Recently, Warren Buffett has made headlines by selling all of his shares in Exxon Mobil (NYSE: XOM), the rest of his position in ConocoPhillips (NYSE:COP), and reducing his stake in National Oilwell Varco. This has people wondering if the glory days of oil investing are over.

Warren’s opinion of oil investments carries a lot of weight, because over a 32 year period, Warren Buffet’s Berkshire Hathaway portfolio has generated an average annual return of 24 percent. His most famous investments are Coke, American Express, and Gillette (which is now Proctor and Gamble). These investments have made him over 3 billion dollars each. This is why when Buffett buys or sells a stock, everyone takes notice. The problem with this generally accepted assumption is that it hasn’t been proven that his equity investing success equates to success in the resource sector. In order to find out if this accepted assumption is correct, we first have to visit Warren’s history of investing in the resource sector.

His first foray into the resource sector began in 2002, when he took a $500 million dollar stake in Petro China (NYSE: PTR). In 2007, he sold it at a profit of $3.5 billion dollars. This investment was successful because he bought it when it was undervalued. He thought the business was worth $100 billion dollars, and it was trading at a value of $45 billion dollars. That is value investing 101; buy when it’s undervalued, and sell when it’s fairly valued.

His next venture into the resource sector began in 2008, when he purchased shares in ConocoPhillips. This investment was made because Buffett claimed that the energy sector provided him the product stability that he desired.

This investment ended up costing Berkshire Hathaway several billion dollars. The first reason this investment failed was he broke his own rule; and that is “if you can’t understand it, don’t do it.” Although a great investor he maybe, he clearly didn’t understand the resource sector. Look at this chart below.

As you can see from the chart above, the price of oil is anything but stable. In the middle of 2008, the price of oil was near its all-time high. The resource sector is the most cyclical sector in the equities market. Warren Buffet’s ConocoPhillips investment cost Berkshire Hathaway billions of dollars because he didn’t follow the cyclicality that’s involved when investing in the resource sector. This is also why his investment in Energy future holdings failed. He purchased their bonds when Natural Gas prices were near their high.

To achieve success in this sector, you have to buy oil and gas stocks when they are out of favor and the price of oil or gas is at a multi-year low. In 2009, the price of ConocoPhillips reached a low of $35 a share, and in 2014, it reached a high of $80 dollars a share. If Warren had purchased ConocoPhillips in 2009, and not 2008, it would have been one of his greatest investments ever.

Buffett’s most successful oil investment was his railroad company Burlington Northern Railroad. This is considered an oil investment, because this rail road company transported oil from the Bakken to its refiners. Since 2009, Berkshire has collected more than $15 billion dollars in dividends from Burlington Northern Railroad, while its annual revenues have increased by 57%, and its earnings have more than doubled.

The main reason his investment in Burlington Northern Railroad was successful, was due to the fact that he made this investment during the 2008 crisis, when prices were low. This Buffett quote explains the success of this investment perfectly, “Be greedy when others are fearful and fearful when others are greedy.” This company also fits the Buffett investing mantra of buying stable, boring, and predictable businesses, with steady cash flows.

Other notable oil investments include Suncor and Phillips 66, which he has recently added to his already existing positions.

As you can see based on past history, Buffett’s success in the resource sector has been a mixed bag. To understand why his success has been a mixed bag, you have to first fully understand Buffet’s investing philosophy, and then fully understand the resource sector as well.

In order for Buffett to buy a stock, the company has to pass this set of criteria: high margins with a low amount of debt (it doesn’t take a genius to run them); strong franchises and freedom to price, with predictable earnings. This set of criteria sounds great when investing in a consumer goods business, but when investing in the resource sector, it’s almost impossible to achieve. Look at this chart below.

The energy industry has higher capital spending requirements than other industries. To be successful in the resource industry, you have to readjust your investing strategy so you’re able to succeed in a high capital spending environment. This also means you have to be comfortable with companies possessing higher amounts of debt and lower margins than what you are normally accustomed to.

Another Buffet criterion that won’t be fulfilled when investing in the resource sector is buying franchises that have the freedom to price. When it comes to oil and gas, this commodity is traded on exchanges all over the world. Exchanges, which speculate on world production and consumption, are the only things that influence the price of oil and gas.

Lastly, when trying to fulfill his criterion of “not needing to be a genius to run it”, this is impossible when trying to grow, or maintain oil production. Running an oil and gas company, requires numerous amounts of geoscientists, chemical engineers, mechanical engineers, and petroleum engineers to maintain or grow the business.

Buffet’s successes in the resource sector demonstrate that you should buy when prices are low, the sector is out of favor, company cash flows are still stable, and companies are selling for less than its book value.

As we approach the end of the quarter, the global economy has set the fertile ground for more growth. Cutting interest rates and extended stimulus has been the prime action taken by several countries–notably in South East Asia. Meanwhile, the American and British central banks are pondering on a possible rate hike. It remains difficult to predict but it is a matter of when and not if.

The Federal Reserve has unanimously chosen not to raise interest rate for a while. Instead, Fed Chair Janet Yellen sounds rather dovish after her remark at the strong U.S. dollar. A healthy correction on the dollar is underway while we reckon this is only temporary at best. There were various discussions about the strong dollar which affect the equity market. Any plans for a rate hike look set to delay until June or September period. Further evidence of better than expected economic data will drive the need to raise interest rates.

Mark Carney and the Bank of England have a lot to juggle as they look to inflate the British economy in the second quarter of 2015. Interest rate is already very low; inflation at zero and with austerity plan set by the current government, Britain may need to embrace deflation for a short while. Anymore cut in the interest rate has been ruled out and other policies may be in place to kick start the economy again.

Finally, there is some light at the end of the long tunnel for Greece. Some aid money will be release for the Tsipras government to pay their creditors after reforms were agreed with Miss Merkel.

This week promises to end with a bang as there are flurry of economic data that could swift the weight on the current U.S. dollar strength. Expect precious metal prices to consolidate but should react abruptly if there are nasty surprises on those data. All eyes will be on the current dollar strength – long live King Dollar.

Bullish engulfing candlestick stood out from last week commentary. Hedge funds are busy unwinding their short positions for profit and the bears ease off the selling pedal. Obviously the U.S. dollar correction play a significant part; allowing gold prices to rocket higher with resistance at 1205, 1225 and 1244 respectively from the Fibonacci retracement line January 2015 high. Our shorts were stopped out in a momentary flash after the Yemen bombing or shall we say one big whale unwinding short to shock and awe the market. Our argument remains bearish since we see a stronger dollar which will continue to drive the market.

Should upper resistance hold then a potential head and shoulders to resume downtrend?

….read page 2 HERE

There is this silly notion that the United States will become energy independent in the next several years, thus making it unnecessary to import oil from Middle Eastern countries such as Saudi Arabia. While some fairy tales in life may come true…. U.S. energy independence isn’t one of them.

Even though the U.S. is supposedly producing more oil than it has in 42 years, this is a party that won’t last long. According to the U.S. Energy Information Agency (EIA), the United States produced an amazing 9.4 million barrels per day (mbd) during the week of 3/20/15, compared to 9.3 mbd of oil back in December, 1972.

That being said, there still seems to be a significant percentage of mortals out there who believe “Peak Oil” is complete nonsense as the Abiotic Oil Theory proves that oil fields continue to refill from the black gold that is produced deep inside the creamy nougat center of the earth.

One individual who continues to regurgitate this Abiotic Oil Theory is Jerome Corsi, the author of Black Gold Stranglehold. Corsi, who is a frequent guest on the late night talk show Coast-to-Coast-Am, believes high oil prices over the past decade were due to the manipulation by the greedy corrupt major oil companies.

Well, Mr. Corsi might know how to write a great book to get the conspiracy folks all worked up, but applying simple 4th grade math totally destroys his faulty theories.

The Falling EROI (Energy Returned On Invested) from 100/1 in the 1930’s to Shale Oil at 5/1 today, proves that oil fields ARE NOT filling back up. For clarification, the EROI of 100/1 means the U.S. oil industry was burning one barrel of oil in the 1930’s to produce 100 barrels for the market.

If the U.S. oil fields were refilling, then why are the poor slobs wasting time losing money drilling in the Bakken?? The oil industry in the U.S. was finding new oil fields during the early 1900’s with EROI in the 100’s and 1,000’s. Again, why on earth would the majority of these greedy corrupt oil companies continue so suffer from negative Free Cash Flow operating in the Bakken, if all they had to do was extract much more profitable oil that was refilling in old fields?

You see, the logic and common sense here is very simple and easy to understand. I am completely surprised at how seemingly intelligent individuals can fall for some of the most INSANE THEORIES.

Okay, here is the chart that also reveals why the United States is UP A CREEK WITHOUT A PADDLE. In 2014, the U.S. produced a lousy 5,665 barrels of oil per drilling rig compared to Saudi Arabia at a staggering 157,335 per drilling rig. Saudi Arabia produced 27 times more oil per oil drilling rig than the U.S. in 2014.

I gather Saudi Arabia’s oil fields are doing a much better job refilling than ours. Of course, I am only kidding.

The average oil drilling rig number for the U.S. in 2014 was 1,527 versus Saudi Arabia at a whopping 62… LOL. However, the current low oil price has cut the U.S. oil drilling rig fleet nearly in half from a high of 1,600 in 2014, to 825 today. According to data from Euan Mearns at Energy Matters, Saudi Arabia’s oil rig count increased to 75 in February.

If you look at the right bar in the chart above, you will see that due to the U.S. cutting its oil drilling rig fleet in half since 2014, its average oil production per rig has doubled. Again… LOL. This is not a good sign. Even though the Saudi’s average declined a bit from 157,335 barrels per rig in 2014 down to 129,333 presently, they can afford to increase their drilling rigs while the U.S. oil industry has done the opposite. The U.S. oil industry is in BIG TROUBLE.

How much trouble?? Well, this next chart just may give us an idea of what’s to come.

According to the EIA’s recently released March 2015 Productivity Report, the Bakken is forecasted to show a decline in production in April by 8,000 barrels per day. This may only be a small number, but this is only an estimate… which may be totally inaccurate.

The North Dakota Department of Mineral Resources released their Production Report for January which stated the following:

Here we can see that the Bakken’s production declined from 1,227,483 barrels per day in December, to 1,190,490 in January 2015. If we look at the U.S. EIA’s Productivity Report for the same month, this was their estimate:

Something is very wrong here. The U.S. EIA shows an increase of 27,000 barrels per day in January while the North Dakota DMR publishes a decline of 37,000 barrels per day. Again, the EIA’s reports are estimates.

So, if North Dakota is already showing a decline in Bakken oil production in January, how bad would it be by the middle of the year? I believe energy analyst Art Berman may indeed be correct forecasting Shale Oil Production Will Fall By 600,000 Barrels Per Day By June.

The United States will never become energy independent as its shale oil industry’s costs and decline rates are just too damn high. Furthermore, the U.S. still imported 6.9 million barrels per day of oil during the week of 3/20/15. There is no way the United States will ever close that gap.

For all the folks who still believe in the Abiotic Oil Theory or that the U.S. contains a trillion barrels of oil resources in the west, logic and common sense is not on your side. If the companies drilling in the Bakken with an EROI of 5/1 are losing money and are in debt up to their eyeballs, who in their right mind is going to extract the trillion barrels of lousy oil shale in the western U.S. at a lousy EROI of 2/1???

Note: Shale oil in the Bakken is technically called “Tight Oil”. However, shale oil should not be confused with oil shale. Oil shale is not even oil. To extract oil from oil shale, the shale has to be crushed and then heated to remove the oil. So, crappy low EROI oil shale resources should not be placed in the same category as high EROI light sweet crude.

Anyone who quotes the U.S. has a trillion barrels of oil resources (including that lousy oil shale), is doing so out of complete ignorance and stupidity.

Please check back for new articles and updates at the SRSrocco Report

When Jim Rogers talks, investors listen. He may be the world’s best-known commodity investor, with his Rogers International Commodity Index and best-selling books, including his latest, “Street Smarts: Adventures on the Road and in the Markets.” HAI Managing Editor Sumit Roy recently spoke with Rogers from his home in Singapore about the recent plunge in oil prices.

….read the interview HERE

Also from Jim Rogers:

Jim Rogers: Gold Will Eventually ‘Turn Into a Bubble’ (posted Wednesday, 25 Mar 2015 08:59 AM)

Oil companies continue to get burned by low oil prices, but the pain is bleeding over into the financial industry. Major banks are suffering huge losses from both directly backing some struggling oil companies, but also from buying high-yield debt that is now going sour.

The Wall Street Journal reported that tens of millions of dollars have gone up in smoke on loans made to the energy industry by Citigroup, Goldman Sachs, and UBS. Loans issued to oil and gas companies have looked increasingly unappetizing, making it difficult for the banks to sell them on the market.

To make matters worse, much of the credit issued by the big banks have been tied to oil field services firms, rather than drillers themselves – companies that provide equipment, housing, well completions, trucks, and much more. These companies sprung up during the boom, but they are the first to feel the pain when drilling activity cuts back. With those firms running out of cash to pay back lenders, Wall Street is having a lot of trouble getting rid of its pile of bad loans.

Robert Cohen, a loan-portfolio manager at DoubleLine Capital, told the Wall Street Journal that he declined to purchase energy loans from Citibank. “We’ve been pretty shy about dipping back into the energy names,” he said. “We’re taking a wait-and-see attitude.”

But some big investors jumped back into the high-yield debt markets in February as it appeared that oil prices stabilized and were even rebounding. However, since March 4 when oil prices began to fall again, an estimated $7 billion in high-yield debt from distressed energy companies was wiped out, according to Bloomberg.

The high-yield debt market is being overrun by the energy industry. High-yield energy debt has swelled from just $65.6 billion in 2007 up to $201 billion today. That is a result of shaky drillers turning to debt markets more and more to stay afloat, as well as once-stable companies getting downgraded into junk territory. Yields on junk energy debt have hit 7.44 percent over government bonds, more than double the rate from June 2014.

An estimated $1 trillion in loans were provided to the energy industry over the past decade, with most of that passed off to other investors. The practice is common, but starts to fall apart when the quality of loans starts to deteriorate. Banks like Citi have been sitting on bad loans, hoping for a rebound. But with oil prices dipping once again, big banks are starting to eat the losses. Some bad loans were sold off in mid-March at 65 cents on the dollar, the Wall Street Journal reported on March 18.

Souring debt comes at a time when oil and gas firms are also issuing new equity at the fastest pace in more than a decade. Drillers are desperate for cash, and issuing new stock, while not optimal because it dilutes the value of all outstanding shares, is preferable to taking on mountains of new debt. An estimated $8 billion in new equity was issued in the first quarter of 2015 in the energy sector, the highest quarterly total in more than ten years. But, falling oil prices have caused share prices to tank, reducing the value of new shares sold, and ultimately, the amount of cash that can be raised.

Big Finance’s struggle to unload some bad energy loans will ripple right back to the energy industry. If financial institutions cannot find buyers, they will be a lot less likely to issue new credit. That means that oil and gas companies in need of new cash injections may have trouble finding willing partners. Once access to cash is cut off, the worst-off drillers could be forced into a liquidity crisis.