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The Forgotten Bull Market

June 25, 2008



Click here to watch a video of Toby's rant. Or click here to listen.

In this tough market, ChangeWave Investing subscribers have made big profits buying small-cap energy exploration players that are going after new deposits of oil and natural gas. If you're not in on these plays, you're probably not making much money in this market.

It's not too late for you to get in the game, but there are some things you must understand.

First and foremost, are oil and natural gas prices a function of speculation or demand?

With the long-only pension money chasing energy investments at 20 times the rate it was eight years ago -- that's 2,000% more dough in oil and natural gas investments -- what we really have is a supply/demand imbalance for oil and natural gas derivatives. These long-only pension funds dedicate huge amounts of money to index funds, which they then must hold.

But fundamentals count, too. Here's an interesting statistic regarding the barrels of oil used per citizen per country each year:

* United States -- 25
* Japan -- 14
* China -- 2
* India -- 1

China is stockpiling oil for the upcoming Olympics, which is affecting demand in the short term. More importantly, though, India and China combined are adding 20,000 to 25,000 new automobiles to their roadways per day, so the demand curve is rising faster than the destruction curve (i.e., Americans trading in their gas-guzzling SUVs).

The Other Side of Energy

But, while everyone is complaining about the price of oil, many people don't realize that natural gas prices have risen 82% in the past 12 months.

The natural gas situation is a little easier to understand than the oil situation. It boils down to weather and liquefied natural gas (LNG) competition.

The cold winter we had -- the first "normal" one in about eight years -- took natural gas storage under its five-year average by about 15%.

Now, with the warm summer we're having, natural gas is being taken out of storage at record rates to generate electricity. If you price natural gas in British thermal units (BTUs) relative to oil, today's price would be around $22.

And we may very well see that price before the end of summer -- it would only take one major hurricane in the Gulf of Mexico. That's how close we are to $20 natural gas.

In addition to the weather, there is the issue of liquefied natural gas competition.

U.S. natural gas prices were supposed to drop as we increased LNG imports and built new depositories. But LNG imports in the United States are down 70% this year. How can that be?

It's simple: We're getting outbid. Other countries are paying $18 per thousand cubic feet (Mcf) for natural gas arriving via LNG ships.

Europe is importing more natural gas due to weather and the depletion of natural gas reserves in the North Sea. It's a similar story in Japan.

For example, Spain had very little rainfall this year, so its hydroelectric power generation is off by about 10%. It makes up for that shortfall with natural gas.

Bear in mind that U.S. natural gas production is up about 7% year-over-year. New discoveries and drilling techniques are contributing to this, and if we have a very mild summer, then we may see some retrenchment.

But the key point here is that natural gas is now a fungible global commodity. We must compete with the rest of the world for liquefied natural gas, just like we do for oil.

At ChangeWave Investing, we're going to continue to make huge profits from our oil and natural gas exploration and production plays. (Learn more.)

These are companies that can add 20%-plus in new reserves each year and grow production. In this type of pricing environment, these stocks will explode in value. Now is the time to get in the game!



Toby

P.S. Energy prices are skyrocketing, and investors in the right areas are making a fortune. But, if you're only investing in oil, then you might be leaving half the profits on the table. Join ChangeWave Investing today to get the names of the best emerging oil and natural gas plays.

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Tobin Smith is the founder of ChangeWave Research, the editor of ChangeWave Investing and ChangeWave MicroCap Investor and a contributing market analyst for Fox News Channel. His market commentary can be found in the ChangeWave WaveWire and he provides more specific recommendations and advice through his ChangeWave Investing service. Click here to learn more about ChangeWave Investing.