So far over the past several columns, I have written to you about cars and tires. So today, let’s talk about something completely different. How about oil?

Damn it!

Okay fine: it’s the American obsession, and last I checked, my passport said I am an American too, so why should I be any different? Besides, there’s some interesting stuff happening with oil futures and energy stocks.

Crossing the Line

Let’s start with crude oil setting its 2009 high at $54.83 in New York intraday trading. For most of this year, $50/barrel has been one of those psychological “lines in the sand,” much like Dow 8,000 for a while there.

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Now that traders have firmly stepped across both lines, interest is perking up from all quarters, both in stocks and in oil. One really must follow the other for two reasons.

The Cost of Doing Business

First of all, there is the obvious: if the global economy recovers even in the slightest, the ensuing increases in manufacturing, shipping and travel will require energy, and despite the best of green intentions, for now energy still means oil.

Second, despite all the rumblings about finding a new world currency, oil is still priced globally in dollars. And while it may be taking Washington an agonizingly long time to actually disburse all the dollars it has promised, it is finally getting around to it.

Eventually, an increase in GDP might soak up enough of those dollars to make a difference. Just as eventually my wife’s dog will grow thumbs and learn to open his own food. Could happen: he’s a pretty smart little guy and all. Still, I am not holding my breath – on either front.

It’s Baaaack (cue the creepy music)

Yeah, yeah, I know: the Fed claims that inflation is actually “below rates that best foster economic growth and price stability in the longer term,” and plans to keep rates at or below zed for the foreseeable future. That’s their story and they are sticking to it.

Traders, on the other hand, are already starting to act on the idea that inflation IS creeping back into the picture. Taken a gander at 30-year T-Bonds lately? Last December, futures were hovering around 142 and change with yields under 2%. Now we were looking 122, a drop of some 14%, forcing yields to just about double.

Best part is, you really don’t have to say which argument is your favorite, as they are not mutually exclusive. Beyond that, they are value arguments: we could tussle over which one is driving oil futures up till the cows come home.

The Heart of the Matter

What truly matters is that oil futures are up, and are likely to keep moving up. While many analysts are having a blast tussling over the penny changes caused by weekly rises and falls in stored reserves, most all concede that crude will be in the vicinity of $65-$70 by year’s end.

With oil’s downside risk clearly defined by a rounding bottom, and a strong upside story playing out both in the news and charts, interest is also returning to oil and energy stocks.

Looking to the Energy Select Sector SPDR (XLE:NYSE) – which still contains the world’s most profitable companies – we see that investors have crossed that same line in the sand. The recent price recovery has put the XLE up over the resistance node at $46.65 and firmly on the path through $55.25 and $63.74 as it moves towards the attractive node at $74.32.

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Simply buying shares of XLE could net you a reasonably satisfying gain just shy of 50%. But if we are seeing the return of inflation and the demise of the dollar (and we really, truly are), then you might want to make your very own dollars multiply a tad faster than that.

If so, then you could consider speculating on the XLE January 2010 50 Calls (WHA AX). That same move would allow these calls to rise from $621/contract to as much as $2,091 for a gain of some 237%.

Source: What Bond and Oil Traders Know About Inflation – and How You Can Make 237% Off It

Every month, TFN’s Financial Roundtable gathers the market’s top financial editors to provide perspective on the dominant trends in the world markets. After July’s meeting of the minds with Money Morning’s Bill Patalon and Martin Hutchinson (Financial Roundtable: Top financial analyst predicts $225 oil and $9 gasoline in 2009), August’s event combines the insights of Investors’ Daily Edge’s gurus Rick Pendergraft and Andrew Gordon.

J. Christoph Amberger: Andrew, we have seen oil prices fall from $147 per barrel in July down to $110-111 in early August. We have seen gold plummet from $1,030 in March by as much as $230 per ounce. What do you make of this decline in commodities prices? Have we seen the end of the speculative bubble or is this just a retrenchment in a bull market?

Andrew Gordon: Things sure have changed quickly. It was just July 11 when oil made its high of over $147 per barrel and commodities across the board were hitting highs and Western countries were asking OPEC to increase oil production. As a matter of fact, they did. They increased it by 150,000 barrels a day in July.

But by the time that happened, the market really reversed and oil demand went down. Gas demand went down. A little bump up in oil supplies really pushed down the price of crude. It’s gone down over 20 percent.

I don’t think we’re seeing the end of the secular bull, the commodity bull market and the oil bull market. But certainly the price of oil became so expensive in the U.S. and other countries that it really dampened demand. Demand in the U.S. was about two to three percent less than last summer at this time.

But even in China, crude imports were down by about six or seven percent. It didn’t help that Asian countries have been removing some of the subsidies. So, yes, we’re seeing the reversal of just what was going on about a month ago. But prices are now so low that investors are starting to ask themselves, are we risking demand going up and never having a chance to really establish consumption patterns that save on oil and gas and that begin to use alternative fuel?

In the short term I think these prices are going to go down a little more. But long-term, global growth is still not dead. In many countries it’s still a big factor and the basic fact about global growth and about oil supply is oil supply has not been able to keep pace with global growth. That basic fact is not going to change going into the future and it’s going to put upward pressure on the price of crude.

J. Christoph Amberger: Rick, how do you look at this situation?

Rick Pendergraft: Almost the exact opposite of Andy. On a short term basis, I see oil bouncing right now. You’ve got a lot of support in the $110 range. The 200-day moving average is there. That was a high in March; a low in May. Former support becomes resistance and former resistance becomes support. So I see the 110 level being very hard to get through for oil right now on the short term basis.

Ironically, back in about March I wrote a special report on oil that I thought that long-term, we would see a drop in the price of oil because this global demand is shifting to the left. So the demand is going to pull back a little bit and we’re seeing it more so in this country than any others.

But ironically we had China go offline with some factories. They limited the number of cars on the road for the Olympics to try and cut down on the pollution. The Olympics ended this weekend. It’s going to be interesting to see whether or not when that comes back online when the demand starts rising again over the short term, I do think you’ll see oil bounce back up.

I don’t think we hit $147 again — that is probably the high for the next few years. I just think that the demand globally will shift to the left a bit and we’ll see a little bit of decline in the demand there. That would keep that 147 as a price high for quite some time.

J. Christoph Amberger: OPEC’s president was saying that $70 per barrel would in his opinion be a fair price for oil. Of course, OPEC seems to be as variable with their oil price projections as anyone. What do you make of the down side for oil?

Andrew Gordon: Well, it’s funny. OPEC bases that price a lot on the dollar going down. They said to take away the exchange rate and the price of oil would cost around $70 these days and that’s a fair price. There’s nothing wrong with that so we don’t need to increase production.

People are already talking about the price of crude in the double digits. It hasn’t gone through $110 yet – never mind $100 – and people are already assuming that it’s going to go below $100.

I think it’s going to have difficulty going under $110 even. It may. One hundred – I’m not sure if OPEC will allow it. They don’t have veto power over the price of oil, but they have that bully pulpit and they can certainly jawbone the price of oil up from the $100 level by threatening to reduce oil production or at least slow down development of fields.

I think actually at $90, at $80, you still have the price of alternative fuels, the oil sands, solar power, nuclear power. You will still see the development of alternative energy, but I think $70 is really the threshold. Below $70 it’s really going to impact on the development of alternative fuels. I wouldn’t want to see it fall below that.

The XLE ETF – which follows oil and gas companies, energy equipment makers and energy services companies – had a pretty good week. It was up over 5%. It passed several tests last week.

• It bounced off its previous low and surged higher.
• It touched below its 100-week moving average before moving back up with conviction and on high volume.
• It moved back into its long-term upward trending channel.

On the other hand, it failed to break through its 50-week moving average which is acting as resistance on a further price rise right now. Breaking that resistance level will establish the ETF’s move up.

The XLE moved up as the war in Georgia showed troubling signs of continuing. Plus the price of oil last week moved above $120 before falling back again. Oil service companies moved up higher than oil producers last week, and that should continue to be the case if the price of oil decides to flirt more with $120 than $110.

As the Olympics end, all eyes will be on China. Will energy demand pick up or stay somewhat depressed. My bet is when China puts those million cars back on the road and reopens those hundreds of factories, energy demand (and imports) will pick right back up.

Source: Energy Sector Shows Renewed Life (Without the Help of China!) 

That’s why now is the perfect time to load up on fuel and energy investments, such as Standard & Poor’s Energy SPDR (XLE:AMEX).

It’s the perfect contrarian play: Make 157% on heating oil calls now, while the weather is perfect!

Every now and then, Maryland delivers up the most pleasant weather in the world. Not but so often, mind you. For most of the year, it is either unbearably hot and humid, or a strange sort of damp cold that worms its way past any sweater.

But the past few days at the Lass family redoubt have been about as nice as anywhere on the planet, with idyllic sun-filled days that just touch 80 degrees, and delicious evenings replete with magnolia-scented breezes.

The air conditioning is off, both at work and at home. Instead we have all opened windows, and as I sit to type this missive, I can hear the sound of folks conversing amiably as they walk past on their way toward Baltimore’s waterfront.

More than a few of my friends and colleagues have taken advantage of this break in the heat to bicycle to work. One has even gone so far as to sell her sedan outright and purchase an adorable little Chinese-made scooter.

I am told by many correspondents that this is a trend across the country. In point of fact, sky-high gas and electricity costs have induced folks to mend their ways as much as possible. Thermostats have been lowered, vacations curtailed and SUVs parked.

Washington tells us that for the past four weeks, gasoline demand is down about 1.6% year over year. And the American Automobile Association notes that the average price at the pump is down some 40 cents to a mere $3.17 per gallon.

How You Could Make 511% on the Next Great Commodity Bull MarketThe global food crisis has sparked a new boom in the agricultural commodities sector that’s following in the footsteps of oil in a big way.This trend is not a fad… it’s not speculation… and if you get in now, you could bank a fivefold gain by February 1, 2009.

What’s more, we are told that crude inventories spiked some 9.4 million barrels last week. Crude futures for September delivery are down to a paltry $112.93 a barrel.

Is our national nightmare finally over? Before you write off this whole “oil spike” episode as some sort of horrid ‘70s rerun, you might want to think things through a bit.

Whereas the oil-rich waters of the Gulf of Mexico have not been overly harassed by hurricanes this year, the ever-so-indecisive Tropical Storm Fay did manage to delay shipments en route, which are now just arriving. This has also contributed a great deal to the sudden swell in our reservoirs.

On the other hand, those fine folks who run our refineries are just as adept at keeping pace with demand when it goes up as when it goes down. Total gasoline inventories actually fell last week, by some 6.2 million barrels.

I don’t mean to bum you out on today of all days, when such gorgeous weather abounds.

But all of this dillydallying is about to be rendered moot…

“Break time is over! Everyone back on your head!” (That’s the punch line to a wonderful dirty joke… which I will be glad to relate after two stiff drinks at the next conference.)

In a few days, the empty roads about town will be replenished with school buses filled with glum children and depressed “post-vacation” drivers in need of a second cup of coffee.

And the chilling winds of winter are not far behind them. I somehow doubt that most of these new bikers will be interested when the roads are slick with cold rain.

Walk to the grocery store? Who the heck has time when the kids need to get their homework done and supper needs serving?

Windows will be closed, and you can only put on but so many sweaters before that thermostat gets cranked back up. And oil, gas, coal and electricity prices are going to get cranked up, too.

Just consider this tidbit from the Energy Information Agency’s August 12 Short-term Energy Outlook:

Residential heating oil prices during the upcoming heating season (October though March) are projected to average $4.34 per gallon compared with $3.31 during the last heating season, an increase of about 31 percent. Residential natural gas prices over the same period are projected to average $15.58 per Mcf compared with $12.72 per Mcf, during the last heating season, an increase of about 22 percent.

Despite this summer’s lull, the various energy-producing countries have been cranking out product at maximum capacity. (Perhaps a global recession will eventually impact overall demand, but the reality of that recession has yet to sink in.)

However, a return to the sobering days of fall and winter need not leave you in a funk. Standard & Poor’s Energy SPDR (XLE:AMEX) collects the top players in the oil patch into one convenient bundle. Its chart appears to have put in a solid bottom in and around $70, with signs of a turnaround already proliferating.

A return to XLE $80 is sufficient to raise XLE January 75 calls (XBT AW) some 61%. A return to the XLE’s recent high of $90 would push those gains to 157%.

Now this is certainly a bit of speculation, as it were. All sorts of things could happen between now and December, when these calls enter their risky front month. Oil could be discovered in East Orange, New Jersey, for instance. Or a war might break out in the Caucasus.

What I can tell you for a fact is that fall always follows summer, and winter always follows fall. So enjoy these last precious days while you can.

Source: Sunny, 80 Degrees and Gorgeous. Time to Go Long Heating Oil!

There’s been a major anomaly occurring in the energy sector over the last two years. The oil majors are struggling to boost refining margins while the oil drillers are posting record-breaking earnings. And it’s no wonder: The oil drillers have an order backlog as far as the eye can see.

The Big Oil Squeeze

Increasingly, the majority of oil companies are shedding profit margins because refining margins are being squeezed.

Earnings have been largely a disappointment for the large-cap oil producers since mid-2006. Oil companies are still earning billions of dollars, but margins are definitely compressing largely because of soaring refining costs.

Despite skyrocketing oil prices this decade, the oil companies can’t contain surging input costs. Lighter distillate fuels, including diesel and heating oil, have become expensive to refine. These higher costs have led to lower profit margins for this segment of the energy business.

Despite lower margins for the majority of oil companies worldwide, investors continue to lunge after stocks in this sector. Crude oil prices have leapt 33% this year but the iShares Energy Select Spiders ETF (XLE) has declined 2.5%, including dividends. That’s hardly an inspiring performance in a bull market. Overseas, the oil majors have generated similar disappointing results.

The Drillers Do the Dirty Work

The big money in energy stocks lies in the companies that extract crude oil and natural gas. It’s also in the service companies that oil majors hire to pump Black Gold.

When Exxon-Mobil (XOM) or BP Petroleum (BP) seeks to boost exploration and development, they contract the oil equipment and service companies to lease onshore or offshore rigs. Exxon-Mobil and BP don’t drill. Oil majors need to outsource that role to the drillers. And that’s where the big bucks have been earned since 2002.

Still Plenty of Fuel Left to Ride this Bull!

From January 1, 2002 to July 22, 2008, the oil services sector as measured by the Philadelphia Oil Services Index, (OSX) has skyrocketed a cumulative 275% – and it’s still climbing this year. As the oil majors are flat or barely in the plus column in 2008, the oil drillers are up another 8% while the S&P 500 Index has tanked 12%.

Second quarter earnings for the drillers have largely been quite strong, exceeding consensus estimates. Many companies that specialize in offshore drilling have been especially strong performers as daily lease rates for rigs continue to hit all-time highs in excess of US$500,000 per day.

If you missed buying the oil services and equipment stocks, then you’ve got another chance coming this summer as crude oil prices continue to correct.

The correlation of crude oil to the drillers is pretty strong. From its all-time high of US$147 a barrel earlier this month, West Texas intermediate crude oil has declined to US$127 recently. And the oil drillers, as expected, have also pulled back and now sit about 12% off their best levels.

So, oil services finally give you a chance to buy again!

We Don’t Have Enough Offshore Rigs

The oil drillers are the specialists required to extract Black Gold once the oil majors discover a new find or develop an existing field. The oil companies actually hire the drillers to explore and drill thousands of feet into the ocean floor.

It can take years to construct a new offshore rig. That includes the time it takes to collect the skyrocketing input costs for piping, metals, deep-sea drilling, and labor. You can’t just flick a switch and turn on a new rig. It takes time.

Until recently, they barely constructed any new rigs to meet bulging demand. A bear market in the energy complex in the post-1980 period resulted in a glut, especially in the Gulf of Mexico and Texas.

But now, according to Barclays, the active natural gas rig count has risen to 1,530 in the United States as of last week. That’s the highest number of rigs in operation since 1987. But offshore rigs – where the daily lease rates are still soaring – remain in a net supply deficit.

The real money to be made in oil drilling is overseas – specifically in the Middle East, Africa and off the coast of Brazil. Since 2006, more oil drillers have fled the United States for greener pastures in the Middle East and elsewhere.

Rogue States Need the Drillers

The oil services companies that have an international presence are poised for the biggest profits. That’s because national oil companies control more than 80% of the world’s oil reserves and they’re now shutting out the middleman – the oil majors.

But they still need the expertise of the oil services and equipment companies. Russia, Venezuela, Bolivia, and other pariah states that have thrown out the major oil companies still need the oil equipment and services firms.

The bull market in oil services is not entirely contingent on Russian or Venezuelan exploration. In fact, the drillers are earning the bulk of their profits elsewhere – mainly in the Middle East, Africa and offshore in the North Sea, Gulf of Mexico and now, Brazil.

Brazil’s Offshore Find is a Drillers’ Gold!

Large oil discoveries in deep-water off the coast of Brazil has triggered another major long-term round of contracts for the leading international drillers.

The Brazilian find sits thousands of feet below the surface and only the major drillers can get to that oil. Other fields in Russia, the North Sea and off the coast of Indonesia require the drillers. The order backlog was already enormous. Now, the Brazilian offshore find will create an even deeper backlog.

There’s also another offshore drilling region that might open to the oil services companies – California and Florida.

I’m not sure the United States will allow offshore drilling off both coasts. Senator Obama, if elected President, would probably slam that idea. But even if drilling is allowed on either shore, even on a limited scale, it would boost earnings for the deep-water operators.

Summer is typically a bad time to invest in certain commodities. This seasonal aberration is happening once again as commodity prices have tumbled 11% from their highs.

I expect this correction will also take the oil equipment stocks lower, too. This will eventually present another great buying opportunity for long-term investors as the hunt for oil and gas continues.

Amid Peak Oil, focus new investment capital to the oil equipment and services companies. That’s where earnings, cash-flows, and momentum are most favorable over the next several years and beyond.

ERIC ROSEMAN, Investment Director

Source: Oil Majors Versus Drillers: The Battle for Profits

I use the CDNX, the benchmark index for the Canadian Venture exchange which is heavily weighted towards mining exploration issues, as a proxy for Canadian juniors. As you can see by the chart, after violent sell-offs it has repeatedly found support just below the 2400 mark – where we are now. Previous price action, and the fact that we are on or just below the 200-week moving average (orange line), would suggest that we are at an entry point now – for those that have the stomach for it. If we break that support, ouch.

The next chart shows the price of Oil (black line – USO) against Gold (blue line – GLD) against the CDNX. It’s apparent that as oil rises, the CDNX tends to decline and vice versa. (The rationale for this would be that as oil rises, mining costs rise and thus profits fall. As oil falls, costs fall and profits rise).

In the long-term, I am very bullish on oil, as you know. But in the intermediate term, it looks like we may have formed a top. The huge volume and extreme volatility we have seen over the last few weeks are one sign, another is that oil stocks have sold off quite brutally since the beginning of the month, as the next chart of the XLE, which is an ETF representing the major oil producers, shows:

Yesterday the sell-off in oil gathered pace. If we have formed an intermediate-term top in oil, and are about to see a few months of decline, I am looking at a potentially bullish scenario for juniors and we should get a decent rally. We can but hope.

AIM market makers kill their own market

In Monday’s Money Morning I had a go at AIM, in particular at AIM’s market makers. I was very surprised the amount of emails I got all saying, “Good for you,” “Somebody has to tell these people” and the like. A lot of people are clearly deeply frustrated by this market.

We have two examples this week of how the practices of AIM’s market makers kill AIM dead.

Last week I tipped Leyshon (AIM:LRL), a late-stage gold development play in China. Some huge buying came into the stock, the likes of which had not been seen since 2006.