Customer Service 1 (888) 261-2693
Advanced Search

The Commodity Investor Q&A

By Matt Badiali, editor, S&A Resource Report
Wednesday, June 11, 2008

Q: Is it too late to get into oil? Given its current run, do you see a correction coming? – M.B.
A: "Recoil" screams The Economist. BusinessWeek shows a gas gauge near empty with the headline "Oil & The Economy." Even the latest National Geographic has an oil story listed on the cover... although Stonehenge made the lead.
All this press would lead a lot of analysts to expect a top in oil... but I'm not so sure.
I've written a lot about the lack of new large oil finds and rising demand from the developing world, but here are three more factors you rarely hear about that are driving prices higher:
Decades of neglected fields: Take a look at Mexico. The country siphoned profits from its enormous Cantarell field (the second-largest field in the world) to finance government programs. Little of that money went to modernizing Pemex, its national oil company.
As Cantarell runs dry, Mexico is struggling to make up for those years of decline. That's not going to happen quickly. Venezuela and Nigeria also have large deposits that aren't being managed properly. All of this restricts supply.
Soaring demand fueled by price supports: Indonesia, for example, is a longstanding member of OPEC but will withdraw from the cartel at the end of the year. The country's production declined and its demand grew, so now it has to import oil. Indonesia long held the record for the cheapest oil and gasoline in Asia, thanks to government subsidies. That fueled high demand, which could cripple the country as it switches from net oil producer to net consumer.
A lack of alternatives: Despite claims to the contrary, you can't plug in a wind farm and expect oil prices to fall. About 76% of every barrel of oil becomes transportation fuel. About half of every barrel becomes gasoline. You can't substitute solar, wind, or hydro power for gasoline on a big scale... not yet, anyway. So keep driving and guzzling gasoline.
So even if the price of oil is peaking, it won't fall far. I think you've seen the last of double-digit oil, but it's not too late to invest. Here are three ideas you can use to profit now, even if oil prices come down off their highs:
First, I like companies that specialize in getting more oil out of oil fields. Generally, when an oil field is "depleted," 70% of the original oil is still sitting there. You read that correctly.
I like smaller companies that specialize in buying these used-up fields and rejuvenating them. These companies can buy the old fields for pennies on the dollar and don't need to spend money exploring. They know the fields are there. That's the sort of business that can hold up against falling oil prices.
Second, I like companies using state-of-the-art technology to do things no one else can.
Longtime S&A Oil Report holding Transocean recently set the world record for the longest well drilled (about 7.6 miles). These companies with specialized skills will remain busy even if oil prices sag. That's because oil companies can't afford to look at short-term price movements. They need to invest for the next five to 10 years. If a company's exploration strategy involves offshore drilling (and it probably does), then it has to hire Transocean.
Finally, I like companies that are working on long-lived assets. For example, many conventional oil fields produce for 25 to 35 years and then they die. However, some tar-sand and heavy-oil fields have 50 years or more of recoverable oil.
Suncor (the giant oil-sand mining company) put its Millennium mine into production in 1967. It still produces more than 300,000 barrels per day. A lot of Canadian oil-sand producers have these kinds of assets. I'll probably be a bull on Canadian oil sands for the next 50 years.
I'm convinced you can find some excellent investments right now in those three areas of the oil industry. If you buy the right companies, you'll have no problem weathering a fall in oil prices.
Good investing,
Matt Badiali

Recent Articles
Market Notes
Corn at all-time high... Soybeans nearing all-time high set in March. Long agriculture stocks still looking good.
Big Pharma's bear market continues... Bristol-Myers, Merck, Pfizer, Shire, and Sanofi-Aventis hit new lows.
Lehman Brothers crushed again yesterday... down 60% since February.
Huge Indian bank ICICI joins the rout... down 50% since January.
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%