Category
Energy
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Why You Should Hate Ethanol (Even Though the EPA Doesn't)
Proving once again that the government refuses to learn from its mistakes, the Environmental Protection Agency yesterday (Thursday) again increased its ethanol mandate.
The EPA raised the Renewable Fuels Standard (RFS) mandate to 16.55 billion gallons for 2013, up from 15.2 billion gallons last year, while ignoring signs that the policy is doing more harm than good.
The list of problems starts with what the use of ethanol-gasoline blends might be doing to our cars.
Earlier this week, the Coordinating Research Council, a group backed by several major automakers, released a study showing that E15, which blends 15% ethanol with gasoline instead of the previous level of 10%, can damage autos.
The tests showed E15 could cause faulty fuel-gauge readings and check-engine alerts. In some cases, E15 could cause swelling and failure of auto components that "could result in breakdowns," according to Robert Greco, a director with the American Petroleum Institute.
The American Automobile Association (AAA) last fall voiced similar concerns and asked the EPA to withdraw E15. AAA said that since only 5% of the cars on U.S. roads are approved for E15, the possibility for accidental use in vehicles is too high.
"AAA automotive engineering experts have reviewed the available research and believe that sustained use of E15 in both newer and older vehicles could result in significant problems such as accelerated engine wear and failure, and fuel-system damage," the organization said in a press release on its Website.
These new concerns come on top of historic complaints that ethanol blends reduce a vehicle's miles per gallon by about 27%, meaning more trips to the gas station and more money out of drivers' pockets.
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Buy Signal: Top Hedge Funds Are Moving Into Energy
There is an easy way to find out where the market thinks a particular sector is heading: Check out the movement of futures contracts held by top hedge fund managers.
These days the signal is clear and pointing in one direction. It's in energy.
Reports have recently surfaced that hedge funds are moving into commodities in general, and energy commodities in particular. What's more these moves are more bullish than at any time since midsummer.
The reason is the same one that we have been discussing for several months. Demand is coming back more quickly than anticipated.
Energy spikes usually start that way. Indicators of market resurgence seem to rush onto the scene, catch analysts by surprise, and the acceleration begins.
But this time, those who survey the market should have seen it coming. After all, the indicators and benchmarks have been there. I have been laying them out here in Money Morning for weeks.
Two elements have emerged over the past several days that finally require the pundits to catch up with us.
First, it is becoming impossible to ignore what is happening in the U.S. and China. Both markets are moving up, with that direction intensifying of late.
In the U.S., forward economic indicators are developing into a bull market signal. This has augmented the run we have experienced of late, largely due to the combination of an oversold condition, no bad news (Congress and the White House may at last be learning how to play nice in the sandbox), and money moving back in.
But it's the second factor that everybody will be talking about this week.
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Cheap Natural Gas Prices Give Hope to this U.S. Industry
While natural gas prices are up 50% from their 2011 lows below $2 per 1,000 cubic feet (million BTUs), they're still cheap at just over $3.
Lower-priced natural gas has helped a number of industries, like chemicals and utilities, cut costs, as Money Morning Global Energy Strategist Dr. Kent Moors pointed out in his 2013 natural gas price outlook.
Now there's another U.S. industry that hopes cheap natural gas can revive its flagging performance.
I'm talking about steel.
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Three Reasons Why the Energy "Experts" are Wrong
Last week, another batch of oversimplifications attempted to explain a significant decline in energy stocks.
Excuses ranged from declining demand to shale oil and gas gluts. Others pointed toward a general market Armageddon.
But you and I know better than to believe this hype.
Last week the S&P closed at a five-year high, NYMEX West Texas Intermediate (WTI) crude oil futures closed higher than in any session since September 18, while the spread between WTI and London's Brent benchmark rate is the narrowest it has been since September 14.
We recognize that the harbingers of doom are right only if markets and economies completely collapse. Once again, we know that is not going to happen.
None of this means we are simply off to the races. But they do indicate how the half-baked approaches used by some "experts" are not reflecting reality.
Their arguments are wrong for three very basic reasons. And once you learn them, you stand to profit from the biggest energy trend in decades.
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Four Timely Moves For The Next Three Crises
As I wrote last Thursday, the aftermath of the fiscal cliff deal requires some restructuring of energy sector holdings.
We are currently in a brief period between crises. Nothing was resolved in the eleventh (and a half) hour compromise.
The truth is there are still three huge fights on the horizon – revisiting the sequestration (automatic spending cuts) portion of the fiscal cliff, spending versus taxation in the budget, and raising the debt ceiling.
All will hit by early March.
So the reprieve gained on New Year's Eve will be brief.
The spike after the accord was huge. Unfortunately, as we witnessed late last week, the market rally has no legs. VIX (volatility) has been abnormally low, but that will be drifting up, to accelerate as we get closer to the next round of legislative paralysis.
We cannot predict how protracted this next round will be, but early indications are hardly encouraging.
That's why investors need to be more defensive and identify energy components that are more likely to withstand the gridlock and even profit from it.
Overall, you should divide the energy sector into four segments:
- Producers;
- Midstreams;
- Processors/Distributors; and,
- Alternatives.
Most members in each of these groups are likely to be vulnerable as we move closer to the end of February. But not all of them.
Here's what you need to know…
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Toshiba Talks Highlight Nuclear Power Slow Down
Toshiba CEO Norio Sasaki told Dow Jones in an interview today (Thursday) the company is negotiating with three potential buyers, including Chicago Bridge & Iron Company NV (NYSE: CBI), to purchase a 16% stake in the Westinghouse Electric nuclear power unit.
Toshiba said earlier this year it would consider offers as long as it retained majority control over Westinghouse.
Toshiba paid $4.16 billion in 2006 for a 77% stake in Westinghouse. In 2007, Toshiba sold a 10% stake in Westinghouse to Kazatomprom of Kazakhstan, leaving the company with 67% of Westinghouse.
But Toshiba's stake will jump to 87% in January when a sale from The Shaw Group Inc. (NYSE: SHAW) becomes final. Shaw in September 2011 exercised an option to sell its stock after it agreed to be taken over by rival Chicago Bridge & Iron.
An 87% stake would give Toshiba too much exposure to a nuclear industry rattled by the March 2011 accident at Japan's Fukushima nuclear power plant.
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Now Is The Time to Buy These Oil Refiners and Coal Stocks
Without fail, every year there are January surprises.
They occur when investors receive a pop in selected stocks because of the way fund managers readjust their holdings to dress up their fourth quarter performance.
These improvements don't usually last very long.
In fact, most investors will see the affected stocks decline back to normal levels by mid- to late-January.
But for a few weeks, investors can earn a nice little return as the calendar begins the New Year. This hedge-fund effect will be of special interest to energy investors in 2013.
That's in stark contrast to last year when oil-related stocks were moving in one direction while natural gas stocks were moving in another. What's more, service companies were beginning to come off of their highs at this point in 2011, and King Coal was about to fall off a cliff of its own.
This time around, we have a fiscal cliff soap opera in the U.S., continuing credit concerns in Europe (although with a parallel rise in market optimism emerging on the continent), rising uncertainty again in the Middle East, and a simmering dispute between Japan and China.
In short, even ignoring the Mayans and their approaching December 21 deadline, there is no lack of concern in the market these days.
Still, there will be several beneficiaries in the energy sector as hedge fund managers make their moves over the next few weeks. This is likely to happen across several categories of companies.
In this case, investors would be wise emphasize two segments of the energy market that are currently on the rise: oil refineries and coal stocks.
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2013 Natural Gas Forecast: Six Bullish Reasons Why Now Is The Time to Buy
Natural gas is developing into a very different market from oil, one that offers plenty of opportunities for investors to make big profits in 2013.
There are two contrasting dynamics when it comes to natural gas prices. First, the amount of recoverable volume has been accelerating, thanks to increasing unconventional (shale, tight, coal bed methane) reserves and technological improvements to extract it.
A rise on the supply side would generally reduce prices, especially if the number of operators continues to increase. More gas moving on the market from more suppliers results in a downward pressure on prices.
The second dynamic, however, is moving in the other direction, enticing the increase in drilling and expansion of infrastructure.
This factor considers the demand side, and there are at least six major trends colliding to increase the prospects for gas usage as we move through 2013.
As a result, I expect natural gas prices to see a 25% increase from current levels… here's why.
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Get Ready to Play Higher Natural Gas Prices with These Picks
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The Brewing Shale Gas Energy Boom That Nobody is Talking About
While folks back in the U.S. were sitting down to Thanksgiving dinner, I was making my way back to Frankfurt, Germany from Warsaw, Poland.
My discussions in the Polish capital were with the PGNiG, the national state-run gas company and the government's designated partner in all domestic drilling operations.
Unlike my German conversations, there is considerable optimism these days that the energy picture in Poland is about to change in a major way-thanks to shale gas.
Poland must overcome a serious of challenges, which, of course, were the reasons for our meetings. And despite the upbeat tenor of everybody involved, significant concerns have emerged.
On the positive side, Polish officials have committed to a rapid development of unconventional gas. In addition, no domestic opposition to drilling exists, at least not yet.
Unlike back in Germany, nascent environmental movements have neither the political clout nor the apparent interest in making this an issue.
Polish operations are currently in a very early stage, which may be the reason for the lack of opposition. Only a few test wells have been drilled (less than 15 in all), and none are near residential populations.
For that matter, PGNiG is preparing to start its first horizontal drilling operation. The test wells thus far have all been spud by foreign companies.
However, it is now clear that the "rapid" ramp up foreseen by the authorities in the central government is not working out as anticipated back at the well sites.
For one thing, the initial wells have either come in dry or produced disappointing gas flows. For another, the national gas company is under considerable pressure to produce positive results in what is becoming a very challenging technical environment.
The former result is hardly surprising. There remains insufficient geology and preliminary field prospecting. The locations of shale deposits are well known. The country has no less than five very promising basins. But Mother Nature has an irritating habit of indifferently placing hydrocarbons in those basins.
That requires initial evaluations before the expensive proposition of sinking exploratory wells commences. Thus far, the few wells attempted have been positioned with little more than rudimentary data and guesswork. The poor initial results, therefore, reflect such considerations more than anything else.
There seems little doubt that there are considerable reserves, but finding where they are remains a major undertaking.
Here challenges exist that are not a problem back in the United States.
But solving them could lead to huge breakthroughs for companies in the U.S. and energy investors alike.
