Inflation is galloping at a 7% pace and a round of one-off corporate profits waiting in the wings are among the near-term sightings in Trader Tracks editor Roger Wiegand's viewfinder. As the veteran prognosticator tells The Energy Report readers in this exclusive interview, while a short-term surplus in oil and natural gas supplies doesn't appear to bode well for expectations of rising prices, the inflationary outlook outweighs the fundamentals, and inflation alone should drive oil up to as high as $100 a barrel.
The Energy Report: Roger, when we last spoke with you at the end of August, you expected the stock market to have a pretty big fall after Labor Day. So, the market didn't collapse. . .what's your view on why it keeps appreciating?
Roger Wiegand: Well, part of it has to do with manipulation and part of it has to do with an awful lot of money that had been on the sidelines. A couple of months ago there was around $8.5 trillion in cash that was not invested. I couldn't believe it. A lot of the money is starting to come back because investors are persuaded things are going to really pick up. Typically, what happens in the normal cycles is that November 1st is the time to buy, after the September-October event sell-off is over. And if you buy on November 1st forward, you usually do pretty well. This year it was delayed, and some of those charts look a little bit sloppy and choppy, and that's what has everybody confused, including me.
TER: Are you saying that you're expecting the markets to go up now that it's after November 1st?
RW: We could go either way. I really believe that. We've have some interesting charts. There's the S&P chart, which has a double top right now; when you see that, it's indicative of a selling point, obviously. But, I don't think there's going to be that much of a selling event. I suspect markets are going to stay propped up. In mid-November we saw a gravitational move from smaller cap stocks into the larger ones. Usually, when investors move into the S&P 100 and they get out of the trading 500, it's because they're looking for security and safety, and they're looking to buy those consumer cyclical stocks, like household goods and toothpaste. There's a heavy load in that regard right now in the market, but I think they're going to get out-managers of the funds will get their bonuses, and they're going out of town with some pretty big money. But I don't think there's going to be very much selling right now. I really don't.
A big part of this has to do with inflation, too. I know a lot of people say, Well, there's no inflation now; it's all deflation. We disagree; we say that the inflation is now 7% and rising more quickly. Unemployment is a lot higher than people are discussing, and others are saying, Well, this is a jobless recovery. Well, it may be a jobless situation, but it's certainly no recovery. What's happened here is several of these corporations have laid off so many people and run down their inventory so much that overhead was cut back tremendously and they're showing profits, at least where we are right now. And those profits are going to be a one-off event. They're going to last for maybe a few months but come spring again, we're back to the same old problems. We're overloaded on debt. The bond market in Japan is looking absolutely horrifying right now; it's really scary. The government is selling bonds to pay pensioners and I don't think they've ever been in that position before. The amount of paper out there in Japan relative to GDP and their currency is way beyond where it is in the U.S. And I thought ours was bad!
So, in all likelihood, something is going to snap here pretty soon; it's got to. But it's confusing a lot of people because many good reports are coming in.
TER: If we go back over the past year or two, energy commodities all remain down from the 2008 highs, while many are up from the 2009 lows. Positive economic news is coming out of the U.S. and Europe, even Asia. Given those reports, it looks as if there may be some economic growth, which would be positive for energy investing. But as you point out, those reports are confusing. So in summary, what's your view of the outlook on the energy investment front?
RW: On the fundamentals side for the shorter term-a few months to a year-we're oversupplied on natural gas and crude oil. There are 14 ships with 137 million gallons of oil parked off Malta, in the Mediterranean Sea, because there's nowhere to store the oil. Sunoco (USA) (SUN) shut down a refinery because it was costing them more to run it than they could get out of their refined product, which I can't ever remember happening before.
TER: Even with oil trading at about $80?
RW: That's correct, but there's a lot of competition from other companies in other countries right now. About 35% of the unleaded gasoline used in the U.S. is produced overseas. It's refined in a foreign nation; the oil probably comes from a foreign nation; it's delivered fully refined and ready to use in automobiles and trucks at the U.S. docks. So, there are these foreign competitors.
And then you have problems with currency valuations-a weak dollar versus a costly dollar versus the currencies where these supplies come from. So fundamentally, while we have got too much product, on the other side of the coin we're going to have inflation and are starting to see it now.
Next year, after things really start to roll in the springtime, after we get past the heating oil changeover and go to gasoline in March and April, you're going to see those prices back up at $100. A lot of the reserves will be burned-off at that point. Fundamentally, prices might be back in line where they were previously. In my view, inflation will push the price more than the fundamentals.
TER: But if we're going from under $80 today to back over $100, that's way more than inflation. Isn't that a supply problem?
RW: If supplies get used up, if the economies in Asia hang on, and if the U.S. doesn't get much worse than it is, we should probably get up to $100. This will be very difficult to evaluate because the International Agency for Oil and Energy-the group that measures oil-is forecasting U.S. demand for next year to go down 1%. Supplies being where they are, there will probably be a cap on price. But if you're looking at a situation where inflation steps up considerably, the price could easily go from $80 to $100 based on inflation alone because the dollar is worth less. It's not that the fundamentals are that much different; it's just that the dollar is cheaper. December is historically the worst and weakest month for the U.S. Dollar.
TER: So it's really more devaluation than inflation. And if gas goes up a lot, we'll see another decrease in demand, which is what we saw the summer before last when we had the really high gas prices.
RW: Although 1% doesn't sound like very much, it's a considerable amount and it's a big deal for the U.S. On top of that, some of the supplies we were getting before are curtailed or way down. The primary production loss is the Cantarell Field in Mexico, by the end of this year, it's supposed to be down to only about 10% to 20% of where it was. We're looking at nearly total depletion; they're running it out.
TER: But we're also seeing the deep sea oil drilling off Brazil, and there are supposed to some really amazing deep water oil reserves in the Gulf of Mexico.
RW: There's one in Brazil's extreme deep water, something like 27,000 feet. It will be very expensive to make that work out and it's going to take time. Brazil has a lot of oil, a massive new discovery field with 100 billion barrels or some ungodly amount. But they don't have the money or the deep water expertise to develop it. It will take 10 years to get it going and they'll have to take on perhaps Royal Dutch Shell plc (NYSE:RDS.A) and Exxon Mobil Corporation (NYSE:XOM) and Chevron Corporation (NYSE:CVX) . So it's a long-term proposition with short-term ups and downs, which makes their forecasting very difficult.
TER: So, long-term, do you see investing in oil-the commodity, through ETFs, or oil the equities-as a good investment strategy?
RW: I expect to see a few isolated plays in some of the junior stocks. An option trader who knows how to play the cycles, trading the senior stocks, will find some opportunities. The question becomes whether there are easier ways to make money, and quite frankly I think there are. It's going to be harder to make money in energy.
I'm not saying you can't do it. For example, I think I see some opportunity ahead with two major pipelines that are supposed to be coming from the North Slope of Alaska. One is going to the Midwestern U.S. and the other one from the North Slope down to Western Canada and over to the Pacific Ocean supplying China. One of those pipelines is approved and licensed by the State of Alaska, which will get a big cut on the royalties. BP plc (NYSE:BP) and Exxon are going to build their own, but they still need permits from Alaska to build it, and they don't want to pay Alaska any royalties.
TER: What kind of timelines are we looking at for these pipelines?
RW: It's going to be a while yet. We suspect construction on the first one (licensed) might start in five years. Keep in mind our current economic conditions. Also, some pretty smart people tell me there won't be enough steel pipe capacity in the whole world to build them. That's why I found it very interesting when the Chinese were slapped with a 90%-plus tariff by the U.S. I think this is going to change very quickly. I really do, because steel pipe will be in huge demand when construction begins.
TER: You mentioned that there are easier ways to make money. Are you suggesting outside of energy totally or a different sector within energy?
RW: A lot of people say that the best stock to own in the energy industry is Exxon. They say it's the best-managed company and it has the most capital. If you can get the stock on a beaten-down cycle, when there's really nothing wrong with the company or the fundamentals, just that it sold off because it's that the time of year, there are opportunities to make money in the energy business.
In addition, if you're smart and you follow what I call the junior stocks or the baby stocks, there are opportunities within some energy sectors. There will be a way to make money in geothermal, the wind sector and some of the others. The old adage in the gold business is that those who sell the picks and shovels are the ones who make money. There must be counterparts in the green energy field. Exactly what they would be and where they would come from I am not entirely sure. You just go where you see the best trading-buying horsepower.
TER: Do you see these energy juniors as buy-and-hold investments? Or more speculative, where you'd get out when they're going up?
RW: It depends on the stock and the time of year and where they are in the sequence. Some juniors in the energy field have good things coming for them. You really have to figure out what a company is doing, how much money it has, if it's for real, if it has a good reputation-and does it have a chance of success? Watch the news and watch the behavior of the stock. Normally, if I watch the behavior of the stock and use tech analysis, I can get a pretty good handle on what might happen.
You never know for sure, but if a company has good promise and it gets off to a stronger start-let's say they open at 30 cents or 40 cents and then move to 50 cents-that might be a good time to get in. After (Elliott) waves one and two, and here comes wave three; expectations are high and volume is picking up. There's certainly nothing wrong with buying in wave three, which is normally half of the entire move on the upside, at least in the first five wave set. You could earn that 40% or 50%, sell it and go away.
TER: Isn't this market basically one in which you need to trade a couple times a year? In other words, buy, and then when they have news or are in their cyclical upside, take some money off the table, and keep going? Alternative energy sounds perfect for that kind of trading.
RW: It is if you understand it and if you know the companies and their prospects. You also have to understand very clearly how the market views that company. Some of these companies are out on the edge. It's not that they're necessarily bad but they don't have proper exposure. They don't update their news like they ought to. If the market isn't sold on their story or doesn't believe in it, the stock isn't going to move.
TER: Do you have any specific companies that you're following that you can share?
RW: Nevada Geothermal Power Inc. (TSX:NGP) had some good things going before, and based upon the latest things I've heard there's no reason that stock couldn't come back again. That's been one of the better ones within that group.
TER: Will your newsletter be focusing on some of these alternative energies or are you pretty much concentrating on precious metals?
RW: Oh, we look at some energy, too. It has a way of finding its way to the desk. We talk to a lot of people and have many good friends in the business, so these stories pop up periodically.
TER: Any other advice you'd like to share with our readers?
RW: Just be careful and don't be a buy and hold forever investor. I'm not saying you have to be a day trader unless you're really into that (which I'm not). But somewhere along the line if you make some money on some of these stocks, you're going to have to take it or, you're bound to give it back.
Roger Wiegand produces the popular Trader Tracks online newsletter, offering investors short-term buy-and-sell recommendations and insights into political and economic factors that drive markets. He has devoted intensive research time to the precious metals, currency, energy and financial markets for more than 17 years. His varied background-a blend of graphics and commercial printing, writing and editing, sales and marketing, consulting and real estate development (from sand and gravel mines to landfills to residential/commercial projects). . .and trading-also shapes the views he shares. TraderRog also digests various domestic and international publications for economic, political, monetary and market news and commentary that inform his opinions and analyses. Roger is a regular essay contributor to popular websites addressing the commodities markets and is frequently interviewed on radio in the United States and Canada. Roger is a regular speaker at major precious metals and resource conventions in North America.
1) Karen Roche, of The Energy Report, conducted this interview. She personally and/or her family own none of the companies mentioned in this interview.
2) The following companies mentioned in the interview are sponsors of The Energy Report: Royal Dutch Shell
3) Roger Wiegand-I do not own shares in any companies and deliberately trade futures and commodities only to avoid ethical questions. I personally and/or my family am not paid by the companies mentioned in this interview. None of these companies pay me any fees for recommendations. Some of them do, however, pay a modest one-time fee for reprint rights for using my professional journalist's writings and work.
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