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Erik Townsend's Peak Oil View

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Another idea...

My profits on being short OIH may go here:

Leaving...

No.3 - alternative/ emerging energy stocks.

Rush in now whilst you can; may not last forever!

 

PBW / PowerShares WilderHill Clean Energy Portfolio (ETF)

 

I like the chart here: PBW-chart

PBW.jpg

*except that: the volume on the price slide is too high

 

Might be worthwhile to buy a Calls spread if it holds on the opening, whilst all else is falling.

 

RELATIVE STRENGTH today would be a good sign.

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There is already surplus electricity from wind generation at night in many parts of the US that must be "curtailed" because there is no demand for it at night. There will be even more surplus in future. This surplus electricity frequently drives the wholesale price of electricity toward zero or even *negative* for several hours -- certain users take this electricity for "free" (such as pumped storage facilities).

Hmmm.

That's a jolly nice subsidy !

It should encourage people (in relevant areas) to build power storage.

If you get it right, you pull down 80-90% of your electric power requirement at night (when it is free), and then you use it during the day. That way, your "only" electricity cost, is the cost of storage. What a boon for those who can build or buy efficient electricity storage.

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The Peak Oil world's answer to Jim Roger's "Investment Biker" perhaps?

 

Peak Oil Trader's Diary in the works:

 

I've put my plans to launch a Peak Oil hedge fund on hold. The reason is that I am convinced that "These are the good old days", and so I'm planning an around the world trip for 2011, while airlines are still working and air travel is still basically convenient and hassle-free. I'll revisit the hedge fund idea when I'm done traveling. On the suggestion of an i-banker friend here in HK, I'm going to start a new blog where I'll be writing at-least monthly updates about my oil trading activities and results (performance). The rationale is to document my trading activities in my own account as this will help document my track record and trading philosophy. I'm going to make it publicly available on my website, figuring other investors out there might benefit from knowing my latest thinking. Once I get something up and running, I'll post something here with a link.

All the best,

Erik

 

Keep us up-to-date on GEI as those plans, and the Diary emerges !

 

"Prediction: The Fukushima disaster will ultimately turn out to have been much worse than early reports suggested. Unfortunately, I think this will mean the end of nuclear energy."

 

Hmm.

I heard that those reactors were built in the 1970's, and much safer ones are being built now. I wonder how long it will take for the market's "panic reaction" to subside?

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Hmmm.

That's a jolly nice subsidy !

It should encourage people (in relevant areas) to build power storage.

If you get it right, you pull down 80-90% of your electric power requirement at night (when it is free), and then you use it during the day. That way, your "only" electricity cost, is the cost of storage. What a boon for those who can build or buy efficient electricity storage.

 

Unfortunately "energy storage" is so very very expensive that the business case isn't there (excepting the lucky geographic locations where pumped storage is easy to implement).

 

There have been serious meetings in Congress regarding the potential of electric vehicles to store that surplus energy at night. Consumers would buy the batteries (the "energy storage") for their transportation needs -- economically justifying them based on the price of oil/fuel -- and the fortuitous complement of having cheap/surplus energy at night becomes a pleasant bonus. The $7 to $10 per day paid to EVs for grid Frequency Regulation service would be a further cost reduction (although only commercial buyers are likely to take advantage of this capability).

 

The FERC and public utility commissions may eventually implement 'time of day' pricing to consumers (like exists for some commercial customers) to encourage the appropriate nighttime charging behavior.

 

Also, as solar PV panels become even more grid price competitive then EVs become a convenient place to store any surplus generation.

 

Still, the main impediments are (1) the upfront additional cost and (2) the approximate 100 mile range limitation. Although the range problem can be mitigated by using 'fast charge' lithium titanate batteries cells which can charge from 0% to 95% in less than 10 minutes using a commercial 480V 3-phase unit (importantly without heating or harming the life expectancy of the battery -- which is longer than the life of the vehicle).

 

The chicken/egg problem has been solved by the fact that the transit buses already justify the cost of the high speed charging units.

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The FERC and public utility commissions may eventually implement 'time of day' pricing to consumers (like exists for some commercial customers) to encourage the appropriate nighttime charging behavior.

 

Also, as solar PV panels become even more grid price competitive then EVs become a convenient place to store any surplus generation.

 

Still, the main impediments are (1) the upfront additional cost and (2) the approximate 100 mile range limitation. Although the range problem can be mitigated by using 'fast charge' lithium titanate batteries cells which can charge from 0% to 95% in less than 10 minutes using a commercial 480V 3-phase unit (importantly without heating or harming the life expectancy of the battery -- which is longer than the life of the vehicle).

Great Point.

Electric Vehicles are like a missing link in the whole system.

 

But there are other associated problems:

+ The batteries for EV's are expensive (I read something like $12,000 - 15,000 per battery, and with limited life!)

 

+ One of the main reasons that power is virtually "free" at night is because Nuclear plants run 24 hours, and there is little demand at night. If as a result of the Japan accident, we move away from nuclear, this free power may disappear

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HOLD OFF BUYING ?

 

(I have this message from Erik T. overnight):

 

Guys,

 

I’ve sent a couple of e-mails saying that I think we’re seeing a buying opportunity in crude oil. My rationale has been that in the long run, rebuilding what has been lost in Japan will consume more, not less energy, and also for the very long run it looks like nuclear power is likely to be taken off the table as a mitigation strategy for peak oil. Meanwhile, as Japan dominates the MSM newsflow, there have been several fatalities in conflicts between Saudi forces and Bahrainian protesters. It looks to me like MENA is about to escalate in a big way, which is exactly what would propel oil prices to new all-time highs. The fact that oil is down $5/bbl in panic selling in reaction to Japan led me to conclude that this is an extremely ripe opportunity to get into the oil trade.

 

All of the above might still hold true. MENA does seem to be on the verge of chaos. But today’s news is really, really scary. If you aren’t already paying close attention to the developing situation in Japan , I strongly encourage you to do so. They pulled out the remaining 50 workers today. It looks like they’re going to “just let it burn”. I am not an expert, but I believe we are now approaching a situation equivalent to a quadruple full melt-down (four reactors melt down and 20+ years worth of “spent” nuclear fuel burns). This could be big enough to induce a global depression in which oil and everything else sell off regardless of the supply issues. It could also start World War III.

 

Today was the day I shifted my focus from “How do I best play this as an investor” to “Holy shit – if this is as bad as it’s starting to look, the impact on the world could be so bad I just don’t care about my investment returns”. I should stress that I don’t know it’s really that bad – I’m going on what I read and the Internet is full of hype and exaggeration – we all know that. So I fade the doom and gloom on ZeroHedge, but I still take people I know and trust seriously. Chris Martenson penned an alert message for his subscribers today (attached below) that really caught my attention.

 

The scenario Chris sees makes sense to me if this is really as bad as it’s starting to look: Japan’s economy is annihilated, Japan is no longer able to participate in US Treasury auctions (not even to roll over existing holdings), that spikes U.S. rates beyond the fed’s control, and an irreversible global financial meltdown follows the nuclear meltdowns that appear to be in progress. The obvious “antidote” from the Fed would be QE3 on steroids, but this might just be the exogenous shock that makes all interventions futile.

 

I got defensive and started selling oil futures at a loss today. If the Japan situation turns out to be anything short of an epic catastrophe, this will turn out to have been a mistake. But the workers being pulled out of Fukushima was a real wake up call. If they can’t be present to contend with the situation, all they can do is “let it burn”. There are 20+ years of spent fuel rods stored in the fuel pools in the reactor buildings, and one of them is already on fire. I think it’s time to forget speculative opportunity and just get defensive.

 

The next big wildcard will be mass hysteria in the western USA . My understanding is that even in a quadruple meltdown, the fallout would dissipate enough before reaching the USA so as not to pose a “major” health risk. But that’s irrelevant. What matters is human reaction. If word gets out that a quadruple meltdown occurred and the radiation is “coming our way”, it could lead to a complete outbreak of chaos on the west coast, regardless of whether the circumstances warranted such a reaction or not. It is pretty clear now that the Japanese gov’t was not really straight with the public in terms of revealing how bad this was when the crisis began. That could cause people elsewhere to completely disregard “official guidance” that the fallout isn’t going to be bad enough to cause major health risk, even if that guidance is truthful.

 

I do continue to see a huge, explosive upside for crude oil here, but only if the Fukushima situation turns out to be better than it is starting to look. I should also say that I really don’t even know exactly how big a deal a full quadruple meltdown would be in terms of health risk. But I don’t think it even matters – what will matter is how people react to it.

 

I won’t be at all surprised if it turns out that I’m getting out right at the bottom. A big conflict in MENA could jolt crude prices to $125 overnight. Time will tell. I think Chris Martenson is a little over the top in the following missive, but frankly he’s been right before and for whatever reason he seems to think this is the beginning of a worse-than-2008 economic meltdown. I’m not convinced of that yet, but I’m convinced it’s time to play a defensive game – both in investing and in life.

 

Erik

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HOLD OFF BUYING ?

(I have this message from Erik T. overnight):

Here's the response I sent by email:

 

Purely looking at stock indices, I think it is likely that Tuesday's low will be retested, but perhaps not until next week.

 

When that retest comes, if it is on lighter volume:

 

I will plan to cover my remaining shorts and put some Bull spreads on. Tony Caldaro's excellent E-wave calls have convinced me to bet on further upside if we see the right set-up. (Currently, He targets approx. SPX-1220 or 1240)

 

/see: http://caldaro.wordpress.com/

 

I bought a few shares in Laramide (LAM.t) at $1.43 yesterday, and may add more and perhaps some other Uranium stocks. I think there is a future for well-designed modern nuclear plants - they carry a vastly reduced risk of meltdowns.

 

One worrying thing is that the Full Moon on 19-Mar will bring the Moon into its closest approach to the Earth in years. That means high tides, and more stress on continental plates. The quakes and volcanos may return again this weekend, and places like Seattle and Vancouver are at risk - I have read. Let's hope this proves to be a false warning.

 

One thing that surprised me a bit yesterday was that the Dollar could not hold its gains. But maybe with the Fed saying: "printing as usual" I should have expected it.

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I can't see WWIII. I think China, the US, Europe etc will avoid such a catastrophe and work together. Just look at how countries are pulling for Japan right now. This isn't the World it was 70 year ago.

 

MENA is another matter, internal conflict and regional civil war. More likely to accelerate global diversification away from oil.

 

What I can see is a mass nuclear decommissioning programme in many countries which have old nuclear power stations. Most in the US (104 facilities) were built in the 1970's on 1960's designs. Then reconstruction using modern 'safe' designs. Add to this mass development of any technology (hydroelectric projects in particular) that will generate electricity as the world 'electrifies'.

 

Worth looking at . . . Nuclear decommissioning firms. Nuclear constructors, particularly Areva the French nuclear constructor. Uranium miners. More research into Thorium and other alternative fissionable fuels. Civil engineering firms in hydroelectric. Solar manufacturers. Wind turbine manufacturers.

 

Let's try and stay positive about the future, especially investors whose mass herd like behavior ultimately determines what happens next.

 

Expect to see changes in consumer behavior as buying behavior shifts from performance to efficiency, probably driven by Western governments setting new minimum efficiency standards. I think we're not far away from gas guzzlers being banned and that doesn't just include SUV's, I think most cars will be of the 90mpg small hatchback type.

 

This also includes energy guzzling consumer durables of all types, like the big TV's, energy hungry desktop PC's, changes in home efficiency standards such as 12 volt lighting systems, insulation etc.

 

Cities will become cyclist and pedestrian orientated.

 

There's a lot to do.

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> batteries for EV's are expensive... and with limited life!

 

A small EV might need 24kWh (like the Nissan Leaf for its 100 mile / 60 km range). At $400/kWh that is $9600.

 

An advanced lithium battery might be good for 5,000 cycles at 100% Depth Of Discharge (DOD) which would be 13.6 years, but vehicle designers limit the DOD because the battery life goes up exponentially as DOD is reduced. However, temperature will adversely affect the battery cycle life, so that 13.6 years will decrease some due to that.

 

The aforementioned LTO batteries have a 100% DOD cycle life of 12,000 or more, but with less energy contained by weight. These types will be preferred for route vehicles (like buses, postal delivery, package delivery, taxis, etc) where the shorter range is less of an issue, but the 10-minute fast charge feature is highly desirable. LTO cells are also less temperature sensitive (especially to cold).

 

> If as a result of the Japan accident, we move away from nuclear, this free power may disappear...

 

The "free" power comes from the wind, not the nukes. It has to do with how the "bid stack" operates in ISO grid markets -- the lowest marginal cost producer has the highest priority.

 

So the effect of wind/solar output on the grid is to "back down" coal and natural gas generators, not the nuclear ones. This has already been studied, and is true for two reasons: (1) the marginal cost of coal/gas electricity is always higher than nuclear, and (2) since wind/solar output is variable then the offsetting complementary output must also be variable, and nuclear doesn't ramp up and down as needed. FERC is currently in the process of changing the ISO energy schedules to 15 minutes, from 1 hour, in order to facilitate wind integration.

 

In addition, as more wind gets installed, its price relative to the thermal generators will improve because the thermal generators will have an even lower utilization rate than they do now. Many people leave out the utilization rate when comparing the cost of electricity between wind and carbon based sources.

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I won’t be at all surprised if it turns out that I’m getting out right at the bottom. A big conflict in MENA could jolt crude prices to $125 overnight. Time will tell.

 

For the record, I only reduced my crude oil futures holdings by about 12%. Indications thus far are looking like I may have bottom-ticked the market. More news is heating up and while the Fukushima situation is, in my own analysis only getting worse, the market reaction to it seems to be slowing down. Oh well, you win some you lose some.

 

I do continue to think crude oil plays (in futures, not options - implied vol is too expensive) are attractive here. I reduced my holdings because I was leveraged and was starting to see some real downside potential in the wake of panic selling. I remain confident that prices will eventually move higher. They just might move a lot lower first.

 

Erik

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Very quick update...

 

I was convinced oil was headed higher with MENA back in the news, but Libya's unexpected cooperation changed everything. Crude dropped $2 in less than 30 seconds!

 

I don't buy the Libya story - I think Qadaffi is stalling for time and doesn't really intend to cooperate. But the risk to the trade is that Libya goes through the weekend with no more escalations, while on the other hand something does escalate in Japan, which could lead to crude opening much, much lower Monday. I hedged all my naked longs with 90-100 put spreads, and will cover after seeing what the weekend brings and where the open occurs monday.

 

Erik

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Very quick update...

 

...convinced oil was headed higher...

...unexpected...

...Crude dropped $2...

...while on the other hand...

...could lead to...

...hedged...

...will cover after...

 

Erik

 

Why not just buy oil production trusts will long reserve life indexes and wait for the value of the whole asset to rise, rather than placing bets on the marginal value of current oil production?

 

Current (prompt month) oil is very hard to value -- like watching a squirrel cross a road, back and forth...

 

Buying years of proven oil in the ground seems to make better sense.

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Hey Erik,

 

I saw you picked up PUTS recently. Are you surprised by the recent strength in oil, or is your long position in place to compensate for losses?

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Hey Erik,

 

I saw you picked up PUTS recently. Are you surprised by the recent strength in oil, or is your long position in place to compensate for losses?

Hi deeper,

 

My call on the puts was to take advantage of the recent strength to "leg in" to the long-dated futures hedged by shorter-dated puts strategy described in the videos. Specifically, my advice was to take advantage of this strength to buy $75 puts on the March 2012 contract, with the idea of waiting for the puts to move into the money (my downside target is still below $75) and then buying an equal number of Dec'15 futures. The idea being that your downside is hedged by the puts, and the hedge came very cheap because (1) it's only thru March, by which time I expect QE3 and a move higher in the crude complex, and (2) because you bought the puts out of the money, at considerable discount.

 

When I made that call, Dec'11 was at 86.25, and to be honest, no, I didn't expect the price to last - I thought it was headed lower pretty quickly. But what has surprised me the most has not been the additional strength since then (Dec'11 hit $94.65 today), but rather the sudden move into backwardation. Dec'11 is up something like $6 in the last two days, while Dec'15 is actually down on the same period!

 

So yes, I've been surprised by how much strength we've seen, and my call to buy the puts at $4.50 ($86.25 underlying) was obviously early. I still think we're headed much lower - I don't expect any real solution in Europe and I think we could be setting up for a CRASH in all asset classes a la 2008. But the backwardation is what has me concerned. I didn't see it coming, and am not sure what to make of it. There are really only two possibilities that I can fathom:

 

1) Some big oil traders have convinced themselves that QE3 is imminent. The backwardation would appear to telegraph QE3 coming at next week's FOMC meeting (Nov. 2)

2) Some big oil traders have reason to believe that another MENA uprising is imminent.

 

As to #1, it's true that several Fed officials have begun hinting at the idea of MBS purchases, but I would be very surprised to get a full-on QE3 announcement on Nov 2nd. I just don't think the political climate would tolerate it, and given the strength in equities, I would expect the Fed to prefer to delay QE3 for at least another month, because I am convinced that they want to stimulate non-stop from the beginning of QE3 right through the Nov. 2012 elections. They can easily afford to wait here, and I think they will. A counter-argument would be that they see the same train wreck of Euro contagion that I do, and intend to launch a pre-emptive QE3 next week. I would be quite surprised by that, but it's certainly what the backwardation seems to be signaling.

 

As to #2, anything is possible, but with Gadaffi out of the picture, things seem to be (very slightly) stabilizing rather than worsening.

 

Bottom line - the puts I recommended accumulating with the underlying a full $7 lower are an even better bargain here, although at this point I think I'd shoot for the $80 or even $85 strikes. The big question is whether the backwardation is a false signal or not. If we get QE3 next week, any OTM puts bought here will almost certainly expire worthless. If we don't get QE3 and the market falls back into Contango, the puts could be a real bargain here. Only time will tell...

 

Erik

 

p.s. For anyone who may be interested, I've begun writing a quarterly newsletter called The Peak Oil Investor. You can get the free .PDF on my website, and/or sign up to receive updates by e-mail. www.eriktownsend.com/peakoil.

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Hey Erik,

 

What if October was the lows? Take the loss on the puts, and count your lucky stars you have a long position?

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It is nice to see Eric still posting here.

 

I enjoyed his comments in the brief interview with Jim Puplava

 

MP3: http://www.netcastdaily.com/broadcast/fsn2011-1105-2.mp3

 

Jim welcomes Erik Townsend to discuss his Peak Oil journey; the search for the best places to live when the reality of peak oil unfolds on the global economy.

 

And thought it might be interesting to start a new thread:

 

Eric Townsend's Peak Oil Journeys

 

I think that many would find his comments of possible alternative living places to be of interest

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What if October was the lows? Take the loss on the puts, and count your lucky stars you have a long position?

 

Hi deeper,

 

You're definitely asking the right questions, my friend. But if you'll indulge me, I'd like to reframe your question as two separate questions:

 

1. What if Oct. 4th really was the low point in the economic slump, and it turns out the European mess is solved?

 

Anything is possible, and I've been wrong before. But frankly, I don't even take this risk seriously. Nothing has been solved in Europe, and Italy appears to be blowing up as I type. I am absolutely shocked that the contagion effect has yet to spread to broader global asset markets, but I expect it will. Last night looked like the beginning of a crash in the S&P, and I expected it to pick up steam in today's cash session. Instead, the opposite happened - we've been in a modest relief rally all morning. All I can think of is that the market now thinks QE3 just has to be imminent. That may be true, but IMHO it will be very difficult (politically) for Bernanke to pull the trigger on QE3 without the cover of a domestic crisis.

 

2. What if the economic slump continues, but oil prices decouple from broader asset classes, and push higher, making Oct. 4th the low in crude oil prices?

 

Now that scenario concerns me a lot more. There have been rumors circulating for the past few days that Iran is about to be declared a nuclear state, or on the cusp of becoming one, or somesuch. That could give Israel "justification" (to them, anyway) for a pre-emptive strike on Iranian nuclear facilities, igniting a crisis rally in crude oil. This morning's $3 spike in crude futures is quite the mystery (it has not reversed as of this writing, but I'm thinking it may). On the surface, it appears to have been triggered by nothing more than supply data released today. But that just doesn't add up. ZeroCred came out with a hypothesis that they think it was a margin call event going into today's European close. Possible, I guess, but if that was it, I'd expect a prompt reversal which has yet to happen.

 

I've shifted my strategy slightly - I'm lightening up on my short exposure (hedges for larger longs), and replacing same with an increased short exposure to S&P futures. My logic is that if anything takes down the oil market, it will be Euro contagion and the threat of a global recession. Although the S&P is not as tight a correlation (and doesn't meet portfolio margining rules) for use as a hedge against market risk in a levered long crude oil position, I can envision scenarios where oil goes up and stocks go down, but I have a much harder time envisioning the opposite. A big move up in oil futures resulting from an Israeli strike against Iran would probably worsen the economic outlook, and put even more downward pressure on equities.

 

Hope that helps. These are challenging times to say the very least.

 

Erik

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It is nice to see Eric still posting here.

 

I enjoyed his comments in the brief interview with Jim Puplava

 

MP3: http://www.netcastda...2011-1105-2.mp3

 

Jim welcomes Erik Townsend to discuss his Peak Oil journey; the search for the best places to live when the reality of peak oil unfolds on the global economy.

 

And thought it might be interesting to start a new thread:

 

Eric Townsend's Peak Oil Journeys

 

I think that many would find his comments of possible alternative living places to be of interest

 

Ditto also find Eric T's comments here and on FSN interesting. Do feel however any peak oil crunch will be a painful step on a journey to a new global energy solution.

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Jim Puplava's recent show on the idea that Peak Oil rather than interest rates is now responsible for business cycles is also very prescient IMO.

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Hmm, in contrast to our dear DrBubb, Erik seems to have smelled the coffee and is thinking about bullion only from now on.

 

As you know, I have always propagated bullion mainly, if not bullion only. But I do have a derivatives peak oil bet standing with some of the biggest banking turds out there, which I intend to hold (my gold acting as a hedge against the complete banking meltdown).

 

In any case, CDSs on Greece decided to be worth nil, ErikT and Gerald Celente being each screwed by two different brokerages, how much else do some people need to know?

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Hmm, in contrast to our dear DrBubb, Erik seems to have smelled the coffee and is thinking about bullion only from now on.

I haven't listened yet, but there may be other reasons for that.

 

My own opinion is that some of Eric's long term strategies are difficult (or risky) to implement without using options - let's say as I do on the Beating B&H thread. But Erik is not keen on using options. Or at least he wasn't as of a few months ago.

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