"I've long favored Russia for investment, building my case around its energy sector and the infrastructure boom taking place," says Yiannis Mostrous in Silk Road Investor. Here are his top energy plays.
"Russia is currently in a sweet spot: It's a net oil exporter, has solid GDP growth, isn't dependent on foreign capital flows, is politically stable, has reasonable market valuations and, above all, enjoys solid exposure to the biggest growth story of our time, Asia.
"Russia's GDP grew by 8.5% year-over-year in the first quarter of 2008, stronger than expectations. The expansion was broad based: construction, manufacturing, electricity generation and services all showed healthy growth.
"Russia's energy companies have underperformed because of the relatively heavy tax burden imposed by the state. But the Russian economy has turned around, and the government has announced tax cuts that will take effect 1 January 2009, saving the industry USD1.30 per barrel of crude produced.
With crude oil prices soaring, shares in coal and fertilizer companies have also been climbing for the past year. Barron's offers a survey of the momentum plays, pointing out some opportunities and risks when investing in coal and fertilizer stocks.
Talking about risks, Barron's underlines the fact that it can be difficult for investors to put their hard earned money into a stock that is already trading near its highs. But as they say, the trend is up unless proven otherwise, and we might take this into account when picking our trades. For example, back in April, it looked like Mosaic Co. (NYSE: MOS) was facing technical weakness, but this did not last long and the company was able to rebound.
Now let's take a took at the coal sector. Data shows that the Dow Jones U.S. coal index gas gained more than 50% for the past year. While James River Coal Co. (NASDAQ: JRCC) has quadrupled this year, Peabody Energy Corp. (NYSE: BTU) has been seeing some weakness, and this might be a sign that the sector could face tough times ahead. The first concern tied to supply and demand appeared for Peabody when we began to notice that volume on rally days slipped, while volume on declining days has increased.
Politicians this week have come up with a brilliant plan. Oh, let's blame the recent oil price hike on speculators, why don't we? This way, we can continue not doing anything about energy prices and oil's scarcity and still keep our jobs. Let's just deflect attention from us and our inaction and blame it all on those commodity traders.
Okay, of course, anyone who manipulates oil prices, inflating them artificially and causing us to pay $4 a gallon at the pump as a result while making a nice juicy profit on our backs, should pay. No doubt. But here's a thought: what if these speculators are doing us a service?
I'll use a line from Syriana: "It's running out." We all know it. At some point there will be no more oil, or it will become so scarce that $4 a gallon will sound like a joke, like my grandma telling me about those five-cent movie tickets (I still think she was pulling my leg!). And barring any alternative energy found to heat our homes, fuel our cars and power our factories, it is not difficult to envision doomsday scenarios.
So perhaps, instead of reaching that crucial stage and having to start scrambling for solutions then, perhaps the recent oil price hikes have done us more good than harm. It put the problem of oil and energy in the forefront; it made the problem too big to be ignored, brushed aside. Indeed, there has never been this much news and these many resources diverted to alternative energy as there has been in the past year (at least it feels that way).
The high price of oil has repercussions throughout the economy; it trickles down to the smallest of items and we've only been experiencing the beginning. The effect on prices is lagging. Still, only Wednesday Dow Chemical (NYSE: DOW) announced a price increase of up to 20% to offset these higher costs. Dow's CEO blamed Washington for not listening to industrialists when they demanded action for years.
The Associated Press reports that the Commodities Futures Trading Commission (CFTC) is investigating possible market manipulation by oil traders. The purpose is to shut down big trading bets that drive up the price of oil -- rather than follow the price discovery that results from the interaction of supply and demand. Since one source said that 60% of oil trading comes from speculators, the flow of capital into oil could fall as speculators stop their abuse. And the price of oil could drop.
The investigation went public yesterday and the CFTC appears to be examining whether investment banks are trading more than their share of contracts. As I posted, The Goldman Sachs Group (NYSE: GS) is among the investment banks taking advantage of a swaps loophole that classifies them as a commercial market participant -- like an airline -- instead of a trader. This loophole allows these banks to avoid disclosure of their bets that oil will rise.
This excess capital flowing into oil -- and against the dollar -- has driven up the price of oil. If the price of oil was set solely on supply and demand, it would surely drop. The numbers I posted here suggest that demand in the U.S. is down 300,000 barrels per day thanks to the slowdown in driving due to $4 a gallon gas.
Now if we could get Goldman and its peers to start betting heavily on a drop in oil prices and a rise in the dollar, we'd really be getting somewhere. What's good for Goldman is good for America -- or at least the top 0.1% of Americans.
Just call it a status-quo month for U.S. purchasing power.
Personal income, consumer spending and consumer prices all rose 0.2% in April 2008, the U.S. Commerce Department announced Friday -- a report that suggests the economy slowed to a crawl as tax rebate checks started to arrive.
Economists surveyed by Bloomberg News had expected to 0.2% increases in both consumer spending and personal income in April 2008.
Further, it was the fifth straight month of sluggish consumer spending performance. Also, in real terms, employee compensation declined 0.1%, its first decline in 12 months. Real disposable incomes are up 1.2% in the last 12 months.
Economist Peter Dawson said the April 2008 consumer spending statistic was not a surprise. "Consumers are cutting back, given the large increases in their monthly expenses for food and gasoline, so a 0.2% spending rise is a bit of an achievement," Dawson said. "It could have been much lower, given the lack of improvement in purchasing power."
Investors and traders know that major news items move markets, and stocks. Big headlines can mean millions, and billions.
Still, to stay in-touch with trends, and the pulse of money, markets, and investment, one has to survey the information landscape thoroughly, and know when a lesser-publicized data point or fact may be indicative of a larger phenomenon -- one that could tell telegraph where markets are headed.
One such data point occurred a few weeks back. It was a little-discussed item: it didn't receive much coverage in the financial press, and it certainly wasn't the lead story on the 'week in review' financial news shows. But it's a telling data point, nonetheless.
The price of oil rose to $135 a barrel -- up a mere 463% since January 2001. If supply and demand has anything to do with it, prices will rise more. That's because demand is expected to rise 37%, while supply is optimistically forecast to grow half as fast by 2030.
Bloomberg News reports that the International Energy Agency (IEA) -- oil adviser to 27 nations -- is lowering its forecast of 2030's global oil production. Despite, the lower IEA forecast -- based on an analysis of the world's 400 largest oil fields -- it still forecasts an 18% production increase. But others believe -- in the face of a 37% growth in demand -- that oil production will not reach the heights predicted by the IEA's lower forecast.
Meanwhile, short term US supply is down. AFP reports that Wednesday's Department of Energy report showed US crude oil stocks fell in the week ended May 16, by 5.4 million barrels to 320.4 million barrels -- analysts expected a 300,000 barrel increase. Gasoline inventories dropped by 800,000 barrels, to 209.4 million -- a far cry from the expected 250,000 barrel gain.
The April 2008 producer price data indicated that inflation, as measured at the business or wholesale level, is accelerating. But investors and consumers shouldn't be surprised, so says economist David H. Wang.
"It's beginning to look like a re-run of a show we don't want to see, 'That 70s inflation show,' " Wang said. "Oil is increasing inflation throughout the U.S. economy and you can really see it at the producer level."
During the past 12 months, producer prices have increased 6.5% and the core rate has risen 3.0%, according to U.S. Labor Department data released Tuesday. Other producer price index surges occurred in 1974, 1980, and 1991. What do the three have in common? You guessed it. They were periods when the price of oil increased by a large percentage, Wang said. The 1991 event was more of an oil spike, but the other two were the first two oil shocks, in 1973-1974 and 1979-1980, he said.
Oil's current march higher, up 100% in the past 12 months to about $129 per barrel, and up about 480% since 2002, does not qualify as an oil shock just yet, but it's close and getting there, Wang said, and inflation has trended higher in tandem with oil's latest run-up.
Readers of this space know that the investment bias is toward large-cap companies with demonstrated business models and who have a competitive advantage in established markets, preferably with a favorable global trend as a support. And with the above in mind, El Paso Corp. is worth a review.
El Paso Corp. (NYSE: EP) operates the largest natural gas transportation system in the United States, with a host of attractive, lateral business lines including natural gas production, gas storage, power generation, and trading.
El Paso is in a sweet spot, of sorts, concerning energy. Record-high oil prices -- plus the unknown regarding how high the price of oil will rise ($150?, $175?, $200?) -- means that a good number of businesses and residences will convert to natural gas, where possible, which, of course, benefits transmitters and producers of natural gas. The U.S has experienced two other periods with mass defections from oil to natural gas, during the two previous oil shocks, in 1973-74 and 1979-80.
The rise in commodity prices is set to complicate the growth plans for yet another sector.
Projected costs for a new generation of nuclear power plants on the drawing boards are increasing at an enormous rate -- in some cases double to quadruple their earlier, rough estimates - - The Wall Street Journal reported Monday(subscription required).
Further, that new generation of nuclear power plants has emerged as an important component of the United States' future energy supply, due to $100-plus oil and the technology's superiority to high-pollution, coal-fired energy plants, The Journal reported Monday. However, surging costs for cement, steel, and copper, among other factors, have caused nuclear plant construction costs to soar to $5-$12 billion -- a trend that could lead to delayed or canceled projects.
Rising energy costs
Economist Peter Dawson told BloggingStocks Monday what investors should take away from the rising nuclear plant cost phenomenon is not so much a comparison of the positives/negatives of each energy technology, but the rising cost of energy, across all platforms, in general.
In reaction to surging fuel costs, several major airlines announced today that they were raising their fares in order to recoup some of their rapidly increasing flying costs.
The increase this time around is $20 and effects passengers traveling on UAL Corporation (NASDAQ: UAUA), Delta Air Lines, Inc. (NYSE: DAL), and AMR Corporation (NYSE: AMR)'s American Airlines. The $20 jump in prices will be added to the airline's fuel surcharges, and consequently, these charges are now running at $130 round trip on most flights that you will book through the airlines.
The current rate hike was first initiated by Delta, and marks the second time in just over a week that the airline has been forced to raise fares in order to combat record high fuel costs. Times are definitely tough for airlines, and they are doing everything they can to combat fuel prices, but regardless of the rate increases most analysts are still expecting to see huge losses this year from most, if not all, airline carriers.
As if there were not plenty to worry about, Goldman Sachs (NYSE:GS) is forecasting oil prices to hit $150 to $200 in the next six months to two years. According toBloomberg, a note from one the of the bank's analysts said:``The possibility of $150-$200 per barrel seems increasingly likely over the next six-24 months, though predicting the ultimate peak in oil prices as well as the remaining duration of the upcycle remains a major uncertainty."'
Observers do not need help from Goldman to make the case. Recent problems with production in Nigeria and political unrest in the Middle East have already moved oil above $120. That situations could continue and move into other unstable countries such as Venezuela.
The theory that a slowdown in the global economy would drop oil prices has not borne out. China, India, and other major developing nations continue to push demand higher. Even in the US where gas prices are now over $3.50, consumers have not cut back use enough to move pricing down.
Some new fields will come online. Brazil just made a major discovery off its Atlantic coast, but production will not be up and running there for several years. During that time, exports from large producers like Mexico and Russia will continue to fall due to aging of their fields.
Nuclear power looks better every day.
Douglas A. McIntyre is an editor at 247wallst.com and the author of the Ten Stocks Under $10 letter.
Net income at the world's largest oil company rose 17% to $10.9 billion, or $2.03 per share, from $9.3 billion, or $1.62 per share, a year earlier. Revenue rose 34% to $116.9 billion. Analysts had expected profit of $2.13 on revenue of $124.4 billion, according to Thomson Financial. Shares of the company fell.
Just because oil prices remain above $100 per barrel doesn't necessarily mean everything is going Exxon's way. For one thing, high oil prices resulted in "significantly lower" refining margins, which pushed down downstream earnings by $746 million to $1.16 billion. Lower margins also pushed down profit in Exxon's chemical business by $208 million to $1.03 billion. Moreover, spending on capital and exploration projects soared 30% to $5.5 billion "as we continued to actively invest in projects to bring additional crude oil, natural gas and finished products to market."
The problem is that's proving to be difficult. For one thing, production at the company's oil wells dropped as did natural gas production in the Middle East, The U.S., Canada, South America and Asia. This is happening as surging demand from the developing world is keeping oil prices at record levels. Exxon is "having trouble raising production, and that's not a good sign,'' Leeb Capital Management's Stephen Leeb told Bloomberg News.
The Saudis will shortly open one of the largest oil fields in the world for production. That would seem to be good news, but it may be the last big deposit of crude left in the country. And, getting it online has cost $15 billion.
According toThe Wall Street Journal, "Even in Saudi Arabia, home to more than a quarter of the world's known recoverable reserves, the age of cheap and easily pumped oil is over."
In a period where oil now sells for $117 a barrel, the largest single question is whether global oil production has peaked. There are very few new, large fields being found now. Recently, Brazil said it has discovered one off its coast, but that is in very deep water. Getting to the crude will be expensive, and some of it may be beyond reaching at all.
Part of the rise in oil prices probably has nothing to do with current supply, but it may well anticipate a fall-off in crude production in years to come. Developing nations like China and India are still increasing their consumption. Without large new deposits to develop, there is every reason to expect that oil reserves may start to fall a decade from now.
There is nothing to replace that.
Douglas A. McIntyre is an editor at 247wallst.com.
American citizens and corporations, already stung by the more than 200% increase in oil and gasoline prices since 1999, most likely will be confronted with another energy shock in the months and quarters ahead: natural gas.
U.S. natural gas prices have risen an astounding 93% since August 2007 -- this despite a mild winter in much of the nation -- as rising demand from energy-hungry Asian buyers, such as South Korea and Japan, have forced up natural gas' price, The Wall Street Journal reported Friday. (Subscription required.)
Natural gas, which traded Friday morning in the United States at $10.22 per million BTUs, heats 50% of U.S. homes, generates 20% of the nation's electricity, and is intrinsic to making everything from fertilizer to plastic bags.
International natural gas demand rises
Further, with solid international demand, and a U.S. price that's roughly one-half the global price, many analysts argue U.S. natural gas prices are likely to increase substantially, moving forward. That would create another "core inflation" price accelerator to a U.S. economy already experiencing rising core/retail inflation from oil's enormous rise from $25 per barrel in 1999 to more than $110 today.
With crude oil prices soaring, shares in coal and fertilizer companies have also been climbing for the past year. Barron's offers a 
Politicians this week have come up with a brilliant plan. Oh, let's blame the recent oil price hike on speculators, why don't we? This way, we can continue not doing anything about energy prices and oil's scarcity and still keep our jobs. Let's just deflect attention from us and our inaction and blame it all on those commodity traders.
The 
The price of oil rose to 
The April 2008 producer price data indicated that inflation, as measured at the business or wholesale level, is accelerating. But investors and consumers shouldn't be surprised, so says economist David H. Wang. 
Readers of this space know that the investment bias is toward large-cap companies with demonstrated business models and who have a competitive advantage in established markets, preferably with a favorable global trend as a support. And with the above in mind, El Paso Corp. is worth a review. 
As if there were not plenty to worry about, 
Exxon Mobil Corp. 
The Saudis will shortly open one of the largest oil fields in the world for production. That would seem to be good news, but it may be the last big deposit of crude left in the country. And, getting it online has cost $15 billion. 
Alcoa's Q2 2008 earnings transcript
Anheuser-Busch (BUD) sues InBev, what's next?
Wal-Mart might help your portfolio during the recession
