Crude Sell-off: Solid Entry Point into U.S. Oil Majors

This article has 41 comments:

•  
  Ishortyou

  Aug 06 07:31 AM
  Nah, we not going to use oil anymore too much of a headache and poluting, we just gonna stick with non fossil fuel technology like electric or hydrogen-water even for airplanes.
•  
  mangolfer

  Aug 06 07:44 AM
  I've been shorting oil and making a fortune since early July. As you know, prices always drop faster than they go up and it went up to fast. There is way too much media, demand destruction, and BS surrounding the price rise. I suggest you get out now while you can....
•  
  redbaron

  Aug 06 07:51 AM
  Well said, Fitzman.
•  
  CLH

  Aug 06 07:53 AM
  The main reason for the commodity crash is the turnaround of the dollar. This has only started.
•  
  Fedman

  Aug 06 08:13 AM
  You should stay in oil, but only if you have an estimate for what the price of a barrell of oil should be. Is it $200, $150, $75? The recent run up shows that demand destruction does occur at some point, just as a longer-term higher average price will show more development and investment on the supply side.
  You say that there have been only small changes in supply and demand, but there has been a huge change in price, which likely overshot the equilibrium price, just as the current reversal will likely undershoot the price.
  
  So for me, I'm waiting until hurricane season is over, summer is over, and winter heating demand hasn't kicked in, and then, depending upon the price of oil and Ngas, I will go long. I don't think it is the time just yet.
•  
  just knock
  the horns
  off

  Aug 06 08:36 AM
  Nancy Panoche sees her mission as saving the planet. There will be no long term energy policy coming out of the US Congress which includes using US resources. SNAFU.
•  
  jjason

  Aug 06 08:40 AM
  Someone on Seekingalpha recently said " the price of oil doubled in the last 12 months but DEMAND did not double." This was a good comment.
  
  Now, perhaps, there are more people who know that we are being cheated by OPEC, Big oil, Government regulators who are not doing their jobs ( like the Commodity Futures Trading Commission ), oil futures traders and speculators, and are finally doing something about it.
  
  Go to:
  
  www.stopoilspeculation.../
  
  AND SIGN THE PETITION.
  
  Send Michael Greenberger's report to your Congressman and COMPLAIN.
  
  www.commerce.senate.go...
  
  and tell your friends how former Senator Phil Gramm is responsible for allowing the American people to be CHEATED.
  
  Also, if something is wrong with the link to the US Senate Report, type Michael Greenberger into the search box at the top of the screen.
  
  It's the "ENRON LOOPHOLE" FITZ. And Congress is going to fix it...and we might see oil at $60.00 a barrel...which is what oil is worth.
•  
  truthinvesti
  ng

  Aug 06 08:56 AM

  My Website
  Fantastic article. I think Exxon s getting real cheap considering that as places to put your money gets smalle Exxon is a safe place to park cash. real estate and fixed income is not appealing
•  
  CT
  Programmer

  Aug 06 09:23 AM
  Great article, Fitz, as usual. Couple points, however. First, I don't see the dollar strengthening in the medium to long term. Asian countries have runaway inflation currently, and the only way they'll be able to reign that in is to raise rates. They've been doing this, but only tepidly. They'll get to the point where they have to drastically raise them. China will after the Olympics. Europe is starting to slow a bit, but the ECB unlike the Fed has a primary directive to fight inflation, not promote growth, and theirs is on the rise. So I see them raising rates soon, although not as fast as Asia will need to raise them. You won't see the Fed raising rates in the next year as they continue to worry about slow growth and not technically hitting the "R" word. All of this is going to further weigh on the dollar. Like you said, we've seen a slight strengthening of the dollar by a meek 3% --- you can compare that to a bear rally.
  
  Ag is facing the same thing as oil. It has dropped off a cliff lately (I've seen a 200% return reduced to a 125% return on one of my fertilizer stocks --- I know, boo hoo for me). You've had tons of money poured into energy, ag, metals, etc. over the last 6-12 months because everything else was tanking. Now you've got people taking profits and looking for other opportunities to put their money to work. Cramer called the bottom last week, and true or not, you can't argue that in many people's minds we have turned a corner and it is at least flat if not up from here for the market in general. I'm still long on oil, NG, ag, and metals. 2-10% demand destruction in the short term is just that --- short term. Too bad the Fed can't print oil. Man, that would solve everything. ;-)
  
  By the way, there's a sale on solar stocks currently. I picked up LDK recently, but they're just one of many that have come down in price and have low forward PE's and good prospects.
•  
  The Fitzman

  Aug 06 09:46 AM

  My Website
  Thanks for the great comments. As usual, I like to jump in and add my two-cents-worth:
  
  Ishortyou: i will assume your comment is sarcastic in nature...
  
  redbaron, truth: thanks!
  
  CLH: i hope you are right about the US dollar's turnaround, but I kind of doubt it. yes, the dollar has rallied 3% or so in recent months, but it is still down ~3% for the year. what is the basis to be bullish on the US currency? bush doubled the US fiscal debt in a mere 8 years. the US government is bailing out Bear, Freddie, and Fannie by trading toxic debt for US treasuries. this is socialism for the rich wall streeters (or, as i believe, actually fascism). meanwhile, the FDIC has shot 15% of its wad on IndyMac, while there will probably be hundreds of banks which will go under as the financial crisis plays out. meanwhile, the Fed can't hike interest rates because the economy and employment is so anemic. how does that lead to a strong US dollar turnaround? i believe the opposite, that it will continue to weaken until we get "leaders" in washington, and i don't see either obama or mccain as "leader" material.
  
  Fedman: yes there has been a big price movement in oil, but as the article states i dont see big supply/demand fundamental changes. yes, there is more investment, but as the last few years' data shows, oil exploration spending is increasing drastically just to keep up with existing major oil fields' depletion rates. that is why i still maintain oil service stocks are the single best investment idea for the coming decade.
  
  jjason: sorry, i don't buy the speculators argument for why oil prices are where they are. they certainly are part of the reason, but the reason they jumped into oil as an investment was two-fold: supply/demand fundamentals, and a place to hedge against the weak dollar policies of the Bush administration.
  
  CT: i agree with you on the dollar (see my above comment to CLH). also, i'm not sure it's time to bail on ag and commodities. i recently bought more DBC as a hedge here. it all has to do with the US dollar and supply/demand fundamentals. i remember hearing the CEO of pepsi talk about how billions in india and china are going from one meal a day to two meals a day. that's alot of food...meanwhile, the idiotic ethanol mandates are causing huge distortions in the food chain. time will tell...
  
  
  
•  
  lewisabroad

  Aug 06 09:51 AM
  oil demand is highly ineslastic - that's why it took a doubling in price to cause a 3% reduction in demand in the US. Oil is worth whatever people will pay for it - where jjason $60 comes from is beyond me. It costs ~$3 a barrel to extract oil in Saudi Arabia or Iraq, $40+ to extract it from Athabasca tar sands. add in transportation and delivery probably jjason is right, but it is willingness to pay that sets the price - not production and delivery costs. Clearly a fraction of drivers in the US are not coping well with $4 a gallon hence the drop in demand and price. Combine that with a reduction in Chinese subsidies and you have demand destruction causing a slight excess in supply that results in a radical drop in price. That's how inelastic goods' prices behave in a market. The true speculators in this market are all those American drivers willing to pay $4 a gallon - not traders on wall street. Complain about the price, but until you trade in your f150 or H2 for a prius you aren't sending a signal to the market that the price is too high.
  One way we get $60 a barrel oil is with price caps. Do you remember last time we did that? lines at gas stations? theother way is demand destruction on a much bigger scale than currently. remember the late '90's when gas got so cheap? This was due to heavy demand destruciton in asia due to the asian financial crisis combined witha bunch of new investments coming on line from 10 years prior.
  
  Michael is right on the money with this one. A host of fundamentals points to a long term price rise in oil. Until several of the fundamentals in demand change (US energy policy and foreign subsidies being 2 big ones) there won't be any structural change. What we are seeing is the radical effect that a few percentage points demand reduction globally is causing on oil prices. The only thing anyone could accurately predict in this kind of market is volatility. The hardest part is going to be finding the lows. Long-term, the price is going to go up, but there are going to be a lot of retrenchments and bumps in the road as demand fluctuates. Production is pretty well tapped out globally - anyone who tells you that we haven't hit peak oil from a production standpoint is not looking at production data.
  As for US energy policy, the only bit that is going to make a difference to the typical American as well as the balance sheet is programs that help with demand destruciton. That means increases to CAFE, tax breaks on plug-in hybrids and alt-fuel vehicles like those running on nat gas, and a gradually increasing tax on oil imports to fund those programs. The tax revenue would go directly to programs designed to reduce demand by small business owners and homeowners, like rebates for PHEV and replacement of oil -burning furnaces with efficient gas / heat pump / solar thermal systems. Any excess would be nice to bring down the defecit - another big drag on our economy paying interest to Japanese and Chinese treasury holders.
  
  Offshore drilling would also help, but is a longer-term solution versus demand reduction schemes and delays the inevitable point at which we wean transport from gasoline.
  
  Long-term, the best investment play is hold what you've got in this sector. Short term, we won't know if this is a bottom until we see how much demand has been affected by the decrease in price - some time in September. I expect prices to slide until we see an uptick in US demand or reduction of inventory.
  
•  
  John
  Pseudonym

  Aug 06 10:02 AM
  When every site I hit said gold was going to $2000 an ounce, I knew it was over.
  
  Go with the crowds folks; get in, make money and get out before it's over.
  
  Crowds don't think rationally, so don't argue with them...just go along and make as much as possible.
•  
  longoil

  Aug 06 10:12 AM
  The lack of a long term energy policy is why I am long on oil, in particular with companies involved in E & P as oil well + drilling services. Even if significant measures regarding conservation, alternative energy and new reserves were implemented today you will not see noticable changes in oil prices for the next 5-10 years. The fact there is so much inaction extends the oil investment opportunity into the next 20 to 30 years.
  
•  
  CT
  Programmer

  Aug 06 11:06 AM
  I hope I didn't sound like I was saying it was time to bail on ag and oil. Quite the opposite. The time to bail was a month ago, and that just to buy back in now at the lower price if you had the foresight. Ditto on metals. This is all just a temporary sell-off. Ethanol production accounts for less than 2% of the worldwide harvest. Ag, like oil, has gone up due to fundamentals. More mouths to feed, and to do that it takes better better ag tech --- thus fertilizer, seeds, tractors, etc. all are good plays long-term. Fertilizer contracts just keep going up and up. Last year potash went from roughly $500/ton to $1000/ton. Agrium just reported today and their revenues are up 90% yoy. Sure, that's not sustainable. And yes, the upward pressure for ag stock prices will EASE due to money being pulled out and directed elsewhere, but like oil, fundamentals are fundamentals and you can expect it to keep trending upward. If you're not into ag, today is the day to do it. Ditto for oil, NG, solar, wind and metals. They've pulled back from being overvalued, but that doesn't mean they're not solid investments.
  
  I do agree with lewisabroad in that demand will taper off, but I see that as more just leveling off as the developed world uses less and the developing world uses more. Demand will still increase, but not by as much. However, you'll still have falling supply and increasing demand so prices will trend up over the long haul.
  
  Also, even if we did have real "leaders" in Washington, these things take time. We're talking decades, even if a real plan was adopted today. So we're not coming off our oil addiction anytime soon, and China and Asia would lag behind us by a decade as well.
•  
  Fedman

  Aug 06 12:13 PM
  Thanks for your response. I believe that Oil and NG are great plays for the next decade. My comments were focused on this particular point in time being an "entry point". That makes it more short-term in horizon. If we're looking 10 years out, then 147 oil is an entry point IMO. But I do think near-term we'll see better entry points.
  
  I agree with you fundamental points, mine was just about equilibrium. Great comments by many of the posters here!!!
•  
  John
  Pseudonym

  Aug 06 12:46 PM
  OMG! Just looked at the COP chart and it is a screaming sell!
  
  The top has passed. Sell now. Good chance of $60 a share over the next few months.
  
  That chart just screams major top in place. If you want to trade it, short term in/out is the only way to go.
•  
  nakedjaybird

  Aug 06 12:52 PM
  T. Boone for President. Even tho he's half right by wanting to replace NG electrical power generation with WIND POWER and half wrong by wanting to burn NG in vehicles instead of biofuels, he understands the real problems; the real causes; and addresses the real actions that change the causes of the problems. His head is where the sun shines and wind blows, as contrasted to ALL THE LEADERSHIP IN WASHINGTON.
  
  
•  
  Jimbo

  Aug 06 01:29 PM
  I have been investing energy since 1980. Investors seem to be like a herd of Wildebeastes(spelling?... panicking at the first smell of a lion. The fundamental issues on energy are still in place and aren't going to change as long as the "Greenies" are able to control the Democrats and many Republicans. Bill Clinton vetoed a Republican resolution authorizing drilling in ANWAR in 1996, saying it would be ten years until any gas or oil was produced.Well, here we are 12 years later and the "DemoGreenies&quo... are still singing the same song.The Greenies want to bomb us back to the Stone Age, or at least the 17th. Century when all people and goods moved by wind, animal power or foot power. I have a solar water heater that has been saving me $50.00 a month in electricity since 2002. I am perfectly willing to embrace solar, wind, and all other alternatives. But we have to get from here to that great day with an intelligent energy policy. The Greenies don't want us to use "dirty oil" from the Canadian tar sands. They don't seem to understand if they get their way, we will be facing anarchy and revolution. When Green Peace first came out, I was an early contributor. Then I read their material and concluded they were NUTS!. We need more realists in Washington rather than utopians. I don't know how you accomplish that as long as politicians can use public money to buy votes. In the meantime, Those dirty,greedy oil companies ain't going away!!
•  
  phinsuntanni
  ng

  Aug 06 02:40 PM

  My Website
  well, the Chinese dont like to expend their money in expensive commodities, the Japanese are sacrified to the God of Cheap Yen
  and Growing Exports, Trichet is right but alone, and the strong dollar
  will make some votes for GOP and XOM, they rule the world.
•  
  AlexS

  Aug 06 03:05 PM

  My Website
  There are at least three good reasons high oil prices aren't necessarily good for big oil (XOM, COP, etc) and falling oil prices (within limits) not necessarily bad. One is that higher prices get the public and the politicians riled up, and little good comes from politicians getting riled up (or pretending to get riled up). Two is that crude oil is the major cost input for refined products, and most big oil companies refine much more oil (1.5-2x) than they produce. Three is that high oil prices put in motion a lot more oil production projects and bidding for resources (engineering, materials, etc) makes everything get expensive. For instance, much has been made of offshore U.S. drilling, but even if Congress were to approve drilling, most of the deep water platforms are currently off the Brazil coast and it would be very expensive to snare them for OCS US drilling. Of course, few of our politicians would know that, because few of them have ever been responsible for any business outside of perhaps being a partner in a law firm. Sad to say both of our Presidential nominees fit the "no business experience" class.
•  
  pockyclips
  2020

  Aug 06 03:17 PM
  Great story, and mostly constructive comments. Bought more stock in the most hammered E & P company.
  
  Offshore and ANWR drilling: This should be a states rights issue if you're a true Republican. If Alaska wants to, and California doesn't, so be it. With oil selling south of $120/barrel, and capital costs for
  new wells north of $60, I don't see this as a good economic model.
  Typically, you need 250 to 300% margin to be in this game. Big oil will not expand drilling until $150 is crossed and maintained. Less than $4 gallon gas may make us feel better now, but it brings $5.50 gas a lot closer to reality in the near future. (If Alfred E. Neuman decides to take a parting shot at Iran.)
  
  Tar sands: This will eventually be exposed as fraudulent as ethanol. Mining sand and producing 9 barrels of toxic, unusable
  waste water for every barrel of crude defies logic.
  
  And speaking of fraud, I resent folks like Bob Brinker of Money Talk comparing subsidized costs of nuclear and oil, vs the unsubsidized costs of alternatives. This guy used to be pretty level-headed, but of late has become a toadie. If you can really produce nuclear power @ 2 cents/kwh, counting enrichment, waste disposal, and de-commission costs, why do you need a subsidy? Spread the subsidies across the energy spectrum, then make your cost comparisons. But the powers that be (on both sides) continue to push the S.O.S.
  
  Oil: I keep banging this drum, but we can only achieve energy independence by not using oil for personal transportation. Oil has become too precious; we should use for national defense and petrochemicals. Even if our domestic dinosaur production increases 50 %, we will only be producing 9.5 million barrels /day vs 21 million used in the U.S. We will have 6 % of the reserves vs Russia /Arabs with 65 %, assuming the best case . They will continue to have pricing power over crude oil.
  
  We should use the lowest cost resources we have instead of coveting those we don't, and quit giving our enemies the geopolitical advantage! We can actually come out ahead in this
  Project for a New American Century meltdown if we pull our heads out of the sand. But with two globalists running for President, I doubt anything will be accomplished except interdependence, not independence.
  
  
  
•  
  BSchecker

  Aug 06 04:34 PM
  I agree with the comment above. Buy Nat GAS in late Sept or early Oct. Leaders like UPL will move up quite a bit. Last Aug bought UPL 09 Leaps when the stock was at $52. Rolled the options a few times and sold at $92. Will look to do it again.
•  
  Lazy Al

  Aug 06 04:51 PM
  John Pseudonym:
  
  I did look at the COP chart--along with the rest of the fundamentals of the stock--and to me it appears a strong buy.
  
  At seven times earnings, it’s selling at a huge discount to the general market. The stock is currently priced to reflect $75 crude oil. The fair valuation on the stock at current oil prices is a over $100 per share.
  
•  
  AlexS

  Aug 06 05:00 PM

  My Website
  Pockyclips, I'd have to say as a Republican that offshore drilling is not necessarily a states rights issue. The region they're talking about (outer continental shelf) is by definition federal jurisdiction. I can see the states worried about their seashores but 5 miles out? And I think you've got the concept of subsidies reversed. Oil and nuclear to my knowledge are not subsidized. What usually stands in the way is some authority saying "NO", whether its Congress and OCS and ANWR, or Congress with its unwillingness to finally allow a geologically safe repository for nuclear waste, or to allow reprocessing of nuclear waste. Note that tax cuts are not subsidies by any reasonable definition. If they were, then allowing people (or companies) to keep the money they've earned would somehow become "subsidies". Not at all an honest definition. Just as dishonest is to impute to oil protection the cost of the U.S. Navy, for instance, as some people do. The Navy exists in large part to keep the sea lanes open for all trade, and no one attempts to attribute the cost of the Navy to the price of shirts, for instance. But Congress does subsidize ethanol, for instance, and requires oil companies to use certain percentages of ethanol in their gasoline. Congress hands over our cash. As well, Congress protects domestic ethanol with an import tax, thereby prohibiting the one source of ethanol (from sugar) that makes economic and energy sense (including greenhouse gases). Lastly I hear a lot of objections to OCS drilling on the grounds that it wouldn't be economical for the oil companies. Well if that's really the reason, then I say remove the obstacles to drilling and let the oil companies decide if its economical. No one in Congress, for instance, is making any calls about whether another hamburger chain would be profitable. Why would they object about profitability from oil production? Just another red herring.
•  
  The Fitzman

  Aug 06 05:19 PM

  My Website
  lewisabroad: i agree that oil demand is highly inelastic, especially in the US which is over 20% of the entire oil market. and, at the same time, india & china are going head to head bidding for the oil their billions need to grow their economy. until the US gets a replacement for the gasoline powered internal combustion engine, AND, the time it takes for people to make the transition from their current autos to those, AND the electrical power sources and grid to help power these new autos..the US will remain 70% addicted to foreign oil...and the stocks i mentioned in the article will be printing cash profits.
  
  longoil: exactly! that said, the US had better make significant headway by 2015, as that is d-day according to the CEO's at COP, RDS, and Hess in terms of when worldwide oil production will cease to meet worldwide demand...so, who knows what the top of oil will be when that happens (skies the limit). i mean, we have $120/barrel of oil today and there are no shortages. the US, importing 70% of its oil, will be naked in desert when this happens if we don't have alternatives to the gasoline powered auto.
  
  CT: no, i understood you..i was just chimming in there.
  
  Fedman: and you could be right, oil was down a lil bit more today after the inventory report.
  
  Pseudonym: COP a sell? hmm...let's see, they will earn over $13/share this year, pay 2.3% dividend, are the largest nat gas producer in the US, and are expected to earn $14+/share in 2009 and they are selling at $80 and change? ok, you sell, i will buy.
  
  naked: right on, Pickens is the man! notice however, he's getting no support. where are bill gates? buffet? the google guys? how come obama and mccain aren't inviting Pickens to meet with them? the silence is deafening isnt it?
  
  Jimbo: god i hate labels like "greenies". if we had listened to the "greenies" we'd have more solutions in place today and a cleaner planet. look, the US imports 15 million barrels a day out of 20 million barrels of consumption. sure, alaska and offshore could yield maybe another million or 2million barrels a day of production and sure it would help. but that means we'd just be importing 13 million barrels a day instead of 15 million barrels a day. the point is, we cannot drill our way out of this problem and we need to make the transition AWAY from gasoline powered internal combustion engines or it won't matter what the energy stocks do on wall street because the entire financial system is going to come tumbling down along with the economy. glad to hear you are embracing solar, wind, and nuclear - we need them all, now. wrt anarchy and revolution, if we continue to see the US dollar shrink at its present rate, we will see anarchy and revolution because the economic realities of oil will simply sink the US. i hate labels, especially when they are so wrong. like bush being a "conservative&quo... nothing is further from the truth. he's a radical fascist and his economic and military policies prove it. labels mean nothing these days - they just polarize and are divisive. i would suggest making your points without using labels.
  
  pockyclips: agree with most of your comments except re nuclear. i used to be against. that said, with the energy challenge facing the US, we're gonna need every bit of non-oil energy we can get, including nuclear. you're not gonna run non-gasoline based autos without some percent of those autos being electricity based.
  
  BSchecker: at first i thought your name was "BS checker", which some of the people who disagree with me would love to see :) that said, i now realize you might be "B Schecker", correct?
  
  Lazy Al: yup, i called for COP to trade over $100 this year and it made it to what, $95 before this latest celebration over oil falling all the way down to $119/barrel? COP is a screaming buy, and so are many of the energy service companies.
  
  
•  
  apeakay

  Aug 06 05:43 PM
  I absolutely love to read these comments. I get more info from y'all than I do from the talking heads. Please keep it coming.
•  
  FourBrane

  Aug 06 06:02 PM
  Pokeyclips2020, the water usage in tar sands extraction is not as high as you presently think. The water is recycled. The CRS Report for Congress (RS34258) dated January 17, 2008 claims that 2-3 barrels of water from the Athabaska River are needed per barrel of bitumen produced, but notes that this is before recycling. Makeup water is only .5 barrel per barrel of bitumen. (To make this clear, the first barrel of bitumen takes 2-3 barrels of water. The process loses about .5 barrel to escaped steam, etc. and thus the second barrel of bitumen needs just .5 barrels of additional "makeup" water.)
  Alberta is indeed concerned about pollution problems surrounding the extraction process and are likely to do several things, all of which will increase the production price. First on the list may be a 30% increase in royalties.
  I am long oil-related stocks, and momentarily taking a beating, but I look at the next five years and see no way for oil to remain below $150 per barrel. While I think your 300% margin requirement may be a trifle high (new side scanning techniques make drilling dry holes less likely), E&P is still an intensely risky, capital burning business and it will take oil remaining well above $100/bbl for at least a year before we see some serious new development. The oil exploration industry has to feel comfortable that the high price will still be in force 2-3 years from now when their production starts flowing before they will start shoveling money out the door to find and develop new expensive domestic resources. There are still millions of acres under contract in the Gulf of Mexico (GOM) which have not been explored, let alone drilled. Putting more unexplored acres under contract in the Atlantic or Pacific won't result in a single well being drilled until the price per barrel has stayed high for a long time and all of the GOM tracts have been drilled and are producing. The GOM comes first because flowline infrastructure already exists close to every new tract, so it's cheaper to get that oil to market.
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  mekats

  Aug 06 06:46 PM
  Re-reading the May 30 post about no need for portfolio diversification is as stunning a contrary indicator that has ever been on SA. Hard to not recall it when reading this one.
•  
  WingNPrayer

  Aug 06 07:49 PM
  Why don't we open up offshore and the arctic, but require that 5% (or whatever appropriate %) of all revenues from dilling endeavors there be placed into a fund that will be used to develop alternative energy technologies?
  
  Seems like a win-win for all.
•  
  The Fitzman

  Aug 06 08:45 PM

  My Website
  mekats: nice try, but you need to present some data to back up your position. oil and energy related stocks are really taking the first sustained beating in years. (i say sustained, it's been what 6 weeks?). as i made clear in the article, i think it's way over done and they are a screaming buy at the moment. as far as diversification goes, consider this data from vanguard's end of june 2008 investment performance profile:
  
  10 year returns (annualized):
  
  Index 500 (S&P500): 2.81%
  Energy: 20.30%
  Precious Metals: 26.48%
  
  this data clearly shows the S&P500 has not only been dead money, but if one considers inflation and the 50% drop in the US dollar over this period, an investment made in the broadly diversified S&P500 has lost you in the neighborhood of 10-12% per year. take the energy and precious metal components out of the S&P500 and the point of my diversification article is even more stunningly evident.
  
  on the other hand, energy and precious metals, as you can see, have not only kept up with the falling dollar and inflation, but actually returned gains back to the investor and increased his or hers net worth. and it's not even close, its by a
  
  ***FACTOR OF 10 over 10 years! ***
  
  that is astoundingly evident proof that my advice to get out of the S&P500 and NOT diversify was good advice indeed.
  
  investing is a long term proposition. i am surely not going to change my investment philosophy because of a 6 week sell-off in spite of fundamentals that are obviously very strong. if you are not comfortable unless you are broadly diversified, then hey, go for it and sleep well. for me, i am glad as hell i got out of the S&P500 and similar broadly based diversified investments. besides, even with the recent correction in energy related stocks recently, i am still out-performing the S&P500 year-to-date, and the year isn't over yet....
  
  WingNPrayer: good idead i agree! in fact, since the states have a say in divying up the royalty streams from their offshore resources, the states should demand a cut for their local energy endeavors, and the Feds should get a cut for countrywide efforts (for instance, building out the energy grid, nuclear, wind, and solar).
•  
  longoil

  Aug 06 09:25 PM
  Fitzman,
  Excellent advice on non-diversifed portfolios to achieve superior returns. Few people have the courage to state this.
  
  Many years ago, when I used the services of investor advisors (IA)who peddled mutual funds they claimed were well diversied. What the IAs failed to say is that 80% of all diversifed mutual funds do not even achieve the S&P 500 baseline results.
  
  Diversifed is a code word in the investment advisor community for an inefficent poor performing portfolio that appears safe and provides you a legal safeguard against lawsuits for bad advice.
  
  It takes little effort to recommend something that is diversifed.
  Most IAs work for invetsment companies that have research departments that provide them with a list of picks.
  
  It takes a great amount of work and research to create non-diversifed portflio. Like yourself, I found this approach to be the most fruitful and I have also enjoyed superior returns with boring energy companies. I find very useful information (like your articles) on SA that provide me with great insight.
•  
  Lazy Al

  Aug 06 10:26 PM
  
  FourBane,
  You speak as if it were a small matter to discover and develop a 100,000 bpd wellhead.
  The international oil industry--and their numerous government regulators--are rapidly losing the option to drill at times, places and prices of their own choosing.
  It’s almost a certainty the world will rely predominately on hydrocarbon fuels for at least the next three decades; ergo, Priority One: Be certain we’ve enough oil, gas and coal for another thirty years. Priority Two: Start worrying about what about what the hell we’ll do when it’s gone.
  
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  Perceptions

  Aug 07 01:43 AM
  Your entire argument is predicated on the assumption that the recent rise in the price of oil is due to growing demand and lack of supply. While I agree that demand continues to rise, do you really believe that worldwide demand for oil DOUBLED within the past year alone? C'mon.
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  longoil

  Aug 07 06:20 AM
  Perceptions,
  Oil is an inelastic commodity and the relationship between supply and demand is non-linear. In other words, you do NOT need a doubling in demand to get a doubling in price. A shortage in supply of a few percent will do the trick.
  
  There is an excellent analogy between oil and insulin. If you have a supply of only 98 units of insulin and 100 diabetics, does the price of insulin only increase by 2% ? In fact, it will increase to the point where the two poorest people in the group will have maxed out their bids. In other words, a 2% decline in supply can cause increase price of several hundred percent.
  
  In fact this has actually happened several times in past history of oil prices:
  1973-1974: Arab Embargo takes 5% of supply off the global market, price of oil goes up 5 fold ($2 >> $10)
  1979-1981: Iran-Iraq war takes 10% of supply off the global market, price of oil goes up 4 fold ($10 >> $40)
  2003-present: Supply is plateaus at 85 mbl/day, but demand is steadily increasing. Price of oil goes 7 fold ($20 >> $140)
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  optionsgirl

  Aug 07 08:01 AM
  Good article and commentary. I would like to address the question of why we need nuclear subsidies when it is already economical, raised by Pockyclips. We need them to build new plants. A new plant is somewhere in the vicinity of 4 billion dollars. I would also suggest that GE may be a good stock to invest in long term, as they are heavily involved throughout the world in the building of new nuclear plants. One also has to wonder if the nuclear plants being built in China and Iran will possess the kinds of safety features of those in the US and Britain, for instance.
  I read that the Russians are designing and building a nuclear plant in Iran that is based on a 30+ year old model.
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  The Fitzman

  Aug 07 09:07 AM

  My Website
  longoil: thanks!
  
  LazyAl: i'm not sure we have 30 years. the CEO's of COP, RDS, and Hess have all thrown out the date 2015 as the timeframe for when worldwide oil supply won't keep up with demand. that's only 7 years away. if the US economy is in the ditch now, with oil at $120, imagine what will happen when oil and gasoline become scarce and shortages arise? the price of oil will skyrocket, and the economy, currency, stock market, and social fabric of the US will shatter. that is why i am such a proponet of a comprehensive long-term energy policy. history shows that no matter how much wealth a person gathers, if their country, currency, and economy go down the tubes, everyone goes down the tube....
  
  our only hope:
  thefitzman.blogspot.co...
  
  Perceptions: no, my argument is a bit more sophisticated than that. worldwide oil supply won't be able to keep up with worldwide demand. therefore, the margin between the two has been shrinking, and therefore the price increased. add to that issue the 50% drop in the US currency, which oil is priced in, due to the insane Bush economic policies and you have another oil kicker. add to that the risk premium due to the oil war and you have another factor. add to that china and india competing for the same oil resources and you have another factor. wasn't all this in the article?
  
  options: i agree we need more nukes too. financing of nuclear plants is necessary because of the large up-front cost and the long-term pay-off (decades of utility bills). i'd rather see the government finance nuclear plants than start oil wars - at least we'd have something concrete at the end of the day. i also wish they'd help finance the nat gas pipeline from alaska and western canada to the lower 48. the US could have done both for the money (not to mention lives) we've wasted in Iraq, plus, they could have put 50,000,000 hybrids on US highways. all for the cost of Iraq. what a waste huh? i agree GE is a good energy play. nukes, wind, and compressors and handlers for LNG and the oil industry. they are wonderfully positioned in energy. unfortunately, they have had large exposures to the financing and consumer markets, which they are now addressing. once this is out of the way, the stock should start to perform, which it hasnt done for years. wrt nuclear, i'm sure iran would love to have a French or American designed nuclear plant, but of course the sanctions prevent that. so, they go shopping elsewhere. i read the russian plant you speak of was the same exact design as the chernobyl plant :O
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  truthinvesti
  ng

  Aug 08 07:18 AM

  My Website
  Enjoy the spirited debate. My freewebsite is up over double digits on long positions . My feeling is the integrated plays like COP and XOM are pricedattractively at these levels. Oil while in "bubble mode" is not going to see 70 dollars a barrell either more than likely. XOM is my favoritebecause it is a400 billion dollar stock and many soverign wealth funds need toput their money somewhere. Real estate and treasuries are not attractive.
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  AndyS

  Aug 08 02:33 PM

  My Website
  Great artile and like you I think the respite is temporary. As I discussed recently, Oil prices long term will go back up due to the following factors which relate well to the ones you have listed.
  
  - The planet remains in a state of energy stress. Asian countries are adding an estimated 50,000 new cars per day to their roads. Adding this growth plus that from other oil based consumables, will provide a huge demand side effect. With supply limited and growing very slowly, this will lead to a steep rise in prices.
  
  - If China's oil demand growth rate continues at its current pace of 6% to 7% per year, China will use 20 million barrels a day by 2020 - about the same as what the U.S. uses today. And by 2030, China would be up to 40 million barrels per day - twice what America uses now.
  
  - Tensions between Iran and the U.S. and other Middle east countries don't look like abating in the longer term despite recent diplomatic efforts and a lull in tensions.
  
  - We'll drive more, fly more and waste more. As prices fall, the alliance of environmentalists and consumers, brought together by pain at the pump, is already coming apart. When has is below $4, people will think of it as a relief and unfortunately most will go back to their old habits.
  
  - Renewable energy is still a long way from being a viable alternative to oil in terms of widespread usage. The world economy cannot and will not quickly convert from an oil-based consumer to a blend of other energy options such as natural gas, solar, wind and so on
  
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  jjason

  Aug 10 06:26 AM
  High oil prices are helping to ruin the economy that we live in. ( I assume most of you are US citizens and live in the US. )
  
  None of you seem to understand the connection between Cartels, price fixing and high prices. Also, If oil prices were lower, the dollar might be stronger.
  
  On Friday oil was down to $115.00 a barrel. All energy related stocks took a dive...some as much as 7% in one day. Ups and downs in the markets of 7 to 15% a day is the result of traders who are speculators and this has become a fools game. I do not trade stocks, bonds, real estate or commodities for a living.
  
  There will be winners and losers because we are playing a zero sum zero game here. This is not good for the overall economy.
  
  If any of you want some input from another source, look up David Kotok, at Cumberland Advisors, and go to his website and sign up for his email newsletter. I can tell you that David is worried about this economy...very worried.
  
  In the meantime, I was wondering if any of you read Michael Greenberger's report?
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  mekats

  Aug 10 08:36 AM
  Fitzman - don't recall your May post referencing a 10 yr timeframe. Thought it was a "going forward" recommendation. The 30%-40% losses in the last month will require a lot of that long term horizon in order to recoup.
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  The Fitzman

  Aug 10 10:14 PM

  My Website
  mekats: they are recommendations going forward. you seem to believe the energy stocks are down alot more this year than the S&P500 or the DJIA or some other "diversified"... equity play. they aren't. my point is, the fundamentals behind oil and energy haven't changed to be bearish, if anything, i believe they are more bullish now than at the start of the year. COP is down less than the S&P this year, as is vanguard energy. i think it will be helpful if you got something like barrons, the WSJ, or investors daily and looked at the YTD, 5yr, and 10yr returns to compare the investments.