Option Investor

So Close

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We came within a $1.38 of hitting $100 oil but could not get that final spike. $98.62 is the official record high but it is too soon to be counting $100 out. A 10-year storm in the North Sea cut off 540,000 bpd of production but crude had already lost momentum when the news hit the wires. I mentioned last week I was ready to short any touch of $100 and it looks like a lot of other traders stepped in front of that target. I guess the early entry gets the bid. That storm was not expected to last more than 5-days so production should have already been resumed.

This should be another volatile week for crude with options expiring on Tuesday and futures expiring on Friday. The inventory report will be delayed until Thursday due to the Veterans Day holiday on Monday. That means there will be a lot of trading packed into Thursday and a surprise inventory build would be the perfect spoiler to longs wanting to exit on Friday with a giant profit.

It was a busy week with lots of oil news and lots of volatility on the Chinese stocks. We were lucky enough to get a $75 drop in PetroChina and make our entry on Thursday. We were also triggered on the FXI Index position on the decline in their markets. Even more exciting was a windfall entry on Foster Wheeler the day before they spiked +$25. It was a good week overall.

It was a great week for Petrobras (PBR), the national oil company of Brazil. It was a masterful art of press release scheduling as well. On Thursday Petrobras announced the discovery of an 8 billion barrel field off the coast of Brazil. The stock soared from $92.60 to nearly $120 on the news. On Friday profit taking took $9 off the price to close at $108. After the markets closed on Friday Petrobras reported earnings that fell -22% on flat year over year production. The company reported a net profit of 5.528 billion R$ (The Brazilian currency is the "Real") compared to estimates of 7.1 billon R$. Because they have substantial investments around the world denominated in dollars they are suffering from currency problems when they account for their investments. They suffered a 900 million R$ loss for the quarter and for the first nine months of 2007 currency losses against the dollar have risen to 2 billion R$. Because the earnings miss happened after the close the impact to the stock price will not occur until Monday. I would love to see a major crash to give us another entry but with a new 8 billion barrel discovery I doubt it will fall much below $100. This amounts to nearly 50% of their prior total reserves. Unfortunately it is in very deep water and it could be 7-10 years before full production is achieved. Initial production is being quoted for 2013-2014 but these dates on complicated production systems can slide by a factor of years. This pushes Brazil up to number eight in the world in terms of oil reserves and the oil discovered was light crude. This was a serious windfall for Petrobras. Brazil currently imports 360,000 bpd of crude. These reserves could push Petrobras ahead of Shell and Chevron in terms of reserves with only Exxon and BP larger among the independent oil companies.

Petrobras is going to have a tough time producing this oil. It lies at a depth of 23,000 feet. (7,000 water, 10,000 sand/rock and another 6,000 feet of salt) Petrobras is already a world leader in deep water drilling and production. 65% of their current exploration blocks are below 1300 feet and 70% of their current production comes from deep and ultra deep waters.

I sent out a note on Thursday about the Brazilian governments reaction to the new discovery. (see below) This is clearly one more country that has figured out that oil supplies are shrinking and it is in the country's best interest not to sell it. Having oil 5 years from now will be a major plus and could make the difference between a "normal" economic environment for Brazilians and avoid the massive recession that is heading our way after Peak Oil arrives. China gets it, Russia gets it and now Brazil obviously got it. Eventually the rest of the world will wake up and realize that life as they know it is about to change drastically. When that happens those with oil will be kings and able to command any price they want IF they want to sell it.

Reprint - Blog alert sent 11/08

Petrobras Windfall Is A Problem

Brazil's oil company Petrobras (PBR) reported a monster find in deep water off the coast of Brazil. The total recoverable reserves are expected to be between 5 billion and 8 billion barrels. That is about 50% of Brazil's existing reserves.

The problem comes from Brazil's action after the find was announced. Brazil canceled auctions on 41 adjoining blocks in the Santos Basin field. They canceled the auctions to "preserve the country's sovereign assets." This is just another step towards the conditions I have been warning about for the last three years. Countries are becoming increasingly negative about sharing their oil. We have seen several countries voluntarily reduce exploration that would lead to exportation and exportation itself.

This is going to be a major problem in the years ahead. Once we have clear signs peak oil has arrived many more countries are going to halt exports with a plan to keep their own oil for future use. This is going to cause a dramatic shift in world exports and it could come very quickly once peak oil arrives. This means the world could suddenly go from producing 88 mbpd to 75-80 mbpd in less than a year once the dominoes begin to fall into place. It will only get worse from there. Countries are going to decide that having oil in the future is more valuable than the $125-$150 they would receive on the open market once the peak begins.

I first wrote about this over three years ago and was soundly criticized about my views. Nobody believed countries would quit exporting and change to hoarding oil. Now that it is beginning to occur I believe the potential for peak oil is even closer than thought just six months ago. Sometimes perception is more of a risk than reality. If enough countries perceive there is going to be a shortage their hoarding in advance of that shortage will create the actual shortage they are worried about.

Readers need to take my warnings to heart because once this crisis begins it is going to create the kind of stampede you would get by yelling fire in a crowded theater. Do you want to be at the front of the exit line or bringing up the rear?

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