BP Well Pressure Test Proves a Leak Exists Under Seabed!

BP scientists puzzled on why closing the new sealing cap of the Macondo well did not raise the well pressure to the expected 8000 to 9000 PSI pressure, but reached only 6700 PSI after the first 24 hours and 6745 PSI after 48 hours. If the well did not leak underground, with oil from the underground reservoir could only gush into the well but not leak out of it, the pressure should promptly reach equilibrium with the reservoir pressure. The reading at the sealing cap should then reach between 8000 to 9000 PSI, calculated based on reservoir pressure which is estimated based on conditions when the well blew out on April 20, 2010.

BP scientists offer only two possible explanations:
1. There is a significant underground leak from the well.
2. The oil reservoir pressure has dropped due to depletion from 80 days of spill.

I believe the pressure deficiency clearly indicates there is a big leak underground. Almost every one fail to notice to another data which is more important, and more disturbing: Why it is so slow for the pressure to approach its final equilibrium level. It's been more than two days and the pressure still hasn't fully stabilized yet! If the well has no leak, since the volume of oil in the well is small, and the liquid oil is hardly compressible, the well pressure should promptly raise to equilibrium level and stabilize within a few minutes after the sealing cap is shut off.

Let me explain the basic physics how fast the pressure in the well should raise, after the valves at the new sealing cap is shut off. If the well is not leaking, then all the oil already in the well has no where to go. Mean while at the bottom, the oil from reservoir continue to gush into the well. As the oil from reservoir squeezes in it builds up the pressure. This continues until the pressure reaches equiulibrium with the reservoir, and then there is no more oil getting in or out of the well any more and the pressure is stabilized.

How fast the pressure builds up to equilibrium level depends on three things:

1. How fast the reservoir oil can gush in under the pressure difference. The faster the oil gushes, the faster the pressure builds up.

2. How big a volume the oil in the well is confined to. The more room there is, the longer it takes to squeeze in extra oil to build up the pressure.

3. How compressible is the oil. The less compressible the oil is, the harder it is squeeze extra oil into the volume and therefore the faster the pressure reaches equilibrium.

Based on the estimate that reservoir oil was gushing into the well at a flow rate of 50,000 barrels per day, the total confined volume of oil the well is no more than 6500 barrels. And the compressibility of that amount of oil (liquid is not very compressible!) gives no more than 50 barrels extra space under full pressure. It takes roughly 3 * 50/50,000 of one day, or roughly 5 minutes, for the pressure in the well to build up to equilibrium level.

But now it's taking much longer than 5 minutes, and the pressure is far from stabilized yet. At the start the pressure was at 5000 feet deep water pressure level, or 2250 PSI. After the first 24 hours it reached 6700 PSI. After 48 hours it was 6745 PSI. After 72 hours it was 6775 PSI. Now after 4 days it's nearly 6800 PSI. The fact it is raising so slowing, and the pressure fails to stabilize, is a very troubling sign.

The data tells us that the oil is confined in a volume way much bigger than just the well itself. As the oil gushes into the well, it simutaneously leaks out of the well, through a pierced opening, into a way much bigger pocket of storage within the seabed rocks. This is why the pressure builds up extremely slowly. Lots of oil is being squeezed out through the leak point into the giant pocket in the seabed, to build up the pressure there slowly over time.

There is no question that the well casing is compromised and there is a huge leak some where in the well casing.

So why can't BP spot any seepage of oil out of the sea floor, if the oil is leaking out of the well into the seabed? That's because the well itself is 3 miles deep under the sea floor. If the oil seeps through the seabed and leak out from sea floor, it does not necessarily come out of the vicinity of the well site. It can come out at ANY spot within a roughly 3 miles radius from the well site. That is a pretty wide area to look for leaks. It is also pitch dark at the sea floor, the ROV video camera must use artificial lighting and can not see more than a living room's area of sea floor at at time.

if there is one single leak out of the sea floor within a 3 mile radius, it will take forever for BP to discover it using those under-sea ROVs. If BP find one leak, that means there must be hundreds of un-discovered leaks out of the sea floor!

What should BP do? BP should publicly publish detailed profile of pressure change over time, since the beginning of the pressure test. Let the experts look at the data and build physics model to discover what teh data tells us, and debate the scientific question whether there is a leak and how big the leak is, and/or whether the leak has penetrated all the way to the sea floor.

As for the relief wells, if the well casing has been dameged, then there is no point to proceed with the relief wells any more. Once the relief well is pierced through to the wild well, BP will continue to lose mud throught the leak in the wild well. Once all the mud is lost, BP will have a blowout at the relief wells, causing a much bigger disaster than the existing one.

It's time for BP to be honest with itself, publish all information and invite experts around the world to deal with the problem together. This is a disaster that BP can not handle on its own.

Full Disclose: The author currently owns a small short position of BP. But my main stock portfolio are on long positions on my favorite palladium mining stocks, SWC and PAL, as well as silver mining stocks such as SSRI, CDE, PAAS. The author does intend to increase BP shorts over time, if there is significant recovery of the BP stock price.

Warning to BP: Stop the Relief Wells Or Expect a Much Bigger Catastrophe!

I issue a serious warning to BP: Stop it right now, do NOT drill the last few feet of the relief wells. Do NOT punch that hole through. Think everything through very carefully! If BP proceeds to puncture the hole through to the original blowout well, it opens up a Pandora's Box which may lead to a much bigger catastrophe than any one has ever bargained for!

BP must halt now and invite all experts for a good debate on exactly what could happen. Build a computer model and test all scenaries. Build a physical model and run tests on it. BP is foolhardy to just proceed and pray/gamble for a success. Because what could happen is not just another failure, but rather a much bigger catastrophe!

BP explains how a relief well works. You drill another well nearby which intercepts and punches a hole through the casing of the original well, at 18000 feet below sea level, or 135,000 feet below the sea floor. Then heavy mud is injected through the relief well into the original blowout well, filing it up from near the bottom. Since the density of the mud is heavy, the gravity of the mud column generates a pressure enough to counters the pressure of the oil and gas from the reservoir, hence the oil/gas flowis stopped. Once the oil/gas flow is stopped the well can then be sealed off using cement.

It sounds simple. But due the the extreme depth of the well and the extreme pressure from the reservoir, some technical details makes the plan virtually impossible to work. Let me explain.

For the plan to work. BP needs to ensure several things:
1. The mud must have a density heavy enough to counter the pressure of the oil from the reservoir and to stop the flow of oil from the reservoir.

2. The mud must be pumped into the junction point fast enough to prevent it from being diluted by oil and gas coming from the reservoir. See condition 1.

3. The mud must not be too heavy that it seeps down into the fracture of rocks, damaging the rock formation, fracturing the sea floor which releases oil and gas in an uncontrolable way.

4. BP must have enough mud at hand. If it ever runs out of mud it's game over for BP. But not so much mud that it all go down into the rock fractures and causes the sea floor to rupture. See condition 3 again.

I don't see how BP can pull it off.

For the discussion below, let's keep one thing in mind, when liquid flows thorugh a path, pressure drops the further you go alone the path. Part of the pressure is lost to overcome the resistance to the flow. The higher the viscosity (sticker) is, the narrower the flow path is, the more pressure drops along the path. On the other hand, if the liquid is not flowing, then there is no pressure drop due to liquid flowing.

In the first phase of operation, mud is injected from the relief well through the junction point into the blowout well, expelling the oil and gas originally in the blowout well out of the exit point, while stopping the flow of oil and gas from the reservoir below.

When the oil from reservoir is to seep through the rock fractures and then gush out of the blow out well, the pressure at the junction point is way much lower than the reservoir pressure, because it is much harder for the oil to seep through the rock fractures then to flow through the blowout well. Hence more pressure is lost at the rock fractures, than the pressure loss needed to push the oil up through the well. What it means is once the oil below the junction point stops, the pressure at the junction point quickly raises to a much higher level. And BP needs to be able to counter this much higher junction pressure and still be able to push the mud in.

Now consider the path of the mud. It is pushed down the relief well and then it pushes the oil and gas up the blowout well. Note the exit point is free flowing. The pressure of the mud must be high enough that while the mud is flowing at very high rate, it still generate high enough pressure at the junction point to fight the static pressure from the oil in the reservoir. That goal is extremely hard to achieve, because most of the mud pressure is lost in pushing the mud through the resistance of the relief well.

Likewise, the original oil and gas must be pushed to gush out of the blowout well even faster than the free flowing rate, to generate enough back pressure to push back the oil coming from the reservoir. Failing that, the oil will continue to flow from below to mix with the mud, hence diluting the mud entering the blowout well. This, again, is virtually impossible for BP to achieve. We are talking about pushing the mud in at more than twice the rate how free flowing oil and gas gushes out of the blowout well.

To put things into formulas, let's call the pressure at the junction point Pj:

Formula One, Junction Pressure from the Relief Well:
(1) Pj = P(Pump) + P(Mud Column) - Q2(Mud Flow) * Rm(Mud Resistance in Relief Well)

Formula TWO, Junction Pressure from the Blowout Well:
(2) Pj = P(Sea Floor) + P(Oil Column) + Q2(Oil Flow) * Ro(Oil Resistance in Blowout Well)

Formula THREE, Junction Pressure from the oil from the Reservoir:
(3) Pj = P(Reservoir) - P(Oil Below) - Zero (Oil below not flowing)

Let's define net pressures, which is the pressures the three source of liquid would generate at the junction point if we put a flow stopper there, as such:

P(Net Relief Well) = P(Pump) + P(Mud Column)
P(Net Reservoir) = P(Reservoir) - P(Oil Below)
P(Net Blowout Well) = P(Sea Floor) + P(Oil Column)

The relationships can be re-written as such:

(4) (P(Net Relief) - P(Net Reservoir))/(P(Net Blowout) - P(Net Reservoir))
= Rm(Mud Resistance in Relief Well)/Ro(Oil Resistance in Blowout Well)

Let me explain it in layman's English. Let's imagine the reservoir is directly connected to the junction point with no resistance to the flow movement in either direction. The net force that pushes the mud down into the oil reservoir must be pushing the mud down at the same rate that the oil from the reservoir is able to push oil up to gush out of the blowout well, in terms of barrels per day.

I don't see how BP can have mud heavy enough to achieve this goal. The fact that viscosity of mud is significant higher than the viscosity of oil, hense mud flow experiences much higher resistance than the oil flow, makes it even harder.

Now that is just one condition, being able to inject mud and completely fill the blowout well with it, without being diluted by the gushing oil. It requires mud heavy enough. This condition directly contradict another condition, which is that the mud must not be so heavy that it is able to seep into the rock fractures, which requires mud that is not so heavy.

The second condition, preventing mud from seeping into the rock formation, can simply be written as:

(5) (P(Net Relief) - P(Net Reservoir)) <= 0 This second conditon, formula (5), can not be achieved at the same time that first condition, formula (4) is achieved. I predict that BP's relief wells are not going to be successful.

A MORE SERIOUS warning to BP: If the relief wells fail as I predicted, do NOT resort to the desperate act of using nuclear options. If you use nuclear option, there is a good possibility it will trigger chain reaction of methane eruption on a global scale, turning the local catastrophe into a global catastrophe!!!

Full Disclosure:
The author does not currently have any short or long position in BP, but plan to short BP if irrational exuberance pushes BP share price higher leading to the near finish of the relief wells giving people false hope it's going to be successful.

Eco Emissions - Great Innovation and Huge Demand Potential for Platinum Group Metals

There are eureka moments when you slap on your thighes and ask yourself: "Why haven't I thought about THAT!" The time when I first learned about Eco Emissions is one such moment.

But let me first remind people on the on-going and ever worsening Gulf Oil Spill caused by British Petroleum (BP). Many predicts that the disaster is so bad that a BP bankruptcy is a certainty. That includes Matthew Simmons, author of Twilight in the Desert, who calls for a BP demise in a month. I have high respect for Matthew Simmons but I believe he owe an appology to the world for getting his math wrong, by orders of magnitude. I believe that the fate of BP is now a political issue with Peak Oil implication which goes far beyond the mere fate of one big company. If death of BP means the death of the deep water oil drilling industry, there may be political will to save BP after all. But I will not touch BP either way at this moment as there are too many uncertainties. I will discuss when is best time to buy BP in another article.

The real story: Fossil fuels are bad pollutants, both BEFORE and AFTER they are burned. Before the oil is burned, they could pollute the ocean and kill birds. After the oil is burned, carbon dioxide and sulphur dioxide is emitted to pollute the air and destroy rain forests. But if oil is only partially burned, the pollution is way much worse: it results in emissions containing carbon monoxide, a toxic gas which is several hundred times worse than carbon dioxide in its greenhouse effect; and various nitrogen oxides which kills infants and senior citizens; and worse, particulate matters which are cancer agents which causes millions of deaths per year. The world collectively generates a thousand BP oil spill environmental disaster per year by producing and burning fossil fuels, accumulatively killed many times more people than was killed in WW II.

Incomplete burning of fuel is a big problem, it reduces fuel efficiency and creates air pollution. Scientists have worked relentlessly to solve the problem. The biggest progress of ourse is the global adaption of catalytic converters on automobiles. Using PGM metals, platinum, palladium and rhodium, as catalyst metals in catalytic converters, auto makers like FORD (F), GM (GMGMQ.PK), and TOYOTA (TM) are the largest industry users of PGM. What occurs in catalytic converters is basically after-burning: the incompletely burned fuel is once more burned more thoroughly in the catalytic converters, hence it cuts the pollutant emissions.

But catalytic converters do not solved all problems: They do not improve the fuel burning within the combustion chamber and hence do not improve fuel efficiency. More over, ocean traveling ships are currently not required to be equipped with catalytic converters, although there are pending new regulations which may finally impose such requirements on ships and also on gasoline-operated lawn machines.

This is going to change big time, thanks to a startup company called Eco Emissions Systems, founded only in 2008. The idea is simple: just directly introduce the catalyst in the combustion chambers of diesel engines! Doing so makes the fuel burn more thorough and hence improves engine efficiency. It also means less pollutants are emitted into the air. The technology is already there: platinum metal can be use to make nano-solutions containing tiny particles of the metal. The liquid can be turned into moist and injected into the diesel engine combustion chamber through the air intake. The catalyst contained in the moist then meets the fuel and promote the thorough burning, resulting in great savings of fuel cost. A simple idea worth billions of dollars.

At roughly 10% or more fuel savings, a typical dry bulk ship could save $1M per year just in fuel cost. For a shipping company like DRYS, EXM or EGLE, applying the technology on a fleet of 40 ships means a saving of $40M per year. That is a huge boost of their financial bottom line.

Too bad I did not come up with the idea early enough: Eco Emissions Systems already patented the idea globally and they stand to rip huge profit from the patent. Their stock symbol is ECMZ.PK or ECMB.OB. They are already well into business as their systems are being tested on a Holland America cruise ship, before being expanded to the whole fleet. I can see Royal Caribbean Cruises (RCL) and Carnival Corp (CCL) expressing interest soon. According to their web site, the company already has more than $132M documented product demands and that was in 2009, a mere one year after the founding of the company. I can see they grow much bigger! Who would not like the idea of saving cost?!

I would like to come up another novel idea which might be worth billions of dollars as well, but instead of patenting it I would give it out for free to big oil companies like BP, XOM and CVX: Why not simply add the platinum containing nano-solution to the diesel fuel itself, and hence achieve the same fuel efficiency improvements, without the need to retro-fit existing diesel engines to modify the air intake system? This way, their diesel fuel products will be more competitive. But then I guess the big oil may not like the idea: they want consumers to pay higher prices for oil and burn more fuels, not less. But if an idea can save consumers money, it will catch on like wild fire, regardless whether big oil like it or not.

Where is the investment opportunity here? The Eco Emissions technology, and similar technologies that put PGM catalysts directly into fuel combustion chambers can create huge demand for the PGM metals! Even though only a small amount of platinum is consumed, consider the fact that the world consumes one cubic miles of oil per year while producing no more than a cube of 8 feet worth of platinum annually, this new demand on PGM metals could mean paradigm shift in the global supply/demand picture, sending the prices skyrocketing.

How do you invest in this opportunity? Venture capitalists might want to talk to Eco Emissions Systems and get a good gauge what their growth potential is. For average investors, it's time to hoard physical platinum and palladium, and invest in two physical metal backed ETFs: PPLT and PALL. More leveraged play would be investing in stocks of platinum and palladium mining companies, like South Africa's Anglo Platinum (AGPPY.PK) and Impala Platinum (IMPUY.PK). Some one keeps refering Norilsk Nickel (NILSY.PK) as a palladium play. But even though I keep mentioning Norilsk Nickel as the world's largest palladium producer, they are a nickel play, not a palladium play, as palladium is only their by-product.

Of course, my most favorite PGM play remains Stillwater Mining (SWC) and North American Palladium (PAL). They are closer to home in North America, and they are the world's only primary palladium producers. SWC recently published a market study, A Case For Palladium, which documents how various factors, like the termination of the decades long Russian government palladium stockpile sales, and ongoing South African electricity crisis, could create a ten year bull market in palladium.

More than 95% of my 401K retirement account is invested in SWC and PAL, mostly SWC. I keep hearing people calling me crazy on that. One day they will know it's crazy not to have a big chunk of that stock in your portfoio, knowing the huge potential in palladium. Cold Fusion which uses palladium was considered a crazy idea to begin with, but it's now getting more and more acceptance in the mainstream. Peak Oil is still considered a crazy idea by most, but it is a looming reality right now right this moment. All great investors were called crazy at certain point of their investment career. Warren Buffett was called crazy putting all his eggs in just one busket, purchasing that bankrupt textile mill no one heard about. He was crazy. But the company by the original name which is now known globally is totally out of the textile business and into quite something else. You know the rest of the history of Berkshire Hathaway (BRK-A and BRK-B).

Full Disclosure: The author is heavily invested in SWC and PAL and own palladium metal bullion coins. The author also owns shipping stocks mentioned: EXM and EGLE. The author currently has no position in BP or other stocks mentioned and has no connection to Eco Emissions Systems other than learning it from the news.

A Few World Events Bullish for Metals

I noticed a few important world events happened in the last 24 to 48 hours and triggered dramatic rallies of a few related metals, including palladium, platinum, nickel and aluminum. Let me discuss those events.

First, something that must be described as a paradigm shift event in the palladium market. No one noticed this Bloomberg news except for a few fast thinkers, who immediately responded. Palladium price instant jumpped up $12. But more spectacular is the spike in the palladium lease rate. I have NEVER see such a big lease rate spike in any precious metal! Please read this to understand the significance of metal leasing rate.


Quote from the news:

The metal (palladium) rallied after Russia's OAO GMK Norilsk Nickel, the world's biggest producer, said its stockpiles of the metal may be "depleted'' in one to five
years as the government reduces its holdings.

One to five years? Why such a big margin of uncertainty? I think they are really explicitly saying it's zero years, there is virtually no more government palladium stockpile left. This is a gigantic paradigm shift event that palladium investors have been waiting for for years, and that many speculate it is getting closer, the depletion of Russian palladium stockpile. This is a paradigm shift because over past years, massive Russian stockpile palladium sale, up to the tune of 2 million ounces per year, was the reason that the Pd market was in surplus. But the stockpile has to be depleted one day, and when it happens, the palladium market shifts from structural surplus to a large structural deficit, which is extremely bullish. Some strong hand investors have been waiting for this since 2003, as I discussed before, and looked at again recently. Read today's mineweb piece: The Russian palladium stockpile - do we need to worry?

Second event that just happened, is also very significant. Nickel rallied strongly up 6%+ on Thursday, as investors now believe nickel is in supply shortage again, rather than surplus. This is caused by the supply disruption due to the big natural gas blow up in western Australia. But more importantly, BHP announced today that it shuts down the Kalgoorlie smelter for at least four month, removing 2% worth of the world's nickel supply. This news is quite bullish for nickel.

Third event came from China. A whole batch of nickel producers in China are shutting down production. During the strong nickel rally which peaked at $50/kg in may, 2007, a number of producers of the so called nickel pig iron emerged. The nickel pig iron production process is highly pollutive, energy intensive and costly but was profitable at $50/kg nickel price. As nickel pig iron flooded the market, nickel price now drops to an unprofitable level for these producers. On top of that, electricity tariff has been inreased by 170%. The higher cost forces producers to shut down. Another reason is China is preparing for the Summer Olympics and so a whole lot of air polluting industries were ordered to shut down in order to clean the air pollution. As a result, now traders widely believe that the nickel market has turned around to supply shortage again and price must surge.

The year 2008, China Olympics Year, is a pretty big deal in China. The folks consider the number 2008, which ends with an 8, a lucky number, on top of it, Olympics is first held in China. So there are lots of jewelry and souvenir buyings and lots of young Chinese couples are getting married this year, boosting demand on precious metal wedding bands. This development is bullish for both PGM metals, palladium and platinum, as I talked before.

But the most important development as far as PGM metals are concerned, of course is the PGM production disruption in South Africa, due to the on-going and long lasting electricity crisis there. Many people noticed the headline on January 25, 2008, and then soon forgot about it and assumed that everything is back to normal again in South Africa. The electricity supply there is far from normal and it is actually getting worse, and more bad news from ESKOM are revealed as days go by. I often visit the ESKOM web site and click on the Media Rooms->News on ESKOM link. So I keep track of things happening there.

ESKOM now claims that the electricity crisis will last at least seven more years. After tracking the news and analyzing the data from ESKOM, I draw the conclusion that the South African electricity crisis is more than just a problem of outdated facilities and lack of electricity generation capacity, but a coal supply problem as well. Most importantly it is a money problem. And sealing it all, it is a problem of lack of leadership and lack of vision, not just in ESKOM, but in South Africa Government, and even within the people of South Africa.

Money buys you things and pretty much fixes everything. ESKOM could get new electricity capacity built and coal supply secured, on a fast track, to fix the electricity supply problem, IF it had the money. But it does NOT have the money. It is broken, bankrupt! That's a fundamental problem. With money, most everything can be solved. Without money, nothing can be fixed.

It's a problem when you run a country on socialist principles instead of on free market. South Africans pay the lowest electricity tariff in the world when energy cost is skyrocketing: 11 cents per KWH for foreign customers, 17 cents for domestic industry, and 41 cents for households. That's in South African Rand. Divide it by 8.1 to convert to US$. It cost far more for ESKOM to generate the electricity, than it gets paid.

Let's look at ESKOM's 2007 Financial Report. Electricity tariffs collected was R40.068B (US$4.95B). Cost to acquire fuels, namely coal, natural gas, diesel and uranium, was R13.040B. ESKOM distributed 241.170 billion KWH of electricity in 2007. So average tariff was R0.166, or US$0.0205 per KWH. I think we in America are now paying up to 25 cents per KWH! Using the energy equivalence calculator, and use quoted energy efficiency of about 35% of SA power plants and that they use the low quality coal (lignite), it costs about 0.59 kilograms of coal to generate one KWH of electricity. So they burned roughly 143 million tons of coal in 2007, roughly nearly half million ton per day.

And it costed ESKOM only R13.040B to acquire the coal and other fuels? That's only R91.20 per metric ton of coal, or US$11.26 per metric ton. Where did ESKOM get coal so cheap? Where can ESKOM continue to get such cheap coal? Internationa coal price is now approaching $160 per metric ton. The Indians are happily coming to South African harbors and pay well over US$100/ton thermal coal at free on board basis. I am quoting this, which is just hilarious:

I think it just reflected poorly on Eskom in terms of their coal purchasing.
After the mining indaba in Cape Town in February it was quite amazing - we
were flying in to have a look at the Camden Power Station with two to three
days supply in front of it, and it just so happened that at the time there
was a train with 200 wagons of export quality thermal coal chuffing past.

Clearly ESKOM doesn't have the money, and can't compete with foreign customers for South Africa's coal. I can not believe they paid US$11.26 per ton. Using trucks to transport coals to the power plants would cost more than that, even if they get the coal for free from mines. The root of problem is South Africans are paying too little for electricity. That's the whole reason ESKOM wants an immediate 53% tariff increase. But every one said NO and Mboweni wants only 6% electricity tariff increase, and the labor union is planning a massive strike against the electricity tariff increase.

With no hope of dramatic increase of tariff income, ESKOM must borrow money to fill the hole of coal cost. But who would lend knowing they can't pay back? South Africa, with double digit inflation rate, above 35% unemployment, and people impossible to accept a 53% increase of a super cheap electricity tariff, is a broken system with broken leadership, and there is no hope of fixing the electricity crisis any time soon. With winter approaching, it's almost guaranteed they will run into another round of deep electricity supply crisis, disrupting mine productions, including PGM mines.

It's important for people to pay attention to what's happening in South Africa, because PGM supply shortfall there provides a virtually guaranteed bullish case for palladium and platinum. That turns North America's only two PGM mining companies, PAL and SWC, into extremely excellent investment opportunity, with high reward virtually guaranteed in the near future.

The recent nickel rebounce further strengthens the bullish case for PAL, who produces nickel as a significant byproduct. I am also trying to look for other cheap nickel players. Norilsk Nickel (NILSY) has fallen down from recent high but it is not cheap at all. I noticed that FNX Mining (FNXMF.PK) has recently been added to the naked short list. The price seems to be at a low level. I need to spend more time research it. But many times, stocks on naked short list may rally strongly on ensuring short squeezes. One example is LDK's rally from its recent lows in March. I noticed there was heavy naked short going on on LDK at that time, so I curiously watched and surely it put up some nice rally when the nakes shorts covered.

Some one asked about aluminum stocks. Many aluminum stocks had been red hot and have since fallen from their recent highs, like AA, ACH, CENX, KALU, NX, SPSX, TG. All of them have fallen down, even though aluminum price is still near its historical high. Why? Are these aluminum stocks at a good price to buy? ACH caught my attention in mid August, 2007. I watched it rally from $40 to $80, but I wasn't impressed at all and never thought about buying it, now ACH is right back to below $40.

The reason I never got interested in aluminum, is because as a natural resource investor, I know aluminum is a virtually unlimited natural resource. You could never exhaust the aluminum mineral reserve of the world. Production of aluminum is just a matter of transporting the raw material, and then producing it using electricity. When the supply is tight, any one can spend some money set up a shop to process aluminum, so the competition diminishes profit margin. And then skyrocketing energy cost really cuts into the corner of any aluminum producers. That's why I could never become interested in any aluminum player.

For any natural resource player, you need to look into the basic economic fundamentals of supply and demand. Look at where the raw material comes from. Is it scarce or abundant? What's the cost of processing it. Also look at the demand side, is it price elastic or inelastic.

Using these principles, I am not too big a fan of coal. I really liked JRCC and bought it at $4 a share only because I found the share price incredibly low, the price/sales ratio was incredibly low, and the quarterly loss was only a small fraction of the sales revenue, and I knew coal price has got to go up. But coal price has gone up too far, too fast and I do not think it can last. Nowadays you can not go to a financial web site without seeing names of coal mining companies being mentioned by every one, like PCX, ACI, APA, BTU, JOYG. If every one is talking about coal stocks, that sounds a bit like a bubble. the world still has plenty of coal reserves left. According to recent BP survey of global coal production, consumption and reserve, global coal supply/demand is roughly in balance. The shortage is no more than 1%. So any disruption is local and temporary in nature. Recent coal price raise of double or even triple is not warranted by the supply/demand relationship and could be in large part attributed to speculator bidding price up.

My advice is it may be time to sell your coal stocks before they reach the top. Move on to something else. don't try to catch the very top, which few people can do. I would think natural gas is way much better than coal. Natural gas is limited, depleting faster than oil, and is less talked about than oil. have a look at natural gas stocks like CHK, SWN, CNP, NGAS, NFX, WMB. The Atlantic hurricane season is coming and natural gas may get a boost if this hurricane season is relatively active and may hit some platiforms in the Mexican gulf.

But I think nothing beats the scarcity and price inflexibility of PGM metals, platinum, palladium, rhodium, the narrow play field (only PAL and SWC in North America), and the lack of mentioning of these two stocks in the investment community. Plus isn't it true that South Africa's winter is fast approaching and will come earlier than the first Atlantic hurricane?

So I am sticking with my PGM plays, SWC and PAL, and will only consider putting small stakes in natural gas fund UNG, and a few select natural gas stocks.

P.S. The author is heavily invested in the stocks of PAL and SWC.