Luckily, I don’t have to do that very often. Living in a city allows me to walk most places.

But if you commute to work, as many do, one gas tank could be costing you as much as $60. If you are filling up more than once a week…

Lets just say, it adds up.

But what if there was a way to profit from rising price in oil? A way to hedge against the money you are paying at the pump?

A couple of weeks ago, Byron King joined us to tell us about the best way to profit from exploding oil prices.

He said:

With the events we’re seeing in the Middle East I don’t think we’re far from a super spike in the price of oil.

And if that’s the case, you’ll want to take a look at the oil that offer you a chance to profit from a general rise in the price per barrel. Plus, plays that are out of the “danger zone” and won’t be affected by Middle East turmoil. This way you’ll have the opportunity to profit from oils next leap higher.

(If you missed it, you can find the full article here.)

Here at the Sleuth, we provided you with 3 small-cap oil companies that are out of the “danger zone.”

• ATP Oil and Gas Corp. (NASDAQ:ATPG)

• Kodiak Oil and Gas Corp. (NYSE:KOG)

• Vantage Drilling Company (AMEX:VTG)

Today let’s take a closer look at these three companies…

ATP Oil and Gas Corp. — ATP is an international company that works on the acquisition, development and production of oil and natural gas. They create value for their shareholders through the acquisition and development of significant underdeveloped reserves. Their reserves are located in the Gulf of Mexico, the United Kingdom, and the Dutch sectors of the North Sea.

While they are smaller than many of their competitors, they are invested in new technology. Staying on the cutting edge is a great way to end up on top when other companies start to fall behind.

Better yet? There has been a significant amount of insider buying over the past few months…

If you remember awhile ago, I wrote about the importance of insider buying. (If you missed it, click here.) Insiders will sell their company’s shares for any number of reasons—but normally only pick up shares for one.

They think the stock will go up.

Now may be a great chance to pick up shares for cheap.

Kodiak Oil and Gas Corp.— When we first mentioned Kodiak, it was listed on the American Stock Exchange (AMEX). Kodiak recently changed it’s listing to the New York Stock Exchange (NYSE).

Kodiak is an oil company that works on the exploration, acquisition, and productions of oil and natural gas. They have a oil and natural gas portfolio in proven U.S. reserves.

And—they are also working on the speculation of new reserves.

Kodiak is highly competitive with other companies in the industry and with showing substantial revenue growth. This could also be a good addition to your small-cap resource portfolio.

Vantage Drilling Company— Vantage Drilling is a provider of offshore contract drilling services for oil. They are focused on operating a fleet of drilling unit.

While the company is not turning a profit yet, they are showing revenue growth. They are smaller than many of their competitors, but in line with industry standards.

This would probably be the riskiest play of the three, but not necessarily a bad buy. Like ATP, insiders have been buying up shares for the last couple of months.

And the stock is trading at just under $1.50.

As you can see, there is a lot of opportunity in small-cap oil companies right now. But just one reminder: the Sleuth does not keep a model portfolio. We will not be sending out buy or sell alerts on these companies. If you do decide to invest in any of these oil plays, be sure to plan your entry and exit carefully.

And please tell us about it… you can shoot us an email at editor@pennysleuth.com.

Sincerely,

Jessica Comitto
Managing Editor, Penny Sleuth

Sleuth’s Picks: 3 Penny Plays Set to Explode was originally featured in the Penny Sleuth.

But ask the average man on the street why gas prices are on the rise, and you’ll discover that there is very little understanding about how the world works today.

Truly, the world energy market is a complex system. Many things influence the price that we pay at the pump.

So what’s poised to send prices at the pump higher?

A lot of things.

To start with, I could tell you a long story about the depreciating dollar and how inflation is creating higher prices at the pump.  This, as you know, has been true over the past few decades – and looks to continue into the future.  And although inflation will increase the price of commodities like oil, it isn’t something that will spur a rampant rise in the price.

For that to happen we’d have to look directly at supply and demand for oil. Indeed, there are plenty of things that could trigger a price spike like 2008’s high of $147 a barrel.

For instance political events can trigger a rise in the price per barrel. Nationalization or even the idea of an all out “oil war” could catapult prices to well over $220 a barrel, overnight.  Clearly, with any disruption of output in the Middle East prices could skyrocket.

Situations like this can create vast opportunities.

And lead to huge profits for investors…

Today, I’d like to tell you about a sure-fire reason that prices at the pump are expected to go higher. And later on I’ll show you exactly how you can profit from this same event.

Surprisingly the main trigger is just pure and simple science. It’s known as Peak Oil, and it’s the end of cheap oil as we know it…

The Peak Oil theory was pioneered in the 1950s by a geologist named M. King Hubbert (1903–1989), who worked for Shell. He reviewed mountains of data concerning oil discoveries, extraction and production dating back as far as the 1860s.

Hubbert noted the common trend in oil field development for a new field to come online and oil production to increase as the field was drilled and developed. But then, over time, the inevitable effects of depletion would kick in and cause the overall production of the oil field to steadily decline.

The discovery side of the Peak Oil theory holds that mankind has identified and located, if not actually discovered, most of the conventional crude oil that there is to find in the crust of the Earth. The production side of the Peak Oil theory holds that mankind has produced and, of course, consumed something near half of it. In terms of really big Peak Oil numbers, out of a worldwide resource base of conventional oil that is estimated by some knowledgeable commentators at about 2.2 trillion barrels, about 90% has been discovered and about 1 trillion barrels have been extracted and consumed over the past 150 years or so.

So the fact is Peak Oil is an event of profound significance. One commentator on the subject is Ali Samsam Bakhtiari, a retired director of the National Iranian Oil Co. He has been studying the history of petroleum and the oil industry for decades. He has a collection of databases from every major producing region of the world. Dr. Bakhtiari is among the most respected oil analysts anywhere. Bakhtiari has reviewed the available evidence on world oil production and believes that world output peaked absolutely in the summer of 2006.

If Dr. Bakhtiari is correct, then the world is many years passed the “peak” point of Peak Oil. The future of conventional oil extraction is all downhill from here. Which does not mean that we cannot make some money on the phenomenon. And in the post-Peak Oil future, you will definitely want to have some money…

Okay. So we’re past the point of no return with the supply of oil.

Although some oil finds, even big ones, will surface over the coming years they won’t make up for failing production and increased oil demand.

This paints a pretty grim picture when it comes to the price of oil.  Prices are set to rise for all the reasons listed above.

But even past peak oil, inflation and increased demand certain market shock events could drive the price of oil up over $300 per barrel.

The oil market is tight – every year demand stretches the limits of our oil supply and all it would take is one blip on the supply side to throw this delicate equilibrium off.

With the events we’re seeing in the Middle East I don’t think we’re far from a super spike in the price of oil.

And if that’s the case, you’ll want to take a look at the oil that offer you a chance to profit from a general rise in the price per barrel. Plus, plays that are out of the “danger zone” and won’t be affected by Middle East turmoil. This way you’ll have the opportunity to profit from oils next leap higher.

[The Sleuth’s Note: Doing a quick search with Google Finance’s Stock Screener, we were able to find a few small-cap domestic oil companies to get you started. They are: ATP Oil & Gas Corp. (NASDAQ: ATPG), Kodiak Oil & Gas Corp. (AMEX: KOG), and Vantage Drilling Company (AMEX: VTG). As always, this is just a place to start. Before investing in anything, we recommend you do your own research.]

Sincerely,

Byron King,
for Penny Sleuth

How You Can Profit from Exploding Oil Prices was originally featured in the Penny Sleuth.

The oil-rich inlet is named for Captain Cook. He stumbled on this 180-mile inlet on his search for the Northwest Passage. It stretches from the Gulf of Alaska to Anchorage. Too bad for Cook, he never realized the true value of his discovery.

However, investors today are in the best position to reap the gains. Right now, the value of Cook’s oil “jackpot” is over $23 billion, but it wasn’t always like this…

You see, after the Russians’ discovery, a variety of fortune-seekers — lone prospectors, private wildcatters and big oil companies — took shots looking for commercial oil here. While there was some success, there were mostly setbacks and a trail of abandoned wells.

It wasn’t until 1961 (two years after Alaska became a state) that Swanson River — a joint venture between Richfield and Standard Oil — became a commercially successful oil field.

The rest, as they say, is history.

More than a billion barrels of oil, along with 5 trillion cubic feet of natural gas, has been pumped out of the Cook Inlet area. Oil and gas development in Alaska as a whole has been huge.

About one-fifth of the domestically produced oil in the U.S., for instance, comes from Alaska.

But these assets have been in long decline. Production of crude oil is down more 70% from its high in the 1980s.

Cook Inlet is now an old horse with oilmen trying to coax whatever they can get out of it.

But here’s where things get interesting…

Chevron, one of the largest Cook Inlet producers, recently said it would sell all of its assets here. This includes offshore and land-based oil and gas fields, 10 offshore rigs and two gas tank farms. Chevron will also part with its interests in two regional pipelines.

“The decision comes as production from Cook Inlet oil and gas fields is declining,” Anchorage Daily News reports, “typically, a period when big energy companies lose interest in their investments and smaller operators jump in.”

Here, then, is the opportunity. There is still a lot of oil and gas left in Cook Inlet. It’s just too small for big guys like Chevron to spend time and money on. For a smaller outfit, it could mean a fortune.

Remarkably, despite the fact that the Cook Inlet is the oldest producing basin in Alaska, much of it is still untapped, as Petroleum News points out:

Nearly all of the operating oil and gas fields in Cook Inlet derive from exploration done in the 1950s and 1960s, before the discovery of the giant Prudhoe Bay field caused the attention of explorers to switch to the North Slope. As a consequence, only limited exploration of Cook Inlet has taken place in more recent decades.

The state of Alaska, too, is bending over backward to keep investment in oil and gas flowing.

The state leans greatly on this industry. Some 80% of state revenues depend on oil and gas extraction.

It employs thousands of people. Those people in turn support shops, restaurants and the whole wheel that is a community.
So the government created some sweetheart deals for oil and gas companies to spend money here. Among these goodies is a 40% state refund on money spent for drilling and exploration costs — paid in cash to the operator. There are other laws in place that could refund as much as 20% of other costs and 25% of net losses incurred.

Again, for a small operator looking to get a sweet return on a moderate-sized pot of money, Alaska is golden. The economics of Alaskan oil and gas are as good as anywhere in the world.

Location is very important. As with real estate, where you are makes all the difference. I like to find “pockets” where natural gas goes for a big premium. For example, in Turkey, prices are more than double what they are in the U.S. And here we find another pocket in Alaska. Plus, the state gives you all kinds of goodies besides.

I see Alaska’s oil and gas fields becoming a very profitable region for smaller companies.

Cook Inlet may well enjoy a revival.

In fact, the seeds are already starting to germinate. One group is bringing the first new drilling jack-up rig to come to Alaska in 16 years. Another group is bringing back shut-in wells. There is actually a fairly long list of companies squeezing life from old assets and/or exploring new prospects, spurred on by generous state incentives.

It’s the beginning of a good old-fashioned Alaskan oil and gas boom. In a world where foreign sources of oil are more frowned upon and uncertain than ever, my guess is that investors will look warmly on the efforts of those in “the last frontier.”

[The Sleuth's Note: Doing a quick search using Yahoo! Finance, we came across a few Alaskan drilling companies. You can start out by taking a closer look at these: Parker Drilling Company (NYSE:PKD), Tesoro Corporation (NYSE:TSO), and Linc Energy LTD (ASX:LNC). But, before buying anything, we suggest doing your homework.]

Sincerely,
Chris Mayer
Penny Sleuth

How to Become the Next Alaskan Millionaire was originally featured in the Penny Sleuth.

Over the next hundred years, a variety of fortune-seekers — lone prospectors, private wildcatters and big oil companies — took shots looking for commercial oil here. While there was some success, there were mostly setbacks and a trail of abandoned wells.

It wasn’t until 1961 (two years after Alaska became a state) that Swanson River — a joint venture between Richfield and Standard Oil — became a commercially successful oil field.

The rest, as they say, is history.

More than a billion barrels of oil, along with 5 trillion cubic feet of natural gas, has been pumped out of the Cook Inlet area. Oil and gas development in Alaska as a whole has been huge. About one-fifth of the domestically produced oil in the U.S. comes from Alaska.

But these assets have been in long decline. Production of crude oil is down more 70% from its high in the 1980s:

Annual Alaska Field Production of Crude Oil

Cook Inlet is now an old horse with oilmen trying to coax whatever they can get out of it. But here’s where things get interesting.

Chevron, one of the largest Cook Inlet producers, decided recently to sell all of its assets here. This includes offshore and land-based oil and gas fields, 10 offshore rigs and two gas tank farms. Chevron will also part with its interests in two regional pipelines.

“The decision comes as production from Cook Inlet oil and gas fields is declining,” Anchorage Daily News reports, “typically, a period when big energy companies lose interest in their investments and smaller operators jump in.”

Here, then, is the opportunity. There is still a lot of oil and gas left in Cook Inlet. It’s just too small for big guys like Chevron to spend time and money on. For a smaller outfit, it could mean a fortune.

The state of Alaska is bending over backward to keep investment in oil and gas flowing. The state leans greatly on this industry. Some 80% of state revenues depend on oil and gas extraction. It employs thousands of people. Those people in turn support shops, restaurants and the whole wheel that is a community.

So the government created some sweetheart deals for oil and gas companies to spend money here. Among these goodies is a 40% state refund on money spent for drilling and exploration costs — paid in cash to the operator. There are other laws in place that could refund as much as 20% of other costs and 25% of net losses incurred.

Again, for a small operator looking to get a sweet return on a moderate-sized pot of money, Alaska is like the El Dorado of oil and gas.

And there is actually a natural gas shortage in the region. Current proved reserves may well fall behind demand by 2012. Yet the inlet has an estimated 13–15 trillion cubic feet of gas, as well as more 200 million barrels of oil — mostly overlooked by the big majors.

As a result of the shortage, prices for natural gas here are about $3 more per million cubic feet (mcf) than they are in the lower 48. While gas wallows around $4, Alaskan natural gas goes for $6.50 and as much as $10 per mcf in the winter.

This is the fascinating thing about natural gas that many investors don’t understand. Location is very important. As with real estate, where you are makes all the difference.

I could see a kind of echo boom to Alaska’s oil and gas, where it becomes a very profitable region for smaller companies. Cook Inlet may well enjoy a revival.

In fact, the seeds are already starting to germinate. One group is bringing the first new drilling jack-up rig to come to Alaska in 16 years. Another group is bringing back shut-in wells. There is actually a fairly long list of companies squeezing life from old assets and/or exploring new prospects, spurred on by generous state incentives.

It’s the beginning of a good old-fashioned Alaskan oil and gas boom. In a world where foreign sources of oil are more frowned upon and uncertain than ever, my guess is that investors will look warmly on the efforts of those in “the last frontier.”

Sincerely,
Chris Mayer
Penny Sleuth

May 16, 2011

Hidden Profits from These Forgotten Treasures was originally featured in the Penny Sleuth.

The 1980s also left its indelible mark on certain places. Say “Nicaragua” and it likely conjures up images of guerilla fighting between Sandinistas and Contras. Or say “Colombia” and you likely think of the drug trade. Cigarette boats. Violence. Drug mafias. Rich cocaine kingpins. Back in the day, as the saying went, Colombians didn’t rob banks. They bought them.

Both countries have changed dramatically, though.

Nicaragua has changed a lot since the 1980s, of course. I was down in Nicaragua with a group of readers exploring property in Rancho Santana. I also poked around other developments nearby. The country is enjoying a revival of investor interest.

As for Colombia… Well, I recently read a very entertaining book titled The Fruit Palace: An Odyssey Through Colombia’s Cocaine Underworld by Charles Nicholl. Published in 1985, the author sets off, Hunter S. Thompson-style, in search of the Great Cocaine Story, “a one-eyed glimpse up the skirts of South America.” The book takes its name from a little whitewashed café in the seaport of Santa Marta, where the author had his first encounter with drug trafficking.

Colombia is ideal for growing coca, which thrives in the lush, hot, semitropical slopes of its mountains, which run north-south up the country like primeval spines. Nicholls writes, “Fiercely hot, plentifully watered, full of hidden cul-de-sac valleys and mostly impassable to any vehicle larger than a mule… They call this the continent of fugitives, where a man can lose his own shadow.”

This is the South America of imagination, shrouded in greenery, fringed with mist and full of steamy valleys and half-hidden villages and lost shrines. Slow-moving rivers, rice paddies, cane fields, coffee plantations…

Today, though, Colombia may be the best economic story in Latin America. The drug violence has been mostly rooted out. Bogotá, the capital, is now safer than Miami, Washington or Atlanta. The economy is growing 5% per year and has a large middle class. In just the last six years, foreign investment in Colombia has gone up fourfold, and exports tripled.

The famous IMD survey recently ranked Colombia second best in Latin America in protecting private property, behind only Chile. And the World Bank rated Colombia third in Latin America in the “business friendly” category, behind only Mexico and Peru.

The Colombian stock market has been on a tear since the ’08 financial crisis. But valuations remain reasonable given the high growth rate.

As a resource story, Colombia has huge potential for oil production. There have been a number of success stories already.

Colombia is currently the world’s 25th largest producer of oil. Colombia’s history as an oil producer goes back to 1918 with the discovery of “La Cira — Infantas,” a giant oil field. Oil companies continue to make big finds here, adding to Colombia’s reserves.

The Colombian oil story peaked in the late 1990s, though. Production declined and has been flat in recent years. The reasons for the decline are complicated. The turmoil in the country certainly took its toll. Some of it had to do with the shifting nature of contracts and concessions. Some of it had to do with just neglect and poor management. And some of it was just that the easy oil was found and pumped out.

But things have turned in the last couple of years. In 2009, production increased for the first time since the 1990s. Colombia’s oil industry is thriving amid better security, a better investment climate and the use of the new technologies.

Some ex-Venezuelan oil hands, chased out by Hugo Chavez, wound up in Colombia. They used their knowledge of Venezuela’s Orinoco fields, which produce heavy oil, and applied it to the same geology found over the border in Colombia. The rich source rocks that produce oil from Venezuela’s massive oil fields share a history with those found in Colombia.

The results have been fantastic. Now oil watchers expect Colombia to pump out an average of 800,000 barrels of oil per day this year, up 50% from 2007. The stocks of Colombia oil companies have exploded on the growth.

There are companies here, locking down acreage, exploring relatively untapped basins. I think it’s still early in Colombia’s oil boom, and may be a good time to start keeping an eye on this market.

Sincerely,
Chris Mayer
Penny Sleuth

April 12, 2011

Seeking Profits in This Emerging Market was originally featured in the Penny Sleuth.

According to the Chevron executive, “My greatest challenge is to manage a large array of aging assets.”

In the Permian Basin, Chevron is producing oil from fields discovered many decades ago, often using pipe and equipment that was installed decades ago. Oh, it would be nice to rebuild everything with new steel and equipment, and all the latest automation. But you can only justify so much new investment wells that produce 6.5 barrels per day before it’s cheaper to plug them…

This New Technology IS Working

At the same time, the modern U.S. oil business is not just all about managing legacy assets. For all the oil that’s ever been pulled out of the Permian Basin, MOST of the original oil is still down there, in the source rocks and in reservoir rocks that won’t give it up very easily.

So Chevron is using the Permian Basin as a modern laboratory for new oil recovery techniques. There’s still a lot of oil down there, but now it takes more imagination, capital and technology to extract it.

With some old reservoirs, Chevron is pumping CO2 to “flood” the reservoir, mix with the oil in place, and then move that oil out of pores in ways that traditional water-floods won’t reach. In fact, Chevron is working on ways of making the oil less viscous via CO2, and then “sweeping” the reservoir with water floods. The idea is to increase recovery from the reservoir, to get every drop that will possibly flow.

Chevron is also drilling new wells into formations that were not, traditionally, oil producers. Up until now, the rocks had something “wrong” with them — such that they didn’t give up the oil.

Indeed, some new types of oil bearing rocks have the permeability (“impermeability” is a better word) of granite. But the kinds of hydro-fracturing that we see in shale formations is also beginning to yield a lot of “new” oil from tight formations.

Chevron had eight, powerful pumper trucks all lined up. These pumpers were just roaring away, pushing barrels of fracturing fluid (mostly water, with chemical additives and propping-sand) down the hole.

The idea is for the fluids to work their way into the rock formation, and literally crack open a series of fractures as far away from the well as the energy will carry. Then when the water comes back out, the sand that’s been mixed will stay in the fractures and hold them open. This makes it easier for oil to move out of the rock formation and into the well.

According to the University of Texas Bureau of Economic Geology, there may still be 60 billion and more barrels of oil left in the Permian Basin — half the oil reserves of Iraq, by way of illustration. The trick is to develop technology to get it out.

It’s the new tech – with companies like Chevron out in front — that will keep the Permian Basin supplying oil for another 100 years — and offering new investment opportunities in the process. This is one technology you will want to keep your eye on.

Until we meet again,
Byron King
Penny Sleuth

March 9, 2011

A “Flood” of Profit to Come from This Oil Technology was originally featured in the Penny Sleuth.

Uncertainty is what adds additional fear and volatility components to the everyday trading concerns. The quantitative easing stimulus has been well-publicized and political changes foreseen so the results may be minimal.

A non-event often takes place as investors have positioned prior to the actual outcome. An efficient (in theory) auction style marketplace digests all of the information to determine an equilibrium price.

The fundamental drivers are reflected in the price action. The news or data event itself is not where money is made but rather the market reaction.

Personal travels took me through western Illinois to Iowa City, Iowa (obviously) for a pigskin quest. As reported to my Resource Trader Alert readers the grain harvest has been at a record pace while grain market prices remain at multi year highs.

The fall sunshine, warm temperatures and clear skies highlighted the oddness of the cleaner sweep of the plains. Something was amiss wearing short sleeves with not a standing crop to be found on the 200-mile trip.

An early cleanup and short work describes the football game action as well for the Hawkeye state. Cold beers were donated by polite strangers like freebees setting up the casino guests to fail. Food, fun and frolic was had by all after harvest work has been done. A beat down of epic proportions capped the farmer’s season but certainly not mine.

Apparently this quick and efficient harvest has been playing havoc in another sector, though. This according to the Des Moines Register:

“The harvest under way is taking its toll on Iowa’ rural roads and bridges. In recent weeks, Buchanan County has experienced piling failures at three bridges.

“The reality is, the bridges are getting older while the agricultural equipment and loads are getting heavier. One farmer acknowledged that he had his corn header on but there was supposedly very little corn in his hopper. His foreword momentum got him across, even though a portion of the deck broke away and fell into the creek. Had the combine gone down with it, he could have been injured or killed.

“One of our local farmers acknowledged that his two 750-bushel grain wagons weighed just less than 100,000 pounds without the weight of the tractor. Bridges are designed for 80,000 pound vehicles.

“When the grain gets finished we will begin with the liquid manure tanks. I am told the loaded tanks with the weight of the tractor are in the vicinity of 140,000 pounds. They shouldn’t be crossing the bridges.

“We are currently funded to replace about one bridge per year with federal funds. At that rate, we could get to all the bridges in Buchanan County in 257 years.”

On the subject of corn, the ethanol expansion has continued to the backyard or tailgate in this instance. The clean and convertible FlameDisk is the new way to barbecue.

According to the Chicago Sun Times:

“Now comes Chad Sorenson to convert charcoal-using grillers among us. Sorenson is the Madison, Wis. Inventor whose ethanol powered FlameDisk was made for charcoal grills.

“Put the aluminum disk, which resembles a Frisbe-sized Jiffy Pop popcorn container, on the grate where you usually load your charcoal, peel back the top and light. A few minutes more, and you’re ready to grill.

“Its targeted at people who like the simplicity and upfront cost of the charcoal grill but don’t want the soot and ash. They’re getting gas like performance in their charcoal grill, says Sorenson, a mechanical engineer.

“Sorenson is big on talking about how his invention has been tested and is good for the environment, since solidified ethanol used in the disk is a renewable energy source and burns cleaner than charcoal and lighter fluid.”

Leader in This Race

Stocks, crude and the Commodity Research Bureau (CRB) index have moved in tandem both up and down as the price correlation has led to intelligent and insightful option plays. In truth it is only the result that matters and the price action in these indicators have made for a lot of winners.

While quiet last week to finish the month, stocks had the best September- October performance since 1998. The Dow was down 14 points, -0.13%, on the week ending October 29th. The S&P fared better to close unchanged, +0.02, and the NASDAQ was the upside leader positive 28 points, +1.13 on the week.

The bullish trends remain strong with the potential catalyst of crude oil pushing above $85 a barrel to set commodities markets aflame once again… I expect for this trend to continue to affect the commodity markets in a very positive way.

Sincerely,
Alan Knuckman
Penny Sleuth

November 11, 2010

How You Can Make Money Off Market Reaction was originally featured in the Penny Sleuth.

While not rising to participate in the recent resource and asset rally, crude is not going lower… And if it doesn’t go down then the odds are high right now that it will go up.

A high price correlation to rallying markets in equities and gold make crude a low risk and high reward trade from here. The December spread will be watched closely for recovery as time starts to become an issue. It was only the beginning of August that Dec. crude prices hit $84 a barrel to illustrate resurgence potential.

As a derivative of crude, heating oil should participate in any price rally gains indirectly.

With heating oil prices trading between $2.50 and $2.00 per gallon for more than a year, the odds of a significant breakout has dramatically increased. The target is $3.00 on a challenge of the upside resistance.

But I digress – let’s get back to crude oil for the moment… Here is a glimpse of Wall Street’s take on crude right now, courtesy of a recent article in Bloomberg news:

“The shutdown of a U.S. oil pipeline that caused prices to fluctuate twice as much as in Europe is adding to concern that the benchmark contract for crude is failing to reflect supply and demand for energy.

“The eight-day closing of the Enbridge Energy Partners LP 6A pipeline, which moves 670,000 barrels a day of Canadian oil to the U.S., caused West Texas Intermediate crude futures to trade in a $5.29 range on the New York Mercantile Exchange last week. That compares with $2.65 for the Brent contract in London.”

Recent record supply data has been unable to push crude lower, a bit of price action that shows us encouraging signs. Price volatility has also declined sharply setting up for a possible bullish rally. “Never sell a quiet market” was the mantra here before the recent stock market run let’s hope it holds true here too.

The list of resources and assets that made new relative and multi year highs last week adds to the positive sentiment and momentum. Copper, S&P 500, Corn, Wheat, Soybeans, Gold, Silver, Hogs, Cotton, Coffee continue to be hot commodities. More upside remains as the Commodity Research Bureau (CRB) Index rallied to the highest levels since January even without the energy complex in play.

As commodities continue to see bullish activity, traders will be waiting out that spark needed to send crude higher alongside. It could easily make up for next time very soon…

[Editor’s Note: While Alan’s Resource Trader Alert subscribers can take advantage of leveraged commodity gains through his recommendations, there’s still another way to play a bullish bent for oil if you’re willing to settle for smaller gain potential…

Right now, there are only three oil futures ETFs (and ETNs) trading on the market: the U.S. Oil Fund ETF (NYSE: USO), the PowerShares DB Oil Fund ETF (NYSE: DBO) and the iPath S&P GSCI Crude Oil Total Return Index ETN (NYSE: OIL). Of the three, DBO is the most attractive because it uses a strategy to account for negative roll yield that other commodity ETFs deal with. While even DBO can’t track the spot price of oil perfectly, the ETF is the only fund worth considering if you want to invest in oil.]

It all comes back to commodities,
Alan Knuckman
Penny Sleuth

September 29, 2010

[Independence Note: Unlike scores of other penny stock resources, we’re 100% independent from the companies we talk about in the Sleuth – that means that we never accept compensation in exchange for profiling a company, and our editors never own a position in any stocks they talk about.]

Cash in on Crude Oil This Month was originally featured in the Penny Sleuth.

When it comes to oil, there are many numbers out there, but most of these involve a lot of guesswork. For example, we really don’t know just how much oil the world will need. The U.S. Department of Energy says we’ll need 106.6 million barrels a day by 2030, buy how does it know? It can’t know. It can’t know what the world will look like in 2030.

We don’t really know how much oil we’re discovering or how much will actually come to the market any time soon. We don’t really know how much it will cost to get this oil. We can guess, but our guesses are frequently wrong. Goldman Sachs wrote in a research report issued in February of last year (230 Projects to Change the World) that the cost of bringing on additional oil sands project would come to $80–90 a barrel. It sounds nice, but it’s a guess.

We don’t know a lot, even though we put decimal points on lots of numbers as if we knew precisely. And there is plenty of room for people to fudge numbers and make up stuff. It happens all the time.

Of course, no one knows what the price of oil will be, but there is no shortage of forecasts. Goldman Sachs says it will be $95 by the end of 2010. Deutsche Bank says $65. They are all guessing.

There is one thing we do know. And fortunately, this is the most important thing to remember as an investor in oil: The market is still pricing proved oil reserves at less than replacement cost.

In other words, it is cheaper in today’s market to buy proven reserves in the stock market than to drill for new ones.

I would cite the 2008 reserve and finding cost study published by Howard Weil. It shows the average cost of reserves through the drill bit is about $43 per barrel, with the median (or midpoint) around $25 per barrel. These are hard numbers, not soft guesses. You can do this yourself and find out how much it costs for your favorite oil company to add a barrel of proved oil reserves by drilling for it.

So we have a good idea of what it costs to create a barrel of proved oil reserves today. Figuring out these numbers is easier than guessing what the price of oil will be in the future. Granted, even these cost numbers will change. There are no constants.

But here is the trick. You want to buy oil companies when you can pick up proved oil reserves for a lot less than what it costs to produce them. In the market, that’s where we are today. In fact, you can pick up proved reserves for less than $15 a barrel.

Here is a scatter plot by an energy firm I respect a great deal, Lucas Capital Management. It shows you the universe of stocks it follows. EV is enterprise value, which you can think of as the cost to acquire the entire business, both the stock and the debt. So EV/BOE shows you how much you are paying per barrel of oil. It plots this number against reserve life. Take a look:

The math is easy. You have lots of companies here in which you can buy oil in the ground for under $10 a barrel… and remember it costs on average $25 a barrel to replace it.

I could not make a more compelling argument for oil stocks than this.

Buying for less than replacement costs is one of my main compasses in investing — whether I’m buying potash mines or gold mines or factories or oil rigs or what have you. If I can buy it in the stock market for less than it costs to replace those assets — and as long as I’m not buying buggy whips — then I’ve got a good chance of making money.

That’s because the stock market is, after all, just a market. Eventually, prices correct. In the oil market, we’ll see more acquisitions. It’s cheaper and easier to grow reserves that way. The buying pressure will lift the price of oil stocks so that the disparity is not so great. Simple as that.

In the case of oil, we are also looking at strong odds that the costs of producing a barrel of oil reserves will go up. Recently, The Wall Street Journal ran a piece titled “Cramped on Land, Big Oil Bets at Sea.”

Now, you’ve probably heard of all the big deep-water oil projects. All the major oil companies are moving farther offshore in their quest for oil. The WSJ article leads with this: “Big Oil never wanted to be here, in 4,300 feet of water far out in the Gulf of Mexico, drilling through nearly five miles of rock. It is an expensive way to look for oil.”

Yes, it is. This is another of the great unknowns. We don’t know how much it will cost at the end of the day to get this oil. We know that it will cost a lot. Chevron spent $2.7 billion over 10 years on just the first phase of a deep-water oil project in the Gulf.

That’s one of the more tame projects. Some of the sub-salt discoveries involve drilling more than 30,000 feet. They will be the most expensive wells ever drilled. You really don’t need to know a lot about geology or oil to guess that this deep-water oil is going to be more expensive than the good old oil wells onshore.

So that average cost of reserves is likely to go higher. Meaning, that if you can lock in quality, low-cost, long-lived reserves today for only $15 a barrel or less — you should do it. That’s why you own oil stocks today.

Sincerely,
Chris Mayer

February 2, 2010

The Most Important Thing to Remember As an Oil Investor was originally featured in the Penny Sleuth.

But one thing I’d like to stress in today’s Sleuth, with the Volatility Index ($VIX) around 25, is that I believe we’re still at a reasonable level of volatility – and if anything, last week’s correction was long due.

The sell off was the worst since March 2009 with a 5% drop in the last three days of the weak week. Put in perspective, though, 15 Month S&P highs were made Monday January 19th – only a few trading days ago.

My focus lies on the recently humbled physical commodity markets that were down 6.5% as the raw materials sector retreated on Chinese concerns. Their coordinated announcement of slowing growth from the official 10% latest quarter GDP jump is designed to temper inflationary pressures – but contrary to some published obituaries the Red Dragon is still very much alive.

Last week has definitely gotten our attention but remember we have seen this action repeatedly before. For the last 10 months, every time the market looks like it will turn down it has responded with a rally to new relative highs.  Take a look:

One component in pricing for the options that my Resource Trader Alert readers invest in is volatility. For our purposes it helps us determine simply to buy an outright option if price are cheap or to purchase a spread if expensive (in relative terms). An increase in volatility is an increase in price movement – and don’t forget we need the markets to move in order to make money on our positions.

Stocks had slowed in the last couple of weeks and the $VIX, which measures the S&P 100 stocks, was solidly below 20 and as low as 16 January 11th. No fear, no movement as you saw quiet market conditions with tighter daily trading ranges while the market searched for a catalyst for prices.

Earnings have begun once again feeding the beast with its necessary diet of market information to digest. Banks have been permitted to make back some money from interest rates held low by the Fed. They had to make some money the old fashioned way:  they Earned it with the risk free policies of the Central Bank allowing them to replenish their dwindled cash coffers.

Is This Just a Pullback, Jack?

After any turnaround (in any market), traders look for price support. The logic is to start small with not making new lows for an hour, then a day, then the week. For example, the highly traded e-mini S&P 500 futures declined to 1089 in today’s session but not below Friday’s lows at 1086 and reversed to move higher on the day.

As a group commodities have done much the same with Gold and Oil closing higher after testing last weeks lows. Crude actually made a lower low at 73.97 Monday for the March contract but closed higher on the day which is a positive technical sign with that reversal on lower volume than Friday.

Another clue can be taken from the action in Treasuries, which benefited from the stock uncertainty last week. 30-Year Bond futures are off by nearly half a basis point as some fear has subsided in the short term. The next round of market volatility will tell us a lot about the market’s future direction.

It may be cliché, but my nearly 20 years of experience makes me most afraid when others are not and gives me a sense of calm when the public is frantic and unhinged.

This from Bloomberg:

Traders are piling into bets that the biggest sell-off in U.S. shares since March will increase stock market volatility, pushing call options on the VIX Index to the highest level in 19 months.

The VIX jumped 55 percent to 27.31 in the last three sessions, the biggest surge since February 2007, as demand rose for options to protect equities from losses. Futures show traders are betting it will remain above 25 for six months after averaging 20.29 over its two-decade history.

The VIX had its biggest annual drop ever in 2009, falling 46 percent, as the smallest stock-market swings in two years reduced the value of equity derivatives. The gauge is still down 66 percent from a record 80.86 in November 2008.

These emotional inputs have been successfully interpreted and managed within my readers’ disciplined RTA trading plan through ups and downs. Risk is always quantified and controlled with our strategies and that does not change as volatility increases, but opportunities do. We’re going to take advantage of those opportunities going into 2010.

It all comes back to commodities,
Alan Knuckman

January 29, 2010

Don’t Panic from the Pullback… Profit from It! was originally featured in the Penny Sleuth.