And the green shoots brigade gained a firmer hold on investor sentiment. It has become okay to say that the global economy is out of the woods and that the rally in US stocks could be the beginning of a new bull.

Is this optimism justifiable? This is the question we’ll attempt to answer in today’s Notes.

“The whole credit collapse and the recession must have been a hoax,” writes our favorite underground analyst David Rosenberg at Gluskin Sheff.

Rosie is talking about the latest Investors’ Intelligence survey. It shows bullish sentiment at 47.7% (versus 42.5% the week before) and bearish sentiment all the way down to 23.3% (from 25.3% the week before).

Meanwhile, net inflows into US equity funds have been positive now for 12 consecutive weeks, with a total of $2.83 in fresh capital pouring in the week before last. Another sign of exuberance, as Rosie points out, for contrarian investors.

Maybe the bulls haven’t been paying attention to the catastrophe in exports. This from Rosie’s Friday missive:

The latest data on China’s outbound shipments showed renewed hints of slowing. Same for Korea. German exports plunged 4.8% in April and are off 28.7% from a year ago. Canadian export volumes sank 5.1% in April — and this transcended the problems in the auto sector — on top of 2.3% slide in March, taking Canada into a deficit position of $178 million in what is a vivid sign of a hugely overvalued loonie. U.S. export volumes also dropped 4.3% in April after a 0.5% decline in March, taking the YoYo trend down to a new all-time low of -20.4% from -13.8% in March.

Maybe the bulls just don’t care. This has been our suspicion here at Notes since the current rally US stocks kicked off in March. Let us explain…

The credit crunch and the collapse of onetime Wall Street darling Lehman Brothers last September spooked investors bad. Fear spread over a 1930s style great deleveraging, and stocks plunged as a result.

But are we really experiencing a great deleveraging? The upsurge in US stocks signals that we’re not… as does the more recent rise in crude oil prices. A deleveraging is by nature deflationary. But the rise in base metals, stocks and oil reveal that traders and investors are counting on deflation’s nemesis – and the nemesis of earners and savers – inflation.

We’re learning the lessons of history not by studying it but by repeating it. Warns underground investor Bob Carver over at MarketClues.com:

When the Bankster Debt Bubble burst in 2007 and 2008, it was popular for most to think that a great period of de-leveraging had begun. This happened in the Thirties and led to the Great Depression. It wasn’t pretty, but debt was either written off or paid off. The country learned a big lesson about banksters and how their bad decisions blew up the economy. Once those who had learned those lessons were gone, we had to re-learn those lessons, not by studying history, but by repeating it.”

Or, have we learned the lessons? Today, we not only have not learned the lessons of the Bankster Bubble, we are repeating and expanding the bubble of debt. Instead of a Bankster Bubble, we have a Government Debt Bubble that subsumes the Bankster Bubble and expands it. There is no de-leveraging going on. We are simply blowing a bigger bubble, waiting for the day when our lenders cut off the flow of funds.

Total debt is still rising sharply, according to the Fed’s Flow of Funds Report. In 2008, Federal debt grew 24% and in the first quarter of 2009 grew by 22.6% at an annualized rate. Household and business debt was virtually unchanged, while state and local government debt is rising at a 4.9% annual rate in 2009. Don’t take our word for it. OptionARMaggedon did some charts which show that the debt bubble is still expanding. The last two years were simply a sneak preview of what’s coming when the, by then much larger, debt bubble blows up in the future. The longer this goes on, the worse it will be. The public is sitting idly by while this pile of explosives is being built higher and higher, just waiting for the day when someone with a match lights the fuse.

Put simply, the only way out of a debt induced depression is to pay down debt or write it off. Leveraging up only delays the inevitable.

Given this “leveraging up,” it should come as no surprise that oil prices have risen sharply recently. The black goo is now trading at over $70 a barrel, just off its nine-month high of $73.20. The rate of gain is astonishing: oil prices have risen 100% since their $38 low in January.

Underground investor David Fessler at Investment U recommends four ways to profit from oil’s price moves (three long and one short).

• 1. Certainly one of the big drillers like TransOcean  (NYSE: RIG) is a great long-term play on rising oil prices, as their shares closely mirror the rise and fall of the commodity itself. Shares of the drillers have been absolutely punished, and TransOcean is off nearly 50% from its 52-week high.
  2. The United States Oil Fund LP  (NYSE: USO) is an ETF designed to track West Texas Intermediate (light, sweet crude oil) prices. The fund invests in futures contracts for crude, heating oil, gasoline and other petroleum-based fuels.
  3. If you don’t mind some potential added volatility, PowerShares DB Crude Oil Double Long ETN  (NYSE: DXO) is a long-leveraged Exchange Traded Note available to investors. It’s designed to track the performance of certain crude oil futures contracts, plus the returns from investing in three-month Treasuries.
  4. But if you’re a bit more active in your trading, or if you feel oil is ready for a pullback, you might consider a short approach. PowerShares DB Crude Oil Double Short ETN (NYSE: DTO) is designed to do just the opposite of DXO if you feel that our current rally in oil prices is overdone. For the reasons above, I don’t believe that’s the direction we’re going, but I think DTO is one of the better ways to play a short approach to oil.

Unfortunately – at a time when consumers can’t afford a wallet drain – retail gasoline prices across the United States have risen to $2.55 a gallon on average, and over $3.00 a gallon in places like California.

As you drive by the gas station and see the now familiar price changes – sometimes by the hour – you might wonder what’s really affecting the price you pay…

Investors, of course, want to know if there’s a good way to play the price moves. Let’s take a look at the two biggest drivers of oil prices and ways you can play its movements.

Oil Prices Rise As Production Costs Vary Widely

As with any natural resource we use, crude oil has costs associated with its production that are relatively clear, but nonetheless can vary widely.

Those variations come about almost entirely based on where the oil is. Since we’ve been using the black goo for nearly 100 years, it stands to reason that most of the easy, cheap oil deposits have already been found.

Taking a look at the costs to even find the stuff:

• You’ll find deep-water exploration is far more expensive than land-based exploration. You need a sizeable exploration vessel, capable of operating in some of the world’s angriest oceans for months at a time.It has to be equipped with highly sophisticated instrumentation and software to be able to “see” potential crude oil deposits as deep as seven miles below the surface of the ocean. You also need a crew of mechanics to keep it all working, and petroleum engineers and geologists to interpret the data.
• Land-based exploration – on the other hand – can be done from a well-equipped van, by one or two petroleum geologists.Then there’s production costs: land based oil is cheap to drill for. Land-based drills can fit on the back of a few tractor-trailers and can be torn down, moved and setup at a new location with relative ease. In addition, it’s much less expensive to extract.

Land based production is definitely preferred. Unfortunately it’s not where the big new finds are made.

As you go offshore into deep water, things get expensive fast: deep-water extraction is a financially losing proposition with prices anywhere below $75 to$80 a barrel, compared to as little as $25 to$30 a barrel for some land-based deposits.

But exploration isn’t the only cost of crude oil. Refining, transportation and taxes make up the remaining cost of what you pay at the pump. And that’s really just the start of what we pay for gas…

The Other Price Drivers: It’s Not Always What You Think

When crude oil prices spiked to $147 a barrel, there was no question that speculation played a significant role in getting it there. But speculation also played a role it getting it to $38 a barrel, too.

In the end, for oil and just about everything else, it all comes down to supply and demand. We’re in a recession, and demand continues to slacken. OPEC’s response has been to cut supply, with the thought that – everything else being equal – prices would eventually stabilize at some level.

But everything else isn’t equal: The Federal government has been dumping cash into the financial system at unprecedented levels. It’s caused the dollar to drop in value with respect to other world currencies and with respect to gold.

Since oil on all the world markets is priced in dollars, its price rises as the value of the dollar declines. It’s one of the reasons many oil-producing countries have suggested that the price of oil be tied to a basket of currencies instead of just to the dollar.

Unfortunately, there aren’t any other currencies that are as abundant or – more importantly – strong enough to handle the sheer volume of the transactions that occur daily in the oil market.

So we have demand and supply destruction in a race downward here in the United States that’s kept oil inventories high – up until a few weeks ago. Add to that steadily rising demand coming from emerging markets around the world. Throw a declining dollar into the mix and stir.

The result is rising oil prices – in all likelihood heading to $80 a barrel or possibly even higher by the end of the year.

Three Ways to Play the Pickup in Crude Oil Prices

As for investing in crude oil, here are three ways to get long in oil and one way to short it:

• Certainly one of the big drillers like TransOcean (NYSE: RIG) is a great long-term play on rising oil prices, as their shares closely mirror the rise and fall of the commodity itself. Shares of the drillers have been absolutely punished, and TransOcean is off nearly 50% from its 52-week high.
• The United States Oil Fund LP (NYSE: USO) is an ETF designed to track West Texas Intermediate (light, sweet crude oil) prices. The fund invests in futures contracts for crude, heating oil, gasoline and other petroleum-based fuels.
• If you don’t mind some potential added volatility, PowerShares DB Crude Oil Double Long ETN (NYSE: DXO) is a long-leveraged Exchange Traded Note available to investors. It’s designed to track the performance of certain crude oil futures contracts, plus the returns from investing in three-month Treasuries.
• But if you’re a bit more active in your trading, or if you feel oil is ready for a pullback, you might consider a short approach. PowerShares DB Crude Oil Double Short ETN (NYSE: DTO) is designed to do just the opposite of DXO if you feel that our current rally in oil prices is overdone.For the reasons above, I don’t believe that’s the direction we’re going, but I think DTO is one of the better ways to play a short approach to oil.

Any way you play it, you need to be aware that there are many factors that can affect oil’s price, and by extension, any investments you have that are tied to it. Keeping an eye on the biggest drivers of these prices will give you a leg up on the average investor.

Good investing,

David Fessler

Source: Rising Oil Prices: Here’s Four Ways to Play Crude Oil

Exxon’s Azulao-1 well tapped a reservoir that reportedly contains as much as 8 billion barrels of recoverable oil, says Luiz Lemos, a partner at TozziniFreire Advogados, a Brazilian law firm that represents foreign energy companies.

“This is very huge,” Lemos told Bloomberg News.

So is the potential benefit for Brazil. If Lemos’ estimate is accurate, this new Azulao find will rival the nearby Tupi oil field as the largest discovery on this side of the planet since Mexico’s Cantarell field was discovered in 1976.

Lemos’ estimate is unconfirmed, but Exxon Mobil Chief Executive Officer Rex Tillerson described the find in January as “a huge potential resource.”

Exxon first notified Brazilian regulatory agency National Petroleum Agency that it discovered hydrocarbons in the reservoir, identified as BM-S-22, on Jan. 16. The world’s largest oil company operates the block with a 40% stake. Hess Corp. (HES) also holds a 40% interest and Brazilian state energy company Petroleo Brasileiro SA (ADR: PBR), known as Petrobras, holds the remaining 20%.

It was Petrobras that first triggered the rush on Brazil’s energy sector when, in November 2007, the company announced the Tupi discovery – an underwater field that could contain as much as 80 billion barrels of oil equivalent.

Petrobas actually downplayed the findings of the Tupi oil field before announcing last November that the reserve contained between 5 billion and 8 billion barrels of light oil and gas.

Petrobras will begin extract its first crude oil from Tupi on May 1. Initial output from the Tupi field is expected to be around 15,000 barrels per day, then rising to 30,000 barrels a day during a later stage of testing, and eventually reaching about 100,000 barrels per day by 2010, Reuters reported.

If Tupi lives up to analysts’ expectations, it will be very encouraging not just for development of Azulao, but also the Carioca reserve, another massive field expected to hold a large bounty of petroleum.

Last year, Haroldo Lima, the head of Brazil’s National Petroleum Agency, said Carioca could hold 33 billion barrels of oil and gas. Upon hearing the news, brokers and analysts rushed to tell their clients that Brazil, as one minister put it just months ago, was about to become the “new Saudi Arabia.”

Experts say that even 10 billion recoverable barrels of oil – whether they come from Tupi, Carioca, Azulao, or a combination of all three – would be a remarkable find and enough to catapult Brazil into the world’s oil-producing elite. Brazil currently has about 12 billion barrels of proven reserves, and could soon find itself nestled between Nigeria (with 36 billion barrels) and Venezuela (80 billion).

Foreign Oil Majors Flock to Brazil

As rich and expansive as Brazil’s oil reserves may be, they are also very difficult to access. The Carioca field, for instance, is 170 miles offshore, more than 6,000 feet below the surface of the water, and trapped beneath a shelf of salt 500 miles long and 125 miles wide.

There is no question that extraction will be costly, but even at today’s energy prices there’s no shortage of domestic and foreign companies ready to invest big money Brazil’s energy sector.

In fact, Manuel Ferreira de Oliveira, chief executive officer of Portugal’s Galp Energia SGPS SA, said March 4 that production at the Tupi sub-salt oil field in Brazil is viable — despite the slide in international oil prices.

“Production at Tupi is competitive, even at the actual level of oil prices,” Oliveira told the Estado news agency, on the same day that his company released its fourth-quarter earnings. “The projects in Brazil are going to gain strength this year and the next.”

Exxon said Thursday that it would continue investing in exploration and production at “record levels,” despite the economic downturn and plunging oil and gas prices that have reduced spending by some competitors.

Exxon will invest $29 billion this year, and reiterated plans to invest between $25 billion and $30 billion annually over the next five years.

The company is currently spending $79 million a day to search for oil fields, construct platforms and renovate refineries Bloomberg reported.

China is also looking to become a long-term partner in Brazil. China Development Bank last month agreed to lend Petrobras $10 billion to help finance deepwater oil exploration off the coast of Brazil.
Oil exploration will be carried out with the participation of Sinopec (ADR: SHI), the Chinese state oil company.

The contract will be finalized within the next two months so it can be signed when Brazilian President Luiz Inácio Lula da Silva visits China in May, according to Petrobras Chief Executive Officer Sergio Gabrielli.

In addition to the exploration partnership, the deal signed between Petrobras and Sinopec includes the supply of 60,000 to 100,000 barrels of oil per day in the current year. Petrobras also signed a memorandum of understanding with state company China National Petroleum Corporation (CNPC) for the supply of 40,000 to 60,000 barrels per day.

Last month, Petrobras announced plans to invest $174.4 billion in exploration and production.

Energy demand in Brazil is “already starting to recover,” Petrobras CEO Gabrielli told Reuters during an interview at a Brazilian investment conference. “Even the fall in demand during the last quarter of 2008 was within a range we could expect for that season.”

In addition to Exxon and Petrobras, the companies that stand to profit the most from Brazil’s energy renaissance are offshore drilling companies such as Transocean Ltd. (RIG) and Diamond Offshore Drilling Inc. (DO), which was recently recommended by Contributing Editor Horacio Marquez in his weekly “Buy, Sell or Hold” feature.

Devon Energy Corp. (DVN) also made headlines last week when it notified regulators that it found traces of natural gas in the Barreirinhas Basin. Larry Nichols, chief executive officer of Devon Energy, said Monday that prices for natural gas are close to recovering from their recent drubbing.

“When the recession ends and the economy starts booming, we’re going to have less natural gas than we do today and prices are going to spike back up,” Nichols said.

Source: Is Brazil the ‘New Saudi Arabia?’

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 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 Today’s Financial News:

This cannot be good for the oil industry. There is a very left-leaning Democrat packing his bags and heading to Washington. The high-profit, we’ve-got-them-bent-over-a-table oil industry must be pinching itself hoping this is nothing more than a bad dream.

Unfortunately, it is real. Democrats now control the White House, the Senate, the House, the courts, our schools, and a large chunk of our nation’s banks. All that is left for us pro-business voters to do is pray they do not infiltrate the rest of Wall Street.

Over the next few years, the nation’s thriving businesses will face a strong headwind. Higher taxes, less incentives, and employees that feel their over-paying job is their god-given right will make profits even harder to come by.

No industry is more worried about an Obama administration than the oil industry. The nation’s new “supreme leader” has already promised to impose heavy windfall taxes on the nation’s energy producers. Companies like Exxon Mobil (NYSE:XOM) and BP (NYSE:BP) are huge political targets. You can bet Obama has his eye on their record-smashing profits.

Dig deep for profits

But what about companies like Transocean (NYSE:RIG) that are working to tap the world’s offshore oil resources? We already know the chances of increased drilling off the American coast went out the window last night. But what about the rest of the world?

A glimpse into Transocean’s earnings report released earlier today will give us some clues. The company earned $1.1 billion last quarter, up from $973 million this time last year. It was an increase of 13%. Per share earnings were lower, $3.49 from $4.63, but that was caused by the dilution created when the company purchased GlobalSantaFe. On a top-line basis, Transocean recorded $3.19 billion in revenues, up 2.9% over the year.

Overall, investors have to be happy with these figures. While the actual earnings per share figure was five cents lower than expectations, revenues exceeded prior estimates. The company’s large acquisition made accurate estimates difficult at best.

Looking forward, it would be easy to say Transocean’s best days are behind it. With a new left-leaning administration that is not fond of offshore drilling, Transocean’s business growth will slow. Or so we think.

There are flaws in that logic.

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What if they’re right?

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———–

To find the truth, we have to look much deeper. First, oil production across the globe is getting tougher. The easy reserves have long been tapped. Now, it takes more research, more technology, and much more money to find oil, especially on land. That is good news for Transocean, as it has the capability to produce oil where others cannot, deep beneath the ocean’s surface.

Offshore drilling may not be on the agenda in the United States, but it is quickly gaining momentum in places like the North Sea and South America. Oil addiction is far from a solely American dilemma.

Looking at today’s share price, Transocean is a real bargain for long-term investors. If you are willing to buy shares today and hold them for ten years or more (long enough to take advantage of the next oil cycle), you have a great shot at success.

If you are a short-term trader, I would hold off. There are better investments that will pay sizeable, low-risk profits over the next few months.

We have a new administration on its way to Washington. It means we need to adjust our investment strategies a bit, but it certainly does not mean our days of making big profits are over.

Sometimes, change can be good.

Source: Democrats and the oil industry

Don Miller says industry insiders are now betting on triple-digit crude oil prices for the next decade. And long-term oil futures show demand will continue to outstrip supply, as Asia industrializes and proven reserves diminish.

Don says Transocean Inc. (NYSE:RIG), StatoilHydro ASA (NYSE:STO), and Petrobras (NYSE:PZE) are likely to benefit from new drilling projects. And the company that supplies equipment lines for 90% of oilrigs, National Oilwell Varco (NYSE:NOV), is also well placed for profits.

Want to know what the price of a barrel of oil will be in eight years? Exactly $119.50 a barrel.

There’s no shortage of pundits predicting where oil prices are heading. And every day seems to bring new reasons to change the forecast – a resurgent dollar, Americans curtailing their driving habits, oil supply reports… The list goes on.

But the guys who really know the future of oil prices are those sitting right in the driver’s seat – oil producers.

Every day, they make bets about the direction of petro prices on the futures market. And right now, they’re telling you – in no uncertain terms – oil’s got a floor price of $100 a barrel for years to come.

“Oil-flation” is here to stay, but this free report reveals four ways you can beat it starting now…

The Future Price of Oil – And Why You don’t Need a Crystal Ball

Crude oil is the world’s most actively traded commodity. Every day, oil producers trade futures contracts on the New York Mercantile Exchange (NYMEX) to hedge against price swings.

At the end of the day, they – along with speculators who bring liquidity to the market – determine the price of oil, which is simply a reflection of the market’s attempt to balance supply and demand.

So, that prediction of $119.50 a barrel? That’s a recent closing price on NYMEX for the December 2016 contract.

Fact is, NYMEX has over 1,000,000 active futures contracts or “open interest” on crude oil for the next eight years and not one trades below $112 a barrel.

That means the guys in the business – the ones who make their living producing and selling oil – are predicting oil will be priced over $112 a barrel for most of the next decade.

Why are they predicting the continuation of triple digit oil prices?

Plain and simple, the markets are telling us future demand for oil will outstrip supplies.

Demand for Oil Keeps Growing

Although demand is highest in the developed world, exploding economies like China and India are quickly becoming large oil consumers.

The United States is still the world’s largest consumer of petroleum and our thirst for oil is growing rapidly. Between 1995 and 2005, U.S. consumption grew from 17.7 million barrels per day (bpd) to 20.7 million bpd – a 17% increase.

In the same time frame, China’s consumption vaulted from 3.4 million bpd to 7 million bpd – a 106% increase. And that number’s rising, as China surpassed 8 million bpd for the first time in June.

Meanwhile, India’s oil imports are expected to more than triple from 2005 levels by 2020, rising to 5 million bpd.

All totaled, Asia accounts for 60% of the world’s new oil demand.

Putting a worldwide number on it, the International Energy Association recently increased its 2009 oil demand forecast to 87.8 million barrels a day.

On top of that, The U.S. Energy Information Administration projects world consumption of oil to increase to 98.3 million bpd in 2015 and 118 million bpd in 2030. That’s a 35% increase by 2030.

Oil Production Dropping?

By now, you’ve probably heard of the Peak Oil theory – that worldwide oil production has peaked and is now dropping. Consider:

• The U.S. Energy Information Administration Energy contends that world production leveled out in 2004, and reached a peak in the third quarter of 2006.
• Oil tycoon T. Boone Pickens recently told Congress, “I believe you have peaked out at 85 million bpd globally.”
• And at a recent industry conference, the chief executive officer of Total SA (ADR: TOT), the French oil major, said the industry would be lucky to produce 95 million bpd by 2020.

But whether you believe Peak Oil is true or not, at least nine of the largest 21 oil fields on the planet are in decline.

In 2006, a Saudi Aramco spokesman admitted that its mature fields are declining 8% per year. It’s now clear that Ghawar, the largest oil field in the world, has peaked.

The second largest, the Burgan field in Kuwait, started down in 2005. And Mexico announced that its giant Cantarell Field entered depletion in 2006.

Reserves Don’t Equal Production

Then there’s the matter of oil reserves, a moving target if there ever was one.

You see, oil reserves are classified three ways: proven, probable and possible. Proven reserves have at least 90% to 95% certainty of entering production. Probable reserves have 50% probability. And possible reserves have a 5% to 10% chance.

A 2007 report by the Energy Watch Group pegged total world proven plus probable reserves at between 850 and 1,250 billion barrels. That’s 30 to 40 years of supply if demand holds steady – which it won’t.

But as Sadad I. Al Husseini, a former VP of Aramco, said in October 2007, “Reserves are confused and inflated. Many of the so-called reserves are in fact speculative. They’re not delineated, they’re not accessible, they’re not available for production.”

By Al-Husseini’s estimate, 300 billion of the world’s proven reserves should be re-categorized as speculative.

On top of that, about 70 oil-producing nations don’t reduce their reserves to account for yearly production. As noted investor Jim Rogers says, “Despite consistently pumping 8 million bpd for over two decades, Saudi Arabia has repeatedly stated their reserves are at 267 billion barrels.”

Organization of Petroleum Exporting Countries (OPEC) member nations even have economic incentives to exaggerate their reserves, as the OPEC quota system allows greater output for countries with bigger reserves.

The reality is this: it’s highly likely we have a lot less than 1,200 billion barrels to burn in the next 30 to 40 years.

And increasing demand could have us running on fumes in an even shorter span.

New Production — a Pipe Dream?

Even though we continue to hear about new oil discoveries, new oil reserves will be harder to find and extract.

Take Kazakhstan, for instance. Its oil fields are slated to be the third largest in the world. The heralded Kashagan field should produce 1.5 million bpd at its peak. But technical problems continue to plague the project.

In 2005, production was scheduled to start in 2009. A year ago that was moved to 2011 and now it’s been pushed back to 2013. And the projected cost has risen to a whopping $50 billion.

Canada’s oil sands are another example. Production could reach 5 million bpd by 2030 in a “crash program,” but the oil contains contaminants such as sulfur and carbon that are difficult to extract and leave highly toxic tailings.

Frankly, the most easy-to-extract oil has been found. Price increases have led to exploration where high technology is required and where it is much more expensive to extract the oil.

We are replacing OPEC oil that costs $3 per barrel to produce with deep-water and other nonconventional sources at $60 per barrel and up.

And that’s why the markets are predicting triple digit oil prices are here to stay.

Four Ways to Play “Oil-Flation”

Here’s a four-prong strategy to help you ride the oil bull market into the future and get your share of the profits.

Lehman Brothers predicts that oil producers will spend a record $369 billion on energy projects this year. With oil prices still in record territory, oil companies are drilling wells in waters previously considered cost-prohibitive. And with President Bush calling for the reopening of offshore drilling, look for the trend to accelerate.

Money Morning Investment Director Keith Fitz-Gerald recommends StatoilHydro ASA, an integrated oil company headquartered in Norway. The company is now the world’s largest energy operator in waters more than 100 meters deep and produces, on average, 1.7 million barrels of oil equivalent per day.

It has proven reserves of more than 6 billion barrels of oil, has operations in 34 countries, and is expanding aggressively to diversify internationally.

You might also look at Transocean Inc., the world’s largest provider of offshore drilling services for oil and gas wells. Its fleet includes ultra-deepwater and harsh environment semisubmersibles, and drill ships.

In November, Transocean merged with GlobalSantaFe, combining the world’s No. 1 and No. 2 offshore drilling companies. The company now owns 138 offshore rigs, twice the number of its nearest competitor.

It also just signed a $1.69 billion agreement with Petrobras, Brazil’s government-sponsored oil company to provide rigs for its newly discovered Tupi field. With over 40 billion barrels in reserves – three times the size of Alaska’s Prudoe Bay field – Tupi could be a bonanza for both companies.

Another way to capitalize is buying companies that outfit drilling rigs with pipe, fittings, and provide oil-exploration and field-management services. National Oilwell Varco is the “picks and shovels” play in the oil services industry, with the lion’s share – over 60% – of the market for rig gear.

The company’s huge product line is found on about 90% of all drilling rigs. It’s been growing revenues at almost 40% for the past three years while increasing earnings per share by a whopping 68%.

And don’t ignore the burgeoning alternative energy field. Both Sens. Obama and McCain are pledging over $150 billion in renewable and alternative energy initiatives during the next decade.

As Fitz-Gerald likes to say, “alternative energy is an alternative no longer.” Vestas Wind Systems (PINK: VWDRY) is the world leader with over 35,000 wind turbines installed in 63 countries. It is the industry leader in wind technology with 23% of the market worldwide, and a full 85% share of the market for turbines with a capacity of 2 megawatts and higher.

Be cautious with this one as its stock is up over 300% in the last 18 months. But with a surging government investment climate in alternative energy in the U.S., the company should continue to benefit.

Source: Four Ways to Fight the “Oil-Flation Epidemic”

• In reporting a $164.8 million loss (or $1 per share), electronics retailer Circuit City Stores Inc. (CC) suspended its 4-cent dividend. The company also forecast a wider second-quarter loss but said it expects a “gradual recovery” in the second half, Reuters reported.

• Mitsubishi Motors Corp. (PINK: MMTOF) plans to introduce a line of plug-in hybrids as soon as 2013. The company’s all-electric i MiEV minicar plans to be charged from a standard electric outlet. About 1,000 of them will go on sale to fleet customers starting April 1, 2009, Bloomberg reported.

• Continental Airlines Inc. (CAL) and United Air Lines Inc. announced yesterday (Thursday) that despite deciding not to merge in April, the two carriers would form an alliance that includes linking their networks and operations worldwide, The New York Times reported. As part of the deal, Continental will join the Star Alliance, of which United is already a member.

• Western oil majors will return to Iraq for the first time in 36 years, The New York Times reported yesterday (Thursday). Exxon Mobil Corp. (XOM), Chevron Corp. (CVX), Royal Dutch Shell PLC (ADR: RDS.A, RDS.B), BP PLC (ADR: BP) and Total SA (ADR: TOT) are at the forefront for contracts on the countries largest oil fields and are currently in talks with the government’s oil ministry, MarketWatch reported.

• Shares of Citigroup Inc. (C) dropped over 1% with a 23 cent decline to close at $20.17 yesterday (Thursday) after Chief Financial Officer Gary Crittenden said there would be “substantial” additional write-downs and losses on consumer loans, Bloomberg News reported. Citigroup has already written down $42 billion, or approximately 10% of the $396 billion in total write-downs.

• Matthew Tannin and Ralph Cioffi, two former Bear Stearns Cos. Inc. (BSC) managers, were arrested yesterday (Thursday) on securities fraud and other charges linked to the collapse of a hedge fund that bet heavily on subprime mortgages before the market collapsed, The Associated Press reported. The FBI announced Thursday that it had arrested about 300 real estate industry players since March.

• Transocean Inc. (RIG) said yesterday (Thursday) that BP PLC (ADR: BP) extended an ultra-deepwater drilling contract for five more years, The Associated Press reported. The extension for the semi-submersible vessel GSF Development Driller II begins in November and is expected to generate up to $1.06 billion in revenue over the life of the contract.

• Bank of America Corp. (BAC) expects to complete its acquisition of mortgage lender Countrywide Financial Corp. (CFC) by July 1, a source familiar with the matter told Reuters yesterday (Thursday). Bank of America has agreed to pay about $4 billion for Countrywide.

Source: Global Investing Roundups: Friday, June 20th, 2008

To answer those questions we turn to a report published in late March by UBS energy analyst Jon Rigby and his team in London. Their incredibly useful report is called, “Will there be enough production capacity?” UBS has been battered by its huge sub-prime related losses. But their work on where future oil production will actually come from nearly redeems them. They have asked just the right question at the right time, and answered it in detail.

The report reaches a number of surprising conclusions about the global oil market. It also includes a useful database of oil projects scheduled to enter production in the next five years. These are projects which could add meaningful capacity (100kbpd or more) to global oil production. We’ll look at who stands to benefit in a moment. But first, some of the report’s findings [emphasis added is ours]:

• “Declining existing basins, rising costs, increased technical challenges, stretched supply chains, geopolitical blocks and tightening fiscal terms all seem impediments to growing global production capacity for oil and gas, despite the clear pricing signals.
• “There is no obvious wall of new production coming to the market in response to high prices.”
• New projects scheduled to come on-line from National Oil Companies (NOCs) belong mostly to three major firms: Aramco, Petrobras, and Gazprom.
• New project cost is rising and becoming more technologically challenging, especially deep-water.
• “Nominal growth rates tied to global GDP now look more unrealistic as potential upstream growth slows. This appears reasonably consistent with a growing view that oil production may actually not exceed 100Mbbl/d.”

The idea that global oil production may never exceed 100mbbl/d is worth a much closer look. I’ll get to that later. But before we look at the end, let us look at the beginning of the end and where new production might come from as the world’s oil producers try to bridge the gap between 87mbpd and 117mbpd.

The good news is that there IS new production capacity in the pipeline this year and next. Keep in mind that the final investment decision on the projects entering into production this year was made anywhere from 3-6 years ago. That shows you how far in advance you have to plan for new production (assuming you’ve even found oil in the first place).

There is no such thing as just-in-time oil production. But let’s take a look at projects that will come on line between now and 2010. We’ve selected only those projects that will produce more than 200kbp or more:

If you include LNG and the barrels of oil equivalent produced from it, your list expands a little more to include the following projects:

Beyond 2010, the future is murkier. But the UBS team has identified projects for which the final investment decision has been made. Assuming cost blowouts can be avoided and the projects aren’t cancelled, here are some of the bigger projects that could come on-stream between 2011 and 2015:

There are some massive LNG and natural gas projects coming on-stream between 2011 and 2015. Gazprom, Shell, BP, and ExxonMobil all look like big winners, should oil prices stay high and pass through to higher LNG prices.

The new oil finds off-shore in Brazil’s Santos Basin are not included in the UBS report because they are not likely to enter into production during the next five years. They will be difficult to produce in any event. Petrobras says the Tupi find may contain as many as 8 million barrels, while the Carioca field may have 33 billion barrels of reserves, of which about 10 billion could be recoverable, according to Citigroup.

Current Production Trumps Reserves

One UBS claim which may surprise older oil hands is that, “the capacity to produce—not reserves—is critical to energy markets.” UBS does not conclude that current producers should be valued differently that companies with large reserves but current production challenges. But it’s worth thinking about.

In the industry that sells transport, drilling, and pumping services to Big Oil, the rising tide is more of a 130-foot wave crashing onto shore. In other words, you could close your eyes, buy almost any oil-service stock right now, and come out ahead this year.

One of Market Notes‘ frequent guests, Transocean, is up 53% in the past year. It’s the world’s largest drill-ship operator. You find similar gains in CHC Helicopter (transport), Cameron (valves), Tenaris (drill steel), FMC (wells and transport systems), Nabors (drilling), National Oilwell Varco (drill rigs), Weatherford (drilling systems), and… well… we’ve run out of space.

No doubt this market is frothy… but for those speculating in 2008, keep this in mind: Skyrocketing oil prices are filling the pockets of Russia, Saudi Arabia, Canada, Norway, and Brazil right now. They’ll have to spend that cash to find more oil… and that 130-foot wave will continue pushing money into oil services.

Source: A Giant Wave Of Money Is Headed Toward This Industry