BlastInvest
Blast Investor Real-time Plus           by Henry Lu

China Slowdown(2), Saudi Oil - Sweet or Sour?

05/31/2005


US stock market rebounded in recent weeks and regained some of the lost ground this year. Still stock market overall is tough this year. S&P500 index is down -1.68% year to date, NASDAQ is down -4.93% year to date.

Long term oriented value investing approach continues to shine in this tough market environment and continues to help BIRTP members and myself to make big profit this year. BIRTP model portfolio generated record double digit investment return  for the first 5 months this year, up 15.49% year to date, beating S&P500 by 17%.

GKIS up 32%

Particularly, GKIS rallied significantly, up 32.02% for only 3 months of holding time. The past 3 months of GKIS price movement was volatile and could be painful for many inexperienced investors in the stock market. It dropped nearly 10% to $14 a share sharply after I issued trade alert  and quickly rebounded and hit new high today. BIRTP model portfolio successfully stayed put through the tough price drop and eventually came ahead big time.

It is not unexpected for market to have this kind of high volatility from down to up in relative short time frame. Over the long run (sometimes in a couple of months time frame, some times in years time frame), stock tends to move to its intrinsic value or its fair value based on its inherent asset and inherent earning power.  That is why over the long run, value investing is a proven method to make big return year over year.


China Slowdown (2) - Oil Shortage in China

One of the trigger for the recent oil stock correction was economic slowdown news coming from China.

China's Premier Wen Jiabao on Energy Shortage

Here is a headline in Chinese news portal SOHU just couple of weeks ago: "Premier Wen: China will face energy shortage for quite long run". In fact, the energy shortage for China is such an urgent issue that Premier Wen himself and 2 other vice premiers organized the National Energy Committee earlier this month.

How come when the leader of world second largest consumer of oil claimed energy shortage just weeks ago, WLL or CHK is still trading at single digit cash flow multiple on the assumption of "plenty of oil"?  Oil stock prices of WLL and CHK and other cheap oil stocks are still far from realities of world oil market.

Past China's Oil Consumption

Below is the data I obtained from a publication of Mr. Chen Qingtai (陈清泰), head of Center of National Development and Research, State Department of China (国务院发展研究中心副主任).

Over past 15 years, China's oil consumption grew at about 5.9% per year. 

1994 was especially tough year when China's economy slowed down due to government crack down on bank loans. The result of 1994 crack down:  lots of empty office building and devaluation of RMB currency. However, look at table below, there was no dropping of oil consumption in China in the last economical slowdown in 1994!

The current fear of oil price crash because of China's economical slowdown is unwarranted.
Year
 China Oil Consumption
(10k tons coal equivalent)
1987 14727.44
1988 15809.49
1989 16575.71
1990 16384.70
1991 17746.89
1992 19104.75
1993 21110.73
1994 21356.24
1995 22955.80
1996 25010.64
1997 28110.79
1998 28426.01
1999 30187.61
2000 32053.06
2001 32784.10
2002 34632.00


My Comment on Saudi Oil Supply

After the China's economical slowdown news hit oil market 2 weeks ago, Saudi Arabian Oil Minister came out talking about same old tone on May 17, 2005: "Saudi has plenty of oil to supply global need", "Saudi already increased production of oil, but there is refining capacity bottlenecks in the world".

Saudi's Oil Minister's recent talk sounds good for oil bears. The oil bear rational is like this:  there is plenty of oil supply from Saudi, and it is just as simple as removing refining bottlenecks to kill the oil bull market.

Wrong. The bear case from Saudi oil minister's recent talk is misleading.  Let me explain below:

Saudi indeed increased "oil" production recently. Unfortunately, this increased "oil" is not conventional crude oil or light sweet oil that trades at $50 a barrel. The increased "oil" from Saudi mostly is heavy oil or sour oil.  Not many refinery companies in the world can use this kind of oil. Saudi has to cut price of sour oil to attract buyers. In other words, the regular or light sweet oil is in shortage, but the oil Saudi claimed "plenty" is very cold in market, few want them.

That is why the Saudi Oil Minister is insisting that there is "refining bottleneck". Actually, if Saudi can increase production of regular oil or light sweet oil, there will be no refining bottlenecks.

Note: oil that WLL produces is regular light sweet oil.

Sour Oil vs Light Sweet Oil

The world wants light sweet oil. In fact, majority of oil produced in the world is light sweet oil. Typically, the term "crude oil" is equivalent of light sweet oil.

If Saudi can produce more heavy oil or sour oil, why not just increase refining capacity to solve the shortage of light sweet oil?

It is not so simple.

First, refineries may want to buy Saudi sour oil, but the taste is just too "sour", they can not take it. The world relies on the light sweet oil and cars need light sweet oil. Sour oil has high-sulphur content which is rejected by most western countries. It is simply an environmental issue.  There are strict environmental laws in USA and in other western countries that restrict amount of sulphur emission. Sulphur in air are harmful.

Second, it is very expensive to produce and refine sour oil. Light sweet oil is cheaper to produce. Just dig a hole on the ground and sweet oil gushes.  However, heavy oil or sour oil is sticky so that sometimes oil company needs to burn natural gas to produce heavy oil.  Refining sour oil is not cheap either. Removing sulphur to meet laws is extremely expensive. Over past decades, no new sour oil facilities was built because the light sweet oil has been so cheap. In other words, in order to have sour oil as alternative, the regular light sweet oil price needs to be very high and stay very high for long time. Even if the new sour oil facilities are to be built from now on, there will be years to have impact on oil market.

For the above 2 reasons, I do not see sour oil as real solution for the current tight oil market any time soon.

Bullish on WLL and CHK

Unfortunately for oil consumers, Saudi can not produce more light sweet tasty oil. That is fortunate news for oil investors.

Oil and natural gas stocks WLL and CHK corrected significantly from peak and they dropped to where they were at beginning of this year.  They are dirt cheap based on their reserve or based on their past earning power.

Out of best rated stocks in hot list, 2 oil and natural gas stocks WLL and CHK are my favorite stocks at this moment. 



Blast Investor Model Portfolio Update

(as of 05/31/2005)

Model Portfolio - Performance


Portfolio inception date
 12/31/2003
Portfolio inception value
 $89,000
Portfolio 12/31/04 value
 $141,981.00
2004 SP&500 Performance 8.78%
2004 Portfolio Performance 59.53%
2005 SP&500 YTD Performance -1.68%
2005 Portfolio YTD Performance
 15.49%


Model Portfolio - Open Positions
Symbol Last Shrs Value Paid Gain
ADGO.OB 1.16 9,000 $10,440.00 0.78 $3,410.00 +48.51%
CEI 18.39 1,500 $27,585.00 16.63 $2,620.00 +10.49%
CHK 20.47 1,100 $22,517.00 13.90 $7,217.00 +47.17%
EXX-A 1.88 6,500 $12,220.00 1.638462 $1,550.00 +14.53%
GKIS 20.81 1,500 $31,215.00 15.68 $7,685.00 +32.66%
LIBHA.PK 4.72 1,200 $5,664.00 5.10 -$466.00 -7.60%
NRG 35.75 335 $11,976.25 23.05 $4,244.50 +54.90%
SOHU 18.72 700 $13,104.00 24.882857 -$4,334.00 -24.85%
USG 45.85 950 $43,557.50 18.425789 $26,033.00 +148.55%
WLL 34.58 600 $20,748.00 22.683333 $7,118.00 +52.22%
$$CASH -35,056.3 -$35,056.30 - - -
11 symbols Total(USD):
$163,970.45




Model Portfolio Transactions
Date  Type Symbol Shares Price Comm Amount Notes
Feb 28, 2005 Buy GKIS 1,500 15.68 10.00 23,530.00
-
Feb 28, 2005 Sell NTES 150 41.88 10.00 6,272.00 +14.22%
Feb 25, 2005 Buy CEI 500 16.39 10.00 8,205.00
-
Feb 25, 2005 Sell NRG 335 38.42 10.00 12,860.70 +66.57%
Jan 31, 2005 Buy CEI 1,000 16.75 10.00 16,760.00
-
Nov 24, 2004 Sell HRB 350 47.35 10.00 16,562.50 - 12.31%
Nov 4, 2004 Sell NTES 100 46.50 10.00 4,640.00 + 27.05%
Oct 19, 2004 Buy EXX-A 1,500 1.60 10.00 2,410.00
-
Oct 6, 2004 Buy EXX-A 5,000 1.65 10.00 8,260.00
-
Oct 6, 2004 Sell NEN 100 80.00 10.00 7,990.00 + 48.15%
Oct 5, 2004 Buy USG 250 18.75 10.00 4,697.50
-
Oct 5, 2004 Sell NTES 100 39.12 10.00 3,902.00 + 6.9%
Sep 30, 2004 Buy USG 700 18.31 10.00 12,827.00
-
Sep 29, 2004 Sell NEN 100 79.65 10.00 7,955.00 + 47.5%
Aug 5, 2004 Buy WLL 250 23.50 10.00 5,885.00
-
Aug 2, 2004 Sell NEN 100 69.95 10.00 6,985.00 + 29.5%
Jun 17, 2004 Sell HCA 250 40.30 10.00 10,065.00 - 4%
Jun 17, 2004 Buy NRG 670 23.05 10.00 15,453.50
-
May 24, 2004 Sell ADGO.OB 13,000 1.55 10.00 20,140.00 + 98.7%
May 10, 2004 Sell HCA 250 39.97 10.00 9,982.50 - 4.8%

Date  Type Symbol Shares Price Comm Amount Notes
May 10, 2004 Buy SOHU 200 15.59 10.00 3,128.00
-
Mar 5, 2004 Buy WLL 350 22.10 10.00 7,745.00
-
Jan 26, 2004 Sell WRP 700 17.40 10.00 12,170.00 - 5%
Dec 31, 2003 Buy CHK 1,100 13.90 10.00 15,300.00
-
Dec 31, 2003 Buy NEN 300 54.00 10.00 16,210.00
-
Dec 31, 2003 Buy HRB 350 54.00 10.00 18,910.00
-
Dec 31, 2003 Buy NTES 350 36.60 10.00 12,820.00
-
Dec 31, 2003 Buy SOHU 500 28.60 10.00 14,310.00
-
Dec 31, 2003 Buy LIBHA.PK 1,200 5.10 10.00 6,130.00
-
Dec 31, 2003 Buy ADGO.OB 22,000 0.78 10.00 17,170.00
-
Dec 31, 2003 Buy HCA 500 42.00 10.00 21,010.00
-
Dec 31, 2003 Buy WRP 700 18.30 10.00 12,820.00
-
Dec 31, 2003 Cash In -
-
-
-
 89,000.00 Inception