GLG News by Simon Atkins, MBA

Implications: This article has three main issues: 1) Aubrey McClendon, the CEO of Chesapeake Energy Corp, the second-biggest U.S. independent natural gas producer, says that up to 400 drilling rigs might shut down by the end of 2008; 2) There are worries that natural gas winter supplies will be less than anticipated after hurricanes Ike and Gustav caused havoc in the Gulf.  Even though no winter forecast is given, it will be interesting to note what does happen with natural gas prices especially with a couple of early to mid-Fall and mid-winter Canadian blasts well below normal likely occur; 3) Will natural gas decouple from oil?

Analysis: 1) Mr. McClendon Wishes He Had Bigger Cowboy Boots But Fortunately He Does Not

You know what can be scary?  When a corporate officer knows or thinks they have a large herd following them, and then s/he says things that are 'reverse-logic' or aim to shock in order to expand the herd because many rush-in on a new trend because they panic.  If you're asking 'what are you talking about'? then this is exactly what McClendon wants.  McClendon doesn't want you to deeply analyze this, he just wants you to follow his three-toed hooves.  Tell me you are not one of the supposed large herd that drops your pants when Audrey, oh wait, Aubrey talks?  Heck, it might be so that "every analyst, trader and producer takes their cue from this guy" (as one research director in the original article says).  But -- read my lips -- when McClendon leads "everyone" down the long bumpy path that ends up going only into a swampy marsh, and nobody has a boat to get across it, I think it's highly advisable to happily research (i.e., for your own profit) what the ulterior motives are of this CEO and what could happen when and if "everyone" does follow him and it is proven that the chief composition of his words are just methane gas.

Roughly just 4% of the so-called "400 drilling rigs that might shut-down" are owned by Chesapeake, and the 400 rig count is only about 20% of the total oil and gas rigs, of which less than 1% is owned by Chesapeake.  McClendon's agenda is typical for a person whose boots are too big for the boss he thinks he is.  Rigs are not going to just close-down in this energy-trying-to-become-more-efficient era we have just 'hit', and b) other companies are not unintelligent comparably to plan to cut output and exploration. 

2) It Happens A Lot:  The Famous 10-Day Wait-N-See Period (After A Hurricane Landfalls On The Western Or Central Gulf), Then Natural Gas Spikes.  With A Cold First Half To The Winter, Natural Gas Could Panic.

Every time a hurricane impacts energy along the Gulf Coast, traders almost always expect less disruption, fewer delays and less problems compared to what actually happens in about 8 out of 10 cases.  You can't blame the majority for being optimistic.  But for the storms that really do make an impact, like Ike and even Gustav this season, price increases are much more likely in the period starting 10 days after disruption.  In 10 days, a more thorough assessment can be performed, and based on a more detailed inspection whereby everyone gets to see what has not happened (as quickly as expected), that is when gas prices tend to go up the most.  It seems to be a good opportunistic window.  Obviously, this only accounts for those hurricanes that actually DO damage to the energy industry.  There does not seem to be any "signal" up or down related to fish storms.

As disruptions continue, and natural gas continues to rocket-away off its post-hurricane launch-pad, and as stronger than usual Fall frontal passages get leading markets chillier than usual in October and again in December, it's likely that a lot of traders will become increasingly worried on the price and the future of natural gas.  But hopefully we'll awaken from this dream, and realize that we need these natural gas rigs...more of them, not less.

3) Will Natural Gas Trade On Its Own Merit?

You betcha.  Not yet entirely...at least not starting until early '09, but there's going to be increasing efforts to have natural gas decouple from crude.  The main reason is that there is a conflict as to which energy will be our future, and the greater the conflict, the more the decoupling.

Summary

Watch this subject matter carefully:  my wisest intuition and research tells me, and now you, to watch out for this great charlatan McClendon and to run the other way:  natural gas IS our next phase of becoming more energy-independent.  Shutting down the gas rigs won't happen -- and if it does -- it will be just Chesapeake's and maybe a few others that soon quickly reverse their decisions once they know that their "leader" has duped them.

It won't make sense, but watch for colder than usual bouts on the horizon (and sharper changes from Canada to come swooping down earlier than usual, much in contrast to the milder air brought up by east-coast storms from the Caribbean currently) to come at the same time as many join the McClendon herd and close down their natural gas rigs.  When the second cold waves attack in December, watch for many in the herd to scratch their heads in disbelief in what they have done, and then watch natural gas really become as volatile as the Dow has done in the past week. 

Implications: Human beings boast about having kept sea ice records for just 30 years.  Then we have the audacity to say there is an “alarming trend” of arctic sea ice shrinkage.  The most frightening aspect is that this ‘theory’ that human activity is causing the majority of sea ice shrinkage is going to have a heck of a negative impact on business especially in the energy, insurance, environmental, and financial sectors over the next five years.

Analysis: What is truly alarming is we are producing a ton of pseudo-science linking human activity to climate change, and we are wrongly assuming that sea ice does not have its own melt-freeze cycles, decades in length due to much larger & more important parameters such as solar and geothermal activity.

It’s great to be all for the restriction of the worst type of pollution, but let’s first get the facts straight that carbon dioxide is not a pollutant.  Moreover, let’s shake the gold coins rolling in our eyes and realize that if we start radical new schemes like new laws and tougher industrial standards based on the ‘proof’ that human-induced climate change is rapidly melting arctic ice, and continue this increasingly savage witch-hunt that calls people liars who show evidence against human-caused climate change, then we will set ourselves on a path that could seriously jeopardize our economy further than necessary just so we can justify illogical cause and effect schemes of poorly-educated scientific conclusions.  But if we continue the track we’re on, we are going to put a big strain on our economy, especially if our new president starts a similar brown-pants theme of carbon trading that is dubbed as so successful in other parts of the world.

Of course, facts like arctic sea ice this past winter was on average six feet thicker than the mean of that 30-year record was dubbed as an anomaly not worth exploring, and in fact, since it did not fit-in to the theme of Global Warming many people were not even made aware of this fact.  There is very rarely ever talk about the minute changes in the sun’s energy output, which has been ever-so-critical to global climate cycles over the thousands of years (and proved in ice core analysis that there has been much warmer times in the past compared to now, and I don’t remember too many combustion engines in 6,145 B.C.).  Sadly, the impact of any changes in the sun (of which there are documented 22-year and many other longer time cycles) on our climate are not included in the long-range climate forecast reports from the infamous IPCC; if the sun was incorporated into computer simulations of our future climate we would not be in our current Global Warming phase of hysteria which is actually now merging with our part-time doubts about whether Global Warming is really occurring and even whether human activity is the main cause for Global Warming.  The “crucial” arctic sea ice amounts are almost always shown to be less in late summer, but nothing is drawn to the fact that the arctic has already had three months of 24-hour sunlight by this time.  The real ballgame is happening right before our eyes – and yet we are turning a blind eye to it.  Maybe when we experience not just one but a few consecutive very cold winters in the near future across many big cities that will spark an energy crisis after 18 months or so, as well as record thicker ice forming across the Great Lakes and even over the Hudson River by future New Year Days, only then might we check previous Arctic Ice Shrinkage correlations and Human-Induced Global Warming theories, stop recording meteorological observations at airport runways and next door to inner-city factories (i.e., creating falsely elevated readings) and our dire warnings for a world supposedly going on overheat.  Just watch the reversal happen, but first you should expect to freeze and shovel more snow than necessary first.

Implications: Chakib Khelil, Algerian Oil Minister and OPEC President, predicts that oil will climb to $170 a barrel by 12/31/08 due to the likelihood that political pressure on Iran as well as other conflicts and turmoil will continue, and on further speculation that the US dollar will see further decline (weakening against the Euro in particular). Khelil, as well as most other OPEC oil ministers, believe that the increasing price of oil is not linked to supply, and that there is more than enough oil in the market to meet the international demand. I have followed Khelil’s public words for over 5 years now, and when he says / forecasts something regarding crude, particularly with regard to its future price, I have calculated that the man is 84% accurate.  So it may be a bit of a surprise that I have to disagree with his prediction of $170 by the end of 2008, especially when it almost seems almost a certainty to some that oil will continue rising.  My commentary explains the logic.

Analysis:  I have decided to be bold in this commentary – lots of predictions (and remember, when we speak of forecasting ahead of present time, some things may not make much sense, which is something perfectly normal, otherwise it would not be called the future):

I believe we have already entered a much different US socio-economic and global monetary fiscal period.  It only has happened recently, and to many, it feels like they have been spun-around 180 degrees not believing all the Market losses as of late, yet for those that are fully aware of the current and impending changes, many of which are cyclical (don’t forget the “rules of Mother Nature”, Fibonacci and other mathematical / energy relationships associated with teachings in the Drunvalo Melchizedek books called “The Ancient Secret of The Flower Of life:  Parts 1 & 2”), the relationships between oil, gold, currencies, fiscal policies and a host of different types of threats are all changing.  Impacts on these “things of worth” are increasingly less related to each other.  That which we have become accustomed to witnessing is really beginning to change.  And I forecast a notable increase in erratic and bizarre economic and fiscal movements (as well as socio-economic shifts) and “odd” relationships starting in September 2008 with new (away from the old) signals getting increasingly stronger and new trenches dug as we go into the middle of 2009, particularly with a new president at the helm.

Khelil says that fuel demand grows in the United States during the summer period.  That would be true with a “normal” summer.  But 2008 is very likely not going to be a “normal” summer.  This summer will likely be different:  fuel demand will likely stabilize in the USA (compared to rising demand during a “normal” summer), and will even probably slightly decrease in certain regions of the country that are experiencing highest gasoline prices coupled with the most foreclosures per normalized population.

Despite surging demand this summer in China and India, and of course the ever-continuing threat of terrorism around the world, and, even though oil will likely extend gains when ECB policy-makers boost rates on July 3 by a quarter-percentage point to contain inflation – which will further weaken the U.S. currency – I believe that oil prices starting near to the end of July and continuing for most of the summer will more likely back-off their recent highs and start to decline, staying more within a $112 to $128 range.  The main reasons (in importance):  1) fuel demand in the USA will likely stabilize and/or slightly decrease; 2) Iraq will put an additional 10-15% of oil on the market (before taking some of it off later due to changing policies and more violence in the country); 3) generally, less violence in oil-affected areas; 4) a general slow increase in rates to fight-off inflation – but in the ‘new arena of relationships” – this will mean that a slight decrease in the US currency value will not necessarily boost oil prices – BECAUSE more and more oil payments will be made in other currencies, particularly the Euro.

Certainly, this is lots to think about, but there’s my seven cents for the time being.

Implications: If you build it, it’s almost certain the media will come, and they certainly did come in hoards recently to see Honda’s new FCX Clarity.  However, the proposed hydrogen fuel cell economy is a fantasy in the media hype consciousness. Why should oil companies (or government) spend tens of billions of dollars building a hydrogen fueling infrastructure, which at best will take away business from their gasoline sales, and at worst will be a complete business loss, assuming as now seems likely, that hydrogen cars never catch on? Sure, hydrogen can be made from carbon-free sources of power like wind energy or nuclear (but has not so far), but so can electricity for electric cars.  Hydrogen cars are just outright inefficient, very costly and have little to no supporting infrastructure in place compared with electric cars. In two years, GM and Toyota have promised to deliver plug-in hybrids. That will be a real step closer to a future free of petroleum.

Analysis: Sure, the FCX is an impressive engineering accomplishment as the first commercial fuel cell car, but in my opinion, backed-by dozens of researched articles on this subject, the hydrogen car almost certainly has no future.

Of course, California and Japan are building refueling networks for the hydrogen car:  check outhydrogencarsnow.com/japan-hydrogen-highway.htm.  And some generation-IV nuclear-reactor designs have been proposed that could potentially produce hydrogen (from water) cheaper than electricity.

And yes, even though media attention and reviews on the new Honda FCX Clarity car have been glowing, the classification that hydrogen is an alternative fuel makes it deceptively attractive.  Once you realize it’s just a battery storing the same old electric power, the only differences with a hydrogen car are: 1) it is prohibitive costly, for 2) it has significantly lower efficiency, and 3) it requires a huge investment in an entire new infrastructure just to make it relevant.

Electric cars – and especially plug-in hybrid electric vehicles (PHEVs)– have an enormous advantage over hydrogen fuel-cell vehicles in utilizing low-carbon electricity.

Three important things to remember:

1) Electricity is pretty much available everywhere, whereas hydrogen is essentially available nowhere;
2) The per-mile fuel cost of an electric car is probably one-quarter that of a hydrogen fuel-cell car.  That is, an electric car will travel three to four times farther on a kilowatt-hour of renewable or nuclear power than a hydrogen fuel-cell vehicle will;
3) Electric-car manufacturers are working on "exchangeable batteries” which would make a battery swap about as fast as it takes to refuel a car with hydrogen.

Sure, our electric grid may need repairs and maintenance but at least it's already in place and not some pie-in-the-sky potential like most alternative energy prospects.  This can be done economically NOW, not years from now and we need it NOW more than ever.

In summary, I really do think people will opt for electric vehicles and moreover plug-in hybrids:  it just makes a whole lot more sense for the average person's financial situation, the economy, and for our environment.  

Implications: On the subject of Peak Oil and Global Warming, the article http://windnh3.blogspot.com/search?q=Global+Warming+Meets+Peak+Oil is an intelligent set of ideas on presenting a feasible solution to reversing the energy-climate crisis. 1.  We are at or have already passed the peak of cheap conventional oil production. 2.  There is little realistic prospect that the conventional oil supply can keep up with current projected demand since it is unlikely in the short-term (despite higher gas prices) that industrialized countries won’t take strong action to sharply reduce consumption, and perhaps more unlikely that China & India won't take strong action to sharply reduce consumption growth. 3.  More supply (of oil) is not the answer to our energy-climate crisis. 4.  Two primary solutions to Peak Oil:  fuel efficiency and plug-in hybrid electric vehicles run on zero-carbon electricity.  This is a sane energy policy thacan be a compromise between different groups with different interests.

Analysis: On this important topic, I’m going to present my conclusion paragraph first.  With all the research I have done, clearly we have two realistic strategies:  we must greatly increase the fuel economy of our vehicles, and we must find one or more alternative fuel sources that are abundant, low-carbon, and affordable.  One alternative fuel is plausible:  carbon-free electricity.  I believe plug-in hybrids and electric cars are the cars of the future, especially as a climate solution, and as an ideal solution to Peak Oil too.  Hydrogen fuel cells for mass-market production in the near-term is only plausible if we have home-conversion stations.  Corn ethanol is, as we’re seeing many times over now, quite the ‘loser’ from an energy and climate and food and just about every other perspective.  Biomass-based cellulosic biofuels hold a lot of promise, yet we need abundant commercial cellulosic biofuel plants in operation in the USA, something which will require massive government support for biofuels to be a major player by 2020.  Moreover, electricity is not a fuel that can be used for air travel and probably not for long-distance travel, especially by big trucks.  So, again optimistically, we should probably assume every last drop of cellulosic biofuels will be set aside to cut non-automotive transportation fuel sharply in the coming decades.

The bottom line is that if we solve the climate problem, we will solve the Peak Oil problem.  We all know that Global Warming (better voiced as Global Climate Change because there are also many regions that are witnessing dramatic cooling trends too) has become unfortunately much politicized, and myths continue to pervade in the general public.  Obviously, on the subject of Peak Oil and the current climate crisis, many facts are skewed, misrepresented and/or otherwise false.  Therefore, allow this commentary to be a combination of well-researched facts and my opinion as a climate scientist.

Although humans are responsible for a portion of the climate crisis, it is not the majority of the current situation.  There have always been cyclical temperature changes on the planet.  For example, the Renaissance Period in Europe was a wonderfully productive period mainly because it was 8 degrees Fahrenheit warmer then compared to now, and many in the media do not touch upon this fact because they cannot blame factories, automobiles and whatever else emits gases into the atmosphere.  Much of these temperature cycles have to do with past natural methane releases from oceans, volcanic eruptions, Milankovitch Theory, and of course our very heating source, the sun, which goes through its own heat cycles.  Scientists have even found out that plants and trees release carbon into the atmosphere, a fact that is not well published or well-known because it does not “help” the Global Warming Theory that blames humankind.

As oil and natural gas production go into decline in North America, even though an increasing number are developing wonderful alternative energies that will help reduce pollution and assist in the energy-climate crisis, the choice that many including the government are ultimately turning more to is coal.  Coal is considered to be abundant in North America, and it is cheap.  Despite all the well-intentioned talk of a hydrogen economy, the real investment is going into stepping-up coal production.  In fact, the production of coal-fired electric power plants has already been planned to increase in more than 35 states.  As the production of oil and natural gas continues to slide, we will open up our coal reserves for electricity production, heating, industrial use, and to process coal into liquid transportation fuel.  In the process, we will increase our exhaust emissions, rip up vast areas of land, create immense slag dumps, and pollute our waterways and groundwater.  And we will require a major upgrade in our coal transportation network too – that is, trucks and trains.  But two things are totally misaligned with this ‘following’:  first, coal will not be able to support the kind of energy-intensive economy which we have built on oil and natural gas, and second, most ironically, coal is likely to peak in around 20 years, maybe sooner.  Despite this though, we can expect strong efforts from industry and politicians to turn back environmental laws regulating coal production and coal burning.  It will be argued that these regulations are damaging the economy.  They will point to an economy choking from a constricting energy base, and they will insist that they cannot provide the energy we so desperately need with all these legal restrictions.  Power outages may act to blunt the environmental sensibilities of the public.  Much of the new coal growth market is hovering just outside of RADAR, because it is likely that once plans for a coal-burning plant are made public, they are liable to be halted by the legislative efforts of environmentalists and neighborhood coalitions.  If even half of these plants are completed, they will increase exhaust gas emissions by at least 120 million cubic feet per minute.  All the new coal plants being proposed would add one-tenth of one percent to the world's annual carbon dioxide emissions.  That may not seem like much, but it is not a move in the right direction in my view.  But the US is not the only country likely to turn to coal.  China is also eyeing its large reserves of coal, as is India.  If the world's two most populous countries step up their coal consumption along with the US, then the decline in petroleum and natural gas production will actually be greeted with a pronounced increase in carbon emissions.

Listen, Peak Oil will not be a blessing in disguise with regard to Global Warming (aka global climate change).  The models of global climate change developed by the IPCC and others have not taken into account simple things like water vapor – the most important gas in the atmosphere.  Nor has the IPCC taken into account the impacts of Peak Oil and the North American Natural Gas Cliff.  These models are based on faulty economic projections produced by what some term as neo-classical economics – a warped discipline which is blind to resource depletion.

No one should be surprised that we are now mired in a tar pit of growing dependence on oil imported from unstable or undemocratic regions (of which direction the US needs to reverse and ‘unhook’ itself from), that oil prices have risen to almost $140 a barrel, that we have a trade deficit in oil alone approaching $500 billion a year, and, of course, that we're faced with a very serious threat of insanely high pollution levels in many cities in the US and around the globe caused from burning an ever-increasing amount of fossil fuels.  Many people are expecting unconventional oil – such as the tar sands and liquid coal – to make up the supply shortage – but it’s not the answer if we are to stop our energy-climate crisis.  Even if we opened the Arctic National Wildlife Refuge to drilling, and we found enough to provide one million barrels a day for 30 years, calculations show that this would delay the peak in oil by just one whole year.  More domestic supply is not a good solution because the medium-term impacts will be more negative than positive.

Implications: Even if you're one of the less than 3% of people that does not get TWC (The Weather Channel) on one of the average household's multiple TV sets blaring away at any hour of the day or night, TWC is the favored channel at airport screens and even in bars.  And of course the TWC is in many other languages too.  So if you have never seen TWC, you literally have been holed-up in some cave.  TWC is almost as ubiquitous as McDonald’s!  Everybody is talking about TWC.  Everybody wants to own it, now that it is up for sale.  So, surely, TWC is a top dog prize, right?  I might shock you, but I would not be doing my job if I agreed with the majority of TWC fanatics.  

Analysis: If there is one subject that unites many across all ages, backgrounds, and other differences, it is the weather.  The Weather Channel was a cable network that succeeded when almost all the experts predicted it would fail.  But fail it did not.  I well remember the first few years of TWC:  gosh, it not only was amazing to us meteorologists, especially compared to the competition – the news channels’ 2-minute segments of the next 3-days’ highs and lows; but also, it was amazing to any person who loved the weather. 

Back then, in the first five years of its service, TWC gave the weather details for at least 90% of every hour, and higher than that during peak times and widespread inclement weather episodes.  Meteorologists on TWC would go out on a limb, providing different forecasts to NWS (the National Weather Service) and NHC (the National Hurricane Center) and were talkative “real” people getting important information across to the public and whoever wanted to also be fascinated with the weather. 

Now, TWC has sadly become a huge advertising program and round-the-clock center for drugs.  Let me clarify that:  pharmaceutical pills.  Check me and time it to work out the math:   on an average daytime hour, TWC advertising takes out 58% of each hour, and it goes up to 70% at night.  In fact, at times, the back-to-back commercials for diarrhea, insomnia, back pain and irritable bowel syndrome become so irritating themselves, that it is possible in an increasingly sensitive crowd that TWC itself directly causes some of the body irregularities for which ironically its commercials provide patch-the-wound medications.  In addition, since some of my friends have been on-air meteorologists at TWC, it is my opinion that they will agree that those on-camera personalities who have survived the rather tumultuous management switchbacks over the past few years, and don’t mind being told what to say more than half the time, have in effect become talking weather parrots, programmed not to veer-off the hundred-page-plus training manual.

In addition, more and more people are getting their weather information not only from the Internet, but better weather info sites too, and without all the annoying commercials.  Rather astute individuals have taken weather information from TWC, Accuweather, Weather Underground, and other weather internet sources that update their forecasts round-the-clock, and have published the results of forecast contests in blogs and on various sites.  TWC comes regularly in the bottom one-third in accuracy.  With climate change on the increase, with more and more impacts and effects on industry and people’s livelihood, THE KEY in weather forecasting is accuracy.

Unfortunately, TWC just does not ‘get it’.  As a meteorologist for twenty years (and former on-air weatherman), I make predictions; 85-90% of the time, I am right.  The other times, I will readily admit I just don’t get close; long-term though, I will beat Mother Nature with successful results, and that is why it ought to be, especially with today’s technology.  But TWC goes around copying everyone and then calling themselves the “Authority”.  People are waking-up, or have already woken-up and switched TWC off.  I can say with pretty good confidence, although it may sound contrary to some numbers and charts you may see, viewers are disappearing from TWC like bees from a poisoned hive.

But when I make the following prediction, maybe this is one of those few times when I am just ‘up in the clouds’:  TWC has seen its peak time, its best days are behind us, the clouds are now darkening, and TWC – if it does not see the light – will become dizzy from downdrafts and twisted from tornadoes.

In summarizing a cloud or two at TWC, the old days of darn good weather forecasting are over, unless of course, management wake-up with a few cold buckets of water thrown over their heads, and look back on the old-day videos, and realize that the millions they make from drug companies is one way to do it, but certainly not a healthy way aligned to its original tune, and certainly not a way for TWC to see many sunny days in the future.

Implications: Dow Chemical is on the prowl.  And it has the confidence of a Tyrannosaurus Rex.  While sources cite Dow's ability to swallow up to 50-60 acquisitions, JVs or divestments, the quantity aspect is really not Dow's main goal.  While quality is more important, this time around, it's a measure of three things:  1) adding strengths to its long-term weakness; 2) processing hybrid mixes; and 3) think Middle East.

Analysis: In that regard, with this 1-2-3 strategy, let's go through the 5 scenarios you have mentioned above:

1) highly unlikely.  Not Dow's "way" of doing things, period.
2) highly LIKELY.  Excellent strategy.  Surface Specialites:  I love it.
3) possible but not very likely.
4) a good bet indeed.
5) unlikely.  Too 'boring' for Dow.

Focus on 2 first and foremost, then 4.  That's probably going to be where 80% of their direction will be toward. 

Implications: Listen to what Chakib Khelil says:  his words predict the actions at OPEC better than some weather forecasts (excluding AFC's prognostications of course)! Words from OPEC sources almost always stoke a reaction on the Markets worldwide.  For the past 5 years, I have "tracked" important comments from OPEC, and have found some very interesting results.  Most importantly, it is the Algerian Oil Minister, Chakib Khelil, that provides an eighty percent (80%) confidence in saying what OPEC will likely do -- that is, what he has said ahead of an OPEC meeting does occur 80% of the time.

Analysis: Over the weekend, Mr. Khelil said that OPEC might raise its oil production at the next meeting in February 2008.  We won't know until then, unless in the rare case there is an emergency OPEC meeting, but after plenty of analysis I have found it's a good bet to go with Khelil's comments compared with any other voice that comes out of OPEC.

The fact that Mr. Khelil has spoken so close to the end of 2007 makes the century-mark for oil before the stroke of midnight on 12/31/07 must less probable now...despite the Bullish stories in the news currently (i.e., Turkey, Nigeria, etc.) that have in the past affected oil prices upward.

Implications: This MarketWatch article is a better report because it does not beat around the bush.  The authors interviewed a professor who had some intelligent things to say.  First, when the dollar loses value, the demand for crude increases which naturally reduces oil supplies, which causes the price of oil to increase.  We have seen from multiple sources in the last few months that OPEC has really not increased supplies -- and it is mainly because they see no need to do so.  Call me sarcastic, but the true face of OPEC is a wolf in sheep's clothing:  its members say they don't forecast a recession in the USA, but they are expecting it to occur.  When oil prices increase and the dollar falls at the same time, economic growth in areas outside of the USA is impacted negatively.  Therefore, with dollar depreciation continuing, look for OPEC to invest less and less in additional capacity, thereby reducing supplies overall, causing prices most likely to escalate in stair-like fashion in 2008.

Analysis: Here is a two-part commentary based on the original title of the article:  in the first part, I give expectations for the crude and the US Dollar Index, and then in the second part, I predict what will likely happen with the weather in December and its relationship with the heating market in the Northeast.

As a result of US economic policy, OPEC chattering in the background and other political plays, it is more likely than not that the US Dollar Index will continue to droop in the next 45 days.  In addition, in "modeling-out" crude based on a moderately conservative conglomeration of predictions, it is more likely than not that it will continue climbing through the triple-digit breakpoint plus some 'carry-over' before a shift occurs, causing crude to slide back to what it was in early November.  Volatility will increase.

Most of the current US weather models are out-to-lunch both in the short-range through the next 7 days and in the longer-term through the next 30 days. The new NOAA / NWS outlook for December incorporating the latest information on La Nina is for a huge warm-up from southern Texas northward to the Upper Midwest and eastward to the Atlantic Seaboard over to southern New England. AFC's consensus model -- which takes out all the biases of all major models -- combines the strengths, and then adapts the results by putting on top our own modeling -- is showing much different results.  The NWS modeling is not "seeing" the importance of the increasingly stormier pattern currently taking shape:  this often brings surprise cold snaps and much above normal precipitation in two areas from the Panhandle of Texas into the drought-parched Southeast and from the Pacific NW and northern Rockies over into the Great Lakes and interior Northeast.  In fact, in December, due to the sudden or 'surprise' cold outbreaks, the larger heating market of the Northeast could really see some Bullish activity take place in the energy trades.   

Implications: First, I strongly do not agree with the article's assumption that oil at $100 is unsustainable.  One-hundred-dollar oil is just another round number, like $70, $80 and $90 -- all so-called "ceilings" of the past that were "incredulously" surpassed when the dollar devalued more, or violence increased more in oil-producing regions of the world, or when OPEC said this or didn't say that.  Granted, $100 oil does have an important psychological emphasis and importance attached to it, but interesting enough, not necessarily because of the fact that we are then talking about "triple-digit" prices (and what that means to the global economy), but possibly more because of the fact that the Goldman Sachs energy report that came out well over a year ago calling for $100 oil (double the price back then) in the near future came true!  In addition, the all-time inflation-adjusted high of $101 a barrel is again -- just another marker on the way up to many more agreeing that Peak Oil is in the past.

Analysis: It is important to note that the Wall Street Journal also had published most recently (on October 31, 2007) an almost diametrically-opposed article titled, "Why Oil May Not Stop At $100" where it starts out "Oil at $100 a barrel?  That may not be the worst of it."  The authors of this article much better provide the answers to why oil CAN sustain $100.  Check it out here:  http://online.wsj.com/article/SB119378768690976877.html?mod=sphere_ts.  But, for completeness, let's go through the Top 10 reasons cited in the original (November 8, 2007) article with an "agree" or "disagree" next to them:  you will see that even though I have "AGREE" next to some of the premises, there are big "but's" associated with the premises / arguments.

Implications: When Archer Daniels Midland Co. (ADM) looks at itself in the mirror, it knows itself very well, and foremost, the management knows that its business has had and will continue to have ups and downs, based on commodities, politics, global weather, and a plethora of other risks, some of them not even showing-up on the periscope yet.  My best prediction is that ADM will "weather" the storm of biofuel risk, because as far as I can tell from studying the company for a long time, they know what they are doing.  I have to say it:  America's falling in love with ethanol is akin to a guy or a gal falling in love and proposing marriage after just 2 dates.  Good things sometimes DO come about from irrationality but they are usually accompanied by good luck, cosmic guidance and other intangible stuff that most cannot wrap their arms around.  To the contrary, a very studious strategy is needed to attempt to predict "Part 2" of the ethanol boom (a.k.a., now that the honeymoon period is over).

Analysis: One of the key foci points of this article is a reiteration of ADM's refocusing strategy:  fortunately, for the company, many in the public arena are continuing to realize that ADM is reshaping itself to be one of the largest producers of biofuels.  However, many still today know the company as "just" a successful agricultural processor.  You see, ADM is really becoming an energy company, but at the same time it is not leaving behind its agricultural footprint. 

Obviously, with any strategy box, there is always the corner where we label "danger", in the opposite corner to "opportunity".  A rather up-in-arms crowd may say that the ethanol industry reformers will get their way, an action in which subsidies and tariffs will be repealed.  But that is just one part the possible end equation.  Global weather risks, long-term contracts and politics could all weigh the reformers, and other parts of the in-process equation could have a favorable impact on the company in the near (i.e., the next 12 months) future.

Commodities go down and come up.  My prediction is that ethanol prices will recover in the next year.  If this happens, it will relieve some of the pressure on ethanol profit margins.  However, the road ahead will not be one without potholes nor the proverbial set of flash floods temporarily making thoroughfare tricky at best.  But the bigger picture says that the strategy of ADM is a good one, and it is a company that has an excellent understanding of the different parts of the equation, AND can adapt and make good measure of those parts of the equation that may change along the way. 

Implications: It is challenging to attribute specific natural phenomena, such as Global Climate Change (better worded than 'Global Warming' in my opinion due to the cooling witnessed in many parts of the world) to long-term causes, but an increasingly longer list of attributable effects are indeed occurring; in fact, climate change is affecting the USA in more than just subtle ways.  Climate change is already affecting many industries, from agriculture to energy, from retail and health to insurance and transport.  Of course, the media harps mainly on rising sea levels or glacier retreat, but those may seem a bit "wild" in the USA.  However, extreme weather events and the direct and indirect impacts are increasing in the USA.  And catastrophes resulting from extreme weather are exacerbated by increasing population densities, especially coastal zones.  Altered patterns in agriculture and increased flooding events, as well as weather volatility on energy systems all cause drastic economic impact.

Analysis: It is important to separate global climate change impact into short-range effects and long-term consequences.  Sea-level rises are of course a threat but this large-scale peril will likely be a longer-range impact.  Shorter-range, in the months and years to come through say 2012, extreme weather events will very likely continue to increase in the USA.  And they will occur with increasingly devastating financial impact to all systems from economic to social to personal levels of consumer confidence / buying power.

Extreme weather events are linked almost always to modifications to the water cycle on the planet.  Alterations in weather systems that are made by the water cycle result in more climate-related disasters, like droughts, floods, heatwaves and windstorms. 

Just in the past few weeks, there have been political "fights" between the US States of Florida and Georgia -- about which State gets more accessible water to it -- due to the extreme drought that has ravaged the Southeast since the spring of 2007.  Impacts like starvation, conflict, and refugees in lands far away, are beginning to show-up in mild forms here in the USA.  Trends are being documented, and the once-isolated incidents are congregating in occurrence more steadily into groups with each passing season.

An industry very directly affected by changing climate and its risks is the insurance industry.  It is a fact that the number of major natural disasters has tripled since the 1960s, and insured losses have augmented fifteen-fold (in real terms, adjusted for inflation).  In fact, 35–40% of the worst catastrophes have been climate change related over the past 20 years.  Over the past three decades, the proportion of the global population affected by weather-related disasters has more than doubled in linear trend, rising from roughly 2% in 1975 to 5% in 2006.

You might have heard that Munich Re and Swiss Re have studied global climate change extensively, and have warned that the increasing frequency of severe climatic events, coupled with social trends could cost at least $150 billion dollars each year in the next decade.  Here's the key:  these costs would, through increased costs related to insurance and disaster relief, burden customers and taxpayers and industry alike.  Our government does not allow in its annual "budgeting" for increasing disaster payouts...nor potential industry bailouts!

Roads, airport runways, railway lines and pipelines, (including oil pipelines, sewers and water mains) are requiring increased maintenance and renewal as they become subject to greater temperature variation and incidence of flood.  Increased evaporation with increasing heatwaves and more drought are reducing the effectiveness of reservoirs.  Increased extreme weather including mainly from more potent storms is causing more water to fall on hardened ground unable to absorb it, leading to a higher incidence of flash floods instead of a replenishment of soil moisture or groundwater levels.

This year, an interesting report came out:  on April 15, 2007, the "Military Advisory Board" (a panel of retired U.S. generals and admirals) released a report entitled "National Security and the Threat of Climate Change."  The report predicts that global climate change will have significant security implications, in particular serving as a "threat multiplier" in already volatile regions.  An unstable climate will exacerbate some of the core drivers of conflict, such as migratory pressures and competition for resources.  And that, in and of itself, might cause the USA to be spread too thin with its need for military assistance or intervention, of course with the cost in the billions of dollars that won't go into systems for positive purposes in the USA.

In summary, I am not an alarmist, yet the increase in extreme weather events could cause an exponentially increasing stress on social and economic systems, as well as cause a devastating financial toll both here in the USA and on the global financial system. 

More businesses are increasingly turning to weather hazard and disaster risk management intelligence to protect their resources and people.  And so the key take-away -- left for the end -- is that any business affected adversely by weather threats would be well-advised to increase the intelligence gained in order to protect one's assets against this "uncontrolled" increasing risk going forward.

Implications: Energy companies are using weather intelligence in more ways today than ever before, especially as climate change appears to be becoming more volatile.  In most of the larger and successful energy firms, as well as those investment firms that trade a substantial amount in energy, weather forecasts -- both short-range and long-term -- assist greatly in strategic functions from planning through finance to operations.  While load forecasting is the primary use of weather data, customized and advanced predictions in weather risk management are now used in emergency response and contingency planning.  Add in asset management, maintenance planning, trading strategies and specific storm tracking -- and the whole "marriage" of weather intelligence with energy (and other industries) is for the purpose of the-all-vital goal of business continuity.  In summary, weather data is being used by increasing numbers in many different ways with very productive results on the bottom line.

Analysis: Meteorologists are in increasing demand in many different industries, especially in energy businesses.  Even though there is the free National Weather Service, its information is not detailed enough or quantitative enough to provide a true strategic "edge" over the competition, especially during times of greatest weather hazards.  Specialized weather data will become of primary importance to an increasing number of companies in the near future, not just energy firms.  In fact, any company or industry that has weather adversity is under constant duress to figure-out ways to utilize weather data to its best advantage so as to minimize adversity and take advantage of all the potential additional income it could reap if it weren't "fighting fires" due to lack of intelligence in the first place.  Bottom line:    threat management risk forecasting -- especially when it comes to Mother Nature's power -- provides information security and business continuity -- a very powerful equation indeed!

Implications: Let’s put Gore aside for a second. There lies a potentially very valid and logical theorem of the A=B, and B=C, then A=C type. A). Extreme weather causes environmental degradation. B). Disarray and disruption on an environmental scale causes conflict. C). Therefore abrupt events associated with climate change causes disagreement, discord, struggles, skirmishes, clashes and war. In many ways, addressing climate change seems beyond human capacity. But in reality, the morality of realizing how we can affect it looms larger each month. Climate change is happening almost every day in the USA too, not just in some faraway land. Climate change is not only a weather and environmental and economic issue; climate change is a security issue too. The theme here is to take our technology and reconfigure the economy in how we use energy: a future near-term revolution will change our economy, and on a positive light, it will be a source of jobs, development and opportunity for millions.

Analysis:

There are many points that could be discussed on the topic of climate change, “Global Warming” and what may or may not happen. But my opinion on a non-controversial tone is that we each need to plant a seed in our heads, to begin to think about how climate change could affect each of us.

It is interesting to note that there was a small snippet of news today (Oct 22, 2007) about how the Georgia Governor was increasingly reluctant to send billions of gallons of water “downstream” to Alabama and Florida due to Georgia’s ever-so-severe drought this year. The potential implication here is that States bordering each other could be getting into disputes over rain and water storage rights! Take that for face value and you can see that if we plan ahead and work it out now, instead of later in an even worse potential emergency, then one can start to see why climate change is related to the importance of keeping the peace.

Let me start that “seed” of thinking … here are 3 ways the climate is mainly changing:

1) more floods are occurring;
2) more drought is occurring (this may seem contradictory to the first change, but more extremes in precipitation are occurring, often in the same year in the same location);
3) gale-force winds are becoming more frequent (as high and low pressure systems are becoming stronger, they produce more of a pressure gradient, thereby increasing wind speeds)...by the way, as low pressure systems get stronger, there are more extreme storms too.

Based on those 3 changes, the main question you have to ask yourself is this: how are those individual and combined climate changes going to affect me, my business, and my future? At first, most of us have a "I don't really know" type of answer, but if you begin to think more about it, you can begin to see how if things get drier and windier in your neck-of-the-woods, many more wildfires will occur, and that could pose some very dramatic changes in your life and business. Or, if you're near or along a major river, say in St. Louis, it might be best to ascertain a risk prediction for a potential flooding event, along with the probability of being adversely or negatively affected. It can be done, and as I tell many, it's better to know now to prepare best for potential outcomes later.

Weather risk management is all about posing these types of questions and calculating answers based on scientific analysis. Many firms are doing it these days to get a better picture of the negative outcomes that may occur in the future.

Implications: In Goldman Sachs’ most recent energy report, it says that if the fall into early winter is chillier than usual (by just 10% below normal temps) then that impact could push raise oil an additional $8 to over $93/bbl (granted, their forecast came out when crude was at $85). But that is not necessarily where it gets interesting: the report stresses that abnormal anomalies in the weather pattern will likely be a bigger threat on a near-future oil demand growth curve compared to any near-future economic slowdown, assuming that both the economy and the weather were to slide downhill at the same time (because there would be no way to compare apples to apples if an economic slowdown happened at a different time to an abnormal temperature streak). After reviewing & correlating a lot of weather and oil price data, I discuss below the probability of seeing colder or warmer weather for Q4, and with that information one might have a much better idea on where oil prices are heading (or not).

Analysis:

I do not know for sure, but it is an educated guess that Goldman Sachs has more than one meteorological service advising its energy traders: it likely takes multiple forecasts and derives a consensus prognostication and determines a standard deviation bias as to which way the weather will most likely take (i.e., colder or warmer), based on two components – scientific prediction technology and historical analysis – and then multiplying both by a biased weighting mechanism – to get their final answer for how the each quarter’s weather will be with a certain level of confidence.  At least, that is how I would do it if I were in an energy trader's position there and not in a weather risk management company.

But I have to tell you, I disagree with the main statement that abnormal weather is more of a risk to oil prices than a slowing economy, especially based on the 10% swing to colder or warmer. I will leave that long and complex argument for a different day because the stress on this article is the weather. Ten percent anomalies in the weather happen frequently, and it is only when volatility above at least 20% from normal or below 20% from the median or historical average is when large price changes in oil have usually occurred in the past. That is, if Goldman Sachs had said that deviations of 20% colder or warmer could bring about oil prices of $8/pl, then I could better validate the firm’s predictive statement.

Large price swings upward in oil prices have indeed occurred in the first half of the cold season when arctic airmasses have dominated the Eastern USA. And looking at past data, in correlating oil prices with weather volatility, one can see that when the first half of the cold season is milder than normal, oil prices have gone downward. But what is interesting is that in the first half of winter, before the end of the year, oil prices will on average rise more on a Canadian arctic wave entering the Eastern USA compared to oil prices declining on a milder fall-like airmass of equivalent deviation from normal of the colder airmass. That is, oil reacts more to price with cold than warm during Q4 of the overwhelming majority of years I could find data. One big question that surfaces and probably sticks-out in many minds is ‘what if Q4 is colder or warmer by 20% or even 30%...then what might be the effect on oil prices’?

Remember that just because Goldman Sachs has calculated or is just forecasting that a 10% deviation in temperatures equals a +/-$8/pl change, it would not be wise based on weather alone to double their equation if Q4 turns out to be 20% colder or warmer than normal. In my mind, even though I am an atmospheric scientist, I still believe that weather is one of many, perhaps a couple of dozen reasons, why oil prices go up and down.

Lastly, the fact is, with an increasingly stronger La Nina pattern in the Pacific through this fall, currently at a “moderate” level event, the important news is the bias in long-range forecasting favors a milder pattern for the majority of Q4, except in over half the times in the past, there has been a sudden bitter cold-wave at the end of the fourth quarter (i.e., by mid-December). That arctic blast in the key month of December, on average, has been 20% below normal temperature records, and if that holds true in 2007, that could just be enough to raise oil prices well beyond Goldman Sachs’ forecast on the plus side, all the way to Goldman’s originally forecasted triple-digit mark. Then again, if that sudden switch to wintry weather does not happen, in the approximate 35-40% probability based on historical analysis, then Q4 will more likely be milder than usual by more than 10%, and oil demand would decrease, thereby lowering the value of oil potentially even back to summer 2007 levels (especially if turmoil in the Middle East takes a positive turn).

Take October so far…record-breaking warmth: obviously, colder weather will come, but with sea-surface temperatures very mild off the Eastern Seaboard now (due to the warmer air temperatures), it is going to take a greater intensity of colder weather for a longer duration to make Q4 weather colder than normal when averaged-out. In other words, it is just the law of averaging: the longer it is warmer to start Q4, the lower the probability for colder weather in Q4 overall. So, watch the skies, especially the NW direction (where colder airmasses come from), but in the meantime, perhaps it is not so bad to take another look at that Prius brochure at your local Toyota dealership over the next few weeks, just in case.

Implications: Focus away from the speculation of any interest rate cut, and put your attention onto the tropical weather situation for such a minute. Royal Dutch Shell is very carefully watching the potential development of a tropical disturbance off the coast of FL: they are already evacuating 300 workers (with 400 more waiting for evacuation orders) even though a storm has yet to be named. Somebody must have told Shell that the next named tropical entity, Jerry-to-be, could strike production platforms this weekend. That news in and of itself is enough to raise some hairs, and subsequently, oil prices too. So far this hurricane season, the US has had 4 landfalls: even though 3 were tropical storms, and Humberto was a minimal hurricane, it still has been an increasingly active season, and there are plenty of forecasts saying that a total of 6 landfalls are imminent before November. Of all tropical systems that form in September, one-third of them threaten refineries in the Gulf.

Analysis:

When Hype With Tropical Systems Goes From Bad To Worse:

With regard to the current tropical disturbance over the southern half of Florida, there is an increasing amount of hype concerning the future of its track and the danger of its potential path not only near or even into New Orleans for the weekend of Sept 22-23, but also with the hazard of the storm harming a bunch of energy assets just offshore the Louisiana coastline.  This hype is mainly stemming from one of the main USA tropical models used by the National Hurricane Center -- the GFS -- which is forecasting a hurricane moving northwestward into southeast Louisiana.  Other hype surrounds less reliable models that are also forecasting a fairly strong storm with 80 mph winds to hit the Central or West-Central Gulf of Mexico this weekend.  If these predictions prove to stand correct ... the hype continues to indicate that not only will it be a test of the levy system in New Orleans, especially with the predicted SE to NW entry angle, the worst angle for sending water into the streets, but also a Bullish indicator for energy assets at and near the coast of both Louisiana and northeastern Texas. 

For the fifth time, this is all hype.  I am calling it hype because at time of writing, there is not even a tropical depression (the stage before a tropical storm) over Florida.  In addition, the thunderstorms originating from the low pressure system are "cold-core", not "warm-core" as is the case needed for rapid tropical development.  Granted, on the side of the GFS model, once this tropical disturbance comes out into the eastern-most Gulf of Mexico, wind shear is forecast to be only 10 knots over the entire Central Gulf through Saturday, and sea-surface temperatures are just a tepid warm bath.  Yet even though organization surrounding the circulation center is getting more organized, an impact to the Gulf region is possible but not at the hype of the current models.

In summary, even though many eyes will be on this storm in the Gulf, especially Shell's, remind yourself of the old adage, "Don't count your chickens before they have hatched".

Implications: I have followed OPEC closely for years, and I have carefully written down comments that come out of the Cartel, followed by the actions taken, and then of course the market pricing direction of oil -- up or down or steady.  It's been a very interesting ride over the years.  Metaphorically, OPEC loves to spin round and round, trying to catch its own tail, like some crazed mutt.  The Organization hasn't setan official price target since getting rid of the $22-28-a-barrel range over 4 years ago.  From that example alone, it has never caught up to reality, and therefore, it never does catch its tail, but continues trying...and as a result, the "dog" gets increasingly exhausted.  OPEC has chased so many of its own lies that it is exhausted, and really does not know what way to turn now.  As a result, the key implication is that OPEC will likely become more and more unstable, and oil prices -- although they will remain volatile -- will likely creep up and up, until the next confrontation.

Analysis: I think many can agree that the most recent price increase in oil is due to a myriad of factors.  One reason is probably due to the Market's belief that there is a lack of oil.  Some might disagree to that in total, but I take center ground by saying that there are times when there are periods of oil insuficiency when demand suddenly peaks.  But I believe the BIGGER reason for the current $76 oil price is that an increasing number of people are a) having serious doubts as to the inner workings of OPEC, and b) not trusting the majority of words that come out of many of the oil ministers' "well-oiled" mouths.

Case in point:  when OPEC Secretary-General Abdalla El-Badri uses the A-word (i.e., Assure, as in "I assure you"), last said in an Aug. 28 interview in Angola (OPEC's newest participant by the way) when he Assured everyone that "if there's any shortage [OPEC] will supply more crude to the market", watch to see if he then uses the B-word (i.e., But), as he did so when he ended that previous Assure sentence with, "...but I think the market is really stable at this time." With all due respect to El-Badri, the man has a solid record of manipulating promises that he likely does not intend to keep, and frequently has blamed unrelated conditions for changes in his opinion and actions.

However, ONE country head making up OPEC that I truly believe the Market can trust is the Algerian Oil Minister.  Although he does not have that much weight, he calls the oil sweet when it is, and sour on other times, and over 80% of the time, his statements are accurate.

All in all, OPEC is driven by greed, and in its crazy spin, subconsciously it really does not have much choice other than to leak more oil onto the market DESPITE the fact that members are pumping more than their agreement allows.

A lot of people are worrying about the sub-prime market potentially getting more and more out-of-hand and eventually helping the US economy into some type of recession (a newer definition of recession that is).  Granted, those people have a good point.  But OPEC is looking now well beyond -- in their first bigger strategic move in many years -- to gain ground by going above the reliance of the US "system".  OPEC is trying to snub their noses in the US delegatory faces.  Libya's top oil official said most recently that OPEC's record revenue is offsetting the weakness of the US dollar ad higher development costs.  Perhaps rather shockingly, Libya might be right if they think this will continue in the future...and if that is the case, then OPEC might sooner than we think be switching to Euros for most of the oil trades.  That could really be a big nail in the US coffin...and I hope that the US sees that potential big black bowling ball coming down the steep hill so that not too many of our "pins" are knocked over.  

Higher than $76?  You bet:  the Market does not think there are many signs of sufficient supply.  The Market is betting that the sub-prime mess will become watered-down enough to be manageable, and growth will continue.  OPEC is betting on the sidelines that the US economy tanks because the sub-prime mess will get out-of-control.  Let's see who wins the wager. 

Implications: Climate change is pushing weather risk management to new heights. In fact, the market is exploding: as of this past April, trading in weather contracts had a face value of $19 billion at the CME, a jump of 100-fold since 2003. Fears of global climate change are bringing to the table all kinds of companies from power suppliers to ski resorts that want to transfer the risk of adverse weather. As a result, hedge-funds, investment banks, insurers and other firms are devising novel ways of exploiting weather fluctuations by hiring more mathematicians, statisticians and programmers so they can get a piece of the multi-billion market in weather futures – financial instruments tied to everything from hurricanes to freezes and everything in between. Although trades are typically capped at between $1 million and $5 million maximum loss, thereby stemming the amount of failure, the path ahead is to make the caps much larger and increased losses could become larger in a hurry.

Analysis:

First, competition among hedge fund managers is increasing as returns decline.  As a result, many funds are “upping the playing field” by going into exotic instruments, from carbon dioxide emission rights to derivatives b