textbook,” says Theo Casey in Fleet Street Daily.

Airliners tend to suffer most in a weak economy. The airlines biz is very cyclical, i.e. very sensitive to the business cycle. Revenues tend to pick up in times of economic expansion, and fall in periods of economic contraction. Airliners also are at the mercy of the oil markets, which are at all-time highs.

This isn’t just a recession. This is a recession combined with the raw asset prices getting too high to handle. Lower revenues were already on the cards with the threat of UK, US and Eurozone recessions. But throwing in oil prices that range from $125 – $135 a barrel, the problem is made much, much worse.

In terms of affordability, air travel has flown in the opposite direction of things like higher education, houses, and designer jeans,” says Andrew Gordon in Investor’s Daily Edge.

People have to fly. And, globally, it’s inevitable that they’ll be flying in greater numbers. Higher prices may slow this trend, but it won’t reverse it. Flying is already taking off in Asia. For example, China’s domestic airline industry is just a fifth of the size of the U.S.’ domestic market, but it’s growing much faster. In 20 years time, it’ll be about half the size of the U.S. market.

And market liberalization is in the air. Many more markets will soon receive a strong boost as governments ease regulations. New Open Skies agreements between the European Union and the United States and Canada are a start. Further market reform will open up Asian and North African markets. The result? The global airline industry will outperform the world economy in the coming years.

The airline industry isn’t so much broken as it is overcrowded. It’s mainly a matter of too many seats available for too few customers. If the industry continues to consolidate, supply and demand should rebalance. Then investors will be able to focus on the solid fundamentals of the industry – reasonable prices and growing demand.

Here it is:

We need to pump 50,000 barrels more each day.

It’s a masterstroke. A policy that manages to be really bad in two different, fundamental ways.

Point one — we don’t have much oil left. This will deplete our reserves faster.

Point two — the world as a whole produces 85 million barrels a day. This extra production will have no impact on the oil price. It’s like throwing a dart at a tank.

Of course, there could be another motive for this. Brown famously sold a lot of our gold in 1999. Since then, the price of gold has soared. It was a really, really bad trade. If Brown was your fund manager, you’d sack him.

Maybe Gordon’s trying to make up for it now. Britain is a price taker in the global oil market. We have no influence on how much a barrel of crude costs. Now oil is hitting record highs. Some, like our own Bill Bonner and our Time Trader, Robin Tracey, suspect we could be in bubble territory.

Perhaps Brown is advocating increased production to capitalise on the high price (though even then, I don’t think it’s at all his call to make). I don’t really believe this… but I’m trying to think of a rationale for this mad policy.

If that is the case… OK. We’ll talk about it.

Just don’t dress it up as the energy solution it clearly, clearly isn’t.

Below, commodities hound Garry White proposes a far more workable solution. He also follows up on yesterday’s Blackout Britain story — why was it that the lights went out in Cleveland?

House prices lose their footing

Woops!

You remember my rock climbing analogy from two days ago? The one that likened the housing market to a climber on a rock face, trying to descend to a sustainable level and groping around for a foot hold?

Well, the climber’s slipped. He’s not at the bottom (at least, we don’t believe so). But he has slipped a bit, and grazed his face on the rock.

According to the latest Nationwide house price index, the average house price has fallen 4.4% since May last year. That’s the biggest fall since December 1992 (when prices fell by 6.3%).

But here’s a line from the FT that puzzles me:

“The price drop makes the position of the Bank of England’s monetary policy committee even more complex as it struggles to set an interest rate policy which is consistent both with surging inflation and a deep slowdown in economic activity”.

Why? Why should it make the Bank’s job more difficult?

I’m going to have to quote from the Bank of England Act again, aren’t I? Here we go…

In relation to monetary policy, the objectives of the Bank of England shall be — (a) to maintain price stability, and (b) subject to that, to support the economic policy of Her Majesty’s Government, including its objectives for growth and employment.

The key phrase is ‘subject to that’. If prices are stable, worry about growth and employment. If they’re not, don’t.

There isn’t an interest rate policy consistent with both surging inflation and a deep slowdown in economic activity. There’s no reason to think there would be. That’s why each policy tool should be used to achieve one, and only one, policy goal.

In the case of interest rates, the goal is price stability. Keeping inflation down.

Falling house prices may make ugly headlines, but that shouldn’t be the Bank’s concern. And besides, house prices got too high anyway.The housing market is trying to find an equilibrium. Let’s go back to my climber on the rock face. He knows there’s solid ground below. He’s making his way down… from time to time he slips, but then the safety rope kicks in.

This “Belay Effect” takes the form, for example, of people desperate to buy, but priced out of the market. As soon as prices slip a little, they’re in!

But our climber’s still searching for a surer footing. So he’ll keep edging downwards. And here’s where the Bank of England might make a nuisance of itself. The equilibrium is below the climber. Cutting rates has the effect of temporarily hoisting him higher up the wall.

But he still has to come down.

Solving Britain’s power crisis — the Garry White two-step

Step one — start building nuclear reactors. But remember — these take over a decade to build. You can’t just throw them up. Best get started, then, however unpopular it may be with environmentalists.

Step two — find a workable solution for the interim period. For Garry, the solution is a four-letter word. Coal!

“Coal’s making a comeback,” says Garry. And that, dear reader, leads me onto step three:

Invest in coal. This is exactly what Garry told his Smart Commodities readers to do last October. But Garry was too far ahead of the curve — his coal stock slumped straight after.

But Garry’s stuck with it. And he’s told his readers to stick with it, too. He sees the current energy crisis for what it is — a gap to be plugged… and a great investment opportunity.

Garry’s been rewarded for his patience — his coal stock’s now showing a 19% profit since recommendation, despite the earlier dip. Now, past performance is not a reliable indicator of future results. Perhaps Garry was lucky?

“Not a bit of it!” says the man himself. “Investors are slowly waking up to coal’s profit potential. The world needs energy — and coal, however dirty it may be, is a proven source. This stock has a way to go yet. Get it in your portfolio!”

Find out today what Garry believes is the number one coal investment on the market right now!

Until tomorrow

Ben Traynor

Source: Gordon Brown’s Barmy Answer To The Oil Crisis

In their search for explanations as to why oil has surged past $130 per barrel, Washington, Wall Street and the financial media are as clueless as cavemen after a freak summer snowstorm. Despite the head scratching, the blame game is nevertheless in full force.

Speculators and big oil companies are being trotted out as scapegoats, and increased margin requirements and taxes on windfall profits and futures trading have been mentioned as appropriate sanctions. It should be clear that this is pure farce, and that no one understands what is actually happening.

The reality is that after years of reckless consumption and dollar debasement, Americans are now being priced out of the very markets over which they formerly held unchallenged title. As more affluent foreigners consume more of the resources and products they previously exported to us, Americans are being forced to cut back. The rising dollar-based price of gasoline is simply an illustration of this global trend.

Poorly concealed behind contrived government statistics, the signs of America’s falling standard of living are everywhere; all one has to do is look. We are unloading our SUVs for less-desirable compacts, and are paying more to fly on crowded planes (where we pay to check luggage and dine only on what we bring onboard). We now buy our lattes from McDonald’s Corp. (MCD) or not at all, and we increasingly forego dining out, trips to the mall and vacations – just so we can scrape together enough to fill our gas tanks and kitchen pantries, pay taxes and insurance, or make credit card, mortgage or car payments.

The collective belt tightening is simply the down payment on the U.S. government’s massive bailout of Wall Street investment banks and mortgage lenders. As the U.S. Federal Reserve creates money to buy bad mortgages and other shaky securities held by banks and brokerage firms, the value of the savings and wages of everyone on Main Street will continue to fall. As a result, the costs of products previously taken for granted have begun to bite.

The various housing bills and stimulus packages now passing through Congress will add significantly to the staggering final price tag. In the end, the “free lunch” currently being dished out by Washington will be the most expensive meal ever served. The cost will be borne by ordinary Americans citizens every time they open their wallets. And four-dollar gasoline is just the beginning.

For all the talk of increased global demand, few seem to understand from where it actually comes. The surge in global demand is both a function of the increased purchasing power of foreign currencies and the fact that foreigners are choosing to spend more of their incomes themselves.

In other words, former Fed Chairman Alan Greenspan’s famous “global savings glut” is turning into a global consumption binge, with Americans unable to crash the party. This trend will only get worse as the dollar-denominated price of just about everything that is either imported, or capable of being exported, goes through the roof.

We can look for scapegoats all we want but the simple fact is Americans are going to have to get used to a much lower standard of living. Those who have been putting all the food on our tables are finally pulling up chairs and are serving themselves.

Source: That Pain You Feel at the Pump is From a Dollar Crisis, Not an Oil Crisis

Although hybrid cars account for only about 3% of U.S. car sales, their share is growing rapidly. Sales of hybrid cars surged 25% during the first four months of this year compared with the same period last year. And the pace accelerated last month, when sales jumped 58%. That outpaced the overall April sales gain of 18% for small fuel-efficient cars and comes as total new-vehicle sales are slumping.

The reason is simple. The average price of a gallon of self-serve regular gas topped $4 a gallon in California for the first time Thursday, according to AAA. That’s up 16% from a year earlier, and many analysts expect pump prices to go higher as the summer driving season kicks off over the Memorial Day weekend.

“The fact is that ever-rising energy costs will alter American driving and dietary habits,” says Dave Gonigam in The Daily Reckoning.

“Seven-dollar (or $12, now that Robert Hirsch of Hirsch Report fame has repeated Charlie Maxwell’s $12 forecast on CNBC) will make the 40-mile one-way commute unsustainable. And to some degree, we already see this reflected on a nationwide map of foreclosures, county-by-county, as put out by RealtyTrac.”

“The trend that is important behind the story of the future expansions is the downtrend in gasoline,” said Joanne Shore, analyst for the U.S. Energy Information Administration, speaking to Thomson Reuters.

“We feel that demand for distillates is going to be higher than gasoline for the next several years. And margins right now for distillates are quite a bit higher than gasoline, so it makes more sense to do your investments there than other projects,” Valero Energy Corp spokesman Bill Day said, in the same article.

Demand for diesel is increasing globally, with China and Europe playing a major part in driving prices up. This from Bloomberg:

China is pushing the price of diesel fuel higher by stockpiling it ahead of both the Summer Olympics and the need to rebuild Sichuan province after last week’s earthquake … The country is hoarding the fuel in the event that its power grid fails and it needs to use backup generators.

Low inventories in Europe are also pressuring diesel prices, which have risen 53 percent in the last year in the US, compared with a 20-percent increase in gasoline.

Tom Dyson in Daily Wealth says, “I’m trying to figure out if ethanol’s a good investment. Frankly, I haven’t made up my mind yet. The fortunes of the ethanol industry depend on the government. Without the government’s support, the ethanol industry wouldn’t exist in America. So to invest in ethanol, you have to know what the government’s going to do.

“John McCain hates ethanol. If he wins the election, he’ll remove all the ethanol subsidies and hurt the farm economy. If the Democrats win, they’ll keep the subsidies in place, and ethanol stocks will probably take off.”

Drivers will likely need to become comfortable with gas at $4 a gallon, as oil experts say an era of historic pain at the pump will endure well beyond the Memorial Day weekend, when prices traditionally peak.

You might trade in that GMC Yukon for a Honda Civic, skip the highway for the bike lane and redefine that time-honored tradition of the road trip. Americans are already reordering their Memorial Day weekends, with AAA predicting a decrease in travel for the first time since 2002.

But those changes might not be enough to immediately pull down a gasoline market that follows the whims of the world economy. Newfound wealth fills pockets of the globe once known for overwhelming poverty, and for the first time prices are responding to their thirst for fuel as much as demand in America.

The new world order for petroleum markets has some analysts predicting far higher prices ahead. Gasoline in the U.S. could reach $7 a gallon because more drivers in India and China will hit the road even as American oil consumption retreats, the Canadian Imperial Bank of Commerce predicts.

The flip side of sky-high crude oil prices is that Gulf States are raining money. Read on here to find out about a “backdoor” way into the booming Gulf.

“It’s just a token increase but it shows that the Saudis realize just how important it is for the president to not come back empty handed,” said Peter Beutel, president of Cameron Hanover Inc. in New Canaan, Connecticut. “This is about a lot more than oil, the special relationship between the countries is at stake.”

Saudi Arabia, the world’s largest exporter of the black goo, said it would raise output by 300,000 barrels a day to 9.45 million barrels a day in June, following a meeting between Bush and Saudi Arabia’s King Abdullah.

However, according to an OPEC report, Saudi Arabia’s April oil production was 9.02 million barrels a day, down 37,000 barrels a day from a month earlier, while Nigeria’s output fell by 251,000 barrels a day. This means the all the Saudi supply increase will offset declines last month.

“It’s almost funny to watch the reactions of politicians everywhere,” says Manraaj Singh in Profit Watch. “Someone must have forgotten to tell them that OPEC is a cartel. Its job is to make its members rich, not provide cheap oil to faltering Western economies.”And it must be doing something right… because the petrodollars are really beginning to pile up.”

Read on here find out why Arab oil wealth is set to dwarf the US economy.

According to the Houston Chronicle, Pickens, through Mesa Power, ordered 667 wind turbines from General Electric to begin a $10 billion wind-farm project in Texas that will be the nation’s largest.

Delivery of the equipment will begin in mid-2010, Dallas-based Mesa said today in a statement. When completed in 2014, the Pampa Wind Project in northern Texas will be capable of producing 4,000 megawatts, the company said. That’s enough power for about 1.2 million average U.S. homes.

Abundant wind, open land, federal tax credits and rising electricity prices have made Texas the largest U.S. producer of electricity from wind. Mesa’s Pampa Wind Project would almost double that generating capacity. Royal Dutch Shell Plc has proposed a 3,000-megawatt wind project in the state.

The wind turbines ordered from GE for the $2 billion first phase of the Pampa Wind Project will be capable of producing a total of 1,000 megawatts, Mesa said. A megawatt of wind-power is enough for 300 average U.S. homes, according to the association.

Peak Oil guru Byron King and editor of Outstanding Investments reckons much of oil’s climbs can be attributed to dollar weakness.

What should you do as an investor to protect yourself from a declining dollar?

Here is Byron’s abbreviated list of recommendations:

1. Buy gold and silver
2. Own mining shares
3. Own energy plays. What forms of energy? All of them — oil, gas, coal, nuclear, wind, solar, geothermal, biofuels
4. Own energy service plays
5. Own infrastructure plays
6. Buy soft commodities, but only if you really understand how to do this

Read on at Outstanding Investments about how to protect your wealth from the dollar’s demise.

In pretty short order, all the charge-card companies boost his credit limits, cut the interest rates he’s paying on his outstanding balances, offer him new credit lines – and even make him eligible for various “rewards” programs that give him all sorts of freebies for spending money.

Brazil finds itself in that situation because uber-debt-rater Standard & Poor’s just boosted the country’s credit rating to “investment grade” in recent weeks, moving its rating from BB+ to BBB-. Why should we care? After all, isn’t Brazilian debt bought mostly by institutional investors? That’s true. But with the increased debt rating, Brazilian shares also should benefit – provided the government doesn’t embark on a big spending binge.

Brazil was included in the “BRIC” (Brazil, Russia, India, China) group of rapidly growing emerging economies that was created by Goldman Sachs Group Inc. (GS) back in 2003. At that time, it really didn’t deserve the distinction. Long-term growth since the 1970s had averaged less than 2% per capita, and the country had narrowly avoided bankruptcy only the year before. Long-term interest rates were above 20% (around 15% in real terms), which hardly encouraged companies to make capital-spending commitments that might grow the economy. Most alarming, a left wing socialist named Luis Inacio Lula da Silva had just been elected president.

Brazil got lucky. First, Lula proved to be surprisingly moderate, not much to the left economically of previous Brazilian governments, perfectly willing to welcome foreign investment, generally friendly to the United States and not at all like his socialist neighbor, Venezuelan President Hugo Chavez. Second – and probably even more importantly – 2003 was the year in which energy and commodity prices began the long climb that has brought them to their current (astronomical) record levels. Third, since Brazil was not an oil exporter, there was no single source of new wealth that the government could just seize. Instead, revenue flowed to mining companies, the oil company Petroleo Brasileiro SA (usually referred to as just Petrobras) (ADR: PBR), and numerous agri-business operations that benefited from the rise in agricultural prices.

Most startlingly, Brazil’s ethanol program, which had been a hopeless boondoggle for a generation since it started during the oil crisis of 1979-82, suddenly became the envy of the world. Rising oil prices made Brazilian sugarcane the world’s cheapest and most economically and ecologically efficient source of newly fashionable ethanol. At a $20 per barrel oil price, the ethanol-from-sugar program was a typical example of misguided Third World government planning; at $120, it is a bonanza.

Brazil’s debt position has improved in three ways:

• The amount of outstanding debt has been reduced through modest repayments.
• Its ratio of debt to gross domestic product (GDP) has dropped sharply, as GDP in dollar terms has shot up with the revaluation of the Brazilian real against the dollar.
• And Brazil’s interest costs have dropped along with the country’s improving creditworthiness and with the generally low level of global interest rates.

With more income, a stronger currency and lower debt, it’s not surprising that Brazil’s credit rating has improved. As with an individual consumer on whom the credit card gods suddenly smile, what happens next depends on what use is made of the improved position. If a person reverts to their earlier spendthrift ways, they will quickly max out the new credit limits, actually making their position even worse than before.

Fortunately, the Brazilian government appears to have learned the difficult lessons of the last 25 years, and is remaining both careful in its spending and welcoming to foreign investment. That will bring down Brazil’s debt costs further, as will recent favorable developments like the discovery by Petrobras of about 36 billion barrels of oil in an offshore Brazilian oilfield.

Now, don’t get carried away. This isn’t China – with its 10% annual growth rate, apparently repeatable ad infinitum. Brazil had such growth rates for a brief period in the 1970s, but they disappeared around 1980 in a blizzard of unpaid debt. Brazil’s growth rate is currently around 5% – but it looks far more balanced and stable than it did in the 1970s. Brazil’s improving credit position is likely to make growth persist, and future political risk appears minimal. When Lula goes, a politician of the center-right could well replace him.

Another good sign for Brazil – there are more than 30 Brazilian companies with full American Depository Receipt (ADR) listings on the New York Stock Exchange, plus 40-50 more that are traded in the over-the-counter market. Here are a few attractive examples to consider:

Banco Itau Holding Financeira SA, referred to usually as Banco Itau (ADR: ITU), has a Price/Earnings ratio of 14 and dividend yield of 2.4%.  Brazilian banks earn very high returns, primarily from domestic market lending in reals. Including Banco Itau, there are three large ones listed on the Big Board in New York; the other two are Banco Bradesco SA (ADR: BBD) and Uniao Bancos Brasile SA (Unibanco) (ADR: UBB). However, Itau is the cheapest of the three, though only slightly.

Companhia Vale do Rio Doce, now referred to only as Vale (ADR: RIO), is one of the true global blue chips, with a market capitalization of almost $200 billion. An iron-ore company with ancillary operations in gold, nickel, copper and other metals, its shares trade at a reasonably valued 13 times earnings, though its dividend yield is only 1.2%.

Petrobras (ADR: PBR) is one of the few emerging market oil companies with access to modern technology – and the willingness to work with the oil majors. Its shares are up 168% in the past year, but the stock’s P/E still is only 16. It has a 1.3% yield. The possible upside: It finds another gigantic offshore oilfield. The possible downside: Oil drops back to $50 a barrel. If the world’s monetary authorities get serious about imposing higher interest rates to fight inflation, PBR and RIO would probably suffer as commodities prices fall back to earth.

Companhia de Saneamento Basico (Sabesp) (ADR: SBS) is the water and sewage system provider for Sao Paulo. Now that’s a growth business, and not dependent on commodity prices. With a P/E of only 9.2 and a yield of 2.7%, this is one stock I have to say I love.

TNE (ADR: TNE) There are a bunch of Brazilian cell phone companies, but TNE appears to be the cheapest. It’s concentrated in the populous southeast and northeast regions of Brazil, with a P/E ratio of only 7 and yield of 4.25%.

Telecomunicacoes de Sao Paulo SA, or Telesp (ADR: TSP) provides the fixed line telephone system for Sao Paulo. Before you sneer, consider this: the company has a dividend yield of 9.8% and a P/E ratio of 10 (which means the dividend is only just covered). And it’s majority owned by Spain’s Telefonica.

Voturantim Cellulose (ADR: VCP) is a pulp and paper company, with a P/E ratio of 14 and a dividend yield of 2.8%. Trees grow fast in the tropics and VCP definitely benefits from that!

Source: Is Brazil ‘Investment Grade’ for Investor’s Money, Too?