ExxonMobil will soon be "cookin' with natural gas" after this week's takeover of XTO Energy.
For a mere $3o billion in ExxonMobil stock and assumption of $10 billion in XTO Energy debt, Exxon is now (pending approval of shareholders and regulatory clearance) the leader in developing cleaner fuel technologies in the United States via natural gas. The pay off will likely be realized in a short term and long term scenario parallel to likely changes in fuel stock dynamics.
The immediate benefit to Exxon is access to recent natural gas hydraulic fracturing drilling technology. XTO Energy has had a steady growth rate of 25% per year for the past several years due to its more efficient drilling and storage techniques that has enabled drilling in shale formations that were previously cost prohibitive. Also, Exxon natural gas inventory stocks receive a nice domestic boost. And, it is only paying $2.96 per thousand cubic feet for XTO's proven reserves of 45 trillion cubic feet of gas.
Longer term, the acquisition of XTO is a major domestic piece of the worldwide nat gas purchases Exxon has been accumulating as it positions itself for an anticipated shift in natural gas as a bridge fuel to eventual non-carbon based fuels.
Not too long ago natural gas was burned off at oil field production operations as a waste product due to its past low market price. The future value of natty gas will be much different, especially if current legislation passes requiring nat gas for government fleet vehicles. Exxon is now well positioned to someday even fuel potential future compressed natural gas vehicles.
Friday, December 18, 2009
Saturday, December 12, 2009
Improving Hedge Strategy Modeling
Energy product producers and sellers are well aware of the cyclical pricing nature of their respective products. The difficulty is in accommodating for outside economic influences that may exaggerate cyclical pricing volatility into hedge analysis modeling. Get the macro economic direction correct and modeling formulas will provide precision timing for enabling profitable hedging strategies.
The foundation for successful commodity energy hedge modeling generally consists of fundamental inputs of supply stocks relative to current and future demand. The future demand component will be more accurately produced by incorporating energy options greeks as a directional compass on market sentiment on macro economic conditions.
Rising put options premium after the underlying futures has regressed from technical resistance, is a good indication to delay locking in long term pricing. However, this is an excellent indicator to sell calls and hedge a long position.
Conversely, rising call options premium after the underlying futures has held support and begun to trend slope positive, is an excellent indicator to lock in fixed pricing to establish a long position on the underlying futures commodity.
The element of risk can never be eliminated. Long Term Capital found this out the hard way when the Black Scholes model they relied upon failed to accommodate tail risk. Having the proper modeling inputs will however, increase the probability of accurately timing a hedging strategy.
The foundation for successful commodity energy hedge modeling generally consists of fundamental inputs of supply stocks relative to current and future demand. The future demand component will be more accurately produced by incorporating energy options greeks as a directional compass on market sentiment on macro economic conditions.
Rising put options premium after the underlying futures has regressed from technical resistance, is a good indication to delay locking in long term pricing. However, this is an excellent indicator to sell calls and hedge a long position.
Conversely, rising call options premium after the underlying futures has held support and begun to trend slope positive, is an excellent indicator to lock in fixed pricing to establish a long position on the underlying futures commodity.
The element of risk can never be eliminated. Long Term Capital found this out the hard way when the Black Scholes model they relied upon failed to accommodate tail risk. Having the proper modeling inputs will however, increase the probability of accurately timing a hedging strategy.
Saturday, December 5, 2009
Will the Energy Complex Be the Next Commodities Group to Unwind?
The US dollar vs. the euro broke $1.49 up channel support Friday that traces back to the euro's steady rise beginning in March of 2009. This uptrend channel also coincides with the pricing pattern of crude, gas and diesel. Does this break in the currency pair signal energy is about to reverse from its uptrend channel?
Should the US dollar continue gaining strength the energy complex would shift to pricing primarily on the fundamentals. With OPEC oil producers selling volumes above agreed upon quotas and non-OPEC producers such as Russia and Venezuela producing at full speed, refiners would need to show a dramatic increase in refinery products utilization rates to avoid a massive oversupply of crude. Refiners are still in hunker down mode with utilization runs under 80%.
In this environment, the crude supply is likely to continue to grow.
Refined products are also well supplied with distillates at a 26 year high and gas hitting 17 year inventory highs. Therefore, should the US dollar continue strengthening, the energy complex is very likely to begin slowly drifting below up channel support seeking a new bottom based on pure fundamentals.
Traders will be monitoring comments from the US Federal Reserve bankers on any shift in policy on target interest rates or monetary easing. The current White House regime will apply pressure on the supposively independent Fed to prevent any change its weak dollar policy. Higher interest rates will create higher costs in funding budget deficits. Knowing this, energy traders will probably not be expecting too much of a drop in crude below its current $75 support handle.
Should the US dollar continue gaining strength the energy complex would shift to pricing primarily on the fundamentals. With OPEC oil producers selling volumes above agreed upon quotas and non-OPEC producers such as Russia and Venezuela producing at full speed, refiners would need to show a dramatic increase in refinery products utilization rates to avoid a massive oversupply of crude. Refiners are still in hunker down mode with utilization runs under 80%.
In this environment, the crude supply is likely to continue to grow.
Refined products are also well supplied with distillates at a 26 year high and gas hitting 17 year inventory highs. Therefore, should the US dollar continue strengthening, the energy complex is very likely to begin slowly drifting below up channel support seeking a new bottom based on pure fundamentals.
Traders will be monitoring comments from the US Federal Reserve bankers on any shift in policy on target interest rates or monetary easing. The current White House regime will apply pressure on the supposively independent Fed to prevent any change its weak dollar policy. Higher interest rates will create higher costs in funding budget deficits. Knowing this, energy traders will probably not be expecting too much of a drop in crude below its current $75 support handle.
Saturday, November 21, 2009
Enhancing Value to Each Refined Product Sale
Wholesale fuel buyers have many tools available to enhance sales profit margins and directly impact a distributor's market growth. Speculating, hedging, and forward buying are all necessary strategic components, if a fuel wholesaler intends to be a winner in today's highly competitive environment. Managing the risk of these three components separates well run jobbers from those that are just a few bad decisions from being forced into bankruptcy.
Many wholesalers shy away from the first component of speculation. This might be the best decision for smaller jobbers who cannot afford to hire a competent trading department. For those who do have the necessary capital, hiring a seasoned team of paper traders allows the business to receive a lucrative revenue stream, that should be able to produce profits regardless of which direction the energy complex is trending.
The next component, hedging, encompasses a broad range of techniques to offset the inherent short position that all fuel wholesalers are positioned. If a jobber has not made a refined product purchase prior to the start of the day's delivery schedule, the jobber is short the market. An increase in spot prices will decrease profit margins. A very simple strategy would be to buy physical product and sell an equal amount in futures or options contracts, when spot basis is unusually low. Allowing spot basis to rise to satisfactory profit margins, then buying back the contracts and selling the physical product, will juice profit margins.
The last strategy tool in the fuel buyer's arsenal, buying forward, requires accurate macroeconomic forecasting. Buying forward contracts whether they be indexed or fixed price based, will pay huge dividends if the timing is right. The risk of entering the contracts at the wrong time may be offset by staggering effective dates and utilizing a variety of combinations of indexed and fixed price contracts.
No wholesale fuel buyer has a crystal ball on the future. However, every fuel buyer has many opportunities to implement profit enhancing strategies which will add value to each gallon sold.
Many wholesalers shy away from the first component of speculation. This might be the best decision for smaller jobbers who cannot afford to hire a competent trading department. For those who do have the necessary capital, hiring a seasoned team of paper traders allows the business to receive a lucrative revenue stream, that should be able to produce profits regardless of which direction the energy complex is trending.
The next component, hedging, encompasses a broad range of techniques to offset the inherent short position that all fuel wholesalers are positioned. If a jobber has not made a refined product purchase prior to the start of the day's delivery schedule, the jobber is short the market. An increase in spot prices will decrease profit margins. A very simple strategy would be to buy physical product and sell an equal amount in futures or options contracts, when spot basis is unusually low. Allowing spot basis to rise to satisfactory profit margins, then buying back the contracts and selling the physical product, will juice profit margins.
The last strategy tool in the fuel buyer's arsenal, buying forward, requires accurate macroeconomic forecasting. Buying forward contracts whether they be indexed or fixed price based, will pay huge dividends if the timing is right. The risk of entering the contracts at the wrong time may be offset by staggering effective dates and utilizing a variety of combinations of indexed and fixed price contracts.
No wholesale fuel buyer has a crystal ball on the future. However, every fuel buyer has many opportunities to implement profit enhancing strategies which will add value to each gallon sold.
Saturday, November 14, 2009
Strange Times Creating Stranger Correlations
As the energy complex has emerged from the ashes of the financial meltdown, strange correlations have developed. Stock prices and treasury yields, normally moving in opposite directions, are both moving higher together. Consumer discretionary stocks and energy prices, normally inversely correlated have recently been moving higher together. Will market participants be able to continue keying off these unusual relationships in the months ahead to improve trading profits?
In a normal economic environment, higher energy prices trigger discretionary consumer stocks lower. When consumers have to pay more for gas, they cut back on non-essential goods. However, a very unusual correlation developed since crude prices bottomed out on March 9th of this year. The price of crude and the price of consumer discretionary stocks have risen in tandem. Crude has risen 60% off this year's lows. The S&P consumer discretionary sector has risen 80%.
One of the main reasons we are seeing unusual correlations, such as treasury yields and stock prices both moving higher, is directly due to the Federal Reserve's flood of liquidity. When the economic recovery begins gaining traction and the Fed pulls back on liquidity, correlations will begin to return to normalcy. Until that happens, these strange correlations will continue and astute traders will be able to squeeze a little more juice out of their trades.
One major caveat for energy traders to heed. Commodities always eventually price back to supply and demand. Always have a hedging strategy in place or ready to implement when these fundamental forces return.
In a normal economic environment, higher energy prices trigger discretionary consumer stocks lower. When consumers have to pay more for gas, they cut back on non-essential goods. However, a very unusual correlation developed since crude prices bottomed out on March 9th of this year. The price of crude and the price of consumer discretionary stocks have risen in tandem. Crude has risen 60% off this year's lows. The S&P consumer discretionary sector has risen 80%.
One of the main reasons we are seeing unusual correlations, such as treasury yields and stock prices both moving higher, is directly due to the Federal Reserve's flood of liquidity. When the economic recovery begins gaining traction and the Fed pulls back on liquidity, correlations will begin to return to normalcy. Until that happens, these strange correlations will continue and astute traders will be able to squeeze a little more juice out of their trades.
One major caveat for energy traders to heed. Commodities always eventually price back to supply and demand. Always have a hedging strategy in place or ready to implement when these fundamental forces return.
Saturday, November 7, 2009
Anticipatory Hedging for Profit Margin Enhancement
In these times of extreme competitive retail pricing of refined petroleum products, fuel buyers need to find creative ways of enhancing profit margins. Being willing to take on appropriate cash price movement risk can be a creative profit strategy tool.
When a cash market participant has a very definitive position on future price movements, he would be wise to speculate by unhedging a small percentage of his cash position. The key to success is having a thorough understanding of local market historical pricing.
All successful trader/hedgers have access to local market cash pricing trends. When a proven re-occurring price pattern is discovered, determine what level of risk the firm is able to comfortably accommodate and allow a predetermined percentage of a cash position to ride with the market unhedged.
High probability, low risk trading is essential for giving your firm the competitive edge necessary to prosper in these difficult economic times.
When a cash market participant has a very definitive position on future price movements, he would be wise to speculate by unhedging a small percentage of his cash position. The key to success is having a thorough understanding of local market historical pricing.
All successful trader/hedgers have access to local market cash pricing trends. When a proven re-occurring price pattern is discovered, determine what level of risk the firm is able to comfortably accommodate and allow a predetermined percentage of a cash position to ride with the market unhedged.
High probability, low risk trading is essential for giving your firm the competitive edge necessary to prosper in these difficult economic times.
Sunday, November 1, 2009
Energy Risk Management and 13th Century Mathematician Leonardo of Pisa
Energy risk managers would have a much easier life if they knew for sure when one trend has ended and another has just begun. Are there any reliable tell tales that may help with this task?
The US dollar relationship with the energy complex, along with a 13th century Italian mathematician, Leonardo of Pisa, may provide the insight needed.
The energy complex has been moving this year in an inverse relationship with the US dollar.
This week the US dollar recovered most of October's losses, gaining 300 points vs. the euro. This retracement from $1.50 to the $1.47 handle coincides with a powerful Fibonacci ratio. Fibonacci ratios, explored and popularized by Leornado of Pisa's work, Liber Abaci, are powerful in currency trading because investors tend to take profits or put on new positions based upon whether the "Fib" ratio provided directional support or signaled continuation of a trend by not holding directional resistance.
Currency traders will be watching this $1.47 level to see whether the dollar can significantly close below this "Fib' support number, signalling the strengthening dollar will continue, and allowing traders to place trades ahead of the massive economic data coming out this week.
For traders who prefer ignoring the technical patterns and would rather rely strictly on the fundamentals, pay close attention to Federal Open Market Committee comments coming from Ben Bernanke on meetings ending Wednesday of this week. Any talk of interest rate increases, will send the US dollar sharply higher and energy prices lower.
The US dollar relationship with the energy complex, along with a 13th century Italian mathematician, Leonardo of Pisa, may provide the insight needed.
The energy complex has been moving this year in an inverse relationship with the US dollar.
This week the US dollar recovered most of October's losses, gaining 300 points vs. the euro. This retracement from $1.50 to the $1.47 handle coincides with a powerful Fibonacci ratio. Fibonacci ratios, explored and popularized by Leornado of Pisa's work, Liber Abaci, are powerful in currency trading because investors tend to take profits or put on new positions based upon whether the "Fib" ratio provided directional support or signaled continuation of a trend by not holding directional resistance.
Currency traders will be watching this $1.47 level to see whether the dollar can significantly close below this "Fib' support number, signalling the strengthening dollar will continue, and allowing traders to place trades ahead of the massive economic data coming out this week.
For traders who prefer ignoring the technical patterns and would rather rely strictly on the fundamentals, pay close attention to Federal Open Market Committee comments coming from Ben Bernanke on meetings ending Wednesday of this week. Any talk of interest rate increases, will send the US dollar sharply higher and energy prices lower.
Saturday, October 24, 2009
Rising Energy Prices Affect on Interest Rates
Higher wholesale fuel prices were noticeably passed along to retail end users this week, causing service stations throughout the country to raise retail gas and diesel prices. Other commodities including; sugar, gold, and copper, continue to print new yearly highs on a daily basis. The Federal Open Market Committee will be carefully monitoring this rise in commodity inflation for signs higher costs are penetrating core inflation.
Speculators are not waiting for more inflation data analysis. The May contract for Fed's funds futures are pricing in an 85% probability that the FOMC will raise interest rates 50 points in April.
The Fed is unlikely to make any interest rate move during its November 2nd and 3rd meeting. However, energy investors will want to pay close attention to any change in previous rhetoric signalling a rise in interest rates will be a viable consideration.
The Fed will not make a move until improved employment data and rising core inflation give them the go ahead. Historically the Fed has never raised interest rates until total unemployment, currently at 9.8%, began to decline. Continued rising commodity prices likely will force their hand to raise rates in April.
Speculators are not waiting for more inflation data analysis. The May contract for Fed's funds futures are pricing in an 85% probability that the FOMC will raise interest rates 50 points in April.
The Fed is unlikely to make any interest rate move during its November 2nd and 3rd meeting. However, energy investors will want to pay close attention to any change in previous rhetoric signalling a rise in interest rates will be a viable consideration.
The Fed will not make a move until improved employment data and rising core inflation give them the go ahead. Historically the Fed has never raised interest rates until total unemployment, currently at 9.8%, began to decline. Continued rising commodity prices likely will force their hand to raise rates in April.
Sunday, October 18, 2009
Energy Bulls Have Nothing to Fear From the Obama Administration
Crude and refined products broke out higher from well entrenched trading ranges this week. The catalyst was surprise inventory draws in gas and distillates. The underlying driving forces are low US interest rates to finance trades and a weak US dollar supporting energy prices.
The US Federal Open Market Committee should have learned the consequences of a weak US dollar when the dollar vs the euro was trading at $1.60 and crude at $147. On Friday crude closed at $78.47 and the dollar at $1.4967.
Quite simply, the Fed needs to raise interest rates now, or at least begin rhetoric advising it might be a near term consideration. Without any fear at all of an imminent interest rate hike, the dollar will continue to slide, trades will be financed on the cheap, and crude has nothing stopping it from cruising to $90 by year end.
The US Federal Open Market Committee should have learned the consequences of a weak US dollar when the dollar vs the euro was trading at $1.60 and crude at $147. On Friday crude closed at $78.47 and the dollar at $1.4967.
Quite simply, the Fed needs to raise interest rates now, or at least begin rhetoric advising it might be a near term consideration. Without any fear at all of an imminent interest rate hike, the dollar will continue to slide, trades will be financed on the cheap, and crude has nothing stopping it from cruising to $90 by year end.
Saturday, October 10, 2009
"Wee" Willie Keeler "I keep my eyes clear and hit 'em where they ain't."
"Wee" Willie Keeler played baseball for the New York Giants from 1892 to 1910. At 5'4" and 140 pounds, he was the smallest player ever in the major leagues. The bat he used was only 30 inches long and weighed 29 ounces. Similar size and weight as an eight year old boy's little league bat.
Amazingly he had a streak of eight seasons with 200 or more hits, matched only in later years by Pete Rose. When asked how he was able to accomplish this achievement Mr. Keeler stated, "I keep my eyes clear and hit 'em where they ain't." Successful energy option sellers strictly adhere to the same philosophy.
When selling energy options knowing where the underlying commodity price is going has value. Knowing whether the market is trending or range bound will help to gain a little extra premium on the sale. Vitally important, however, is knowing where the price is definitely not going.
Just as "Wee" Willie would scan the field to see where the opposing players were positioned, so too energy option sellers need to understand historical and seasonal price tendencies to have a high level of confidence that the sold option will expire unexercised and maximum profitability on the trade will be obtained.
Amazingly he had a streak of eight seasons with 200 or more hits, matched only in later years by Pete Rose. When asked how he was able to accomplish this achievement Mr. Keeler stated, "I keep my eyes clear and hit 'em where they ain't." Successful energy option sellers strictly adhere to the same philosophy.
When selling energy options knowing where the underlying commodity price is going has value. Knowing whether the market is trending or range bound will help to gain a little extra premium on the sale. Vitally important, however, is knowing where the price is definitely not going.
Just as "Wee" Willie would scan the field to see where the opposing players were positioned, so too energy option sellers need to understand historical and seasonal price tendencies to have a high level of confidence that the sold option will expire unexercised and maximum profitability on the trade will be obtained.
Saturday, October 3, 2009
Why Are Only 20% of Energy Commodities Traders Successful?
Most energy traders, professional and amateur, are drawn to energy commodities futures trading because they are aware of the potential for very large profits, using little capital. However, knowing the difference between potential profit and potential for profit is what separates skilled traders from the pack. This is especially true in energy commodities options trading.
Numerous studies have shown that 80% of commodities options expire worthless. While commercial traders may be offsetting these losses with gains on the physical product price movements, the vast majority of traders are unhedged and experiencing pure losses. The problem is that most traders plan a trade based solely on profit expectations and not on the probability of exiting the trade profitably.
Energy options traders are particularly vulnerable to this trap. The leveraged based margin requirements of commodities allows a trader to control a large position using relatively small premium. Traders will often receive additional incentive from their options broker reminding clients that the risk in buying a put or call is limited to the premium paid.
The problem is that the options buyer is not much different than someone trying to beat the house in Las Vegas. That is why I prefer to be the house by selling options, rather than trying to beat the house by buying options.
By selling options, I am limiting the potential for profits. I am also exposing myself to unlimited risk. However the reason this strategy works so well is that I have improved my probability of success to 80%.
Just like the Vegas casinos I have to have enough capital on hand so I can pay out the occasional losing trades. However, by carefully monitoring the market I am trading, I am able to limit these losses by exiting losing trades early and allowing the winning trades to provide a steady income stream.
Numerous studies have shown that 80% of commodities options expire worthless. While commercial traders may be offsetting these losses with gains on the physical product price movements, the vast majority of traders are unhedged and experiencing pure losses. The problem is that most traders plan a trade based solely on profit expectations and not on the probability of exiting the trade profitably.
Energy options traders are particularly vulnerable to this trap. The leveraged based margin requirements of commodities allows a trader to control a large position using relatively small premium. Traders will often receive additional incentive from their options broker reminding clients that the risk in buying a put or call is limited to the premium paid.
The problem is that the options buyer is not much different than someone trying to beat the house in Las Vegas. That is why I prefer to be the house by selling options, rather than trying to beat the house by buying options.
By selling options, I am limiting the potential for profits. I am also exposing myself to unlimited risk. However the reason this strategy works so well is that I have improved my probability of success to 80%.
Just like the Vegas casinos I have to have enough capital on hand so I can pay out the occasional losing trades. However, by carefully monitoring the market I am trading, I am able to limit these losses by exiting losing trades early and allowing the winning trades to provide a steady income stream.
Saturday, September 26, 2009
How Will the Iranian/US Tension Affect the Energy Complex?
This week crude bears were finally able to break support, taking near month crude futures out below short term trading ranges. Bulls came back into the market Friday defending the $65 support level. However, energy option put buying on HO, RBOB and CL, have dramatically increased, indicating fear of a continuing down trend. Will Iranian nuclear negotiations next month reverse these fears?
The G20 meetings this week ended on a sour note with President Obama coming forward with accusations Iran is producing enriched uranium at a previously undisclosed facility. The month of October will continue with back and forth verbal attacks, with little progress towards a resolution, unless China and France back Obama's call for stronger sanctions.
Since Iran is less than 3% of world crude production, current over supply will easily make up for any lost barrels on the market. The greater concern is a decrease in Nigerian low sulfur crude production.
Nigeria produces 13% of world low sulfur crude. Low sulfur or "sweet crude" is preferred by refiners as production costs are less than the more plentiful high sulfur crude or "sour crude". Many refiners are are not capable of cracking sour crude into petroleum products.
Nigerian sweet crude production is down one million barrels per day vs 2005 levels.
Refineries in Nigeria have been cutting production and closing facilities due to political unrest and lower demand. Any increased violence in this area will create a return to 2008 bottlenecks of world sweet crude supply resulting in increased prices for crude and petroleum products.
This is not to down play the seriousness of the tension in Iran. Should verbiage escalate into actual physical conflict, crude will be well on its way back to $100. The greater probability is for shortages of sweet crude keeping energy complex futures firm.
The G20 meetings this week ended on a sour note with President Obama coming forward with accusations Iran is producing enriched uranium at a previously undisclosed facility. The month of October will continue with back and forth verbal attacks, with little progress towards a resolution, unless China and France back Obama's call for stronger sanctions.
Since Iran is less than 3% of world crude production, current over supply will easily make up for any lost barrels on the market. The greater concern is a decrease in Nigerian low sulfur crude production.
Nigeria produces 13% of world low sulfur crude. Low sulfur or "sweet crude" is preferred by refiners as production costs are less than the more plentiful high sulfur crude or "sour crude". Many refiners are are not capable of cracking sour crude into petroleum products.
Nigerian sweet crude production is down one million barrels per day vs 2005 levels.
Refineries in Nigeria have been cutting production and closing facilities due to political unrest and lower demand. Any increased violence in this area will create a return to 2008 bottlenecks of world sweet crude supply resulting in increased prices for crude and petroleum products.
This is not to down play the seriousness of the tension in Iran. Should verbiage escalate into actual physical conflict, crude will be well on its way back to $100. The greater probability is for shortages of sweet crude keeping energy complex futures firm.
Saturday, September 19, 2009
Event Anticipative Energy Trading
Successful energy traders maintain their edge by knowing what potential market moving events will occur during a particular week. Some will anticipate outcomes placing trades prior to the events. Others will wait until the results are known.
The market moving events scheduled for this week include Wednesday's Federal Reserve meeting and Thursday's and Friday's G20 meeting in Pittsburgh.
Should the Fed or G20 surprise with news that stimulative programs, including low interest rates, are no longer necessary, look for market participants to quickly sell out of long positions, taking the energy complex down quickly.
This scenario is highly unlikely to become reality as governments want to see unemployment numbers improving before even thinking about fighting inevitalbe future inflation.
In anticipation of this week's events, crude traders will likely begin the week hoping for a pull back to $70 and then begin putting on long positions for the ride to $75.
The market moving events scheduled for this week include Wednesday's Federal Reserve meeting and Thursday's and Friday's G20 meeting in Pittsburgh.
Should the Fed or G20 surprise with news that stimulative programs, including low interest rates, are no longer necessary, look for market participants to quickly sell out of long positions, taking the energy complex down quickly.
This scenario is highly unlikely to become reality as governments want to see unemployment numbers improving before even thinking about fighting inevitalbe future inflation.
In anticipation of this week's events, crude traders will likely begin the week hoping for a pull back to $70 and then begin putting on long positions for the ride to $75.
Thursday, September 10, 2009
China's Liu Xinhua Assures Energy Markets
Liu Xinhua, Vice Chairman of China Securities Regulatory Commission, assured energy markets by saying China will seek to promote a stable and healthy market place. His comments alleviated concerns certain Chinese state owned companies would default on heavily out of the money hedge positions.
Free now from fear of counter party concerns, energy traders have been focused on US dollar weakness. The dollar is making almost daily lows vs the euro giving crude traders confidence in long positions.
With EIA inventories showing a large draw in US crude supplies last week, fewer traders will be comfortable on the short side.
Free now from fear of counter party concerns, energy traders have been focused on US dollar weakness. The dollar is making almost daily lows vs the euro giving crude traders confidence in long positions.
With EIA inventories showing a large draw in US crude supplies last week, fewer traders will be comfortable on the short side.
Tuesday, September 1, 2009
Potential China Derivative Contract Defaults
Crude is having a swift fall from yearly highs. Investors looking for the reason are pointing to China owned commodity derivative contracts, currently deeply out of the money.
It was China's buying of commodities that led crude to its yearly highs. Rumours are now circulating that several state owned China entities may walk away from hedging bets put on prior to the collapse of the world wide economy.
The total amount of derivative contracts at jeopardy is not known, but counter parties at risk advise the dollar amount is substantial.
If the rumours turn out to be true, world banking will be in for another round of losses; crude and the refined products will continue to sink.
It was China's buying of commodities that led crude to its yearly highs. Rumours are now circulating that several state owned China entities may walk away from hedging bets put on prior to the collapse of the world wide economy.
The total amount of derivative contracts at jeopardy is not known, but counter parties at risk advise the dollar amount is substantial.
If the rumours turn out to be true, world banking will be in for another round of losses; crude and the refined products will continue to sink.
Sunday, August 23, 2009
Euro Euphoria "Don't Dream It's Over"
Neil Finn of Crowded House wrote a song, "Don't Dream It's Over", that would be a fitting motto for the huge sums of money flowing into euro and crude futures.
This euro euphoria is destroying all currencies in its path.
To put it plainly, there is no fear of a stronger US dollar derailing resumption of the pre-great recession era trading arb of selling the dollar and buying commodities, specifically crude and gold.
There are very few contrarians willing to jump in front of this train by going short the euro, crude or gold. And with two more months of the US Treasury increasing bond supply, there are few fundamental arguments left for a strengthening US dollar. Also, Ben Bernanke has confirmed that there will be no increasing of Fed Fund interest rates anytime in the near future.
There will be occasional pull backs as high frequency traders move in and out of the market to capture profits or reverse commodity short positions to long. Take advantage of these down moves and "Don't Dream It's Over."
This euro euphoria is destroying all currencies in its path.
To put it plainly, there is no fear of a stronger US dollar derailing resumption of the pre-great recession era trading arb of selling the dollar and buying commodities, specifically crude and gold.
There are very few contrarians willing to jump in front of this train by going short the euro, crude or gold. And with two more months of the US Treasury increasing bond supply, there are few fundamental arguments left for a strengthening US dollar. Also, Ben Bernanke has confirmed that there will be no increasing of Fed Fund interest rates anytime in the near future.
There will be occasional pull backs as high frequency traders move in and out of the market to capture profits or reverse commodity short positions to long. Take advantage of these down moves and "Don't Dream It's Over."
Saturday, August 15, 2009
The $75 Billion Bond Feast
Weak retail sales and consumer confidence data this week created a huge appetite for bond buyers. $75 billion in US bonds were well covered creating a rise in bond prices and fall in bond yields.
Investor consensus is that the US consumer is not in a position, or has the desire to spend aggressively as in prior recession recovery periods. This should enable the treasury to complete its remaining bond sales in the next few months without much difficulty, as institutional investors will seek the safety of bonds.
Crude broke $68 support on the poor consumption data. Traders long on commodity play currencies were forced to sell their long positions and buy the dollar, causing the dollar to close the week strong vs the euro.
This week look for crude to try to carve out support in the $65 area. Barring any hurricanes arriving in the gulf this week, gas and distillate futures will also seek the least resistant path lower.
Investor consensus is that the US consumer is not in a position, or has the desire to spend aggressively as in prior recession recovery periods. This should enable the treasury to complete its remaining bond sales in the next few months without much difficulty, as institutional investors will seek the safety of bonds.
Crude broke $68 support on the poor consumption data. Traders long on commodity play currencies were forced to sell their long positions and buy the dollar, causing the dollar to close the week strong vs the euro.
This week look for crude to try to carve out support in the $65 area. Barring any hurricanes arriving in the gulf this week, gas and distillate futures will also seek the least resistant path lower.
Saturday, August 8, 2009
U.S. Dollar Exuberance
Energy traders were taken by surprise this Friday. Not by the better than expected unemployment data. Rather it was the reaction by currency traders to the good news.
For the first time since the collapse of Lehman Brothers, the U.S. dollar staged a rally on good economic news. Currency traders have begun to price in a rise in US interest rates occurring sooner than previously anticipated. Until Friday, any surprise good news on the economy has met with buying of the euro and selling the US dollar.
The unexpected strength of the US dollar brought the energy complex to its knees.
This week will be a great test of dollar bull's trading plans, as the US Treasury will again be flooding the market with bonds. Any weakness in demand for the bonds send bond prices lower, giving dollar bears the opportunity to mount a come back..
For the first time since the collapse of Lehman Brothers, the U.S. dollar staged a rally on good economic news. Currency traders have begun to price in a rise in US interest rates occurring sooner than previously anticipated. Until Friday, any surprise good news on the economy has met with buying of the euro and selling the US dollar.
The unexpected strength of the US dollar brought the energy complex to its knees.
This week will be a great test of dollar bull's trading plans, as the US Treasury will again be flooding the market with bonds. Any weakness in demand for the bonds send bond prices lower, giving dollar bears the opportunity to mount a come back..
Saturday, August 1, 2009
Really Gross Domestic Product
It was a roller coaster for energy traders this week. Crude and refined products fell sharply following Wednesday's DOE inventories report. Then proceeded to finish the week with a strong two day rally on hopes the presumed recovery will stimulate demand.
Energy bulls are betting heavy that the low inventory numbers and lower company operating expenses are creating leverage that will catapult production higher. One problem with this theory is that most of our production has moved overseas. If demand for products does increase, our imports will need to increase, contributing to decreased GDP numbers for Q3.
The key to long term GDP growth is to increase our exports. This is unlikely to happen in the near future, but as the US$ continues to weaken, our exports will be in greater demand.
Traders will be watching this week to see if the euro can finally break through $1.43 resistance vs. the US$. A break above this figure will have crude traders gunning for $73 with gas and distillates following the least resistance path higher.
Energy bulls are betting heavy that the low inventory numbers and lower company operating expenses are creating leverage that will catapult production higher. One problem with this theory is that most of our production has moved overseas. If demand for products does increase, our imports will need to increase, contributing to decreased GDP numbers for Q3.
The key to long term GDP growth is to increase our exports. This is unlikely to happen in the near future, but as the US$ continues to weaken, our exports will be in greater demand.
Traders will be watching this week to see if the euro can finally break through $1.43 resistance vs. the US$. A break above this figure will have crude traders gunning for $73 with gas and distillates following the least resistance path higher.
Sunday, July 26, 2009
T-Bond Sales Tsunami Coming
This week the US Treasury will flood the bond market with sales of short and long term bonds.
Energy traders will be very alert to bond buying coverage. Should the demand for bonds fall short of expectations, watch for the US dollar to continue its fall vs. the euro, paving the way for more gains on crude and refined products.
The bond sales by the US government are coming at a time when world wide equity markets are on the rise and general consensus has shifted to an improving world wide economy. This will further dampen demand for, "flight to safety," US bonds and cause bond yields to rise.
Investors will tend to favor the recent trend in allocating more funds to equities and commodities, seeking diversification to avoid certain inflation.
Energy investors should increase long positions on any pull backs.
Energy traders will be very alert to bond buying coverage. Should the demand for bonds fall short of expectations, watch for the US dollar to continue its fall vs. the euro, paving the way for more gains on crude and refined products.
The bond sales by the US government are coming at a time when world wide equity markets are on the rise and general consensus has shifted to an improving world wide economy. This will further dampen demand for, "flight to safety," US bonds and cause bond yields to rise.
Investors will tend to favor the recent trend in allocating more funds to equities and commodities, seeking diversification to avoid certain inflation.
Energy investors should increase long positions on any pull backs.
Sunday, July 19, 2009
Equities Saying Goodbye to the Recession
This week most equity investors bid their farewell to the recession. Everyone from JP Morgan Chase to Merrill Lynch boldly announced not only that the recession is over, but that growth recovery has begun. Should they be using more caution?
Equity investors make their money by predicting the future. Future earnings growth, to be specific. Generally they are looking six to twelve months ahead of the present to determine which companies will be the leaders in generating income. Yet it was a look into the past that sparked equities higher.
Goldman Sachs and JP Morgan blew away Q2 earning per share expectations. This was all investors needed to assure themselves that the banking problems are behind and solid growth can be expected.
The news this week had disappointments with CIT announcing bankruptcy is imminent. Also, Bank of America declared that difficulties still lie ahead with problem loans. Investors did not blink an eye at these warnings and continued to buy heavily on the price dips.
Energy complex traders fed off the excitement in equities and the falling US dollar to drive crude, gasoline and distillate futures higher.
All indications point to the equity trader's optimism to be justified. Energy investors would be best served by accepting the recovery is coming and base trades on a bull trend strategy. Caution and patience will be needed in waiting for pull back down days and not to chase the market at daily highs.
Equity investors make their money by predicting the future. Future earnings growth, to be specific. Generally they are looking six to twelve months ahead of the present to determine which companies will be the leaders in generating income. Yet it was a look into the past that sparked equities higher.
Goldman Sachs and JP Morgan blew away Q2 earning per share expectations. This was all investors needed to assure themselves that the banking problems are behind and solid growth can be expected.
The news this week had disappointments with CIT announcing bankruptcy is imminent. Also, Bank of America declared that difficulties still lie ahead with problem loans. Investors did not blink an eye at these warnings and continued to buy heavily on the price dips.
Energy complex traders fed off the excitement in equities and the falling US dollar to drive crude, gasoline and distillate futures higher.
All indications point to the equity trader's optimism to be justified. Energy investors would be best served by accepting the recovery is coming and base trades on a bull trend strategy. Caution and patience will be needed in waiting for pull back down days and not to chase the market at daily highs.
Saturday, July 11, 2009
'Tis The Season
Successful equity and commodity investors find that trading ideas are best analyzed through fundamental, technical, or a combination of these two techniques. For energy sector investors a third technique should be added to their arsenal, seasonal trends.
Seasonal analysis involves looking for price movements that tend to occur on a repetitive basis during a particular given time frame for a given market or sector.
The most important aspect of seasonal trading is to not expect a given seasonal trend to magically produce profits every time around. Instead, traders should use a seasonal trend as a catalyst and then make reasonable decisions regarding risk management and trade selection to exploit the potentially profitable situation.
Over the past two decades, the energy sector has demonstrated a strong seasonal tendency to advance during the late-winter, early-spring time period. By late winter, the supply of raw energy products may be running low and production may be gearing up for the upcoming summer driving season. This seasonal low supply, high demand phenomenon creates an excellent trading set up.
A couple of low cost ways to capture this trend is to buy an energy equity mutual fund such as the Fidelity Select Energy Fund (FSNEX), or buying an ETF such as the S&P Select Energy SPDR Fund (XLE). Going back 21 years to 1989 to test this theory, 20 years would have been profitable, with an average annual rate of return at 10.8%, by buying only in the months of March, April and May. In 2009 the return was a record 41.4%.
There is no way to know whether this trade will be profitable in any given year. Seven years in the above trading scenario produced returns of 3% or less. Because of this unknown and occasionally low annual rate of return, many investors who are aware of this trend will not invest. Others will be too over confident and fail to implement proper risk management in executing the trade. The investor who is aware of the risks and plans accordingly, will be rewarded with a high probability profit boost to his trading account.
Seasonal analysis involves looking for price movements that tend to occur on a repetitive basis during a particular given time frame for a given market or sector.
The most important aspect of seasonal trading is to not expect a given seasonal trend to magically produce profits every time around. Instead, traders should use a seasonal trend as a catalyst and then make reasonable decisions regarding risk management and trade selection to exploit the potentially profitable situation.
Over the past two decades, the energy sector has demonstrated a strong seasonal tendency to advance during the late-winter, early-spring time period. By late winter, the supply of raw energy products may be running low and production may be gearing up for the upcoming summer driving season. This seasonal low supply, high demand phenomenon creates an excellent trading set up.
A couple of low cost ways to capture this trend is to buy an energy equity mutual fund such as the Fidelity Select Energy Fund (FSNEX), or buying an ETF such as the S&P Select Energy SPDR Fund (XLE). Going back 21 years to 1989 to test this theory, 20 years would have been profitable, with an average annual rate of return at 10.8%, by buying only in the months of March, April and May. In 2009 the return was a record 41.4%.
There is no way to know whether this trade will be profitable in any given year. Seven years in the above trading scenario produced returns of 3% or less. Because of this unknown and occasionally low annual rate of return, many investors who are aware of this trend will not invest. Others will be too over confident and fail to implement proper risk management in executing the trade. The investor who is aware of the risks and plans accordingly, will be rewarded with a high probability profit boost to his trading account.
Saturday, July 4, 2009
Crude and Products Break Support
The strengthening US dollar helped to bring crude and refined products below support levels last week. Gas futures led the way by breaking $1.90. Crude followed gas future's lead by closing the week under $68.
The US dollar is being buoyed by a combination of continuing loss of jobs in the US and speculation the European Central Bank will be forced to lower interest rates to boost a very weak European economy. It is a short term flight to quality, that will likely see the euro back in demand by beginning of next year.
Gas prices historically tend to drift lower after the 4th of July weekend's peak driving season. The probability of the lower trend continuing is strengthened by weak demand for gas and diesel. However, stay tuned to the weather forecasts. It only takes one major hurricane in the gulf to swing the market.
The US dollar is being buoyed by a combination of continuing loss of jobs in the US and speculation the European Central Bank will be forced to lower interest rates to boost a very weak European economy. It is a short term flight to quality, that will likely see the euro back in demand by beginning of next year.
Gas prices historically tend to drift lower after the 4th of July weekend's peak driving season. The probability of the lower trend continuing is strengthened by weak demand for gas and diesel. However, stay tuned to the weather forecasts. It only takes one major hurricane in the gulf to swing the market.
Saturday, June 20, 2009
Inflation On Hold for Now
A bit of inflation relief on lower than expected wholesale and consumer prices helped continue a near term shift in the selling the dollar/buying commodities arbitrage trade. How long will it continue?
The lower inflation data gives the Fed more time to stimulate the economy before it will need to raise interest rates. Traders realizing this, began taking profits, helping the dollar to rebound.
RBOB futures led the energy complex lower this past week. Gas inventories showed a greater than expected build leading to a sell off below $2.00 support. Traders will be watching crude's support at $69. Should it give way, we will likely see a further pull back in the complex.
Traders will also be closely watching this week's inventories looking for another large build in gas. RBOB will receive some support for falling prices by the 4th of July driving patterns and as we enter further into the hurricane season. The Iranian protests have the potential to drive the complex higher should the Iranian government increase aggression.
Inflation will eventually take hold in the US. The beginning of price increases has been temporarily delayed. Longer term traders will be looking to take this temporary pull back to put the US$/commodities arb positions back on.
The lower inflation data gives the Fed more time to stimulate the economy before it will need to raise interest rates. Traders realizing this, began taking profits, helping the dollar to rebound.
RBOB futures led the energy complex lower this past week. Gas inventories showed a greater than expected build leading to a sell off below $2.00 support. Traders will be watching crude's support at $69. Should it give way, we will likely see a further pull back in the complex.
Traders will also be closely watching this week's inventories looking for another large build in gas. RBOB will receive some support for falling prices by the 4th of July driving patterns and as we enter further into the hurricane season. The Iranian protests have the potential to drive the complex higher should the Iranian government increase aggression.
Inflation will eventually take hold in the US. The beginning of price increases has been temporarily delayed. Longer term traders will be looking to take this temporary pull back to put the US$/commodities arb positions back on.
Saturday, June 6, 2009
US$/Euro and Its Seven Year Influence on Oil
Since 2002 the euro has trended steadily higher versus the U.S. dollar. The same is true of the price of a barrel of oil versus the U.S. dollar. Recognition of the inverse correlation between the falling U.S dollar and the rising price of oil has been used by professional investors to profitable advantage for the past seven years. The correlation pattern will not only continue, the strength of the correlation will increase.
Investors must have an advantage over other market participants in order to enjoy lower risk and higher return on investments. There has been no better barometer of crude market direction than its correlation to the currency pairing value of the euro vs US$. This relationship was most evident in September of 2008 with the destruction of Lehman Brothers. The correlation coefficient reached an all time high of .93. Investors alert to the rapid rise in the strength of the dollar knew crude had much further to fall.
Investors must be aware that although crude and the dollar move inversely, the movement alerts to trend direction not exact price movements. Yesterday, the US$ rose almost 300 points vs the euro. However, crude along with gas and diesel futures remained flat to slightly higher on the trading session. This price action also indicates that the energy complex is anticipating a rebound in the euro.
There are literally hundreds of factors affecting the price of crude each day. The key to successful investing is knowing which factors will have the greatest influence. Staying alert to directional price movements of the euro/US$ currency pair will give the investor the competitive advantage needed to maintain sufficient return on capital.
Investors must have an advantage over other market participants in order to enjoy lower risk and higher return on investments. There has been no better barometer of crude market direction than its correlation to the currency pairing value of the euro vs US$. This relationship was most evident in September of 2008 with the destruction of Lehman Brothers. The correlation coefficient reached an all time high of .93. Investors alert to the rapid rise in the strength of the dollar knew crude had much further to fall.
Investors must be aware that although crude and the dollar move inversely, the movement alerts to trend direction not exact price movements. Yesterday, the US$ rose almost 300 points vs the euro. However, crude along with gas and diesel futures remained flat to slightly higher on the trading session. This price action also indicates that the energy complex is anticipating a rebound in the euro.
There are literally hundreds of factors affecting the price of crude each day. The key to successful investing is knowing which factors will have the greatest influence. Staying alert to directional price movements of the euro/US$ currency pair will give the investor the competitive advantage needed to maintain sufficient return on capital.
Tuesday, June 2, 2009
Banking on Bakken
The North American Bakken oil field has been reported to contain up to 500 billion barrels of oil. If true, this would be the single largest oil deposit in the world.
Located in the Rocky Mountains on the Montana and North Dakota borders, the Bakken oil field has been extensively studied and extensively promoted as a solution to U.S. energy supply needs.
The spread out nature of the oil in this formation makes recovering it an expensive task. Those areas where there is some pooling of oil have already been drilled and developed and to date 105 million barrels of oil have come from the site. A recent report from the United States Geological Survey (USGS) has predicted that a maximum of 4.3 billion barrels of oil can be extracted from the area using conventional technology. Possible technology developments such as horizontal drilling may increase this somewhat. The figure for the amount of recoverable oil in the Bakken formation contrasts sharply with the amount predicted to be present. In 1999 the USGS estimated the total volume of oil in the formation to be in the range of 413 billion barrels.
Located in the Rocky Mountains on the Montana and North Dakota borders, the Bakken oil field has been extensively studied and extensively promoted as a solution to U.S. energy supply needs.
The spread out nature of the oil in this formation makes recovering it an expensive task. Those areas where there is some pooling of oil have already been drilled and developed and to date 105 million barrels of oil have come from the site. A recent report from the United States Geological Survey (USGS) has predicted that a maximum of 4.3 billion barrels of oil can be extracted from the area using conventional technology. Possible technology developments such as horizontal drilling may increase this somewhat. The figure for the amount of recoverable oil in the Bakken formation contrasts sharply with the amount predicted to be present. In 1999 the USGS estimated the total volume of oil in the formation to be in the range of 413 billion barrels.
What then can we make of the claims that this oil field is the solution to America's oil problems, and that development of this field will hail the return of cheap gasoline in the US?
The 4.3 billion barrels of oil available in this area must be seen in context. The United States presently uses somewhere in the vicinity of 7 billion barrels of oil each year, meaning that all the oil readily able to be extracted from this formation would last the US less than eight months. This is in contrast to Saudi oil production which is over 8 billion barrels a year and will continue to be so for some time.
The remainder of the oil in the formation cannot be accessed without great effort and expense. Due to this it is highly unlikely that the field will be developed in a major way until oil prices are so high and demand is so great that there is no alternative.
Clearly the Bakken oil field does not qualify as "the next oil boom". Caution must be exercised when considering investing any money in projects that make improper use of the USGS reports on this formation's oil bearing capacity.
Monday, May 25, 2009
The Return of Peak Oil
There has not been much talk of crude production hitting its peak during this recession. The evidence now is real. Investors will need to examine the proof carefully.
According to Marshall Adkins with Raymond James, global oil production peaked in the first quarter of 2008. What is the evidence? OPEC oil production reached a high point in the first quarter of last year, while non-OPEC production peaked even earlier in 2007. Worldwide, total oil production rose to its highest level to date in 1Q2008 (approx. 79.3mmbpd).
Mr. Adkins explains, "It is entirely intuitive to conclude that if both OPEC and non-OPEC production posted declines against the backdrop of $100 plus oil, when the obvious economic incentive was to pump full blast, those declines had to have come for involuntary reasons, such as the inherent geological limits of oil fields."
Marshall Adkins is right on with his reasoning. Why would countries or companies curb production when they could make so much money by producing more oil?
Energy demands have declined, but the reality is they will eventually come back. The supply of oil will then be inadequate to sustain the increased demand.
The fundamental reality is that oil is scarce . Oil producers will be hard pressed to keep up with future demand. E&P companies will be drilling everywhere possible. However, because most drillers cut exploration and production during the recession, they will be behind the demand supply curve. Investors will continue to see the price of crude going higher for years to come.
According to Marshall Adkins with Raymond James, global oil production peaked in the first quarter of 2008. What is the evidence? OPEC oil production reached a high point in the first quarter of last year, while non-OPEC production peaked even earlier in 2007. Worldwide, total oil production rose to its highest level to date in 1Q2008 (approx. 79.3mmbpd).
Mr. Adkins explains, "It is entirely intuitive to conclude that if both OPEC and non-OPEC production posted declines against the backdrop of $100 plus oil, when the obvious economic incentive was to pump full blast, those declines had to have come for involuntary reasons, such as the inherent geological limits of oil fields."
Marshall Adkins is right on with his reasoning. Why would countries or companies curb production when they could make so much money by producing more oil?
Energy demands have declined, but the reality is they will eventually come back. The supply of oil will then be inadequate to sustain the increased demand.
The fundamental reality is that oil is scarce . Oil producers will be hard pressed to keep up with future demand. E&P companies will be drilling everywhere possible. However, because most drillers cut exploration and production during the recession, they will be behind the demand supply curve. Investors will continue to see the price of crude going higher for years to come.
Saturday, May 16, 2009
Scrap Cap and Trade
Under the guise of regulating industries that generate greenhouse gases, the Obama administration is aggressively pushing an approach called, "Cap and Trade".
The idea is to limit the amount of emissions a company produces. A noble idea. The problem is the method Washington is seeking to implement.
The plan being promoted would require companies to purchase emission credits should they exceed their capped emission limit. The Congressional Budget Office is projecting revenues generated from this proposed bill at a minimum of $50 billion per year, and could quite easily reach $300 billion.
With those kind of revenue dollars at stake, look for the Obama administration to push hard for this legislation. They will then be able to use this backdoor tax on business to pursue their other societal agendas.
The greater concern with this type of legislation is that it will add cost to doing business for any company involved with fossil fuels. Although there appears to be signs of economic recovery, the economy is still stagnant and experiencing lots of pain. American companies will find themselves at a disadvantage as it will become necessary to pass on these additional costs to consumers.
Companies consuming fossil fuels will be more than willing to adapt to new energy sources when the market place provides the new alternatives. Until viable new technologies emerge, it is best that Washington not do further damage to a highly fragile economy by enacting "Cap and Trade".
The idea is to limit the amount of emissions a company produces. A noble idea. The problem is the method Washington is seeking to implement.
The plan being promoted would require companies to purchase emission credits should they exceed their capped emission limit. The Congressional Budget Office is projecting revenues generated from this proposed bill at a minimum of $50 billion per year, and could quite easily reach $300 billion.
With those kind of revenue dollars at stake, look for the Obama administration to push hard for this legislation. They will then be able to use this backdoor tax on business to pursue their other societal agendas.
The greater concern with this type of legislation is that it will add cost to doing business for any company involved with fossil fuels. Although there appears to be signs of economic recovery, the economy is still stagnant and experiencing lots of pain. American companies will find themselves at a disadvantage as it will become necessary to pass on these additional costs to consumers.
Companies consuming fossil fuels will be more than willing to adapt to new energy sources when the market place provides the new alternatives. Until viable new technologies emerge, it is best that Washington not do further damage to a highly fragile economy by enacting "Cap and Trade".
Saturday, May 9, 2009
The 10 Year Note Is Our Inflation Canary in the Cave
Crude futures are up 80% from their $32 low this year. The main drivers of this upward trend has been a combination of increased demand from China, and investors using crude as a hedge against inflation.
China's economic stimulus package is focused heavily on infrastructure spending. Huge government projects to build roads, pipelines and bridges, helped drive the Baltic Dry Index up over 100% to its current 2211. China is also storing vast amounts of crude at what they perceive are low prices.
Investors in crude are also driving prices higher as they seek protection from certain coming inflation. The 10 year treasury yield is now up to 3.3% from 2.5% just a few weeks ago.
A 6% yield on the 10 year note is when things will get very interesting. Investors will find equities not worth the risk, if they can lock in a 6% return by owning debt. Also, should interest rates continue their climb, the US Treasury will find it even more expensive to cover the budget deficit. This will lead to more purchase of debt by the Treasury to try to hold interest rates down. The printing of money in this fashion will lead to higher inflation, which will continue to support higher crude prices.
China's economic stimulus package is focused heavily on infrastructure spending. Huge government projects to build roads, pipelines and bridges, helped drive the Baltic Dry Index up over 100% to its current 2211. China is also storing vast amounts of crude at what they perceive are low prices.
Investors in crude are also driving prices higher as they seek protection from certain coming inflation. The 10 year treasury yield is now up to 3.3% from 2.5% just a few weeks ago.
A 6% yield on the 10 year note is when things will get very interesting. Investors will find equities not worth the risk, if they can lock in a 6% return by owning debt. Also, should interest rates continue their climb, the US Treasury will find it even more expensive to cover the budget deficit. This will lead to more purchase of debt by the Treasury to try to hold interest rates down. The printing of money in this fashion will lead to higher inflation, which will continue to support higher crude prices.
Saturday, May 2, 2009
Proposed Transaction Taxation Bill
Traders are in the cross hairs of newly proposed congressional legislative bill proposals. The greatest harm could come from bill H.R. 1068, better known as, "Let Wall Street Pay for Wall Street's Bailout Act of 2009".
This bill would put a 0.25 percent tax on all securities transactions as a means to pay for the Troubled Tax Asset Relief Program (TARP). The proposal claims $150 billion a year could be raised. The bill goes on to state that the tax would have a negligible effect on the average investor.
In reality taxes have to be paid by someone. Robert Green rightly assessed in Active Trader, April 2009, "Ultimately , the financial-transaction tax could put thousands of traders out of business overnight...Entire Wall Street firms may simply shut down their proprietary trading desks, further drying up liquidity and making the U.S. markets less appealing to the rest of the world."
Less liquidity in the energy complex futures markets will mean greater volatility swings in crude, diesel and gasoline spot and futures prices. Individual traders, trading groups and hedge funds will move their trading away from US markets to more liquid foreign markets.
TARP eventually needs to be paid off. However, taxing transactions will not be the intelligent method to dispose of this liability.
This bill would put a 0.25 percent tax on all securities transactions as a means to pay for the Troubled Tax Asset Relief Program (TARP). The proposal claims $150 billion a year could be raised. The bill goes on to state that the tax would have a negligible effect on the average investor.
In reality taxes have to be paid by someone. Robert Green rightly assessed in Active Trader, April 2009, "Ultimately , the financial-transaction tax could put thousands of traders out of business overnight...Entire Wall Street firms may simply shut down their proprietary trading desks, further drying up liquidity and making the U.S. markets less appealing to the rest of the world."
Less liquidity in the energy complex futures markets will mean greater volatility swings in crude, diesel and gasoline spot and futures prices. Individual traders, trading groups and hedge funds will move their trading away from US markets to more liquid foreign markets.
TARP eventually needs to be paid off. However, taxing transactions will not be the intelligent method to dispose of this liability.
Friday, April 24, 2009
It Takes Two to Seasonally Contango
When crude futures pricing is upward sloping, prices in succeeding delivery months are progressively higher than in the nearest delivery month, investors refer to this type of market as contango. This is the normal state of the crude market, similar to the bond market's normally upward sloping yield curve. However, the economy has been anything but normal lately. Demand estimates for crude seem to be lowering each month. Why are we not seeing backwardation of the crude futures market, where prices in succeeding delivery months are progressively moving lower than the nearest delivery month?
The answer lies in understanding the seasonality of crude prices. There are many factors every day affecting crude pricing. The two most important this time of year supporting contango are the end of refinery maintenance season and the soon arrival of hurricane season.
Refiners of petroleum products take advantage of the end of winter heating season and lower car driving in the U.S.A. to lower production capacity of diesel and gasoline, so that they may perform routine maintenance on their facilities. Now it is time to ramp back up for agriculture, construction and increased summer driving. In order to produce more product, refiners must purchase more crude, which lowers supply and raises spot pricing as well as outer month futures, as end users seek to lock in contracted supply for the summer. We are seeing evidence of this from WTI crude stored in Cushing, OK finally beginning to record lower inventory supply, as the Midwest prepares for agricultural planting.
The other partner supporting crude contango is the weather man. Soon we will be receiving hurricane activity predictions for the 2009 hurricane season. Heavy users of diesel and gasoline in the southern states cannot afford to be without fuel supply due to a hurricane disruption. They begin locking in supply contracts now, with many locking in fixed pricing as well. This activity drives the outer months higher than near month futures.
Traders looking solely at fundamental current over supply will be tempted to short the near month spread. That trade may work if we receive another round of devastating economic news. The higher probability trade is to look at seasonal factors and plan your trading accordingly.
The answer lies in understanding the seasonality of crude prices. There are many factors every day affecting crude pricing. The two most important this time of year supporting contango are the end of refinery maintenance season and the soon arrival of hurricane season.
Refiners of petroleum products take advantage of the end of winter heating season and lower car driving in the U.S.A. to lower production capacity of diesel and gasoline, so that they may perform routine maintenance on their facilities. Now it is time to ramp back up for agriculture, construction and increased summer driving. In order to produce more product, refiners must purchase more crude, which lowers supply and raises spot pricing as well as outer month futures, as end users seek to lock in contracted supply for the summer. We are seeing evidence of this from WTI crude stored in Cushing, OK finally beginning to record lower inventory supply, as the Midwest prepares for agricultural planting.
The other partner supporting crude contango is the weather man. Soon we will be receiving hurricane activity predictions for the 2009 hurricane season. Heavy users of diesel and gasoline in the southern states cannot afford to be without fuel supply due to a hurricane disruption. They begin locking in supply contracts now, with many locking in fixed pricing as well. This activity drives the outer months higher than near month futures.
Traders looking solely at fundamental current over supply will be tempted to short the near month spread. That trade may work if we receive another round of devastating economic news. The higher probability trade is to look at seasonal factors and plan your trading accordingly.
Friday, April 17, 2009
NYMEX WTI Futures Divergence from Retail Gas
In January thru March of 2009 consumers witnessed retail gas prices move from an average $1.61 to $1.96, while NYMEX crude futures were range bound with no upward trend. How can this be possible?
Understanding this phenomenon requires knowing what type of oil the NYMEX futures are based. West Texas Intermediate (WTI), a light or sweet crude spec, with delivery at Cushing, OK, is the particular type of oil being traded on NYMEX. Local conditions at this delivery point, as well as larger market trends are mainly what is being reflected in the WTI futures price.
Therefore, the WTI NYMEX futures contract sometimes is not an accurate indicator of retail gas price movements.
There are two key elements in understanding how retail gas is priced. First, WTI is not the only kind of crude oil being refined in the United States to produce gas. Price rises in these other types crude accounted for half of the price increase in gas between January and March.
The other piece of the puzzle is overall supply and demand. Crude is used to make a variety of products. Overall demand for these other products will affect the price of crude and ultimately the price of gas. Gross gasoline margin, the difference between the wholesale (spot) price of gas and the spot price of crude, is the main indicator of divergence between the two markets.
In 2008 gas margins were weak, encouraging refiners to produce higher margin distillate products such as diesel. As supply of gas fell, gross gas margins began to increase in 2009. As a result, retail gas prices increased.
Retail gas prices will continue to depend on gross gas margins in 2009. However, as long as oil inventories at Cushing, OK continue to remain at historically high levels, the NYMEX WTI price may continue to be a misleading indicator for the price of retail gas.
Understanding this phenomenon requires knowing what type of oil the NYMEX futures are based. West Texas Intermediate (WTI), a light or sweet crude spec, with delivery at Cushing, OK, is the particular type of oil being traded on NYMEX. Local conditions at this delivery point, as well as larger market trends are mainly what is being reflected in the WTI futures price.
Therefore, the WTI NYMEX futures contract sometimes is not an accurate indicator of retail gas price movements.
There are two key elements in understanding how retail gas is priced. First, WTI is not the only kind of crude oil being refined in the United States to produce gas. Price rises in these other types crude accounted for half of the price increase in gas between January and March.
The other piece of the puzzle is overall supply and demand. Crude is used to make a variety of products. Overall demand for these other products will affect the price of crude and ultimately the price of gas. Gross gasoline margin, the difference between the wholesale (spot) price of gas and the spot price of crude, is the main indicator of divergence between the two markets.
In 2008 gas margins were weak, encouraging refiners to produce higher margin distillate products such as diesel. As supply of gas fell, gross gas margins began to increase in 2009. As a result, retail gas prices increased.
Retail gas prices will continue to depend on gross gas margins in 2009. However, as long as oil inventories at Cushing, OK continue to remain at historically high levels, the NYMEX WTI price may continue to be a misleading indicator for the price of retail gas.
Friday, April 10, 2009
The Importance of Transportation Indeces
Twelve years before the Dow Jones Industrial Average (DJIA) was conceived, Charles Dow relied on his Transportation Index to understand how the overall market was trending. Developed in 1884, and consisting mainly of railroad companies, the Dow Jones Transportation Index (DJTI), alerted investors to the overall strength of the economy.
Based on the concept,"if you make it, you gotta move it," the DJTI is still used by equity investors to confirm price trending of the DJIA. If the DJIA is moving up, and the DJTI is staying flat, or heading lower, the divergence of the indices indicates the DJIA movement higher is a head fake.
Another important index energy complex traders need also to closely observe is the Baltic Dry Index (BDI). Designed to track daily freight rates of dry commodity cargo ships, the BDI has great value in alerting investors to the beginning stages of economic slow downs, and the commencement of economic growth.
Energy traders who followed both the DJTI and the BDI were rewarded by knowing when world wide economic growth had peaked last year, and when the recovery began to take hold this year.
Based on the concept,"if you make it, you gotta move it," the DJTI is still used by equity investors to confirm price trending of the DJIA. If the DJIA is moving up, and the DJTI is staying flat, or heading lower, the divergence of the indices indicates the DJIA movement higher is a head fake.
Another important index energy complex traders need also to closely observe is the Baltic Dry Index (BDI). Designed to track daily freight rates of dry commodity cargo ships, the BDI has great value in alerting investors to the beginning stages of economic slow downs, and the commencement of economic growth.
Energy traders who followed both the DJTI and the BDI were rewarded by knowing when world wide economic growth had peaked last year, and when the recovery began to take hold this year.
Saturday, April 4, 2009
The US Treasury Impact on Crude Price Direction
The US Treasury will need to borrow $3.25 trillion this fiscal year, including sales to replace maturing securities. This will place significant over supply pressure on debt markets. Treasury notes dropped for a second week as investors show a growing concern over the vast supply coming on board.
The US Treasury is attempting to prop up the debt market by buying back $300 billion of supply. However, this is only delaying the inevitable rise in interest rates and decrease in debt prices, that will occur when the US ceases its debt buy back spending spree at fiscal year end six months from now .
Proof of trader skepticism is evident in the recent drops in T-notes the last two weeks, despite the first US Treasury debt buy backs since the 1960's.
Because of this enormous current account deficit, we are dependent upon foreign capital to increase demand for our debt. This presents an extremely bearish environment for the US dollar. Since crude pricing is in US dollars, a weaker dollar means a higher price will be paid for crude.
Crude supplies are at record peaks, with demand falling. However, alert traders are looking out six months ahead to when the Treasury fiscal year ends, and thus the end of debt buybacks. They are positioning themselves now for the inevitable US dollar weakness and energy complex bull run.
The US Treasury is attempting to prop up the debt market by buying back $300 billion of supply. However, this is only delaying the inevitable rise in interest rates and decrease in debt prices, that will occur when the US ceases its debt buy back spending spree at fiscal year end six months from now .
Proof of trader skepticism is evident in the recent drops in T-notes the last two weeks, despite the first US Treasury debt buy backs since the 1960's.
Because of this enormous current account deficit, we are dependent upon foreign capital to increase demand for our debt. This presents an extremely bearish environment for the US dollar. Since crude pricing is in US dollars, a weaker dollar means a higher price will be paid for crude.
Crude supplies are at record peaks, with demand falling. However, alert traders are looking out six months ahead to when the Treasury fiscal year ends, and thus the end of debt buybacks. They are positioning themselves now for the inevitable US dollar weakness and energy complex bull run.
Saturday, March 28, 2009
Energy Stocks Light the Way
Crude futures have been on a run since the start of the year. Bouncing off lows in the high 30's, crude tested the yearly high mark of $55 this week. Has the bull market returned?
Whether a particular market is bullish or bearish always depends upon the time frame of the price sequence being observed. Traders may be bullish on a 1 day price pattern, yet bearish on a 1 year pattern.
The inherent scarcity in crude supplies long term keeps the bulls in charge until a disrupting technology/ies, replaces crude as a base fuel stock. Therefore, traders will be looking to buy crude on price dips.
How does a trader now when a particular dip in crude will not dip even further? An excellent indicator is the price pattern of energy stocks. Energy stocks began declining well before crude hit its $149 high. Alert traders took advantage of this signal and began shorting crude. Over the past few months we began to see energy stocks move higher. Subsequently crude followed equities' lead.
Using the energy equity indicator, traders have a higher probability of successfully executing a bull trend strategy.
Whether a particular market is bullish or bearish always depends upon the time frame of the price sequence being observed. Traders may be bullish on a 1 day price pattern, yet bearish on a 1 year pattern.
The inherent scarcity in crude supplies long term keeps the bulls in charge until a disrupting technology/ies, replaces crude as a base fuel stock. Therefore, traders will be looking to buy crude on price dips.
How does a trader now when a particular dip in crude will not dip even further? An excellent indicator is the price pattern of energy stocks. Energy stocks began declining well before crude hit its $149 high. Alert traders took advantage of this signal and began shorting crude. Over the past few months we began to see energy stocks move higher. Subsequently crude followed equities' lead.
Using the energy equity indicator, traders have a higher probability of successfully executing a bull trend strategy.
Friday, March 20, 2009
Fed Fires Up Its Own Brand of March Madness
The U.S. Federal Reserve shocked the energy complex into life this week announcing it will buy $1.15 trillion in treasuries. The purchase will include $300 billion in long term bonds and the balance in mortgage debt. Their hope is the influx of cash into the economy will lower interest rates and stimulate consumer spending.
The surprise monetary policy announcement sent crude prices higher, as the US$ fell over 400 points vs the euro. Crude traders drove the front month contract to over $52. Highest price for crude since late 2008. Distillates and gas futures also improved on hopes of an improved economy creating stronger demand.
The gains this week in crude could be tempered by seasonal refinery maintenance shut downs. It also remains to be seen whether banks will significantly lower interest rates to consumers. Should the lenders continue to hoard, monetary velocity will not increase, thwarting the Fed's stimulus objective.
The surprise monetary policy announcement sent crude prices higher, as the US$ fell over 400 points vs the euro. Crude traders drove the front month contract to over $52. Highest price for crude since late 2008. Distillates and gas futures also improved on hopes of an improved economy creating stronger demand.
The gains this week in crude could be tempered by seasonal refinery maintenance shut downs. It also remains to be seen whether banks will significantly lower interest rates to consumers. Should the lenders continue to hoard, monetary velocity will not increase, thwarting the Fed's stimulus objective.
Sunday, March 15, 2009
OPEC Seeking Compliance From Members
OPEC's Vienna meeting concluded with members agreeing to make no adjustments to crude production levels. The focus turned to compliance with existing production cuts. OPEC states that full compliance will remove 800,000 bbls per day from the market.
The market will not be impressed with this rhetoric. The near month crude contract will not be able to break through $50 resistance on this news. Look for a bit of a sell off from today's meeting.
This week will be interesting to watch stronger correlations develop between equities and crude futures. Both are leading indicators, and both feed off each other in an improving economic environment.
The market will not be impressed with this rhetoric. The near month crude contract will not be able to break through $50 resistance on this news. Look for a bit of a sell off from today's meeting.
This week will be interesting to watch stronger correlations develop between equities and crude futures. Both are leading indicators, and both feed off each other in an improving economic environment.
Sunday, March 8, 2009
OPEC Decision Could Be a Short Set Up
We have seen a steady increase in the energy complex over the past five weeks.
Seems to be a bit counter intuitive with the steady news stream of continuing economic deterioration.
One of the major factors is the decreasing crude supply from record levels at Cushing, OK.
This has helped WTI to trade at a premium to Brent. “A lot of what we are seeing is a return to normality,” said Tim Evans, an energy analyst with Citi Futures Perspective in New York. “WTI needs to trade at a premium to Brent to attract the imports that we need.”
This week OPEC takes center stage as they are expected to announce potential further cutbacks in crude production. Near month crude futures will have the opportunity to test $50 resistance levels should the cuts surpass market expectations. Range traders will be looking to short at $50, hoping to ride the likely sell off back down to $40.
Seems to be a bit counter intuitive with the steady news stream of continuing economic deterioration.
One of the major factors is the decreasing crude supply from record levels at Cushing, OK.
This has helped WTI to trade at a premium to Brent. “A lot of what we are seeing is a return to normality,” said Tim Evans, an energy analyst with Citi Futures Perspective in New York. “WTI needs to trade at a premium to Brent to attract the imports that we need.”
This week OPEC takes center stage as they are expected to announce potential further cutbacks in crude production. Near month crude futures will have the opportunity to test $50 resistance levels should the cuts surpass market expectations. Range traders will be looking to short at $50, hoping to ride the likely sell off back down to $40.
Saturday, March 7, 2009
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