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Oil & Energy Archive

China’s Olympics Vacation – How Real is the Drop In Commodities and Inflation?

We all know the relief madness over the past week or so: oil got denied when it almost tapped $150 and dived to $123, taking down the rest of the commodities world- metals, agriculture, coal…you name it. Meanwhile, banks hit a trampoline and the XLF rebounded some 50% off the lows. Yes, it’s great to see gas here down to $4.59 from $4.89 just 2 weeks ago. Sure, maybe it’s the speculators the regulators have now caught, or maybe it’s money coming out to chase the banks off their lows.

But- what if it’s because China has halted a big chunk of it’s manufacturing to clear the air for the Olympics that starts exactly in 2 weeks? I haven’t figured out the effects yet. Just thinking what will happen starting September, when the Olympics are over, and the China manufacturing beast roars to life again? Devouring commodities for breakfast, lunch, dinner, and a midnight snack 7 days a week – because the Chinese are workaholics and wouldn’t know what to do if they had a day off? (I am serious – this is what my dad tells me from his business trips to China every 2 months) Sure, one could argue that China has been limiting it’s manufacturing to clean up it’s air since early in the year, yet commodities kept climbing. There probably was quite a bit of speculative money or money that sought safe haven away from the banks. However, China did not completely slam on the brakes till recently. And, had China not been slowing down it’s manufacturing all year, where would commodity prices be even without the speculative money? Would oil be at $150, and in that scenario NOT be due to speculation? Meaning, where should we expect commodities to rebound to once China goes full steam again?

Also, for those hoping China slowed down because the U.S. and Europe have slowed to a crawl, I beg you to do more research and think again. My dad and his business partners are having trouble placing their orders at factories in China because domestic demand is too strong. Factories are actually turning down orders for exports, the very exports that catapulted China’s economy to the fastest growing. If I had to place a wager, I’d bet China’s recent weakness is self-imposed for the Olympics, and not because it’s being dragged down by U.S. slowdown. Again, we Americans always thinking we’re the center of the world, and the rest of the world depends on us. This is a very dangerous tunnel vision and, as Mitt Romney said, will turn us into a second rate country like France in no time.

My dad is currently visiting factories in China, saying his factories have been required to set aside roughly ~20% of steel for China’s domestic use (so he can’t get his products made as they’re exported here to the U.S.) This restriction is because steel mills have been shut down to clear the air for the Olympics. Also, he says China is fixing steel prices 20% – 35% below market prices specifically for the earthquake rebuild. This is to ensure steel availability to the damaged areas.

This corresponds with the following reports from Capital Link Shipping’s Imarex report (yes, shipping research websites are great even if you’re not rolling the dice on a DryShips):

Steel mills affected by the Olympics have finally begun suspending production to ensure clean air in Beijing. Domestic Chinese steel consumption, although very strong, is also expected to come down a bit due to a normal summer lull in consumption. In addition, production costs (iron ore, coking coal, credit issues) and coke shortages are making it harder for small steel mills to keep up production. ~http://files.irwebpage.com/reports/shipping/08l26Pvi9u/ImarexJuly22.pdf

And on the July 25h report:

All eyes are on China / Olympics. The skies in Beijing are still smoggy as hell, expectations point to a slowdown in industrial production, but no indication yet of any significant reduction in iron ore imports. The Chinese are good at always keeping us guessing. One important thing to point out: even if shortterm sentiment is a bit iffy, medium-term sentiment is really good considering the period activity we’ve been seeing. Interesting side note: for the most part, there’s a general consensus that dry bulk rates will trend sideways / fall for the Olympics, then rebounded significantly in the fourth quarter and approach record freight levels by the end of the year. ~http://files.irwebpage.com/reports/shipping/08l26Pvi9u/ImarexJuly25.pdf

Be careful out there. And remember, don’t assume what seems the most logical, or what you want to believe, to be reality. The biggest risk is not knowing, so do your research.

Referenced SuckingLess.com Research Tool:

** Disclosure: no positions in the stocks mentioned **

Feeling Very Violated as MDR Gets Dropped Below $49

Yeah, I don’t usually make venting posts, but seriously, who the heck is relentlessly selling MDR at the open? Took it straight from the open above $54 down to $49!!! Someone’s dumping MDR like it has subprime exposure! Are they selling it because oil is down lately? HAL has much more oil & gas exposure and it’s not even down this ridiculously much. Or, are people just selling anything non-financials so they can jump into financials…AFTER this 50% move in the XLF?!?! Are so many people seriously trying to get into the financials or short cover the financials that they’d dump the actual good stocks…the stocks with earnings? Why would you sell the companies that are making money everyday for companies that are losing money everyday… Are the banks out of the woods after this earnings report? HEEEEECK no. Just for the moment people took the prices down to where THEY WILL BE at the end of the year as housing keeps getting whacked…just shouldn’t be there now. It’s like selling a beemer to buy a tricycle just because the tricycle pumped up its flat wheels. This is wrong, so wrong. The sharpest snapbacks occur in bear markets. Whoever’s jumping into financials here are gonna be pantsed like nobody’s business. If you think you have too much money, donate it to charity. Throwing it away on picking financials bottoms.

**Disclosure: I am long MDR and bought MDR Feb Calls as MDR dropped below $49**

Chesapeake Launches Shale.tv for Programming on the Barnett Shale and Other Shales

Thanks to today’s CNBC Fast Money show for pointing this out (at least to me). As if shows like Extreme Engineering’s Sahkalin Oil & Gas Complex on the Discovery Channel or the site GoHaynesvilleShale wasn’t enough, we get to go deep into the shale action along with Aubrey McClendon! Is it really possible for me to become a oil wildcatter roughneck just sitting at home watching Shale.tv? I hope so! Here’s Shale.tv’s self-introduction:

Shale.tv is a unique, online video channel designed to provide a platform for in-depth information, discussion and analyses about the Barnett Shale and other shale natural gas plays in the US. Through a combination of live talk/interview shows and interactive and archived content, we hope to provide thorough, accurate and independent information about the complex issues and opportunities of developing natural gas domestically. We seek participation from all the stakeholders in these shale plays.

For now, I’m still using the following SuckingLess.com research sites for my natural gas holdings:

**Disclosure: I own shares of CHK as of this post**

Fast Money’s Joe Terranova Says Nat Gas June Highs July Lows?

Coming into July, we were riding the Natural Gas high like we had a straight shot to the moon, especially off big shale announcements like Chesapeake (CHK)’s Haynesville Shale venture. Sure, nothing goes vertical forever and we all knew natural gas would have to “correct” for a while. However, for us at-home mom-and-pop non-commodities traders, a lot of the time it felt like we’re just riding this straight shot to the moon blind.

Thankfully, veteran commodity trader Joe Terranova on CNBC’s Fast Money had a simple rule of thumb to offer: June Highs, July Lows. Does it always work? Of course not! Market’s aren’t that easy! But I did a little check and found this rule of thumb is a good one any of us with natural gas exposure to keep close to heart. I used charts from the Federal Energy Regulatory Commission’s Natural Gas Market info- one of my favorite research tools I’ve collected at my SuckingLess.com website.

FERC Natural Gas Market Overview - Daily Henry Hub Spot Prices 2002-2008

As you can see, other than the out-of-norm Katrina event in 2005, July natural gas prices have generally been lower than June prices. This weakness seems to persist from July into early or mid august. While natural gas prices in the following December-Januarys are usually higher than the July-August weakness, there are a few years where Natural Gas prices just keep sliding the rest of the year. I suppose Natural Gas prices still depend on the weather and how much of it is used, so it still has that random factor that we should all be aware of.  Personally, I think selling some Natural gas, whether taking partial or full positions off, seems like a smart thing to do given historical trends suggest July will be lower than June. Sure, you might miss another “Katrina” spike, but that feels more like rolling the dice.  Because I didn’t want to be completely out natural gas in case we get the hurricane spike, I’ve kept 25% of my HAL position, but bought USO puts against it.

However, this year, Natural Gas prices have been on a steady climb alongside crude oil’s climb, natural gas looking much less volatile than in the past. Natural gas isn’t a direct replacement of crude oil, but there are various users of energy who can switch between the two. When crude oil gets too expensive, they would switch to natural gas, thus increasing natural gas’s demand and raising it’s prices alongside crude. Jim Cramer offers a separate rule of thumb: Natural Gas prices trade at roughly 1/6 the price of crude oil. So, at the moment, either crude oil is too expensive or natural gas is too cheap

Also, I have offered the analysis of the trend to use much more natural gas for electrical power generation by utilities around the world. This should decrease some of the volatility in natural gas prices as demand becomes more consistent to produce consistent electrical power. Still, we need to do something about our limited storage capacities!

Remember, beyond just owning the companies, dig just slightly deeper into the businesses the companies are in. That’s why I started SuckingLess.com, to collect the most relevant industry magazines and information useful to investors.

SuckinLess.com Research Resources Used:

**Disclosure: I am long of CHK, HAL, and USO puts as of this post**

Badger Meter Profits Keep Flowing, up 29% in Q2

Badger meter is popping a nice 9% today on strong Q2 earnings. Compared to Q2 of 2007, Q2 2008 sales are up 20.1%, net earnings up 28.8%, and EPS up 26.3%. These results are in the face of what appeared to be a challenging environment for utility and industrial component suppliers. Chicago Bridge & Iron (CBI) confirmed the decrease in utility and local municipal spending (local municipalities have been hit by the credit crisis and the decrease in tax revenues due to rising foreclosures). However, Badger Meter showed us that water utilities are still buying the small infrastructure components such as meters and valves, even as larger projects such as those Chicago Bridge & Iron is involved in are being scrapped. This is another reminder of the big sea change I’ve been concerned with for a while: U.S. infrastructure is deteriorating fast and must be replaced and upgraded. If new big projects such as new utility stations or pipelines have to be canceled, that puts even more pressure on the existing system, requiring advanced technology such as Badger Meter’s AMR (Automatic meter reading) technology to make the existing system more efficient and reliable. Badger Meter also mentioned strength in precision valves and flow sensors due to the continued demand in the petroleum industry.

Also, Badger Meter’s recent acquisition of an automatic metering infrastructure (AMI) system is looking good. Watch for accelerating growth in this product line.

The majority of Badger’s sales are domestic, which is where the weakness concerns have been.  International infrastructure should still be strong across the board.  So if Badger can find strength in the U.S. domestic market, this is a good omen for both Flowserve (FLS) and SPX Corp (SPW), who are leaders in flow technology.

More on Badger Meter:

Additional Water Utility Resources featured on SuckingLess.com Research Tools

**Disclosure: I own shares of FLS and SPW as of this post**

ABB acquires U.S. Transformer Company Kuhlman Electric Corporation for America Presence

Transformers Optimus PrimeABB finally made the move I’d hope they make! In this A.D.D. market only able to focus on 2 things: financials and oil, great things are happening at individual companies and not even registering on the radar. ABB acquires U.S. transformer company Kuhlman Electric Corporation. This is one of the sweetspots (of the limited investable opportunities) for the power grid upgrade and buildout. I own SPX Corp (SPW) exactly for their transformer business, SPX Corp’s fastest growing business:

“Our Industrial Products and Services segment had revenues of $966.4, $836.7 and $716.0 in 2007, 2006 and 2005, respectively. Of the segment’s 2007 revenue, approximately 44% was from the sale of power transformers into the US transmission and distribution market.” ~SPX Corp’s 2007 10-K

One of my very first blog post dealt with the twin drivers for the power grid infrastructure suppliers: U.S. power grid outdated by some 30 yrs, always using near capacity and a system shock away from massive destructive blackouts. The complementary driver: BRIC (and then some..Mid East especially, no one talks about Saudi Arabia building 4 Dubai like cities….) countries building whole CITIES, of which the power grid is the foundation.

The problem with investing on this theme was Read the rest of this entry »

Trading Brazil: Is the next teet to milk Brazil financials and NOT Commodities?

PBR and RIO have been Brazil’s stars in this latest Brazil run, dominating positions in the iShares Brazil ETF ticker EWZ. PBR and RIO’s stories are well known, and I actually think RIO looks done for now given the continual weakness in nickel prices. Could financials be the next leg up for Brazil’s markets?

BLOOMBERG: REINSURERS RUSH TO BRAZIL AS PREMIUMS CLIMB 40%

“By Telma Marotto

July 11 (Bloomberg) — Swiss Reinsurance Co. and Munich Re, the world’s two largest reinsurance companies, are leading a rush to Brazil to capitalize on the biggest deregulation of a market since China opened up more than six years ago.

At least 13 companies have been authorized to operate since the government ended its 69-year monopoly in April, said Armando Vergilio dos Santos Junior, head of Brazil’s insurance regulator, who estimates the number will reach 40 by December. He expects reinsurance premiums to rise 40 percent to $3.5 billion this year and then double to $7 billion by 2011.”

Full Article: http://www.bloomberg.com/apps/news?pid=20601109&sid=aGQItoNVF_As&refer=home

Purchasing.com: Potash supply at risk, more price hikes expected

Purchasing.com: Potash Supply at risk, more price hikes-

“New concerns at major producer in Russia could push fertilizer prices up again
By Dave Hannon — Purchasing, 7/14/2008 9:33:00 AM

With demand booming and more supply expected to become restricted, potash prices are rising yet again.

In Russia, a vital rail line at one of the world’s largest potash mines could be closed soon, due to a rapidly expanding sinkhole, and put the mine down for at least several weeks until a new rail line is completed.”

full article:

http://www.purchasing.com/index.asp?layout=article&articleid=CA6578219&article_prefix=CA&article_id=6578219&rssid=268

Engineering/Tech Linkage: Boeing reduces Fuel and Carbon Emissions with Air Traffic Control management

Non-stock related. Just thought this was interesting. Too early in development and deployment to have any significant impact. Let’s just look at this as a thoughtful science experiment with good results.

SEATTLE, July 11, 2008 — Boeing [NYSE: BA] and partners in industry and government achieved significant reductions in fuel consumption and carbon dioxide emissions during a recent deployment of an innovative Air Traffic Management (ATM) concept called Tailored Arrivals.

From Dec. 4, 2007 to March 23, 2008, United Airlines, Air New Zealand and Japan Airlines completed 57 flights into San Francisco International Airport that utilized a continuous descent rather than a series of level segments as now required. The Tailored Arrivals approach reduced fuel consumption during descents by up to 39 percent, depending on airplane type, and total carbon emissions by more than 500,000 pounds.

“Concepts like Tailored Arrivals potentially can be deployed quickly and at relatively low cost because the technology is in place today,” said Kevin Brown, Boeing vice president and general manager of Air Traffic Management. “As more airlines and airports use it, we move closer toward realizing the benefits expected from the Next-Generation Air Transportation System (NextGen).”

>>Read full news release at Boeing: Boeing Tailored Arrivals ATM Concept Cuts Fuel, Emissions in Initial Deployment

**Disclosure: No positions in the stocks mentioned.**

TransOcean’s view of Oil’s Fundamentals from Deep Sea

Volatility in the energy prices got you feeling a bit loopy? Yeah me too, but looking through all the daily madness at the underlying industry fundamentals makes me feel much better. See through the smoke screen of the daily price swings and see the reality- where money is actually put to work to change the world, not just an investment vehicle or hedge. TransOcean (RIG) just signed another 5-yr contract for one of its deep sea rigs and the pricing power couldn’t be better. The 5-yr contract signed today is worth $1.19 Billion while 2 comparable contracts signed just 3 months ago (April 7th) were at $928 per ship for 5-yr: Read the rest of this entry »