Archive for March, 2009

Natural Gas Prices Drop to Lowest Level in 6 years on weak US Economy

Posted in Investment on March 28, 2009 by nedgrace

 

 

naturalgas

By Mario Parker

March 27 (Bloomberg) — Natural gas futures fell to the lowest price in more than six years on weakening demand during the recession.

The heating and industrial fuel has tumbled 73 percent from the 2008 high reached in July as consumption contracted. Incomes in the U.S. fell 0.2 percent in February, the Commerce Department said today. Gas prices dropped yesterday after a government report showed an unexpected gain in U.S. stockpiles.

“It’s the economy,” said George Ellis, a director in the energy derivatives group at BMO Capital Markets in New York. “The selloff started with the build yesterday and that drove the point home that the market is well-supplied, demand is weak and the economy is weak.”

Gas futures for April delivery fell 31.6 cents, or 8 percent, to settle at $3.631 per million British thermal units on the New York Mercantile Exchange, the lowest closing price since Sept. 25, 2002. The futures tumbled 14 percent this week, the biggest one-week decline since August 2007, and are down 35 percent this year.

The April contract expired today. The more active May futures fell 29.7 cents, or 7.4 percent, to $3.737.

An Energy Department report yesterday showed that supplies rose 3 billion cubic feet in the week ended March 20 to 1.654 trillion cubic feet. Analysts forecast a drop of 10 billion. The average for this time of year is a decline of 49 billion because of heating-fuel demand at the end of the cold-weather months.

“That just brought reality back into the market,” Ellis said. “As long as there’s a supply overhang, as long as demand is weak, we’re going to see low prices.”

Factory Demand

Industrial users and power plants each account for about 29 percent of gas consumption, according to the Energy Department. The department has forecast a 5.1 percent decline in industrial usage of gas for 2009 as the economy shrinks.

Spending by American consumers rose 0.2 percent in February after climbing 1 percent the previous month, the Commerce Department said today. Inflation-adjusted spending on durable goods, such as cars, furniture, and other long-lasting items, dropped 1.5 percent.

Natural gas stockpiles were 20 percent above the five-year average and 29 percent higher than a year earlier, yesterday’s report showed. Supplies in last week’s report were 16 percent above average.

“Notably, last week marks the earliest gas storage injection since March 2003,”Cameron Horwitz, an analyst at SunTrust Robinson Humphrey Inc. in Houston wrote today in a report.

U.S. Supplies

Stockpiles typically drop to 1.364 trillion cubic feet at the end of the heating season in late March or early April, based on the five-year average. Supplies in yesterday’s report were 21 percent higher than that total.

“No weather and ample supply is a tough combination to beat,” said Michael Fitzpatrick, a vice president for energy at MF Global Ltd. in New York.

Producers of the fuel have responded to falling prices by slashing output. Baker Hughes Inc. today said natural gas rigs fell by 47, or 5.5 percent, to 810, the lowest since the week ended April 25, 2003. The count was down 50 percent from a peak of 1,606 on Sept. 12.

U.S. Natural Gas Rig Count sinks to near 6-yr low

Posted in Investment on March 28, 2009 by nedgrace

rig

drilling-rigs-laid-down

NEW YORK, March 27 (Reuters) – The number of rigs drilling for natural gas in the United States fell 47 to 810 last week, the lowest level since April 2003, according to a report issued on Friday by oil services firm Baker Hughes Inc in Houston.

U.S. natural gas drilling rigs, which three weeks ago fell below 1,000 for the first time since May 7, 2004, have been in a steady decline since peaking above 1,600 in September.

Traders and analysts have said tight credit and a 70 percent slide in gas prices over the last nine months have forced many producers to scale back drilling operations.

The current gas rig count stands about 637 below the same week last year, and is the lowest for gas drilling rigs since April 25, 2003, when there were 804 gas rigs operating.

Near record-high gas production last year and a deepening recession that sharply cut demand led to a severe oversupply that collapsed gas prices to about the $4 per mmBtu level from their peak above $13 in July.

While first quarter U.S. natural gas production was still expected to be up from the same period last year despite the steady slide in drilling, most industry analysts expect to see year-on-year output declines soon, probably in late spring or early summer, as rigs continue falling.

Gas rigs are expected to decline by another 10 to 15 percent this year to between 700 and 750, a level that should turn output negative and help tighten the supply-demand balance. (Reporting by Joe Silha; Editing by Marguerita Choy)

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Low Oil Prices Putting Supply Growth at Risk – Cambridge Energy Research

Posted in Investment on March 27, 2009 by nedgrace

cambridge

CAMBRIDGE, Mass.–(BUSINESS WIRE)–The collapse in oil prices could end up cutting the growth in future oil supply in half from what would have been anticipated during the high price period, according to a new study from Cambridge Energy Research Associates (CERA), an IHS Inc. (NYSE: IHS) company. The Long Aftershock concludes that about 7.6 million barrels per day (mbd) out of total potential future net growth of 14.5 mbd from 2009 to 2014 are “at risk.”

“The inventory of potential new oilfield developments, including fields that could be developed and brought online during the next five years, remains adequate to meet likely demand in the medium- to long-term,” says CERA Senior Director Peter M. Jackson, an author of the report. “This, however, depends on sufficient and timely investment.”

The steep decline in oil prices has, so far, not been matched by an equal decline in the cost of developing new oil fields or in fiscal terms. This means the economics of a significant share of potential future oil supply growth have deteriorated to the point where it risks “being slowed down, postponed, or cancelled altogether. Slower growth in oil production capacity over the next five years could lead to the next period of rising oil prices, but much depends on the recovery of world oil demand – which CERA predicts could fall as much as 2.3 mbd in 2008 and 2009 combined – and the reaction of the oil industry and government policies.

“Investment decisions are rooted in expectations about future value, and while long-term oil price expectations are critical, so are upstream development costs,” added Jackson. “The oil price needed to justify investment will decline as the cost base falls, but this readjustment may take time to unfold, and lower costs will not necessarily equate with increasing activity levels.”

The potential reduction in capacity represents a potentially powerful and long-lasting aftershock following the oil price collapse that began in 2008. Using proprietary databases from CERA and IHS, the report analyzes how global oil supply could be reshaped by lower oil prices and the credit crisis.

“Seven consecutive years of rising oil prices – unprecedented in the history of the oil industry – have come crashing down, thus burying the notion that the commodity price cycle was a historical relic,” the report says. “Instead, old truths have been reaffirmed. Sustained rising oil prices do, eventually, affect demand trends. One-way bets on oil prices eventually go awry.”

The report adds that the “commodity price cycle” is affected “by global economy, geopolitics, and technology. The question today is, as always, ‘When will the next swing in oil price occur?’”

Economic growth and oil demand will be key factors that also affect future supply. After declining in 2008 and 2009, CERA expects oil demand to pick up in 2010. However, “If oil demand does not begin to recover next year, the oil market could face a large surplus of production capacity for the next several years – even if growth in production capacity slows significantly,” said James Burkhard, CERA managing director and an author of the report.

CERA’s analysis finds that, with the fall in oil prices, the pace at which new supply will grow and come onstream is already slowing. Given the global economic climate, short-term corporate cash flow problems will lead to project deferrals throughout the global industry, and financial pressures could spark a possible wave of merger and acquisition (M&A) activity. Oil-exploring countries face a large reduction in revenue compared with 2008 as well, and current indications are that as many as 35 new projects in OPEC countries will be delayed significantly.

The Long Aftershock concludes that if all “at risk” supply fails to materialize, world oil production capacity just five years from now could be 101.4 mbd, 7.6 mbd below the pre-collapse CERA projection of 109 mbd for 2014. The report identifies the most likely areas for postponements as new heavy oil and deep water projects and countries with difficult fiscal regimes, as well as a reduction in the investment in new biofuel, gas-to-liquid and coal-to-liquid projects, and high cost discretionary “rank wildcat exploration.” Although it will take time for these changes to have an impact on total global oil supply, that impact could prove to be significant.

CERA Chairman and Pulitzer Prize-winning author of The Prize: The Epic Quest for Oil, Money and Power Daniel Yergin added, “Future demand is particularly uncertain today because of the impact of high prices on consumers, the depth of the recession, the shifts in the automobile industry, and the introduction of new energy and climate change policies.”

But, the report says, if demand growth is eventually far greater than expected, especially in emerging markets, and current, prolonged low oil prices persist and productive capacity growth stalls even more than expected, a new period of tight supply and strongly rising oil prices could mark the next turn in the oil cycle.

To learn more about The Long Aftershock, please visit www.cera.com or email info@cera.com.

CERA is an IHS Inc. (NYSE: IHS) company.

About CERA (www.cera.com)

Cambridge Energy Research Associates (CERA), an IHS company, is a leading advisor to energy companies, consumers, financial institutions, technology providers, and governments. CERA (www.cera.com) delivers strategic knowledge and independent analysis on energy markets, geopolitics, industry trends, and strategy. CERA is based in Cambridge, Mass., and has offices in Bangkok, Beijing, Calgary, Dubai, Johannesburg, Mexico City, Moscow, Mumbai, Oslo, Paris, Rio de Janeiro, San Francisco, Tokyo, and Washington, DC.

About IHS (www.ihs.com)

IHS (NYSE: IHS) is a leading global source of critical information and insight, dedicated to providing the most complete and trusted data and expertise. IHS product and service solutions span four areas of information that encompass the most important concerns facing global business today: Energy, Product Lifecycle, Security, and Environment. It serves customers ranging from governments and multinational companies to smaller companies and technical professionals in more than 180 countries. IHS is celebrating its 50th anniversary in 2009 and employs approximately 3,800 people in 20 countries.

IHS is a registered trademark of IHS Inc. CERA is a registered trademark of Cambridge Energy Research Associates, Inc. Copyright ©2009 IHS Inc. All rights reserved.

Who is Right – Bond Market or Equity Market?

Posted in Investment on March 26, 2009 by nedgrace

If there really are signs of financial recovery, nobody told the bond market. Treasury Secretary Timothy Geithner’s plan to rescue the financial system sent the S&P 500 soaring 7% on Monday alone, bringing its gains from March 6 to an impressive 19% through Wednesday. But credit markets have hardly budged.

[Spread Alert]

Corporate debt is still priced for disaster. Investment-grade nonfinancial U.S. corporate bonds rallied in January but now have stalled, with spreads about four percentage points over Treasurys, based on Markit iBoxx indexes. More worryingly, even as bank stocks have climbed, with the KBW index gaining 54% from its lows, U.S. senior bank-bond spreads remain at their widest levels since Lehman Brothers collapsed.

Looking at the performance of the underlying assets the banks hold, there has been some improvement in commercial-mortgage-backed securities, with the triple-A portion of the CMBX index rallying sharply in the past week, albeit remaining extremely wide at 5.99 percentage points. But leveraged loans as measured by the LCDX index remain unloved, with the index, at 74% of face value, still close to its all-time lows. Meanwhile, corporate defaults are surging: S&P by March 20 had recorded 47 defaults globally so far on the year, nearly triple the number seen in the same period of 2008.

Bonds are pricing in unheard-of and devastating levels of default. Deutsche Bank recently calculated dollar investment-grade corporate bonds were pricing in a five-year default rate of 40% assuming average recovery rates. Even if one makes the unlikely assumption that bondholders recover nothing after default, prices suggest a 25% default rate over five years. The worst five-year investment-grade default rate since 1970 is just 2.4%. The average is 0.9%.

On that basis corporate debt is almost absurdly cheap — and so a lot of investors are pumping money into the market. That this has failed to fuel a rally in the credit markets similar to that in equities should ring warning bells for stock-market investors. What is holding back the credit markets is a lack of demand for financial debt — a sure sign that all still isn’t well in the banking system.

Demand in the credit markets is mostly for nonfinancial debt, but this is being met by huge supply as borrowers look to bypass the banking system, thereby preventing spreads from tightening. The vast majority of financial debt finding buyers is that guaranteed by governments — hardly a vote of confidence. Asset-backed securities and leveraged loans remain unloved.

Until investors recover confidence in financial assets, credit spreads are unlikely to tighten significantly. And without a sustained improvement in the credit market — the seat of the crisis — it seems irrational to expect a durable move higher in equities.

OPEC and Real Oil Production

Posted in Investment on March 26, 2009 by nedgrace

 

opec

Recently, EIA and other oil market forecasters have been paying close attention to how the Organization of the Petroleum Exporting Countries (OPEC) is adjusting to lower global oil demand and weaker oil prices brought on by the global economic recession. Crude oil prices are now almost $100 per barrel off their peak level last year, and most forecasters, including EIA, are projecting 2009 global oil demand to be over 1 million barrels per day (bbl/d) lower than in 2008. In response, OPEC has met four times during the past 6 months, most recently earlier this month, to consider production cuts to arrest the oil price decline and cut rising oil inventories, which had reached a level not seen in the last 9 years in terms of days of supply in countries belonging to the Organization for Economic Cooperation and Development.

 

OPEC generally holds almost all of the world’s available surplus petroleum production capacity, and its members have frequently intervened over the years to alter production to influence oil prices, usually to support higher prices. During the first quarter of 2009, EIA estimates that OPEC held 43 percent of the world’s production capacity of crude oil and other petroleum liquids. Following OPEC’s most recent round of production cuts, OPEC members’ surplus production capacity had risen to 4.4 million bbl/d, about 5 percent of the total global production capacity of 87 million bbl/d.

 

The outcome from OPEC meetings is never certain because members often have differing opinions on the need for action. OPEC has met 90 times since it instituted its first production targets in 1982, and has left its targets unchanged 41 times. This was the outcome of OPEC’s most recent meeting on March 15, where its members had to weigh their desire for higher prices against concerns that a production cut could jeopardize any recovery in global oil demand and significantly delay any potential price rise well into the future. OPEC decided to encourage its members to adhere to existing targets.

 

OPEC members had previously agreed to lower production by 4.2 million barrels per day from September levels to 24.85 million bbl/d. Measuring compliance with the targeted production cuts is difficult because OPEC did not list individual country targets in its most recent communiqués, but estimates from industry and trade sources are available, and EIA has incorporated them in its estimates of compliance in the table below. EIA’s latest estimate of OPEC crude oil production in February, excluding Iraq (which has been exempt from OPEC production targets for the past decade) shows a decrease of almost 3 million bbl/d from last September. This represents almost 70 percent of the 4.2 million bbl/d cut in OPEC’s production target. As the table below indicates, Persian Gulf producers (Saudi Arabia, Kuwait, the United Arab Emirates, Qatar and Iran) appear to have accounted for 80 percent of the overall cutback over the period, with Saudi Arabia alone having shaved output by 1.3 million bbl/d. All eyes will continue to focus on OPEC producers, especially those outside of the Persian Gulf, to see how much they end up cutting production.

Country

Sept 1

February


Production

Targets

February


2009


Production

February


Compliance


With Cuts 2

Crude Oil


Production

Capacity

Excess


Production


Capacity

Algeria

1,400

1,200

1,420

-10%

1,420

0

Angola

1,760

1,520

1,700

25%

2,050

350

Ecudor

500

430

490

15%

475

0

Iran

3,900

3,340

3,650

45%

3,900

250

Kuwait

2,600

2,220

2,300

79%

2,600

300

Libya

1,720

1,470

1,600

48%

1,750

150

Nigeria

1,990

1,670

1,800

59%

1,955

155

Qatar

850

730

750

83%

1,065

315

Saudia Arabia

9,370

8,050

8,050

100%

10,600

2,600

UAE

2,600

2,220

2,300

79%

2,600

300

Venezula

2,350

1,990

2,200

42%

2,200

0

OPEC ex. Iraq

29,040

24,840

26,210

67%

30,615

4,420

Iraq

2,320

 

2,350

 

2,350

0

OPEC

31,360

 

28,560

 

32,965

4,420

 1 OPEC’s published estimates of September crude oil production that were used to derive current OPEC production targets – these vary slightly from EIA estimates of September 2008 production. 

2 OPEC compliance is calculated by comparing the size of the production cuts that OPEC members made (actual February 2009 production minus September 2008 production) with the targeted cuts (February 2009 production targets minus September 2008 production).

 

Source: EIA

 

AIG – Scary Congressional Overreaction to Operation Bonus

Posted in Investment on March 25, 2009 by nedgrace

aig-logo
March 25, 2009
OP-ED CONTRIBUTOR – NY Times
Dear A.I.G., I Quit!

The following is a letter sent on Tuesday by Jake DeSantis, an executive vice president of the American International Group’s financial products unit, to Edward M. Liddy, the chief executive of A.I.G.

DEAR Mr. Liddy,

It is with deep regret that I submit my notice of resignation from A.I.G. Financial Products. I hope you take the time to read this entire letter. Before describing the details of my decision, I want to offer some context:

I am proud of everything I have done for the commodity and equity divisions of A.I.G.-F.P. I was in no way involved in — or responsible for — the credit default swap transactions that have hamstrung A.I.G. Nor were more than a handful of the 400 current employees of A.I.G.-F.P. Most of those responsible have left the company and have conspicuously escaped the public outrage.

After 12 months of hard work dismantling the company — during which A.I.G. reassured us many times we would be rewarded in March 2009 — we in the financial products unit have been betrayed by A.I.G. and are being unfairly persecuted by elected officials. In response to this, I will now leave the company and donate my entire post-tax retention payment to those suffering from the global economic downturn. My intent is to keep none of the money myself.

I take this action after 11 years of dedicated, honorable service to A.I.G. I can no longer effectively perform my duties in this dysfunctional environment, nor am I being paid to do so. Like you, I was asked to work for an annual salary of $1, and I agreed out of a sense of duty to the company and to the public officials who have come to its aid. Having now been let down by both, I can no longer justify spending 10, 12, 14 hours a day away from my family for the benefit of those who have let me down.

You and I have never met or spoken to each other, so I’d like to tell you about myself. I was raised by schoolteachers working multiple jobs in a world of closing steel mills. My hard work earned me acceptance to M.I.T., and the institute’s generous financial aid enabled me to attend. I had fulfilled my American dream.

I started at this company in 1998 as an equity trader, became the head of equity and commodity trading and, a couple of years before A.I.G.’s meltdown last September, was named the head of business development for commodities. Over this period the equity and commodity units were consistently profitable — in most years generating net profits of well over $100 million. Most recently, during the dismantling of A.I.G.-F.P., I was an integral player in the pending sale of its well-regarded commodity index business to UBS. As you know, business unit sales like this are crucial to A.I.G.’s effort to repay the American taxpayer.

The profitability of the businesses with which I was associated clearly supported my compensation. I never received any pay resulting from the credit default swaps that are now losing so much money. I did, however, like many others here, lose a significant portion of my life savings in the form of deferred compensation invested in the capital of A.I.G.-F.P. because of those losses. In this way I have personally suffered from this controversial activity — directly as well as indirectly with the rest of the taxpayers.

I have the utmost respect for the civic duty that you are now performing at A.I.G. You are as blameless for these credit default swap losses as I am. You answered your country’s call and you are taking a tremendous beating for it.

But you also are aware that most of the employees of your financial products unit had nothing to do with the large losses. And I am disappointed and frustrated over your lack of support for us. I and many others in the unit feel betrayed that you failed to stand up for us in the face of untrue and unfair accusations from certain members of Congress last Wednesday and from the press over our retention payments, and that you didn’t defend us against the baseless and reckless comments made by the attorneys general of New York and Connecticut.

My guess is that in October, when you learned of these retention contracts, you realized that the employees of the financial products unit needed some incentive to stay and that the contracts, being both ethical and useful, should be left to stand. That’s probably why A.I.G. management assured us on three occasions during that month that the company would “live up to its commitment” to honor the contract guarantees.

That may be why you decided to accelerate by three months more than a quarter of the amounts due under the contracts. That action signified to us your support, and was hardly something that one would do if he truly found the contracts “distasteful.”

That may also be why you authorized the balance of the payments on March 13.

At no time during the past six months that you have been leading A.I.G. did you ask us to revise, renegotiate or break these contracts — until several hours before your appearance last week before Congress.

I think your initial decision to honor the contracts was both ethical and financially astute, but it seems to have been politically unwise. It’s now apparent that you either misunderstood the agreements that you had made — tacit or otherwise — with the Federal Reserve, the Treasury, various members of Congress and Attorney General Andrew Cuomo of New York, or were not strong enough to withstand the shifting political winds.

You’ve now asked the current employees of A.I.G.-F.P. to repay these earnings. As you can imagine, there has been a tremendous amount of serious thought and heated discussion about how we should respond to this breach of trust.

As most of us have done nothing wrong, guilt is not a motivation to surrender our earnings. We have worked 12 long months under these contracts and now deserve to be paid as promised. None of us should be cheated of our payments any more than a plumber should be cheated after he has fixed the pipes but a careless electrician causes a fire that burns down the house.

Many of the employees have, in the past six months, turned down job offers from more stable employers, based on A.I.G.’s assurances that the contracts would be honored. They are now angry about having been misled by A.I.G.’s promises and are not inclined to return the money as a favor to you.

The only real motivation that anyone at A.I.G.-F.P. now has is fear. Mr. Cuomo has threatened to “name and shame,” and his counterpart in Connecticut, Richard Blumenthal, has made similar threats — even though attorneys general are supposed to stand for due process, to conduct trials in courts and not the press.

So what am I to do? There’s no easy answer. I know that because of hard work I have benefited more than most during the economic boom and have saved enough that my family is unlikely to suffer devastating losses during the current bust. Some might argue that members of my profession have been overpaid, and I wouldn’t disagree.

That is why I have decided to donate 100 percent of the effective after-tax proceeds of my retention payment directly to organizations that are helping people who are suffering from the global downturn. This is not a tax-deduction gimmick; I simply believe that I at least deserve to dictate how my earnings are spent, and do not want to see them disappear back into the obscurity of A.I.G.’s or the federal government’s budget. Our earnings have caused such a distraction for so many from the more pressing issues our country faces, and I would like to see my share of it benefit those truly in need.

On March 16 I received a payment from A.I.G. amounting to $742,006.40, after taxes. In light of the uncertainty over the ultimate taxation and legal status of this payment, the actual amount I donate may be less — in fact, it may end up being far less if the recent House bill raising the tax on the retention payments to 90 percent stands. Once all the money is donated, you will immediately receive a list of all recipients.

This choice is right for me. I wish others at A.I.G.-F.P. luck finding peace with their difficult decision, and only hope their judgment is not clouded by fear.

Mr. Liddy, I wish you success in your commitment to return the money extended by the American government, and luck with the continued unwinding of the company’s diverse businesses — especially those remaining credit default swaps. I’ll continue over the short term to help make sure no balls are dropped, but after what’s happened this past week I can’t remain much longer — there is too much bad blood. I’m not sure how you will greet my resignation, but at least Attorney General Blumenthal should be relieved that I’ll leave under my own power and will not need to be “shoved out the door.”

Sincerely,

Jake DeSantis

Copyright 2009 The New York Times Company

Update March 16th Presentation to Pioneer Oil Producers from Guru Matt Simmons on Oil & Gas

Posted in Investment on March 21, 2009 by nedgrace

Most of you know how I have been bullish on Oil and Gasoline since late last year. Oil has been moving up nicely from a low of $32 to now over $50. I first bought gasoline at 80 cents a gallon in December and it is now $1.45 for April Delivery. I am now also becoming interested in Natural Gas as it has been beaten up beyond belief, and rig counts are declining in a record fashion.
mattsimmons
Matt Simmons latest Presentation on Oil:

Click here: pioneer-oil-producers-society