Much has been made in the media about the $25/bbl decline in the price of oil since the beginning of July. Granted, this is a big move; however, it's far from unprecedented. It's important to keep price moves in perspective and not to panic because of the sensational headlines we see on the evening news.
In mid-2006, oil traded to a high of around $77/bbl before slumping to a low of $50.48 the following January. These numbers represent closing prices for cash US West Texas Intermediate crude. This is a decline of roughly $27, roughly what we've saw in July.
But, the 2006/07 crude correction was actually far worse. On a percentage basis, crude fell by roughly one-third over this time period. So far in July crude is off only about 15 - 17 percent. We also saw a 22 percent correction in 2004/05, a 28 percent pullback in 2003/04 and a 37 percent correction in 2003.
On an equivalent basis, a 30 percent correction in oil this time around would equate to a move to about $105. Such a move would be totally consistent with the pattern of higher highs and higher lows--the uptrend--in oil prices over the past few years. It certainly doesn't portend disaster for the energy sector.
An interesting measure passed the House of Representatives yesterday which could give the FDA the authority to regulate cigarettes in a fashion.
The agency would be charged with overseeing the labeling of tobacco products and regulating such things as the amount of tar in tobacco products, but interesting enough, will not have the authority to regulate the amount of nicotine in a product. That strikes me as interesting. This isn't the first time FDA regulation of tobacco products has been proposed, but in the past the argument has always been that since nicotine has obviously drug-like effects, it's only logical that the FDA would have regulatory authority. This is an interesting change of tactics here.
What's even more interesting is that the measure had broad bipartisan, with Reps from traditional tobacco states voting in favor of it. Philip Morris, the tobacco arm of the Altria Group, has even come out in favor of the measure. As counterintuitive as it may seem, such a plan would actually benefit tobacco companies and their investors because it would create clears standards for the industry, which in turn would reduce potential legal liabilities, which has always been one of the major risks for investors.
The smaller fry in the tobacco industry have strenuous objections to the bill because in could give the larger enterprises an unfair advantage in that they'll have the cash and resources to easily comply.
The Senate must still pass the measure and President Bush has threatened a veto on the grounds that it could lend tobacco a certain implied safety while costing the FDA money. But as the House bill is written, the FDA's expenses would be paid through a system of fees paid by the industry beginning in 2009. As far as the "implied safety" argument, I guess that's possible if someone's been living under a rock for the past four decades.
But all in all, the measure looks like it could ultimately be favorable to both investors and the industry. While it would cost tobacco companies extra cash, it would level the legal playing field for all involved.
Natural gas inventories were up 65 billion cubic feet for the week ended July 25. Consensus estimates were for about a 71 billion cubic foot build so this number is more bullish for gas than expected. However, the five-year average build for this time of year is about 55 to 60 bcf so, on that basis, the build is a little more than normal.
Natural gas prices are roughly steady at this time, down a few cents to about $9.62/MMBTU based on the 12-month strip. I suspect this report will be relatively neutral although it is a welcome change from the past two weeks where we saw builds way above normal.
With the return of hot summer weather, I expect we will see inventories continue to build at near-average rates over the next few weeks. In addition, the Atlantic hurricane season will likely put a floor under gas prices. So too European and Asian gas prices that remain way above US levels -- the current London-traded contract is at roughly $15 to $16/mmBTU.
I continue to believe the gas sell-off of the past three weeks is massively overdone. It appears to me that we are, at worst, building inventories at about a 1 bcf/day faster than normal pace.
Local media have reported that Andrew McCain, the son of Republican presidential candidate John McCain, has resigned his board positions at Silver State Bancorp and Silver State Bank for "personal reasons." The nature of those personal reasons is open to speculation.
The bank's business footprint includes Las Vegas, NV and Phoenix, AZ--formerly overheated housing markets that have been especially hard hit by the subprime crisis.
In its first quarter earnings report, Silver State Bancorp announced a net loss of $14.4 million and categorized 4.14 percent of its total assets as nonperforming (versus 1.28 percent for its peer group). The bank more than doubled its loan loss reserves from the end of 2007 in response to deteriorating loan performance. Needless to say, addition writedowns and charge-offs may be in the cards.
Oil and refined products inventory numbers have just been released. Oil inventories were down just 100,000 barrels which is less that the 1.3 million expected. However, crude oil inventories in the US are actually very tight right now and near the lower end of the average range. This is not the important part of the report.
Instead, I suspect the market will initially seize on the 3.5 million barrel drop in motor gasoline inventories compared to a 350,000 barrel build that had been expected. This is bullish for the oil complex and is the first postive report we've seen in a while. Motor gasoline inventories are still bloated seasonally but refiners are clearly taking steps to amerliorate the situation -- US refineries are operating at 87 percent of capacity, well under the levels you'd expect for this time of year.
The important thing to watch today is how oil will respond after, I suspect, an initial spike. If we hold the gains over the next few days it will suggest the sell-off in oil is about complete. That said, I don't expect that and am actually looking for a deeper pullback, perhaps top the $110 to $115 region. But don't misinterpret that short -term expectation -- expectations from some pundits for a deeper pullback to $80 to $100 are pure fantasy.
The Discovery Channel's new Planet Green boasts a variety of eco-friendly programming--from "green" cooking with everyone's favorite chef, Emeril "Bam!" Lagasse, to wilderness survival guides and everything in between. Although some shows are geared more toward an MTV-type audience, there's one in particular that's worthy of your attention: Off the Grid, featuring Les Stroud of Survivorman fame.
Stroud, a filmmaker and much more convincing survivalist than Man vs. Wild's adventurer Bear Grylls, produced two specials called "Stroud…Off the Grid" that originally aired on Canada's now-defunct Outdoor Life Network in 2006. Planet Green borrowed the documentary in an attempt to open more eyes to the use of alternative energy sources. The show highlights Stroud's family as they move "off the grid" onto a 150 acre bush lot in the middle of East Bumble, Nowhere.
With the green movement well underway, many people are asking, "What would happen if modern infrastructure (i.e., water, electricity and telecommunications) fell apart?" Stroud shows that it's possible to live on our own resources, namely using solar power, rain harvesting systems and an array of newer technologies--such as wind power--that allow for energy-conscious, self-sustaining living.
For more information on becoming energy independent and living unplugged, click here.
I am scheduled to do an interview for CleanSkies TV at 4 pm EDT this afternoon to discuss the recent drops in energy prices and what to expect in coming weeks. The full interview will be archived on their website at www.cleanskies.tv for those unable to watch it live. Be sure to check it out.
Judging by this article on washingtonpost.com, you'd think every automaker in the world should open up shop in China ASAP because of how quickly inventory is flying off the lots. After all, if SUV sales are were up 43 percent here, GM would likely be in better shape.
But further research shows that car demand overall in China is actually slowing, with sales increasing almost 6 percent less than expected this past quarter-its third consecutive quarterly decrease. Year-over-year growth for some automakers isn't favorable either; sales of GM models for the first half of 2008 rose only 12 percent, compared to a 19 percent jump over the same period in 2007. And production is expected to slow as well following a 17 percent price hike in oil by the Chinese government.
One of the main points of the Washington Post article--that emerging-market oil demand has risen sharply over the past decade amid a rising middle class and government subsidies--has certainly been noted many times over the past couple years as energy prices continued to climb. But missed growth expectations and decreased year-over-year growth don't seem to fully support the claim that "[c]ar ownership in China is exploding." Perhaps if this story had run last summer it might be a little more timely.
Our man in Athens, Yiannis Mostrous, sent along the following comment on recent events in Europe:
The capture of Radovan Karadzic, the former Bosnian Serb leader accused of the deaths of 20,000 people, has been celebrated in the Western media as a great victory were a war criminal will be brought to justice. This may be so.
What’s silly, though, is the idea that the Serbian government didn’t know where he was and that he had “reinvented” himself as a healer!!
Unfortunately, it’s been known for some time in the southeastern part of Europe that the Serbs were ready to “trade” Karadzic in order to achieve a fast track position in their desire to join the European Union. People in this part of the world are also speculating that pretty soon Ratko Mladic, his lieutenant, will also “be discovered” and handed over to the international court.
As Karadzic isn’t useful to anyone anymore while Serbia is in a hurry to join the EU, trading him while offering justice is being viewed as the best approach. Appeasing the international community while working toward achieving one’s goals is the great balance of international relations.
Generally, I love Alexandria, Virginia, the city I live in just outside Washington DC. Perhaps, it’s because I am a ninth generation Alexandrian. But, as much as I might like my home, I loathe city politics.
Typically, my issue of "FYI: Alexandria", the city’s newsletter, is confiscated long before I have a chance to read it. This is a good thing as it keeps my blood pressure down and generally improves my quality of life. Unfortunately, this past weekend, as I was returning from Japan, the postman spotted me in the corridor of my flat and handed the recent issue of FYI directly to me along with a box of mail.
Then, I made the mistake of opening that same issue and ruining my Saturday morning. Apparently, the most important thing that has happened in Alexandria in my absence is that the city has decided to spend some of my real estate tax dollars on trying to close a Norfolk Southern (NYSE: NSC) ethanol transloading facility located on the extreme western edge of the city. The city has made a point of highlighting the term transloading, I suppose with the intent of scaring people. But, transloading is nothing more than the process of taking ethanol out of railcars and putting it into tanker trucks for transport locally.
I was corresponding with Silk Road Editor Yiannis Mostrous, discussing the capture of Bosnian Serb butcher Radovan Karadzic earlier this week. And even having read the stories posted out of London and various other European sources, Yiannis penned a quick line that explained why Karadzic hadn't been nabbed before now--there have been stories going back years that Karadzic and his thug ally Ratko Mladic had a box and season tickets at their local soccer stadium and attended regularly.
Yiannis wrote: "Obviously a gift to the EU for early inclusion of Serbia in the family. Once they have further assurances, they will produce [Mladic] too."
Of course.
Yiannis is meeting with a journalist friend today and promises more on this from the pragmatic perspective in coming days.
Nowadays practically everyone uses a debit card to make purchases. It's easy. It's fast. It's convenient. The money you spend is taken directly from your bank account. But now there's a new kid in town, and it's raising red flags left and right: the 401(k) debit card.
The danger is that the money you spend with this card is directly debited from your retirement account. Much like a 401(k) loan, the debit card allows you to pay yourself back over time. But the increased ease and convenience of the debit card is a bit too unsettling. Now it's become much too easy to jeopardize your entire future with one swipe of plastic.
Today the Congressional Budget Office (CBO) released a research letter calculating the potential cost of the administration's plan to backstop the government-sponsored housing enterprises, Fannie Mae and Freddie Mac.
The report estimated this cost at $25 billion over 2009 and 2010. Although this is a round number that's easy to digest, the CBO concedes that the ultimate cost depends on a number of contingencies.
Such uncertainties include the performance of Fannie Mae and Freddie Mac's mortgage portfolios, the amount of capital the enterprises raise from other sources, and the Treasury Dept's criteria for determining whether or not to inject funds under its temporary authority. Needless to say, this situation is quite fluid.
At the same time, as a recent Mortgage Note released by the Office of Federal Housing Enterprise Oversight makes clear, Fannie Mae and Freddie Mac are absolutely integral to sustaining the nation's housing and mortgage markets.
The image below demonstrates the enterprises' importance following the collapse of the market for mortgage-backed securities issued by private firms:
Back in February, a survey conducted by American Banker found that almost 60 percent of banking executives believed that financial services companies faced a "crisis of trust" among their customers--the worst housing crisis since the Great Depression tends to have that effect on people.
Last Friday, that crisis of trust intensified.
The sight of irate IndyMac customers gathered around closed branches in an effort to access their money did little to inspire confidence in the US banking system. In fact, the highly-publicized run on deposits at IndyMac bank continued even after the FDIC had reopened the branches under its auspices.
Mattress companies salivated over a potential bump in sales of "cash storage models," while banks and regulators fretted that IndyMac's failure could prompt a jump in withdrawals at other institutions--particularly among customers with account balances in excess of the $100,000 limit on the FDIC's deposit insurance.
The FDIC should be commended for its efficient handling of IndyMac's failure; however, a new FDIC rule designed to "maintain public confidence in the banking system" by making future resolutions go much more smoothly only makes me more confident that more bank failures are on the horizon.
At the Summit this year world leaders of G8 countries resolved to cut carbon dioxide emissions by 50 percent by 2050. One of the biggest planned contributors to that cut: promoting better energy efficiency.
But while politicians discuss energy efficiency, the markets are forcing change. At this time, it really has little to do with carbon dioxide; rising energy prices are forcing companies and consumers to make changes.
Consider that General Motors truck and SUV sales for the US are off more than 21 percent since the beginning of the year. Car sales are down because of the economic slump but only by around 9 percent. That's a sure sign that consumers are changing their behavior in response to higher oil prices. It has absolutely nothing to do with fuel efficiency standards or any other government regulations, rather it's the invisible hand of higher prices at work.
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