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The Commodity Investor Q&A

With Matt Badiali, editor, S&A Resource Report
Wednesday, March 19, 2008

Q: I always see stories about China's big increase in auto use and fuel consumption... Where will the country get the oil it needs? – S.H.
A: Anywhere it can. That includes all the places U.S. companies are not allowed to go. In fact, according to the Mining Journal, China recently signed more than $100 billion worth of energy deals with Iran.
In addition, Chinese companies aren't afraid of Africa. I read recently that China will try to supply 40% of its oil and gas imports from Africa in the next five to 10 years. Angola is already its largest source of foreign oil. Chinese companies have invested $30 billion in Africa's oil and gas industry so far.
Much of this investment is in countries that are considered unsavory by American voters and investors. Remember when Warren Buffett was called out last year for his investment in PetroChina? Protesters said he should divest his shares because PetroChina does business in the Sudan. The authoritarian Chinese government doesn't entertain that kind of shareholder complaint.
To me, that means long-term oil assets are going to become increasingly valuable. China is far, far behind the U.S. in oil consumption per person, and it's playing catch up. This competition will be unlike anything we have seen in the past... The days of cheap oil and gas are behind us, and investors would do well to look for undiscovered ways to profit.
Q: Refiners aren't making any money right now... Why is this a good time to buy? – M.B.
A: Yes, I believe there is an investment opportunity in refiners right now. And yes, the share prices of these companies have been killed recently, along with their earnings.
That's because the price of refined products versus the price of oil is way down. This ratio is simply the price a refiner can get for its finished product (output) versus the price it has to pay for oil (input). A low ratio means refiners aren't making a whole lot of profit.
In this table, you can see this ratio in terms of gasoline, diesel, and heating oil...
Highest Ratio
Lowest Ratio
Average Ratio
Current Ratio
Heating Oil
Gas & heating oil data from 1988 to present, diesel from 1993 to present
What I'm showing you is the margin you would receive for a barrel of refined product over a barrel of West Texas Intermediate (WTI) oil. For example, a barrel (42 gallons) of gasoline is worth less than a barrel of WTI right now! That means refiners must find discounted, low-quality oil to make any margin at all.
As you can see, the refiners must be making up some profits on heating oil and diesel fuel. But I think the margins on gasoline, and therefore the earnings of the refiners, are about to get better.
Analysts told Oil and Gas Investor that they expect the spot price of gasoline to hit $3.10 per gallon this summer. After transportation costs and taxes are figured in, that'll equate to $4 per gallon at the pump. If oil just moves sideways, I think steady demand from drivers will keep fuel prices high.
Given this situation and the washed out shares prices in the sector, I think we're due for a rally. However, if you speculate on refiners, mind your trailing stops because it's a volatile sector.
Good investing,
Matt Badiali

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Market Notes
The world's buildout continues... steelmakers Nucor, Olympic Steel, and Steel Dynamics hit all-time highs.
Gaming breaks down... Shuffle Master, FortuNet, Multimedia Games, Elixir Gaming, and PokerTek at new lows.
Sprint-Nextel grazes new low... down 76% from its 52-week high.
Earnings today... Charming Shoppes, General Mills, Morgan Stanley, Nike.
Market Watch
Symbol Price
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
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
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%