After not having made a trade in a couple weeks, I made a number of them this week, reducing my positions in MET coal further, adding a couple of oil names, and adding back a portion of my previously sold down copper exposure.

There was an interesting article on the Gregor blog this week discussing the demise of the Cantarell field in Mexico.  The decline rates of Cantarell over the past couple years have outpaced even the bearish forecasts. 

What strikes me is how Cantarell could be a harbinger of things to come in some of the old Saudi fields.  As Gregor points out in his post and newsletter article, Cantarell has been an example of well-applied technology, which allowed the field to produce beyond expectations, and hold peak production, for a longer time then most had anticipated.

The downside of that appears to be that when it declines, it does so rapidly.  This is a phenomenon that Matthew Simmons was warning about as far back as his book, Twilight in the Desert.  Technology does a wonderful job of increasing production, but it is less adept at increasing reserves.  The reality is that when at oil field has hit 30% to 50% recovery factors, getting any more out of it is going to be slow and tedious, not nearly the production rates experienced up to that point.

Oil looks like a good bet to me.  The price is stickier then almost anyone had expected. Demand has declined less then most economists anticipated.  And Cantarell could be the first of many aging giant fields to experience steep declines.

Perhaps on a more for curiousity's sake note, I came across an interview describing the relationship between tallow prices and oil.  Tallow is animal fat.  Apparently the price of tallow is a coincident indicator of oil prices,and because it is not traded publically, it tends to confirm truesupply/demand based rises in oil prices.  Tallow prices have beenrising lately along with oil.  In the attached link, Laksman Achuthanrefers to tallow as one of the indicators he uses to confirm oildemand.

Regardless of the validity of the tallow confirmation, I think oil is one of the better  places to be.  I already own and have done well with Breaker Energy, one of the few Canadian juniors with more oil then gas exposure.  This week I added Northern Oil and Gas (NOG) and Brigham Petroleum (BEXP) to my list on some weakness on Thursday.

Brigham is along the lines of Breaker, currently with about a 60% oil, 40% gas ratio.  But Brigham owns a lot of acreage in the Bakken, and they have been one of the most successful operators in the Bakken.  I realize that the Bakken is not Gwahar, and the decline rates are extremely steep.  Yet at $70+ oil its profitable, and its one of the few ways of playing oil without having to take on what I consider to be most unwanted natural gas exposure.

Northern Oil and Gas, much like Brigham, has a significant land package in the Bakken.  There is no question that neither of these companies is nearly as cheap as they were a few months ago, but viewed against an oil price of $70/bbl, neither are they inordinately expensive. And I am willing to take on some risk on the bet that oil prices continue to move higher, not lower.

I talked last week about the supply and demand situation for copper, and how I wanted to wade back into some copper stocks if given the opportunity.  This week I did, as I bought Capstone and Taseko on Thursday.  I will not lie though, my purchases worry me.  Copper inventory is rising both in LME warehouses and in Shanghai.  I usually don't like to buy into a market of rising inventory; there is a pretty good inverse correlation between inventory and the price of copper.

Yet I also don't think that stocks like Taseko and Capstone are pricing in anything like $3 copper, and as my analysis last week pointed out, it took nearly that to see rumors return of the copper scrap market coming back to life.  I still think that the copper scrap producers are the key swing producer of copper in places like China and India.  And it looks like we need at least $2.50/lb copper to bring that production back on-line.  Still, my copper positions are only half of what they were when I sold Taseko and Quadra a few weeks back, and I don't intend to increase those further unless there is a significant pullback.

I bought my stocks this week by drawing down my cash some (from 35% to 25%) and by selling more of my two Met Coal names, Grande Cache and Western Canadian Coal.   Nothing wrong with these companies, but they probably have gotten ahead of themselves.  I figure that Grande Cache at $4 per share, or where it was last week, probably is pricing in around $180/t Met coal.  That certainly is not out of the question for the next contract settlement, but neither is it "in the bag".  There were comments out of BMO this week that the Chinese have re-started some of their inland coal mines.  Its hard to say how much of this is Met coal, for as are most things out of China, the details are fuzzy at best.  Nevertheless, it seems to me that oil stocks are the better buy here, and so I traded accordingly. 

My met coal positions are now maybe 25% of what they were at their peak.  Having bought GCE at 60 cents, and WTN at 50 cents, those two stocks are responsible for some enormous profits over the past few months.  It is with some regret that I let them go, but, having went through the chaos that was last October, one lesson that screamed out loudly was to take profits when you can.  So I have, and will continue to.

Before I end this post, just a comment on natural gas.  What the heck is going on with these stocks?  The AECO hub price closed this week at $2.43/mcf.  There is no one making money at this price.  I just can't understand who bid up this week the price of stocks such as Fairborne, Galleon, Ember, Crew (to name just a few gas weighted producers).  It smells like a bloodbath to me, but obviously someone sees it otherwise.  I don't pretend to be smarter then the market, but what am I missing here?