Energy & Commodities

Those wretched crude oil speculators

“There is no life I know to compare with pure imagination. Living there, you’ll be free if you truly wish to be.”

– Willy Wonka

Chock another one up to the “let’s look like we’re doing something” category …

Hypothetical scenario:

Suppose all 5th grade teachers at a given elementary school give their students ample amounts of candy before recess each day. This sugar high has led to wilder children on the playground. It has also emboldened the kids to act more dangerously as their risk-taking is near perfectly correlation with their classroom popularity. Taken together, the now rowdier mob of children has led to an increased number of serious injuries on the playground. And pretend for a moment that the rest of the student body is responsible for the hospital bills of these injured 5th graders. And pretend that prior to the teacher’s decision to sugar-up her students before recess the rate of injury was insubstantial. What might they do to mitigate the increased cost the public must pay for the hospital bill?

Easy. Lower the heights of the playground equipment and pay new playground police to monitor the situation closely. But don’t alter the pre-recess candy supply (maybe even increase the supply if the kids begin to look sluggish now that the playground equipment isn’t as inviting …)

President Obama is talking tough – he’s going to crack down on the problem that’s driving gasoline prices beyond tolerable levels. He’s going to crack down on those wretched speculators.

Obama is urging the CFTC use its clout to get tougher on those trading in the crude oil futures market. Specifically, he wants to see higher margin rates per contract and wants them to enact some form of position limits to mitigate any abnormally large long positions that could serve to manipulate crude prices higher.

Ted Butler would be proud. [If you don’t know Ted, he’s been all over the CME and COMEX and the regulators to rain down on such large short positions that are allegedly manipulating precious metals’ prices lower. It will be interesting to see if this do-something attitude being applied to the crude oil market will translate to the precious metals et al.]

All that said, here’s a short list often used on a day-to-day basis to explain the fluctuation in crude oil prices:

    Geopolitical risk (e.g. what might result from butting heads with Iran)

    Supply/demand changes (e.g. falling energy consumption in the US or depletion of existing well output rates or Saudis pumping overtime or supertankers running out of gas or …)

    Inflation hedge (e.g. hold real assets in case prices soar as a result of the declining purchasing power of the US dollar—the currency in which most commodities are priced)

    Broad-market risk appetite (e.g. commodities moving in line with “risk assets” driven by growth opimtimism)

Let me say this: speculation is a necessary and natural form of price discovery in the markets. It is this price discovery that sends signals to all market players, financial and real. The pricing system is the core of the market system and what makes capitalism the best and more efficient way to structure an economy. Period! End of story.

Yet politicos,  through the ages, have attacked speculators as devious manipulators who are the cause of all ills economic. There is nothing new here; it’s the same tired scapegoat rhetoric.

Granted, there are speculative premiums embedded in prices; that is a fact and will not change as long as you have actively traded markets. Sometimes these premiums will be out of line, and those betting the wrong way will be punished by Mr. Market. But over time the real supply/demand dynamics will rule the day.  Not speculation.  Though I am not a big believer in so-called equilibrium, I do believe prices will trend toward some supply and demand equilibrium over the longer term. It’s true for oil, wheat, corn and every actively traded commodity.  It has always been that way.   This doesn’t mean markets or market mechanisms are perfect.  They are not.  And it doesn’t mean market efficiency can’t be improved.  It doesn’t mean politically-protected con-artists—read Jon Corzine—should not be thrown in jail forever.


Down here in Florida we are represented in the Senate by Republican Marco Rubio and Democrat Bill Nelson. Marco is good, but not perfect. Bill isn’t so good. In fact, he recently delivered the government’s preferred approach to crude speculators in an interview with CNN where he promised these recently proposed efforts were not “political”. He then passed around a YouTube link to that interview. Here is the interview with Mr. Nelson if you can sit through it without a barf-bag at your side:

I felt compelled to write him.

To Read The Rest CLICK HERE


Written by Sumit Roy  |

April 12, 2012

The natural gas market is facing an unprecedented glut. We examine the latest outlook.

Natural gas prices were little changed today after the Energy Information Administration reported that storage operators injected 8 bcf into storage last week. That was below market expectations that were calling for an injection close to 18 bcf, but excluding a one-time accounting adjustment of 10 bcf, the figure was in line with estimates.

Earlier this week, natural gas plunged below $2/mmbtu for the first time in 10 years, as the unprecedented glut of inventories in the U.S. and Canada weighed on already-depressed prices.


HAI GasPipelineXXXXX

3 Reasons to Start Growing Your Wealth with Grains

According to the U.S. government, our corn and wheat surpluses are going to be larger-than-expected this year. Normally, that increased supply would lead to a decline in prices. But that’s not happening this time and, in fact, grain prices are acting darned bullish.

Take a look at the iPath DJ-AIG Grains ETN (JJG). The fund tracks a basket of three commodities traded on U.S. exchanges: Soybeans, corn and wheat. As you can see, it recently broke out to the upside, and I think it could shoot up to $55, and perhaps even higher.


One reason for the rally is that other grain suppliers around the world haven’t been as successful as the United States this year. For example, while our winter was warm, one of Russia’s key growing regions was hit so hard with frost that big sections of it may be replanted. Meanwhile, drought is damaging crops in South America and withering fields across Europe.

You also have to take into account the other side of the equation. U.S. supplies may be rising, but so is demand, especially from China. Last year, China replaced Canada as the largest importer of U.S. agricultural products, bringing in $95 billion worth. That was up from just $12 billion in 2001, a year-over-year increase of 30% for a full decade.

China imports a lot of corn and beef from the U.S., but the No. 1 seller is soybeans. Last year, 60% of all U.S. soybean exports went to China and, this year, that number could be even higher.

But it’s not just China. There are now more than 7 billion people in the world, and many of them want to eat more and better food. The United Nations’ Food and Agriculture Organization confirms that food prices are rising, and will continue to rise.

If you combine all these forces, it paints a picture of higher prices going forward. Luckily, that may prove to be a positive development for America. Heck, we’re the Saudi Arabia of grain exporters, so higher prices should help our trade balance.

There are plenty of ways to invest in this sector, in everything from tractor and seed manufacturers to funds that track agricultural commodities and industries. But make sure to do your own due diligence before investing in anything.

It’s hard not to be bullish on the Canadian oil sands: China’s Ambitions

Given the amount of rhetoric we’re exposed to these days about U.S. energy independence, you’d think our addiction to foreign oil would be headed downhill — even if only at a snail’s pace.

And to a certain extent, our imports have been declining…

According to the EIA, our crude oil imports from OPEC members declined by 358,000 barrels last year compared to 2010.

But there’s one place we keep going for more crude.

Last October, we said our Canadian petroleum imports would soon top three million barrels per day.

It didn’t come as much of a surprise when we hit that benchmark just three months later.


It’s hard not to be bullish on the Canadian oil sands, especially considering it accounts for nearly the country’s total production:


click chart to enlarge

Within the next two decades, that share may be well over 75%.

The only question is how soon it will be until they start shipping us four million barrels per day.

How about five?

Unfortunately, we may be taking our neighbor’s energy for granted, because we’re not the only ones eyeing up Canada’s future barrels…

170 Billion Barrels or Bust

Extracting the 170 billion barrels of bitumen reserves beneath Alberta’s soil seems like an immense task.

I have no doubt you’ve heard the horror stories.

The massive surface mining operations that can be seen from space are enough to keep environmentalists up all night. I’ve seen it firsthand, and it isn’t a particularly pretty sight.

Buy we’re still holding on to my bullish outlook.

Because we realize the future of the oil sands isn’t from the trucks and shovels working day and night to dig up the bitumen.

It’s in extracting the part of the resource that’s too deep for mining.


We’ve mentioned before that about 80% of the bitumen needs to be produced through in-situ methods. 

The choice for investors on where to put their money is far simpler than you might think.

They can play both.

How Investors Can Play the Field

Yesterday, Nick Hodge covered a broad spectrum of ETFs and ETNs to help diversify your exposure to the volatility inside the oil and gas industry…

This also holds true in the Canadian oil sands sector.

We’ve already seen the long-term growth expected in the oil sands during the next two decades.

The iShares Oil Sands Sector ETF (TSX: CLO) is one way you can play the field in Alberta.
The fund is set up to replicate the performance of the Sustainable Oil Sands Index.

Just some of their top holdings are among the strongest producers in the oil sands patch, including:


  • Suncor Energy

  • Imperial Oil

  • Cenovus Energy

  • Canadian Oil Sands Limited


It’s interesting to note that most U.S. investors don’t realize how close Canada is to adding China to their customer base. That’s a billion new friends willing to buy Canadian crude.

This year, China is expecting to import an average of six million barrels per day.


Now consider how the U.S. government is handling the Keystone XL Pipeline approval process…

Election politics aside, there’s only so much our neighbors to the north will endure.

Canadian Prime Minister Stephen Harper has been making Canada’s position very clear, saying:

Look, I’m a strong believer in the economic importance of our relationship, the security importance, and the importance of the United states and the World. But we cannot take this to the point where we are creating risk and significant economic penalty to the Canadian economy.

Truth is Canadian oil producers are selling their product at a substantial discount to Brent crude.

It’s only a matter of time before they begin to ship their barrels across the Pacific.

And believe me — it’s not just Canadian oil producers that will be taking advantage of the Far East…

Here’s another way to play the burgeoning Chinese-Canadian relationship.

Until next time,

Keith Kohl Signature

Keith Kohl

follow basic@KeithKohl1 on Twitter

A true insider in the energy markets, Keith is one of few financial reporters to have visited the Alberta oil sands. His research has helped thousands of investors capitalize from the rapidly changing face of energy. Keith connects with hundreds of thousands of readers as the Managing Editor of Energy & Capital as well as Investment Director of Angel Publishing’s Energy Investor. For years, Keith has been providing in-depth coverage of the Bakken, the Haynesville Shale, and the Marcellus natural gas formations — all ahead of the mainstream media. For more on Keith, go to his editor’spage.

There are many instances when an energy exchange-traded fund (ETF) and exchange-traded notes (ETNs) can come in handy…

You can use them to play commodities like oil and natural gas without actually buying commodity contracts.

You can use them to play individual sectors without having to put all your chips on one company.

And you can use them to hedge against macroeconomic events like inflation and bear markets by quickly going short without actually shorting.

The selection of energy ETFs available seems to grow every week, so here’s a partial rundown of your options and when to use them.

Energy Commodity ETFs and ETNs

  • PowerShares DB Energy (NYSE: DBE) – Splits its assets between West Texas Intermediate (WTI) crude, gasoline, Brent crude, heating oil, and natural gas

  • iPath S&P GSCI Crude Oil (NYSE: OIL) – Tracks the return of WTI

  • iPath Dow Jones-UBS Commodity Sub-index Total Return (NYSE: JJE) – Tracks the return of crude oil, heating oil, natural gas, and unleaded gasoline

  • United States Gasoline (NYSE: UGA) – Tracks the movement of gasoline prices

  • United State Natural Gas (NYSE: UNG) – Tracks the return of natural gas futures


Short Energy Commodity ETFs and ETNs


  • PowerShares DB Crude Oil Short (NYSE: SZO) – Short oil

  • United States Short Oil (NYSE: DNO) – Short oil

  • ProShares UltraShort DJ-UBS Natural Gas (NYSE: KOLD) – Short natural gas


Broad-based Energy ETFs and ETNs


  • Market Vectors Oil Services (NYSE: OIH) – Basket of behind-the-scenes oil companies like Schlumberger (NYSE: SLB), Baker Hughes (NYSE: BHI), and Transocean (NYSE: RIG)

  • Energy Select Sector SPDR (NYSE: XLE) – Basket of oil majors and drillers like Exxon (NYSE: XOM), Chevron (NYSE: CVX), Anadarko (NYSE: APC)

  • iShares S&P Global Energy (NYSE: IXC)  Basket of international oil companies like Total (NYSE: TOT), BP (NYSE: BP), and Royal Dutch Shell (NYSE: RDS)

  • PowerShares Global Clean Energy (NYSE: PBD) – Basket of international solar, wind, geothermal, and grid players

  • First Trust Global Wind Energy (NYSE: FAN) – Basket of international wind players

  • Guggenheim Solar (NYSE: TAN) – Basket of international solar players

  • iShares S&P Global Nuclear Energy (NASDAQ: NUCL) – Basket of nuclear operators and uranium players like Exelon (NYSE: EXC) and Cameco (NYSE: CCJ)

  • Market Vectors Coal (NYSE: KOL) – Basket of international coal miners and sellers like Peabody (NYSE: BTU) and China Coal Energy

  • First Trust NASDAQ Smart Grid (NASDAQ: GRID) – Basket of grid operators and electricity infrastructure companies like ABB (NYSE: ABB) and NGK Insulators

  • EGShares Energy GEMS (NYSE: OGEM) – Basket of emerging market energy companies ranging from Petroleo Brasileiro (NYSE: PBR) to Renesola (NYSE: SOL)


Leveraged Energy ETFs and ETNs

How to Use Them

That list could easily be twice that size, because so many brands offer the same thing…

Among ProShares, PowerShares, iPath, Direxion, and Market Vectors, you’re bound to find duplicate offerings for the same sector or investment strategy.

Brand doesn’t really matter to me; I’m more interested in the funds’ objective.

For example, in the annual run-up of oil and gas prices in spring and summer, I’m usually in a long oil or gasoline fund.

If corporate earnings are bad or other signs of recession are popping up, you can get on the short side to capitalize on the commodity sell-off that always follows bearish macro news…

Or you can use them to play Fed announcements and other economic factors.

Commodities usually rise during inflationary periods, so use an ETF to get long commodities the next time Ben says he’s printing more money.

I love ETFs because they can be used to play like a hedge fund manager without having to get your hands dirty in actual commodities contracts or the physical shorting of stocks.

In other words, they allow you to act on ideas and deploy complex strategies usually reserved for the Wall Street elite… just by buying a single security.

Use them often to diversify your energy investment approach and increase your success.

Call it like you see it,

Nick Hodge
Editor, Energy and Capital

P.S. Besides energy ETFs, Angel Publishing owner Brian Hicks has found another way to invest like a Wall Street higher-up… There’s an investment you can make that allows you to collect rent from Wal-Mart, the world’s largest retailer and third-largest employer. It’s very real and very legal, and you can start collecting your share today.


  • ProShares Ultra DJ-UBS Crude Oil (NYSE: UCO) – Twice the daily return of oil

  • ProShares UltraShort DJ-UBS Crude Oil (NYSE: SCO) – Negative 2x the daily return of oil

  • ProShares UltraShort DJ-UBS Natural Gas (NYSE: KOLD) Negative 2x the daily return of natural gas