Petrodollar Alert: Putin Prepares To Announce "Holy Grail" Gas Deal With China

http://www.zerohedge.com/news/2014-03-21/petrodollar-alert-isolated-west-putin-prepares-announce-holy-grail-gas-deal-china

SHALE AND WALL STREET: WAS THE DECLINE IN NATURAL GAS PRICES ORCHESTRATED?

Technological advances (such as horizontal drilling and fracturing) have enabled natural gas and oil companies to increase production levels.  But since natural resources are finite, the increased productions rates don't automatically increase reserves--and won't extend their production lives.  In other words, production forecasts will proven to be overly optimistic.

Hence, the thesis of a renaissance in US energy production will be short-lived.  Which means our debts and deficits still have to be addressed, because energy production alone will not improve our economy in the long-term, as the cheerleaders insist.  We won't magically grow our economy from increased energy exports--because there isn't as much oil as the pundits have glowingly predicted.

http://shalebubble.org/wp-content/uploads/2013/02/SWS-report-FINAL.pdf

Senate works on new package of Iran sanctions

http://www.reuters.com/article/2012/11/27/us-usa-iran-sanctions-idUSBRE8AQ1CY20121127

The package seeks to ban financial transactions with any person or organization blacklisted for their association with the Iranian government, as well as sales of metallurgical coal and precious metals, a congressional aide said, speaking on condition of anonymity.

The sanctions would end "Turkey's game of gold for natural gas," a senior Senate aide said, referring to reports that Turkey has been paying for natural gas with gold due to sanctions rules.

The legislation "would bring economic sanctions on Iran near de facto trade embargo levels with the hope of speeding up the date by which Iran's economy will collapse," the aide said.

Leeb - Gold, Silver & Natural Gas Are Going To Soar

Like Leeb, I'm bullish on fracking natural gas also.  But extraction output and life cycles of fracking drills will be proven to be far too much optimistic due to high depletion rates--at current natural gas prices.  Which means capital expenditures will soar to continue current production rates.  Higher natural gas prices will be needed to make fracking economic.

As for prices of gold and silver, readers should already know where we stand on that.

http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2012/11/27_Leeb_-_Gold%2C_Silver_%26_Natural_Gas_Are_Going_To_Soar.html

Documents: Leaked Industry E-Mails and Reports

This is more evidence from geologists who are dampening expectations for shale.  Yes, I do believe we should pursue this and other alternative energy resources--including renewables, but due to more efficient extraction (i.e., horizontal drilling), the life cycles of oil and natural gas fields are much shorter in duration than what the hopium describes.  Peak oil subscribes to the theory that we will not run out of oil--rather, we will run out of easy-to-reach, and cheap oil.

While this "bubble" in shale will end in tears, it is the investments in the technology that will be end up being a disaster.  Prices will remain elevated as long as these forecasts for production remain overly optimistic.

http://www.nytimes.com/interactive/us/natural-gas-drilling-down-documents-4.html

Egypt ends gas deal with Israel, stakeholder says

Remember how Americans yawned when there was rioting and military skirmishes in the middle east / north Africa (MENA) last year?  The US had their own domestic economic problems, yet we chastised the foreign sovereign governments for their violent treatment of their citizens' uprising.  "Those poor, poor folks..." was the general sentiment.

Well, a power vacuum has been filled by militaristic entities, and Egypt has just cut off energy supplies to Israel.  If this sounds vaguely familiar (see Iran being cut off of the global financial system), it's understandable.  The posturing has now turned into trade sanctions and economic warfare.  If one applies a bit of extrapolation, the end game doesn't look so good.

http://www.reuters.com/article/2012/04/22/israel-egypt-gas-idUSL5E8FM2XZ20120422

Contrarian natural gas call

http://www.theglobeandmail.com/globe-investor/investment-ideas/features/taking-stock/a-contrarian-makes-another-call-this-time-natural-gas/article1538686/

Disclosure: long shares of natural gas pipeline MLP's

US refineries

I had a couple discussions last week with two men who work in refineries, one in Louisiana and Texas. Apparently, it's becoming increasingly difficult to operate a petroleum refinery in the Gulf states due to environmental pressures, shrinking profit margins and regulatory restrictions.

Refineries are an important link in our nation's energy chain, where crude oil is processed and refined into byproducts such as gasoline, diesel, asphalt base, kerosene, heating oil, and liquefied natural gas.

The US already imports too much crude oil from foreign countries, some with unstable governments, putting us at geopolitical risk. If more domestic refineries are forced offshore, we will become increasingly dependent on foreign sources of energy. Crude oil AND refined products would need to be imported. This will increase our exposure to supply shocks, and it will also inject a hidden, permanent tax on our energy sources.

Energy costs

Currently, these are the approximate costs for the following energy sources (in cent/kilowatt hours):

solar - 18
crude oil - 10
natural gas - 7
wind - 6.5
geothermal - 6.5
coal - 4.5
nuclear - 4.5
hydro - 4.5

Geothermal energy generation is impervious to weather conditions (it doesn't require wind or sunshine) so power generation can occur 24 hours, 7 days a week. Energy loads are more predictable and efficient, and geothermal energy plants require less capital cost. Since geothermal energy is already economically feasible, it doesn't need government subsidies to remain viable. However, our government needs to provided more incentives to tap into this ultimate green energy source.

Money management

Money management to me is positioning your assets so they are poised to appreciate, but having enough liquidity to pounce when opportunities arise. You need bullets in your rifle to hunt your prey.

When markets rise and my asset values do accordingly, I get increasingly nervous. I am nervous by nature when it comes to finances, and I also have a bargain-shopping mentality. Perhaps that's why I don't mind it when markets drop--they represent buying opportunities. That's just my personality make-up.

The current rally in equities and commodities is a head fake to me, but strong enough to appreciate 40% so far from March lows, and irrational enough to extend another 20% potentially. So even though I believe this is a short-covering rally wrapped inside a secular bear market, I won't be shorting it--I won't get in the way and will let it run its course.

Instead, I pulled some profits off the table, leaving the majority in play for more profits--in case I am wrong on an impending correction. The higher the market goes, the more I'll pull off the table. Just like I will average in (buy) while the market tumbles, I will average out (sell) when it rises. I'll never be 100% invested, and I'll never be 0% invested. You don't want to get caught 100% long when the market tanks, but you don't want to completely miss a huge rally either. Meanwhile, I also am writing covered calls to generate income while I stay in the market. This will limit my upside if called away, but I'd still be up triple digits on my entry points and I keep the options premiums no matter what. Not bad. If the market corrects as I expect it to, I have some dry powder to go bottom-fishing.

In a raging bull market, your best returns result from being fully invested. But in a declining market, being 100% long leaves you no recourse but to sell into that declining market. Liquidity is king in those instances. So I will never be fully invested, no matter how bullish I am. And I am certainly not bullish today--at least not on equities.

Commodities--that's another story. With the dollar continuing to be flogged in the FOREX, the energy sector, metals, and soft commodities have all soared. This plays right into my thesis of the Fed reflating the economy with dollars in order to stave off another Great Depression. I think Bernanke will be successful by his criteria, but looking around the corner, this monetary explosion will result in inflation--the commodities markets are telling us that--all we have to do is listen to them. By the way, an exploding money supply is also why I believe equities may have more room to run north, but structurally, our economy is so broken I can't see a sustainable rally in equities.

I will stay mostly long my core inflation holdings: gold and silver mining shares, oil companies, natural gas drillers and pipelines, and commodities. The only equities I'm long on are specialized biotech companies which fluctuate somewhat independently of economic cycles, as they are pivotal event-driven, based on FDA approval. I use the qualifier "somewhat independently" because the financing environment is still very difficult, and markets have a low tolerance for risk. Unless the road to FDA approval is paved with certainty, microcap biotech companies have to be resourceful in order to fund their clinical trials. So far, the biotech companies I have invested in have shown promise, and some have even paid off financially already. A year from now, hopefully all of them will be in the green.

Until then, I stand firmly grounded in my thesis that paper money is becoming increasingly cheap, and owning hard assets will be the best hedge against debased currencies worldwide, including the US Dollar.

Natural Gas and Contrarian investing

Remember when I bought natural gas a couple weeks ago--mainly because NO ONE liked that sector, even the CEO's of natural gas companies, who should be the industry's biggest cheerleaders?

Well, guess what--natural gas company shares have exploded, up over 30% in certain cases. My mutual fund purchase is up 25%, and ATN has more than doubled, a triple-digit bagger.

Logic? The world is awash with natural gas supply, due to demand destruction from a worldwide economic downturn. Natural gas prices surely must decline further, right?

Well, the reason that conventional logic doesn't work as an investment thesis is because markets are not always rational, and when they are rational, they tend to become over-extended and distorted.

But let's examine this scenario further before we declare the madness of markets. If the cost of producing natural gas is $4.00 per British thermal unit, and the market price is $3.50, companies will eventually shut down natural gas wells, in order to suspend losses with each delivery. They have done exactly that, as there are now 45% fewer wells. Shutting them down is easier than starting then up again. More on that later.

With capacity reduced, prices eventually will stabilize and rise, as demand recovers and absorbs excess inventory. As prices rise above production cost, natural gas companies will look to dig new wells to increase their profit margins. However, that's not so easy. Starting up a well takes a lot longer than shutting one down--hence a time lag before bringing capacity on-line. With supply no longer able to keep up with increasing demand, prices rise further. That's the typical supply/demand cycle, and astute, but courageous investors need to account for. Perhaps I'm not so crazy after all. The economic laws of supply and demand do work, but not always in the timeframe most investors anticipate.

As a contrarian, you want a consensus to develop--because it's usually a confirmation that the consensus is wrong when it comes to pricing reversals. It's cyclical. The rule of thumb is when there is a 60/40 ratio, follow the trend--the "trend is your friend" is an appropriate slogan. But when the consensus is overwhelming--perhaps 90/10, you better look for the exits, as the overwhelming majority is almost always wrong.

With natural gas, the selling pressure has been so intense since mid-2008, that the number of sellers has been exhausted--the market ran out of sellers. Prices had to bottom. I follow several indicators to monitor investor sentiment, but it's easier said than done. When your social instincts are to chase the latest fad, it's difficult to go against that same crowd, especially when they are well-regarded. But when it comes to predicting inflection points, it's a prerequisite for investing success.

Why I like natural gas

The reason why I believe natural gas prices have reached bottom: because no one else does. That's it--that's my investment thesis. I own some natural gas pipelines for their high dividends, but I bought a natural gas mutual fund in my Fidelity account several weeks ago as a sector rotation play in my IRA.

Most people thought I was crazy, which was reaffirming. But the reason why I dove in? Last month, in an interview with Jim Cramer's Mad Money show on CNBC, the CEO of a natural gas company CEO was so bearish that he could not call a bottom on natural gas prices. I commend him for being an honest CEO (a rare commodity these days), but the fact that someone who should be the biggest cheerleader for his industry was so glum about his company's prospects triggered a buy alert inside of me. He went on and on about demand destruction due to the weakening worldwide economy, exploding inventories, yada yada yada.

But in between the gloom and doom, he also mentioned his company and his peers were closing down wells at record amounts, because gas prices were so low that they were bleeding cash with each drilling. In other words, due to depressed prices, there are now 50% fewer natural gas wells in production. That tells me the supply side of the equation will fix itself eventually, which means prices have to stabilize, if not rise even if demand does not return to previous levels. And if the economy does recover even slightly, prices have to rise more.

I was a couple days early from the exact bottom, but I'll take that any day of the week and twice on Sunday. I actually did the same thing by buying gold stocks in the November lows. NO investor can catch the exact bottom or top of an asset price, but if you are close, you can still capture the majority of the major trend move.

Why I bought natural gas yesterday

Most raw material producers and mines have either gone out of business, or have shut down capacity, due to an overshoot on pricing to the low side--they were losing money with every production dollar they were spending. Mines and drills are expensive to shut down, and even more expensive to start back up--plus they take time.

In other words, due to cash concerns, these raw material producers are shutting down capacity when they should precisely be increasing capacity when prices are low. Because when the recovery occurs, there will be a time lag for them to start up production. This lag creates pricing bubbles, as too many dollars chase too few goods.

Natural gas prices bottomed out last week, so I bought into a natural gas mutual fund yesterday. If natural gas prices double by next year (winter season), this will triple or quadruple. I purchased some natural gas pipelines for the dividend income last quarter, but I just didn't have time to research individual companies in the sector, so I used an IRA account which specifically caters to no-load mutual funds.

Anyway, since natural gas prices are so low, more fleet vehicles are being converted. We'll have rallies and declines along the way, and I'm not trying to time the moves, but at these levels, I found the trade attractive. As our economy attempts to transition away from oil and coal toward renewable energy, the movement is real, but this weaning process may take years and even decades. Meanwhile, natural gas is a stopgap solution, as it is not renewable, but it is the least offensive to our environment.

But the overriding reason why I targeted natural gas last week is because natural gas CEO's were even more bearish than many investors. Think about it: these guys are supposed to be the biggest cheerleaders for their industry and their respective companies, yet they were joining the doom and gloom crowd. My contrarian antenna was triggered. So I waited for a confirmation move up and jumped in yesterday. I could be early, but if you look at the charts, I'm buying near the bottom--no one can time a bottom or top perfectly. But if you buy right, you can still capture the majority of the move.

So I really am pulling for Obama, cheering for a recovery, even if it is muted and inconsistent, as a high debt load and high taxes dampen any chance of a meaningful economic recovery. At the end of the day, we're all dead anyway.

What to do going forward (part 2)

While I will agree with you on the metals play, you jumped in a bit early (not a sin), as hedge funds are unloading everything to raise cash--stocks, bonds, commodities, their first-born, etc.You're down 10%, but again, not a sin.

What I do object to is your recommendation of speculative mining stocks. Some of these junior mining companies could run out of cash unless the coming boom occurs soon, which it may or may not. An investor would lose all or much of their investment (cash-poor mining stocks sometimes agree to be acquired, albeit it at a low price). It would suck to make the right call on the direction of metals, and but lose money because the mining company ran out of cash. So yes, on mining companies with cash, no on the speculative plays.

I do like your call on coins and some of the larger gold and silver mining companies--as long as they earn a profit and are well-capitalized (have lots of cash).

As for peak oil, that call proved to be disastrous--or really early, as there has been demand destruction due to a worldwide slowdown. An alternative energy play is natural gas MLP's, which are currently yielding double-digits (all-time highs). Their prices have been battered, but I like the bigger ones who are paying out dividends to unitholders, as they must from positive cash flows. I don't mind waiting for a turnaround if I can earn 20% on my money--most of it tax-deferred. Crude oil is sensitive to the worldwide economy. Natural gas is less sensitive to the transportation and manufacturing industries. However, people need to heat their homes, and cook their food. And more fleet vehicles are being converted to natural gas, as it burns cleaner. But like I said, earning 10-20% is better than earning 1%. When energy prices do recover, these MLP's will appreciate as well.

Bargain basement

Any bargain hunters who have ever been to Boston know of two names: Filene's Basement, and the No-Name restaurant. The former gets you designer rags for pennies on the dollar, especially factoring in the age of the apparel, as time erodes its price. The latter is a no-nonsense Maine lobster house, where prices are half of the more famous Legal Seafood chain and local favorite SkipJack's. There is no ambiance, but you get the true local flavor of what Boston is famous for: lobstah and chowdah. With both time-honored institutions, you get value, something you couldn't get from the nearby mutual fund industry--at least, not until now.

With the implosion of the stock market, due to hedge fund and mutual fund redemptions, it's time to nibble at this double-bottom (October 10 was a secular bottom, in my opinion). I picked up a couple natural gas plays, one a pipeline outfitter for both domestic oil and natural gas. With oil demand destruction driving crude prices lower, natural gas prices have fallen in tandem, as the markets brace for a long, crushing recession (some are predicting an outright depression).

But while oil is an indicator of economic activity, with the transportation and manufacturing industries being major consumers, natural gas is not as interconnected to the overall economy. Sure, we'll turn our thermostats lower this winter in the hopes of reducing our energy bill, but natural gas is more tied to consumer use than industrial use. My thesis is that natural gas use will decline, but not by 80%, as recent market prices suggest. We'll still use natural gas, and public transportation fleet vehicles are converting over to natural gas in increasing numbers, since they burn cleaner. Besides, if T. Boone Pickens is on that side of the bet, I want to be next to him.

But here is the kicker: the owners of these natural gas pipelines are like toll-booths--they just collect revenue for being gatekeepers--no drilling, no speculation, no unknowns. And with some share prices down over 80%, there is deep value, as some are kicking off 20% dividends! These are better than junk bond-like returns, yet these are solid, stable companies, with little debt. Even if I have to wait for a rebound, I don't mind collecting 20% on my money. And these aren't speculative startup plays with hockey stick growth trajectories. On the contrary, these are boring energy plays, with dividends over triple what they normally are.

Perhaps I'm older now, and I still get excited over discovering the next early-stage growth company, but for my serious cash, I really, really like dividend plays. Not earnings--dividends. Despite stricter accounting rules, earnings are still malleable (and manipulated quarter to quarter). Cash flow and dividends to shareholders are transparent. Companies either pay them, or they don't. And they are either increasing the dividend pay outs, or they aren't. Natural gas master limited partnerships (consult your tax advisor on the differences between common shares and MLP's, especially regarding qualified retirement plans) are not only paying out juicy dividends, but their revenue and earnings growth are accelerating.

Of course, all bets are off if the world were to come to an end, as some are predicting, but if you aren't one of those expecting Armageddon, you may want to consider natural gas pipelines. This will be one of the most painful recoveries, as we still have more de-leveraging ahead of us, but if your long-term horizon is beyond a nanosecond, these MLP's look awfully enticing. Consult your investment advisor, and proceed with caution.

Meanwhile, enjoy your lobstah and chowdah, and sleep better knowing you're pocketing 20% dividends at these levels.