Monday, February 23, 2009
(Cont'd from above)...

Jim:       Now, the oil stocks at this very moment… as of last week too… are in free fall… and I cannot think of a better time to start buying them than when everyone else is selling them… now, we have heard a lot of chatter about the sudden plunge of crude, from the relentless nose dive from $147 to $33... it has always been assumed that this decline came from demand destruction, an oversupply led by the Saudi’s… frankly that is nonsense… what we are discovering is the rather intense manipulation of the oil markets by hedge funds… bent on keeping supply off of the market… hedge funds that basically cornered supply thru the use of illiquid futures and ample storage… without any government to speak of when it comes to regulating this market… courtesy of the lazy fair policies of the previous administration… real supply and real demand last year whether it be at $147 or $33 because irrelevant… how do I know this… you remember, I had oil executive after oil executive on Mad Money for months at a time… and they said, to a person, they said the same things… the oil markets are phony… the prices that you see are phony… of course, they weren’t believed… and even if they were so what, the regulators didn’t regulate.

Now, two things are happening that are reshaping the debate… two actually natural forces, now that the hedge funds seem to be gone, that were missing before… remember, the hedge funds were in control, and then when they ran wild when they had their money pulled out… as part of the vast deleveraging that is going on… that made them dump all of their oil in the market… that pressured prices to far below than where they should have naturally… what makes me want to buy an oil here, to augment gold as an integral hard asset portion of your portfolio.

First, when it comes to supply, as you will hear from our next guest after the break… the supply is measured by actual drilling, it is going down quickly… both because of the inability to obtain financing, and because of self correction… that you could see a true stabilization of oil prices, that should give the cash flows of the oil companies that kind of consistency that drives buyers towards them… don’t forget that OPEC is slated to put in some huge cuts next month, that should be begin to reflect in crude prices.

Second, the demand side… look at that astounding rally in China… they need oil… look at the fact that they made a deal last week to lock in petroleum thru an investment in Petrobras Energia (PZE)… the only large oil company that is growing and drilling… that tells me that there is going to be an increase in demand… the Chinese are going all the way to Brazil to make sure that they have enough oil… that says something doesn’t it… and when you couple that with rising gasoline prices, I paid $2.03 yesterday… that is a sign of demand… and a return to buying bigger gas guzzling cars, that is what is happening… turns out we do use more oil when it gets cheaper… the demand destruction can still change the demand thirst… it can change the demand thirst at these prices… even with meager to negative national growth… we got buyers of oil… when you look at the oils remember that the companies are valued at what they can earn and what kind of cash flow they have… that is money that comes in thru operations… as these companies cut back production, stop drilling, the money that they get back from just pumping is likely going to be returned to you… in the form of buy backs, or hopefully bigger dividends… making followers of investment gurus, like Sir Mix-A-Lot or Cramer fave Biggie Smalls, very happy.

I think this situation could go on for a long time… last week Transocean Inc. (RIG), largest deep water driller, made it clear… that the oil drilling budgets that are staying the same, are just the deep water ones… mostly because the drillers are locked into long term contracts… but oil drillers have emphasized, as they reported that only Algeria, Liberia, and Brazil are drilling more… every other country Middle East, Russia, United States, Canada are all drilling less… Mexico.. it is too expensive to drill when crude is this cheap… meanwhile in this country we have many companies that were drilling aggressively at this time last year, that are now running out of cash… in a stock and bond market that is totally inhospitable to raising more money so they can drill… that is why I have been emphasizing BP plc (BP*), at $38, that is really low, it was off a $1.45 today… I own it my charitable trust, ActionAlertsPlus.com… it is an integrated that I think will do best when oil stabilizes and goes higher… because it is the lowest with the highest dividend… BP yields a juicy 8.6%… and can take out a huge amount of cost while it waits for prices to stabilize.

Now, perhaps the hardest hit group… I mean the one that is really the most problematic, are the producers of natural gas… and they have just been… they know nothing… that is what it seems like… it is a commodity that has gotten hit with a triple whammy… the price has fallen as natural gas demand has deteriorated… thru a slow down in manufacturing and a failure of the producers to push thru any plan from Washington… or from California… that would have encouraged greater use of natural gas…. second the imports in natural gas are growing rapidly… that means that we have supply, we are supply all over the place… third, we found out that so much of the darn stuff… that the price is practically capped… we just found it everywhere… it is probably underneath this chair… that is prevalent natural gas is…
I though I smelled something… so what do we do.
What is the bottom line…

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