The Coming oil and water shortage >>

Here’s a nice article on Business Insider on the developments of oil and the future production of it around that region:

It seems that the NPD also accepts that Norwegian peak oil production has passed and it is the nature of the post-peak decline that is the subject of this discussion.

The upper gold band charts Norwegian gas production which is set to grow. The blue band charts NGL which together with oil (green) are forecast to rise in volume in coming years. Chart from the NPD (in Norwegian)

The NPD forecast from 2006 to 2010 is as follows:

Conversion factors given by BP have been used to normalize to mm bpd.

Norwegian average daily production since 2001 (source BP statistical review) was as follows:

The simple, top down approach (Hubbert) to forecasting future Norwegian production is to presume that the established decline rate of around 7% will continue. The NPD approach is more complex and this produces a very different outcome for forecast Norwegian production by the year 2010, less than 5 years from now.

Hubbert linearisation for Norway using BP data (crude+condensate+NGL). It will require a super-human effort to modify the decline curve established since 2001. NB – this is my first HL – but not my last. Thanks to Khebab for assistance.

Two very different forecasts for future oil production in Norway. The difference between the 7% decline model and the NPD forecast is 700,000 bpd by 2010 – the equivalent of two giant fields.

By the year 2010, the NPD are forecasting 2.8 mmbpd while the 7% decline model implies daily production of 2.1 mmbpd. The difference of 700,000 bpd is equivalent to the production from two giant oil fields and is therefore both hugely significant, and difficult to explain away by different forecasting philosophies. Where does the truth lie?

[Read the full article here >>]

• Gold being the reserve currency
• Where he is positioning
• The baltic rates, commodities as indicators leading the market.

Nevertheless here is a Point and Figure chart of HUI. The double top breakout seems to be pointing at a far high. We might want to build a good position here and test fire with some GDX or blue chips like kinross and goldcorp

Financial Post have this article where Philip Verleger predicted that oil would go to $20 dollar.

Demand for oil matters and in deflation consumption is likely to fall. However the other side of the equation is that supply is getting difficult to produce as well. But the world should enjoy this slack driven by the deflation.

Crude oil prices will plunge to $20 US per barrel as the global slowdown throws even burgeoning China into a recession, predicts Philip Verleger of the Haskayne School of Business at the University of Calgary.

Furthermore, he said Tuesday, the downturn will be so deep it will take three to four years for the global economy – and energy prices – to return to normal levels.

“I think we’re going to see a dip in prices just because this economic situation is so terrible,” said the recently appointed David E. Mitchell/EnCana professor in management after speaking during a panel discussion sponsored by the school Tuesday morning.

“I don’t think it stays there (at $20) very long (but) I think it’s going to be some time before it goes back just because of the state of the global economy.”

Crude oil closed down $1.64 at $42.07 US a barrel Tuesday in New York, less than a third of the $147 peak it reached in July, after the U.S. Energy Information Administration said in its monthly energy outlook it expected global oil demand to fall by 50,000 barrels per day in 2008 and 450,000 bpd in 2009 – marking the first time since 1983 that year-to-year world oil demand has dropped.

The lower forecast came as the EIA revised its 2009 world GDP growth estimate to 0.5 per cent, down from last month’s estimate of 1.8 per cent. The EIA estimates 2008 GDP growth will end up at 2.7 per cent.

Panelist Randy Ollenberger, managing director of North American energy equity research for BMO Capital Markets, agreed prices might touch $20 in the very short term but they will quickly rebound as supply costs make uneconomic even sustaining oil and gas plays.

While Verleger emphasized the demand side of the coming business cycle, Ollenberger focused on supply, noting that a survey of 200 oil and gas companies shows the oil price required to allow new oil projects to break even has climbed from about $18 US per barrel in 1999 to $60 in 2007 and an estimated $62 now.

That average price rises to between $80 and $100 per barrel in difficult plays such as the oilsands, he said.

“We may see $20 oil,” said Ollenberger. “My point is we won’t see $20 oil last. We saw $10 oil in 1998; $10 oil didn’t last.

“What made low oil prices last for such a long time in the 1980s was that big inventory of capacity. We don’t have that today,” he said.

BMO is forecasting that the economy won’t get much worse and will start to rebound in the second half of 2009, leading to an oil price forecast of $50 to $60 over the next six months and improving to $70 to $80 in the second half.

“If the economy worsens, I would shift down those near term trading bands by $20,” he said, adding recent declines are due to downside speculation in markets.

Panel member Hal Kvisle, president and chief executive of TransCanada Corp., said the current situation reminds him of 1986, when he was working for Dome Petroleum, and it cost $16 to produce a barrel of oil that was selling for $11.

“People need to recognize that the cost structure will come down,” he said after an audience member asked if Albertans should be worried. “The cost structure for crude oil tends to be whatever the price of crude oil is and if the price is very low, people will select only those very best projects.”

Verleger, an American who served in the Jimmy Carter administration, said oil prices rose after environmental regulation changes in Canada, the U.S. and Europe required lower sulphur content in diesel fuel. That created a shortage of low-sulphur oil, a problem made worse when the U.S. government began adding sweet crude to its strategic reserves. Meanwhile, demand for diesel surged, particularly in Europe, and diesel prices caught up with gasoline.

The recession, he said, is killing demand for oil, down 12 per cent the United States this year, which means inventories are climbing and prices are falling.

“Many people think we’ll see a turnaround in oil markets by next spring. I don’t think so,” Verleger said.

He added the Organization of the Petroleum Exporting Countries may lower its quotas at its next meeting on Dec. 17 to bring the oil price higher but it won’t cut by the five million barrels per day needed to have an affect and it’s very unlikely that its members will curb their output anyway.

In this light, how can one beat inflation and generate higher inflation adjusted returns?
Commodities are the best inflation hedge, better than real estate better than anything else. Nothing can assure you better than commodities, but only if you are good at it. You have to pick the things that go up the most to make more money. Inflation does not cause prices to rise, price rise causes inflation.

Frequently, since the prices of the commodities go up before the inflation numbers, one can stay ahead of inflation. But, if you get it wrong you might do worse. So, investing in those commodities, which are going to go up first or selecting the right commodities, is the key to stay ahead of the inflation and make a lot of money…

Do you think Asian economies are decoupling from the rest of the world?
If you deal with the largest economy you are going to get affected by what is happening in America. If you are in the other sectors in Asia, such as water treatment and agriculture you have decoupled. You do not care what is happening in America.

But, if you sell to Wal-Mart, which is the largest retailer in America, you are going to suffer badly. So, some will decouple and some may not. Since India is such a closed economy, which is a negative as far as I am concerned, in this particular short term, India will suffer less probably than other countries which are more integrated with the world economy.

What is your view on the dollar?
Fundamentally, dollar is a terribly flawed currency. I am pessimistic about the future of the dollar; I expect it to continue to deteriorate over the next two or three decades.

The dollar is rallying at the movement because there are so many pessimists including me. But, I hope to use that rally some time in next year to get better of rest of my dollars. I do not want to own any US dollar. Also, I would not urge you to buy US dollar. Dollar is going to loose its status as world reserve currency.

Some of the OPEC countries have already started and no longer take dollar, like Venezuela no longer accepts dollar. Other countries, like Gulf, are already looking and may be taking a package of basket of currencies instead of dollar. I am not the only one who knows the dollar is in trouble. Anybody who watches the TV knows that the dollar is in trouble.

What is you assessment of the crude oil prices in the short and longer term?
I do not have idea as to where the oil prices are headed in the short to medium term. I do know over the course of the bull market, which perhaps has another 10 years to go, the crude oil price will be much higher.

Your bets in the commodity space?
Agriculture is one thing I will be looking for the next decade or so. Within commodities, I would not say these are the best, but may be sugar, coffee and cotton. I am also starting to look at some of the base metals they are down a lot; starting to look at some of these like silver, copper, zinc and gold.

Also, if you want to invest in Asia, commodities are the best way. Because, no matter what happens, the commodities have to be better, Asia has three billion people and is now involved in the world economy. Besides, in commodities you do not have to worry about corporate governance, central banks, unions, politicians or anything.

With gold prices correcting, do you still advocate buying gold?
I am trying and want to buy some gold. However, whether this is the low in the gold, I have no idea, but if gold goes lower, I will add some more. Gold is something I do not plan to sell. Gold is something I will gift to my children.

How will alternative fuels play?
Many politicians around the world are advocating bio fuel now. It is going to happen whether it is good or bad. There is going to be much more demand for the bio fuel going forward. This is also a reason that I am optimistic about the outlook of agriculture.

Your views on the water potential in Asia?
India and China have huge water problems. Water could be the next big investment. And, the best way is to invest in water companies which clean it, transport or pump it. Find the water companies that solve the water problem and you could be the richest person in India.

Über investor George Soros stocked up on potash mining shares during the second quarter, increased his Freeport-McMoRan Copper & Gold holdings by more than 1,600%, invested in the world’s largest uranium miner, Cameco, and dumped his holdings in Apex Silver, CVRD and Southern Copper.

Documents filed with the SEC revealed that among the gold companies in which Soros Fund Management maintained its holdings during the second quarter were AngloGold Ashanti, Barrick, and Newmont.

Soros Fund increased its holdings in Potash Corp. of Saskatchewan Inc. by 2568%… The fund also enhanced its Freeport-McMoRan Copper & Gold holdings by 1608%…

Among the fund’s new purchases was Canadian uranium miner Cameco… as well as CONSOL Energy Inc., the largest U.S. producer of high-Btu bituminous coal… The fund also initiated holdings in Intrepid Potash, the largest U.S. potash producer…

The Soros Fund reduced to its holdings in IAMGOLD Corp. by 23.3%… Soros reduced to his holdings in Alpha Natural Resources Inc., a Central Appalachian coal producer, by 46.95%…

Meanwhile, the fund sold out its holdings in the world’s largest iron miner, Brazil’s Vale (previously CVRD), as well as its holdings in U.S. silver producer Apex Silver Mines, and also in Southern Copper Corp.

The US and the economies of the free world run on credit. In the US it now takes six dollars in credit to produce one dollar in Gross National Product. Maybe the biggest problem today is that the banking system has become so traumatized that it is restricting credit. Today “nobody can get a loan,” the complete opposite of the situation which existed prior to the housing bust. The danger — constricting credit will impact heavily on the nation’s GDP. If that happens, say hello to a blistering recession.

With credit being restricted, a second and very serious danger surfaces. That danger is asset deflation. The very thought of asset deflation sends chills of fear up Fed chief Ben Bernanke’s spine. Credit contraction, asset deflation — shades of the great Depression.

What’s the antidote to deflation? It’s print, print, print. What would gold’s reaction be to “print, print, print”? Gold’s reaction would be — rise, rise, rise.
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Following up on yesterday’s XAU chart, below we see a daily chart of Gold going back to the year 2000. First gold established that long shallow rising trendline that you see. Then around 2005 gold established a much steeper trendline. During 2008 gold moved up and away from its steeper trendline, hitting a high of 1037 in May.

But by that time gold had gone up too far and too fast. Ads in the newspapers appeared telling you that gold was going to the moon. Gold had become “a hot item.” Next, gold slumped in to what we might call “the big correction.” Which is where we are now.

But gold is also severely oversold. Referring to the chart, look at RSI, look at MACD, look at the bottom panel which is momentum or the 144-day rate-of-change. So no, I don’t think it’s the end of the great gold bull market. I guess you could call this “the correction that makes the true-believers doubt their beliefs.”

It may take an extended period of time to repair the technical damage to gold. But as the girl who was eating peas one at a time said, “What’s the hurry?”

But gold isn’t the only item that is oversold. Just for the fun of it, I ran the Dow with the same technical coordinates. First, we see the Dow breaking below a long rising trendline — and then plunging.

Up to now, all the market’s shenanigans have occurred with the Dow holding above the 50% level of the entire 2002 to 2007 Dow advance. That’s the good news. The bad news is that the decline is clearly not over. What level will the Dow be at when it finally hits bottom, that’s what is so important. Will the Dow establish its final low above 10725 or below it? That’s the trillion dollar question.

Question — The stock market is in an extended decline, and with Lowry’s Selling Pressure at its high, nobody knows when or where this decline will end. Could the stock market become so chaotic, so scary, that people will buy gold as “the only item that can’t go bankrupt?” Will they buy gold because they don’t trust anything else, and gold represents pure wealth?”

Answer – That’s a possibility, a distant one to be sure, but it is one rationale for holding bullion (coins). When all else is suspect, gold will represent wealth with no counter-party — the eternal standard against which everything else is priced.

Question – Russell, we’ve be hearing the bad news month after month. It never seems to end. How bad do you really think the US economy might become, at its worst?

Answer — I honestly have no idea. I’m more interested in this question — “at what point will the stock market have discounted the worst that can be seen ahead?” For at least a hint of now bad the situation might become, read the piece below about Meredith Whitney.

I just received the latest issue (Aug. 18) of Fortune magazine. On the cover is a picture of Meredith Whitney, currently the hottest analyst in the nation (she called the credit meltdown a year ago before anyone else knew what was going on). So what’s her verdict now? Here it is, fresh out of Fortune –

“Whereas her peers keep searching for some sort of light at the end of the tunnel, Whitney thinks the tunnel is about to collapse. Bank stock investors will get crushed if they jump back in now, she contends because the banks are facing much bigger credit losses than what they’ve reported so far. Moreover, Whitney is convinced that the economy is about to sink into an “early 1980s-style” recession that will devastate the 10% of the population that became over-extended during the housing boom. “It feels like I’m at the epicenter of the biggest financial crisis in history,” says Whitney.

Russell comment — If the sage Meredith Whitney is correct, the market is probably fated to fall apart. That is, if the stock market has not yet discounted all the bad news she’s talking about. But there’s always that nagging question — how much of the bad news has the stock market already discounted?
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Discouraging development from Lowry’s – At yesterday’s close Lowry’s Selling Pressure Index was at exactly its multi-year high. Major stock market lows have never in the 75-year history of Lowry’s occurred within a month of a new high in the Selling Pressure Index.

The best hope for the bulls is that this market will record a final bottom in the October-November period of 2008. The further best hope is that the Dow will be able to register its final low this side of Dow 10725.

The nature of the bid was surprisingly local. Cadence is a small oil driller; we’re talking tiny. They produce 3,600 barrels of oil a day. I mean, why bother? The short answer is this: Barrick is thinking globally, and acting locally.

With this deal, Cadence becomes a captive producer of oil – the nominal barrel of oil flowing from Cadence’s wells goes directly to Barrick. Absorbing all of Cadence’s production would replace some 25% of Barrick’s energy needs.

Interestingly, Barrick didn’t stop with this one deal. Yesterday, Barrick took things a step further, announcing it would buy ALL of the adjacent oilfield assets from Daylight, one of the competitive bidders for Cadence. This puts another 900 barrels of theoretical oil per day at its disposal. Barrick now owns its own little corner of Alberta, Canada, spewing 4,500 barrels a day of oil for at least the next decade. It’s the equivalent of a home owner, fed up with oil prices, converting to a wood furnace and buying 200 acres of forest to get off the grid.

Here’s how the admittedly simplistic math works. Cadence sat on 18.2 million barrels of oil, with an expected cost of extraction of $20/barrel. Assuming the new acquisition has similar scale, we can do some simple math.

Let’s say production stays flat at 4,500 barrels a day, and nobody takes Christmas off. Barrick can now count on 1.6 million barrels of oil per year, at a cost of $33 million. At spot (or even a year out, given the current long-horizon flat futures curve), Barrick would have to spend about $120 per barrel to hedge a future oil spike, or a fully collateralized $192 million. That’s a whopping $160 million economic argument in favor of owning your own cow to forgo all that milk. Even if these hypothetical extraction costs are off by a few hundred percent, it’s still a compelling argument.

Understand that these are back-of-the-envelope calculations with all sorts of problems. For one, the oil field has more than just light sweet crude (70% of the field) – it’s got natural gas and ugly oil too. It’s also the case that this raw production won’t end up in trucks and literally get transported for Barrick’s use. Instead, the production from Barrick’s new Canadian energy operation will go out into the open market, and those proceeds will let Barrick purchase actual energy in the form it needs it, where it needs it.

But it remains interesting as a true economic hedge. Barrick (and many commodities players) is rolling in cash. It just reported quarterly cash flow in excess of $500 million, a 58% increase over last year. The real question management and investors face is what to do with it. They can’t just magically get more gold out of the ground, so controlling their costs for the future is a smart move – after all, the whole reason their cash flow is so high right now is because their current costs for extraction haven’t gone up in lockstep with the price of gold.

There’s a good chance that this is the tip of the iceberg. Commodities companies have much in common. Whether they’re extracting ore, oil or crops from the earth, they are fundamentally in the same business – they make big investments, they deal with big governments and complex policies, and they run massive hedging operations. While the cost for actually producing some commodities has gone up, the fundamental drivers for higher prices has been demand, so we’ve seen most producers trade in line with increases in underlying commodities prices.

Which puts many commodities producers in the same boat as Barrick. We’ve just witnessed a rash of exceptional quarters from oil producers. Even turbulent lovers Rio Tinto and BHP Billiton have had tremendous profits – tens of billions of dollars in free cash (even if that hasn’t been enough to keep their share prices up). If the major producers’ share prices become depressed compared with their underlying resources, there’s an incentive to buy back shares – something Exxon’s been getting a lot of heat for, as they dumped $8 billion back into their own stock last quarter.

If, by contrast, we see share prices relatively high compared with the underlying, there’s incentive to do something better with the cash – make acquisitions.

Those acquisitions make the most sense when they leverage internal expertise (like hedging and infrastructure management).

So how do you play it? If you’re willing to do the homework, the challenge is finding small-cap resource companies who may be undervalued relative to their reserves. That’s what Barrick’s doing. The trick is getting there first. There’s some evidence that those smaller firms may have a hard time raising new capital for expansion, despite the boom in prices, meaning they’ll need to merge or seek investment from the big boys to play in the game.

And energy is probably the smartest place to look. The Barrick investments are fundamentally about hedging energy – something big aluminum producers have been doing for ages, co-locating their facilities near big electrical utilities. It is an increasing consideration in ethanol plant development. The longer oil stays expensive, the more this kind of deeply vertical integration will make sense.

In mid-May 2005, gold had gotten ahead of mining stocks, according to watchers of the Philadelphia Gold/Silver Index (PHLX: XAU), a benchmark tracking the performance of a baker’s dozen mining outfits. Gold’s price, as a multiple of XAU’s, had advanced to a historic plateau that rather predictably signaled a reversal point in the past.

Apparently, they were right. Those who bought mining equities and held them through early January 2006 watched their investments gain value at a pace nearly three times as fast as gold itself. XAU raced ahead 73.6% against bullion’s 26% gain.

But there was no such move set up by this March’s pattern. At least not yet. The GLD/GDX ratio, instead of falling, rose to new highs. It closed at 2.12 Friday.

Gold Bullion’s Price Vs. Mining Stocks (GLD/GDX)

What went wrong?

Well, three things really. First and foremost, let’s not forget that gold mining stocks are stocks. Though their issuers are engaged in the business of finding and producing a commodity, they’re not commodities themselves.

In 2005, the equity environment wasn’t ideal, but it was definitely better than now. We’re currently looking forward to a low- or no-growth environment seasoned with high inflation. That’s a noxious atmosphere for equities – even for gold stocks.

Mining stock prices are inherently more volatile than those of bullion. Since 2005, Axe’s standard deviation (a measure of volatility), at 34.6% per annum, is nearly twice that of gold’s. The outsized riskiness arises from the enormous influence gold’s market price has on a mining company’s earnings. That’s where the second factor – production costs – comes in.

During gold’s 20-year bear market, miners learned to survive by controlling costs. Using higher-grade and easy-to-find ore, producers tried to wrest profits from sub-$300 market prices. Bottom-line-focused
management also was stingy about equipment and labor investments.

In 2005, extraction costs for large operations averaged about $200 per ounce. Thus, gold’s early upticks had a dramatic – and positive – impact on producers’ bottom lines. One miner, in fact, estimated that a $10 rise in the price of gold back then translated into a $50 million boost to its earnings.

As the higher-grade ore was taken out, though, second-tier deposits had to be targeted and equipment updated to get at it. Hiring and training also had to be stepped up, further increasing production costs. The most recent report from Goldcorp. (NYSE: GG), Canada’s second-largest producer, for example, puts extraction costs at $300 per ounce now. For marginal producers, extraction costs may be even higher.

Keep in mind that the refurbishment of productive capacity is taking place in an environment of rising inflation and a generally weaker dollar. That cranks up cash costs further.

Then there’s the impact of exchange-traded vehicles. The increasing popularity of ETFs and ETNs based upon gold bullion or futures has siphoned off more and more of the demand for mining stocks. GLD, for example, posted an average daily volume of 2.5 million shares between May 2005 and January 2006. Volume has more than quadrupled. Over the past nine months, 11.6 million GLD shares change hands on an average day. Investors thirsty for a slug of gold exposure can now obtain it cheaply and efficiently without running it first through an equity filter.

Gold ETF (GLD) Volume

All this makes the current market decidedly different from 2005.

So, are gold stocks cheap or not?

Well, you can’t put the ETF genie back in its bottle. And you’ll just have to wait to see if there’s actually been a turnaround in investors’ sentiment for equities. As for mining stocks themselves, spiraling production costs, and the consequent pinch on margins, can’t be good.