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Davos Signals Our Next Big Oil Opportunity

by | published February 5th, 2010

I have been talking about the coming energy crunch for some time. It will be a major challenge, but an amazing opportunity to make money. And it won't come from normal market trends and dynamics.

That's because the world's fat cats are attempting to redesign it in their own image…

The largest international oil companies (read Exxon and the boys) and their huge suppliers (enter the Saudis and their crew) intend to manipulate supply and futures pricing instead of balancing energy prospects. They are already speculating in their own product and trying to scare the hell out of the rest of us in the process.

Actually, I don't care whether Mother Teresa or Simon Legree is running this charade. Because once the show starts in earnest, we are going to lay out our own path to make money right along with them.

I've spent years advising these prima donnas. One lesson I learned early: You don't have to like somebody, take him home to dinner or introduce him to your sister to make money off of what he does.

And the game is already afoot with the first salvo coming from a usually sleepy little chalet town…

The Big Boys Are Fueling Speculation

Every year at this time, the movers and shakers descend upon a Swiss skiing village to redesign the world. This is the World Economic Forum at Davos. On January 28, the bigwigs turned their attention to global energy and revealed more than they realized.

(You can watch the entire session right here.)

On one side were the CEOs of large multinational companies – Tony Hayward from BP (NYSE:BP), Shell's (NYSE:RDS.A) Peter Voser, French Total (NYSE:TOT) head Thierry Desmarest, and Andy Liveris of DOW (NYSE:DOW).

On the other were major producing countries represented by Khalid Al-Falih, head of Saudi Aramco, and Ilham Aliyev, president of Azerbaijan. The budgets of both these nations stand or fall with the price of oil.

The script came down to this: The companies are saying a “supply challenge” is approaching… and fast. Voser claims $27 TRILLION in new investment is necessary in the next 20 years or we cannot meet the 40% rise in demand.

In response, the producers, like Al-Falih, are saying “rubbish.” There will be enough oil to meet needs.

Underneath the surface, however, both are rapidly hedging their bets by fueling a speculative fire that will shortly reignite oil prices and market volatility – and doing much of this together. The Davos exercise was setting a stage for the speculation to accelerate.

Bubble, bubble, who's got the next bubble?

Here's how it will roll out…

“True-Market” Price Manipulation

By controlling output – putting it on tankers that never seem to make it to port, or simply shorting the spot market – the producers are affecting the price of their own commodity. So are the companies. They're restricting refinery capacity and trading futures contracts in their own product.

Even before the subprime mortgage mess settles, the Goldman Sachses and Merrill Lynches of the financial world have already moved on to the next windfall from cutting phantom paper on overpriced assets. They are now descending on oil… with the help of the guys who produce it and the guys who turn it into retail product.

Manipulation of the true market price of oil is hardly new. It has been underway in one way or another ever since futures contracts emerged three decades ago.

Simply put, an ability to increase the price of the futures contract will result in a corresponding price increase in the real oil upon which it is based . That's because we expect the two prices to come together (to converge) when the contract expires.

That's where volatility messes things up…

If you own only paper barrels (the futures), as the uncertainty increases, it will become difficult to figure out the correct price of an option to protect your position. If you are only in wet barrels (the actual oil), you need the futures traders to provide the liquidity to set your market prices.

However, BIG players in the paper, who are also BIG players in the real oil, have a very different approach. They hedge in both markets, manipulating supply and price along the way. The volatility is less of a concern.

After all, they – in large measure – deliberately created it!

It's like being the dealer in a poker game and knowing everybody's hand before you decide to sit at the table and bet.

You have to be a major in both futures and supply to pull this off. But the connections are quickly developing among suppliers, processor/distributors and money houses to move the bubble into oil. Some of the primary culprits were there for all to see among those talking heads discussing energy in Davos.

Well, here's what we are going to do…

The “Flexible” Energy Portfolio

In the months to come, as this speculative intensity increases and the usual suspects shield supply concerns in a rising mountain of paper prices, we are going to profit right along with them.

The strategy will involve setting up a flexible portfolio approach.

It will feature:

  • Mid-sized and smaller producers, where the real profit upside is among operating companies;
  • Service companies, which will benefit first from field activities; and
  • ETFs in crude oil, oil product and currencies – because this is a global play.

Plus, I'll throw in some “tricks of the trade” for good measure.

Before it's over, you stand to make a great deal of money off of the fat cats who are just getting fatter. So I'll let you know when it's time to move with the big boys… and then show you how to do it.

In the meantime, I'll be pointing out attractive opportunities throughout the energy market as this “brave new world” forms in oil.

Kent

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