Tuesday, March 30, 2010

The New Oil And Gas Industry

When enterprising companies first started installing wells in the ground to retrieve oil, they had to deal with the natural gas that was part of the oil find. It was combustible and a source of energy, but it was regarded as a nuisance to get out of the way in the oil recovery process. As the decades of the fossil energy age rolled on, natural gas was given much more respect and attention and capital was deployed to capture and pipe it to end users as a clean burning alternative to oil and coal. But it was always considered one business - oil 'n gas. So much so that there evolved a pricing guide among investors to gauge the over or under valuation of the oil or gas price. This guide was simply that under stable conditions, oil should be about 6 times gas. For many decades that has been a pretty good guide, but it no longer applies - since about 2006. So what happened in 2006? Two mega developments - peak oil and hydro-fracing in gas bearing shale.

First, oil and gas are peaking at two considerably different time frames globally. (click to enlarge charts)

This was never a big deal in the past because both production curves advanced in unison. But now in 2010 (check the above chart) we are going into the "criss-cross" where oil is fast becoming a lot more dear than the gas. This chart actually understates the case because gas production produces NGL (natural gas liquids) that condense out of the gas processing and are added to the official "oil" supply numbers, about 8 million barrels a day worth of our 85 million barrel a day habit. This fat portion of our oil is actually natural gas production energy. The above chart illustrates why natural gas is often referred to as the "bridge fuel" we need - a bridge of about 25 years between the oil peak and the gas peak to safely get us across to the nonfossil fuels of the future, like sugar and cellulosic ethanol, scaled up to what we need. Oil companies that used to discard gas like a candy wrapper to pump their oil finds are now making moves to develope gas as the main attraction, because they are beginning to realize that natural gas is becoming at least as primary a fuel of the future as crude.

To greatly aggravate this disparity between oil and gas supplied energy, technology breakthroughs in gas drilling are now making it possible to recover vast amounts of gas entrained in shale rock that have always been known to the industry but deemed unrecoverable. North America is blessed with a Saudi-like supply of this stuff, and it is why the above mentioned bridge could be lengthened beyond 25 years and it is why the price of natural gas is about the only thing going down these days:

Inside the golden box, the 6 to 1 pricing guide held pretty well. When the ratio got out of whack, you could pick which one was more typically priced and expect the other one to soon come into line. But now you have to think outside the box, horrible pun intended. The current ratio is over 20, and I don't think it will be near 6 anytime soon.

All this explains why it is so tragic and insane to slight cheap domestic natural gas drilling in favor of expensive and highly toxic and geopolitically suicidal oil imports and greenhouse gas challenged domestic coal. "Clean coal", according to Jim Cramer, is an oxymoron invented by the black lung coalition lobbyists. Making coal anywhere near as clean as nat gas already is will nearly bankrupt the country - just what we need now:

It should be noted that about all the alternatives to natural gas, except sugar ethanol and maybe some future cellulosic forms, suffer from a big net energy problem. It takes about as much energy from oil to make it as it replaces - no solution to a vanishing oil supply.

The current U.S. Congress has a bias against natural gas, but other nations around the world aren't so dumb and run a large portion of their fleets on natural gas. They pay much less per gallon equivalent. Boone Pickens points out that 7 gallons of diesel is the energy equal of one MCF - current price is $3.00 a gallon of diesel times 7, or $21 vs about $5 an MCF of gas. But you have to put up with your engine oil staying clear as the day you put it in and your engine lasting much longer.

Wednesday, March 24, 2010

Gold at Pivotal Point

In its correction since December, gold now sits at a crossroads between bull and bear. As I pointed out in my post on gold a few days back, the fractal analysis has gold nearing the end of a typical 4 month phase (down since December) and at the turn point into a new cycle (up into a fast climb to over $2000 into early 2011. Technically, we see gold perched atop the critical 140 day ema that is one of the best ways of dividing bull and bear markets: (click to enlarge charts)

Here we see gold's RSI entering regular buy zones just below 40 with those points correlating very well with the 140 ema support level. We are smack on one of those right now. We will either dive through it, perhaps linked to a new leg up in the dollar, and go toward the bottom of the correction's megaphone , or we will turn and break the formation with a swift move up. This megaphone breakage would also be a break of a fractal energy level stronghold of $1128 - the shoulder level of the head and shoulder top shown. The odds would seem to favor a hold of the 140 ema, which would also be a completion of the larger scale inverse head and shoulders bottom to the correction. But who knows. Until this situation resolves itself, new positions in gold may be a little dicey. Gold does not have to dance to the tune of the USD, but to the extent that it does, it is linked to a possible turn there too as this article on China over at safehaven discusses.

Tuesday, March 23, 2010

The Shoe Bull

As Jim Cramer alerted us to on Mad Money yesterday, there is a bull market in shoes right now. As usual, he zeroed in on "best in class" which he deems as Nike. I like bull markets but I don't like high profile, so I'll offer two shoe names that Cramer would frown on - Rocky Brands RCKY and Crocs CROX. Well I guess Crocs was high profile awhile back, but Rocky is quite obscure.

RCKY makes a lot of cowboy boots - very expensive ones. That's one thing that you'd think would be getting absolutely killed in this retail environment - completely needless spending by the average Joe. But just look at this chart: (click to enlarge charts)

These people know how to survive, and the stock price is showing the first twitches of emerging from the coma investors have put it in. It was dead as a hammer across the big market event of March '09 - about all the weak hands gone. I remember this one catching my eye back when it was around a comatose $4 over the course of the July market sell-off last year, but I never got around to buying it. The short term technicals currently look good:

There is a resistance level at $9.5 that will soon break if it follows the lead of CROX and NKE. CROX has been working on a similar formation:

I wrote up a buy case for CROX back on January 16 and it now looks ready to move above $8.

Friday, March 19, 2010

Gold's Technical Condition

Gold has been in the doldrums since early December, and anti-inflationists are pounding the table for gold's demise. Inflation may or may not be a problem anytime soon, but to me that's not the question. Gold climbs correlate with a lack of fiscal integrity regardless of whether this winds up causing inflation or any other particular problem.

Gold's technical condition (including its fractal condition) tells you more about its direction than trying to figuring out inflation, deflation, or conflagration. Going outside the charts, we see an abundance of fiscal angst being highlighted by the ongoing bailouts, including the one for our dysfunctional healthcare system that many believe will be a fiscal nightmare. But just staying with the charts, we see some interesting things: (click to enlarge)
Here we see a clear downsloping megaphone formation for the HUI index of gold stocks formed over the four months of the correction since December. These formations tend to break violently when they finally break (either up or down) out of the boundaries. You could think of a megaphone as announcing that a big move is coming up. The gold stocks have cooled enough to put a slightly negative slope in the 140 and 200 day exponential moving averages. But as we approach a possible exit point from the megaphone, the moving averages have regained the parallel and positive slope they've been in for months, signaling that the gyrations inside the formation may be about done with. Also, a clear oversold condition has been registered in the RSI and a new RSI cycle seems to have taken hold.

Looking at the gold price chart, we see a more subdued megaphone:

The moving averages look sturdy despite the long correction, suggesting a very powerful trend and a strong climb once the correction ends.

The fractal students of gold have been very accurate on gold's direction in recent years. They project late March as a major turn date, just as they did prior to last July (the beginning of the big climb into December). They point out that gold has moved up and down in 4 month units - either single 4 month units in one direction or a mild 4 month move followed by another more severe 4 month move in the same direction. It's interesting that our present down move hits its four month mark in early April, just when the above technicals are suggesting a new move coming, and in the aftermath of the upcoming congressional actions on healthcare. Storm-chasers beware - it could be a perfect storm gathering for gold.

The rest of the market has had to deal with all these known problems as well as the fiscal dominoes abroad out of Dubai, Greece, and every other place the debt roaches are hiding; but it has somehow chosen to ignore all that. So we could have the 2004 condition of gold and the S&P 500 both moving up (although '04 was a little flat and boring). Of the two, I would say gold has the best and by far the safest performance outlook.

Wednesday, March 10, 2010

Baltic Index On Leave Of Absence ?

The Baltic Dry Index is usually a good first sign of future stock market direction, and I pay attention to it. But there is now a disturbance in the force that makes it so reliable as recent stories in the WSJ and CNBC have pointed out. Three years ago, when the BRIC ports were insatiable, a frenzied boat building spree got under way. Now the recession has cooled that appetite and the 3 year lead time for getting boats in the water has a gross over supply messing with the rates that the BDI goes by - making the index overly bearish looking.

As I wrote in the previous post on market leader groups, the BDI is currently the bearish one. So if you discount its effectiveness until the boat situation normalizes, that leaves a much more bullish picture of rotating leader groups in a stabilizing bull market. As Cramer opined on his show today, the financials were the most severe climbers in the bottom gyrations of a year ago, but have lagged over the last few months, letting retail and other things steal the show for awhile. But after a very bearish island reversal that fell back below resistance back in October, the XLF is threatening to bust that resistance and be the star again: (click to enlarge)