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Saturday
May162009

Where is the Price of Oil Going?

crude storage 16 May 09.JPG

This mornings mail bag contains this article penned by Marin Katusa, Senior Editor, Casey Energy Opportunities which we hope that you enjoy.

What a difference a year makes.

While March lions and April showers were at work in 2008, so were these factors in the U.S. and global economies:

The Dow Jones Industrial Average remained steady above 12,000.

The leading indicator of existing home sales was down over 21% from the previous year, and the official unemployment rate was just beginning its upward creep by crossing the 5% mark.

The first official admissions of the “R” word. In early April 2008, the International Monetary Fund (IMF) declared a 25% chance of a global recession, and Federal Reserve Chairman Ben Bernanke told Congress that gross domestic product “could even contract slightly.”

The novelty of bailouts began. Bernanke also assured Congress that the Fed's emergency authorization of a loan against $29 billion of Bear Stearns assets wasn't putting taxpayer money at risk: “I feel reasonably confident that we'll be able to recover all the principal and indeed some interest, and there is some chance of even upside beyond that.”

The dollar's six-year slide against the euro, hitting its lowest ever at $1.60 in late April. It also fell below the 7-yuan mark in China for the first time.

And oil, comfortably above $100/barrel, was heading for its summer crest of $147.

A scant 12 months later, the Dow is trying to stagger back from a plunge to 6,500. Home sales are hinting a possible turnaround, unemployment (even the official, conservative figures) is expected to reach double digits before long, “recession” and “bailout” are household words (often accompanied by four-letter ones), the dollar is recovering... and a barrel of oil is worth half that hundred dollars. Hardly worth pulling out of the ground.

What happened? And even more important for us as investors, what's going to happen?

The Casey Energy Opportunities team pulled together the pieces of the oil sector picture that other sources tend to scatter or ignore. We’ll give you a broader understanding of the drivers within the oil industry, the markets in which they operate, and how you can use that knowledge to push your profits upward.

The Oil Industry Now: A Rock, a Hard Place, and a Supply Glut That Isn't

Everyone who drives a car or heats a home with petroleum has welcomed the fall in oil prices from their high in the summer of 2008.


While it's hard to argue that filling your tank at $2 per gallon is a lot easier on the wallet than $4 or $5 per gallon, the broader economic effects of such low oil prices are troubling.

Leading the concerns is the drop in oil exploration and drilling that accompany a drop in price. Below the $50/barrel mark – and for many companies the bar is closer to $65 even for conventional fields – oil producers typically spend more money getting oil out of the ground than they can recoup by selling it. At the same time, turbulent financial markets have tightened credit. These two factors have pressured producers to allocate exploration budgets away from drilling projects and toward meeting debt obligations and day-to-day operating costs instead.

The plunge in prices has consumed the cash buffers of even the major oil companies. ConocoPhillips, for example, announced in January that along with eliminating 1,300 jobs and writing down $34 billion in assets, it was also planning to cut its 2009 investment budget by 18%. Exploration projects are part of both writedowns and spending cuts. The results of curtailed exploration are two-fold. First, some oil companies will be simply unable to survive the economic crisis. Second, supply in the longer term is being sacrificed to stay afloat now.

Storage facilities are bulging. The chart below shows the contents of the Cushing, OK, storage facility — where NYMEX deliveries take place — have recently doubled from their average 2008 volume. Along with a host of other facilities around the world, it got this way because of an unusually dramatic contango at the beginning of 2009. (A contango is a kind of market inversion, when the current [spot] price dips lower than the future price.)


In January, the spot price of oil plummeted as low as $37/barrel, while futures for July delivery were trading for $52. That meant if an oil company could buy and store product for seven months, it could lay out $37/barrel and be guaranteed a profit of $15 – or 40%, minus costs – in July. And indeed the buying frenzy took off, reinforcing the decision to turn off the drills.

So for the moment, we are artificially flush with oil, and demand has dropped as the global economy will likely shrink for the first time since World War II. It’s no surprise that oil prices have been staying down.

Many analysts say we won't feel the effects of declining exploration for a few years. But the numbers are emerging already. According to the U.S. Energy Information Administration (EIA), non-OPEC countries demonstrated an average annual growth in supply of 570,000 barrels/day from 2000 through 2007. In contrast, they recorded a drop last year of some 300,000 barrels/day.

At the same time, OPEC appears to be conforming to its production cuts of 4.2 million barrels/day, begun in September 2008. The oil cartel is known to announce cuts that its members don't actually follow; it's in their economic best interest, if only in the short term, to sell all they can. But this time, oil has plunged far below levels to sustain their economies. Even Saudi Arabia expects to run a budget deficit this year.

OPEC, which produces about 40% of the world's oil, would like to see prices around $75/barrel, at least. But the fragile global economy would have a difficult time absorbing such a price at the moment, and the cartel decided against further production cuts when it met in March. In fact, some three weeks later, Saudi Arabia actually announced a price cut on all its grades of crude to European, North American, and Mediterranean markets – a dramatic attempt to spur demand amidst high inventories.

So, entwined as it is with the economy, the oil industry is currently in a conundrum. The fix it requires – higher prices for its product – will choke the framework in which it operates.

At the same time, we've got supply problems ahead.


How Did We Get Here Anyway?

Like many aspects of the markets, movements in price are driven partly by real factors and partly by perception. Rags-to-riches-to-rags-to-riches Texas oilwoman Sue Sanders summed it up when she noted wryly in her 1940 autobiography that “nothing succeeds like reports of success.”

Last year's run-up of oil was no exception: part real, part report. Some of the real factors:

The weak U.S. dollar. The United States is not the only country that buys oil in U.S. dollars. The price per barrel is pegged to it, in fact. When the dollar is weak, the cost of U.S. exports drops; and indeed by December 2008, the U.S. trade deficit had fallen to its lowest in nearly six years ($39.9 billion, according to U.S. Commerce Department data). However, a weak dollar means it takes more dollars to buy a barrel of oil. Global concerns over the strength of the U.S. economy, including America's ever-rising level of debt, had undermined the dollar to the point that OPEC members began to murmur about dumping it for the euro or a basket of currencies.

Geopolitical turbulence in oil-producing countries. The Iraq war, oil-related militancy in Nigeria, and Iran-Israel-U.S. posturing over nuclear issues were hotspots in the first half of 2008. The average nightly news covered casualties in Iraq, but industry watchers tracked attacks on pipelines and oil facilities. Likewise, in Nigeria, sabotage and oil worker kidnappings by militant groups such as the Movement for the Emancipation of the Niger Delta (MEND) regularly shut down facilities to repair, negotiate, or improve security. And as spring warmed up, so did the war of words between Iran and Israel. By early July, Iran had gone so far to indicate it would move against shipping in the Persian Gulf if attacked. The United States would have moved next, of course... thus driving up the price of oil in the jittery oil markets, which depend on Persian Gulf shipping lanes.

Unusually low crude and gasoline supplies entering the 2008 summer driving season. In early April, the EIA reported significant drops in supply – gasoline declined by 4.53 million barrels and crude oil by 3.2 million barrels, a one-two blow that surprised and worried industry watchers. Behind the gasoline slump were lower refinery margins, called crack spreads. In mid-March, when refineries would normally be coming off their maintenance schedules to churn out gasoline for summer driving, the margin for turning a barrel of crude into gasoline was negative for the first time in three years. Refineries sought profits in other oil products, and the markets responded to the expected imbalance in supply and demand.

High demand. China is a stand-out here, and for more than its usual energy appetite. China has a penchant for aiming to break records – from its goals in five-year plans and building projects to its haul of Olympic medals – and in the first half of 2008, it was visited by some dramatic examples: a great earthquake and major snowstorms, events that disrupted the country’s energy industry. Combine that with the fact that China was also preparing for the Beijing Olympics in August, and it’s easy to understand why it was buying oil very heavily until mid-summer.

On the perception side of price drivers, it's hard to overlook the fact that the market push stayed strong in the face of increasingly gloomy economic data. Casey Research was earlier than most in predicting the economic crash (we published reports such as “The Coming Currency Crisis” in June 2006), but by spring 2008, even officialdom was dancing around the word recession.

Normally, news of burgeoning foreclosures, plummeting home sales, spiking personal and business bankruptcies, rising unemployment, and other economic indicators would tend to exert a bearish influence. After all, consumers generate 70% of U.S. economic activity, and if they stop or cut back on driving to work or the shopping mall, telephone relatives or business partners instead of flying out to see them, reduce purchases of items containing plastics, turn down the thermostat, and other weather-the-storm measures, oil consumption should decline.

It took months for all these drivers to realign – but as we all know, they did, and then some. The chicken-and-egg debate, whether oil's sky shot triggered or portended the economic debacle in the closing months of 2008, will require more distance and data to resolve. But it's true that the dollar had started its comeback by mid-summer, supply had caught up, geopolitics had settled a bit, China backed off on its buying, no major hurricanes hit – but economic realities did.

Meanwhile, Congress jumped up and down and cried “Speculators!” “OPEC!” “Oil producers!” in tidy sound bites.


The Next Big Plays: Where You Need to Be

Oil companies are influenced by the range of market drivers and economic conditions according to size. The junior oil producers, those with market capitalizations of $250 million or less, have the small-business advantage of flexibility when times are good. These times aren't good, of course, and even well-managed juniors with good projects are in trouble. Their vulnerability is in the credit market. You’ve likely heard of credit lines being revoked and refinancings denied to people with impeccable credit. Now imagine pitching a drill project without a wallet full of assets ready to lay on the table.

Mid-tier producers, with market caps between $250 million to $2 billion, will look to mergers and acquisitions to survive. The majors ($2-20 billion market cap) and Big Oil (over $20 billion) will also be shopping. With low oil prices shutting down exploration, development, and even production, these companies will be looking to replace their reserves instead by purchasing smaller, solid companies with proven production. It's simply cheaper.

We see two ways to profit from this trend.

First, we buy shares in undervalued, producing companies that are profitable even below $40/barrel, are best of peer, and own large reserves. These are the companies that Big Oil will be looking to acquire. One such company, an oil sands producer, is currently a part of the Casey Energy Opportunities portfolio.

Second, we believe that owning a potential consolidator is the best position. As debt load and low commodity prices overtake them, junior producers will be forced to consolidate their projects. We currently own one such candidate, and are scouting for others with such muscle. Consolidators will be purchasing projects from the bank at 25 to 30 cents on the dollar.

Our tactics have already paid off handsomely in the last six months: all our recent recommendations have been on fire. A few tripled their value, and one generated a return of 540%.

As we’ve seen, supply problems are looming, no matter what timetable of Peak Oil you may believe in. With increased demand inevitably come higher prices. Our approach at Casey Energy Opportunities positions us to take advantage of the trend in both the short and longer term. And we guide our subscribers not only when to buy or sell, but also when to take profits and a “Casey Free Ride” to eliminate risk.

We’d like to offer you the opportunity to kick the tires of Casey Energy Opportunities RISK-FREE for 90 days, with 100% money-back guarantee. Click here to give it a try.


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Friday
May152009

‘Investment Earthquake in the Energy Sector’ Ahead

Byron King.JPG

Byron King, Editor of Agora Financial's newsletter, Energy & Scarcity, addresses issues of "chronic underinvestment in productive assets" in this exclusive interview with The Energy Report who have kindly allowed us to carry it in full.

Source: The Energy Report  05/14/2009

http://www.theenergyreport.com/pub/na_u/882

A former Navy flyer and one-time field historian on the staff of the U.S. Chief of Naval Operations, Byron King has a gift for putting events into historical context. In this exclusive interview with The Energy Report, he addresses issues of “chronic underinvestment in productive assets.” How will more than six billion people—all wanting a higher standard of living—manage on a planet with dwindling resources? Byron also offers insight into alternative energy sources. They aren’t everything that some people think, but they offer opportunities for investors.

The Energy Report: You edit Agora Financial’s newsletter, Energy & Scarcity. How do you define scarcity?

Byron King: I look at scarcity in the classic sense of shortages, of not enough to go around. When you look at world development in the last century, growing from a population of one billion or so, for much of the time 90% of the people were on the outs and maybe 10% were on the in. The Western world—North America, Europe, Japan and parts of the rest of the world—had access to ample resources, whether it’s mineral resources; energy resources; water, fresh water; food, what-have-you. That’s where we get the modern theories of economics, and commodity cycles. That’s the history that we see. But you have to be careful where you get your history.

Now we’re living in a world with over 6½ billion people. One billion or so are at or approaching a middle-class standard of living. The other 5 billion or so? They understand what a better existence means for them. When, say, 4 billion more people are competing for that oil or the mineral resources—the copper, the nickel, the iron ore, the food that you can grow on the arable land, the fresh water, the fish in the sea—you deplete your resources a lot faster than in the good old days.

Historical commodity cycles are useful examples. But the commodity cycle that we’re living in now, and that’s evolving very rapidly, is going to be quite different. It’s outside that proverbial “box.” That’s where the scarcity concept originates. So when people say, “it’s different this time,” well, yes it’s a couple of billion people “different” this time.

TER: But is it really a scarcity of commodities? Or is it that we haven’t we been able to increase our production of commodities to accommodate the increased demand? Or are we just at the inflection point that production hasn’t increased enough to match demand that we project in the next five years?

BK: There has been chronic underinvestment in productive assets in most modern Western societies. It’s generational. It’s perverse. We brag about it. We call ourselves a “consumer society.” As opposed to what? A “producer” society? Yes, because we don’t produce near as much as we consume. How long can that last? Until the rest of the world catches on to the con, I suppose. Which is happening right now.

The West has been lucky since the end of the Second World War. We saw immense discoveries of oil, for example, in the Middle East in the ’40s, the ’50s and the ’60s that got developed in the ’70s, ’80s and the ’90s. We’ve had a couple of generations’ worth of cheap energy and, by extension, cheap credit.

But the world hasn’t replaced those early oil discoveries with new discoveries because where else are you going to look? Where’s the next North Sea? Where’s the next Alaska?

People say, “What about offshore Brazil?” Okay, let’s get 200 miles offshore in the South Atlantic in 8,000 feet of water. Drill 28,000-foot wells at $200 million a piece. It’s an order of magnitude different than anything we’ve ever done. So in that sense, how does a world of six billion people imitate the past in any future resource scenario?

I don’t think it can. Brazil will be good for Brazil. But Brazil won’t save the world. Not our world, the Western world, anyhow. So we in the West have to come up with different ideas for energy resources and how to exploit them.

Now add this. In the last year we’ve seen the breakdown of much of the world financial system. Or at least what our adversaries like to call the “Anglo-Saxon Model”—that’s NOT a compliment, by the way. Large swaths of the old investment paradigm have just gone away. In the olden days, when you had a mega-development, you could raise financing. Can you do that today? Maybe some of the really, really big guys can do a $4 billion development. But it’s much more difficult now than it ever was.

TER: Many people are looking to invest in oil because they think the price is still relatively low compared to where it will settle out. What’s your viewpoint about oil as a commodity or as an investment play?

BK: Oil right now is at a relative low point. Someday, we’ll look back and think these were the good old days. We had the immense run-up in oil last year. The high was $147 per barrel. The low was $33. Oil has been working its way back up, now into the mid-$50s.

There’s a lot going on with those swings. Part of it has to do with the world issues of the economy breaking down and demand just falling off a cliff. But at the same time, supply is falling. OPEC has been cutting back, and has shown good production discipline in the past six months. OPEC is working hard to stabilize prices.

TER: When will that decrease in production output hit the market pricing?

BK: It’s happening now. OPEC started cutbacks in December, January and February. It takes 60 to 90 days for that production cutback to hit the refineries. They turn the valves out in the field, and less goes into the pipeline. Then they load fewer tankers, and those tankers have that long route out of the Persian Gulf, across oceans to the unloading terminals. Depending on the route the tanker takes, you’re looking at 60 days, or even 90 days. So, really we are seeing the impact of the cutbacks now as we speak. We have less oil on the markets from the Middle Eastern oil patches.

At the same time, other players in the industry are loading up tankers with oil and literally just parking them offshore. They’re betting on higher oil prices in the summer and fall. I understand that over 100 million barrels of oil are in floating storage in leased tankers, either sailing slow circles in the ocean or anchored out someplace.

TER: Doesn’t that imply, though, that until that floating inventory is consumed, it won’t affect the price of oil?

BK: That will slow down price increases to some extent, for a while—maybe into next year. If you draw down 500,000 barrels per day from floating storage, it’ll take 200 days to get 100 million barrels down to zero. Of course it doesn’t work in quite such a linear fashion. But it illustrates the point.

The medium- and long-term issue for the price of oil is that a lot of oil investment projects worldwide have been deferred, delayed or cancelled. That’s going to come back and bite the world really hard two years, three years, five years out. I’d compare it to an investment earthquake in the energy sector. Now we’re in for the energy aftershock.

The worldwide rig count is, say, half of what it was a year ago. Entire elements of the drilling and oil service industries are experiencing cutbacks. Big companies like Schlumberger (NYSE:SLB), Halliburton (NYSE:HAL) and Baker Hughes Inc. (NYSE:BHI) have laid people off, including skilled personnel. Smaller companies have laid even more people off. We’ll be sorry about that, eventually. You don’t just decide one day you need more rigs and take them out of storage. It will take many months—years, really—to get rigs back to where you need them when we come out on the other side of this recession.

TER: So at some point in time we’re going to eat through our ready inventory. We’ll need to produce more oil to accommodate the demand.

BK: Yes, we’ll need more wells. We won’t have the wells. And we won’t have the rigs, the drill pipe, the drill bits, the skilled workers to drill them and complete them.

We ought to be drilling more wells now; expanding oilfields; doing more exploration and development. But we’re not. So I think the world probably has seen about the highest output that it’s ever going to see. Within the last two or three years when the world hit daily output of 87 million barrels of oil, or oil equivalent when you throw in the natural gas liquid—I think that’s going to be the biggest number that we’ll ever see in human history. It’s all downhill.

TER: That brings us to the peak oil idea.

BK: Yes. There are geological limits as to how much hydrocarbon you can get fairly easily from a traditional oil well. There are a lot of hydrocarbon molecules out there, but they’re not in those nice, easy-to-drill oilfields where you can just poke a hole and pump them out. Mankind could do other things to get the hydrocarbons. We understand the technology. But it’ll take a lot of investment—and a lot more energy—to get those dispersed, harder-to-trap molecules.

The one sweet spot in the energy industry right now for drilling is in the deep-water. There just are not enough deep-water rigs for working in water that is more than 2,500 feet deep. After lowering equipment through the water column to the seafloor, they have to go through maybe 20,000 feet of rock, half of which might be a salt cap that you’ve got to drill through to get to that pre-salt layer.

Offshore Brazil is one of the key plays in the world for that, but you’re also seeing it in what they call the Lower Tertiary, or the Wilcox Trend, offshore in the Gulf of Mexico. You’re seeing a lot of deep-water development off the coast of West Africa. The Russians are eyeballing doing a lot of work up in the Arctic, so the deep-water rig and the drilling ship business is doing well in that regard.

My favorite sector right now is a niche within the energy industry—the subsurface equipment players. Companies like Cameron International (NYSE:CAM), FMC Technologies (NYSE:FTI), Dril-Quip Inc. (NYSE:DRQ) and VetcoGray, which is part of General Electric. These firms make the deep-water equipment—the Christmas trees and blowout preventers and pumps that go literally a mile or almost two, under the seawater. They put this equipment down on the ocean floor, and it might never again see the light of day. The subsea equipment has to work well, and work for decades in these oilfields. That’s one sweet spot in the energy industry that seems to be doing pretty well.

TER: If we’re going to be short on resources in oil and natural gas due to cutbacks in exploration or drilling; so, should we play those commodities? Or should we listen to what the world is talking about in terms of energy alternatives and play those instead?

BK: That gets into a loaded political question. Depending on how you want to invest in the energy business, you can pick up companies that have good reserve positions in fossil fuels, and good technical competence at a relative bargain. Looking ahead five, 10 or 20 years, is the world still going to want to burn hydrocarbons? Will we still be working in the current, anti-CO2 paradigm? Or will people start to worry about living through a few generations of low-energy poverty? Will they vote in new politicians?

When you go into alternatives—wind, solar, whatever—we’re starting from a really small base. If you thought of U.S. energy as a big pizza pie, alternative sources wouldn’t account for even a small slice. It’s like a sliver of one slice. At most, alternatives are 4% of the total energy mix in the United States. And a lot of that is because companies like Weyerhaeuser Company (NYSE:WY) burn sawdust to run their mills. When the government people make up statistics, they call that alternative energy.

Right now the United States gets 40% of its electricity from burning coal; it gets not quite 30% from natural gas, maybe 20% from nuclear. A tiny fraction of electricity comes from windmills on the prairies of North Dakota. They say we’re going to really have a huge build-out on this in the next couple of decades. Well, maybe we are, but I’m not sure how we’re ever going to accomplish that. I don’t know that we have the industrial capability.

There are, of course, some outstanding investments in alternative energy. Trinity Industries (NYSE:TRN), for example, is a railcar company but it also makes windmill towers. These aren’t backyard flagpoles; they’re big enough that you could put a Boeing 757 on top of one of them. That’s about the equivalent of the two megawatt wind turbines up there spinning away.

For my money, I think that the safest way to play the alternative energy industry is in the geothermal world. The one big pure play company I like is Ormat Technologies Inc. (NYSE:ORA), in Reno, Nevada. It’s an international company, and they do everything—engineering, design, building equipment. They actually operate on their own account, too. They have acreage and wells. They make steam; they spin turbines; they generate electricity and they sell it.

There are a few other pure play, small geothermal prospects. US Geothermal Inc. (NYSE.A:HTM) (TSX:GTH) has an operation at Raft River, Idaho. To my mind, they’re still figuring out how to make money, but at least they’re doing it. Eventually, it’ll work out. Some other smaller developers are Western GeoPower Corp. (TSX.V:WGP), Sierra Geothermal Power Corp. (TSX.V:SRA) and Nevada Geothermal Power Inc. (TSX:NGP) (OTCBB:NGLPF), and there’s a tiny company called Polaris Geothermal Inc. (TSX:GEO), which operates in Nicaragua. And if you want the largest geothermal producer in the country that’s publicly traded, that’s Chevron. They produce more geothermal watts than anybody else.

TER: These smaller producers like Western GeoPower, Nevada Geothermal, and U.S. Geothermal, is there a potential acquisition play for someone like a Chevron to come in and add more geothermal properties?

BK: The small geothermal guys don’t talk about being for sale. But there are political mandates for utility companies to come up with so-called “green power” or zero carbon power. State legislatures are enacting renewable portfolio standards—RPS. And Congress is going to set a national standard. Some of these small geothermal companies are probably being eyed by larger utility systems or power companies that feed into the utility system. The RPS mandates are coming. Things will be so tight from a regulatory standpoint, that if you don’t have green power moving down your transmission line, you’re out of business.

In the short term, the geothermal guys are development stories. They’re putting themselves into operation. In the medium to long-term, these are probably rollup or takeout kind of stories. If we talk about this five years from now, I think we’d be talking about how all these companies got taken out. It’s just a question of when and how and what’s going to be the mechanism that takes them out.

TER: Why do you see the geothermal sector as an opportunity for investors when the companies are not making money at it?

BK: Let’s back up. Geothermal has been around for 100 years, but from our investment standpoint right now it’s an early-stage industry. It’s starting from little more than scratch. There was a geothermal proto-boom in the 1970s, but it fell apart by the mid-1980s. In the 1980s and ‘90s, energy was cheap. So who needed geothermal, or anything else? Geothermal was a curiosity. There were only a small number of serious new projects in the U.S.

What has driven geothermal development in this decade has been what’s driven other alternative energy development—government subsidies. Whether it’s tax credits or the RPS mandates, public policy is driving it. There will come a point, a critical mass, maybe 2% market penetration or so, where there’s enough technical skill and people available. Also, the utility industry will have to get used to working with geothermal power to an extent that everybody finally gets it all figured out.

At the end of the day, geothermal power is about making electricity, and there’s hardly one electron in the U.S. grid that isn’t regulated by some public entity someplace—the 50 different state Public Utility Commissions, the Federal Energy Regulatory Commission. It is a highly regulated industry. Geothermal has to make that jump into the regulated energy space. It’s not there yet. Moving in the right direction, but not there.

I am not saying that geothermal is a bad investment right now. I have a lot of hope for the future for geothermal power. But as we speak, there’s a serious element of risk you won’t find in other established energy industry plays. The geothermal stocks can go up or down based just on what’s in the news yesterday or today versus tomorrow.

Very few of these geothermal projects are actually putting power into the grid and getting paid for it. Once we see more geothermal electrons moving down the grid and once the cash starts flowing from the utility rate payer, putting that check in the mail every month, paying the utility, and the utility pays the geothermal producer, we’re going to get a better handle on it.

Right now the geothermal industry has a lot of business plans and a lot of forecasts, and a lot of companies that (if they’re spinning a turbine at all), have been spinning it for just a short time. They haven’t got all the bugs and kinks out of their system. They give great presentations at the conferences. But my question to a lot of these guys is, “Where’s the money?” They’re burning more cash than they’re generating. So if you want to get into this early, it’s speculative. Understand that. But there could be a very handsome return downstream. And again, much of it is politically driven.

TER: Are these some of the things you’ll be talking about at Agora’s conference in Vancouver in July?

BK: I will be talking about these things—gold, trends for gold; energy and other issues related to that. I will be talking about oil and alternative resources. Vancouver is always a great conference. This is the 10th anniversary of that conference. We always get great comments from attendees, so anyone who is interested should really check in with Agora Financial for the details—that’s AgoraFinancial.com.

Byron King writes for Agora Financial’s Daily Reckoning and Whiskey and Gunpowder (a self-styled “independent investor’s daily guide to gold, commodities, profits and freedom”). Byron edits two newsletters, Energy and Scarcity Investor and Outstanding Investments, This July 21-24, Byron will speak at the Agora Financial Investment Symposium in Vancouver, BC.

Byron graduated cum laude from Harvard University with a degree in geology. Later, he received his Juris Doctor from the University Of Pittsburgh School Of Law, and an advanced degree from the U.S. Naval War College. Byron served for many years in both the active and reserve components of the U.S. Navy. Byron also worked as a geologist for Gulf Oil in the exploration and production division. And Byron practiced law, focusing on bankruptcy and other contentious matters involving people and money.

Byron has written extensively about Peak Oil and world energy developments. His expertise includes precious metals and alternative energy sources such as solar, wind and geothermal. Byron has provided advice on national energy policy to the U.S. Department of Defense.

To read more articles written by Byron King, click here or go to www.dailyreckoning.com.

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Sleep tight.

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Wednesday
May132009

Cameco Corporation PUTS Gain 45% in One Day

We are pleased to report that our purchase of the June 09 $25.00 PUTs for $1.40 per contract (CCJRE) on Cameco Corporation (NYSE: CCJ) yesterday have started well by gaining 45% to close at $2.05 today.

Cameco Corporations share price dropped $1.62 or 6.21% to close at $24.47, this in turn had the effect of driving up the value of the PUT contract.

We have tracked Cameco closely with the view to making this trade and posted articles outlining our thoughts and possible strategies which we hope were of some use to you. With options trading timing is critical as it is not a buy and hold vehicle. At one time today we considered closing this trade as a 40% gain in one day is not to be sneezed at, however we are still of the opinion that Cameco could retrace its steps back to around the $20.00 mark.

The next question is the tricky one of the exit strategy. Do remember that Cameco could just as easily bounce back and wipe out any gains that have been achieved.

If you bought and sold all in one day then well done, give yourself a pat on the back.

If you have just bought then you could plan to close at a set percentage profit which you think is achievable, in which case calculate what your selling price would be and place the order now. There are aberrations in the market whereby your target could be met briefly during the trading session so you don't need to watch every tick of the action.

We'll stew on it for now and post as and when we decide to make a move.

Options are extremely volatile so please limit the amount of cash that you place into this sort of trade as you could lose it all if it goes wrong.

Cameco Corporation trades as CCO on the Toronto Stock Exchange and as CCJ on the New York Stock Exchange.

Sleep tight.

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Tuesday
May122009

Cameco Corporation Bought PUTs Today

Cameco Puts 13 May 09.JPG

Chart courtesy of StockCharts.com



Just a quick note to let you know that we purchased the June 09 $25.00 PUTs for $1.40 per contract (CCJRE) on Cameco Corporation (CCJ) today.

June 2009 is the expiry date for this trade so we will need to move quickly as options this close to the expiry date deteriorate fast. Our assessment is that Cameco has ran ahead of itself as the above chart shows and a pull back is now imminent. The strike price is $25.00 so we are hoping to see a pull back to around the $20.00 level. However if the opportunity presents itself we may just take a quick profit and duck out early. If Cameco continues to improve than we will sell these contracts at a loss and go back to the sidelines.

Options are extremely volatile so please limit the amount of cash that you place into this sort of trade as you could lose it all if it goes wrong.

Sleep tight.

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Tuesday
May122009

Uranium Spot Price Up to $49/lb

Uranium spot price 12 May 09.JPG
Chart courtesy of TradeTech


As we can see from the above chart the spot price of uranium had a nice pop up to $49/lb this week which is encouraging as it is watched closely by many in the uranium space. The following comments by TradeTech accompanied their weekly update:

The uranium spot market price jumped significantly this week due to robust buying interest. TradeTech’s Spot Price Indicator is $49.00 per pound U3O8, an increase of $4.00 from last week’s value on the basis of the most recently concluded transactions. Eleven transactions are reported for the week. Utilities were buyers in half of the transactions.

Over at The Ux Consulting Company the spot remained at $46/lb.

Over at the NYMEX the futures market shows little change with contracts for June at $44/lb, October at $48/lb, December at $50/lb and March 2010 at $53/lb.

Never the less the trend upwards appears to taking shape and hopefully it will continue to do so.

Our core position remains in place with the only additions being Denison and Crosshair a few months back. We are watching Extract Resources and hoping to make a purchase on a dip in the near future.

Cameco Corporation is still in the frame for a possible PUT trade however we have not moved yet on this one.








Sleep tight.

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Thursday
May072009

Cameco Corporation Looking Overbought

CCJ Chart 08 May 09.JPG
Chart courtesy of StockCharts.

This a quick note to say that we are still watching Cameco with the view to shorting this stock via the purchase of a few 'PUT' options. From the chart we can see that Cameco's progress appears to have slowed and could now be ready to retrace a few steps.

We will watch the next trading session with great interest as the opportunity to short this stock on the basis that it will experience a little correction is now upon us. We are looking for Cameco to drop back to the 200dma level which stands at around $20.00 at the moment.


The RSI is in the overbought zone which suggest a U-turn for the stock and
the MACD and the STO are also close to the top of their respective ranges.

Nothing is certain so we will not be risking a lot on this one if and when we do move but we do think that the scales are tipped in the favour of a correction.

Have a good one.

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Wednesday
May062009

Could this be Bigger Than Watergate?

Watergate.JPG



We don't place much store in conspiracy theories but this one is an interesting read about the forced acquisition of Merrill Lynch by the Bank of America, written by Olivier Garret, CEO, Casey Research.

Reportedly, Bill O’Reilly referred to a recent story out of our nation’s capital as “bigger than Watergate.”

Whether the story is bigger than Watergate or not, it is definitely a scandal of huge proportions.


To sum it up, on April 23, 2009, New York Attorney General Andrew Cuomo sent a letter to Chairman of the U.S. Senate Committee on Banking, Housing, and Urban Affairs Chris Dodd; Chairman of the House Financial Services Committee Barney Frank; SEC Chairwoman Mary Schapiro; and Chairwoman of the Congressional Oversight Panel Elizabeth Warren.

The letter outlined how former Treasury Secretary Paulson and Fed Chairman Ben Bernanke forced Bank of America’s acquisition of Merrill Lynch – even though Bank of America CEO Ken Lewis and the board of directors tried to pull the plug on the deal after it turned out that Merrill Lynch was far deeper in debt than it had admitted.

In the words of Attorney General Cuomo himself:

Immediately after learning on December 14, 2008 of what Lewis described as the “staggering amount of deterioration” at Merrill Lynch, Lewis conferred with counsel to determine if Bank of America had grounds to rescind the merger agreement by using a clause that allowed Bank of America to exit the deal if a material adverse event (“MAC”) occurred. After a series of internal consultations and consultations with counsel, on December 17, 2008, Lewis informed then-Treasury Secretary Henry Paulson that Bank of America was seriously considering invoking the MAC clause. Paulson asked Lewis to come to Washington that evening to discuss the matter.

Bank of America’s attempt to exit the merger came to a halt on December 21, 2008. That day, Lewis informed Secretary Paulson that Bank of America still wanted to exit the merger agreement. According to Lewis, Secretary Paulson then advised Lewis that, if Bank of America invoked the MAC, its management and Board would be replaced.

Meanwhile Ken Lewis has been sacked as chairman of the board at Bank of America… even though he might well have been the only conscientious and honest player in this scheme. And now the sharks have started to turn on each other: according to Cuomo, Paulson “largely corroborated Lewis’s account” and informed the attorney general’s office that he “made the threat at the request of Chairman Bernanke.” The latter has so far chosen to keep his mouth shut.

The key factor here is not that the Devious Duo forced Bank of America into a merger it didn’t want to commit to. Granted, that’s an unheard-of interference of government in the free market, but we’re quite sure that the Powers-That-Be could sweep it under the rug by invoking the “greater good.”

No, the part of the story that could really break Al Paulson and Don Bernanke’s necks is the failure to inform the Securities and Exchange Commission, as well as Bank of America’s shareholders, of the extent of toxic waste Bank of America was forced to accept. That’s fraud, pure and simple.

And that’s a pretty good sign that this is not going to go away. Some of the Casey Research editors – yes, we do have bets out – think it’s going to be huge, especially since the scandal happened on President Bush’s watch and the Democrats are in control of Congress. Chances are that either Paulson or Bernanke is going down, depending who cuts a deal with prosecutors first. Their “friends in high places” may be able to keep the Justice Department out of it, but they won’t be able to control ambitious state officials like Cuomo. There’s blood in the water, and this is a career maker for a prosecutor.

So what happens when the highest financial officials in the U.S. government are unmasked as crooks? Will there be riots in the streets? Will the average American pick up his torch and pitchfork and march on Washington D.C.? Probably not. But it may happen at some point as we are moving deeper into the Greater Depression, a term coined by Doug Casey, our resident contrarian investment guru. Read Doug’s FREE, 13-page special report about what will happen when social unrest breaks out in the United States, and what you should do to prepare your assets for that time. Click here to read it now.

Have a good one.

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Monday
May042009

Cameco PUTS wait for it

Today we thought we would be buying some PUTS on Cameco Corporation (CCJ) however the market took off with the DOW adding 214 points or 2.61% on optimism for the banks. Our tiny sector took off too, with Denison Mines, for example adding $0.47 or 23.62%. In turn Cameco also gained adding $0.75 or 3.07% by the close in New York.

We are still of the opinion that it is good for a short however timing the entry into such a position is critical to the success of the trade. If we look at the JUN-09 $25.00 PUT (CCJRE) as it was one of the most actively traded we can see that it closed slightly lower at a $1.95 when compared with the previous days close of $1.99. If this stock continues to gain then the likely hood of a correction becomes more of a possibility and the cost of buying the PUTS becomes cheaper. For now we will watch the action closely and try and determine a suitable entry point.

Have a good one.

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Saturday
May022009

Cameco Corporation looks ripe for a short

Cameco Chart 02 May 09.JPG


Chart courtesy of TradeTech.

Taking a quick look at the above chart we can see that Cameco Corporation (CCJ) has put in a terrific run recently as the uranium sector attracts a little more in the way of investor interest.

The technical indicators suggest that this stock is now overbought especially the RSI which stands at 82.23 and it appears to us to be ready to take a breather and retrace a few steps back towards the $20.00 level.

In anticipation of a pull back we are looking at purchasing the June 2009 PUTS at a strike price possibly just out of the money. We will watch the market opening on Monday and then take it from there. This is a hit and run trade so we don't expect to hold this position for very long. If and when a reasonable profit appears we will close the trade.

We thought that it might help if we gave you a 'heads up' as to the way we are thinking and how we intend to try and make a few bucks from this situation. Your comments are of course most welcome.


Cameco Corporation has a market capitalization of $9.60 billion, a 52 week high of C$44.00 and a 52 week low of C$11.78, average turnover is was 2.77 million shares and trades as CCO on the Toronto Stock Exchange and as CCJ on the New York Stock Exchange.


Have a good one.

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Wednesday
Apr292009

Uranium Stocks Attracting More Interest

Uranium Chart 30 apr 09.JPG



Chart courtesy of u308.biz.

What a day today has been for uranium stocks as some put on tremendous gains, such as Uranium Resources Incorporated (URRE) up 50%, Crosshair Exploration and Mining Corporation (CXX) up 41.67%, Denison Mines Corporation (DNN) up 22% and Laramide up 11.11% to mention just a few.

Also take a note of the increased volume of shares now being traded on these stocks, URRE has an average daily turnover of 393,000 and yesterday that number hit 4.56 million, so investor interest is returning with a vengeance.

Picking entry points is always difficult but it does appear to us that this tiny sector is trying to get up off the floor having been slaughtered during the recent broader market sell off attributed to de-leveraging. The rally in the main markets may continue a little longer however we think it is nothing more than a bear rally and an opportunity to get out of mainstream stocks at slightly higher prices. The banking sector remains treacherous as the latest fad of stress testing is implemented with the results eagerly awaited. When this rally peters out and stocks once again head south it may well take uraniums with it. The month of May is upon us so we will see just how resilient this sector is. The spot price of uranium has moved up slightly and would appear to be the indicator that is being closely watched and acted upon. The longer term price for uranium remains steady at $70/lb which is the 'good news' in our humble opinion.

Uranium Long term price from TradeTech 30 Apr 09.JPG
Chart courtesy of TradeTech.

Have a good one.


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