Deutsche Bank announced late yesterday that they were pulling the plug on the PowerShares DB Crude Oil Double Long ETN (better known as DXO). Most ETFs and ETNs die out because they can’t attract enough investors. DXO seems to have suffered the opposite fate.

In the new clampdown on commodity speculators, it’s no huge surprise to see the world’s most popular double-long, leveraged ETN fold suddenly. Deutsche Bank didn’t specifically claim that the Commodity Futures Trading Commission put the kibosh on the DXO, but their press release did cite a “regulatory event” as the principal reason for the closure.

Set to close on Sept. 9, DXO is now hemorrhaging. We’re not sure which is worse for share prices: its imminent closure or that it’s double leveraged a commodity that’s currently plummeting.

Deutsche Bank has other popular commodity trading vehicles, like DBA (agriculture) and DBC (general commodities), that could suffer a similar fate. Both of those funds rely on a position limit exemption, which the CFTC revoked last month. Caveat emptor.

“Anytime the government intervenes like this in the financial markets, they destroy efficiency,” says Resource Trader Alert’s Alan Knuckman. “The action by the CFTC to limit position sizes will only make the problem worse by decreasing liquidity. Markets need more speculators — not less — to lessen the impact by any one entity. For example, the elimination of short selling in the financial stocks in the fall of 2008 caused more damage by dragging out the inevitable for companies that made disastrously poor decisions.

“The CFTC will force trading to move to the over the counter market, which lacks transparency, or to foreign exchanges. Volume and open interest could decline here in the United States and make transacting business more difficult and costly in the future. The present tight bid/ask spreads ensure smooth market entries and exits for all. Without the ability to execute a solid trading plan efficiently, the risks increase for all participants.

“With the current and effective monitoring rules, we know exactly who and how players are positioned. Under the proposed political pandering, that data will disappear from the public eye.”

Source: ETF Reckoning Day?

Since April, the commodity has embarked on an extreme upside move, shooting to highs not seen since sugar hit $0.45 per pound in 1981. The chart below illustrates it perfectly…

Sugar Chart: http://www.investmentu.com/images/sugar_082509.gif

The main reason for such a large jump was news from India, which indicated a potentially low sugar crop.

Over the past couple of weeks, the sugar market has surprised many analysts by trading even higher. I say that because while fundamental news like this often results in impressive-looking moves, its impact has a limited lifespan.

So be warned. Moves like this usually indicate that the news is factored into the price and we’re entering the last phase of the bullish run.

Based on my experience in the commodities markets, where I’ve seen this type of pattern many times, I believe we’re headed for an inevitable turnaround for the sugar market. Here’s what you can do to profit form this, and two other commodities to keep an eye on.

How to Play the Sugar Market to the Downside

If you want to play the sugar market to the downside, I suggest you buy put option contracts, or by selling limited-risk call option spreads. At the moment, the October 2009 and March 2010 option contracts are the most active.

As you can see on the chart of the October 2009 futures contract above, the price surpassed the $0.2300 per pound level twice, moved back to $0.2150 per pound, then trotted past the $0.2300 mark again.

This is what technical analysts call a “triple top” and if sugar doesn’t move above $0.2300 again, we can seriously count on the market having a big retracement lower – most likely between $0.1900 and $0.2000 per pound.

So if you play the downside and it does make that retracement, I’d suggest taking profits at that $0.1900 to $0.2000 level.

Oil Heading For $80… And Beyond: Three Ways to Play the Move

Given the historic rise and fall of the oil market and the current state of the global economy, you’d never think that it could even consider the idea of moving higher again.

But the market continues to amaze everyone with its resilience and strength, with the current price hovering around the $74.50 per barrel area.

And with conflicting reports on the global demand for oil over both the near term and long term – plus weekly inventory reports that show a strong buildup of supplies one week, followed by draw-downs the next week – it’s easy to see how this can be a very treacherous market.

Here’s the deal: Regardless of what statistics are released and how Congressional attempts curtail oil trading limits, it’s clear that the oil market continues to bring in speculators from all levels – and will most likely keep trekking higher.

Check out the oil chart below. The price is currently trading above all three main moving averages (20-day, 50-day, 200-day) and is now looking to pop above the recent high of $75.27 from June 11. If that happens, we could easily see oil shoot to $80 from there – with $90 probably right behind.

Oil Chart: http://www.investmentu.com/images/oil_082509.gif

There are a couple ways to play the oil market – be it on the long or short side…

• The futures and futures options that trade on the floor of the NYMEX. This is usually best for experienced commodities investors.
• Through an ETF like United States Oil (NYSE: USO), which tracks the price performance. This gives you broad exposure to the market through one investment, rather than playing individual companies. It’s also a less expensive way to play the market and doesn’t require a commodity trading account.

You can either play the USO shares directly, or the options on the ETF. No matter whether you’re bullish or bearish, pick an option expiration period at least three to six months in the future, as that will give your directional call ample time to mature.

The Grain Markets: Summertime Means We’re on “Grain Watch”

Finally, let’s hit the grain markets (corn, wheat, soybeans)…

During summer, these markets can really turn to the upside, as the growing season can be extremely volatile, particularly if the weather is less than ideal.

The June-October period typically sees more speculation in the grain markets than any other time of year, purely because of the prospect of more volatility. Regardless of what any fundamental data may show, nothing can compare to the sheer panic-buying when we receive weather reports that show how a drought could wipe out a year’s worth of crop.

And some of it doesn’t even need to necessarily happen… it’s merely the potential for it happening, based on previous history. Fortunes can be made or lost in just those few summer months.

Buy Corn Commodities Low… And Ride the Bullish Move Higher

This year, for example, we’ve seen corn and wheat prices shuffle around their annual lows, due to government reports that show ample planting, high carry-over levels from last year and crop production that is ahead of schedule.

Corn Chart: http://www.investmentu.com/images/corn_082509.gif

With corn currently at its lows, if any potential weather disruption does occur over the next few months, taking a bullish position here could be a low-risk way to get involved.

Like with the sugar market, the best way to play corn is through limited-risk option strategies. Stick with expiration months of December 2009 or March 2010, so that you give the market plenty of time to mount a bullish move.

Good trading,

Lee Lowell

Source: These Three Commodities Are Set to Move… Are You Ready to Profit?

This from Steve:

It’s time to stop worrying about the bottom of this market and start taking advantage of the carnage the gross mismanagement of this country’s affairs has left us. Oil is a good place to start.

$40 Oil? Are you kidding me? This is what I call a slap in the face investment. It’s so obvious it’s hitting you in the nose.

This temporary worldwide slow down, and it is temporary, has pushed oil down to a point most people never thought they’d see again. After all the speculation driven price increases of the past few years, it is a nice break, but it won’t last long.

Oil at this price isn’t reasonable. Some of the price drop is the typical over reaction by investors because the run up to the $147 range was so over done. This sell off has created one of the greatest money making opportunities, ever.

The reality of the situation is that OPEC will only put up with these prices for so long. Forget about all the technical data, the opinions of the talking heads and supply/demand numbers, the price is going up.

The best guy I know in the business, a commodities analyst with a group in Chicago says oil should rise to at least $75 in 2009. One way or another OPEC will raise prices. They have to; they need the money.

The problem with not having an energy policy for the past 40 years is that we are wide open to the demands of energy exporters. If they decide they are going to raise the price of oil, they can. Whether it’s because of manipulation, production, consumption or nothing, it will go up. Just look back to 1974 to see how it can be done.

We are doing virtually nothing to reduce our dependence on imported oil, unless you consider this administration’s rhetoric as doing something.  The developing world will shortly resume its huge demand for oil and other commodities, and $75 a barrel will be cheap.

Rather than get caught again with your pants down at the gas pump, lets look at how to turn the tables and make money on this run up.

Investing in oil companies has never been my favorite way of making money on oil. They tend to be very diversified and their stock price rarely tracks oil’s price closely. I prefer two ETF’s.

The first one is the USO, not the serviceman’s group, but the United States Oil Fund. It is designed to track the price of oil, on a percentage basis, not point for point, but close.

It has been as high as $119 per share and as low as $24. It is currently within a few dollars of its low. You should expect close to, not exactly, but close to a point for point move on a percentage basis as the price of oil changes.

Over the next year a realistic gain expectation is about 80% to 100%. On the three to five year horizon, the sky is the limit.

Now here’s a play that will give you almost a two for one return on any increase in oil.

DXO- this is an exchange-traded note, not a fund, offered by Deutsche Bank. It is designed to give you twice the percentage return of oil. Keep in mind, if you have an investment that gives you twice on the upside, it will also take twice on the downside. Nothing is free!

Its 52-week range is around $1.75 to $29. It is only a few cents above its low. This is a potential 150% to 200% gain this year or early next.

Very rarely have I seen an opportunity as blatant as this one. If we had a choice to not use oil I might be a little more subdued, but we don’t. Add to this equation the fact that we have put ourselves in a position where we have no choice but to import oil for a very long time and you have a win-win scenario for this play.

Add the increasing demand by the developing world, which will only accelerate in the years to come, and you have a tiger by the tail. The only question is how long you will give it to work.

As with any strategy time is the real issue.  What if this doesn’t begin to work until late this year, or early next? So what. Give this time to work and you have as close to a guaranteed short term double as I have ever seen.

Oil is only one of many plays that will make millions over the next 18 to 36 months. This is the best buying opportunity since the market collapse of the late 70’s.

Turn off the TV’s negative talking heads and start looking at the positive of this mess. All it will take is a little patience to make a fortune.

Source: $75 Oil This Year and it Can Put a Lot of Money in Your Pocket

This from Investment U:

You might think you’re properly invested in oil, but you could be wrong.

Despite reaching lows since 2004, the long-term outlook for oil is still up. Maybe not $147 a barrel like the old days (i.e. six months ago), but because of supply, demand, turmoil in the Middle East, and the fact that we will eventually resume worldwide economic growth, oil prices have only one way to go.

If you think you’ve positioned yourself according, or if you’re thinking about a new investment in oil… tread carefully. Here’s why:

I covered a situation last week call contango. It’s a feature of futures markets where you can buy oil cheap right now and lock in a contract to sell it in the future for a higher price. Normally, the difference between those prices is so close to the cost of storing the oil that it’s not a profitable trade.

But right now, we’re in a state of super-contango. Prices are way out of whack. And commodity investors are storing oil everywhere they can to earn the excess profits. (For a more detailed description, see contango.)

Contango is big news now. But some of the “traditional” oil investments that are being tossed around aren’t what they seem to be. In fact, if you skipped some very fine print, you could have set yourself up for a huge disappointment.

So let’s clear that up… and pad our pockets with a little extra in the process.

You’re Not Buying What You Think You’re Buying

When we broke the news on contango, we suggested looking at some oil storage providers, explorers and drillers. And that hasn’t changed. Looking around, there are a number of “oil investments” that look promising.

One would think the quickest way to invest in rising oil prices would be to simply buy shares of an oil-based ETF, like United States Oil (NYSE: USO). These oil ETFs are very popular – USO trades over 34 million shares per day.

But not so fast.

These funds don’t buy and sell oil for profit. They trade futures contracts on oil. And while there are a few ways to do that – some good, some bad – they may not be the best way to take advantage of contango. Let me explain.

USO buys a contract for oil for the very next month. Before it expires, they sell it off and buy one for the next month. In a contango situation the returns will indisputably be lower. (Conversely, during the opposite of contango, “backwardation,” the fund returns will be higher).

USO makes no secret of this. They print it in their risk disclosures that contango is not good for their fund.

And they are not alone. The iPath GSCI Crude Oil ETN (NYSE: OIL) and the Powershares DB Crude Oil ETN (NYSE:OLO) use the same methodologies. (Though OLO actively manages its roll forward strategy to reduce losses.)

But don’t give up on investing in oil.

Every Problem Has a Solution

In fact, the same manager that runs the USO fund runs another, custom designed to benefit from situations like this. It’s called the United States 12 Month Oil Fund (NYSE:USL). It uses a 12-month average of futures prices that will lessen the losses caused by a contango market.

Here’s the interesting thing. Oil markets usually exhibit a small amount of contango, it’s a natural result of price fluctuations. But its opposite, backwardation, is the rarity. So even if we were in a normal oil situation, wouldn’t the 12 Month Fund be better?

In fact, wouldn’t it make sense all the time? It would seem to be so.

Obviously, oil prices have been down… but you’d have fared significantly better investing in USL. Reading the fine print on an ETF isn’t the most entertaining way to spend your day, but it’s certainly worth a near 15% difference in performance.

If we were to enter a backwardation period, USO would then outperform. But since backwardation is so rare… you can expect USL will outperform consistently over the short and long term.

Source: The Wrong Way to Profit From Oil

This from Money Morning:

Many investors have given up on oil, fearing that a fall from grace precludes a rise in price from the ashes. But it’s worth noting that the oil markets are right now in a rare state of  ’super contango,’ which suggests that the markets expect far higher prices by next year.

Here’s what you need to know.

In case you’re not familiar with the term, ‘contango‘ denotes a normal and very specific condition associated with futures contracts in which the price of oil for distant delivery months from now exceeds the price of oil being traded right now on the spot market. Typically, the price difference is related to the cost of storing and insuring the oil itself.

An example might help. On Tuesday, oil traded at $38.81 a barrel on the New York Mercantile Exchange (NYMEX) spot market. So if we bought a barrel and put it into storage for the next five months, and assumed that would cost us 90 cents per barrel per month, under normal market conditions, we’d expect the June crude oil contracts to be priced roughly at $43.31 ($38.81+ the cost of storage for five months = $43.31).

However, according to the New York Mercantile Exchange, June crude oil contracts settled at $52.14 on Tuesday, which represents a state of ’super contango’ – and an excess potential profit of $8.83 per barrel ($52.14 – $43.31 = Excess Potential Profit of $8.83). But only for traders who can buy oil now and store it until then.

There are obviously wrinkles, of course, depending on where the oil is stored and how it is priced for delivery. But, in general, the spreads we’re seeing now are at, or near, their highest levels since April 2004, when the government started collecting Cushing data. Cushing is the delivery point for all NYMEX futures.

Super contango is a rare situation that causes most traders to drool – myself included – because it signals an arbitrage opportunity that’s literally too good to pass up if you’ve got the means to capitalize on it.

But, as usual, there are all sorts of unanticipated consequences – including a phenomenon we don’t see very often – hoarding at sea.

Tanker rates are skyrocketing as companies literally top off very large crude carriers with the 2 million gallons they’re designed to carry – and then park them offshore until prices rise. In the meantime, they’re also selling the June futures and locking in profits above and beyond what it costs them to buy and store their stash of this ‘black gold.’

Of course, with every tanker that’s stuffed to the gills as a storage container, there’s fewer of the big boats in circulation. And that’s caused benchmark supertanker rental rates to rise more than 56% since Jan. 1. But the perceived profit potential is so high right now, that even investment banks, which are hardly in the market for super tanker rentals under normal circumstances, are getting into the game.

According to recent reports by Bloomberg News, Phibro LLC, the commodities trading arm for Citigroup Inc. (C), has booked two supertankers to hoard crude oil supplies. Phibro recently stationed the 1-million-barrel carrier ‘Ice Transporter’ off the coast of Scotland and the ‘Ashna’ waits patiently on the U.S. Gulf Coast. Assuming they capture the entire $8.83 a barrel in excess profits we cited in our example, that’s a cool $8.8 million in the bank, just from the Ice Transporter cargo alone.

Based on my experience, traders tend to run in packs, so it’s highly likely that all the usual suspects are involved including most notably Morgan Stanley (MS), which owns half of tanker group operator Heidmar Inc. and Goldman Sachs Group Inc. (GS), which executes commodities trades and structures related deals through J. Aron & Co.

As many as 80 million barrels of crude are being stored at sea around the globe, according to Frontline Ltd. (FRO), the world’s largest owner of supertankers. That’s nearly enough to supply the entire world’s demand for a day.

As for what caused the super contango, the most common and widely accepted argument is that falling global demand has caused a current glut in supply that will be rectified by production cuts by the Organization of Petroleum Exporting Countries (OPEC) later this year. That’s certainly plausible and there is no shortage of data to support this contention.

‘That’s really what they’re betting on,’ said Opportunities in Options‘ Paul Forchione, a veteran trader with 30 years in the commodities markets. ‘A significantly higher price for the deferred contract month in excess of storage and insurance costs typically means traders expect demand to grow in the future.’

In his experience, Forchione said that ‘this situation is hardly the panacea that everybody thinks it is because it’s hard to put a limit on how far out of whack prices can get.’

However, there’s also another plausible explanation that seems entirely likely, based on conversations I’ve had with traders, officials and company officers in the oil business all around the world.

Basically, the super contango we’re seeing now could suggest that future pricing is as much about the fear of supply interruption as it is about present demand dropping. And that’s entirely logical given the constant state of warfare in the Middle East, threatened production in Africa, an unsteady South America, and China, which is structuring oil-supply deals with rogue nations as fast as it can.

I know from having addressed crowds of investors all over the world that this seems impossible, but at a time when China and India, for instance, are doing everything they can to stave off a global recession, it’s certainly not inconceivable. Moreover, if this is even remotely true, as a growing trail of evidence suggests, then the present super contango could also imply that traders believe oil will be increasingly hard to find, refine and transport in the months ahead. That, too, suggests higher prices to come

Now for the million-dollar question: What can investors do about it?

The most obvious choice for investors who think prices will indeed be higher come next June is to buy any of the half dozen oil-related ETFs. That includes The United States Oil Fund LP (NYSE:USO) or iPath S&P GSCI Crude Oil Total Return ETF (NYSE:OIL).

The problem, of course, is that the spreads companies are counting on for profits could drop rapidly between now and then. This would force companies currently hoarding oil to begin dumping it, thereby reinforcing even lower prices going forward. There is also the possibility that OPEC production cuts never happen, or are ineffective, which would also point to lower prices.

History suggests that far safer bets include mid-process transportation companies like TeeKay Corp. (NYSE:TK) or land-based alternatives like Kinder Morgan Energy Partners LP (NYSE:KMP). Both pay healthy dividends that can help stave off a personal recession no matter what happens with oil prices. That’s always important in rough markets.

For futures-savvy investors, there’s an even more direct bet. Data shows that ‘mean reversions’ are particularly powerful phenomena when it comes to commodities, so the fact that spreads have risen to all-time highs suggests that it’s only a matter of time before they reverse. One way to potentially capture that would be to buy March futures while selling June futures.

Risk management is paramount, regardless of which path investors choose. Super contango sounds to good to be true and we all know the old adage: If it sounds too good to be true …

Source: Contango Isn’t A Dance In Argentina: It is a Shot at Windfall Profits

This from Money Morning:

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

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

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

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

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

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

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

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

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

Just ask the IEA.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

$500 Oil?

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

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

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

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

Unfortunately, the IEA is behind the curve.

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

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

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

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

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

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

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

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

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

“Black Gold” Profit Plays

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

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

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

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

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

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

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

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

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

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

This from Money Morning:

Many of my neighbors here in Oregon are enjoying the big decline in gasoline prices, particularly those who still own SUVs, pickup trucks or any of the other fire-breathing, piston-clanking monstrosities I’ve seen on the road recently.

And no wonder. Gasoline prices in our neck of the woods have fallen between 60% and 70% since July, when oil closed at a peak price of $145.29 a barrel. Here in Oregon, that means that my wife and I don’t feel like we’ve been mugged every time we fill up.

But what happens when the prices start going up again? Global demand for oil will fall this year for the first time since 1983 as the world financial crisis saps demand, the International Energy Agency said a week ago. That has some people believing that prices will remain low.
But I wouldn’t bet on it – at least not for long.

The Organization of Petroleum Exporting Countries (OPEC) is making loud noises that it wants to see $75 a barrel again soon, which would represent a 70% increase from the $43.60 a barrel where oil closed yesterday (Tuesday). OPEC, supplier of more than 40% of the world’s oil, is ready to make a “big” cut in supplies when it meets in Oran, Algeria, today (Wednesday), Venezuelan Oil Minister Rafael Ramirez told journalists.

How much of a production cut we’ll see is anybody’s guess, depending on who does the cutting and who actually abides by the agreement over time. But we’ll know very shortly.

Russia recently announced, after years of going it alone, that it wants to actually join OPEC. Now OPEC has asked Russia to cut oil output by between 200,000 and 300,000 barrels a day to help revive prices, OAO Lukoil Chief Executive Officer Vagit Alekperov said in Moscow on Monday. And Russia may well do just that.

A price of $60 to $80 a barrel would be consistent with a global production cut of about 2.5 million barrels, and that’s a figure apparently supported by OPEC representatives we spoke to.   Leonid Fedun, OAO Lukoil’s deputy chief executive officer, noted in a recent Bloomberg News report that “there is a consensus [among members] to reduce production.”

This highlights something that’s often missed in the Western media, where the price of oil is typically associated with the price of gasoline and how that price impacts driving habits. According to CNN, MSNBC and a whole host of others, evidently that’s what matters to us.

But in OPEC-producing countries, it’s a different story. There the price of oil is more typically associated with external trade relationships and hard currency requirements that are policy level decisions often made at the expense of individual concerns. And I don’t have to remind you that most OPEC member countries don’t exactly specialize in freedom of choice, so the odds are high that what the energy ministers want, the energy ministers will get … but that’s a story for another time.

Here’s one other point to consider: With all the media’s focus on OPEC, there’s been little mention of China, India and the whole host of emerging markets that are still experiencing double-digit growth in oil demand. That’s not going away.

The bottom line here is that it would behoove interested investors (and people who like to drive less fuel efficient cars) to hedge any potential future rise in gasoline prices sooner rather than later. Here’s one quick and dirty way to do it.

If you drive 20,000 miles a year and your car gets 30 miles to the gallon at a time when fuel costs $1.75 a gallon, you are looking at an annual fuel bill of $1,166.67. If OPEC gets its wish and oil rises by 70%, gas prices may rise in tandem. Therefore, buying the equivalent share value of your projected annual fuel expenditure in such exchange-traded funds (ETFs) as the United States Oil Fund LP (NYSE:USO), the iPath S&P GSCI Crude Oil Total Return Fund (NYSE:OIL) or the United States Gasoline Fund LP (NYSE:UGA) could be just the ticket.

As prices rise, so, too, will the value of your investments. If prices fall further, you’ll obviously lose money, but you’ll be paying less at the pump at the same time.

Granted, what I am proposing is not a perfect hedge. Among other things, there are potential capital gains to contend with when you sell 12 months from now – taxes, transaction costs and a whole host of other variables that could come into play. At the same time, you could simply alter your driving habits, which, of course, would change the value of your calculations midstream.

None of that really is material, though. Hedges are never perfect.

But they do offer you a chance of “being in the neighborhood” when it comes to protecting your wallet from what could be vastly higher oil prices to come.

Source: Pledge to Hedge: Three Ways to Lock in Low Gas Prices Right Now

This from The Sovereign Society:

The oil industry is a tricky business.

I know. I was a well-site geologist for many years. Just like the stock market, sometimes the best-looking prospects are your worst duds and those you were not too sure about gush profits.

It’s a gamble, but one that can pay off big if you’re right. But what if you’re wrong? Well in the old days it was watch out below… but now, I know of a strategy that can insure against some of your losses.

I call it “PPS” and it has helped me out many times in the past. Let me explain…

Right now I’m looking again at the oil, gas and the service industry. They’ve been beaten up pretty badly. As the price of oil has dropped from $147 a barrel to below $40 last week, any company that is even remotely associated with the industry has seen it share price tumble.

The major oil companies like ExxonMobil (NYSE:XOM), Chevron (NYSE:CVX) and ConocoPhillips (NYSE:COP) have seen their stock prices pull back as much as 50% from their 52-week highs. Schlumberger (NYSE:SLB), which traded as high as $111.95 this year, is now at $41.91. Baker Hughes (NYSE:BHI) down from $90 to $30 and Transocean (NYSE:RIG) has fallen from $163 all the way down to $55.

These are great companies in great industries. And no matter the environmentalists want you to believe, they won’t be going away for a long, long time.

They have war chests full of profits from the recent run-up in oil prices. They don’t need much outside financing and can wait out the economy. They’ll invest in themselves just as they’ve always done. They’ll push the limits of technology and invest in people.

And if President elect Obama has his way, and I believe he will, then we’re also going to see massive infrastructure construction projects begin next year. As we put people back to work, as money again begins to flow oil prices should begin to drift higher.

So if you want to profit as the industry turns up you should look at the iShares Dow Jones US Oil & Gas Index ETF (NYSE:IEO) and the HOLDRS Oil Services ETF (NYSE:OIH). These two ETFs will give you broad exposure across the industry.

Then to protect your downside I suggest you look at my “PPS” or Protective Put Strategy. Using this strategy, you’re going to buy one put for every 100 shares of these ETF’s. Now, to keep your cost down look to buy in the nearest month or two and look at the put options about 20% below your share purchase price.

As an example – if the HOLDRS Oil Services (OIH) were trading at about $70 per share like it was today and I was going to use this strategy I would buy 100 shares of OIH and then immediately buy an OIH protective put. I would buy the Jan OIH 55 symbol OIDMK for about $2.35.

This strategy cost a little more then just buying the long position but I’ll tell you, do it and you will sleep better at night. It’s the same as paying $72.35 for the shares and if they take off (like I think they might) the extra $2.35 becomes almost irrelevant…but if I’m wrong I’ve covered my assets.

Source: Striking it rich on Oil…without getting Burned

This from Sovereign Society:

The time to start building fresh positions in oil, gold, silver and TIPs has arrived. Even distressed real estate should be accumulated if credit can be secured.

Over the next 6-12 months the United States, Europeans, Japanese and Chinese will eventually arrest deflation. And long before that materializes, hard assets will begin a major reversal following months of crippling losses.

Since peaking in July, the entire gamut of inflation assets has collapsed amid a growing threat of deflation or an environment of accelerated price declines. The last deflation in the United States occurred in the 1930s, purging household balance sheets, corporations, states, municipalities and even the government following two New Deals.

Thus far, U.S. CPI or the consumer price index has not turned negative year-over-year. Yet as oil prices continue to lose altitude and other commodities have been crushed, input costs and price pressures continue to decline dramatically since October. The only major component of CPI that continues to post modest year-over-year gains is wages. And with unemployment now rising aggressively this quarter it’s highly likely wage demands will also come to a screeching halt.

Plunging Bond Yields Discount Danger

In the span of just six months, foreign currencies (except the yen), commodities, stocks, non-Treasury debt, real estate and art have all declined sharply in value in the worst panic-related sell-off in decades. More than $10 trillion dollars’ worth of asset value has been lost worldwide in 2008.

What’s working since July? U.S. Treasury bonds and the U.S. dollar as investors scramble for safety and liquidity.

On December 5, 30-day and 60-day T-bills yielded just 0.01% – the lowest since the 1930s while the benchmark 10-year T-bond traded below 2.55% – its lowest yield since Eisenhower was president in 1955. Even 30-year bonds have surged as the yield recently dropped below 3% for the first time in more than four decades.

The market is now pricing a severe recession and – possibly – another Great Depression. Despite a series of formidable regular market interventions by central banks since August 2007, the credit crisis is still alive and kicking. The authorities have not won the battle …at least not yet.

Heightened inter-bank lending rates, soaring credit default swaps for sovereign government debt and plunging Treasury yields all confirm that the primary trend is still deflation.

To be sure, credit markets worldwide have improved markedly since the dark days of early October. Investment-grade corporate debt is rallying, commercial-paper is flowing again and companies are starting to issue debt once more – but only the highest and most liquid of companies. For the most part, banks are still hoarding cash and borrowers can’t obtain credit.

The real economy is now feeling the bite as consumption falls off a cliff, foreclosures soar and the unemployment rate surges higher. These primary trends are deflationary as broad consumption is severely curtailed, with consumers preparing for the worst economy since 1981 and rebuilding devastated household balance sheets.

But at some point over the next 12 months, the market might transition from outright deflation or negative consumer prices to some sort of disinflation or at least an environment of stable prices. That’s when inflation assets should start rallying again.

Inflate or Die: The Name of the Game in 2009

The battle now being waged by global central banks, including the Federal Reserve is an outright attack on deflation. Through the massive expansion of credit, the Fed and her overseas colleagues are on course to print money like there’s no tomorrow to finance bulging fiscal spending plans, bailouts, tax cuts and anything else that helps to alleviate economic stress.

Earlier in November, the Fed announced it would target “quantitative easing” and “monetization,” unorthodox monetary policy tools rarely or never used in the post-WW II era.

Without getting too technical, the term “quantitative easing” means the Fed will act as the buyer of last resort to monetize Treasury debt and other government agency paper in an attempt to bring interest rates down. Quantitative easing aims to flood the financial system with liquidity and absorb excess cash through monetization or purchasing of government securities.

Through monetary policy, the Fed controls short-term lending rates but cannot influence long-term rates that are largely set by the markets; the Fed now hopes it can influence long-term rates through quantitative easing. And since its announcement two weeks ago, long-term fixed mortgage rates have declined sharply.

These and other open market operations directed by the Fed and Treasury will eventually arrest the broad-based deflation engulfing asset prices. It will take time. Inflation is the desired goal and is the preferred evil to deflation, a monetary phenomenon that threatens to destroy or seriously compromise the financial system. Policy-makers have studied the Great Depression, including Fed Chairman Bernanke, and the consequences of failed central bank and government intervention in times of severe economic duress are unthinkable.

Ravenous Monetary Expansion

According to Federal Reserve Board data, the Fed is now embarking on a spectacular expansion of credit unseen in the history of modern financial markets.

The total amount of Federal Reserve bank credit has increased from $800 billion dollars to $2.2 trillion dollars (or from 6% to 15% of gross domestic product) as the central bank expands its various liquidity facilities in an attempt to preserve normal functioning of the financial system.

The Fed’s ongoing operations to arrest falling prices are targeted namely at housing – the epicenter of this financial crisis. It is highly unlikely that the United States economy will bottom until housing prices find a floor. Quantitative easing hopes to stabilize this market.

Buy Gold Now

Relative to other assets in 2008, gold prices have declined far less. The ongoing liquidity squeeze has forced investors to dump assets, including gold to raise dollars. I suspect this short-term phenomenon will end in 2009 once the ongoing panic subsides and credit markets become largely functional again.

Gold should be accumulated now ahead of market stabilization. As the financial system gradually comes back to life over the next several months or sooner, the dollar should commence another period of weakness; there will be little incentive to hold dollars with short-term rates at or close to zero percent. The Fed will be in no hurry to raise lending rates.

Still, the Japanese experience in the 1990s warns investors of the travails of long-term deflation.

The Japanese, unlike the United States, only started to seriously attack falling prices in the economy in 1998 through massive fiscal spending. In contrast, the U.S. is already throwing everything at the crisis after just 17 months.

I expect the United States to print its way out of misery and, over time, and conquer deflation. But the cost will be humungous and at the expense of the dollar, U.S. financial hegemony and calls for a new monetary system anchored by gold.

It’s literally “inflate or die” for global central banks. Inflation will win.

Source:  Inflation on “Sale” as Deflation Dominates Global Markets

Whichever way you look at it, we’re in a bear market in shares. And it looks like it’s going to continue, as investors are forced into liquidating positions. This deleveraging of the markets will continue to drag the indices down.

That’s not to say you can’t make money, of course. You can always make money in the markets, if you’re a little smarter than the average investor. You’re just not going to do it by buying the indices — you need to find good quality companies that can beat the bear.

A bull market in disguise

But there’s another market that looks like a bear market at first glance, but which I believe is merely experiencing a short-term correction. In fact, it’s a long-term bull market in disguise.

I believe commodities are in a secular bull market. By that I mean that it’s a long-term bull trend — one that could last up to 25 years. Currently, we’re about seven years into it — and we’re seeing a perfectly normal correction, after prices ran away to the upside. Forced selling of profitable commodities positions to finance the mess in other sectors has dragged the sector down.

The sell-off that we have seen in commodities like oil, gold, silver and so on certainly show the characteristics of a bear market. Oil has fallen some 47% since the $147 peak. Gold and silver have dropped 22% and 51% since their March peaks. These are bear market performances.

But here’s the thing. Secular market trends are made up of multiple sequential primary trends — some bullish, some bearish. As with any market, they zig and they zag.

In a secular bull market the ‘primary’ bear markets are historically shorter and less damaging than the ‘primary’ bull markets were rewarding. Typically, the primary bear market is not deep enough to totally eradicate the inflation adjusted gains of the previous primary bull markets. Similarly, the succeeding bull markets typically make up for the losses of any previous bear markets.

So the recent sell-off in the commodities could just be a bearish zag, caused by forced selling, following the preceding bullish zig. And I believe that the next primary bull market will take out the previous highs and drive the secular bull market on.

Legendary commodities investor, Jim Rogers says: “We have had 8-9 periods of forced liquidation over the past 100-150 years wherein everything was liquidated without regard to fundamentals. This is such a period.”

Rogers believes that the current global economic meltdown will make the commodities bull market last longer. It’s currently being hit by the prospects of slowing growth in emerging economies such as China and India. But, this will ultimately affect supply and that in turn will cause prices to move higher. “The cyclical demand for commodities may slow, but the secular supply will be badly affected so the commodity bull market will last longer and go further in the end,” Rogers says.

Our own commodities expert, Garry White, agrees. In his latest research on our Fleet Street Invest website, Garry writes:

“Market conditions are setting the scene for the next leg up of the commodity supercycle. There are three things that are happening today that will guarantee higher prices for commodities in the future, once the current jitters have started to ease.”

Garry explains that all base metals prices except copper have fallen close to their cost of production. If prices fall any further, it’s likely that mines will be closed. This will cause supply to tighten and prices will rise. That could kick off the next great run.