Bill Bonner (The Daily Reckoning, UK):

Leading economists have a one-stop solution for just about everything: stimulate consumer spending.

When the price of oil hit $150 a barrel, the first major alarm sounded. Something was wrong. Now we have a clearer idea of what it was.

To make a long story short, leading economists have a one-stop solution for just about everything: stimulate consumer spending. But $150 oil warned us: continue down that road and you will run out of gas. There isn’t enough oil in the world to allow US-style consumption for everyone.

Two weeks ago, Dubai gave us another wake-up call. Thought to be risk- free, since it was implicitly backed by all the oil in the Middle East, Dubai World nevertheless stopped paying its debts. And last week yet another bell banged our eyes open. Greece announced first that it would not try to reduce its deficits… then, that it would. Hearing the news, the financial world rolled over and went back to sleep. But The Wall Street Journal offered a hint of trouble to come: “Markets force Greek promise to slash deficit,” said its page one headline.

If markets could force the Greeks to trim their deficit – about 13% of GDP… not far from the US level – could they not force Britain and America too? Coming right to the point, the fixers face not just one crisis, but many. They have a growth model that no longer works. They have aging populations and social welfare obligations that can’t be met. They have limits on available resources, including the most basic ones – land, water, and energy. They have a money system headed for a crack-up, and an economic theory that was only effective when it wasn’t necessary. Now that it is needed, the Keynesian fix is useless. If a recovery depends on borrowed money, what do you do when lenders won’t give you any?

But let us backtrack to a smaller insight. Then we will stretch for a bigger one. Americans are supposed to be insatiable shoppers. For at least three decades, the world counted on it. It was the growth model for almost all the Asian manufacturing economies… and for resource producers everywhere. But as we approach the biggest shopping season of the year, a survey of consumers signals an earthquake. Americans plan to spend an average of 15% less during this holiday season than the year before. Only 35% say they will take advantage of post-Christmas sales, traditionally when the stores unload unwanted inventory. They seem to be satiable after all.

Push come to shove, Americans react like everyone else. Now, they are being shoved into a new world, very different from the one they have come to know. In 1973, the American working stiff went into a decline. His weekly earnings, in real terms, went down for the next 36 years. The typical worker earned the equivalent of $325 a week in 1973… adjusted to constant 1982 dollars. By US official accounting he was down to $275 a week in 2009. Unofficial estimates put the loss as high as two-thirds of his purchasing power.

Yet, his spending increased anyway. How? He squeezed the rest of the world. The US trade gap began to go seriously negative in 1992. By 2006-2007, foreigners were shipping to America nearly $900 billion more per year in goods and services than they received in exchange. This gave the typical American a standard of living few people could afford; too bad, he wasn’t one of them.

Now he’s up against billions of Patels and Hus. They work for less. They save more. They want more stuff too. And they’re suspicious of the dollar.

Their economies are growing faster…

Click here for the rest of Mr. Bonner’s commentary at The Daily Reckoning, UK Edition.

Lord William Rees-Mogg (Fleet Street Invest UK):
In the last six months there has been a rebound of 50% in the great majority of world stock markets.

There has also been a comparable rebound in the price of oil, with West Texas oil rising very close to $80 a barrel. In the oil market there has been heavy two-way trading in options. There could be a sharp spike in the oil price if speculators have to cover their positions.

At the same time the US dollar has remained weak, and now stands at $1.4886 to the euro and $1.66628 to the pound. This is close to a 14-month low on a trade-weighted basis. The poor performance of the dollar reflects the low US interest rates and the twin US fiscal and trade deficits.

The demise of the dollar

The dollar nevertheless remains the world’s leading reserve currency, with the euro in second place. Investors are naturally anxious to protect themselves against markets, including currency markets, which have shown such a high degree of volatility.

The Chinese, who have the greatest number of dollars in their currency reserves, have already suffered substantial losses.

In what amounts to a crisis of the dollar, the euro is in second place as a reserve currency, but there are potential threats to the future of the euro, due to the weak productivity of the Mediterranean economies. There is a big stretch in productivity growth between the German and the Southern European regions.

The fall in the dollar against other currencies includes a devaluation of the dollar in terms of gold, which now seems to have stabilized at a dollar price of $1,050 an ounce.

The circumstances do indeed appear to be uniquely favourable to gold.

Interest rates and therefore carrying costs are exceptionally low. The dollar is exceptionally weak. The technical market position is strong, including good demand for gold in terms of jewellery. The oil price – which is often linked to gold – is rising. Those who believe that oil is due for a further rise to $100 a barrel are likely also to be confident about holding a proportion of their investment . . .
Click here to read the rest of Lord Rees-Mogg’s article at Fleet Street Invest UK.

You need to have a portion of your wealth in something tangible—something you can hold in your hand, like a hard asset.  I’m talking about oil, grains, livestock, sugar, copper, aluminum, gold, silver, platinum and even forest products like lumber.

The price of oil will never go to zero!  Someone will always be in the market to buy gasoline.  Gold has never been worth $0.  Silver could always buy you a meal–even in ancient times.

But can the value of a stock or a paper currency go to zero?  Yes, indeed.  One good way to invest in hard assets is to buy the Market Vectors RVE Hard Assets Exchange Traded Fund (HAP).  This ETF closely tracks the Hard Assets Producers index which consists of over 250 companies engaged in the production and distribution of hard assets and related products and services.

The Hard Assets Producers index was developed by the legendary international investor Jim Rogers.  It includes water and renewable energy sources like wind and solar which are ever more important natural resources.  Some of the big holdings of the index are Monsanto, Exxon Mobil, Potash, Syngenta, BHP Billiton, Archer-Daniels-Midland and Gazprom.

Protect your wealth and invest in hard assets.

Source: Invest in Hard Assets!

As for likening agriculture today to oil in 2001-2002, an investor’s pulse quickens. We all know the great run oil stocks had as the price of oil sprinted from under $30 to a peak of $143 per barrel. Investors made hundreds-of-percent gains – even thousands-of-percent gains. What most investors forget is that oil prices halved from 2000 to the bottom in 2001, just before the great run-up. The same sort of setup seems to be happening today in the agriculture sector. Most ag commodities fell more than 50% after hitting their June 2008 highs.

This is the pause that refreshes.

The biggest reason to get excited about agriculture is the fact that supplies are at multi-decade lows. In fact, as McLornan points out, “agriculture is one of the very few sectors globally that currently face supply shortages.”

The “stocks-to-use ratio” provides a helpful context. This ratio measures how much supply is on hand versus how much we use. High ratios imply a fully supplied market. Low ratios hint at possible shortages. You have to go back to the 1970s to find ratios in wheat and corn as low as they are today.

The kicker to all this is that last year, the world’s farmers produced a record wheat crop and the stocks-to-use ratio barely budged. There is no way we are going to top that harvest this year with all the drought hitting different parts of the world.

The International Grains Council (IGC) predicts a fall in total wheat output in 2009-10. The IGC predicts global wheat output of 650 million tons, down by 5% from the previous year. The largest declines are seen in the European Union, the U.S., China, Russia, and Ukraine. “Although conditions in the Northern Hemisphere are generally favorable,” the IGC says, “production is likely to fall sharply.”

McLornan says that global yields for wheat hit a plateau in the 1980s and “gene modification technology has been unable to improve what natural selection has achieved over the past centuries.” So we already have tight supplies. And they look to get tighter.

The financial crisis also threatens to reduce supplies. Farmers who cannot gain access to credit cannot put seeds in the ground. Thus, the twin forces of drought and financial crisis seem likely to exert a growing influence over the grain markets – depressing supplies and therefore, boosting prices.

We’ve seen this movie before…

In 1933, in the pit of the Great Depression, writer Sherwood Anderson took to America’s back roads to see how the country was making out. He wandered into coal towns and mill towns, farms and factories.

His account, published in 1935 as Puzzled America, gives us a peek at Depression-era days. As the title lets on, most Americans seemed not to know quite what to make of the Great Depression. “Puzzled” seems just the right word.

It was puzzling because a man was prosperous and then suddenly was not any longer. A common story in farm country during the Great Depression began something like this: There was a prosperous farmer with lots of land who grew wheat. He then went into debt to buy more land and plant more wheat. The price of wheat suddenly fell like a shot quail. And the farm went under. Just like that, our man was broke.

If the financial crisis didn’t take the farm, Mother Nature did. “It was a farm until he plowed it,” Anderson quotes one man as saying of his uncle’s place. Then the drought came. The dry soil swirled around like snow in a blizzard. The farm simply “blew away.”

The hot winds tore the bark right off the trees and burned crops to ash. Fences lay buried under dust drifts. Dust storms blackened the sky. Topsoil of thousands of acres blew away. Anderson describes a little church in North Dakota:

The boards of the church cracking and curling under the dry heat, the paint on the boards frying in the hot winds… and the dust of the fields sifting in through the cracks. Dust in the mouths of the people as they prayed for rain.

Commodity prices took a big tumble after the crash of 1929. That’s what bankrupted the once-prosperous farmers. Then you had fewer farmers farming. Then you also had drought. Supply fell and prices soon rallied hard off their bottoms. By 1937, most food commodities – corn, wheat, sugar – were as high, or higher, than their ‘29 highs.

Today, we also have the dual threat of drought and financial crisis. Farmers across the southern plains report poor crop conditions, thanks to dry weather. We also have drought in many places in the world that usually grow a lot of food.

One example: China’s Ministry of Agriculture said that a third of its crop faces drought issues. The country’s stocks-to-use ratio will fall below 30% for the first time since 1971. As AgCapita, an investment fund specializing in farmland, notes in a recent letter, China will be a net importer of 12 million metric tons of wheat. By way of comparison, Canada’s entire annual wheat exports average around 15 million metric tons.

We also have cutbacks in supply, as farmers have a harder time getting financing to buy seed, fertilizer and machinery. As The Wall Street Journal reported recently:

Across the nation, farmers are making plans to cut their production of corn, wheat, rice, peanuts, beef, pork, poultry and milk… Also, some farmers plan to grow just one crop on land that normally produces two each year, and to let some land lie fallow throughout the year.

Production of meat in every category will fall for the first time since 1973. Meanwhile, consumption of grains keeps rising. Globally, wheat demand should rise 6% this year. No surprise that retail food prices rose nearly 6% last year. I think they could rise as much this year.

Ultimately, we’ll have to grow more food…somehow. So a forward-looking investor will want to invest in the ideas that help that process along. Fertilizers are one such idea. Like a prizefighter with a tough chin, fertilizer demand doesn’t stay down for long. The reasons are simple. Lower fertilizer use means lower crop yields. Lower crop yields tend to raise prices for food. These higher prices then provide an incentive to plant more, so fertilizer demand comes back.

I’m a fan of PotashCorp (POT:NYSE), which benefits from these trends. It also owns more potash, a key fertilizer, than anybody else. As Barron’s recently noted: “Longer-term investors can take comfort in the knowledge that many crop-planting, potash-guzzling countries – like China, India, Brazil – all have growing economies.” And they have growing populations as well.

There are other ways to invest too. You can buy other ag-related businesses. You can also invest in the actual food commodities. I expect good moves on this stuff in the back half of the year after the fall harvest disappoints.

What about demand?

I think we’re getting close to the moment when the world’s meager supplies of grains become front-page news. We have another few months before the reality of a lousy fall harvest sets in. Agriculture investments should do very well from that point – for everything from fertilizer stocks to agricultural equipment makers to the grains themselves.

As always, I recommend buying assets like these before the crowd sees it on the 6:00 news.

Source: The Best Investment Opportunity of 2009

The price of oil is a function of many things, but as with all economic issues its prime mover is demand. Demand for the past 18 months has been dropping due to the economic meltdown worldwide. This has made for great energy prices, but it’s like a warm day in January in Canada.  It’s not real and anyone who has ever lived through a northern winter knows it will not last.

Why?

First, the world is coming out of this recession and oil demand is about to explode and we, the USA, the biggest energy pig in the world, have done nothing to prepare for it. We have less of an ability to provide for our energy needs now than we did 35 years ago.

Second, Asia and the rest of the developing world are coming out of this worldwide slow down, too. Consider how much more oil will be going to Asia and the developing world as they rebound and start to suck up what’s left of the world’s capacity to produce black gold. The demand picture really begins to come into focus.

Third, the current effort of the Obama administration to avoid a depression by pumping trillions into the economy has worked. We are soaring out of the hole faster than anyone could have imagined a year ago. At the same time we are doing so with no way to fuel it, literally fuel it.

We are completely unprotected from the threats to our economy and future well being that comes from importing 75% of our oil.

Fourth, there has been zero new development of oil reserves partly because of a very admirable effort by the Obama administration to shift to clean renewable energy. Clean and renewable is great, but we have about a ten year gap that has to be filled with oil before we can make that a reality.

Fifth, a dysfunctional congress whose priorities are their careers, their party, their district and whatever is left over goes to the well being of this country, in that order. Congress is all but incapable of working toward a long term solution to the problem.

Add them up and we have all of the necessary elements for the biggest rise in oil prices in our history over the next three to five years. Here’s how we can make money on this mess.

DXO, Power Shares Deutsche Bank Crude, or DIG, Ultra Oil and gas Pro Shares, both are designed to give you twice the percentage return of any increase in the price of oil. In the past month or so DXO bottomed at about $1.90 per share and ran to about $3.20 on just a $12 dollar move up in the price of crude. That’s a 68% move. DIG has had a similar neck snapping rebound.

If oil only goes to the $75 range, which is a given at this point, the DXO and DIG stand to move another 130%. The money we can make here is mind boggling.

The best part of this play is that it is inevitable. The chances of oil not moving up in price are almost zero.

You will only get a few opportunities like this in your investing life. Think of all the times you looked back at the market and thought how great it would have been if you had put money in at the bottom. This is the bottom!

As always time is the key to the success of this recommendation. A move to $75 a barrel is very likely by the end of this year, but the big money could be several years out. Give this time to work and you won’t be disappointed.

100% plus this year is just the beginning of this move.

Source: Retire Early Compliments of OPEC

This stock is just waiting to explode. He recommends you take advantage of this investing opportunity and says, “because of its strong dividend policies, investors will be well compensated while they wait for that oil-price rebound.”

This from Horacio:

In the face of the global financial meltdown, the price of oil has plummeted from a record high of almost $150 a barrel in July to less than $40 recently. And now it seems to be bottoming.

Clearly, this isn’t the precise moment to call a market bottom, but it is reasonable to think about a bottom around this range for a few reasons.

For starters, the forward curve of oil futures prices is showing a very marked upward slope, known in the commodities business as a forward curve in “contango.”  This means that – the farther out we go – the higher and higher oil futures prices climb. To see what we mean, let’s take a look at the projected price of oil as depicted by this graph.

A futures curve as upwardly skewed as this one provides a great opportunity for profits:  One can just buy oil today, sell it forward and hold it until December 2016 and make a guaranteed rate of return of about 62%.  In a year, you can make about 11% by just buying now, holding it and delivering in a year.  If you add some leverage to the transaction, you can make a nice return.

Some sophisticated players are doing just that: They’re buying oil, and are holding it in a tanker in port – with the obvious intent of capturing these profits.

However, this very favorable contango arbitrage is not going to last for long, as more players have been jumping into it, thus flattening the futures curve with time.  It is easy to see that, at some point, as oil gets absorbed into storage, and the curve gets inverted, the speculative players that shorted oil by selling futures long ago without having production or physical oil will be squeezed into covering at much higher spot prices.  This spike in spot prices situation will develop in less than a year, as demand recovers.

The slope of the curve also indicates widespread expectations for inflation.

From Stimulus to Inflation

The U.S. government has launched a huge stimulus package and its plan for a $3.6 trillion budget for fiscal 2010 will elevate the fiscal deficit to a staggering $1.75 trillion this year – a numbing 12.3% of gross domestic product (GDP).

And we have yet to deal with the massive social-security and health-care entitlement programs, which pose a huge fiscal threat ahead.

The financing of the announced deficits will come through issuance of U.S. Treasuries, which means that the U.S. Federal Reserve will have to monetize the debt. That is, the U.S. central bank will have to print money in order to make it available to buy the debt, since the level of issuance is so high that foreign buyers will not be able to purchase all the debt.

In addition, the Fed has already been very busy expanding its balance sheet in order to pump liquidity into the markets to buy mortgages and other assets. And it has already lowered its benchmark Federal Funds rate to a range of 0.00%-0.25%.

Why are the Fed and the government so intent in stimulating the economy?

The nightmare scenario for any central bank is falling into the so-called “liquidity trap” – a situation that exists when an economy’s asset prices enter a deflationary spiral and people reach the conclusion that by merely sitting in cash, even at a zero interest rate, they are getting richer by the day.  In that situation, monetary policy becomes ineffective, since rates are already at zero, and since it is very difficult to get out of that deflationary spiral.

That is precisely what happened in Japan during its “Lost Decade.” By the time the Japanese figured out that they needed to do something very dramatic in terms of stimulus, it was too late. The drop in prices had already created too many losses in the banking system and taken the entire system into bankruptcy.

Therefore, the theory goes, very aggressive monetary and fiscal action is needed right at the outset, in order to prevent the deflationary spiral and to actually generate some inflation.  At the same time that the United States, at the epicenter of the global crisis, is acting in this manner, countries around the rest of the world, which have been affected to different degrees, have launched their own stimulus initiatives.

China’s Stimulus Points to Strong Global Demand

China, which is at the forefront of global commodities demand, is of particular interest.  China needs to grow its economy at a minimum rate of 8% a year in order to employ the 18 million workers that join the labor force annually.  This is an imperative for a country that has dictatorial government, in order to avoid massive unrest.  That’s why in November, Beijing announced a $585 billion (4 trillion yuan) stimulus plan. It’s also why the country is taking such aggressive steps to assure access to supplies of key commodities.
Since then, the government has been aggressively buying long term access to commodities in such countries as Brazil and Australia.

Aluminum Corp. of China (NYSE ADR: ACH), otherwise known as Chinalco, has invested $19.5 billion in Rio Tinto PLC (NYSE ADR: RTP) to acquire stakes of up to 50% in nine of Rio’s mining assets.

China also struck a deal with Brazil’s Petrobras (NYSE ADR: PBR) for a long-term supply of oil.

China Development Bank, one of China’s largest state-owned enterprises, agreed to lend $10 billion to Petrobras for its ambitious deepwater-development program in order to ensure a long-term daily supply of 160,000 barrels oil. That followed a similar deal with two Russian giants. China Development Bank lent $15 billion to OAO Rosneft Oil Co., Russia’s state-owned oil company, and $10 billion to the Russian state pipeline monopoly Transneft (PINK: TRNFF). In return for the needed financing, Russia agreed to supply China with 15 million tons of oil annually for 20 years.

Hence, the outlook for commodities – given easy global monetary and fiscal policies, and a reflationary bias – is very favorable, and we are going to take advantage of it.

Enter Diamond Offshore Drilling Inc. (NYSE: DO).

Drilling for Profit

Diamond Offshore is the world’s second-largest driller by market capitalization, right after Transocean Ltd. (NYSE: RIG).  It has 31 floating rigs: nine sophisticated deepwater semi-submersibles, one drill ship for very deep water, and 21 other semi-submersibles.  In addition the firm owns only 13 jack-up rigs, of which only seven are in the Gulf of Mexico.

What I like about Diamond Offshore is its conservative, shrewd management and its commitment to shareholders.  The latter is especially ensured because of the situation of its controlling company, the New York conglomerate Loews Corp. (NYSE: L), which owns 54% of the Diamond Offshore’s stock.

Loews, run for half a century by the Tisch family, initially acquired Diamond Offshore’s assets in an opportunistic transaction in 1992.  It then sold 30% of the company to the public in 1995 and later acquired Arethusa (Offshore) Ltd. in 1996, using stock, a move that reduced its participation to the current 54%. Since that time, Diamond Offshore has been using its ample cash flow to repurchase shares from public hands.

Diamond Offshore, also referred to as DO, has been managed very wisely.  As the world’s No. 2 contract driller, DO has concentrated on the higher-priced equipment, that is, the semi-submersible rigs, which operate in deep waters.  And deep water, which require that higher-priced equipment, is where the biggest action is.

And since the specialized deepwater equipment is all taken, DO’s mid-depth equipment benefits because it can be adapted for use on bigger projects.

DO has minimized its exposure to jack-up rigs (those that rest on the ocean floor) and especially to work in the Gulf of Mexico, which has more competition and lower daily rates.

No wonder that DO’s fourth-quarter results handily beat analysts’ consensus estimates of $2.34 per share by posting operating earnings per share of $2.53.  Revenue also beat expectations, showing a 1% increase over the prior quarter.  The company also realized higher day rates and higher utilization rates.

These are all indications of strong management execution.  What is impressive about DO is that the company used the run-up in oil prices last year to enter into long-term contracts at very high prices, registering an impressive $10.3 billion backlog.  That gives Diamond Offshore a great earnings visibility going forward.

But the upside does not stop there.

There is a special situation in the making, because the Loews Group owns CNA Financial Corp. (NYSE: CNA), an insurance company that is trading at half of its book value.  You see, insurance companies have been hit hard financially by markdowns in their fixed-income and hedge-fund holdings, but Loews invested $1.25 billion in CNA last fall in a move to improve the company’s balance sheet.

And in order to be ready to defend debt ratings, a conservative management like Tisch has all the incentive in the world to keep maximizing Diamond Offshore profits to support CNA – should it be needed despite CNA’s current strong liquidity and financial flexibility.

DO recently paid one of its regular special dividends of $1.85 a share, bringing the dividend yield to almost 13%.  If this dividend is safe – and we believe that it is – this is a winning strategy for the group, given the current financial environment, and it will greatly help to maximize profits and cash flow from Diamond Offshore.

Mark Urness, a friend of mine at Calyon Financial, one of the leading energy research specialists on Wall Street, concurs with our assessment of this sky-high dividend. He estimates that DO will continue to offer the 12.5% dividend yield, which is unparalleled in the oilfield-services segment. We, like Mark, expect the company to distribute $8 a share in 2009 in the form of both the regular and the special dividends that DO has been using.

DO has been extremely disciplined with costs and with new investments, maximizing free-cash flow to almost $900 million last year.  In fact, with the ample backlog at higher prices of the contracts signed, DO should increase its free cash flow and net income to about $1.4 billion to $1.5 billion in 2009.

DO’s profit margins are impressive – and exorbitant – thanks to the shortage in rigs: Gross margins are 64% and operating margins are 54%.

These margins are likely to keep growing as management continues to execute thoroughly and oil prices rebound.  This strong growth in revenue and earnings – driven by DO’s savvy positioning in deepwater and mid-water rigs, and bolstered by rebounding oil prices thanks to global monetary and fiscal conditions – will surely help deliver much higher multiples than the meager six times earnings that Diamond Offshore’s shares are currently trading around these days.

Diamond Offshore’s shares closed Friday at $55.58. They are down 62% from their 52-week high of $147.77.

This cash-rich, profit-fountain company is a resounding “Strong Buy,” as its stock is waiting to explode to the upside.

Recommendation: Buy Diamond Offshore Drilling Inc. (NYSE: DO), a top player in its sector, and a company that is poised to capitalize on a projected resurgence in oil prices. Because of its strong dividend policies, investors will be well compensated while they wait for that oil-price rebound (**).

(**)  Special Note of Disclosure: Horacio Marquez holds no interest in Diamond Offshore Drilling Inc. (NYSE: DO).

Source: Buy, Sell, or Hold: Profit From the Projected Oil-Price Rebound With Diamond Offshore

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

Why a Jim Morrison market? Because the future’s uncertain and the end is always near.

(I thought that was too good not to share. For those of you who aren’t fans of The Doors, we’ll move right along…)

Something’s Happening Here…

Something very strange is going on with the price of oil. Not just in terms of straight-up price, but in regard to the huge discrepancy between the near-month and far-month futures contracts.

As I write, the going price for near-month West Texas Intermediate crude is $36.51 per barrel. The December 2009 contract, on the other hand, is trading at $55.13.

That is a monster spread. We’re talking a difference of more than $18 a barrel between spot crude – the stuff you can buy in the cash market – and crude slated for delivery at the end of this year.

The technical name for this situation is contango. That’s what they call it when a forward-month commodity contract is trading at a higher price than the near month. (You don’t really need to know this right now, but the opposite of contango, when near-term prices are higher than the back months, is backwardation.)

The reason this is strange is because of the massive profit opportunity embedded in the crude market.

Assuming you had the means, you could go out right now and sell millions of dollars worth of December crude contracts at $55 dollars a barrel… buy the equivalent amount in the cash market for $37 a barrel or less… and then just wait until it’s time to deliver the oil (and lock in your $18 profit).

The only hitch in the deal is finding a place to store the stuff. If you were to buy crude on the cheap now, you would have to take delivery and store it until late November (or whatever month your delivery date rolls in, when you close the trade and take your locked-in profit).

A number of big, savvy players are making exactly the trade I just described. They are selling millions of barrels worth of expensive far-month futures contracts, buying the equivalent amount of cheap oil in the cash market, and storing that oil in huge supertankers moored off the coast of Scotland and the Gulf of Mexico.

Storage and financing are counted as part of the trade, of course, and those big tankers don’t come cheap. Costs can run as high as $68,000 per day to keep one sitting idle.

But when you can lock in $18 a barrel, who cares? When the outlays are spread over millions of barrels – and a single ship can hold 2 million barrels of crude – there is still an obscene amount of profit left in the trade.

Frontline Limited (FRO:NYSE), the world’s biggest owner of supertankers according to Bloomberg, estimated last week that 80 million barrels worth of oil are being “stored” this way – the most they’ve seen in 20 years.

Not only are some big Wall Street players making this trade (Citigroup, Morgan Stanley, etc), big oil exporters are doing it too. Iran is filling up tankers with crude, no doubt waiting for the opportunity to sell at higher prices.

What It Is Ain’t Exactly Clear…

The puzzling question is why the anomaly persists. Why has the spread not come in?

Remember that once the far-month contracts are sold, price risk is removed from the equation. If you’ve entered into a deal to sell 2MM barrels of crude at $55 after buying at $37, you don’t have to worry about where prices go between now and your delivery date. You can just sit and wait.

When a no-brainer opportunity like this comes along, Wall Street normally jumps all over it. Traders exploit the anomaly in size until it disappears.

If markets weren’t so out of whack, you would gradually see the spread between near-month and far-month crude contracts get smaller and smaller as more and more players piled in. The profit in the spread would be reduced to the point where putting on the trade no longer made sense.

Two constraints that keep this from happening now are financing and storage.

First the finance angle: This is a trade that requires a serious cash outlay (or a major line of credit) to pull off. To fill up a supertanker with crude and sit on it for a year, you’re talking $50 million to $100 million as table stakes. The big Wall Street houses have been so bruised and battered, it’s hard for them to come up with that kind of dough – even for slam-dunk opportunities.

The other major constraint to the trade is storage. Such huge volumes of cash market crude are being held off the market now, traders are literally running out of places to put it. (It’s not like you can just pop into the local EZ-storage or stash a million barrels of oil in the shed.)

Curiouser and Curiouser

The storage issue is also creating headaches for the New York Mercantile Exchange (NYMEX) as traders question the pricing of West Texas Intermediate (WTI crude). The Financial Times reports:

The surge in oil inventories in Cushing, Oklahoma, where WTI is delivered into America’s pipeline system, has depressed its value not only against other global benchmarks, such as Brent, but also against other domestic US crudes.

Julius Walker, an oil market analyst at the International Energy Agency in Paris, said there was “anecdotal evidence” of traders moving away from WTI and “doing deals based on other US oil benchmarks.”

In other words, we’ve got oil coming out of our ears in the short-term… but the price of oil is still head-scratchingly higher – much, much higher – in the longer term.

So what does all this mean for us small-fry traders, i.e., those of us who can’t dial 1-800-TANKERS-R-US like the big boys?

I can think of at least a few takeaways worthy of food for thought:

• Why aren’t the big oil exporters all over this trade? Iran has locked up a few tankers, and it’s likely Russia and Venezuela etc. have too. But these guys are supposed to have lots of oil in the ground… and OPEC just made a big fuss of capacity cuts…. so why aren’t they selling the hell out of the far-month crude contracts, locking in $18 a barrel, and bringing the spread back in with their size? Could it be capacity constraint? Could it be these guys don’t actually have all the spare capacity they’re letting on?
• Why are the drillers and oil service names so depressed? Stock markets are supposed to discount the future, not the past. Equity valuations are supposed to be forward looking. And yet, at current multiples, most of the high-quality drillers and oil service names are trading as if oil were headed to $20, not back to $60. Yet the December crude contract says otherwise… and the huge spread between near-month and far-month contracts persists. What gives?
• Could Wall Street still be “broken” in the aftermath of 2008? After the year we just went through, anyone who still believes in perfectly efficient markets should have their head examined. Markets operate in a range from “mostly efficient” to “wildly, insanely INefficient.” When credit mechanisms and normal channels break down, things just stop making sense. Could the huge disconnect between forward-month oil contracts and insanely cheap oil service names be yet another example of Wall Street not making sense?
• Could December crude contracts be expressing an opinion on the inflationary effects of U.S. debt monetization…. or rebound possibilities for emerging markets…. or both? It’s widely recognized that the U.S. Fed and Treasury are embarking on a “great experiment” now that has never before been tried – one that could be summed up as, “Print like crazy and see what happens.” Some observers, like Joachim Fels of Morgan Stanley’s Global Economics Team, further believe that emerging markets could outperform in 2009 due to better internals than they get credit for. Could the persistent crude spread be reflecting both views?

Yep, no question… something’s happening here. I’ll stay on top of things and keep you posted. If an opportunity arises in the drillers or the oil service names, or in crude itself, you can be sure we’ll be exploiting it to the fullest via Macro Trader.

And by the way, another great thing about Taipan Daily is the largely untapped resource of reader knowledge… so if you have any ideas or insights on this “crude conundrum,” I’d love to hear from you: justice@taipandaily.com.

Source: Something’s Happening Here with the Price of Oil

Oil cost over $147 just three months ago. Now it is under $70. How low can oil go? How low should you want oil to go?

It should go much lower but don’t be too quick to rejoice. If prices fall further, the vast oil sands of Canada would become uneconomical. The tens of billions of barrels of oil lying under the deep waters of Brazil and elsewhere would cost too much to produce.

Oil first went down on weakening demand in the U.S. Then when it became apparent that de-coupling was a load of crap and our economic problems had spread to Europe, oil went down even more. Those were the first two legs. We have one more major leg to go.

Oil should fall another $10-20 per barrel as the global slowdown infects the fastest growing countries in the world. Those are countries in the developing world – countries like China, India, Brazil and Argentina. They’ve just begun to grapple with much slower economic growth.

In response oil producers are cutting back production. When they met last week in Vienna in an emergency session, they decided to cut back crude output by 1.5 million barrels per day. But I doubt that OPEC can put a floor under the price of oil. They failed to do it in the 1990’s. Too many OPEC countries didn’t like the idea of seeing shrinking revenues go down even further from lower production.

Will it be different this time around? Venezuela is a big spender. So is Iran. And then you have non-OPEC countries like Russia that are desperate to put more cash in their coffers. How long can they play this game? A few months won’t be a problem. But the global economic crisis will last longer than a few months … at which point we’re sure to start seeing cracks in OPEC’s united front.

Ten dollars a barrel? Sounds good. But it would not only signify an ineffectual oil cartel. It would also mean that the world is in a long and deep recession. And it would be setting up the biggest oil shortage yet once economies start turning around.

Call me crazy but I like where the price of oil is right now. In this case lower isn’t better.

Source: The Next Great Oil Shortage Begins Now