Right now, the so-called Waxman-Markey bill is snaking its way through the greasy halls of Congress.
"Waxman-Markey" is the name given to the new "cap and trade" bill designed to limit America's carbon emissions. It looks like it's the most expensive thing to hit the economy since the financial crisis began.
Even the normally mild-mannered Wall Street Journal called it "one of the most ambitious efforts to re-engineer American social and economic behavior in decades, presenting risks and opportunities for a wide array of businesses from Silicon Valley to the coal fields of the Appalachians."
First off, the stated objective of cutting carbon emissions by 83% by 2050 will go down in history as outrageous – akin to when Who drummer Keith Moon drove his Lincoln Continental into the pool at the Holiday Inn. I think members of Congress must be smoking the same thing Moon was.
To show you how patently ridiculous such a goal is, I turn to Questar's CEO, Keith Rattie. Questar is an oil and gas company. Rattie is an engineer. He has been in the business since the 1970s. He walks us through the basic math in a speech he made at Utah Valley University on April 2 called "Energy Myths and Realities." Rattie uses Utah as an example:
Utah's carbon footprint today is about 66 million tons per year. Our population is 2.6 million. You divide those two numbers and the average Utahan today has a carbon footprint of about 25 tons per year. An 80% reduction in Utah's carbon footprint by 2050 implies 66 million tons today to about 13 million tons per year by 2050. If Utah's population continues to grow at 2% per year, by 2050, there will be about 6 million people living in our state. So 13 million tons divided by 6 million people equals 2.2 tons per person per year.
Question: When was the last time Utah's carbon footprint was as low as 2.2 tons per person? Answer: Not since Brigham Young and the Mormon pioneers first entered the Wasatch Valley and declared, 'This is the place.'
You can extend this math over the whole country – a growing mass of 300 million people. To meet the Waxman-Markey bill's goals would mean we have to go back to a carbon footprint about as big as the Pilgrims' at Plymouth Rock circa 1620.
So I think the bill is absurd. I think it is also a great blow to what is left of American industry. But this is the way the world works. Politicians do dumb things.
Agriculture. Agriculture, for whatever reasons, is exempt from the new rules. So farmers don't have to worry about those manure pools out back or the flatulent cows emitting methane all over God's green meadows. Those big tractors? Burn up that diesel! Agriculture is a winner by virtue of not losing, like a hockey team that skates to a tie.
Steel. Big loser. U.S. Steel, AK Steel, and even foreign steel companies with U.S. operations all get a big kick in the family jewels on this one. Steelmaking emits all kinds of carbon dioxide. The worst-case scenario here is that the U.S. simply won't be making steel at some point in the future. The plants will all go to Brazil. China is already the biggest steel producer in the world. Now we just handed the country a bunch of new business. Avoid big steel in the U.S.
Oil refiners. Losers. This is an industry in which it is hard to make money most of the time as it is. Now, under the new bill, refineries are really screwed. Basically, they are on the hook for about 44% of U.S. carbon emissions. They would be among the biggest buyers of carbon emission allowances. I think with one stroke of the pen, the U.S. government just made the U.S. refining industry that much smaller. Lots of these older refineries will just have to close. U.S. imports for gasoline will rise.
I think the refinery industry already sees the writing on the wall. This is one reason why Valero, the biggest U.S. refinery, has been quick to get into the politically favored ethanol business. It's also expanding overseas. Avoid the refineries.
Trading desks. Winners. It figures. As if the government doesn't help financial firms enough, it is going to hand them a nice tomato in trading carbon credits. The head of Morgan Stanley's U.S. emission trading desk said: "Carbon, while relatively small, is a critical piece of our commodities offering." So some financial firms with trading desks in carbon get a nice little payday.
To sum up, this is only the beginning. At the end of the day, this obsession with carbon footprints means that Americans are going to have to pay a lot more for products that use fossil fuels. It means we are going to pay a lot more for energy. Obama and his crew can draw up whatever fantasies they want, but they can't repeal the laws of economics, which, like forces of nature, win out every time.
So there will be plenty of losers.
Showing posts with label Oil. Show all posts
Showing posts with label Oil. Show all posts
Thursday, June 4, 2009
Tuesday, June 2, 2009
Be long oil E&P stocks
Three back of the envelope fundamental reasons to be long oil E&P stocks.
1. OPEC cuts are more than enough to offset declining demand by the most bearish estimates (and that is assuming less than full compliance).
The International Energy Agency (IEA) forecasts global crude oil demand to decline approximately 2.56 million barrels per day to 83.2 million barrels of crude oil per day. This happens to be the most bearish of the estimates between the major demand forecasters.
Obviously at first glance this is bearish news since reductions in demand are not typically bullish for price action. However, OPEC has taken action to effectively offset this reduced demand via production cuts. OPEC has a quota cut of 4.2 MMB/D. Of course, not all members of OPEC are 100% compliant with this production quota. In fact as of last month there was really only 76% compliance among OPEC members.
While it may appear that 24% is a significant amount of cheating, at a near record OPEC compliance of 76% or 3.2 MMB/D of production cuts, the production cuts more than offset the most bearish forecast for demand decline at 2.56 million barrels per day. This obviously doesn’t mean that supply will run short overnight. What it means is that over time the world will begin to draw inventories down and before you know it we will be in a supply crunch again.
2. The weak dollar doctrine will fuel commodity inflation in the United States
Well, it is official the U.S. is taking a 60% stake in General Motors (GM). It is all over the news headlines and will likely remain there for the next several weeks. It seems clear the Obama administration will do whatever it takes to promote their set of ideals which includes destroying the fiat currency of the world.
Interestingly enough, it is perfectly logical for Obama to follow a weak dollar policy doctrine. Why would I suggest that? The vast majority of politicians currently in power in this country are absolutely terrible people. They won’t stop at anything to gain votes and Obama is certainly not above that. Hence, the UAW gets a substantially larger stake in GM than the bondholders.
But back on point…if you are an extremely liberal President who seems to legitimately prescribe to socialism as an economic system…and you want to change the system in the United States to support your particular ideology…what would you do?
Beyond directly taking over the means of production, he is actually doing that…you destroy the value of your currency! Why would you do that? Because as the USD collapses goods produced in the United States appear more attractive, in terms of cost, for export.
Thus, by destroying the value of the U.S. dollar, Obama will effectively help promote blue collar unionized workers which effectively will keep the far left wing liberal members of the Democratic Party in office. The weak dollar doctrine will have unintended consequences…
So, for the last couple of years the USD and commodities (namely crude oil) have had a rather strong negative correlation such that when the USD falls in value relative to a basket of currencies, crude oil and commodities tend to rise in value. Effectively, with Obama’s weak dollar doctrine he is pursing policy that will directly lead to commodity price inflation.
Oil prices have been on a tear recently-some of the appreciation can be attributed to the deteriorating U.S. dollar and I believe this will be a multi year trend until the policy of the U.S. government changes.
3. Demand is stabilizing for some consumer fuels. Global demand growth will set in.
Economic data in certain areas of the globe are showing signs of a rebound. China is of course a huge driver of this and will likely continue to be a huge driver. The ripples of Chinese growth will be felt in many other places.
Of most interest to me are countries within South America such as Chile or Brazil. As China applies their stimulus money efficiently, they will begin meaningful expansion or at the very least they will meet their estimated required growth rate to maintain civil order. This will most definitely support surrounding Asian nations such as Taiwan and Malaysia (namely Singapore).
All of this leads to higher commodity consumption via bunker fuel and other petroleum products.
Disclosure: Long PCU, VALE,
1. OPEC cuts are more than enough to offset declining demand by the most bearish estimates (and that is assuming less than full compliance).
The International Energy Agency (IEA) forecasts global crude oil demand to decline approximately 2.56 million barrels per day to 83.2 million barrels of crude oil per day. This happens to be the most bearish of the estimates between the major demand forecasters.
Obviously at first glance this is bearish news since reductions in demand are not typically bullish for price action. However, OPEC has taken action to effectively offset this reduced demand via production cuts. OPEC has a quota cut of 4.2 MMB/D. Of course, not all members of OPEC are 100% compliant with this production quota. In fact as of last month there was really only 76% compliance among OPEC members.
While it may appear that 24% is a significant amount of cheating, at a near record OPEC compliance of 76% or 3.2 MMB/D of production cuts, the production cuts more than offset the most bearish forecast for demand decline at 2.56 million barrels per day. This obviously doesn’t mean that supply will run short overnight. What it means is that over time the world will begin to draw inventories down and before you know it we will be in a supply crunch again.
2. The weak dollar doctrine will fuel commodity inflation in the United States
Well, it is official the U.S. is taking a 60% stake in General Motors (GM). It is all over the news headlines and will likely remain there for the next several weeks. It seems clear the Obama administration will do whatever it takes to promote their set of ideals which includes destroying the fiat currency of the world.
Interestingly enough, it is perfectly logical for Obama to follow a weak dollar policy doctrine. Why would I suggest that? The vast majority of politicians currently in power in this country are absolutely terrible people. They won’t stop at anything to gain votes and Obama is certainly not above that. Hence, the UAW gets a substantially larger stake in GM than the bondholders.
But back on point…if you are an extremely liberal President who seems to legitimately prescribe to socialism as an economic system…and you want to change the system in the United States to support your particular ideology…what would you do?
Beyond directly taking over the means of production, he is actually doing that…you destroy the value of your currency! Why would you do that? Because as the USD collapses goods produced in the United States appear more attractive, in terms of cost, for export.
Thus, by destroying the value of the U.S. dollar, Obama will effectively help promote blue collar unionized workers which effectively will keep the far left wing liberal members of the Democratic Party in office. The weak dollar doctrine will have unintended consequences…
So, for the last couple of years the USD and commodities (namely crude oil) have had a rather strong negative correlation such that when the USD falls in value relative to a basket of currencies, crude oil and commodities tend to rise in value. Effectively, with Obama’s weak dollar doctrine he is pursing policy that will directly lead to commodity price inflation.
Oil prices have been on a tear recently-some of the appreciation can be attributed to the deteriorating U.S. dollar and I believe this will be a multi year trend until the policy of the U.S. government changes.
3. Demand is stabilizing for some consumer fuels. Global demand growth will set in.
Economic data in certain areas of the globe are showing signs of a rebound. China is of course a huge driver of this and will likely continue to be a huge driver. The ripples of Chinese growth will be felt in many other places.
Of most interest to me are countries within South America such as Chile or Brazil. As China applies their stimulus money efficiently, they will begin meaningful expansion or at the very least they will meet their estimated required growth rate to maintain civil order. This will most definitely support surrounding Asian nations such as Taiwan and Malaysia (namely Singapore).
All of this leads to higher commodity consumption via bunker fuel and other petroleum products.
Disclosure: Long PCU, VALE,
Thursday, February 19, 2009
Market Reflections 2/18/2009
President Obama unveiled a $75 billion plan to help limit foreclosures especially for those who fail to qualify for refinancing because their homes have contracted in price. Unlike last week's Treasury stability plan which was met with disappointment, reaction to today's announcement was quiet though initial word of the plan did give the stock market a push last week.
The day's economic data was headed by a 17 percent plunge in January housing starts and a less frightening though still severe 5 percent plunge in permits. The Fed updated its 2009 projections calling for an unemployment peak of up to 8.8 percent. The rate is currently at 7.6 percent. The Fed also sees full year economic contraction of up to 1.3 percent. But the Fed is optimistic, at least for 2011 when it sees growth as high as 5 percent.
The Dow industrials were fractionally changed on the day while money moved out of the Treasury market where the 2-year yield rose 10 basis points to 0.96 percent. The dollar gained another 1/2 cent against the euro to end at $1.2553. Gold is pressing back toward $1,000, ending higher on the day at $988. Oil ended under $35.
The day's economic data was headed by a 17 percent plunge in January housing starts and a less frightening though still severe 5 percent plunge in permits. The Fed updated its 2009 projections calling for an unemployment peak of up to 8.8 percent. The rate is currently at 7.6 percent. The Fed also sees full year economic contraction of up to 1.3 percent. But the Fed is optimistic, at least for 2011 when it sees growth as high as 5 percent.
The Dow industrials were fractionally changed on the day while money moved out of the Treasury market where the 2-year yield rose 10 basis points to 0.96 percent. The dollar gained another 1/2 cent against the euro to end at $1.2553. Gold is pressing back toward $1,000, ending higher on the day at $988. Oil ended under $35.
Wednesday, February 18, 2009
Market Reflections 2/17/2009
It was concern over Japan and Europe that sank the U.S. markets on Monday. A 3.3 percent fourth-quarter contraction in Japanese GDP deepened concern over the global recession as did talk of European bank failures. Treasury International Capital data showed renewed foreign investment but not Japanese investment in Treasuries, another result of contraction in Japan. Data here showed record lows for the Empire State manufacturing report, data suggesting that the recession for the manufacturing sector continues to deepen in the first quarter.
President Obama signed the latest stimulus bill into law and, along with the Treasury Secretary, will offer tomorrow a foreclosure prevention plan for the housing sector. Other data in the session included another rock bottom reading for the housing market report from the nation's homebuilders. Bank stocks were heavily sold in the session as were shares of GM which was due after the close to report its status to the government. The Dow industrials ended at their lows, down 3.8 percent to 7,552.
Money moved further into safety including once again into gold which ended about $30 higher at $970. The dollar gained more than 2 cents against the euro to $1.2605 while yields fell sharply in the Treasury market with the 10-year down 26 basis points to 2.63 percent. Oil fell further with the March contract going off the board at $34.95. April WTI ended 8% lower at $38.55.
President Obama signed the latest stimulus bill into law and, along with the Treasury Secretary, will offer tomorrow a foreclosure prevention plan for the housing sector. Other data in the session included another rock bottom reading for the housing market report from the nation's homebuilders. Bank stocks were heavily sold in the session as were shares of GM which was due after the close to report its status to the government. The Dow industrials ended at their lows, down 3.8 percent to 7,552.
Money moved further into safety including once again into gold which ended about $30 higher at $970. The dollar gained more than 2 cents against the euro to $1.2605 while yields fell sharply in the Treasury market with the 10-year down 26 basis points to 2.63 percent. Oil fell further with the March contract going off the board at $34.95. April WTI ended 8% lower at $38.55.
Friday, February 13, 2009
Oil and Gas Transport Plays
S&P believes these six high-yielding issues should be able to maintain their distribution levels this year
By Beth Piskora From Standard & Poor's Equity Research
Quick: name an industry group where the average dividend yield is hovering around 11%. If you guessed utilities, real estate investment trusts (REITS), or banks, you're wrong. But if you guessed oil and gas transportation companies, that would be correct.
Most oil and gas pipeline companies are set up as Master Limited Partnerships (MLPs), which means they must, by law, distribute their earnings, just like REITs do. That makes them good choices for income-focused investors, in our view.
"The distribution—or dividend—level is a very important driver of investor interest in this group," explains Tanjila Shafi, a Standard & Poor's equity analyst. "The companies know this, so they are working very hard not to cut the payouts. They are doing other things like cutting capital expenditures to preserve capital, just to maintain the distribution levels."
Shafi recommends only six MLPs, and believes all six should be able to maintain their distribution levels this year. She also believes that they, as a group, are the strongest companies in the industry, have good balance sheets, and are more likely to be able to tap the capital markets. She notes investors may find other MLPs with higher dividend yields, but recommends for purchase only these six, each of which carries an S&P investment ranking of 4 STARS (buy) or 5 STARS (strong buy).
Company Ticker S&P STARS Rank (2/12/09)
Energy Transfer Partners ETP 4
Kinder Morgan Energy Partners KMP 5
Magellan Midstream Holdings MGG 4
NuStar Energy NS 4
Oneok Partners OKS 4
Plains All American Pipeline PAA 4
Piskora is managing editor of U.S. Editorial Operations for Standard & Poor's .
All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of analyst compensation was, is or will be, directly or indirectly related to the specific recommendations or views expressed in this research report. Standard & Poor's Regulatory Disclosure
Any advice, analysis, or recommendations contained in articles labeled "Insight from Standard & Poor's" reflect the views of Standard & Poor's, which operates separately from and independently of BusinessWeek Online. It is possible that BWOL may from time to time publish information that is not consistent with advice, analysis, or recommendations that are published by Standard & Poor's. Standard & Poor's and BusinessWeek Online are each units of The McGraw-Hill Companies, Inc.
By Beth Piskora From Standard & Poor's Equity Research
Quick: name an industry group where the average dividend yield is hovering around 11%. If you guessed utilities, real estate investment trusts (REITS), or banks, you're wrong. But if you guessed oil and gas transportation companies, that would be correct.
Most oil and gas pipeline companies are set up as Master Limited Partnerships (MLPs), which means they must, by law, distribute their earnings, just like REITs do. That makes them good choices for income-focused investors, in our view.
"The distribution—or dividend—level is a very important driver of investor interest in this group," explains Tanjila Shafi, a Standard & Poor's equity analyst. "The companies know this, so they are working very hard not to cut the payouts. They are doing other things like cutting capital expenditures to preserve capital, just to maintain the distribution levels."
Shafi recommends only six MLPs, and believes all six should be able to maintain their distribution levels this year. She also believes that they, as a group, are the strongest companies in the industry, have good balance sheets, and are more likely to be able to tap the capital markets. She notes investors may find other MLPs with higher dividend yields, but recommends for purchase only these six, each of which carries an S&P investment ranking of 4 STARS (buy) or 5 STARS (strong buy).
Company Ticker S&P STARS Rank (2/12/09)
Energy Transfer Partners ETP 4
Kinder Morgan Energy Partners KMP 5
Magellan Midstream Holdings MGG 4
NuStar Energy NS 4
Oneok Partners OKS 4
Plains All American Pipeline PAA 4
Piskora is managing editor of U.S. Editorial Operations for Standard & Poor's .
All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of analyst compensation was, is or will be, directly or indirectly related to the specific recommendations or views expressed in this research report. Standard & Poor's Regulatory Disclosure
Any advice, analysis, or recommendations contained in articles labeled "Insight from Standard & Poor's" reflect the views of Standard & Poor's, which operates separately from and independently of BusinessWeek Online. It is possible that BWOL may from time to time publish information that is not consistent with advice, analysis, or recommendations that are published by Standard & Poor's. Standard & Poor's and BusinessWeek Online are each units of The McGraw-Hill Companies, Inc.
Tuesday, February 10, 2009
Market Reflections 2/9/2009
Markets held in mostly narrow ranges awaiting the outcome of the 2009 stimulus package and details of the Treasury's plan to overhaul TARP. The day did see the resignation of the SEC's enforcement chief and a civil agreement with Bernard Madoff. The criminal case against the suspected Ponzi giant, the giant who slipped by the SEC, is still open.
The Dow industrials slipped slightly on the day while Treasury yields were little changed. The pending stimulus news didn't help the value of the dollar which fell back 1-1/2 cents against the euro to end at $1.3016. Oil, benefiting from talk of OPEC quota compliance, is holding near $40. Benefiting from talk of post-stimulus inflation, gold is holding near $900, ending just under on the day.
The Dow industrials slipped slightly on the day while Treasury yields were little changed. The pending stimulus news didn't help the value of the dollar which fell back 1-1/2 cents against the euro to end at $1.3016. Oil, benefiting from talk of OPEC quota compliance, is holding near $40. Benefiting from talk of post-stimulus inflation, gold is holding near $900, ending just under on the day.
Saturday, February 7, 2009
Market Reflections 2/6/2009
Yet another catastrophic employment report heightened the pitch of concern over the economic outlook and is forcing the immediate response of policy makers. Hopes that the government will rescue the banking system and quickly stimulate the economy shifted the focus away from the troubles of the present and toward the future, pushing the Dow industrials 2.7 percent higher and back near 8,300. The S&P 500 also gained 2.7 percent to end at 868.60.
The movement away from safety pulled money out of Treasuries and the dollar. Treasury yields are at 0.27 percent for the 3-month bill and 3.69 percent for the 30-year bond. The dollar fell back a cent against the euro to $1.2934.
Oil isn't reacting to the stock market as it used to. The March contract held within its tight range ending just over $40 once again. Money stayed in gold which was little changed at $913.80.
The movement away from safety pulled money out of Treasuries and the dollar. Treasury yields are at 0.27 percent for the 3-month bill and 3.69 percent for the 30-year bond. The dollar fell back a cent against the euro to $1.2934.
Oil isn't reacting to the stock market as it used to. The March contract held within its tight range ending just over $40 once again. Money stayed in gold which was little changed at $913.80.
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