Thursday, March 1, 2012

The Outlook for Oil

by Russ Koesterich, iShares

“Are we headed for another oil shock and if so what are the investment implications?” Many investors are asking these questions given recent developments in the Middle East and Africa.

Tensions have been escalating lately in the Middle East. Western countries have sought to contain Iran’s nuclear program by imposing new sanctions. Meanwhile, there’s a growing perception among market watchers that Israel has a dwindling window of time if it’s going to attempt any military action against Iran’s nuclear research. Elsewhere, the market has also had to contend with growing unrest in Nigeria, a country that produces two million barrels of oil daily.

As such, it’s easy to see why the price of crude is once again climbing and why investors are wondering about prices rising further.

So what could cause even higher prices? Should Israel attack Iran, it’s possible that Iran would at least attempt to prevent the passage of oil through the Strait of Hormuz, a narrow water way through which 20% of the world’s oil passes. If this happens, at least a temporary oil spike would probably occur. While it’s doubtful that Iran has the military capacity to close the Strait for any length of time, even an attempt would likely push oil north of $150 a barrel.

To be sure, it’s difficult to predict the odds of an Israeli strike and a major escalation in oil prices. But even in the absence of an attack, crude prices are likely to remain elevated for three reasons, supporting my view that investors should consider overweighting global energy companies through instruments like the iShares S&P Global Energy Sector Index Fund (NYSEARCA: IXC).

First, it appears that most emerging markets are likely to engineer a soft landing. This is important as virtually all new demand for energy is currently coming from emerging markets.

Second, while Saudi Arabia and OPEC have spare capacity, this capacity will be stretched if Iranian production slows or an oil embargo takes place. It would likely not be able to adequately cover replacing Iranian and Nigerian production, as well as production from other smaller Gulf countries also experiencing unrest.

Finally, even if oil reaches more than $100 a barrel, many of the largest oil producers — including Saudi Arabia and Russia — are unlikely to ramp up production as they might have in the past. This is because the largest oil producers now require much higher oil prices to balance their budgets.

In short, even without a military confrontation in the Gulf, I expect oil prices to remain high for the near term and I continue to advocate an overweight to global energy companies.

Source: Bloomberg

Will the S&P Rally to Continue?

Goldman Says To Stick With Oil And Gold : APA, BCS, BNO, DBC, DGL, FXN, GLD, GS, GSG, GSP, IEO, OXY

As overall global growth continues to be flat, a variety of market pundits and analysts have begun to revisit their earlier forecasts. For retail investors, these predictions can provide valuable insight to how the macroeconomic picture is evolving and ultimately lead to portfolio gains. Venerable investment bank Goldman Sachs (NYSE:GS) recently reiterated their broad commodities estimates, highlighting two main opportunities. By focusing on these two main natural resources, portfolios have the chance to profit throughout the rest of the year.

Look For Fundamental Drivers

So far this year, the iShares S&P GSCI Commodity-Indexed Trust (ARCA:GSG), which tracks a basket of 24 different commodities, has risen around 8.5% year to date. This is the highest the index has been in nearly six months. However, despite the recent gains, Goldman recently lowered its overall commodities return prediction for the next 12 months. Previously, the bank predicted gains in the 15% range, but lowered them to 12% based on deteriorating fundamentals.

Higher crop plantings in the United States will clip much of agriculture's gains throughout the year. Goldman now sees lower prices for both wheat and corn throughout 2012 and only a slight gain in soybeans pricing. In addition, the bank highlighted weakening manufacturing in China as a potential bearish sign for industrial metals. Recently, the Asian Dragon's PMI readings have been drifting lower and hover under the critical 50-point mark, signaling contraction. Both "Chinese construction activity and consumer appliance output remain relatively weak," according to the bank.

Ultimately, Goldman believes much of the "value opportunities" for commodities investors are now gone and portfolios should focus their attention to fundamental drivers. To that end, the investment bank believes both oil and gold will be 2012's superstars, setting price targets of $127.50 a barrel and $1,940 an ounce, respectively. Oil gets the bullish nod, due to the fact that it is vulnerable to supply disruptions. Iran's recent saber rattling is just one example. Also, OPEC's spare capacity is currently "at a trough" point. That will be problematic as the world's economic recovery is slowing gaining momentum. Gold will continue to see gains as many of the developed world's debt problems still have not gone away. Additionally, higher inflationary scenarios will benefit the precious metal.

Playing the Pair
By and large, Goldman still kept their "overweight" call on all commodities. The iPath S&P GSCI Total Return Index ETN (ARCA:GSP) tracks Goldman's proprietary commodity index and includes a hefty weighting towards energy commodity futures. The ETN does have some counterparty risk, as it is technically an unsecured debt obligation of British bank Barclay's (NYSE:BCS), the ETN structure does eliminate many tax headaches for investors. For investors looking for a more traditional futures route, the PowerShares DB Commodity Index (ARCA:DBC) is still the king in terms of assets and trading volume.

With energy getting high marks from Goldman, investors may want to boost allocations to the sector. The E&P firms will be the ones getting the most benefit from higher oil prices. The iShares Dow Jones US Oil Exploration & Production Index (ARCA:IEO) tracks 66 different firms including Apache (NYSE:APA) and Occidental Petroleum (NYSE:OXY). The ETF costs a cheap 0.47% in expenses and could be a great way to overweight the producers. For those who want to directly bet on the rise in Brent crude prices, the United States Brent Oil Fund (ARCA:BNO) can be used to track the global oil benchmark.

Finally, with the investment bank predicting roughly a $200 rise in the price of gold this year, investors still have time to own the metal. The PowerShares DB Gold (ARCA:DGL) is by far the most popular futures method to track gold prices, while the SPDR Gold Shares (ARCA:GLD) remains the physically backed king, with roughly $71 billion in assets. Either fund makes playing gold's ride quite easy.

The Bottom Line
With many of the deep values in natural resources now gone, investment bank Goldman Sachs has dropped its overall forecast for commodity returns. Instead, the asset manager says to focus on fundamentals. That means gold and oil. The previous funds along with the First Trust Energy AlphaDEX ETF (ARCA:FXN) make ideal choices to play Goldman's predictions.

About that Crash in Natural Gas Prices

It’s looking like fresh lows are in the cards for nat gas. Where is the bottom? When is the blood bath over?

We’re going on over 3 1/2 years of destruction and 80% losses. There is an old saying on Wall St. that, “Bottom Fishing can be Hazardous to your Wealth”. If you didn’t know this, let the current state of Natural Gas and the ’08 Financials be a lesson.

But in this case, we’re not talking about a company that can go bankrupt right? This is a commodity after all. So the reversion to the mean process should begin at some point. But where and when?

Take a look at the recent consolidation in the United States Natural Gas Fund ($UNG). The breakdown here below the triangle is typical. This type of brief pause usually resolves itself in the direction of the underlying trend. In this case it is clearly down. As scary as it may sound, the 4 point base in the triangle gives us a target somewhere in the 17.50 area. We may not get that low, and we can just as easily go even lower. But I have a feeling that a vicious tradable rally will develop from this breakdown.

As Natural Gas makes fresh lows and pessimism in this space makes fresh highs, the right pieces are in place for a Rip-your-face-off rally. But let the trade come to you. Let it develop. It’s been about 45 months, so what’s another couple of weeks or days?

Look at the extreme lows recently put in RSI in the chart above. As $UNG makes new lows in price, I would want to see a higher low made in the Relative Strength Index. This potential bullish divergence could spark the rally. But we’re not there yet. We’re looking at a 17.50 target where we can start looking for entry points, but it could come sooner. A key reversal day would not surprise me. Perhaps a day where Nat Gas sells off early and rallies back hard in the afternoon? Or maybe a big gap lower after a weekend with a solid all-day rally throughout Monday. There are a few different scenarios that could work out here, but the most important thing to remember is that we are looking for the smallest amount of risk. We want a point of reference to help us manage risk with stop losses or put options.

The idea here is to find a risk/reward where we can risk less than 4-5% with the potential to get back to the mean. In this case, a 200 day moving average that could be twice the value of the entry point. And remember that we are in a reversion beyond the mean business. In other words, we typically see prices exceed the mean. So the potential here is huge. The difficult part is the risk management in a crashing security. That is where the patience comes in.

And now for the $UNG haters (everyone hates this ETF). It is a disliked vehicle for good reason – all it does is go down. I’ve never seen anything like it. But at the end of the day, it’s liquid and is very highly correlated with the commodity itself. So if we’re looking for an equity vehicle to trade this space, $UNG will have to do. Look at the very positively correlated $UNG & $NG_F:

So I’m going to be patient. No positions yet and don’t plan on initiating anything yet. But the face-ripper will come. Stay tuned….

McAlvany Weekly Commentary

Three Year Gold Outlook

A Look At This Week’s Show:
- Bull market dynamics accelerating.
- Supply and Demand fundamentals supportive.
- Anticipating a reduction strategy in the future.

Click to the Right for the Presentation: 3 Year Gold Outlook Presentation

Look What Is Happening To Newspapers!

Back in 2007, I wrote a series of posts arguing that "newspapers are screwed."

The theory was that, as readers and ad spending moved online, newspapers would be unable to replace the revenue they were losing from print advertising.

This wasn't a new theory, but, like many theories involving the future, it was frequently ridiculed, especially by people who worked for newspapers.

But I don't think even those who believed newspapers were screwed fully appreciated just how screwed they were.

In 2007, the stock of the New York Times Company was trading for about $25 a share.

Today, it's trading for $6.56.

And the chart below shows why.

Via Derek Thompson at The Atlantic, here's an inflation-adjusted chart of newspaper advertising spending over the past 60 years:


The good news is, contrary to the fears of some doomsayers (also generally people who worked for newspapers), the world has never been better informed. Thanks to blogs, Twitter, Facebook, Google, two billion online fact-checkers, and some amazing online news sites—including some run by newspapers—we now know more faster than at any time in history, by a mile.

And, thankfully, we no longer have to rely on the judgment (and worldview) of a handful of super-powerful gatekeepers to decide what we can and can't know.

Time to Buy Gold after the 5% fall discount

Matthew Grossman, Chief Equity Market Strategist, Adam Mesh Trading Group believes the 5% fall in gold prices overnight presents an attractive buying opportunity.

This Could be the World's Best Oil Stock

By Tim Begany

There may be no better time than right now to invest in energy stocks -- particularly in one of my favorites. This stock is a large and well-known oil and gas producer, and is doing markedly better than the energy sector as a whole, jumping about 18% already this year, compared with a roughly 9% gain for the sector. Furthermore, I think the stock has plenty of potential to significantly outpace the energy sector and overall market [1] for years to come.

Why? If you follow the energy industry, then you're probably aware of the massive offshore oil discoveries this company has made during the past four or five years. There are several, but one of the most publicized is the Tupi oil field, located in the deep waters of the Santos Basin about 160 miles off the coast of Rio de Janeiro.

Tupi is estimated to contain 5-7 billion barrels of recoverable oil, which was between 35% and 55% of Brazil's total reserves of 14 billion barrels when the find was announced in November 2007. Moreover, the general area in and around Tupi holds and estimated 123 BILLION barrels -- all of which this company is in a prime position to recover.

As the table below illustrates, this places Brazil among the world's leading oil nations, not all that far behind Iran and Iraq, each of which has roughly 150 billion barrels of recoverable oil, and right on par [2] with countries like Kuwait and the United Arab Emirates (UAE), which have about 100 billion barrels each.

If you haven't guessed by now, I'm referring to Petroleo Brasiliero (NYSE: PBR [3]), the state-owned Brazilian oil and gas firm, better known as Petrobras.

Petrobras will certainly try to wring all the profits it can out of its prized new assets in the Santos Basin. It's already a year into a five-year expansion program in which it plans to spend $225 billion on the technology, personnel, deepwater drilling equipment and refining capacity needed to extract and market the oil. Between new and existing wells, management projects the company will be producing about 610,000 barrels of oil per day by 2015, up 144% from a current daily total of around 250,000 barrels.

Assuming oil meets price forecasts of $100-$110 a barrel for the next three to five years (and I can imagine prices easily going much higher because of rising tensions with Iran), analysts predict annual growth of 9% in sales, 11% in earnings [4] and 20% in dividends during that time. Such growth would increase sales from $141.8 billion to $218 billion a year, earnings per share (EPS) [5] from $3.60 to $6.07 and dividends from $0.15 to $0.37 a share.

And I wouldn't worry at all about the above-average run-up in Petrobras' stock. Although a situation like this might suggest a stock is racing ahead too fast and could quickly become overvalued [6], I don't think that's an issue here. The stock had an awful 2011, dropping 32%, compared with an overall gain of about 5% for its peers in the integrated oil and gas industry. The poor stock performance stemmed from earnings misses, particularly a 26% decline in profits to $3.6 billion in the third quarter of 2011 from $4.5 billion in the third quarter of 2010. As a result, at around $29 a share, the stock is still trading 30% below the one-year high and 60% below the five-year high.

Basically, I see this as yet another case of Wall Street [7] unfairly punishing a quality stock because of short-term setbacks. But this tendency for Wall Street to overreact could greatly benefit investors with a long-term view because it has helped position the stock to be one of the best performers of 2012 and well beyond.

Risks to Consider: Although Petrobras' oil discoveries hold great promise, the deepwater operations necessary to extract them will be difficult, and costly errors may occur. For example, an accident last November in which Chevron Corp. (NYSE: CVX [8]) leaked an estimated 2,400 barrels of oil while operating off the coast of Brazil illustrates the potential danger, even from a relatively small incident such as this. Fines for the incident have reached $28 million so far, with more to come.

Action to Take --> Petrobras is an excellent value despite the recent spike in price, so now is a good time to buy. The stock's price-to-earnings ratio, for instance, is only 4.8 -- even though investors have historically been willing to pay as much as 14.3 times earnings for the stock. This suggests shares [9] ought to be trading closer to $51 (14.3 x 2011 EPS [5] of $3.60 = $51.48 per share) -- 75% higher than where they are now. I think the stock is capable of delivering this sort of return in the next three to five years as the expansion of Petrobras elevates Brazil to the status of an elite oil-producing nation.

Chart of the Day - CF Industries (CF)

The "Chart of the Day" is CF Industries (CF), which showed up on Tuesday's Barchart "All Time High" list. CF Industries on Tuesday posted a new all-time high of $195.48 and closed up 1.28%. TrendSpotter has been Long since Jan 4 at $157.99. In recent news on the stock, CF Industries on Feb 15 reported Q4 EPS of $6.66, which was lower than the consensus of $6.83. However, the company said it expects margins and volumes to be sustained at high levels. Lazard Capital on Feb 16 said CF Industries should be bought aggressively on weakness because it believes the company is poised for a strong 2012. Lazard reiterated its Buy rating for the stock and raised its target to $205 from $195. CF Industries, with a market cap of $12 billion, is a major producer and distributor of nitrogen and phosphate fertilizer products.