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The Commodity Investor Q&A

With Matt Badiali, editor, S&A Resource Report
Wednesday, January 30, 2008

Q: I recently read natural gas is cheap in relation to oil... How does this work and what does it mean?
 
A: Since natural gas and oil both provide energy and are found together in wells, the industry uses a simple conversion metric to value those resources... and the companies that own them.
 
Natural gas is usually priced in units of 1,000 cubic feet (aka MCF). "MCF" is simply a measuring unit – like an "ounce" of silver or a "bushel" of corn. And as you know, oil is usually priced by the barrel. 
 
One barrel of oil produces about the same amount of energy as 6,000 cubic feet of natural gas. So six MCF of natural gas should cost about the same as one barrel of oil (a 6-to-1 ratio). When the ratio climbs to 10-to-1, oil is expensive relative to natural gas. When the ratio dips down to 4-to-1, it means oil is cheap relative to natural gas. The relationship is like a rubber band... When prices move too far beyond the 6-to-1 ratio, they're likely to snap back into place.
 
Right now, one barrel of oil costs about $90, while one MCF of natural gas costs about $8. This puts our ratio around 11-to-1. Either natural gas is exceptionally cheap, or oil is expensive. I'm guessing in 2008, oil will retrace some of its gains to come closer in line with its energy cousin.
 
Q: I noticed platinum hit a record high this month... What's driving the rise?
 
A: In addition to being a popular material used in jewelry, platinum is a "green" metal. About 50% of world platinum demand comes from catalytic converters, which reduce toxic auto emissions. In this pollution-conscious world, demand for catalytic converters is as close to guaranteed as it gets.
 
Platinum prices are being driven in part by decreased supply. An eight-year run of supply growth ended last year. Production in South Africa (by far the world's largest producer) fell in 2007. That came as a shock, as analysts had predicted the supply of platinum would continue to grow. 
 
In contrast to slowing production, demand is increasing. More people are interested in platinum as an investment, and the world's growing auto fleet needs catalytic converters. It's a setup for elevated platinum prices for at least the next few years.
 
But that doesn't necessarily mean that it's a great time to buy platinum miners. We aren't the first investors to notice the run in platinum.
 
Q: Is the U.S. actually "addicted" to Middle Eastern oil? Who do we import the bulk of our oil from?
 
A: I love this question, because our own president bowed to the uninformed public's pressure (what a surprise). In a speech on January 31, 2006, the president announced that the nation was addicted to oil. He didn't name the Middle East per se, but said we import our oil from "...unstable parts of the world."
 
I think the general public assumes that the Middle East is the source of our imported oil. But that assumption is wrong...
 
We produce 40% of the oil we consume right here in the U.S. And as far as being addicted to Middle East oil, look at this breakdown of U.S. oil imports:
 
Country
% of Oil Imports
Canada
18%
Persian Gulf
16%
Saudi Arabia
11%
Mexico
11%
Venezuela
10%
Nigeria
8%
Algeria
5%
 
As you can see, we import more oil from Canada than we do from all the Persian Gulf states. It's the Canadians' fault, eh? Both Mexico and Venezuela are on par with the amount we import from Saudi Arabia.
 
OPEC oil makes up not quite half our imports, but much of that OPEC oil comes from the African members Angola, Algeria, and Nigeria, not the Middle East. Still, like in 1980s Hollywood, Middle Easterners are the scapegoats. 
 
And truthfully, I don't agree with the idea that we're "addicted" to oil. Saying we're addicted to oil is like saying we're addicted to electricity or copper. Oil is a commodity that has elevated our society. Without oil, you have no airplanes, no Google, no Indy 500... you get the picture. 
 
If you really want to do something meaningful about our oil imports, forget the idea of a substitute for oil. It's not about ethanol or biodiesel... That's just trading crack for heroin. Reduce your gasoline consumption. Fifty percent of the oil we consume is to produce gasoline for our cars. 
 
Sorry to break the news to you, but that's it, that's the solution. There is no pill or patch to make it any easier. Become a one-car family... take the bus... get a fuel-efficient vehicle instead of an SUV troop carrier.
 
Since I'm a pretty good judge of human behavior, I'm going to continue to invest in oil companies. That is until my neighbor sells one of his Chevy Tahoes and buys a Prius.
 
Good investing,
 
Matt Badiali




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Market Notes
Cheap natural gas puts producers on the block... CNX Gas hits new high on Consol Energy's takeover.
 
Market sits on hands... few new lows ahead of the Fed's rate decision.
 
Earnings today... Amazon, Constellation Energy, Hess, Honda, Merck, Pulte Homes, Starbucks, Boeing, and UPS.
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1221.53 +1.3% +10.1%
Oil 37.77 +1.5% -2.8%
Gold 135.20 -0.1% +13.4%
Silver 27.93 +0.4% +47.9%
US-Dollar 80.67 -0.8% +8.1%
Euro 1.32 +0.6% -12.1%
Volatility 19.39 -9.2% -8.2%
Gold Stocks 564.53 +1.3% +10.6%
10-Year Yield 3.00 +1.4% -9.6%

World ETFs
Symbol Price
Change
52-Wk
USA 122.56 +1.3% +10.2%
Canada 30.44 +1.3% +13.8%
Russia 21.63 +2.3% +16.7%
India 37.73 +1.9% +20.0%
Israel 16.47 +0.9% +9.7%
Japan 10.58 +1.0% +7.4%
Singapore 13.88 +1.0% +19.2%
Taiwan 14.72 +1.6% +17.8%
S. Korea 56.56 +1.7% +22.8%
S. Africa 70.85 +3.9% +22.9%
China 45.06 +1.4% +0.1%
Lat.America 52.82 +1.4% +6.7%

Sector ETFs
Symbol Price
Change
52-Wk
Oil Service 136.18 +1.5% +14.8%
Big Pharma 64.13 +0.6% -3.3%
Internet 72.13 +0.7% +22.3%
Semis 16.03 +2.1% +28.9%
Utilities 31.21 +0.3% +1.6%
Defense 18.51 +1.3% +10.1%
Nanotech 9.99 +1.3% +0.0%
Alt. Energy 9.95 +1.4% -4.4%
Water 18.31 +1.1% +12.2%
Insurance 16.07 +1.2% +18.3%
Biotech 20.58 +1.1% +27.1%
Retail 19.65 +0.1% +28.4%
Software 24.59 +0.9% +24.1%
Big Tech 53.73 +1.0% +21.9%
Construction 12.99 +2.1% +13.3%
Media 13.57 +1.1% +25.0%
Consumer Svcs 67.26 +0.8% +23.3%
Financials 54.87 +2.4% +5.2%
Health Care 64.22 +0.7% +1.3%
Industrials 63.25 +1.6% +19.7%
Basic Mat 73.57 +1.6% +21.6%
Real Estate 55.24 +1.4% +23.8%
Transportation 91.17 +1.4% +25.6%
Telecom 22.48 +1.1% +17.1%