Energy Boom [Dry Heat]

DRY HEAT
Timothy Hughes | 602-859-4100 | thughes@pricegroup.com

11/16/12 General Comments
The most dramatic commodity story today is crude and natural gas. Most of us have heard about the Bakken shale oil boom in North Dakota and the Eagle Ford in South Texas. The resultant boom in construction for housing and infrastructure and trucking jobs paying upwards of $100,000 per year are common stories. However, I don’t think that the average person realizes what a game changer fracking and horizontal drilling means to the future of the United States. The largest oilfield ever developed in the continental U.S. , in East Texas known as Spindletop, has produced about 4 billion barrels of oil since the first well in 1901 and is thought to hold total reserves of between 10 -20 billion barrels. What you might find surprising is that today, in the United States, oil companies have recently identified more than 20 different shale fields that are estimated to contain 20 billion barrels of recoverable oil each. Goldman Sachs predicts that America will outpace Saudi Arabia in oil production before the end of this decade. To give an example of how fast oil production is growing we can look at the Eagle Ford in Texas. Oil production there was 4.3 million barrels in 2010 and one year later stood at 36.6 million barrels. 2012 estimated production for Eagle Ford is over 50 million barrels.

Over the next several years America will be the world’s biggest oil producer. The boom in oil and natural gas production in America will produce millions of jobs and prosperity. It will also trigger the next great geopolitical shift in the modern world. US reliance on the Middle East for oil will cease, along with the need to maintain a military presence there to ensure that flow. Oil monarchies that have lasted through the “Arab Spring”, with outside support, may not survive. Iran will be under even more economic pressure than today’s sanctions and if the US is no longer a military presence, will China or India step up their presence to ensure the supplies of oil they buy? The biggest loser may be Putin’s Russia, a regime that is dependent on high energy prices and has a captive market for the natural gas it sells to eastern and central Europe via Gazprom. Europe will be looking for other options for LNG and that may well be from the United States. Russia is dependent on an oil price of $120 per barrel to balance it’s budget. Energy abundance means a weakened Kremlin. The U.S. will be in a much stronger bargaining position with Russia and in the UN Security Council. Abundant, cheap energy will not only create jobs in other sectors of our economy but it will help dig our government out of the debt trap it has created.

Gold: Gold seems to me to be in a quandary. Economic news from Europe, Asia and the U.S. indicates that those economies are continuing to slow down. On the other hand, conflict in the Middle East and easing by central banks are supportive to gold. I believe that long run, coordinated central bank easing will cause inflation. The latest correction to $1672.50, basis the December contract, will most likely hold as the low before the next move to new all time highs. I would use a close below that price as a stop point to protect a new long position.

Corn : The EPA turned down a waiver request for the ethanol blending mandate in gasoline. That has given the corn some support in the face of the weak soybean market. I believe that the main area of support in December corn is 6.75 and also on the weekly charts.

Soybeans: China purchase cancellations of 22 million bushels pushed the market down and then China, in the latest USDA report, stepped in and purchased 13.7 million bushels after the market dropped. Jan beans low today, so far, at 13.7225 was right at a trend line I have going back to December last year. I think they are in an area to buy a little with a stop close under 13.72 for protection.

Cattle: The December contract has been holding above the moving average that I watch and it is hard to be bearish when everyone knows that the numbers will be smaller as time move on. The demand side going into Christmas season is the key. I am not comfortable with the December contract right now. We have been in a sideways to higher trend in that contract since May between 123.95 and 128.30, and right now we are in the middle of the range. I have to wait for a move out of that range to really get involved.

Hogs: Not involved in this market. One factor lately in demand may be the weakness in hams this year compared to last year at this time but a look at the charts shows the trend is still up.

Treasuries & US$: Since I last wrote, Mr. Bernanke still has his job. I am still short the S&P although at today’s low it is approaching the first of my support areas. Although I think it will break further, this market will be jumpy as the politicos discuss averting the fiscal morass. News about the situation in Israel seems to indicate that a ground invasion into Gaza is very possible. I can’t see that situation helping the stock market and should cause a flight into bonds. I am staying short. This will make for a long weekend.

Have a great weekend

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