The Market's Latest Mistake
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- Published on Wednesday, 02 May 2012 08:00
- Written by Andrew Snyder, Editorial Director, Inside Investing Daily
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The energy industry is making big news this week. It was perfect timing for our Natural Resource Investing Summit.
The timing was pure coincidence, but this turned out to be the perfect week to host our Natural Resource Investing Summit.
The energy industry has come alive.
On Monday, we got the news that a pipeline company will buy Sunoco for $5.3 billion.
Then on Tuesday, we learned Delta will buy a refinery in Philadelphia. A huge move.
And to top it all off... a quick spike in the price of natural gas.
If you are here with us in Toronto, you know these sorts of moves are exactly what we expect. There is an energy industry transformation underway.
It is all part of what we call the New America -- where the government lies, corporations cheat and smart investors always trump the dumb ones.
I'm not sure which move this week is more interesting. The idea that an airline has rolled the dice on a refinery and will stretch into a realm it knows nothing about is huge.
The move will be the subject of many MBA case studies and will likely be the first entry of a very interesting chapter in the corporate history book.
And the idea the pipeline industry continues a major M&A spree is great news for one of the most recent additions to the Unconventional Wealth playbook.
But it's the move from the natural gas market that offers us the most short-term opportunity.
This is your chance to prove you're one of the smart investors -- not one of those sissy dumb ones.
You see, natural gas prices are up this week on the "idea" gas production is waning.
But the truth is the herd's got this one all wrong. The number of rigs may be declining, but that doesn't mean the amount of gas surging from the ground is dropping.
It all has to do with something I told conference attendees Monday. There is a difference between dry gas and wet gas... a big difference.
Dry gas is what we've got in the Marcellus region. What we suck from the ground is almost entirely natural gas.
Wet gas, on the other hand, rides to the surface with a slug of oil. And oil is where the money is at.
At $104 a barrel, crude is a much more attractive target than natural gas. That's why companies like Chesapeake and, this week, Shell are leaving the Marcellus and aiming northwest.
They're headed for the uber-rich fields of the Bakken... where they're after oil and the wet gas that comes with it.
That is the problem.
The oil-drilling boom in North Dakota is flooding the market with natural gas that is essentially a byproduct of the real asset. When companies like Shell head to the Bakken, they're after the oil; natural gas is a sideshow.
But these companies will gladly sell the natural gas they gather.
And since it's a marginal byproduct... they're selling it for any price they can get. The payoff doesn't matter... the profits are made sending $104 oil to the market. Selling gas for even a penny a cubic foot is better than flaring it and catching the wary eye of the EPA.
I've said it over and over this week.
The market has the natural gas market wrong. Prices will continue their long-term drop.
Watch for a move tomorrow when we get the latest figures on weekly storage injections. We're already well above average for this year, with the nation's storage filled to 55% capacity.
But the big date will come in October. That's when we think those massive salt mines and storage tanks will fill to the brim.
As that disastrous day beckons, big changes will come to the market. It will sort the smart investors from the dumb ones.
In the New America... natural gas is dirt cheap and getting cheaper.
Editor's Note: I hope you are enjoying Brendan's daily reports from the conference. He has done a top-notch job of getting you the inside scoop. If you missed any of his work, you can get access to our conference media library here.
Chart of the Day: Is It Time for a Bumpy Gold Rally?
by Adam English, Associate Editor, Inside Investing Daily
The precious metal has lost about $125 an ounce since the end of February after a string of encouraging U.S. economic indicators dashed hopes of further monetary easing by the Fed.
In addition, a lessening of fears about the European debt crisis prompted some funds to increase their bullish bets on riskier assets such as equities and reduce positions on gold.
There are signs that gold may be seeing higher prices in the near future though.
Bullion buying accelerated after a report showed U.S. economic growth cooled in the first quarter as businesses cut back on investment.
Central banks have also picked up the pace after prices settled down from nearly $1,800 per ounce. Mexico, Russia and Turkey added about 44.8 metric tons of bullion according to the International Monetary Fund.
Of course, with the price so high, everyone is looking for a good deal. As central bank buyers and investors push prices high due to demand, they'll inevitably scale down buying in the short-term as the market cools.
Central banks joined investors in buying gold in 2011, adding 439.7 tons in 2011. That is the most in almost five decades. They may buy a similar amount this year according to World Gold Council predictions.
HSBC analyst James Steel nailed it on the head when he stated, "Prices appear to be stabilizing above $1,620 an ounce, however, and we believe that net long positions on the Comex in gold and silver have fallen to levels at which latent bulls may begin to rebuild positions."
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