What’s Next for the Energy Sector

• After Tuesday’s slaughter, Wednesday’s resurrection: What’s next for energy

• Two strategies to play the deep-water drilling ban

• The Eagle has soared… U.S. Mint sells most gold coins in a decade, most silver in two

• A lover scorned: Iran dumps the euro after embracing it

• Readers get in a few choice words about Buffett, BP

  We hope you took Byron King’s words to heart yesterday.

At the very moment he declared to The 5 that oil and oil service stocks were “way oversold,” a huge rally was getting under way. Folks who panicked and dumped their positions on Tuesday after BP conceded the “top kill” effort in the Gulf of Mexico had failed? They missed out big-time yesterday.

Consider the case of the OSX — the Philadelphia Oil Service Index, comprising 15 companies, three of them tied directly to the spill. After an end-of-the-world 7.5% plunge on Tuesday, the OSX rallied 5.5% yesterday. Within some of the index’s components, the market action bordered on the absurd.

Halliburton, for instance, issued a statement that said, To heck with Obama and his six-month ban on deep-water drilling. We’ll just move our people and equipment to other places where they’ll be welcome.

Of course, anyone who casually follows the sector already knows Halliburton has no shortage of business. But the statement was enough to pump up HAL stock 12% in a day.

Such is life when the overall market exhibits signs of the bipolar disorder we diagnosed last week. Yes, the sector is still pretty beaten up compared to before the Deepwater Horizon disaster — which nearly coincided with the overall market’s top in late April.

So where from here?

  “A lot of smart money,” says Byron King, is betting the deep-water drilling ban will last “nearer 18 months, and maybe more.”

“The prompt effect of the moratorium is that the U.S. is voluntarily surrendering the only geography — Gulf of Mexico, Atlantic areas, Alaska — that offers any substantial potential for future domestic oil output. Plus, watch the rigs migrate away to distant locales with less of that ‘political risk’ thing.”

According to Morgan Stanley, we get 1.5 million barrels of oil every day from the Gulf of Mexico. 1.2 million of that is from deep water. The United States consumes roughly 20 million barrels a day. So that’s 6% of our daily use that’s about to go away.

”Over the next year,” Byron continues, “we can watch as U.S. oil output begins its drop off a cliff. And we can all watch in helpless frustration as U.S. oil imports increase.”

“That’s assuming imports are there to be had, in view of Peak Oil issues. For example, Mexico continues with its precipitous drop in output. There’s chronic instability in Nigeria. The Chinese are buying up everything they can lay hands on…”

  “One idea that came to me yesterday,” writes Dan Denning from his post down under, “was just to buy a basket of national oil companies with proven reserves.

“If you’re a private company with shareholders, you have to assume that offshore drilling, unless it is state backed, is an existential threat to your business. The public companies will be revalued based on their (I’m presuming) inability to expand reserves offshore.

“I reckon PetroChina, Petrobras, and CNOOC will be OK drilling offshore… especially if it’s someone else’s shore (say, Africa’s).”

Awful as it sounds, this is actually excellent news for a whole slew of companies in Byron’s Outstanding Investments portfolio. Months ago, he recommended a couple of well-run state-owned oil companies that trade on U.S. exchanges.

What’s more, those national oil companies can’t get the job done in deep water (or in a lot of other places) without the help of the energy service companies Byron recommends. One of his industry contacts says there’s no shortage of opportunity outside the United States. “Service company pricing should hold, as there is more flexibility to transfer equipment and tools (internationally),” this individual tells him. “We are already seeing limitations in equipment capacity.”

To learn more about Byron’s energy strategies (and that resource war Dan’s hinting at), check out his latest special report. 

  The market’s manic rally of yesterday — 225 points on the Dow — carried over into today. The S&P jumped 2.5% yesterday and nearly another 0.5% in the first 15 minutes of trading — good enough to move past 1,100. The OSX opened up, too.

Traders took cheer from ADP’s payroll report, which showed 55,000 new private sector jobs in May. That bodes well for the Labor Department’s monthly employment report tomorrow, although it will no doubt be seriously skewed by Census hiring. Yesterday, the Census Bureau said it put 574,000 people on the payroll last month.

We’ll do our best to cut through the nonsense when the numbers come out tomorrow.

  Gold is taking a breather this morning, sitting at $1,221. Oil, however, has moved up past the $73 mark.

  Demand for gold bullion did not result in record sales of U.S. Gold Eagles last month. But the numbers were impressive, nonetheless…

Sales haven’t been this brisk since January 1999, when the world was about to get wiped out by programmers who hadn’t foreseen the end of the millennium.

The Mint also shipped out 3.6 million Silver Eagles — a figure just shy of the all-time monthly record set the year they first went on sale, in 1986.

Rumor has it the Mint may skip issuing collector-grade uncirculated and proof Silver Eagles for the second year running so it can keep up with bullion demand.

“Silver price action up to $18.70 combined with the continued run into gold supports another move above $19,” wrote Alan Knuckman yesterday to his Resource Trader Alert members. “The mid-May highs at $19.84 hover slightly above before new multiyear highs from 2008 can be tested.

“The continued fallout from global events looks to keep the metals in play.” And Alan is eyeing a new silver play to top the one that delivered 84% gains last month. If you want to be on board before the new recommendation comes out, go here.

  The dollar index is up ever so slightly, sitting at 86.8. The euro is more or less unchanged at $1.225.

  Iran is bailing on the sickly euro. According to state-run TV, the Central Bank of Iran is converting forex reserves totaling 45 billion euros into dollars and gold.

We can’t help but chuckle. In 2006, the mullahs in Tehran made a huge deal about opening their own oil bourse that would trade in euros. It took them until 2008 to get their act together and open the thing. Now their founding premise is falling to pieces.

  From the “have we learned nothing?” file comes the news that sales at GM and Ford outpaced year-ago numbers by 17% and 22%, respectively… mostly on the strength of SUV sales. Sales of the Chevy Equinox tripled.

For the record, it gets 22 miles per gallon in city driving.

These will surely be hot items when 6% of the world’s oil production goes away by virtue of presidential decree… and when Mexico becomes a net oil importer… and China owns the last drop coming out of Africa… well, we’ll stop here.

  “As you have undoubtedly seen,” a reader writes after yesterday’s issue, “Buffett remains a fool (or is it tool) of Wall Street. Why they even called on him to testify is strange, given his large position in Moody’s. You probably also saw that the judge threw out the case against the rating agencies. Unbelievable. The top three agencies must have angels in Congress or somewhere.”

The 5: On the eve of Buffett’s testimony to the government’s Financial Crisis Inquiry Commission, we suggested he “admits the truth and sabotages his massive stake in Moody’s or attempts to maintain the status quo… and becomes just another Wall Street fool.”

Indeed, it was the latter, as he adopted the “nobody saw it coming” defense. And there was this gem from the Oracle: “Rising prices are a narcotic” that corrupts the thinking of otherwise rational people.

“Don’t we expect ratings agencies to avoid it?” the commission’s chairman Phil Angelides shot back “You don’t want your police trading in crack.”

  “To the person who said, ‘profits can’t be obscene,’” another reader writes, continuing our BP discussion, “I would ask would you still be of that opinion if the profits were those of a person or a group who kidnapped and sold children for sex?

“Theirs is a business, and it certainly has profits. Are those profits obscene or evil or some other term of opprobrium? Or do you really think that profits of any kind whatever can’t be classified as morally reprehensible? I do not think it is an unfair extension to say that the profits so generated are tainted by the means by which they are created. If someone steals a car, the car is stolen goods. If someone sells children, the profits are reasonably said to be as tainted by that means of acquisition as the car is by being stolen.

“I do not intend to make a mountain out of this matter. I bring it up because it demonstrates that reason and dialog have largely left this interchange of words. For this reason, I would ask the editor: Is not part of your job in selecting these submissions to keep the conversation in the intelligent range and out of the merely emotional?

“We quickly lose interest unless those writings have a minimum level of usefulness and intelligence.”

The 5: Frankly, we prefer the emotional.

  Yesterday, we cited a reader who wrote: “When companies get away with illegal activities, the real culprits are the regulatory agencies that did a poor job. Bottom line is that if ‘voters’ in democratic forms of government and in corporations are willing to accept poor performance from their hired guns, then they are getting what they deserve.”

“That is truly nutty thinking!” a third reader responds, “That’s just another way of saying it’s OK to commit to a crime if you don’t get caught. The real issue is the fact that a company is committing a crime, presumably in pursuit of greater profits; not whether they get caught or not. If crimes are being committed in the process of ‘optimizing’ profits, then those profits are tainted and, if the crime is great enough, yes, ‘obscene.’”

  “The thought that ‘smart companies’ optimize their profits for the long term,” the reader continues, “is a nice one, but hardly has any basis in reality when the valuation of a company is driven by quarterly earnings statements. It takes much more foresight and resistance to outside pressure to be a ‘smart company’ than most boards and executives, apparently, possess.”

“Thanks for your always entertaining newsletter — even if I don’t agree with some things you say.”

The 5: The late Kurt Richebacher referred to this as “late degenerate capitalism,” when people no longer make things, but trade paper — mortgages, stocks, bonds, MBSs, CDSs — for “profits.” Now in the bailout period, the government promises to guarantee prosperity, security, health, welfare with its own paper. We can’t help but wonder where this all ends…

Regards,

Addison Wiggin

The 5 Min. Forecast

P.S. “After a terrible Tuesday,” writes Steve Sarnoff, “equities charged back to close Wednesday’s session with strength. Stocks found support and, because of that, look to have more upside pop. But overhead resistance remains significant.

“Buyers, like salmon, are swimming upstream.”

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