Energy Stocks - Energy and Capital

Rumors of the Demise of the Commodity Boom

The first day back to work and back to school after the Labor Day weekend was a wicked one for commodity and energy investors.

Gold slid 3%, or $25, to $810.50 and ounce, a level it has not seen since its most recent low on August 18 at the end of the last huge commodity/gold/energy selloff.

Crude oil fell intraday to $105.46, a five-month low, and closed at $109.71, the first violation of the $110 floor since the huge run began at the beginning of the year.

Gasoline futures fell 9% to $2.73 a gallon.

One of my favorite agricultural commodity ETFs, the PowerShares DB Agricultural Fund (AMEX: DBA) gapped down 4.7% at the open, recovering over the day to close down 2%.

The dollar rose to a seven-month high against the euro, and an 11-month high against a basket of six major currencies.

Energy stocks were universally thrashed, some suffering double-digit losses at the open...including lots of great stocks in great businesses with ridiculously low P/Es.

Even corn and soybean futures fell about 5%.

On the whole, I took a 5% haircut on the day, and I know I wasn't alone.

It was enough to make me wonder for a moment if my whole thesis—about going long gold, commodities, and energy and shorting the dollar, the major markets and the financials—could somehow be wrong.

All in all, August and the first trading day of September have beaten the commodity and gold complex like a rented mule.

Conventional wisdom on the Street was nearly universal: Commodities and gold have simply fallen out of fashion, the dollar's going higher and oil is going lower.

A Bloomberg story explained: "'The sharp drop in crude prices is the driving factor behind the weakness in grains markets today,' Toby Hassall, an analyst at Commodity Warrants Australia in Sydney, said by e-mail. ‘The fear premium that had been built into crude prices was hastily wiped away.'"

Yeah, yeah, that's the ticket! Lower crude prices should instantly translate into cheap grains!

Spare me.

Captain Contrarian Weighs In

To check my sanity, I did what I often do when I want a good read on the day's action, and what the markets were thinking: I called up a buddy who manages money for a large financial institution. I have to protect his anonymity, so I'll call him Captain Contrarian, because he's generally a contrarian.

"I'm sticking to my guns," he said, then proceeded to lay out his case once again. Buy oil, short the financials, buy commodities, buy gold.

I found myself in complete agreement with the Captain. The herd turned tail and sold off the whole gold/energy/commodity complex, and overdid it, as usual.

For example, there is no sensible way to explain how a weaker-than-expected Gustav would justify whacking corn by 5% and stalwart coal producers like Arch Coal (NYSE: ACI) by 14% at the market open.

It's not like corn is suddenly going to be in less demand, or that we're going to see some crazy corn surplus after a year of intensely challenging weather.

Nor is China suddenly grinding to a halt, or cutting its demand for coal. Quite to the contrary, in fact, as I have argued at length in these pages.

In many ways, Tuesday was just like the action in the first part of August, and my take is exactly as it was then. (See "Is the Commodity Boom Over? Playing the Market in Upside-Down World.")

It's just another crazy episode of the herd suddenly changing direction, selling off whole sectors. When Gustav failed to deliver a Katrina-like blow, traders sold oil, which boosted the dollar because oil and the dollar generally trade inversely, which drove investors toward unloved equities and away from the former safe haven of gold and commodities in general.

But the prevailing idea behind this turnaround is that demand destruction here in the US is so significant, that it will affect the whole world, including China. Reduced expectations for demand of energy and commodities through the rest of the year sent speculators scrambling for the exits.

And to show you that I'm an honest analyst—or at least I try to be—the action has had me re-thinking my view on the role of speculators in oil, and energy futures in general. There might be more to that aspect than I had thought.

But is my overall thesis wrong?

Not on your life.

The inflation threat has hardly been cured. And if China's annual growth rate should drop from a lofty 11% to 9% or 10%, that will only cool the commodity trade from white-hot to bright red.

To paraphrase Mark Twain, rumors of the demise of the commodity boom have been greatly exaggerated.

When the World is Upside Down, Buy!

On a day like Tuesday, when the whole crowd is selling off everything you believe in recklessly and mercilessly, gold is down and all three of the major averages end the day in negative territory, you can really start to feel like there's nowhere to run, and nowhere to hide.

Clearly, we're back in Upside-Down World.

So I'll repeat what I said last time we were here:

Watch the important support levels closely and choose your buy points carefully. Be patient. Accumulate your favorite long positions-and a few shorts for good measure, like SKF and FXP-gradually. And then hold them and hold on.

I say that's still the right call, and I'm sticking by it. Absolutely nothing has changed in the fundamentals for energy and commodities, and I believe the Street is severely overestimating the demand destruction factor.

When nobody wants to be in the sector, that's when you want to buy it.

I mean, seriously: When a stock like ACI is down 14% in a day, that's a golden buying opportunity. And gold, oil and natural gas at current levels are positively cheap.

So seize this opportunity accumulate a little more, and just sit tight. In another day or a week or three, you'll be glad you did. Hold those positions for a year or two, as any good long-term investor would, and I guarantee you will make some good money on them.

In fact, you and other investors in energy and commodities might well be the only ones with gains to show for the period.

Until next time,

Chris

P.S. We have picked out some real best-of-breed and off-the-radar winners in energy, which we make available to subscribers of the $20 Trillion Report. If you want the inside scoop on them, sign up here.

Is the Commodity Boom Over?

The last few weeks have really had me scratching my head and wondering, "What the hell is going on here?" The markets have been behaving exactly the opposite of what any rational read of the facts might suggest.

As we have predicted repeatedly in these pages, the fallout from the mortgage crisis has continued for the top names in finance: USB, Merrill, JPMorgan, AIG, Goldman, Wachovia, Morgan Stanley, HSBC, Citigroup, and on and on. Not just writedowns, but buying back their crap securities, raising more capital, and generally fighting for their survival. Meanwhile, the losses of Fannie and Freddie have been socialized, with a massive taxpayer-funded bailout.

And how did the markets react to this terrible news? The financials boomed, rising about 15% since the bottom on July 15, with some players like Merrill Lynch rising 32% in the first five trading days of the rebound.

With a hallucination of confidence in the health of the US financial system restored, the dollar charged back up, while European and Asian markets took their hits.

The action in oil has been likewise counter-intuitive. The loss of approximately 1.5 million barrels a day of oil supply from the world market due to the conflict in Georgia caused a mild one-day uptick in its steady decline from a peak of $147 to $113.

In a normal world, such a cut in supply would be enough to pack another $20 or more onto the price of oil. If the Saudis were to suddenly cut 1.5 mbpd of production, you can bet it would have a huge impact on the price. But this isn't a normal world.

Upside-Down World

This is Upside-Down world, where everything does the opposite of what you expect. For a short while.

Is the renewable energy business so much worse this year than it was last year, such that the best names deserve to have their stocks whacked by 40%? No, not at all; in fact the business has grown substantially since last year.

Is the world suddenly losing its appetite for oil and natural gas? No, demand is still higher than ever before. Although the rate of growth is slowing somewhat due to record prices, demand in Asia and the Middle East is still red-hot and will continue to outweigh declining demand in the US and Europe.

Is demand for base metals, fertilizer, and food so much lower now than it was in the first half of this year? No, we still want more and more of everything.

So what's the deal?

The recovery of the dollar, however illusory, is the main factor taking down the price of gold, oil and other commodities. As I have said here more than once, the daily news about oil inventories, demand levels, even pipeline attacks isn't nearly as important as the valuation of the dollar. (And no, it's still not because of the evil speculators.) Consider this chart:

As the dollar (the lower red line) has recovered, oil (in blue) and agricultural commodities (DBA, in green) have fallen off. They are the mirror images of each other.

The reason is simply that when traders have lost confidence in the stock market, they fly to the safety of commodities, energy and gold. When confidence returns, they fly right back out and look for bargains in the carnage they just left behind.

Stay the Course

In short, what we have here is a trader's market. The fundamentals have been thrown out the window, and now it's all about herd mentality.

That makes it a particularly dangerous market for longs like you and me. If you're not a very active trader who's on top of every move, you're going to take some hits. And if you're not such a trader, you're going to get killed if you try to play it.

Your best strategy is to simply stay the course. I have no doubt that my long term theses are still solid. Energy, commodities—particularly agricultural commodities—and gold are still the right place to be for long investors, and I don't see that changing for several years...not until global peak oil is clearly behind us, and the consequent global recession sets in.

But you have to have a strong stomach in a market that has simply lost its mind. When chaos is happening all around you, there's nothing harder than standing your ground.

And times like these, when the trendlines have returned to their 200 dma's and the whole sector that you know is right for the long term has been sold off, are ripe for bargain hunting.

Just don't try to be a hero. Watch the important support levels closely and choose your buy points carefully. Be patient. Accumulate your favorite long positions-and a few shorts for good measure, like SKF and FXP-gradually. And then hold them and hold on.

The commodity boom is far from over, and the panic over energy supply and a fundamentally unsound US economy will always return after these bear market rallies. This Tuesday's selloff destroyed half the gains or more in the financial sector over the last three weeks. And today, the bears are out in force, driving the major indexes lower while the gold/commodities/energy complex charges back up. (See my past articles for stock picks in those sectors.)

Likewise, the correction in oil will overshoot, as it always does, and then it will overcorrect to the upside again. I thought the new floor was around $120, but it could be $110, or it might even dip lower for a short while. But it will be back. I expect to see $150 again before the year is out.

I also expect this wicked volatility to increase as we make our way into the heart of this beast. Vladimir Putin isn't done in his campaign to renationalize the resources of the former Soviet Union, oil and gas supply is still as tight as a drum, and there are still far too many mouths to feed. So take your Pepto-Bismol and hold on tight.

When the markets finally come to their senses again, your clearheadedness will be rewarded.

Until next time,

Chris

Domestic Oil and Gas Companies

Editor's Note:

With gasoline prices now at $4 per gallon, two new energy proposals are attracting a lot of attention on the airwaves - the Pickens Plan and Newt Gingrich's "Drill Here. Drill Now. Pay Less." plan. But did you know that we've had an energy plan on the books for months now? It was developed by Chris Nelder and Brian Hicks.

They released their plan to the public last May... and it consistently ranks #1 on Amazon in popularity. In short, the Nelder-Hicks plan could save the US economy from disaster... and make many investors a fortune. To see their plan, go here.

Today's Energy and Capital: The One Energy Stock You Must Own

What makes domestic oil production companies even more attractive as long-term investments are the oil and gas discoveries, and the fact that these explorations are more appealing, given geopolitical tension.

You know as well as we do that prices would come down sharply if we started producing on our own. And it'd be a strong global signal that we're not willing to be hostages of oil rich companies.

Even the President agrees.

"Our problem in America gets solved when we aggressively go for domestic exploration," Bush said.

And we need all the oil we can get.

While the International Energy Agency's oil supply forecast won't be released until November 2008, there's growing fear of a sharp downward revision in supplies. That means supply could be much tighter than previously thought, a nightmare scenario if proven true.

Any pessimistic IEA view will shock the market, spawning oil super spikes. We've already seen prices rocket to $130, doubling year over year. And it'll only get worse on a dismal IEA forecast.

For years, the IEA has said that crude supplies and other liquid fuels would keep up with rising demand, topping 116 million barrels a day by 2030. But now there's fear that the IEA, basing findings on aging oil fields, could revise sharply lower and warn of a struggle to keep up with 100 million barrel a day demand over the next 20 years.

But IEA pessimism is nothing new. Just last summer, the IEA warned that spare OPEC capacity could fall to "minimal levels by 2012."

Even the U.S. Energy Department is embarking on its own supply studies, which could be finished by summer. But they, too, may have nothing positive to say. They already suggest that daily 73 million barrel daily output will level off at 84 million barrels. To then reach 100 million barrels a day by 2030, we'll need a sizeable boost from other fuel sources.

And if you need more of a reason for a rise to $150, $170, even $200, look no further than the Middle East.

Israeli-Iranian tensions over nuclear projects aren't doing much to help. There's a growing fear that in the event of war with Iran, the Strait of Hormuz (passageway for 90% of oil exported from Gulf producers) would be jeopardized. If that happens, we'd see an immediate oil super-spike.

Iran's Revolutionary Guards has already said it would impose controls on shipping in the Persian Gulf and Strait of Hormuz, which accounts for about 40% of the world's oil, if it were attacked.

Natural Gas Squeeze

Natural gas prices are rising just as fast as oil. Natural gas could be subjected to the same supply and demand issues that drove crude oil well above $130 a barrel.

That's as liquefied natural gas (LNG) shipments to the U.S. slow, and as companies like Cheniere and other companies drop plans to build more terminals.

Global natural gas demand has grown about 2.6% a year over the last 10 years. But in Asia, the Mid East and in Africa, demand has been more like 7% over the same time frame. And demand growth will only rocket further refinery and power growth in the developing world.

With that in mind, drilling domestically just makes sense, which makes this next buying opportunity even more attractive.

Warrior Energy (WEN.V)

This is a new natural gas company we're keeping an eye on with a focus on large undervalued assets in the Green River Basin (Wyoming).

We can tell you that the energy companies are drilling and applying for drilling permits like there's no tomorrow.

And Warrior Energy is no different. It's buying land on the cheap with expectations for considerable upside. They just paid $8 million for producing property with active development.

Warrior's current project - called Strike - consists of 3000 net acres with 11 producing wells that are already kicking off cash flow.

And the stock only trades at a scant sub-3 with long-term $10 potential upside.

Better yet, the future doesn't look too shabby.

Over the next two years they hope to demonstrate year over year growth of proven reserves, production and cash flow through acquisitions and development to justify $500 million in asset values.

The investment firm Macquarie gave Warrior a $50 million line of credit, which is huge for an early-stage energy company... and a testament to the company's game plan to increase production within a short period of time.

Again, this is a $10 stock masquerading at $3.

Companies already in the Rockies area don't seem to have a growth problem.

Berry Petroleum bought Rockies assets on January 27, 2006, and watched its stock soar from $33 to $55 inside two years.
Black Hills Corporation bought Rockies assets on March 9, 2006, only to watch its stock roar from $33 to $44.
MDU Resources bought assets on May 1, 2006. Its stock ran from a $23 low to more than $32.
Marathon Oil bought in July 2006, and watched its stock skyrocket from $35 to $65.
EXCO Resources ran from $16 to $24 after buying Rockies assets on September 30, 2006.
Encore Acquisition bought assets on January 17 and 25, 2007. Its stock ran from $25 to $65.
Forest Oil ran from $45 to $66 after buying in January 2008. And Continental Resources jumped from $25 to more than $61 after buying Rockies assets on January 14, 2008.

The potential for Warrior Energy (WEN.V) to run significantly off lows is there. They just bought assets for only $8 million. With domestic oil and gas exploration experiencing a renaissance in the U.S., we expect small emerging plays like Warrior to give early investors exceptional returns.

Take care,

Ian L. Cooper
http://www.energyandcapital.com

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In case you missed our other investment opportunity highlights, here's what we covered in Wealth Daily, Gold World, Energy and Capital, and your free blogs for the week of July 14, 2008.

The Gingrich & Boone Pickens Energy Plans: Which Energy Plan Will Work?
In the past 2 weeks, we've been inundated with two specific energy proposals to kick America's foreign oil addiction. One has come from Newt Gingrich's American Solutions advocacy group. You may have seen the commercial for the petition. The energy campaign's motto is "Drill Here. Drill Now. Pay Less."

Stooges Testify, Inflation Soars: Nothing But a Clown Show
Lost in the charade of yesterday's testimony by Bernanke, Paulson & Cox was an absolutely abysmal wholesale inflation number from the Labor Department. While the Three Stooges entertained, prices continued their journey to the moon.

Gold Mining in Mexico: An Undervalued Gold Producer Working Across the Border - Part 1
Over the next two days I am going to report on one of my favorite Canadian gold stocks mining in Mexico.

The Next Major Banking Crisis: And What To Look For in Precious Metals
Market conditions for the junior mining sector continue to deteriorate as we approach mid-summer. Several forces are currently at work, causing problems not only for our sector but for stock markets in general. Here is what I believe is happening:

Green Energy Investments: Where the Green Money's Going Now
And yet, there's no point in selling-houses or stocks. Why sell a long-term investment for less than you paid for it, especially if it's likely that the price will rise again in the next few years?

Renewable Energy in Europe: France Goes Green for Jobs
MARSEILLE, FRANCE: As beautiful as the South of France is, landscapes alone don't make the future look promising. The economies of Portugal, Spain, and southern France are feeling the pinch of the global recession more than many developed countries.

Shadowboxing the Apocalypse: Energy and the Politics of Partisan Paralysis
If it weren't such a desperately serious situation, watching our fearless leaders trying to grapple with the energy and financial crises would be hilarious.

Offshore Oil Drilling: The One Offshore Oil Drilling Company to Play this Week
It is always good to have a plan. It's not, however, good to have a bad plan. That was my initial reaction last month when the President gave Congress several steps to reduce gas prices and foreign oil dependence.

Copper Mining Companies: Why Southern Copper is a Buy
In September 2007 Citigroup analysts Alan Heap and Alex Tonks called for the spikes in coal and iron ore prices "because of demand from China and congestion at ports in Australia and South Africa." And they were spot on. So when the same analysts upgraded outlooks for coal and copper, why argue?

Insiders Buy at 2-Year Lows
These insider buys come as the company looks to boost customer food business performance, and buy back $900 million of stock with monies from the sales of its departure with its agricultural commodities trading unit.

Nuclear Energy Investing

Note: Parts of this article originally appeared in Wealth Daily. We felt it was important to share this nuclear energy article with you. It's from Wealth Advisory's Steve Christ. Enjoy.

In the U.S., no new nuclear power plants have been built in 30 years. But that could all change under a McCain presidency (I'm not backing either candidate in this article. I'm simply presenting what has been said for this article's purposes.).

McCain has already called for the construction of 45 nuclear plants by 2030, and said that his goal was 100 new nuclear plants.

And if it's not nuclear energy dependency, we desperately need a new source, as electricity demand in the U.S. alone is expected to grow 40% by 2030. We already know too well the "pocketbook" pains of $4 oil, $13 natural gas and exploding electric bills.

Here's more from Wealth Advisory's Steve Christ.

"Whether you agree with him or not, you have to admit that John McCain is the best friend that the U.S. nuclear power industry has these days.

In fact, the entire industry had to have been practically bowled over with glee recently when he called for a crash program to build 45 new reactors by 2030 along with a long-term goal of building 100 such plants.

It was enough to make the "no-nukes" crowd wince. Meanwhile, holders of nuclear energy stocks applauded.

But McCain's love of nuclear power isn't just some newfound crush in the wake of $4 a gallon gasoline. McCain has always been aglow about nuclear power.

Maybe it was all of that time he spent in the Navy aboard ships that never had to be refueled. Or maybe it is just because he recognizes that there is no realistic solution to our energy problem that doesn't include nuclear power - especially when you factor in the possibility that cap and trade could become reality.

Either way, McCain has put the U.S. nuclear industry back on the front page again. And this time, the public seems to agree with him.

The Nuclear Revival: Paving the Way for Nuclear Energy Stocks

In fact, according to a recent poll by Zogby, about 67 percent of Americans support building more nuclear power plants to expand the nation's energy portfolio.

Those figures represent a stunning reversal of fate for an industry that was dead and buried only a few years ago.

Even Barack Obama has joined in, saying that while nuclear power was "not a panacea", it is worth investigating its further development.

So in true campaign style, he's all for nuclear power, except of course when he's against it. Go figure.

Now before any of you political junkie types decide to send me some nasty email about what I have said so far, don't even bother. I don't have a horse in this race. My political idealism was crushed a long time ago under a mountain of broken promises.

To me government is nothing but a giant and corrupt black hole. In it, light doesn't stand a chance.

Even still, putting your political viewpoint aside, it would be hard to argue that nuclear power doesn't have a certain amount of inertia going for it these days.

The shadow of those cooling towers has definitely dimmed and thirty years later nuclear power in the U.S. is back. And in the wake of Three Mile Island, the U.S. is now playing catch up with the rest of the world where nuclear power never left.

Of course, that is something of a larger theme here lately. While the rest of the world has been doing everything in their power to find and develop more energy sources, we have done nothing but twiddle our thumbs.

So here we sit, in an economy pushed to the brink by high energy prices and inaction. And if you want to know why I'm so cynical about politicians that's part of it-they do absolutely nothing until there is a crisis.

As a result, no nuclear power plants have been built in America in more than 30 years, and few U.S. companies have invested in the technology to build new plants. That's true even though the U.S. draws about 20% of its electricity from 104 working commercial reactors.

High Energy Prices Add Up to More Nuclear Power

Now I admit part of the reason for this has been economic. Twenty years of cheap oil and natural gas has certainly played a role. But those days are over now, leaving only the fear of nuclear power to conquer to complete the comeback.

Now consider this the next time you open up your power bill...

The US Department of Energy reports nuclear power costs 1.72 cents per kilowatt-hour (including operations and maintenance costs). Now compare that to:

Coal at 2.37 cents per kilowatt-hour;
Natural gas at 6.75 cents per kilowatt-hour; and
Oil at 9.63 cents per kilowatt-hour

That's part of the economic math that has seventeen companies preparing license applications for as many as 31 new reactors. That's in addition to the 15 construction and operating permits already under review by the US Nuclear Regulatory Commission.

In fact, four to eight new nuclear plants are on track to be in operation by 2016-17.

Of course that doesn't exactly match the 112 new nuclear reactors that were built between 1957 and 1990, but it is a start. Moreover, it is a far cry from the 124 reactors that were cancelled partially as a result of Three Mile Island.

So clearly the tide on this issue is turning.

2 Ways to Win with the Nuclear Energy Stocks

For investors that means a following a growth trend that is already firmly in place in the rest of the developing world. All told, about over 30 new reactors are under construction in 12 countries with over 100 new plants currently being pursued.

Here are two easy ways to play the trend by buying shares of these two exchange traded funds:

Market Vectors-Nuclear Energy ETF (AMEX:NLR)-This fund is down off of its uranium based highs in 2007. But with uranium prices now projected to go as high as $90 a pound this heavily materials weighted EFT is rising.

PowerShares Global Nuclear Energy (NYSE:PKN) - A relative new fund, PKN allocates 47% to industrials, 24% utilities, 15% to mining along with an almost 10% weight to technology. That makes this less susceptible to uranium prices than NLR, which devotes 33% of its holdings to mining.

But no matter how you decide to invest in this trend, I think its pretty obvious that the nuclear renaissance has begun-no matter who wins the election."

For more information on Steve Christ and the Wealth Advisory, click here.

Good Investing,

Ian L. Cooper
http://www.energyandcapital.com

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In case you missed our other investment opportunity highlights, here's what we covered in Wealth Daily, Gold World, Energy and Capital, and your free blogs for the week of June 30, 2008.

BIS: Global Economy Near a "Tipping Point": The Unsustainable has Run its Course
According to a report released today by the Bank for International Settlements (BIS) the global economy has reached a "tipping point". The result says the group may be a far deeper crisis than is expected and a bout of deflation in the world's biggest economies.

Dear President Obama: Signed, William H. Gross, Ordinary Citizen
"You have inherited a mess. Your predecessor, fixated on emulating a former Republican icon from a far different economic era, chose to emphasize tax cuts for the rich and excessive consumption for all Americans."

Oil Speculators Are Not to Blame: But a "dearth" of new supplies are...
For weeks, oil speculators have been blamed for skyrocketing oil prices... but it's not their fault. It's a supply and demand issue.

Caution: High Risk Trade
Modifications suggest included further optimizing the social project in the area, mitigating the impact of open vein deposit in the affected areas of the Imataca, and improving the remediation plans at the end of the mine life as well as remediate the existing environmental damage caused by illegal miners.

The 2008 Oil Forecast
The stock was recently upgraded from "speculative buy" to "buy" with a $10 near-term price target on news that the company successfully drilled its Costayaco-4 well in the Costayaco discovery in southern Colombia.

Uranium Mining Stock: Buy and Hold American Uranium
In just two decades the world's demand for electricity is projected to nearly double! To meet this rising demand, the worldwide power sector will need to add an estimated 4,800 gigawatts of new electrical capacity to the global grid. To put that into perspective, a city the size of San Francisco requires about 1 gigawatt of electricity to function.

Investing in Algae Biofuel: The Only Biofuel that Can Take on Oil
When the price of oil rises just one dollar, the Pentagon's fuel expenses climb an astounding $130 million. So the $50 rise in oil prices over the past six months has taken over a half billion dollar toll on the U.S. government. And that's on your dime.

ANWR Drilling: Will ANWR Oil Production Come Too Late?
There's a new game being played in the media. From what I understand, the rules are easy. Simply pick somebody (other than yourself, of course) to blame for oil prices. Then, you can watch as the blame is bounced around. Unfortunately, there's no way to win the game since the blame goes back and forth repeatedly.

Investing in China: Warren Buffett's New Friend in China
The stock markets in Shanghai, Shenzhen, and even the technically-foreign Hong Kong exchange are hurting since global credit worries yanked down buoyant investor confidence last fall.

Energy Bull Market

With the cost of gasoline skyrocketing and practically every politician in America on the drilling bandwagon, it would seem as though Peak Oil is finally beginning to dawn upon all of its doubters.

It was as if crossing the $130 mark on oil was akin to crossing the Rubicon.

You may remember the story...

It was the 49 BC crossing of a small stream in Northern Italy by Julius Caesar and his army that made a bloody civil war all but inevitable for ancient Rome. Crossing the stream, Caesar remarked, "A lea iacta est," or, "The die is cast."

Otherwise known as... the point of no return.

That, in a way, is what the energy markets are pricing these days as people come to the realization that Peak Oil isn't the work of some lunatic fringe. It's real, and it's here.

Case in point:

Just last month the Paris-based International Energy Agency (IEA) made an announcement that shook the energy complex. The group stunned the markets when it revealed that it's preparing a sharp downward revision of its oil-supply forecast.

And while its findings won't be released until November, the message of the group was crystal clear: Crude-oil supplies are far tighter than previously thought!

That was a stunning reversal for a group that had basically said supply would meet demand on into the year 2030.

The group predicts 116 million barrels a day are in demand, but worries that oil supply will struggle to break over 100 million barrels a day over the next two decades... due to oil production declines.

So, then, how much investment does the IEA think it will take to smooth out this huge supply and demand imbalance?

Well, here's what they said last year, in response to the Peak Oil crisis. According to their World Energy Outlook report, "Some $22 trillion of investment in supply infrastructure is needed to meet projected global demand."

Now think about that figure for a moment, because it is as enormous as it is mind boggling.

And now consider this.

That was long before this shocker from Fatih Birol, the IEA's chief economist. In its most recent report, Birol said, "One of our findings will be that the oil investments required may be much, much higher than what people assume," he said. "This is a dangerous situation."

So $22 trillion is just the starting point on a journey that could easily double this astonishing figure.

Either way, that's enough needed investment in the energy complex to keep it going for many, many years to come. That's why we're so bullish on energy in general, including natural gas.

Let's face it. When the price of oil doubles in a year, and natural gas jumps by 136% in 10 months... the business of finding and drilling for energy becomes white hot.

That's why all of the unconventional shale plays in the Bakken, Haynesville, Fayetteville, the Barnett, and more recently the Marcellus shale, have all gone hyperbolic. You see, they're ready to produce energy right now... not in some time frame so far down the road that the market can't even see it!

Consequently, shares of the majors like ExxonMobil and Royal Dutch Shell have barely budged, while smaller players like Continental Resources Inc (NYSE:CLR) have jumped out of the box.

But don't just take it from me. Give these charts a quick look, and tell me which one you'd rather have bought a year ago.

It's no contest.

But it's not just the exploration and production companies in unconventional oil that have seen their shares rise. The oil services companies that work with them-the ones extracting all the energy-have benefited as well.

You see, shale is "tight rock," making it difficult to extract without some serious help. As a result, the rock itself needs to be fractured or cracked all along the well before the oil or natural gas can flow from it.

Moreover, before the fracturing can take place, it takes 3-D seismic mapping and horizontal drilling techniques to hit the energy-rich layers of shale buried deep underground.

However, when these techniques are successful, the result is an oil or gas well that can basically print money.

That's what Richard Findley and his partners ended up with eight years ago in their Elm Coulee site. Findley and his group were the first to successfully tap what has become known as "The Bakken"... long after Big Oil gave up and went home.

Since then, the Elm Coulee area is believed to contain some 250 millions barrels of oil, making it the biggest find in the lower 48 states in the last 56 years.

Now let's do the math on that one.

It would be 250 million X 130.00, or $32.5 billion. That's 325 followed by eight zeroes... not a bad haul for an area abandoned by the big boys.

So it's no surprise that the share prices of the companies involved in all the new drilling are firmly in a bull market.

Still, there are many other profit plays that the majority of investors aren't privy to.

In fact, I've closed 10 positions in The Wealth Advisory with seven winners averaging a 29.69% gain. Here's what we've done so far:

Adobe Systems Inc. (ADBE: NASDAQ) closed with a 32.28% gain in 11 weeks.
Converted Organics Inc. (COIN: NASDAQ) closed with a 42.11% gain in two weeks.
FXP UltraShort FTSE/Xinhua China 25 Proshare (FXP: AMEX) closed with a 27.23% gain in four weeks.
Morgan Stanley China - SHORT POSITION (CAF: NYSE) a 32.51% gain in four weeks.
PowerShares DB Commodity Idx Trking Fund (DBC: AMEX) a 14.26% gain in eight weeks.
PowerShares DB Energy (DBE: AMEX) a 15% gain in nine weeks.
VMware Inc. (VMW: NASDAQ) a 44.44% gain in eight weeks.

And that's just the tip of the iceberg, considering what's going on in the energy markets.

Make no mistake... The energy bull market still has room to run. After all, when you cross the Rubicon, there is no telling what might happen.

Your energy-loving analyst,

Steve Christ

Chief Investment Analyst
The Wealth Advisory

PS. The Wealth Advisory team has uncovered a new oil and gas play with a fast-growing business model that's taking the unconventional O&G world by storm.

The Bakken, Barnett, Haynesville, Fayetteville, the Marcellus... and even Russia. You name the hot spot, and its products and services are being used there.

The best part is... The company's share price is on the verge of a major break out that could give it a 25% gain or better... even in this down market.

Click here to find out more about this company, and to learn how you can grab your slice of the $22 trillion pie.

http://www.angelnexus.com/o/web/6369

The Big Picture on Q2 2008, Part 1

The second quarter of the year is almost over, so it seems like a good time to zoom out and look at the big picture again (especially after my last few articles, which were pretty technical).

The trends I indentified in my big picture update for the first quarter (Part 1, Part 2, Part 3) have only intensified. The events in Q2 continued to be negative for the economy, but excellent investment opportunities for those who took advantage of a few of my tips.

Let's run the bases again...

Financials

The big story in Q1 was the implosion of Bear Stearns, and the beginning of the continuous mudslide of bad news for the financial sector this year. In the second quarter, the poster child for the credit market's woes has been Lehman Brothers, down 62% for the year. And it looks like Morgan Stanley might be next on the block.

In both of these financial bear runs, I picked up a quick 10% here and a quick 10% there by playing the UltraShort Financials ProShares ETF (AMEX: SKF). It's important to get the timing right with a play like this, but it's not that hard if you pay attention. I watch the news carefully, looking for the early whispers of distress from the financial sector. I buy it when the market is up (which is when SKF is cheap), then after the bad news is plastered all over the front pages, I look for a particularly bearish day to get out.

For those inclined to play a little speculative money now and again, I think it's a good hedge against the sickening jolts that have hit the markets with increasing frequency this year.

The fundamentals of a recession are firmly in place now. The whisper on the street is that the really bad news is yet to come, as broad swaths of the consumer credit markets buckle and break under the strains of steadily higher food and energy costs—the two things that the oft-quoted Consumer Price Index (CPI) explicitly leaves out—and a collapsing housing market.

If the whisper is right, and I think it is, then the markets are in for another downturn. So watch the news on the financials, and keep your powder dry for their next "good" day.

Oil

The volatility in the oil markets has increased quite dramatically in the second quarter, where a $5 to $11 swing in the price over a single day is now becoming more the norm than a rarity.

As I discussed in my piece two weeks ago ("It Takes Two To Contango"), we should expect to see such volatility increase, as the reality of the supply and demand balance really sinks in, and the market seeks to find the new, proper value for oil.

A chorus of analysts have popped up in recent days to claim that oil prices are in a speculative bubble, and their fervor only increased when oil hit a new record just shy of a $140 on Monday.

My favorite piece was an article in Fortune last week titled "Why oil prices will tank," which speculated, "It's even possible that, a few years hence, we could see a sustained period of plentiful oil supplies and low prices, meaning $50 or below." All I could do was shake my head in wonder as the author carried on about how a "new abundance" would come from shale, tar sands, coal, and "an OPEC desperate to regain market share."

If that last bit didn't make you laugh out loud, read it again.

Investor's Business Daily, another venerable financial publication, went just as badly awry in its article three weeks ago, "Peak Oil: An Idea Whose Time Is Up." I was aghast at the parade of wrong information and blatant ignorance in that one. I intend to debunk it formally, but it's going to take a whole ‘nother article to do that job.

So if you thought everybody was already on the same side of the trade in this seemingly endless bull run for oil, think again. Some of the most-read financial journalists in the country still don't understand what "peak oil" means, don't comprehend the numbers, don't understand the crucial differences between oil shale, tar sands and crude, and apparently, some even think oil is overvalued by nearly 3x!

For smart investors like you who do understand these things, though, all the confusion out there simply makes for a good trading environment. When the noise is all wrong, you buy, and when everybody comes around to the way you see it, you sell.

If you took my suggestion in my article two weeks ago, subtitled "Pullback in Oil is a Buying Opportunity," and bought the United States Oil Fund LP (AMEX:USO) that day, at the bottom if oil's most recent dip, you'd be up about 10% on that position now. Not bad for a two-week gain!

Oil prices continue to have an inflationary effect on everything, from food to gasoline to everyday products (thanks to transportation costs). We'll get into the food aspects in the next part of this series.

The next major cue on oil will come from a Saudi-hosted summit meeting of oil producers and consumers this coming Sunday. The kingdom is worried that instability in the markets and high prices will undermine the oil market and encourage alternative energy. King Abdullah has reportedly instructed his ministers to pursue any solution to skyrocketing oil prices.

It is expected that the Saudis will announce a 200,000 barrel per day increase in production starting in July. My bet is that even if they do announce it, it won't affect prices much, or for very long.

They may also decide to raise their discount on crude. That might actually assuage the markets for a while, because it would help restore the profitability of refiners, and should eventually bring down the price of gasoline and diesel.

But in a few weeks or months, even such measures would lose their impact as the markets realize that the world really has no ability to increase production from here. Saudi Arabia has announced that they only intend to add about 1 million barrels per day (mbpd) of production capacity through the end of 2009. That increase still seems highly unlikely to me, but just taking them at their word, they are currently producing about 9.45 mbpd out of a claimed capacity of 11.4 mbpd, with expectations to raise it to 12.5 mbpd, and after that, nada mas.

So while the world waits for the next Saudi announcement, just remember: it's just more short-term noise along the long-term signal of ever-higher oil prices.

The Dollar

The influence of the dollar on commodity prices, particularly oil, continues to be underestimated. I'll dispense with the charts this time, but my observation in the Q1 update, that oil prices moved opposite to the dollar, continues to hold. According to calculations by Bloomberg, the dollar as valued against the euro has moved in the opposite direction from oil 93% of the time this year.

That's a very strong correlation, and should not be overlooked when we hear the latest from Mr. Bernanke. He seems to have successfully jawboned the dollar into a stabler pattern since it crashed to the late-April low, but the recent rally now appears to be losing steam as the expectations of a rate hike in August start to look overblown.

Without a strong rebound in the dollar, which seems extremely unlikely given the Fed's current position somewhere between the rock of inflation and the hard place of recession, oil will have to remain at or above its current heights. So don't go running for the exits the next time you hear some "expert" saying that oil prices are going to crash—instead, buy on any weakness.

Gasoline and Diesel

Gasoline and diesel both shattered all previous records (even the inflation-adjusted ones) in Q2. The national average price of gasoline is now over $4 for the first time, and diesel is trading at the highest premium to gasoline in 15 years, 16% more than gasoline at $4.69.

Diesel is the world's most popular transportation fuel, and refiners simply haven't been able to make enough of it. Not only is it by far the preferred fuel in Europe, most of the rest of the world is currently experiencing shortages of it due to enormous demand and limited supply. China, for example, imported 34 times as much diesel in May as it did last year, partly in preparation for the Olympic Games. Across the Third World, diesel is increasingly being used to run generators as their grid power fails, due to shortages of natural gas and reduced hydropower.

By comparison, 43% of the world's gasoline is consumed in the U.S., where demand is falling as prices rise. Although the sticker shock of gas over $4 has been hard on Americans accustomed to cheap gasoline, we're still paying very low fuel prices compared to Europe and elsewhere in the industrialized world, where gasoline in the $8-12 range is the norm. As I have said before, we should really be grateful to the rest of the world for keeping our gas prices so low by not competing with us for it!

Here in California, a 20-gallon fillup now costs me about $90, and I have no doubt that my first $100 fillup is just around the corner. Believe me, I'm not looking forward to it, but also believe that investing wisely in oil is your best defense against those ever-increasing prices.

While some destruction of diesel demand will take place eventually as vehicles are switched over to run on natural gas, electricity, and other alternative fuels, those transitions will take years to complete. I expect the current imbalances between gasoline and diesel to remain firmly in place for quite some time.

Natural Gas

The trend in natural gas is unchanged from Q1: prices have beat a straight line upward all year, rising from $8.30 on January 10 to $12.95 today. This trend also shows no sign of slacking, for there is very little net excess capacity for gas production.

Consequently, 2008 has been a sweet year for natural gas producers, with some of my favorites delivering better than 60% returns so far:

Coal

Coal has was full of surprises in the second quarter. My Q1 observation that coal didn't have the signs you would expect from a growth industry was based in reality, but no sooner had I published that article than a massive spike in coal prices began.

In Q2, prices for domestic coal went through the roof:

Average Weekly Coal Commodity Spot Prices
Business Week Ended June 13, 2008

Source: EIA, Coal News and Markets

The explosion in prices was reflected in some of the industry's better coal stocks:

Despite this performance, the EIA expects domestic coal consumption to be lackluster, posting less than 1% growth this year after only 2% growth last year, and a lousy 0.6% growth next year.

On the production side, EIA expects a 2.9% growth in production this year, and increasing inventories with coal consumers.

So if it wasn't domestic consumption, what drove prices up?

You guessed it: exports.

Exports of coal posted a sharp jump at the end of last year, and they are continuing to drive demand:

Source: EIA, Quarterly Coal Report, Oct - Dec 2007

The primary region consuming all that exported coal is Europe, where a very limited and uncertain supply of natural gas has been driving up grid prices. The outlook for electricity in Europe is increasingly dim, and they're trying to make up the difference with coal. Flagging Australian coal exports to Europe, along with competition for supply with the emerging nations of the FSU, have really stretched the supply-demand equation.

Exports of coal from the U.S. to Europe jumped 19% from the third to the fourth quarters of last year, and were 52% higher at the end of 2007 than a year earlier.

Again, I do not see anything resolving the tension in this very tight market any time soon. It looks to me like another major bull run has begun for coal. The three stocks in the above chart should continue to do very nicely.

Electricity

The price spikes for natural gas and coal have translated directly to increasing prices for grid power. According to the 2008 Short Term Energy Outlook, June 2008, the Energy Information Administration (EIA) expects average U.S. residential electricity prices to increase by about 3.7% in 2008, and 3.6% in 2009.

The average rate of those historical price increases from 1997-2007 is 2.26%.

In other words, the EIA has just predicted that for the next two years, your bill is going to rise at a rate 63% higher than it has in the past!

For the communities who haven't been aggressively seeking to deploy as much wind and solar and geothermal generation as possible, it spells a long march to ever-higher prices.

But for solar and wind generators, this is great news, because it means that the breakeven point on their projects just got bumped up a couple of years. It's also great news for those who make solar and wind equipment, like the many companies we have recommended in the pages of Green Chip Stocks.

Don't Panic, Profit

As the fallout from rising energy costs, particularly fuel shortages in the Third World, starts to settle around us, it's causing a great deal of pain and unrest and confusion. People are starting to panic.

We understand their fear, but panic isn't helpful. What's important is to be able to understand the trends, play them wisely, and put yourself in the best position you can to weather the even harder days ahead.

That's why we created the $20 Trillion Report—to spot the plays that will bring you profits while everybody else panics.

Next week, I'll update you on the outlook for renewables, food and fertilizer.

Until next time,

Chris

Energy and Capital

Power Grid Stocks

This past Wednesday, Alternative Energy Speculator's Nick Hodge spoke about smart investing in power grids. And I'd like to revisit that article and add a stock to the five stocks he mentioned here.

But first some background on why antiquated power grids must be updated.

California's energy consumption efforts have done little to prevent blackouts. From 1979 to 1999, California residents jumped from 23 million to 33 million. Today, there are 38 million and expectations for 45 million residents. In the long, hot, sticky days of summer, there will be blackouts. Greater electrical dependency from a larger population makes it difficult to say everything will be fine.

The California Independent System Operator has already warned that the "likelihood of going to a Stage 3 power emergency is 10 percent compared to 3 percent last year." Stage 3 allows the state to cut power to certain customers to prevent power system failure.

San Diego Gas and Electric saw record electricity demand in 2006. That record was then broken in 2007. And while the company has taken measures to reduce 2008 blackouts, the only way to prevent blackouts is voluntary conservation and "on-call interruptible loads."

And when the power grid can't take the pressure this year, we'll see widespread power failures.

New York, for example, doesn't have enough electricity to satisfy consumers.

As Hodge said Wednesday, Tuesday was the "second straight day New York set a record not only for high temperatures, but for electricity usage as well."

As temperatures soared, Consolidated Edison scrambled to fix failures across parts of the Bronx, Brooklyn and Queens. It affected homes and public transportation. And it's only June.

Look, if temperatures persist through the hot sticky months of summer, more strain will be put on electricity supply, resulting in further blackouts. Parts of Brooklyn saw a 45% jump in peak demand in a week's time. Again, it's only June.

And just today, a power outage caused a blackout in parts of Washington, D.C., including the White House, leaving many without power and causing major delays.

We'll likely hear similar news throughout the hot summer months, as too much demand is put on antiquated power grids. It's the reason we like Beacon Power (BCON:NASDAQ).

Beacon Power

For some background on how well this stock has moved on power outage news, check this out.

On August 14, 2003, a power failure in the northeastern USA and central Canada hit 50 million people. BCON popped from 25 cents to $1.25.

On September 19, 2003, Hurricane Isabel destroyed electricity for 4.3 million people across the United States and part of Canada. BCON popped from 60 cents to more than $1.

On September 4, 2004, five million people in Florida lost power after Hurricane Frances. BCON ran from 25 cents to 75 cents.

On August 26, 2005, 1.3 million people in Florida lost power because of Hurricane Katrina. BCON ran from $1 to $5.

The stock ran slightly in 2006 on the Queens Blackout news, and again in 2007.

And that's because of the company's potential.

This is the company with flywheel technology, which stores power. These guys can buy power from the grid at cheaper costs and sell it at higher cost.

Just the other week, they got a $340,000 contract to provide their energy storage system to support a wind integration project sponsored by the California Energy Commission. And they recently received environmental approval to build a 20-megawatt flywheel plant in New York.

Better yet, not only did Kaufman Brothers report that BCON can "likely tap into a $700 million energy storage market and post revenue from commercial clients by the end of the year," they started coverage at a Buy rating with a $3 price target.

And they just received a commitment for up to $5 million in loans that'll help fund expansion of a production facility from Mass Development's Emerging Technology Fund and the Massachusetts Technology Collaborative.

Remember, there will be more blackout news this summer. There are antiquated U.S. power grids that will not be able to handle the demand on scorching hot days.

Good Investing,

Ian L. Cooper

———————————-

In case you missed our other investment opportunity highlights, here's what we covered in Wealth Daily, Gold World, Energy and Capital, and your free blogs for the week of June 9, 2008.

Precious Metals Mining Stocks: Get Out of the US Dollar Now!
Investors worldwide in various markets appear to have had their fill for market risk after watching their investments lose significant value in recent months. This has been particularly true with the junior mining share market where investors have become skittish in buying shares for the time being as shares corrected beyond what most analysts had expected.

Chinese Jewelry Sales up 36% Yr-on-Yr: Up US$3 Billion Since 2005
Growth of the jewelry industry in China has been developing much faster than anyone expected.

They're At It Again: Another Dog And Pony Show
So it looks like the Saudis want to hold a summit to discuss how to handle the rising cost of oil, declaring that they will guarantee the availability of oil supplies now, and in the future. Of course they neglect to state how much oil they're guaranteeing. But I can tell you one thing - it'll be less than the global demand.

The Impending Oil Export Crisis: Never Mind Peak Oil; Worry about Peak Exports
The problem is simple: Net oil exporters are awash in the cash from their oil exports. As they grow up and continue to industrialize, they consume more of their own production, which cuts into their exports.

Colorado Oil Shale: Don't Get Caught in This Oil Investment Trap
About a month ago, Goldman Sachs raised their oil price forecast to $141 a barrel during the second half of 2008. The analysts over at Morgan Stanley said crude oil could reach up to $150 a barrel by July 4, 2008. Even Russian natural gas giant Gazprom set their prediction to a whopping $250 a barrel in the "foreseeable future" (whatever that might possibly mean). So in the face of record oil prices, why won't I invest in the Green River Basin oil shales?

50% Gains for Reading a Blog: Not a bad start, considering we're only warming up
On June 3, 2008, Lehman had just broken multi-year support. We mentioned that the "best way to trade the possible drop was to buy the October 25 put options (LYHVE)." At the time, the option traded at $3. Today, as LEH breaks $25 to the downside, the put option trades at $4.55 - a 52% gain in days.

The Economy's Worst Nightmare: Disaster by April 2009?
"With the subprime mortgage crisis already crippling the U.S. economy, some experts are warning that the next wave of foreclosures will begin accelerating in April, 2009."

"Homeowners" Buy and Bail: The Latest Twist in Fraud
Here's a story from the housing world that is a perfect example of that trait. It seems that a number of upside down homeowners have decided to take matters into their own hands.

UK Recession Investments: Where To Invest As The United Kingdom Stumbles
You know the UK is in trouble when the Organization for Economic Cooperation and Development (OECD) singled out the UK economy with gloom and doom forecasts.

Canadian Oil Investments

I told you before that the President wasted his time in Saudi Arabia and I wasn't kidding.

In fact, he was on the completely wrong continent.

By now you've probably gotten used to the huge amount of attention that energy has gotten lately in the mainstream press. News stations have gone so far as to label it, "The American Energy Crisis."

Believe me, the problem is a little bigger than that. Granted, the U.S. is leading the charge in oil consumption, using roughly 20 million barrels of crude everyday.

But, even if Saudi Arabia is one of the few countries left in the world that can actually increase their production capacity over the next few years, the Saudis still aren't our largest source for oil.

According to the Energy Information Administration (EIA), we've been receiving more crude oil from Canada than anywhere else since 2004. You can take a look for yourself here. If you also notice, Canada is one of the few countries that has been able to increase their imports to us since 2002. Furthermore, if we take into account the total amount of crude oil and products, we're getting more from Canada than the entire Persian Gulf since 2006!

We've previously talked about how the U.S. is setting up for a flood of Canadian oil production. At the time, we focused on the important role that the Alberta oil sands will play over the next decade. Today, however, it's not the oil sands that is attracting most of our Canadian oil investment attention...

Saskatchewan's Oil Field Attraction

It's the oil boom going on next door to Alberta. Specifically, the southeastern section of the province. You see, here we're not talking about the heavy oil sands, which requires a large amount of energy to extract the oil.

Instead, I'm referring to the higher quality, light pools of Saskatchewan oil located in The Bakken discovery. A discovery large enough to catch the eye of Alberta oil companies.

One of my readers was quick to point out that the Bakken (both on the U.S. and Canadian side of the formation) will require a huge amount of investment. I couldn't agree more. Do I think the Bakken will be pumping out enough oil to completely relieve us of our addiction to Middle Eastern oil?

I wouldn't hold my breath on that one.

Although the U.S. Geological Survey reported that up to 4.3 billion barrels are technically recoverable in the U.S. side of the Bakken, there's only been speculation as to exactly how much oil is located on the Saskatchewan side.

Either way, there's a lot of oil up for grabs.

And the bottom line for many of my readers comes down to this: How can you invest your hard earned money in the oil sector?

Better yet, is it still worth it?

Canadian Oil Field Investments

I'll let you decide for yourself which side of the field your on concerning oil prices. If you honestly believe that putting your money into oil investments today isn't worth it, I'm probably not going to change your mind.

Then again, if you can see where our energy picture is headed, you're not too late. And as far as the risk involved?

Well, that's all up to you.

So far in 2008, one of my favorite Canadian oil stocks has been TriStar Oil and Gas (TSE: TOG), and a perfect example of how well a company can perform in southeastern Saskatchewan.

TriStar's exposure to the light oil pools in southeastern Saskatchewan is one of the main catalysts for their 2007 growth. In February, 2008, TriStar exposure increased after acquiring Bulldog Resources Inc. The move gave TriStar another 2,200 boepd of high quality to their production, as well as access to another 10 net sections of acreage in the Bakken.

If you're looking for an up-and-coming oil and gas producer, check out Petrostar Petroleum Corporation (CVE: PEP). Trading on the Toronto Venture exchange, Petrostar shares jumped more than 40% during trading today after the company signed a letter of intent to develop certain leaseholds in the Bakken oil play.

Of course, there are even more ways for investors to get a piece of the action...

Stay tuned.

Until next time,

Keith Kohl

Energy and Capital

Domestic Oil Production

Note: Parts of this article originally appeared on Wealth Daily.

"Energy stocks....the only way a human is going to make any money" — Matt Simmons.

Claims that the world has "plenty of oil left are bunk," says Sadad Al-Husseini, a former executive at Saudi Aramco, in recent articles. "Oil-producing countries are inflating the size of their oil reserves by as much as 300 billion barrels by padding supposedly proven reserves with ‘probable' reserves and tar and oil sands."

Oil production, he continues, has peaked and will begin dropping in 15 years or less. Companies mix "proven finds with probable reserves that may have only a 50 percent chance of getting out of the ground."

Even the International Energy Agency is concerned with world oil supplies, studying depletion rates at about 400 oil fields. We'll talk more about the IEA study below.

Regardless of the studies, the global economy wants a solution now.

After paying $4 a gallon, we were told that gas prices fell 2% last month.

But that's what happens when gas prices rise 5.6% in April, and economists are allowed to statistically readjust for seasonal oddities.

You see, historically, gas prices rise in April as we near warmer weather months and summer driving season. Taking that into consideration, the government adjusts its data to reflect the expected rise in gas prices, underscoring trend variations.

And since gas prices did not rise as much as they've historically risen in April, the adjustment showed that prices fell in April.

But flawed stats aside, energy costs are skyrocketing.

Americans want a solution... and they want it now. $4+ at the pump, $127 a barrel oil, $11.50 natural gas, skyrocketing electricity costs... America and the global economy want a solution now.

Domestically, there's the Bakken solution. There's even oil sitting under the Rockies.

And what makes these domestic oil production companies even more attractive as long-term investments are the oil and gas discoveries, and the fact that these explorations are more appealing, given geopolitical tension.

You know as well as we do that prices would come down sharply if we started producing on our own. And it'd be a strong global signal that we're not willing to be hostages of oil rich companies.

Even the President agrees.

"Our problem in America gets solved when we aggressively go for domestic exploration," Bush said.

And we need all the oil we can get.

We've all heard the $200 oil forecasts.

Goldman just raised its oil price outlook to $141 from $107, citing supply issues.

Arjun Murti believes that we could see $150 to $200 oil over the next six to 24 months.

OPEC President Chakib Khelil won't rule out $200.

And, while the International Energy Agency's oil supply forecast won't be released until November 2008, there's growing fear of a sharp downward revision in supplies. That means supply could be much tighter than previously thought, a nightmare scenario if proven true.

Any pessimistic IEA view will shock the market, spawning oil super spikes. We've already seen prices rocket to $130, doubling year over year. And it'll only get worse on a dismal IEA forecast.

But IEA pessimism is nothing new. Just last summer, the IEA warned that spare OPEC capacity could fall to "minimal levels by 2012."

Natural Gas Squeeze

Natural gas prices are rising just as fast as oil, and could be subjected to the same supply and demand issues that drove crude oil well above $130 a barrel.

That's as liquefied natural gas (LNG) shipments to the U.S. slow, and as companies like Cheniere and other companies drop plans to build more terminals.

Tankers full of gas from Africa and the Middle East are going to other countries instead, pushing up the price of gas and choking our stockpiles ahead of U.S. hurricane season.

Truth told natural gas prices are going a lot higher if a solution isn't found.

Not only are we still bullish on our Bakken trades, we've got our eye on several new domestic oil stocks. The editors of Pure Energy Trader are currently doing their due diligence and are looking to issue buys shortly.

Good investing,

Ian L. Cooper

———————-

In case you missed our other investment opportunity highlights, here's what we covered in Wealth Daily, Gold World, Energy and Capital, and your free blogs for the week of May 26, 2008.

Energy Efficient Transportation: How Peak Oil is Transforming Air Travel
These days, energy costs figure in to make a vacation seem anything but glamorous or carefree, and energy-intensive tourism companies have gotten hit hard. But with new energy efficient technologies being employed almost daily, we see a niche where smart investors can make serious money.

Biofuel Energy: Why There May Still Be A Future In Biofuel Investing
I'll be the first to admit it. I'm not a huge fan of corn-based ethanol. There are just too many better solutions out there. Things like Plug-In Hybrid Electric Vehicles (PHEVs) or, dare I say it - mass transit systems like those which are operating successfully and profitably throughout Europe.

The Tipping Point in the Peak Oil Debate: The Game Is Afoot
Those of us who have watched for the inevitable arrival of the peak oil crisis have been waiting for years for the day when we no longer had to fight for the acceptance of the idea, and could start getting on with the hard business of what to do about it. And then, just like that, it happened.

How to Profit from Beijing Pollution: Pollution and the Olympics
It was January 2004 when the World Health Organization warned of bird flu outbreaks, fearing that the disease could latch on to normal human influenza virus, and spread among the human population. One stock jumped from about $1.50 to about $3.

Renewable Energy IPO: Uncorking New Energy Profits
In the Alentejo Forest, money really does grow on trees. Located in Portugal, inland of the southwestern coast of the Iberian Peninsula, the Alentejo Forest is home to a remarkable crop: the cork tree. In fact, the area is so laden with the trees that it's responsible for about half of the world's total cork supply.

Nuclear Energy Investments: Nuclear Energy Lines up for a Piece of the $22 Trillion Pie
As the markets get all giddy about the prospect of a ten dollar pullback in the price of crude, it is easy to be conned into thinking that "this too shall pass." But the larger truth is that in less than two weeks we have gone from an "oil is a bubble" theme to having "America's Oil Crisis" splashed all over the screens on CNBC. It was as if crossing the $130 mark on oil was akin to crossing the Rubicon.

The Future of Air Travel: No Airline Can Make Money on $123+ Oil
Short the airlines. "No airline can make money at $123-a-barrel oil," says Southwest CEO Gary Kelly.Last summer, before the fuel price run, we were okay with flight ticket prices. Airfare, at the time, was compatible with budgets. And all was okay for airlines, showing signs of life with profitable quarters.Then the price of fuel went nuts, running to $132+.

Richard W. Fisher Nails It: Tough Talk From the Dallas Fed Chief
Long before the sound bite ever became the equivalent of news, there were great speeches. Here's one of them by Richard W. Fisher, a man who would be my immediate choice to replace Ben Bernanke. It's long by blog standards but its well worth the read.

Barry Diller Chatter Ups EXPE: The Options Pit Blog
As we said earlier this week, keep an eye on Expedia (EXPE). It's rocketing higher on chatter that Barry Diller is looking to take the company private. The June 25 calls are seeing heavy interest with 9,467 contracts trading hands, as compared to open interest of 6,467. The June 22.50s are seeing interest, too, with 3,260 contracts traded, as compared to open interest of 1,531.

Reiterating a Buy at New Highs
As we said last week, continue buying it. It looks as if the momentum crowd is catching up after the company had its credit facility increased from $13 million to $20 million. Sources tell us the increase was due to improvements in the company's reserves and financial conditions, as of December 31, 2007.

$200 Oil Stocks

After a stock split, shares of Petrobras (PBR:NYSE) have become even more attractive.

At $71, you're buying a dividend paying $314 billion company with a P/E of 24, $103 billion in revenue, and $8 billion in cash. It's a great long-term bet with $100 price targets.

Plus, on an unexpected investment grade upgrade, the Brazilian rally has only just begun.

Standard & Poor's surprised the market when it lifted the country's long-term sovereign credit rating to investment grade, thanks to faster Latin American growth and a decline in international debt.

Brazil's GDP is forecast to grow 4.8% this year after a 2007 expansion of 5.4%, and isn't expected to be impacted much by the U.S. slowdown ripple effect. That's because its exports to the U.S. makes up only 2.5% of Brazil's GDP.

And if you need further reason to get bullish on Brazil, Citigroup believes the Brazilian Bovespa will end the year 10% higher at 74,000. "The main benefit of Brazil's elevation to investment grade is yet further increases over time in capital inflows into Brazil, which should have the effect of raising the valuations attached to Brazilian financial asset prices,'' said the bank.

"The upgrade ‘is a strong long-term positive for the country's financial markets' and probably will reduce the cost of capital by 40 basis points to 5.7 percent."

It's part of the reason Petrobras is an attractive buy.

Earnings Aren't Too Shabby Either

PBR posted a 68% rise in Q1 profit, easily beating expectations on higher oil output and prices. Net profit totaled 6.9 billion reais ($4.1 billion) from 4.1 billion reais year over year. EBITDA rose to 13.8 billion reais from 11 billion. The Street was only looking for profit of 5.6 billion reais and EBITDA of 12.6 billion reias.

But the biggest reason to get bullish on PBR is the idea of $200 oil.

These are the guys that explore and produce oil and natural gas, selling to Brazil and other foreign markets. They operate oil tankers, pipelines, marine, river and lake terminals, power plants, you name it.

They've recently discovered three giant oil fields in the Santos Basin, and confirmed a natural gas deposit in Jupiter. And if reports on the potential size of the Carioca-Sugar Loaf are correct, the company could be looking at 33 billion barrels of oil, or the third-largest oil field in the world. That's in addition to the Brazilian oil finds in Tupi and Jupiter, which are each estimated to hold six to eight billion barrels.

Even if it takes years to see this oil potential, betting against a giant like PBR may not be the smartest move.

Good Investing,

Ian L. Cooper

P.S. How to Bank Gains when the Lights go out...

In the long, hot, sticky days of summer, there will be blackouts. Greater electrical dependency from a larger population makes it difficult to say everything will be fine.

And when the power grid can't take the pressure this year, we'll see widespread power failures.

How many people will voluntarily shut down power on a blistering hot day?

Fortunately, there's one stock that'll run, like it has with other power failures. And we're looking to bank at least 50% every time it happens.

On August 14, 2003, a power failure in the northeastern USA and central Canada hit 50 million people. One stock popped from 25 cents to $1.25.

On September 19, 2003, Hurricane Isabel destroyed electricity for 4.3 million people across the United States and part of Canada. One stock popped from 60 cents to more than $1.

On September 4, 2004, five million people in Florida lost power after Hurricane Frances. One stock ran from 25 cents to 75 cents.

On August 26, 2005, 1.3 million people in Florida lost power because of Hurricane Katrina. One stock ran from $1 to $5.

In 2006, we witnessed the Queens blackout that affected more than 174,000 people. The stock ran slightly.

The stock ran again in 2007 from 75 cents to more than $2.20 around the time that power interruptions shut down some of the Internet's biggest sites.

Listen, I could go on with the reasons why I like it as a seasonal trade, but I also like it for potential profitability.

These are the guys can buy power from the grid at cheaper costs and sell it at higher cost.

Just last week, they were awarded a $300,000 contract to provide energy storage system to support a California Energy project. And just the other day, they received environmental approval to assemble their energy storage system in New York.

But while the stock ran up more than 20% on the news, the run is far from over. We're just nearing the hot, sticky months of summer where blackout news could be commonplace.

SC Trading Pit just revealed the stock here.

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In case you missed our other investment opportunity highlights, here's what we covered in Wealth Daily, Gold World, Energy and Capital, and your free blogs for the week of May 19, 2008.

Gold Investment Advice: Play the Market, Don't Get Played
There are two types of investors, those who play the market and those that get played by the market.

Plug-In Hybrid Electric Vehicles: GM's Future: See It With Your Own Eyes
Over the past few years especially, I've had little sympathy for some of the major auto-makers that have been losing loads of cash. The way we see it, they brought it on themselves by trying to force the market, instead of supplying it properly. Especially General Motors...

Haynesville Natural Gas: 1 of the Biggest Natural Gas Fields in the U.S., and The Stock Play Behind It
On Saturday, my colleague Ian Cooper talked about the upcoming boom in wind energy. As you know, Boone has been one of the biggest supporters of wind energy. But wind isn't the only energy source praised by Pickens. In the wake of record crude oil prices (reaching as high as $129.60 during trading today), natural gas has followed suit.

Renewable Energy Companies: How NASA and Eggs are Hatching Spring Profits
What we're seeing, as I hinted at earlier, is climate change prevention spending finally trickling down to the individual company level.

Little People Mean Nothing: "This is unbelievable. Disgusting," says Mozilo.
You'd think that after making millions by brilliantly running a company into the ground with an army of attorneys at your side, Mozilo would know the difference between "Reply" and "Forward."

Alternative Energy Investments: How To Turn Record Oil Into Record Profits
So far this year, Americans have purchased 1.7% less gas than they did last year.

Let's Sue OPEC: Can you imagine the Chavez reaction?
Yep, the House wants to sue OPEC for "limiting oil supplies and working together to set crude prices." The bill, if passed, would subject OPEC oil producers, including Saudi Arabia and Venezuela to the same antitrust laws that U.S. companies follow. Can you imagine the Chavez reaction?

Peak Oil and the Bakken Formation: President Admits to Peak Oil
As oil prices continue their endless northern trek, those of us "in the know" knew this day would come. The peak oil argument is no longer open for debate... It's here. We just need to figure out how to deal with it.

Uncle Sam's Phony Economic Numbers: The Fix is In
In case you haven't noticed lately, there is something of a gigantic disconnect between the realities that consumers face every day and the statistics on inflation that the government is kind enough to provide us with.

Investments in Vietnam: Economic Growth in Vietnam and China
You can see it all over the Middle Kingdom-old government-run department stores with bare shelves and outdated styles have given way to western-style showcases of modern fashion and technology-often in the same building.

How to Profit from LED's Powerhouse
We're not talking about small industry growth either. In 2005, the LED industry was valued at $205 million. By 2011, it could be valued as high as $1 billion—388% growth in six short years.

Investing in Energy ETFs

It seems we're nowhere near the top of the market for the OIH oil service ETF.

The International Energy Agency is anticipating worst-to-date worldwide reserve numbers, with investment requirements beyond what major players have on hand.

IEA head Nobuo Tanaka said Thursday that the Paris-based organization will soon provide a "more realistic supply potential" appraisal...

That tells us what we've heard to this point may as well be thrown out the window.

It's a data shake-up that will reverberate for years, not just in speculators' ears but with real fundamental sticklers too.

You see, instead of demand-side tunnel vision, the IEA is finally turning its eyes to what matters—what's underground.

The agency is probing the world's 400 leading oil fields, and no one on the NYMEX is expecting rosy data when the tally comes in.

IEA chief economist Fatih Birol says, "the oil investments required may be much, much higher than what people assume."

"This is a dangerous situation," the lead number-cruncher continues.

But if you're an energy ETF investor, that danger is pretty darn profitable.

Energy ETF Investments Shine

Now, many long-term marketeers get out of a play after a loss of 8% or so, and they're careful not to buy into raging bullish charts.

But Investor's Business Daily's ETF rankings these days are full of winning oil, natural gas, and commodity stocks that are appetizing buys despite their recent run-up.

United States Natural Gas Fund (AMEX:UNG) is up more than 54% on the year through May 22, and PowerShares DB Oil (DBO) has gained 43% in the same time.

Normal IBD logic would say you should observe these tickers from afar and bang your desk in frustration for not having bought in December.

We say it's time to get in.

The reason, quite simply, is chaos.

Where supply and demand should stand alone as factors for weighing investment prospects, the oil industry keeps adding wild cards.

Sure, there's the risk premium added to a straight barrel of light, sweet crude coming out of the ground in places like Nigeria and Iraq.

But the IEA statistical shuffle that's now in the works tells us something far scarier than pipeline blasts or widespread siphoning—even reserves in the safest places are in question.

The numbers just aren't reliable, because the IEA and others have adopted a backwards model where price is extrapolated from demand in top economies, not supply.

Supply, it turns out, is connected to decline rates that lie between 4% and 10% a year. 4.5% is what Cambridge Energy Research Associates estimates, but if Fatih Birol's gloomy tone rings true later this year, who knows what kind of supply drops we'll find out about?

Again, that uncertainty and the fact that oil futures are the textbook example of leading indicators means the only way is up.

There is no countervailing momentum now to counteract a rise, other than politicized pot-shots (suing OPEC while nixing gas taxes and drilling in Alaska may be the perfect storm of foolishness).

You know what, though? Despite or maybe because of all the uncertainty, I am sure about one thing—the bleaker the situation looks for oil junkies, the better oil service companies will do.

That's why I'm super-bullish on oil field services companies, the cowboys who are going to the farthest-flung places and using the newest technologies...

And charging higher and higher prices, because they can.

Buy Oil Services HOLDRs on Dips

When's the last time you heard about an analyst boosting 36 companies at once?

Tuesday, that's exactly what happened.

James Crandell over at Lehman Brothers is overweight Transocean Inc. (NYSE:RIG), raising his price target on that oil service and drilling giant by nearly 7%...

That's even after a 75% climb since last spring.

Being the international market watcher over here at Energy and Capital, I'll tell you that even though the wells may be dryer and harder to reach, there's no shortage of work in the pipeline for Transocean.

Same goes for other top players like Schlumberger (NYSE:SLB), Halliburton (NYSE:HAL), and Baker Hughes (NYSE:BHI).

And they're all neatly packaged for you in the Oil Service HOLDRs ETF (AMEX:OIH), which pulled back slightly on Thursday but has room to run.

OIH is a little rich for some people's blood at over $200 per share currently, but consider what you get—a direct tap into the oil industry's last, best hope for capacity increases to offset dwindling production.

I guarantee you don't want to wait for the final IEA numbers later this year to make your move.

Buy OIH anywhere below $215 per ETF unit.

Regards,

Sam Hopkins