Bruce Pile

Avoid (Natural) Gassy Stocks

I've been saying for over a year now that there will be a growing disconnect away from the traditional oil/gas pricing ratio of around 6. For the several decades of the oil age, this ratio was a pretty reliable pricing guide where, if it got too far out of synch, you could expect oil to come down, gas to go up, or whatever. But since about 2006, when this disconnect first started to be noticed and written about, there have been two big changes from the previous decades - one, conventional oil has come up against the forces of peak oil, and two, the shale nat gas recovery advances have made the impending North American gas shortage a thing of the past.

If you look at a gas/oil ratio chart like $NATGAS:$WTIC at SharpCharts, you see that we have recently broken below the trading range bounded by about .07 at the low end for the first time in years. This really makes the whole nat gas stock investing area a little too unpredictable for my taste. Aubrey McClendon of CHK seems quite confident in the gas business with his large insider buying, and he isn't the only gas company official grabbing up insider shares. He is very aware of the plentiful supply of gas and has even hinted at the notion of building more LNG facilities here in America so we can export to the global LNG trade. The technical behavior of the gas stocks sure doesn't suggest doom and gloom for the industry.

As for the domestic land drillers behaving well in the face of low gas prices, I can see that because the new shale gas, while plentiful, is much more drilling intensive than the old conventional gas - and getting much more drilling intensive very quickly. It has been referred to as an accelerating treadmill by industry experts, where the athlete is the driller who must keep running harder just to keep the supply constant.

Not Calling Crude Oil Prices a Bubble For Now

Reduced demand is cited as an automatic trip to lower oil. But consider that net exports is what largely sets price, and net exports are declining even as total liquid production eeks out new highs now and then. And this decline theoretically accelerates post peak per the ELM model, which has been accurate thus far. If exports to the U.S. are declining by 5% per year, that means we must destroy demand at the rate of 5% per year just to keep oil at it's current value (not counting short term speculation).

Per the model, which simulates a hypothetical land where about half of all produced oil is exported around the time of peak (roughly the global condition now), exported oil goes to zero in just 9 years after the global production peak. So we must destroy all demand for imported oil in 9 years to keep oil where it is! If we did a switch to electric cars so fast that half of all vehicles on the road in five years were electric, we could not match this demand destruction rate.

Destroying demand for imported oil is what needed to be done 30 years ago when Carter and Ford tried to get a build out of CTL (coal-to-liquids) plants going along with nuclear power plants, OCS drilling, solar and other things. But nobody believed or understood the math of Hubbert and others about the global production peak even though his modeling of the U.S. oil production peak in 1970 had just been proven stunningly accurate. In his 1956 work projecting the U.S. peak for early 70s, he predicted the global peak for shortly after 2000. So instead of listening to these people, we developed energy policy dictated by environmentalist airheads who reckoned that we needed to ban the needed changes to protect the natural habitat of the yellow speckled squirrel.

Well, here it is 30 years later, and America's natural habitat is about to be destroyed. But thank God, the yellow speckled squirrel is OK.

Petrohawk and Chesapeake Fly on Haynesville Shale News

HK is severely undervalued by my screwball guage even at $50 and I've had it on my buy list for awhile kicking myself all the time for not buying it. The dent in its climb from the present market selloff is probably about all the pullback there will be anytime soon.

Smells Good: The Case for Natural Gas

In addition to the monstrous advantages you point out for NG over oil, which to recap are:
1. Over 5 times cheaper per BTU
2. Much cleaner for the environment, thus much more likely to
get favorable legislation enacted in any energy policy
3. Redirects 700 billion dollars a year away from often
unfriendly foreign governments
you also have the basic fact that over the next 20 years or so, global gas production, and thus LNG trade, is going to be growing briskly while net exports of oil are going to be accelerating a downtrend already in place! Peak gas is projected to be around 2030 while peak oil is happening now and, more importantly, peak oil exports is probably history already. Just look at a chart of LNG trade and compare it to what net exports of oil have done over the last few years. One is rolling over into a decline per the ELM (Export Land Model) while the other is climbing sharply to a peak decades away.

Historically, there has always been a tight correlation between oil price and natural gas price because of the rampant interchangability between the two in industry. When gas lags as far behind oil is it is presently doing, there is always a sharp slingshot move in gas to catch up with what oil is doing, which usually overshoots oil briefly. This seems to happens every 3 years or so, and if it happens again, it would take the price of gas to over $25.

In addition to the usual industrial switchover activity from crude to NG, you are probably going to have a lot of transportation switchover this cycle as well (if Boone Pickens has his way, that is).
If the Clean Energy model catches on, we could see an unprecedented megacycle in NG versus crude.

Burst Bubble? Commodities' Long-Term Story Remains Intact

If you look at a chart for relative valuation between paper and hard assets over the last 50 years, it's clear that there is a powerful cycle at work with about a 15 year bull/bear phase. We seem to be clearly beginning a bull phase for hard assets that is just now getting going (only about 4 years into it). The cycle has yet to even revert to the mean.

As for the volatility that goes along commodities, you can either be the fast trader and try to anticipate each gyration and buy and sell around them (good luck with that) or you can dollar cost average into a line-up buying more aggressively after the corrections and adjusting the line-up only if the good areas of sector warrant it. You pretty much have to make up your mind which approach suits you and stay with it.

It seems to me that most fast traders anticipate 4 or 5 phantom corrections for each real one and wind up rotating in and out too much and being on the sidelines when a lot of the quantum surges happen when they least expect them. They chop the bull climb into bitty pieces of small gains to mix with small loses, which typically results in underperforming a more stable strategy. Not that there aren't traders who can do better with faster trading, but averaging better long term results this way is precarious to say the least.