Energy & Commodities

How To Profit From The Ukraine Crisis

Natural Gas is down to $4:60  from its high of $13:60 in 2008 and and all-time high of $15:65 in 2005. With the Ukraine being a big supplier of Natural Gas, this author has an idea how an investor can take advantage of both the heavily sold out Natural Gas market plus a supply disruption caused by the Ukraine crisis – Money Talks

How To Profit From Events Unfolding In The Ukraine

As we enter a new week and witness the tension building between the Russians and the western backed Ukrainians, it appears that Eastern Europe enters uncertain and potentially dangerous times with echoes of the cold war. Just a couple of days after Sochi, the millions of dollars that went into building Russia’s PR seems to have gone down the drain. This weekend we read that Russian military forces had invaded the Crimea in the pretext of securing national interests and defending ethnic Russians in the aftermath of the Ukrainian riots. As I write this article, I’m hearing reports that Ukrainian military bases in the Crimea are surrounded and local military forces have been ordered to lay down their arms and leave the region. Those units have been instructed by Kiev that they are to defend their positions and fire back if they come under attack; they are not to surrender. Protests by the new government in Kiev went unheeded by the Kremlin and it has come to light that the deposed President of Ukraine, Viktor Yanukovych has fled for Moscow with the Russians affirming him to be the legitimate head of the Ukrainian state.

With every news release, the tension appears to only rise. Certainly the communication back-channels between the main powers have been activated to prevent armed conflict, which has the potential to draw in the most powerful armies in the world. It’s easy to overstate the danger in the current crisis and perceive the global appetite for war as being non-existent, yet I feel the markets tell it like it is in periods of added risk and instruments respond quite quickly with prices factoring in new geopolitical events. I believe that it will get much worse before it gets better, and even if the stand-off does not lead to all-out conflict between armies, it will be remembered as a close call. With this in mind, this new belligerency presents us with excellent trading opportunities. I will discuss the two most obvious ones here.

Natural Gas (BOIL, GAZ, FCG, NWN, UNG)

Russia supplies a large part of Europe’s natural gas. In fact 50% of Russia’s immense NG production is delivered to Europe which is up to 34% of Europe’s total supply. 80% of that gas passes through Ukrainian pipelines which has been a source of controversy in the past. One of the first things the leadership in Ukraine would do in order to pressure Russia to pull back its troops would be to simply turn off the tap. Cutting off European gas supply would create a shortage in the market at the tail end of winter and this shock would cause gas to become far more expensive. The other main gas supplying countries will see their GDP lifted as they will then receive a higher return for their NG production i.e Qatar, Norway, Canada.

It may be a good idea to buy natural gas at the current level, but because this is situation is “fluid”, stop losses are imperative. It’s also worth noting that cold March is forecasted for the USA which will lead to reduced stockpiles of the heating fuel.

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…read more HERE about making money from the Russian Ruble (scroll down)

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New Silver Major is Born

silver66-resize-380x300Mine could be world’s third largest

Ed Note: As laid out below this has an extremely low cost to produce @ $5.00 an ounce which also makes it one of the most profitable mines in production. – Money Talks 

New silver major is born

Just last month Tahoe Resources announced the achievement of commercial production at its Escobal mine. And sounding the trumpets on such an exploit most certainly deserves investors’ attention. When 2014 comes to a close, Tahoe will be flexing its muscles as a global top-10 silver producer!

At an annual clip of approximately 20m ounces, Escobal will be the world’s third-largest primary silver mine behind only BHP Billiton’s Cannington mine (Australia) and Fresnillo PLC’s namesake Fresnillo mine (Mexico). This mine makes Tahoe the world’s third-largest primary silver producer, behind only Fresnillo and Pan American Silver. And it even vaults host country Guatemala into the global top 10.

Tahoe won’t just be your ordinary major silver producer though, it’ll be one of the most profitable. Per the latest economic assessment, Escobal’s life-of-mine total cash costs are expected to be less than $5.00/ounce after byproduct credits from small streams of gold and base metals. This is easily in the lower quartile of industry average, which allows Tahoe to deliver huge margin even at lower silver prices.

And margin in today’s silver environment is something investors are keen to embrace. Sadly the majority of primary silver producers have really struggled with the anomalously-low silver prices experienced lately. Industry average cash operating costs are at least twice Tahoe’s. And then when you factor in sustaining capex, exploration expenses, and G&A expenses (all-in sustaining costs), there isn’t much margin at $20 silver.

In 2014 Tahoe Resources’ mid-point guidance for all-in sustaining costs (by World Gold Council standards) is only $9.35/ounce. At $20 silver we’re talking gross margin of over $10/ounce, or 53%! With Escobal’s super-low operating costs, Tahoe estimates that $18 silver would generate free cash flow of $198m per year. At $25 silver this would move up to $300m. And cash flow would obviously scale even larger concurrent with silver going higher.

Tahoe’s Escobal mine truly is something to behold. But its superior production profile didn’t just come about by luck. It was skillfully crafted by a spectacular team of folks who sought to build one of the world’s premier silver companies.

Interestingly the Escobal deposit was discovered by a subsidiary of major miner Goldcorp in the mid-1990s, though it didn’t see any serious work until about a decade later due to the bear-market-low metals prices. Once the drills did finally start turning, it didn’t take long for Goldcorp to recognize Escobal’s girth.

It also didn’t take long for Goldcorp to realize that the markets would never properly value this major silver project while veiled under its gold umbrella. To remedy this it arranged the sale of Escobal to a private company run by its former CEO Kevin McArthur in 2010. McArthur’s Tahoe Resources thus took charge of one of the world’s finest undeveloped silver deposits. And it would ensure that Escobal got the dedicated attention it deserved.

This was a win-win situation for Goldcorp. In addition to procuring much-needed cash as part of the sale, Goldcorp secured a 40% ownership interest in Tahoe Resources (which it still maintains). This ownership interest allows it to participate in the future success of this project. And with McArthur captaining the ship, Goldcorp was confident its stake would significantly grow in value.

You old-school gold-stock investors may remember Kevin McArthur from back when he ran Glamis Gold. Interestingly Glamis’ flagship asset was the Marlin gold/silver project, located guess where? Yep, Guatemala. And McArthur and team ended up methodically developing Marlin into a super-profitable large-scale mining operation.

You know the story. Goldcorp fancied Marlin, along with Glamis’ other assets, and ended up acquiring Glamis in 2006 in one of the largest gold-mining deals ever (hence McArthur’s subsequent stint as Goldcorp’s CEO). And still today Marlin is one of Goldcorp’s most profitable mines (its cash operating costs are usually in the negative).

With McArthur and team’s intimate knowledge of Guatemala’s geology as well as its legal and social frameworks, his new company was a natural fit to develop Escobal. And Tahoe Resources did not disappoint. It built the Escobal mine on-time and on-budget, which is an exceptionally rare feat in the mining industry.

And speaking of budget, Tahoe was able to build this $327m mine without having to sell its soul on the debt/equity fronts. It financed the pre-production capex via a single share offering in 2010. And in order to supplement working capital during production ramp-up, Tahoe has drawn $75m from a small debt facility (which will easily be paid off from cash flow this year).

Overall Tahoe’s planning and execution has been brilliant. And the cat is out of the bag as investors anticipate stellar returns from its stock as a leveraged silver play. With Tahoe in line for solid cash flow at silver prices lower than what they are today, you can imagine what’ll be in store for it if silver runs higher, which ought to be the case in the years to come. And we can get an idea of Tahoe’s tendencies by looking at its historical stock performance relative to silver in the chart below.

Screen Shot 2014-03-03 at 12.18.20 PM

Tahoe Resources went public on the Toronto Stock Exchange in June 2010 (it listed on the NYSE in May 2012), just in time to take part in the most spectacular surge so far in silver’s secular bull market. From silver’s launching point in July 2010, it rose a mind-boggling 177% to its April 2011 high just over $48. The only time it took a breather was the one you can see above in the beginning of 2011, a 13% correction that only lasted a few weeks.

Amidst silver’s run higher, it didn’t take long for investors to latch onto brand-new silver company Tahoe Resources’ story. And from its IPO to its own April 2011 high, TAHO soared a staggering 289%, easily outpacing silver. What I want to focus on though is the second part of this upleg, from the January 2011 correction low to its April high. Over that period TAHO gained 93%, which positively leveraged silver’s terminal ascent 1.16x.

While this leverage is nothing spectacular, it is positive nevertheless. And it is especially impressive considering most silver stocks had disconnected from silver by this time. The majority of juniors, which was what Tahoe was classified as at the time, merely consolidated sideways. And even the popular SIL Silver Miners ETF, which is comprised of the world’s premier silver producers, could only pace silver’s gains by about half over this early 2011 period. The smart money was clearly with TAHO.

So what makes Tahoe tick? Smashing fundamentals aside, TAHO is a silver stock. And it is ultimately slave to the directionality of silver. The higher the metal runs, the more the potential profits Tahoe can earn and the more its in-ground inventory is worth (with 404m ounces of resources, its inventory is quite robust). Of course the inverse applies too. The more silver sells off, the less the potential profits and the lower the value of the in-ground inventory.

It’s therefore not surprising that TAHO ebbs and flows with its underlying metal. Unfortunately, it was birthed into a silver world rife with discord. On the other side of the euphoric upleg that Tahoe rode out of the gates of its IPO, it’s had to fight the tape of silver’s nasty three-year cyclical bear market.

….Next page: Silver’s price drop HERE

A Pair of Top Picks, a Risky Pair & an Ace in the Hole

Salman Partners Analyst Justin Anderson walks The Energy Report  through the risks and returns of the game. Find out how this particular gentleman plays his hand and see what he has to say about 5 Stocks he recommends and the risks and expected rewards involved in each.- Money Talks

Since its inception in 2007, the Salman Partners’ Top Pick Index has made a 251% return. The index is a huge pot for investors in the international oil and gas space to bet on, but it’s not for the untutored.  

Screen Shot 2014-02-28 at 6.10.37 AMThe Energy Report: Justin, welcome. Tell us about Salman Partners Top Pick Index. Why was it established?

Justin Anderson: Top Pick Index was established to contrast the performance of our company’s favorite investment ideas against a Canadian benchmark of general stocks and to see how those investment ideas performed. Analysts look at the stocks under their coverage and then they try to pick one or two stocks that they think are going to be the best performers in that group over the next 12 months.

TER: What’s the track record? Do Top Picks generally perform as advertised?

JA: So far it’s been a really good track record. Since inception in 2007, the Top Pick Index of Salman Partners has had a 251% return versus the benchmark index, which has returned 30%. Over the last two years, the Top Pick portfolio has returned 38% versus 21% in the general S&P Index.

TER: Canacol Energy Ltd. (CNE:TSX) just earned the Top Pick recommendation in December. How did that happen?

JA: Over the last half of last year, Canacol was increasingly interesting for us, especially when it made a discovery called Labrador in the Llanos Basin of Colombia. That was an important discovery, not just for the intrinsic value of the discovery itself and the potential long-term cash flow that it would add to the company, but also because it meant that Canacol was going to be able to get to the finish line with respect to some of its other assets. What I mean by getting to the finish line is that Canacol has built up a very impressive Middle Magdalena basin unconventional position, very sensitive to time and funding. This conventional discovery at Labrador unlocked some less noticeable value in its Middle Magdalena position. That got us very interested. Then, when it made an additional discovery in the Llanos Basin called Leono, that discovery by itself looked really good, but the compounding benefit to the rest of the portfolio was very strong, so we upped it to a Top Pick.

TER: What are the most exciting positives about Canacol?

JA: To use a baseball analogy, I think Canacol is not really looking for the solid base hit. It’s looking to hit a home run. This company really wants to go big. That’s exciting, when you have a management team that is aggressively looking to make a multiple big return for its shareholders. The reason it’s in that position, as I said, is that it built up this large unconventional position in Colombia. It’s a position that, in terms of acreage, is second only to Ecopetrol SA (ECP:TSX; EC:NYSE), the national oil company there. Should the unconventional Colombia space ever take off, look out. This is a company that will perform extremely well if that happens.

TER: What’s the biggest concern?

JA: I think it’s the other edge of the same sword. If the unconventional Colombian space never does take off, if some of the initial well results are not that great, then you could get in a situation where that acreage becomes less important overall. I think that’s actually the biggest risk to the company as well. The nice thing about Canacol is that it has a very robust conventional portfolio that gives you a lot more downside protection in that scenario than some other companies that may be so exposed.

TER: South America is not the most stable operating environment. What are the political and security conditions in Canacol’s main operational areas of Colombia and Ecuador?

JA: For Canacol, I think the main issue is in its heavy oil portfolio. That’s in the center of Colombia; it has a bunch of heavy oil blocks. Those blocks are very close to some previous FARC strongholds, FARC being the organization that has been agitating through violence in the country to cause a communist revolution. Because of that proximity, people have been dissuaded from ramping up development activity in the area. It has affected Canacol’s heavy oil exploration appraisal work. I think that’s the biggest risk that it’s exposed to. On the plus side, I don’t think stockholders really care about its heavy oil position at this point, and it’s of tertiary concern to the market.

TER: What about Ecuador?

JA: Ecuador is much more of a basket case than Colombia. Ecuador is problematic because it’s not just lingering terrorist groups; the government itself is the issue. That being said, the contract Canacol signed with the government of Ecuador is one that provides much lower netbacks. It is a direct service agreement with the government. It’s an isolated issue for the company; I don’t really see any risk there.

TER: You created an unconventional portfolio for the Middle Magdalena unconventional play. Why?

JA: Unconventional positions, especially in the international locations, are extremely sensitive to initial results. You might have a very large position, but the fracking response, the geology and the capex/opex of the initial wells are going to have a major impact on the long-term development of the play—then slap political risk on top of that. We wanted to look at unconventionals in a unique way, rather than value all of that acreage in one blow. We built a stochastic or Monte Carlo model to try to capture the range of scenarios that those sensitive initial conditions could provide. That’s why we set up this separate unconventional portfolio. The effect that you get is a much more tailing effect: Either things go very poorly and you get no value or things go extremely well and you get a huge amount of value. There isn’t really much of a middle ground for these emerging unconventional plays.

TER: Why was it necessary to separate the unconventional portfolio from the other parts of your portfolio?

JA: A conventional prospect is more independent. If you have five conventional blocks, it makes sense to value them separately and then aggregate the results of those valuations, whereas with an unconventional position, you might have the same five blocks, but in this case they’re either all going to work or none of them will work. It’s much more common to see significant correlations between the successes or the failures, as opposed to a conventional portfolio, where it’s completely normal for, say, two of the five blocks to work out.

TER: Outside North America, shale development has an uneven record. Why is Canacol’s holding of 545,000 net acres of Colombian shale a positive thing?

JA: If you asked people in North America 10 years ago what would be the status of the Eagle Ford or the Montney or the Bakken, I think people would probably have been very skeptical about how those plays would perform. Ten years later, we’re seeing massive growth in these resource plays. There’s absolutely no reason why some of the best quality resources around the world won’t see the same kind of activity that those plays have seen. We’ve seen it in North America first simply because we’ve got the most stable political environment, but the rocks are the same around the world and you’re going to see the same booms in other countries.

The question simply becomes, where are we going to see the next boom? The answer to that question is, you’ve got to have great-quality rocks. We see some of that in Colombia. We see some of that in Argentina. We see some of that in places in Africa, India and China. Then the next question you have to ask is, considering those most prospective areas, where is the most likely place to see near-term capital flows? That’s really a political question. In this department, Colombia actually shines for its relative stability. Combine quality rocks with good political environment, and Colombia starts to look pretty attractive. Obviously there’s still a lot of uncertainty as to which way the tail will go in this one, but I think it’s a pretty good speculative bet.

TER: One of the problems that has affected the viability of shale oil and gas outside the U.S. is that the quality of the rocks is different in new areas, like Poland, for example, than what they were anticipating.

JA: It depends on the location. I would argue that the best rocks in the world for unconventionals outside of North America are probably in Argentina, in the Vaca Muerta. That is an extremely high-quality resource. I would say that Colombia is comparable in quality to Argentina and the Eagle Ford. It’s not as big, but the quality’s likely there. Arguably the quality is actually a more important factor for early-stage development than quantity alone.

TER: Is Canacol management looking for a buyout?

JA: I think they’re open to it. One of the great things about Canacol is its management is very down to earth. They’re there to return money to shareholders, as opposed to some companies where we see them establishing a corporate kingdom. Canacol is focused on shareholder value. If a company comes in that offers that, I think they would go for it.

TER: Parex Resources Inc. (PXT:TSX.V) is another Top Pick. Why?

JA: Parex is an interesting company. It’s a company that has a very undervalued production stream. It’s trading at multiples far below comparable companies in Canada and the U.S. Nearly all of its acreage is in the Llanos Basin of Colombia. The Llanos Basin is known for high decline rates, quick payout times and light oil.

What happens is, investors are very focused on the near-term reserve number, and they do the calculation against production and say, oh, this is a short reserve life. Then they apply a significant multiple discount to the company. The problem is you can’t just look at the reserves; in some cases you have to look at acreage as well. Parex has enough acreage where reserve adds are a foregone conclusion. It has built up such a robust position of acreage that it is going to book new reserves in the future.

Not all exploration acreage is equal. This company is sitting on exploration acreage that will become reserves. I think the market is not giving it any value for that when in fact it should be. That’s the source of the opportunity with Parex, where the actual reserves in the future will be much more than the current reserves, but you’re only paying depressed current reserve multiples to get access to the stock.

TER: The Parex stock has trended up since July of last year. You recently reiterated your Top Pick recommendation and raised your target from CA$9.30 to CA$10/share. What is the driver here?

JA: The strategy’s working. We got really excited about this name mid-2013, when Parex had some drilling success, started to diversify its portfolio and also made some acquisitions to expand its acreage running room. All of this put the company in a position to apply its operational expertise to these different plays and take advantage of that.

What we’ve been seeing over the course of the last nine months is the company executing on the strategy, adding reserves. We just saw a great reserve number recently. The stock has climbed. That’s being partially driven by reserve adds that the market seemed surprised to see.

TER: Parex is indexing its oil price to Brent instead of to West Texas Intermediate. What’s the significance of that?

JA: It probably just underscores even further the ridiculousness of the low multiple that it’s trading at because its production is more valuable than a lot of the Canadian domestic production, which is getting more depressed realized prices. When you look at the production multiples you just say, how is this possible when the company’s selling its crude to Brent prices? It just exaggerates the opportunity that much more.

TER: Africa Oil Corp. (AOI:TSX.V) is not a Top Pick; it’s a Hold. Is that because of the risky neighborhood it’s in?

JA: There are two major issues there. One overriding issue is, will it see development anytime soon of some of the impressive discoveries that it has made over there? Africa Oil is not far from Uganda, where there have been significant discoveries that no one has been able to monetize, and Africa Oil’s nearby discoveries are newer. Yes, the company is in Kenya. It’s a little bit closer to the market, but at this point, there’s still not as much oil discovered there as in Uganda. It is earlier stage. It’s going to take more time to appraise it. There’s still a lot of risk that it won’t find enough oil there to justify a major development and pipeline project.

The other issue is, it’s a really exciting stock. Africa Oil has done some incredible things in terms of exploration. Unfortunately, an analyst doesn’t necessarily look at how well the company is performing. We look at how we think it will perform in the future relative to the expectations, which are reflected in the stock price. From that perspective, I see a company that could go one of two ways: It’s either going to perform very well if it’s able to make some more discoveries, perhaps extend the trend a little further north and find well over a billion barrels in that basin. Alternatively, if it’s unable to open up any other basins in the area and there’s a risk of stranded oil discoveries, then the stock could get killed. A buyer of the stock is going to go one of those two ways, big upside or big downside. The question then becomes, what price are you willing to pay? The current price just doesn’t give me a compelling reason to say it’s a good bet.

TER: When do you think you’ll have a clearer picture of its prospects?

JA: I think it’s going to be over the next six months. It’s doing a ton of drilling this year, which is exciting, both in the Lokichar, where it’s had its discoveries, and outside the basin. I think the Lokichar wells are far less important than the wells outside the basin. It’s drilling on Block 9, for example, in a different basin. It’s drilling north of its discoveries and it’s also doing some work in Ethiopia. If any one of those three other play concepts that it’s tinkering around with turns out to be successful, then it’ll be an excellent story. We should know that in the next six months, but I think that all three of those other plays are very risky. Investors are taking on a big risk. If all three do not work then you could be in a tough situation with the stock.

TER: Mart Resources Inc. (MMT:TSX.V) is another hold and also another African operator. What’s the status of its Umugini pipeline?

JA: It’s under construction. It’s been unfortunately delayed by forces beyond the company’s control. Estimates are that it should be completed midyear 2014.

TER: How will the pipeline’s completion benefit Mart’s stock price?

JA: I think people appreciate that the company needs the pipeline to make the operation more robust. That is probably reflected in the stock. I don’t actually see a huge potential from the pipeline completion alone. I think the more important thing will be production. If everything goes perfectly, the pipeline gets commissioned, production goes past 20,000 barrels/day through the line and the losses are cut to under 10% or 5%, that would be a positive thing for the stock, there’s no question. It’s certainly a possible scenario. The greatest concern for me is how much capacity is behind the pipe. How much can Mart ramp up production once the pipeline is installed?

Talking to investors who hold the stock, I think there are a lot of high expectations for how much capacity is behind the pipe. If you compare that to the reserve numbers, I’m a little skeptical over how much it will be able to push through there. The other issue I have is regarding the Pioneer tax status that has come to an end for the company. It started this year. Once it chews through all the tax credits, that will start to affect the cash flows in a material way as well.

TER: How will Mart ensure the Umugini pipeline will be more secure than the one it’s using now?

JA: It will have to do the same things it’s doing now, trying to make agreements with the government about the losses. It is encouraging see recent news that it’s talking to the government and establishing a committee to review the losses. Just having two export options will be a good thing for the company. That, more than specific details of what it’s going to do to protect the pipeline, is important.

TER: You have a lot more companies than those four under coverage. What are you really excited about right now?

JA: The other one to highlight would be Gran Tierra Energy Inc. (GTE:TSX; GTE:NYSE.MKT). It has been our Top Pick for a long time. Just recently, we rated it a Buy only because we felt Parex and Canacol were even more compelling stories, but Gran Tierra remains a very exciting story. It’s made major discoveries in Peru and it’s a long-term, value-player’s dream because it’s getting a very cheap multiple on its reserves right now and has a lot of extra-exciting exploration in Peru.

TER: Justin, you’ve given us a lot to think about. I appreciate your time.

JA: Thank you.

Justin Anderson joined Salman Partners in December 2011 as an oil and gas investment analyst. He is the founder of the research company Xedge, which specialized in rigorous stochastic analysis of oil and gas exploration portfolios. Previously, he worked for the investment banking energy group at BMO Capital Markets, after having worked on energy company strategy and valuations at McKinsey & Co. Anderson completed a Bachelor of Science in mechanical engineering and a Bachelor of Science in Russian studies at the University of Calgary. He then completed a Master of Science in aeronautical engineering at MIT, with his research and thesis focus on energy economics. While at MIT, Justin founded and commercialized a high-tech company called Waybe and was an executive chair of the MIT Energy Club.

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DISCLOSURE: 
1) Tom Armistead conducted this interview for The Energy Report and provides services to The Energy Report as an independent contractor. He or his family owns shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Energy Report: Mart Resources Inc. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Justin Anderson: I or my family own shares of the following companies mentioned in this interview: Canacol Energy Ltd. I personally am or my family is paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: We seek to do business with all of the companies mentioned (other than Ecopetrol) but have never done any business with them in the past. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview. 
4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts’ statements without their consent. 
5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports’ terms of use and full legal disclaimer
6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the op

 

 

 

Buy When There’s Blood in the Streets….

Screen Shot 2014-02-26 at 8.32.15 AM

Ed Note: Baron Rothschild, an 18th century British nobleman and member of the Rothschild banking family, is credited with saying that “The time to buy is when there’s blood in the streets.” 

He should know. Rothschild made a fortune buying in the panic that followed the Battle of Waterloo against Napoleon. But that’s not the whole story. The original quote is believed to be “Buy when there’s blood in the streets, even if the blood is your own.

This is contrarian investing at its heart – the strongly-held belief that the worse things seem in the market, the better the opportunities are for profit.

While this analyst thinks that Natural Gas is not only sold out, but that the prospect for future growth are exceptional. We strongly recommend that you focus on the risk you are going to take. Whether it be extremely high risk highly leveraged commodity futures as this analyst recommends, or a Junior company with both high profit potential high risk attractive to the aggressive investor. And if futures are going to rise strongly, so to probably will the blue chip dividend paying more conservative investment – Money Talks

The natural gas market is too complacent.

Anyone who’s been following energy markets is well aware that natural gas prices have been spiking. Just today they reached a fresh five-year high at $6.49/mmbtu before tumbling to last trade at $5.60. 

But while the front-month natural gas futures contract have touched relatively lofty levels and seen extreme levels of volatility, that hasn’t been the case for longer-dated contracts. The March contract is down 10 percent today, but the April contract is down a little more than 5 percent. Even further out on the curve, the April 2015 contract is down a mere 1 percent.

The difference comes down to the weather. The 2013/14 winter has been especially brutal, and may turn out to be the coldest in decades when all is said and done. That’s led to a surge in heating demand and plunging inventory levels.

With supplies scarce and daily demand running at record levels, consumers of natural gas have had to bid up spot and front-month natural gas prices significantly. They need the gas now—during the cold—not later, when temperatures moderate and demand plummets.

This has created a massive backwardation in the natural gas futures market. Front-month natural gas for March delivery is trading at $5.60, but the second-month contract—for April delivery—is just below $4.80. Further out on the curve, some of the months in 2015 are even trading below $4.

Natural Gas Futures Curve

0 naturalgasfuturescurve

The market is essentially implying that this cold blast changes nothing from a longer-term perspective, and that prices will normalize at lower levels by 2015. The 2015 natural gas futures strip currently averages $4.18, up just slightly from where it was a year ago at $4.05.

That said, the market isn’t always “right.” As we wrote last week (see NatGas Supplies Fall To Critical Level; How Bulls & Bears See This), if production does not increase as much as anticipated; or a hot summer dampens injections; or inventories are not adequately filled ahead of next winter, then prices may spike again. In that case, natural gas for 2015 delivery may rise from an average of $4.18 to $5, $6 or even higher. 

On the other hand, if the market is right, and inventories are easily refilled during the spring and summer months, prices still may not fall much from the $4.18 level.

Thus, we see a good risk/reward opportunity for deferred-month natural gas futures given the market’s complacency. We are buyers of natural gas below $4.50 for the front month, and below $4 for the 2015 strip.

 

Bob Hoye – Peak Oil Update

“Peak Oil” has been the theory that the US, in particular and the World, in general would run out of oil reserves. Such theories depend upon supply/demand analysis that for centuries market forces have demonstrated as inadequate. The dynamics of financial history move faster than fundamental research can deal with.

Peak Oil is not the only example. The “Coal Question” was a serious concern in the 1860s. Growing population and expanding industry made a shortage of coal inevitable. Stanley Jevons was England’s leading economist and had a personal revelation that coal reserves would soon run out. Civilization, as appreciated then, would collapse.

What is fascinating is that an era of soaring prices prompted fanciful theories about permanent shortages and charismatic leaders ran with the alarm. Peak Oil and Peak Coal are essentially the same story and the intensity of the latter faded as the financial bubble of 1873 crashed. This marked the beginning of a Great Depression. During the late 1800s crude oil became a commercial source of energy that “Coalists” did not see.

This time around, crude oil prices soared with “Peak Oil” convictions and collapsed as a great financial bubble failed in 2008. Traditional reserves, which were diminishing have been more than replaced by technical innovations that made shale deposits economical. “Peakests” became deniers.

Jevons was a competent researcher and had calculated all of the known coal reserves in England and Europe. Right down to a mining depth of 4,000 feet. His book was published in 1865 and was called The Coal Question: An Inquiry Concerning the Progress of the Nation, and the Probable Exhaustion of Our Coal-Mines. 

One of the salient observations was “Coal in truth stands not beside but entirely above all other commodities. It is the material energy of the country – the universal aid – the factor in everything we do. With coal almost any feat is possible or easy; without it we are thrown back into the laborious poverty of early times.”.

The book also included “This is a question of almost religious importance which needs the separate study of every intelligent person.”.

Coal reserves have yet to run out, and the instruction from its commercial history may have tempered the conclusions of supply/demand analysis in petroleum reserves. But did not.

Early Comments:

In 1914, the Bureau of Mines reported that U.S. oil reserves would be exhausted by 1924.

“Production of oil cannot long maintain its present pace.”

– 1922 Federal Commission

In 1939, the Interior Department said that the World had only 13 years of oil reserves.

“Oil production will peak by 1985.”

– April 18, 1977, President Carter

Comments at the Peak:

“And to the Peakests I say. You can declare victory. You are no longer the beleaguered small minority of voices crying in the wilderness. You must learn how to take “yes” and be gracious in victory.”

– President, International Association for the Study of Peak Oil, 2007

“OPEC has already done what OPEC can do and oil prices will not come down.”

– OPEC President, Chakib Khelil, June 24, 2008

Recent Comments:

“The Last Post”

– The Oil Drum, September 22, 2013

A “Peak Oil” website was shut down.

At times of great excitement in any commodity, either at bottoms or peaks, it is price action that clears the market. Although widely popular, supply/demand research lags the important turns in price for all commodities.

Over the last couple of decades, technical analysis has improved a lot and our work as the price surged to 147 in 2008 is worth reviewing.

Our ChartWorks developed a proprietary model in 1999 designed to recognize the characteristics of significant tops and bottoms. Tops are called Upside Exhaustions and bottoms Downside Capitulations. Often such dynamics will occur within a seasonal move.

That was the case in with the rally in natural gas that would likely top around June 2008. The high for natural gas was 13.69 at the end of that June. As part of the energy play, the action in coal stocks also accomplished a Weekly Upside Exhaustion.

An important over-riding feature was that our work on credit markets had concluded in June 2007 that “The greatest train wreck in the history of credit” had begun.

A couple of paragraphs from our “Pivots” through the violence of “Peak Oil” follow.

“On crude oil, last Friday’s Pivot noted that the biggest Upside Exhaustion signal since Iraq’s invasion of Kuwait in 1990 had been accomplished. That was on the Weekly and it was also noted that the Monthly was working on the biggest signal since the sensational high of 1980.”

– Pivot July 10, 2008

“For crude, this is a cyclical high and if the Monthly Exhaustion is accomplished it would be a secular peak. In so many words – Peak Oil.”

– Pivot, July 24, 2008

Where Are We Now?

Although the business cycle has been the weakest since the 1930s, it has run for almost 5 years since the crash ended in 2009. The bull market for stocks and lower-grade bonds has become measurably speculative – at fully 5 years.

Quite likely the cyclical best is being accomplished.

On the last recession crude oil prices crashed from 147 in 2008 to 33.5 in March 2009. The next bull market made it to 114.83 in April 2011. That top was accompanied by the most overbought on the Weekly RSI since 2008. Also there was the signal from our Momentum Peak Forecaster that we took as the cyclical peak for base and precious metals as well as for crude prices.

Base metal and agricultural prices declined by more than 30%. Silver prices plunged by more than 50%. Oil prices declined 11% from 115 in 2011 to 100, recently.

In the face of the cyclical bear market for most commodities, crude’s relative performance has been outstanding. Buoyancy was provided by “Peak Oil” and the “Middle East”, which views had become institutionalized.

The following chart shows the remarkable rise in American shale-oil production since 2011.

The equivalent is taking place essentially around the world.

Mineral extraction has enjoyed outstanding technological innovations. Bulk mining of low-grade copper porphyrys began in the early 1900s. Such mining of other base and precious metal deposits followed. Then there was the development of heap-leach mining of low-grade gold deposits. Strip mining of metallurgical and thermal coal is yet another example of technological revolution.

The unprecedented increase in productivity has materially helped those who work to support the governing classes and their dependents.

It is technical analysis and historical research that prompted our 2008 call that Peak Oil was over.

Technically, crude oil is only moderately overbought and at 102 is breaking above resistance at 100 set in December and 101 set in September.

Action in natural gas has been outstanding with the Weekly RSI up to 76. This compares to 77 reached on July 4th 2008. The high price was 13.60, which was shy of the peak of 15.78 set in 2005.

Because of its impressive dynamics natgas could be the guide to the play. Seasonal tendencies are favourable and the run could continue into spring.

It is worth reviewing the low of last summer, which opportunity we missed. On August 21st, Climate Depot reported that for the period from July 24 to August 19 there were 2899 weather stations that recorded record low temperatures. There were only 667 stations that reported record highs. That was for the summer within the contiguous United States. Natgas low was 3.13 on August 9th. The “Polar Vortex” was not in the headlines.

For January, the tally was 4408 stations with record lows and 1259 with record highs. For what it’s worth, there were 1093 stations with snowfall records.

Occasionally, we have mentioned that at some time crude oil could suffer a decline in its trading range similar to that suffered by natural gas. This is an attempt to place this possibility in perspective. Hopefully within a month or so of the top.

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  • Technological revolution in extraction.
  • Dramatic change in reserves and rates of production.
  • This has quickly become widely known.
  • A popular “Peak Oil” site was voluntarily shut down in September.

 

BOB HOYE, INSTITUTIONAL ADVISORS – WEBSITE: www.institutionaladvisors.com