Friday, May 23, 2008

Will the real bubble please stand up?

Say goodnight to the SUV bubble and the associated cheap gasoline consumption bubble.

The guy running GM needs to be thrown out. [Mulally at Ford came in from Boeing a couple of years ago and thus gets some slack.]

Wall Street Journal: Ford Stumble Signals Rising Risks.


Ford Motor Co.'s plan to return to profitability got run over by a truck.

The rise of gasoline prices toward $4 a gallon is causing a major shift in the U.S. auto industry that threatens to push the Big Three auto makers and some of their rivals to a new level of peril. In recent weeks, sales of pickup trucks and sport-utility vehicles -- already falling in recent years -- took an unexpectedly sharp tumble.


In a Thursday conference call, Chief Executive Alan Mulally said the industry has "reached a tipping point" and that the falling truck sales represent a long-term shift in the U.S. auto market, not a short-term dip.

"We saw real change in the industry demand for pickup trucks and SUVs in the first two weeks of May," Mr. Mulally said.

Leeb on the oil 'bubble'. Author, chief of investment firm weighs in on oil crisis.


Question: Is what we are seeing with oil prices a pricing bubble, or are high oil prices here to stay?

Answer: With the housing bubble, people were just building and building and building and eventually the supply overwhelmed the demand in the housing case. But here, where is the supply?

You've got oil prices rising dramatically, but there is almost no evidence of increased supply. I mean in the past couple of months we have had both Saudi Arabia and Russia, which are the two biggest oil producers in the world, announce not in so may worlds, but certainly imply, that they have very little room left to increase oil production even going into the future, and that is not what you see in a bubble.

Basically you are seeing the market respond in a very rational way. Oil supplies are limited, and that is a very serious situation.


This bubble talk is ridiculous.

Thursday, May 22, 2008

IEA: Better rethink that Certified Pre-Owned H2.

MarketWatch: Report: IEA set to cut oil-supply forecast.


The Paris-based International Energy Agency is getting ready to issue a sharp downward revision of its oil-supply forecast, according to a published report.

A story in the online edition of the Wall Street Journal early Thursday reported IEA's forecast revision signals growing pessimism about whether oil companies can keep abreast of booming demand.

The Journal reported the IEA is attempting to assess the condition of the world's top 400 oil fields. Its findings won't be released until November, but it is clear that future crude supplies could be far tighter than previously thought, the report notes.

The IEA has predicted previously that supplies of crude and other liquid fuels will keep pace with rising demand, topping 116 million barrels a day by 2030, up from around 87 million barrels a day currently, according to the report, which added that the agency now is concerned that aging oil fields and diminished investment mean that companies could struggle to surpass 100 million barrels a day over the next two decades.

The decision to rigorously survey supply reflects an increasing fear within the agency and elsewhere that oil-producing regions aren't on track to meet future needs, according to the Journal.

The report quotes Fatih Birol, the IEA's chief economist and the leader of the study, as saying "the oil investments required may be much, much higher than what people assume. This is a dangerous situation."

Short covering rally?

This last move in oil does have the feel of a short covering rally. If so, it will be interesting to see where it settles out when it's over. $110 would be my guess for a floor, but that's a long way down. That price still makes oil companies a lot of money.

Bloomberg: Blame Wall Street for $135 Oil on Wrong-Way Betting.


Oil's rally to a record above $135 a barrel came as traders bought crude to cover wrong-way bets that prices would decline, according to data from the New York Mercantile Exchange.

The number of outstanding futures contracts, known as open interest, fell 8.1 percent in a week to 1.36 million at the same time that prices rose 2.6 percent, the data show. Falling open interest and rising prices are signs that traders are buying to exit so-called short positions that would profit if oil fell, and lose money as they rose.

Wednesday, May 21, 2008

Somebody's a little off here.

I'd guess the guy in the middle.

Bloomberg: Oil Rises Above $134 on U.S. Supply Drop, Bank Price Forecasts.


``What we have here is a situation where essentially higher prices aren't generating any more supply,'' Paul Sankey, an analyst at Deutsche Bank Securities in New York said in an interview with Bloomberg radio. ``What we have to do is keep pricing the commodity higher until demand starts falling,'' which ``is around $150 a barrel.''


The price of oil should be ``somewhere between $35 and $65 a barrel,'' John Hofmeister, president of Shell Oil Co., the Houston-based subsidiary of Royal Dutch Shell, said at the hearing yesterday. Other executives said prices should be as much as $90 a barrel.

Financial Times: Shortage fears push oil futures near $140.


Adam Sieminski, chief energy economist at Deutsche Bank, said: “The price is going to go up until governments that subsidise oil consumption in Asia and the Middle East can no longer afford it.”

Separating the men from the boys.

CNBC: $12 Gas and Rationing? Possible, Says Expert.


"The prices that we're paying at the pump today are, I think, going to be 'the good old days,' because others who watch this very closely forecast that we're going to be hitting $12 and $15 a gallon, and then, after that, when world oil production goes into decline, we're going to talk about rationing," Robert Hirsch, Management Information Services Senior Energy Advisor, said on CNBC's "Squawk Box." "In other words, not only are we going to be paying high prices and have considerable economic problems, but in addition to that, we're not going to be able to get the fuel when we want it."

Hirsch argued that the maximum in world oil production has already been hit.

"The idea is that [world oil production] would hit a sharp peak and then drop off, and what's happened is, we've hit a plateau in world oil production, and that plateau has been ongoing since about the middle of 2004," he said.

Those who argue that new technology and new types of energy will solve the problem aren't on solid ground, Hirsch suggested.

"There's no single thing that's going to solve this problem, because it's as massive as one can possibly imagine," he said.

Wall Street Journal: U.S. Military Launches Alternative-Fuel Push.


Some Pentagon officers have embraced planning around the "peak oil" theory, which holds that the world's oil production is about to plateau due to shrinking resources and limited investment in many of the most oil-rich regions of the Middle East. Earlier this year, they brought Houston investment banker Matthew Simmons to the Pentagon for a presentation on peak oil; he warned that under the theory, "energy security becomes an oxymoron."

MarketWatch: Crude futures top $130 a barrel.


The Bank of England on Wednesday became the latest to signal their fears, with the central bank saying in minutes of its last meeting that tight supplies rather than speculation is driving prices higher.

"According to the Bank's market contacts, speculative purchases did not seem to be the prime cause of the recent increases in the oil price," the central bank said, referring to the rise in oil prices during the month of April.

"More fundamental demand and supply factors had probably been at the root of its steep rise during recent months, and there remained considerable uncertainty about the oil price outlook," it said.

New York Times: The Cassandra of Oil Prices.


Mr. Murti falls into the camp of oil analysts who believe that supply is likely to remain tight because of geopolitical factors. These analysts predict higher prices because production is declining in non-OPEC countries like Britain, Norway and Mexico.

The analysts who predict lower prices say there are supplies of oil that the bullish analysts are missing. “This year will be a year in which supply will be put into the market by stealth by OPEC and by countries we call black-hole countries,” said Edward L. Morse, chief energy economist at Lehman Brothers. China is one example, he said.

But while oil and gas prices have been rising for a while now, Americans have only just begun to reduce gasoline consumption, so their efforts to conserve have not dragged down oil prices.

“The fact that the U.S. gasoline demand can be down and that the U.S. gasoline consumer is no longer driving world oil prices is a monumental event,” Mr. Murti says. He spends most of his time talking to money managers and analysts, many of whom keep asking him if oil prices will stay high if speculators abandon the market, and says he applauds investors for driving up oil prices, since that will spur investment in alternative sources of energy.

High prices, he says, “send a message to consumers that you should try your best to buy fuel-efficient cars or otherwise conserve on energy.” Washington should create tax incentives to encourage people to buy hybrid cars and develop more nuclear energy, he said.

Of course, if lawmakers heed his advice, oil analysts like him might one day be a thing of the past. That’s fine with Mr. Murti.

“The greatest thing in the world would be if in 15 years we no longer needed oil analysts,” he says.

MarketWatch: Oil of oy vey.


As a trader, I'm not as concerned with the ultimate destination as much as the path that we take to get there. I've generally avoided the energy space this year and focused my attention on the financials and select technology, taking what the market gave me while preserving capital and keeping my powder dry.

Toward the end of last week, I began building short-side exposure in the energy realm. Catching cusps is a dangerous proposition, whether it's grasping at a falling knife or getting in the way of parabolic frolic. It's a generally accepted trading axiom that money is made between the twenties and we should avoid the red zone whenever possible.

With that said, I share these thoughts with two caveats. First, I'm typically early, which is as damaging as being wrong if you're not there to cash in your chips. Second, while a seismic structural shift could occur at any time, my motivation is to simply capture a trade.

The bull case for energy is loud and proud as a function of the price action. There are supply constraints, emerging market needs, incremental demand from China (following the earthquake), pressure on the U.S. dollar (the price of socialization), unreliable alternative sources, psychology (furthered by a recent Goldman Sachs report) and perhaps the biggest risk, in my view, the potential for geopolitical tension in Iran.

On the other side of that ride, we have political agendas into the election, incessant (unconfirmed) chatter that margins on crude futures will be raised, faltering demand by an already strapped U.S. consumer and the unfortunate truth that all roads will ultimately lead to debt destruction through deflation.


Again, the single biggest caveat to the short energy thesis, in my view, is an uptick in Middle East acrimony.

As the market is a prescient beast, that unfortunate thought would certainly explain the incessant bid we've seen to date.

[I think he's wrong there. It's Chinese demand and the idea that we'll have another cold winter that I think is driving this relentless move upwards. But I've been thinking about reducing positions too, though not actual shorting. So much focus on oil smells of some kind of top.]

CNBC: Fast Money Final Trade.


"Short Hess."

CNBC: OPEC Oil Supply Rising in May: Petrologistics.


OPEC oil supply in May is expected to rise by 700,000 barrels per day (bpd), led by higher output from members including Nigeria and Saudi Arabia, an industry consultant said on Wednesday.

The increase comes during a month in which oil has soared to record highs and indicates OPEC is again pumping more than its supply limit after a strike in Nigeria lowered output and Saudi Arabia opted to pump more.

All 13 OPEC members are expected to pump 32.4 million bpd this month compared with a revised 31.7 million bpd in April, Conrad Gerber of tanker tracker Petrologistics, told Reuters.

"There is a strong rebound in supply," Gerber said. "Iraq is having a good export performance and Nigeria is coming back up.

Tuesday, May 20, 2008

Pickens Wants to Move It, Move It to Natural Gas.

Sorry, I just couldn't resist.

CNBC: Pickens: Oil Going to $150, So Move to Gas.


"Eighty-five million barrels of oil a day is all the world can produce, and the demand is 87 million," he said. "It's just that simple. It doesn't have anything to do with the value of the dollar."

He expects the price of a barrel of oil to reach $150 this year, and he insists speculation has nothing to do with it.


Pickens says natural gas is the only American resource that can reduce oil imports. He claims the effective use of natural gas could reduce oil imports by 40 percent. He dismissed ethanol as an alternative. He added that what reduced demand there has been in the United States has immediately been picked up by China.

"The only way I see that oil doesn't continue to rise [is] if we had a global recession." he said. "That will happen at some point, but I don't see the Chinese stumbling until after the Olympics."

Give me liberty or give me windfall profit taxes.

I sort of admired Barack Obama when I first heard about him, but his idea about windfall profit taxes on oil companies is about the quickest legislative way to get to $200 oil that I can think of. If you want less investment in oil and natural gas production, vote for higher taxes on oil companies, and stand back and watch prices skyrocket. As mentioned below, things are already tight enough in the oil and gas business.

My guess is that John McCain will be the next president, but if Obama gets elected, I will be very interested to see what he does with this idea and what the consequences will be.

Reuters: Schlumberger sees threat to oil, gas output growth.


Less than 25 percent of worldwide reserves are open to private investment, he said, because many states are turning over their fields to government-controlled oil companies.

"This does not mean that (production) gains will not occur, but it does mean that they will take longer than if access had been more open," Gould said.

Schlumberger, the world's largest oilfield services company, and its peers have posted sharp revenue and earnings growth in recent years as energy companies increased spending, and Gould has predicted that trend will remain in place into the next decade.

Oil prices in the United States have jumped to record levels near $128 a barrel in recent days, and natural gas has surged to $11 per million British thermal unit.

For the energy producers, rising costs for raw materials such as steel have also help contributed to a 120 percent increase in exploration and production spending between 2004 and 2007, while the number of new wells drilled has risen by only 52 percent, he said.

High energy prices have also prompted governments around the globe to hike taxes and change investment terms to gain a greater share of producers' profits.

But added to the rising materials cost and the riskier nature of many new fields, "there is a real danger that this will cause underinvestment and simply exacerbate the problems," he said

And what of McCain's gasoline tax holiday idea?

Newsweek: Should You Pay $6 Per Gallon?


Kloza goes a bit further, calling a gas-tax holiday "caca." "It represents pandering. You're not leveling with the American public," says Kloza. "All this talk of energy independence means nothing if you don't have energy discipline. When it comes to our gasoline consumption, we're the morbidly obese of the world. And like the person who weighs 350 pounds, we need to exercise more and consume less." To do that, though, first you have to look in the mirror and admit there's a problem—and it's not the price of gas.

Friday, May 16, 2008

Goldman Sachs: Fundamentals.

MarketWatch: Oil and gas producers lead London higher.


Goldman Sachs on Friday raised its forecast for the average price of West Texas Intermediate oil in the second half of 2008 by 32% to $141 a barrel from $107 a barrel.

"We believe that the market is not defying fundamentals but rather experiencing a structural re-pricing much like it did in 2004, searching for a new equilibrium against an uncertain long-term supply environment," the broker said.

Bloomberg: Goldman Raises Second-Half WTI Oil Forecast to $141.


``Supply constraints and a lack of scaleable substitutes are set to continue driving the long end of the oil curve higher,'' Goldman analysts including Peter Oppenheimer and Jeffrey Currie in London wrote in a report dated today.


The trend in the growth of oil supply has fallen to 1 percent per annum, compared with global economic growth of about 3.8 percent, today's Goldman report said. ``Given this imbalance, long-term oil prices will need to rise.''


The near-term oil market is being driven by ``long-dated'' prices, or the price of oil for delivery 5 years forward, Goldman said. While an increase in U.S. stockpiles and declining demand growth due to the global economic slowdown is creating ``near-term fundamental weakness,'' this is not causing lower prices, according to the bank.

``We do not expect these softer fundamentals to translate into spot price weakness given the strength in long-term prices,'' according to the report. ``We expect the bullish structural market to dominate the bearish cyclical weakness.''

Supply Constraints

Goldman said it was unlikely prices would eventually rise enough to justify large scale investment in alternative sources of fuel, thereby offsetting the discrepancy between supply and demand, because of resource protectionism which constrains supply growth.

Instead, an increase in long-term oil prices is required to suppress demand growth and bring it in line with supply growth, Goldman said. It forecasts the long-date oil price to rise 14 percent to $148 a barrel by early next year.

``Long-term oil prices will need to continue to rise to bring trend oil demand growth in line with trend supply growth,'' the bank said. ``Eventually a price will be reached which incentivizes significant conservation, new technologies and political solutions which will eventually cap the price rises.''

Thursday, May 15, 2008

Oil price: Speculators or fundamentals?

[Fundamentals = supply & demand.]

I'm with Jerry Castellini. Oil is at ~ $125 mainly because of the fundamentals. If it were primarily speculation driven, there would be a larger inventory build up, which we are not seeing.

CNBC: Market Mavens.

Friday, May 09, 2008

Bizarro Headline of the Day.

Amidst all of the noise, it's easy to forget that the US continues to be one of the world's largest exporters. The strong dollar policy is paying off, and this may be the reason we're not in a full blown recession.

The Wall Street Journal: Container Shortage Frustrates U.S. Exporters.


Surging U.S. exports on a range of goods including corn, soybeans and frozen pork are hitting a bottleneck in the nation's overloaded ports, threatening to crimp profits for U.S. farmers and agricultural processors at a time when it is easier than ever for them to sell their goods abroad.

The problem can be traced to a shortage of once-plentiful shipping containers and other transportation equipment, along with a lack of space on outgoing ships. The shortage is affecting other industries, including exporters of manufactured goods and sellers of scrap metal and paper.

Thursday, May 08, 2008

What's going on with oil?

Seeing CNBC with features on oil all throughout the day makes me nervous we may be at a short term top.

But what's going on with oil?

Everybody suddenly realized just how valuable it is.

CNBC: What's Going on With Oil?

For Hillary - Stand Down Margaret.

Written originally for a woman of a diametrically opposed political view, I'd like to dedicate this song to Hillary Clinton.

She may not be ready to give in, and her opponent Obama doesn't appear quite ready for prime time either, but Hillary is done, as I thought back in December she might be.

Tuesday, May 06, 2008

He's back, too.

Eric Bolling used to be on CNBC's Fast Money until FoxNews gave him an offer he apparently couldn't refuse. (A big loss for Fast Money and maybe for Bolling too as litigation kept him offscreen for a while.) He's appearing on Fox now, but since nobody much watches... Anyway, he's now also writing a column on stock picks for, and because of his long background in energy trading, he is well worth paying attention to.

In the below article, he suggests that oil may be about to back off a bit, giving refiners better margins and extra breathing room. On that basis, he recommends Tesoro and Chevron. Bolling: Chevron, Tesoro Ready to Roll.

He's back.

The super spike is now moved from $105 to $200. Whoa boy. While U.S. demand is starting to actually fall, it's still rising in China and other places.

Bloomberg: Goldman's Murti Says Oil `Likely' to Reach $150-$200.


Crude oil may rise to between $150 and $200 a barrel within two years as growth in supply fails to keep pace with increased demand from developing nations, Goldman Sachs Group Inc. analysts led by Arjun N. Murti said in a report.

New York-based Murti first wrote of a ``super spike'' in March 2005, when he said oil prices could range between $50 and $105 a barrel through 2009. The price of crude traded in New York averaged $56.71 in 2005, $66.23 in 2006 and $72.36 in 2007. Oil rose to an intraday record $120.93 today on speculation demand will rise during the peak U.S. summer driving season.

``The possibility of $150-$200 per barrel seems increasingly likely over the next six-24 months, though predicting the ultimate peak in oil prices as well as the remaining duration of the upcycle remains a major uncertainty,'' the Goldman analysts wrote in the report dated May 5


China, the world's fastest-growing major economy, has more than doubled oil use since New York crude oil dropped to this decade's low of $16.70 a barrel on Nov. 19, 2001. Record prices have failed to stem rising consumption in developing nations, with demand led by China, India and the Middle East.


``The core of our super-spike view has been that a lack of adequate supply growth coupled with price-insulated non-OECD demand growth'' is leading to higher prices, the analysts said. That could result in a ``sharp correction in oil demand,'' the Goldman analysts said.

Friday, May 02, 2008

The tide turns, finally.

The New York Times: As Gas Costs Soar, Buyers Flock to Small Cars.


Soaring gas prices have turned the steady migration by Americans to smaller cars into a stampede.

In what industry analysts are calling a first, about one in five vehicles sold in the United States was a compact or subcompact car during April, based on monthly sales data released Thursday. Almost a decade ago, when sport utility vehicles were at their peak of popularity, only one in every eight vehicles sold was a small car.

The switch to smaller, more fuel-efficient vehicles has been building in recent years, but has accelerated recently with the advent of $3.50-a-gallon gas. At the same time, sales of pickup trucks and large sport utility vehicles have dropped sharply.

In another first, fuel-sipping four-cylinder engines surpassed six-cylinder models in popularity in April.

“It’s easily the most dramatic segment shift I have witnessed in the market in my 31 years here,” said George Pipas, chief sales analyst for the Ford Motor Company.


Previous spikes in sales of smaller cars were often a result of consumers trading down during tough economic conditions or gas-price increases. When the economy improved or fuel prices dropped again — as they did after the oil-price shocks in the 1970s eased — buyers invariably went back to bigger vehicles.

But with oil prices expected to remain high for years, auto industry executives are seeing a turning point.

“The era of the truck-based large S.U.V.’s is over,” said Michael Jackson, chief executive of AutoNation, the nation’s largest auto retailer.


But there are some indications that the trend toward smaller vehicles will reduce the nation’s fuel use. In California, motorists bought 4 percent less gasoline in January than they did the year before, a drop of more than 58 million gallons, according to the Oil Price Information Service.

“That is an incredible year-over-year drop,” said Tom Kloza, the organization’s chief oil analyst. “Some of it clearly has to do with changes in the vehicle fleet.”


Factor in the economic benefits of fuel-efficient engines, and small cars have not only become practical, but trendy as well.

“This shift appears to be a permanent situation,” said Jesse Toprak, chief industry analyst for the auto information Web site “These new products have become more fashionable, just like small, fuel-efficient cars are in Europe.”

I noted V-SUV day, just over one year ago.