Option Investor

Floating Boats

Printer friendly version

You would think another two month high for oil at $62.40 would be enough to rescue the energy sector from the sell off in the broader markets. That was not the case last week. Just as a rising tide floats all boats an easing tide lets them back down again. Or maybe a better analogy is a helium balloon in a down elevator. A stock can be the best investment in its sector but if that sector sinks with the market that individual stock will sink as well.

Last week was ugly for the broad markets with an average drop of 5% across all the indexes. Many of our energy positions duplicated that drop despite the price of oil holding at $62 all week. We did not have any negative news in the sector and winter continued to blast its way across the Midwest and Northeast in one final effort to make its presence felt before spring. Crude inventories rose less than expected and distillates fell more than expected but both were ignored by investors due to the turmoil in the broader markets.

There was some interesting news about Peak Oil in an unexpected place last week. Republican Representative Roscoe Bartlett said the world may have reached the peak in oil production. He based this comment on data from a draft report from the US Government Accountability Office due out next month. The report is going to say the peak in oil may have arrived or is very near but will stop short of proclaiming the event a done deal. Apparently government staffers were unable to get their questions answered by several major oil producers like Saudi Arabia and Iran. Seems they don't want to make their reserve data public. That should be no surprise to anyone except maybe the government researchers used to having everyone jump at their requests. Bartlett said, "They (major OPEC producers) have no reason to tell us and little reason to be truthful so it is very difficult to determine a specific date when the world will reach peak oil." Welcome to our reality Mr. Bartlett. He also said, "according to the report the largest number of experts believe that it has already occurred and conventional supplies have peaked." When the report is released it will be notable not in its content but that it was done at all. Elected officials have been notorious for sticking their head in the sand and not wanting to face the unpopular issue of oil depletion and its consequences. It is easier to say conserve energy than actually do it.

Venezuela announced last week that is was taking control of the remaining oil assets in Venezuela previously owned and operated by outside companies. The assets located in the Orinoco belt were run by Conoco, Exxon, BP, Chevron, Total and Statoil. Chavez said the companies have until May 1st to turn over majority ownership to state run PDVSA or leave the country. The majors are not talking to the press but Conoco CEO Jim Mulva in an interview on another topic did say that it would be a challenge to those companies. All have extensive investments in the Orinoco Belt and large scale operations. I am afraid you can kiss those assets goodbye Mr. Mulva and the world can expect falling production from that area for decades to come.

A study to be released next Thursday by Rice University says the rise of national oil companies is going to crimp future oil production. 75% of the world's proven reserves are now controlled by national oil companies. Historically the national oil companies see production slow because money needed for exploration and maintenance is siphoned away to pay for other things in the countries budget. The slowing of investment into new production efforts slows future production as depletion accelerates. Most countries fail to realize that depletion never sleeps and to slow investment into new exploration is the easiest way to cut off future cash flow permanently. Countries view their social responsibilities as more important than investing in exploration. Unfortunately without exploration there will be no future funds to pay for those social needs.

AA recent study found that coal to liquids (CTL) produces twice the carbon emissions (CO2) as conventional gasoline. Officials say this will be overcome by new technology but that the technology has yet to be discovered. CTL is widely discussed as a solution to the oil import problem because of our abundance of coal. There are nine CTL plants in the planning/construction stages in the US and slated to begin production by 2009. These nine plants would produce about three billion gallons of fuel per year. Currently CTL plants being developed have no plans to sequester CO2 and the costs of CO2 curtailment are not part of the projected budget. One $800 million project in Gilberton, PA., would make 5,000 barrels of CTL fuel per day and produce 3.2 million tons of CO2 emissions per year. Including the emissions from burning the fuel in vehicles the amount of total emissions for CTL is 85% greater than that for gasoline or diesel. With the growing likelihood the US will eventually establish emission controls the financial viability of these plants is doubtful at best.

It was not a good week for earnings with Forest Oil and ATPG both surprising to the downside for steep losses. Both were closed. Losses in the Asian and Latin American markets knocked out PTR and PTR.

For the coming weeks we will remain at the mercy of the broader market. Oil prices should moderate slightly once warmer weather arrives as is projected for the next 14 days but then gasoline demand will begin to grow. This will push oil prices higher as we approach summer. Until then we should view any further dips in the broader market and energy stocks as a buying opportunity. The dip gave us an opportunity to add some new stocks to the watch list. Any further drop should give us some new entries. I am also adding some short puts to existing plays to reduce our costs.

Jim Brown

April Crude Chart - Daily

April Gas Futures Chart - Daily


Leaps Trader Commentary Archives