Friday, October 07, 2005

Movers & Shakers: Highlights of rising and falling U.S. stocks - General News - General

Movers & Shakers: Highlights of rising and falling U.S. stocks - General News - General


CAL went up 13% yesterday during market hours and then traded up another 1% in after market trading!! This stock has been a roller coaster ride in recent years. In the aftermath of 911, the stock was cut in half and then in half again and finally the the stockbottomed in October of 2002. The path has been from $57 to $4 to $20 to $9 to $16 to $9 and now back to $12.

Since the $4 price in October of 2002, the stock has gradually weathered storm after storm (figuratively and literally). The power of Katrina and Rita were amazing. Seemingly enough to swat this " weak business", but the remaining players are very tough old birds. CAL tested the lows of 2004 but support is very strong around $9.50 per share. The stockhas bounced almost 30% in the past week!

This is not a "dead cat bounce". The roller coaster ride is not over as the energy market is still volatile, but, with millions of barrels of refined products flowing in from overseas, the US market is coming through an extremely difficult time much better than most would have expected. The importation of supplies from overseas will buy the time needed for US refineries to come back on line. Another will start up in a couple more weeks. In the meantime, consumer demand has dropped 5%! Markets work!

Many projects underway around the world will increase the supply of fuel. The number of gas to liquid projects is quite extensive. In many cases they don't make big news because they are relatively small industrial situations. As a group, the total new supplies are very powerful because the price of the entire market is set by the last new source of supply. Of course the projects also include huge deals such as those in Quatar and Canada that will produce millions and millions of new supply.

Some of the more aggressive projects will ultimately prove to be huge mistakes for the investors. The costs of converting every thing from tar, shale and coal to liquid fuel is anywhere from $20 to $40 per barrel. The cost of lifting the "good stuff" is less than $5 per barrel. One must remember that two years ago, $18 oil made exploration a risky business. The motivation and confidence is now certainly there to spend millions finding more of the good stuff. Even whent the price drops back to $40, light sweet crude finds will be very profitable and will cause severe heart burn for those who have invested billons on esoteric and relatively expensive projects.

Don't misunderstand me; Canadian tar sands will certainly be a growing source of supply. Efficiencies have pushed the cost of this product into the $20 range, making it very profitable even at the $40 price that is perhaps a couple of years away.

The process here is one to which farmers can easily relate. I can't remember the technical name for the pattern but the supply demand curve for oil and agriculture products traces out a cobwebed pattern. Hitting and maintaining equilibrium of supply and demand at a stable price is simply impossible. The market is in a constant state of flux.

Old fields offer "virtually free" supplies but gradually are depleted. Exploring and production of new supplies is captal intensive, requiring years of steady production at relatively high prices to recoup investments. Coal is always there and is relatively stable because power companies and industrial users take out long term contracts. Demand for oil is much more volatile. In a strong economy the demand jumps up, increasing the profits for the oil companies but again it takes a considerable time to make up for the cost of the ex. and p. and for the years of losses just incurred.

Again, the market overshoots on supply, prices fall too low and drilling rigs sit idle. Eventually the demand catches and speed past supply and the scramble begins anew. I hope you can picture the spider web pattern. In the early 1980's there were more than 4,000 active rotary rigs. By 1999, there were less than 500 active rotary rigs. Today there are 1,400+ active rigs. However, due to technology the number of dry holes drilled has shruck. Today, 1,400 drills are more productive than 4,000 were in the 80's.

The oil business is risky, capital intensive and difficult. In the meantime, misguided souls such a Bill O'Rielly acuse honest investors and businessmen of price gouging the poor consumer. He keeps asking who sets the price of oil. The answer is "the consumer". The only way an oil company can sell any oil is for a consumer to buy it.

Oh well! CAL will do very well with oil trading at $60. When oil gets to $50, many will wonder how they missed buying CAL at its long-term major bottom. In two or three years when oil is at $40, CAL's profits will be at all time record highs. The scramble to own the stock will be fierce. Just like the scramble to own oil stocks fierce 8 weeks ago--at the top! Those that lead the scramble in three years will make money if they hold for just a year or so. Those that buy the stockat $12 tomorrow will see gains in the neighborhood of 400 percent or more in 5 years or less.

I am a semi retired private investor who makes no recommendations. Don't buy because I said so because talk is cheap---here's a few more comments on the airline industry:
Positioned for Growth

Continental One of the Best Places to Work
Oil Blog

Fuel News