The Tycoon Report

Is Oil overvalued here?

Tuesday, February 7, 2006 | Teeka Tiwari

We had our second Member Call last Thursday, and I want to thank all of you who took the time to tune in. 
 
Those of you who missed it can access it here as follows:
 
Fallen Angel Stocks members can find the recording at: 
http://www.fallenangelstocks.com/vipconference.asp
 
And Trend Rider members can find it here: 
http://www.thetrendrider.com/vipconference.asp
 
Please note: Access to the recording is restricted to current members of Fallen Angel Stocks and The Trend Rider. 
 
On the call, our resident options expert and trader extraordinaire Chris Rowe explained how Trend Rider members have been able to transform 107% gains into 185% gains through the “magic” of calendar spreads. 
 
Fascinating stuff, and I can’t recommend it highly enough. 
 
So do yourself a favor and go listen to the call!
 
One of the questions that I’m frequently asked by both my hedge fund clients, and readers of the “Tycoon Report” is if I think oil is overvalued. 
 
In fact, on the call last week, one member asked this exact question, and went on to say that they were downright bearish on oil. 
 
I can see how it’s very easy to automatically assume that something is expensive and “overvalued” when it keeps shooting up in price. 
 
But what does “overvalued” really mean? 
 
I think we sometimes confuse rapid vertical price appreciation with being overvalued, and I’m here to say that that is not always true. 
 
I remember when Microsoft hit a $100 billion market cap. 
 
It sure looked overvalued. 
 
I mean how much higher could it really go? 
 
How High? 
 
Try half a trillion dollars!!
 
Even today it still trades with a 283 billion dollar market cap. 
 
That’s an awful lot of Lolly (money) to leave on the table. 
 
So as pros, it behooves us to look behind the scenes a little bit and shy away from snap emotional responses. 
 
So what are we looking for? 
 
Well, the key to sustained and escalating energy prices is steady demand coupled with a lack of supply, right? 
 
As investors, we need to ask ourselves what’s happening in the world in support of that outcome? 
 
Here’s what happened, and here’s what’s happening:
 
For almost 20 years, the oil industry was in a backbreaking bear market. 
 
Oil prices were so low that for some companies it cost more to produce a barrel of oil than they could sell it for! 
 
In this environment, there was a systematic UNDERINVESTMENT in finding new oil fields and in developing current oil fields. 
 
Also during this time, a very strange thing was happening. 
 
For the first time in modern history, two emerging global powers started to get their economic acts together; China and India started to experience their own industrial revolutions.
 
Now here’s the problem in a nutshell. 
 
We have approximately 300 million new middle class Indian and Chinese consumers entering the market for the very first time. 
 
So the demand curve is being skewed beyond any previous historical mean!
 
Big oil just plain underestimated the demand for energy from these new markets. 
 
But you really can’t blame them, because for two decades, it just didn’t make financial sense to aggressively drill for oil. 
 
The people who say oil is overvalued and should be sold or shorted are folks who haven’t grasped this huge demographic shift. 
 
Oil bears are going to get hammered as they try to short this market, the same way the tech naysayers did throughout most of the nineties. 
 
Oil is the tech of the new century, and the way to make money here is to buy the dips just like you did through the 90’s. 
 
We are nowhere near a top in this space.
 
While pullbacks and consolidations may feel painful while they are happening, through the lens of 20/20 vision they will appear to be mere bumps in the road along the way to massive profits. 
 
Remember this: You cannot flip a switch and turn on an oil drilling operation. 
 
It takes 10 years to find, develop, and deliver oil from a new oil field. 
 
With those types of supply fundamentals on our side, investors can take great comfort as they settle in and enjoy this multi-year run.


“Let the Game Come to You.”

Teeka Tiwari
Chief Investment Officer
Point & Profit