Friday – Gas Still Soaring + A Company Review.


Commodity Watch:

  • Crude Oil closed up another $0.95 at $105.47. Blame more dollar weakness, increased Latin American tensions and a general flight to perceived safety in commodities as the equity markets took another financials related plunge. This morning crude is trading off slightly as a pitiful jobs numbers weighs on it despite another record low for the dollar.
  • Natural Gas: April contract gas closed flat at $9.74 after another "in line" to slightly low gas storage withdrawal was reported. This morning gas is trading $0.20 higher on very light volume as traders once again try to game the system. 



Holdings Watch:


  • DRYS Entered the March $75 calls for $3.80. The stocks keep diverging with the day rates. That won't last, one way or the other.



  • (UNG) Entered the $46 March puts for $1.00 and the $47 puts for $1.45.

Odds & Ends

Analyst Watch: yada 

BPZ Resources (BPZ) - Interesting Little Peru-Centric E&P.

Note: the ticker and the name of the company are not the same. If you are looking at a $200 quote you have the wrong issue. This is a $18.66 stock as of yesterday's close. 

Background: This a Houston based E&P with all assets in Peru and some non-operated acreage in Ecuador. They're focusing on proving up undeveloped proven reserves via low risk development wells and re-entries of existing wells. Their four exploration licenses are in good hydro-carbon rich territory. In aggregate, they have worked up 50 prospects on their acreage.

Peruvian Economics: Favorable royalty environment, low operating costs.

To get close to their margins take WTI and subtract:

  • $4.50 per Barrel for Royalties
  • $8 per barrel for location discount
  • $7.50 per barrel for cash operating costs (LOE, G&A, production taxes)

Net operating margin  = (WTI - $20)

So at $105 crude they would gin cash at a rate of $85 per barrel. Insert whistle here. 

Their Operations: Peru - 4 Blocks

  • Block Z-1 (Pacific Ocean) (100% working interest). 740,000 acres from coast line to depths of 1,100 feet. They are focused on the Corvina & Albacore Fields:
    • Corvina - Oil (natural gas structures as well but first they are concentrating on developing the oil)
      • 10,000 square km of 2D seismic over the structure.
      • this is an old field with 18 existing wellbores and 4 old platforms,
      • they began work here in late 2006 and have drilled 3 new wells and recompleted an old one and have production from two of these (the 21XD and 14D) of approximately 4,200 BOEpd as of 2/08.
      • they plan 2 more wells, the 18 XD is set to be completed by April 1 (thinking it adds another 2,000 BOEpd) followed by the 20 XD (also 2,000 bopd) by July 1 in essence doubling production.
      • another well, the 15D will be drilled later this year to delineate reserves further afield from the platforms.


  • These four wells form the backbone of their guidance: Using very back of the envelope math and assuming 2008 oil averages $70 in a low case and $90 in a high case I get CFPS for 2008 of:


  • Albacore Structure, large 6,000 acre structure, a little further offshore than Corvina
    • This structure had 8 wells drilled on it during the 70s and has one old platform with 3 shut in wells on it at present.
    • they plan to twin a well (the 8-X-2) during 4Q08 and
    • then to recomplete the 3 shut in wells mentioned above,
    • a fifth new well is planned for later in 2009.
    • they expect production of 8,000 bopd by 3Q09 and that's fine as projections go (2,000 bopd per well) but I don't have any data to sink my teeth into on the original wells to get a handle on productivity ~ will do a little snooping here.
    • Clearly they see this as the growth engine for 2009 and if it comes in as expected you could see CFPS up ~ 50% in 2009 into the mid $3's per share.

Onshore Peru Blocks: 

  • Block XXIII -  Mancora Gas Play
    • Basically they envision that a large structure gas play seen off the coast in the Z-1 block extends 50+ miles running from southwest to northeast, across Block XIX and into this block.
    • The market for potential gas volumes from this play is still under development and would serve increasing Latin American demand for natural gas coming from power generation (they plan to build a gas-fired turbine), LNG, and piped gas to Ecuador.
    • Planning a 3D shoot for 2008/09
  • Block XIX: they have 200 km of 2D seismic and are planning a test in the fourth quarter. 
  • Block XXII
    • Contains several large structure and there is oil production nearby.
    • have some 2D seismic and are planning to conduct a 3D shoot 2008/09.

Ecuador - Block 2: Plan to participate in some directionally drilled onshore to offshore targets with Brazilian operator Pacifpetrol.

Reserves: They are using Netherland Sewell (NSAI) for reserve estimates. This is a high quality firm and speaks volumes to management's conservatism (NSAI and Ryder Scott are the best in the reserves business often underestimating reserves).

  • For Corvina alone, and excluding the success at the 18XD well which occurred in 2008, NSAI has put 1P Reserves (the proved reserves the SEC allows you to book at year end) at 17.8 mm barrels.
  • NSAI's estimate of 3P reserves (proved, probably, and possibles - see definitions page) balloons to 59.8 million barrels from the $974 million of PV10 they credit the 1P reserves with.  On this basis, the PV10 of the reserves at Corvina begins to justify the valuation of the company. Year end 3P PV10 = $1.877 billion vs a Total Enterprise Value for (BZP) of $1.188 billion, but the market won't give you credit for 3P reserves until they start moving up the chain towards 2P and 1P status.
  • I'd also point out that the reserve estimates don't include anything beyond Corvina for now which leaves room for upside revisions in the near term (2008/2009) as the company begins to test some of the other blocks.

Valuation: Very much depends on their ability to execute at Corvina in 2008 and at Albacore in 2009. While PV10 is a useful benchmark for company valuation when a company is in the development stage (ie, they have little to no production) it becomes less valuable as they make the transition to a viable, cash flowing entity (unless they're being acquired). I find it unlikely that they will be acquired for the value of their 3P reserves but they might get $10 per barrel for them in the ground which would not justify the current stock price. However, if they generate the mid $3 CFPS that success at both Z-1 fields would indicate for 2009 then the company is a bargain based on its growth rate and low operating costs.  

In A Nutshell: Interesting. Favorable economics and an apparently low risk development program. The Peruvian government is not as apt to interfere as much as in some neighboring states. Management is aligned with the company's fate holding a quarter of the outstanding shares. Institutions hold another 42%. I like that it's not costly on a forward basis and I like that it has multiple stock catalyzing events in the near term. Their are no options here but I plan on working up a little less back of the envelope model and perhaps taking a piece of the common and settling back for a couple of years to let it run. I'm not going to rush either as the name is oily (at least until they get some of the gas structures (Corvina has a lot of gas + plus the Mancora gas play mentioned above flowing) and at $105 oil and the run the stock has had, I feel it could be due a pullback. I plan to publish this one as a separate piece in coming days with a little more detail.


81 Responses to “Friday – Gas Still Soaring + A Company Review.”

  1. 1
    zman Says:

    Texana – saw your comment, let me get back to you after a cup of joe.

    they actually pay people to predict the jobs numbers? they stink.

  2. 2
    zman Says:

    dry bulk rates close out the week on an up note:


    and the stocks are going to get hammered with the market at the open. unreal.

  3. 3
    Sambone Says:

    8:41 am EST

    Crude Lower, US Jobs Data Watched

    From Market Talk
    1006 GMT [Dow Jones] Crude oil futures are trading lower on profit taking, with little fresh news driving prices Friday, and trading volume relatively light. Analysts suggest latest US employment data, due 1330 GMT, are likely to be closely watched. “The well planned scenario for today is for a weak US employment number, a further fall in the dollar and further gains in oil,” says Olivier Jakob of Petromatrix. “This should provide early support, but the risk is increasing that the scenario is too well written and has become too much of a main street trade.” Nymex April crude -65c at $104.82/bbl, ICE April Brent -57c at $102.04/bbl. (NHE)

  4. 4
    zman Says:

    knock, knock, anybody home?

  5. 5
    Sambone Says:

    yep, yep, I’m here

  6. 6
    apbd Says:

    I’m here, surrounded by ” red.”

  7. 7
    zman Says:

    Thanks, just checking…had someone having trouble getting on the site but it looks like its on their end (string between the 2 cups must be worn thin or some such).

    Big cap E&P wants to rally here. APA, APC, XTO making a go at green. Even VLO…not all red.

    Initial market reaction was a buy op on names like DRYS but I’ve got enough for now.

    Would add to my gas puts but that would ensure it goes to $15.

  8. 8
    zman Says:

    SD raised to outperform at Bear Stearns … better late than never.

  9. 9
    kaman Says:

    Z- LOL at rolling up UNG puts…please, NG doesn’t need any more “help”. And I feel your pain.

  10. 10
    Denise Says:

    Good Morning All I am back-
    this is worth a watch http://yegsz.com/Confusion/index.html
    Sambone-you will be happy to hear I joined your camp and tossed in towel on my finacials two wks ago -at a loss of course

  11. 11
    zman Says:

    K – what’s really sick is the stocks are no longer following it up. When it does sell, they will likely get whacked so timing, especially for the March E&P calls is going to be interesting (unless Charlie Gasparino can save us all).

  12. 12
    Sambone Says:

    D – Love my SKF!!!!

  13. 13
    Denise Says:

    Sambone- watch the Zell video-posted for your pleasure

  14. 14
    zman Says:

    Morning D – Glad your back … what an ugly market. We had some good luck with the stocks while you were away but I’m on the wrong side (for now) of natural gas…unreal move there.

  15. 15
    Sambone Says:

    D – Love it!

  16. 16
    Sambone Says:

    9:17 am EST

    Nymex Crude Drops On Payroll Data

    By Brian Baskin

    HOUSTON — Crude oil futures are trading lower, with grim news about the U.S. economy at least momentarily grabbing attention from the weakening dollar.

    Light, sweet crude for April delivery traded 10 cents lower, or 0.1%, at $105.37 a barrel on the New York Mercantile Exchange. Brent crude on the ICE futures exchange traded 1 cent higher at $102.62.

    Futures immediately fell nearly 70 cents following the release of U.S. jobs data showing nonfarm payrolls dropping 63,000 in February, the sharpest drop in nearly five years. The information provided yet more evidence that the economy of the world’s largest oil consumer is in trouble.

    Oil received a brief respite from the plunge as the dollar hit a new low against the euro on the same information. Each bottom seen by the dollar has sent more money into commodities priced against the U.S. currency.

    “We’re seeing a slight pullback based on the economic numbers, but ultimately the trend is higher,” said Mike Zarembski, senior commodities analyst at brokerage optionsXpress Inc. in Chicago, who sees the current rally taking oil to $110 a barrel before subsiding. “Some people with money to play with are going to take any dips and use the opportunity to buy.”

    Bad news about the economy until recently almost exclusively sent oil prices lower, but now is seen as increasing the chance of further interest rate cuts by the Federal Reserve. Lower interest rates tend to weaken the dollar, thus sending oil higher.

    “By adopting its new “transparency,” the Fed is telegraphing additional interest rate cuts, and that has effectively turned it into an open season to buy commodities and sell the U.S. dollar,” wrote Peter Beutel, with Cameron Hanover.

    The market has remained focused on oil demand ever since the Organization of Petroleum Exporting Countries decided Wednesday to hold output steady. U.S. crude inventories fell for the first time in two months last week, though much of the drop came on the West Coast, a market that is isolated from the rest of the country.

    Oil-exporting nations have had a relatively quiet week, with the exception of Colombia, where rebels attacked a pipeline amid rising tensions between the country and its neighbors, Venezuela and Ecuador.

    “A few days of stability on the geopolitical front could…help quell some buying enthusiasm,” wrote Jim Ritterbusch, President of Ritterbusch & Associates in Galena, Ill., in a note to clients.

    Front-month April reformulated gasoline blendstock, or RBOB, recently traded up 87 points, or 0.3%, at $2.6619 a gallon. April heating oil traded 2.13 cents lower, or 0.7%, at $2.9520 a gallon.

    —By Brian Baskin, Dow Jones Newswires

  17. 17
    zman Says:

    broad market actually went green for a moment.

    Just read a piece from credit suisse on the E&Ps..these guys have underperforms on EOG and NFX (booo) based on NAVs. I find that stocks trade on multiples of CF, not Net Asset Value, especially when there is growth involved (which there is in both of these cases) and when the reserves are extremely long lived (since getting to an NAV requires one to take a present value of the future returns…the longer it takes to produce an asset the more it gets discounted).

  18. 18
    Sambone Says:

    Overall market is up because of expected rate cut.

  19. 19
    zman Says:

    Re 18, ah, thought it was Charlie G but turns out to be Ben B.

    Energy mixed to up now, very dependent on market today, not so much on commodities. Just doing a little reading if anybody needs me.

  20. 20
    bill Says:

    dry bulk rates continue to soar with 1 cape over 200 k per day and a panamax over 100 k per day

    Im buying more drys today stock and options. this price is a gift from God!

    from tradewinds

    Bulk was back in a big way on Friday as both period and spot rates shot through the roof. China was crying out for Indian ore in particular and was willing to spend exorbitant rates, while the $200,000 barrier was punctured once again in the capesizes sector.

    The larger tonnage also threw up a 10-year charter for a Navios newbuilding at a very good rate while Australian cargoes were also heavily sought after in China.

    Period charters were top of the menu for panamaxes with charterers ordering units for one and two years, mainly in the mid-to-high $70,000 range.

    And supramaxes fed off the frenzy too as one unit was booked from India at an astonishing $100,000 a day.


    The Navios newbuilding is a 170,000-dwt unit out of Sundong late next year, Pacific King willing to splash $40,000 a day for 10 years.

    Pacific Bulk got the 184,000-dwt Star Sigma (built 1991) for three years at $63,000, though the charter doesn’t kick off for 13 months.

    The pick of the voyage charters was the $200,000-per-day one picked up by Glory Wealth to run the 176,900-dwt Orient Angel (built 2007) from Europe to Brazil and China.

    Dreyfus and SK Shipping both paid through the teeth to ply the same route. The French player got the 180,300-dwt Mineral Monaco (built 2005) for $185,000 and the Korean the 172,100-dwt Mona Century (built 2000) for $5,000 a day less.

    Cargill is making an absolute fortune from the relet of the 180,200-dwt Genco Augustus (built 2007) to Arcelor Mittal. The Indian metal merchant is paying $130,000 per day for a trip from Europe to Brazil and China while the grain giant only paid $45,300 back in July for two years.

    Rio Tinto and Glory Wealth both booked units for China-Australia roundtrips. The former paid $160,000 for the 177,900-dwt Iron Miner (built 2007) and the latter $115,000 for the 146,900-dwt Dong-A Helios (built 1986).

    There was also a large ballast bonus of $1.75m and a day rate of $145,000 paid by Rio Tinto for a trip from Australia to China with the 150,900-dwt Falcon Cape (built 1991).


    There was a wealth of one-year deals on the table and STX Pan Ocean led the charge.

    It booked three units for the period, the 73,900-dwt Lucia Bulker (built 1999) costing $77,000, the 75,600-dwt Arabella (built 2001) $74,000 and the 73,800-dwt Elinakos (built 1997) $72,000.

    Glory Wealth also spent $77,000 on the 76,800-dwt Belgrano (built 2004) for the period and Cosco got the 77,000-dwt RBD Capri (built 2008) for the year at $73,000.

    Deiulemar paid $62,000 for two years with the 75,700-dwt Salvatore Cafiero (built 2001) and $68,000 for 12 months with the 70,700-dwt Royal Ocean (built 1995).

    A stint of up to half a year with the 74,300-dwt Afovos (built 2001) set Cargill back $76,000 while Glory Wealth paid $77,000 for six to eight months with the 73,100-dwt C Journey (built 1995).

    The pick of the spot charters was the $102,000 Jaldhi paid for a trip from India to China with the 77,100-dwt Clara (built 2006) while another charterer paid a high $90,000 for the same itinerary with the 70,200-dwt Full Beauty (built 1994).


    And this route provided a truly outstanding rate in the supramax sector too. An Indian charterer paid $100,000 to run the 56,000-dwt Medi Dublin (built 2005) to China. A rate this high hasn’t been seen in a while but there is still a way to go to top the highs of last year.

    The 55,300-dwt Tai Hunter (built 2007) earned $68,000 daily and a bonus of $800,000 to go from Brazil to the Far East.

    Six or seven months with the 51,000-dwt Curia (built 2001) set Swiss Marine back $64,500 while BHP Billiton got the 50,300-dwt Desert hawk (built 1999) for three to five months at $62,500.

  21. 21
    zman Says:

    Firing up the printing presses:


  22. 22
    zman Says:

    Bill – why do you think the sector continues to sell off? DRYS is off from the $80s to the $60s since reporting a strong quarter. Rates are up since then. We’re missing something here.

  23. 23
    zman Says:

    ZTRADE: HK April $20 Calls for $0.55.

  24. 24
    kyleandy Says:

    bill in addition to DRYS i also have some NM. do u also like them? thks

  25. 25
    Denise Says:

    Z and Bill-read a column on (good sign)Drys this am from Epiphany Equity Research saying it has broken out of downtrending channel and if it gets to 90 will resume uptrend-
    points out conclusion of China ore negotiations ect…. If it breaks 60 get out-no global decoupling from US

  26. 26
    Bob Says:

    Bill and Z,
    On March 3, EXM announced the earning release date of March 12. Om March 5 they pushed it back to March 17. Does pushing back the date (especially just 2 days after the original announcement) seem like a negative indicator? Are we still looking for a $0.25 beat? At least the QMAR/EXM arb has dropped to 10.6%

  27. 27
    Sambone Says:

    Not happy campers.


  28. 28
    zman Says:

    Bob – they gave no reason for the delay. Sometimes that’s bad, sometimes its a scheduling thing. I’ll put in a call with them. The delay would not affect the expected results. The arb dropped but not with the desired results (dropped due as EXM fell instead of QMAR rising to meet).

  29. 29
    zman Says:

    Sam – I bet there are 20 more in the same position.

  30. 30
    bill Says:

    I also own exm, drys, and a little qmar.

    i have no explanation on the prices other than the market malaise.

    Thornburg mortgage implodes and drys goes down. I suppose you can this banking and financing mess will spill over to capital intensive business that need it.

    But wait, drys will earn 900 m in ebitda and can be debt free in 18 months if the ceo stopped buying things

    z said it well when he said ” The stocks keep diverging with the day rates. That won’t last, one way or the other.”

    What could change sentiment..a rise in the dow or s&p or the next qtrs earning release.

    In a few week’s drys will probably announce spending 1.3 BILLION on 2 ocean rigs…do you view that as a positive or negative. Day rates are 650 k per day

    the market didnt like it when he made a 400 m in ocean rigs as it gets away from the core focus of bulkers and the stock cratered 10 bucks. Will the same thing happen?

  31. 31
    doc Says:

    Bought AAPL calls 09 $200
    Bought Csiq
    Any thoughts on above???


  32. 32
    bill Says:

    on exm, the chairman forced out the ceo and the qmar insiders are filling in the board seats and ceo positions of exm. So it was more a takeover of exm by qmar.

    they are silent to why the kicked out the old ceo but i think they had to do it to get the deal done.

    is their financing to complete the deal?? The market is giving this a wide spread.

  33. 33
    Sambone Says:


    No Top In Sight For Towering Crude Prices


    NEW YORK — Where’s the top? The word from the oil-rich Gulf is we won’t know for a while longer.

    Builders of the Burj Dubai, already the world’s tallest skyscraper, said they are putting off the planned year-end opening until sometime next year.

    The final exact height of the building — something above 2,275 feet — is being kept secret. Developers know, of course, but they’re just not telling.

    In the oil market, sky-scraping crude prices may have much further to rise for many more months. The trouble is, no one — not even powerful Gulf oil ministers — knows where the top is.

    Getting beyond the headline-grabbing hubbub over the OPEC snub of U.S. calls for increased oil flows, the impact of the group’s Wednesday decision to keep output steady will be in how much global stockpiles rise in the weak-demand second quarter.

    It may be tough to convince consumers there’s a bright side to OPEC’s move, which helped push U.S. crude oil futures up by a highest-ever single day rise — a neat $5 and 5% — on Wednesday. Prices gained a further 95 cents to settle at a record $105.47 a barrel Thursday and are up 74% from a year ago.

    Each day of gains puts prices further into uncharted territory, with talk of $120 a barrel — as good as any other number — given the relative ease in which prices added $18.33 a barrel, or 21%, in exactly a month.

    But it is no small matter that OPEC says it won’t be cutting its second-quarter output, as it has in seven of the past 10 years.

    OPEC has been pumping about 32.3 million barrels a day so far this year, according to Dow Jones Newswires estimates. And at current prices, producers are likely to push out as many barrels as they can, even with a twinge of worry over a potential price slide.

    Watching Stocks Build
    By keeping output steady in the face of declining demand, global oil inventories will quickly rebuild, potentially taking froth out of the market and bringing prices down.

    Significantly, OPEC didn’t schedule its next meeting until Sept. 9, a signal that it is prepared to let current output levels ride for months and avoid policy speculation that inevitably builds around OPEC gatherings.

    That said, oil ministers will be out in force for a producer-consumer gathering in Rome late next month, where OPEC could face further pressure, if prices keep climbing.

    Watching a stockbuild is like watching for signs of an economic recession, often when it reliably detected, it’s beyond time to react.

    Still, if OPEC has its sums right, stocks should build quite a bit. It’s fashionable in today’s market to say the fundamentals don’t matter. While commodity funds, driven by the weak dollar, are playing a hefty role in the volatile market, clear signals of the global supply/demand balance would trigger a rethinking.

    For OPEC, deciding to keep output officially unchanged was easy, the hard part now is seeing into the future.

    The size of a critical stockbuild will depend largely on how well OPEC assesses oil output from outside the group and reacts accordingly. Already, there’s widespread disagreement on the vital numbers.

    The OPEC Secretariat’s February assessment put non-OPEC output in the current quarter rising by 850,000 barrels a day from the fourth-quarter of 2007. That seems sharply overstated, as the International Energy Agency, the Paris-based watchdog for the major industrialized countries in the Organization for Economic Cooperation and Development, sees non-OPEC supply rising by less than half in the quarter, at 380,000 barrels a day. IEA’s next update comes out March 11, OPEC’s on March 14.

    Slowing US Demand
    Wednesday’s price surge was triggered in part by an unexpected 3.056-million-barrel drawdown in crude oil stocks, following seven weeks of gains. But the drop was far less significant than it seems; 2.4 million barrels of the decline occurred on the West Coast, which is essentially an isolated, separate market and heavy fog closed Gulf Coast shipping lanes, cutting imports in the week.

    It’s worth noting that while U.S. refinery operations jumped by 1.23 percentage points in the latest week, refinery operations for all of February were in line with expectations. Crude oil input in the four weeks ended Feb. 29 averaged 14.629 million barrels a day, down 1.5% from the estimated January level, and nearly 200,000 barrels a day higher than a year ago.

    After a second-half 2007 drop in U.S. crude oil stocks of nearly 69 million barrels — the most since 1930 and 2.8 times larger than in 2006 — crude stocks are near the middle of their five-year average.

    U.S. oil demand in 2007 was flat with 2006, when it fell 115,000 barrels a day, to 20.7 million barrels. The decline was the biggest since 1991.

    In recent weeks, signs of weak gasoline demand — amid the highest inventories since 1993 — haven’t stopped retail prices from rising to near record levels well before the peak summer season. Diesel prices have set record highs over the past two weeks, potentially adding to costs of the multitude of items that travel by truck and rail.

    February preliminary data from the federal Energy Information Administration show demand down 3.4%, or more than 500,000 barrels a day, from a year ago.

    No Short-Term Solution
    U.S. Energy Secretary Samuel Bodman rejected the notion of weakening demand in the world’s biggest oil consumer, saying it was taking a “pause” and advising against focusing on most recent data “as opposed to trends.”

    Nevermind that Bodman’s buoyant view of U.S. oil demand plays against the U.S.” oft-repeated losing argument with OPEC — that high prices cut oil demand.

    OPEC’s decision to keep output steady was a replay of a February move that followed extraordinary face-to-face lobbying by President George W. Bush with King Abdullah, the leader of Saudi Arabia, the world’s biggest oil exporter and de facto OPEC leader.

    Bodman said the decision was “not a slap in the face,” but he sounded deflated. There is “really nothing” that the U.S. can do to bring down short-term oil prices but to lobby OPEC and other producers to boost supplies.

    Bush told a renewable fuels conference Wednesday that it is “obvious” there is an imbalance between oil supply and demand and said long term that the U.S. needs to cut its oil use.

    “We’ve got to get off oil,” Bush said, later joking “it probably didn’t help today when I rode over (to the conference) in a 20-car motorcade.”

    EIA said Wednesday that with increased use of renewable fuels, the price of imported crude, comparable to the U.S. benchmark, would be near $74 in 2010 and $59.85 in 2015.

    Nymex crude oil futures for August-November 2010 delivery settled Thursday at $99.01 a barrel. Crude for December 2016 settled at $102.43 a barrel, a record for the farthest-forward contract.

    (David Bird is senior energy correspondent for Dow Jones Newswires)

    —By David Bird, Dow Jones Newswires

  34. 34
    bill Says:

    z- how do you feel about drilling rig business

  35. 35
    Sambone Says:

    Jim Rogers shoots his missles! Love it. Read this article first and then read Jim’s response.

    March 5, 2008

    MONEY TALKS: Commodities, An Accident Waiting To Happen
    By Alen Mattich


    LONDON — That commodities suffered a bump yesterday was all the more notable given the size of its massive recent run-up.

    The CRB commodities index has risen 14% so far this year, with most of those gains coming over the past couple of weeks. OK, so there was a near 2% drop yesterday, but the widespread feeling is that there is plenty more upside to come.

    Commodities are, after all, a prime investment hedge against the scourge of inflation. And inflationary pressure is threatening to boil over like it hasn’t done for decades.

    Last month, U.S. producer prices saw their largest year on year gain since the death of the last great inflation, back in the early 1980s. Some oil producing countries, particularly the Gulf States, are suffering consumer price rises in the double digits. Chinese inflation is rising ever faster, triggering wage rises, which, in turn, merely threaten to feed the upward spiral. Given that China has been the globe’s major disinflationary force during recent years, that’s a worry for everyone who wants price stability.

    U.S. inflation expectations, which had been surprisingly well behaved, have started to climb again.

    But with fixed income bonds offering paltry returns — yields on U.S. TIPS with maturities up to five years are negative — it’s little wonder there’s been booming demand for commodities.

    Unfortunately, the asset class has become too good a hedge over the short term. Which will make it a very bad one over the longer term.

    Commodities tend to be relatively very illiquid, the overall size of the market is small and there is every reason to believe it’s no longer anchored to fundamentals. In other words, commodities have just become the latest in a string of bubble investments.

    To begin with, the commodities market is small.

    Global money markets are worth $6.4 trillion, government debt markets $26 trillion, corporate bonds $11 trillion, equities $51 trillion and asset backed securities around $11 trillion, according to Bank of England estimates.

    By contrast, Barclays Capital estimates that just $175 billion is invested in commodities. Annual global production of oil, which makes up around half the global commodities market, comes in at $300 billion.

    Or to look at the derivatives markets as a proxy for the size of the underlying market, the Bank for International Settlements estimates that while the notional amount of over the counter commodity global derivatives was worth $8 trillion last summer, that pales next to the $58 trillion in foreign exchange contracts and $388 trillion of interest rate contracts.

    So it’s easy to see how relatively small flows out of traditional asset classes into the commodities markets could cause wild price swings.

    That those price swings reinforce the inflation story can’t be ignored either. Core inflation in most developed countries (and, indeed, China) remains relatively subdued. Food and energy prices are the villains of the story.

    If commodity prices are a bubble and will be subject to correction, as Julian Jessop at Capital Economics thinks, headline inflation rates will fall back pretty fast.

    As for those who argue commodity prices are a function of supply constraints as well as demand — well, historically, prices have done wonders in fostering new production. To judge by the rate of merger and acquisition activity among mining companies, new supply will be coming on stream just as the U.S. drags the global economy into a slowdown by next year. Agricultural supply is likely to respond even faster.

    Longer term it’s worth remembering that, historically, the real price of commodities has fallen steadily with innovation. There’s no reason to think this innovation has stopped. In fact, with the opening of India and China, two vast stores of brainpower, you’d think innovation would pick up.

    Alen Mattich is a senior reporter and has been writing a column on market strategy for five years. He studied economics on both sides of the Atlantic in the days before the supply-demand curve had been discovered.

    —By Alen Mattich, Dow Jones Newswires

  36. 36
    Sambone Says:

    March 7, 2008

    Jim Rogers Says Commodities Market’s No Bubble

    Dow Jones Newswires

    Commodity trading guru Jim Rogers weighs in on a Dow Jones Newswires column, MONEY TALKS: Commodities, An Accident Waiting To Happen (March 5), saying he’s “startled that DJ would publish it.”

    Rogers writes:

    1) Any one who uses the CRB as a gauge of commodity prices knows little about commodities or indexes.

    2) The columnist writes that “annual global production of oil, which makes up around half the global commodities market, comes in at $300 billion.” 85,000,000 barrels of oil are consumed every day. Oil is over US$100 per barrel. There are 365 days in a year. Who taught him arithmetic?

    The commodities markets are gigantic. The amount of rice and other food that trade 365 days a year dwarfs the NYSE (about 250 days a year.)

    3) “Core inflation in most developed countries (and, indeed, China) remains relatively subdued.” Where does the columnist shop? The U.S. government says there is no inflation, but most other governments do not lie — e.g. Australia, China, Norway, Middle East, Europe, etc. Has he priced education, entertainment, health care, tolls, taxes, etc, etc? His butler must do his shopping for him or else he errs in saying prices are not up and rising.

    4) “To judge by the rate of merger and acquisition activity among mining companies, new supply will be coming on stream…” Now we know he is totally off-base. This activity does zero to increase supply. In fact it insures less supply down the road as the newly merged companies have more leverage on their balance sheets and therefore less money for exploration, mine openings, etc. They also go though periods of digestion which means their operations are slowed for awhile, again slowing future production.

    5) “Agricultural supply is likely to respond even faster.” Someone should tell him that it takes years for coffee, rubber, orange, palm trees to mature. Even doubling acreage (which is very difficult and in fact impossible) does not double production since it brings in marginal acreage. Besides, where will he get the farmers, land, tractors, tires, etc.? Few have gone into farming in recent decades. There are shortages of everything to do with production.

    Agricultural inventories are the lowest in 40-60 years. They must be rebuilt. Suppose there are droughts, crop failures, etc., again after years of very good production in most of the world.

    6) Where is all the oil going to come from which is going to drive down the price of oil and keep it down? I would like for him — or anyone — to tell us so we can invest in it too.

    7) “Longer term it’s worth remembering that, historically, the real price of commodities has fallen steadily with innovation. There’s no reason to think this innovation has stopped. In fact, with the opening of India and China, two vast stores of brainpower, you’d think innovation would pick up.” Yes, but we have had many recurring long, multi-year bull markets in commodities despite repeated innovations such as clipper ships, railroads, electricity, radio, TV, computers, refrigeration, etc. All of his “innovation” had better hurry. I did not realize innovation led to huge supply increases the next afternoon or the next week or even the next year.

    8) I have started a folder of all the people like him who keep calling the “bubble.” Most could not even spell commodities 5 years ago and, like him, completely missed what was coming. Now he is an expert and is calling the top. There will continue to be corrections and consolidations as there always are in all markets, but the top is years away unless there is major economic collapse ahead — which will be a worse “accident” for shares.

    What kind of bubble is it when virtually no one in the world has invested in the asset class? I suspect he knows few if any people who have ever invested in commodities yet everyone he knows has invested in stocks and bonds. There are over 70,000 mutual funds worldwide for the public to invest in stocks and bonds, yet fewer than 50 for the public to invest in commodities. A bubble when no one is yet investing in the asset class? The WSJ has a few paragraphs a day about commodities, but a whole paper 6 days a week about stocks and bonds. A bubble? FORTUNE magazine does not even have a full time commodity reporter. A bubble? Silver is 60% BELOW its all-time high, cotton 40%, sugar 80%, coffee 50%, palladium 50%, etc. A bubble? Adjust other commodity prices for inflation and they are all still far below all time highs. A bubble?

    Etc., etc.

    I urge you to read this article again in 10 years. He may be right if the world collapses, but if so, commodities will still be the best place to be. — Jim Rogers

  37. 37
    zman Says:

    Hey DOC – AAPl I’ve got no opinion. Like my Ipod and we just got a macbook. nice.

    CSIQ? – I’ve heard good things from a couple of different corners there of late.

    Bill – re rigs, they’re deepwater rigs right? In that case the economics are very strong, so it depends on the vintage and how deep capable they are as to what rate they get. Any deets on the rigs themselves, at that price they not newbuilds?

  38. 38
    bill Says:

    he is spending 1.3 billion on 2 new deep rigs

  39. 39
    zman Says:

    bill – is there a link to see the specs on those rigs $1.3 B seems like a deal for two “new” rigs.

    So we have crude tapping $106 and nat gas knocking on the $10 door and the stocks are getting dropped again. Hmmm. Yessir, this is a crappy market.

  40. 40
    redjack Says:

    real crappy

  41. 41
    bill Says:

    Newbuildings: On January 17 and 23, 2008, respectively, the BOD of the Company acquired the right to purchase two drillships for an aggregate purchase price of $1.3 billion from a major Korean shipyard, for an amount of $20 million. Under the agreement with the shipyard, the Company can exercise its right to purchase the two drillships by March 24, 2008.

  42. 42
    bill Says:

    drillships not drilling rigs..sorry

    i think it these 2

    Samsung wins US$1.2 billion drillship orders
    By Hwee Hwee Tan 7/2/2007 3:47:56 AM GMT

    SOUTH KOREA: Samsung Heavy Industries won two separate drillship orders worth US$1.2 billion from two U.S. companies, bringing its orderbook up to US$10.1 billion for the first half of 2007.

    The South Korean shipbuilder will build two drillships worth US$595.6 million and US$600 million for two undisclosed U.S. companies. The 751-foot (229 m) long, 137-foot (42 m) wide drillships, which will be capable of drilling in up to 10,000 feet (3,048 m) of water and to a total depth of 30,000 feet (9,144 m), are to be delivered in second quarter of 2010.

    The company has racked up US$10.1 billion worth of orders, including orders for 13 drillships and three floating production, storage and offloading (FPSO) vessels, in the first half of this year. Samsung, the world’s third biggest shipbuilder, announced earlier this month an order worth US$471 million for an FPSO for an Asian company. The vessel, which will be capable of storing up to 1 million barrels and processing up to 60,000 b/d of oil, will be due for delivery in September 2010.

    Local media reports said Samsung’s closest competitors, and the world’s top two shipbuilders, Hyundai Heavy Industries and Daewoo Shipbuilding and Marine Engineering, have won US$8.37 billion and US$9.2 billion worth of orders, respectively, in the first half of 2007

  43. 43
    bill Says:

    Samsung wins US$1.2 billion drillship orders
    By Hwee Hwee Tan 7/2/2007 3:47:56 AM GMT

    SOUTH KOREA: Samsung Heavy Industries won two separate drillship orders worth US$1.2 billion from two U.S. companies, bringing its orderbook up to US$10.1 billion for the first half of 2007.

    The South Korean shipbuilder will build two drillships worth US$595.6 million and US$600 million for two undisclosed U.S. companies. The 751-foot (229 m) long, 137-foot (42 m) wide drillships, which will be capable of drilling in up to 10,000 feet (3,048 m) of water and to a total depth of 30,000 feet (9,144 m), are to be delivered in second quarter of 2010.

    The company has racked up US$10.1 billion worth of orders, including orders for 13 drillships and three floating production, storage and offloading (FPSO) vessels, in the first half of this year. Samsung, the world’s third biggest shipbuilder, announced earlier this month an order worth US$471 million for an FPSO for an Asian company. The vessel, which will be capable of storing up to 1 million barrels and processing up to 60,000 b/d of oil, will be due for delivery in September 2010.

  44. 44
    zman Says:

    I wonder if Ben still thinks we are not headed into a recession.

    Thanks Bill. I saw those, thought you were saying something additional. I think they are deep but not ultra-deep capable at that price. Probably looking at low $500mpday rates. Did not see when they are to be completed. Market apparently hates the idea but the deepwater is very strong…almost “are you kidding me” strong at the moment.

    NG trying to give it back now.

    Crude over $106! Stocks could care less.

  45. 45
    zman Says:

    oil now flat,

    nat gas up $0.05 from $0.21 earlier. hmmm.

  46. 46
    zman Says:

    nevermind, nat gas down now

  47. 47
    redjack Says:

    I think this is BS, but check it out..

  48. 48
    zman Says:

    RJ – It would make sense for XOM (they’ve recently gotten interested in N. American gas) but so would DVN. Fadel is a smart guy. From an options standpoint, its not a tradable idea unless you just buy leaps and sit on it as this could take a year or never happen.

  49. 49
    ram Says:

    Re #45 – It will be a numbers game when the cost of aquiring a company is less expensive than adding reserves through exploration and buying equipment (or waiting to buy equipment). Therefore, ZMAN should put a list together of the potential targets – yea.

  50. 50
    redjack Says:

    z…in this environment I can’t see how any major e&p could get regulatory approval for a takeover…

  51. 51
    Sambone Says:

    12:13 pm EST

    Crude Tops $106, Sets Record In Choppy Trading

    By Brian Baskin

    HOUSTON — Crude oil futures traded above $106 in light trading Friday, as negative jobs data failed to stop the market’s momentum.

    Light, sweet crude for April delivery recently traded up 53 cents, or 0.5%, at $106 a barrel on the New York Mercantile Exchange. Futures, which set a new intraday record of $106.54, are currently trading up more than $6 since Tuesday’s settlement. Brent crude on the ICE futures exchange traded 72 cents higher at $103.33 a barrel.

    The April contract dropped as low as $103.91 following the release Friday morning of employment statistics showing a 63,000 drop in nonfarm payrolls, the largest such decline since March 2003. The latest sign of a shaky U.S. economy raised the prospect of a reduction in demand for oil.

    The prospect of the world’s largest consumer of crude entering a recession conversely helped send oil back into record territory. Speculators are closely watching the Federal Reserve for new interest rate cuts designed to spur the economy, which would have a side effect of weakening the dollar. This would make it cheaper to purchase commodities priced in U.S. currency.

    “The market has…shown remarkable resilience to negative news with price dips so far attracting fresh buying interest,” wrote Mike Fitzpatrick, vice-president for energy risk management at MF Global.

    Traders may also have been caught by the growing spread between front-month and outer-month futures, which has increased steadily in recent days. In order to avoid losses, traders must buy up the April contract and sell later months, said Peter Donovan, a vice president at Vantage Trading in New York.

    “We’re seeing some very aggressive bullish action in the month-to-month spreads,” he said.

    Events on the ground in oil-producing countries remained a small factor in the day’s gains. Tensions appeared to be deflating between Colombia and Venezuela, following the sabotage of a Colombian pipeline by rebels on Thursday.

    Front-month April reformulated gasoline blendstock, or RBOB, recently traded up 3.41 cents, or 1.3%, at $2.6873 a gallon. April heating oil traded 32 points lower, or 0.1%, at $2.9701 a gallon.

    —By Brian Baskin, Dow Jones Newswires

  52. 52
    aaatest Says:

    Will do Ram …

    RJ – as long as they get it done before th electiond,lol. How does impeding the oil companies ability to do business get us off foreign oil anyway?

  53. 53
    redjack Says:

    …public perception

  54. 54
    zman Says:

    They’re just gouging the eyes out of the market and me right now. I really dislike this all or none trading tone the market has adopted again. Time for a surprise rate cut Ben.

  55. 55
    zman Says:

    headline from marketwatch:

    “Bush has confidence economy will prosper in coming months”

    I feel better already

  56. 56
    Sambone Says:

    Uncle Phil


  57. 57
    kaman Says:

    No kidding Z, my whole temperament has gone to protection, stemming the magnitude of losses, etc. Fugeddabout making any headway in this current.

  58. 58
    Denise Says:

    I was catching up on some reading and thought this was startling
    (wish I could post the graph) – you can view at Investment Postcards from Cape Town – http://www.investmentpostcards.com

    The graph below shows the performance of the S&P 500 Index since the beginning of 2007 in both US dollar terms (red line) and euro terms (blue line). Whereas US investors are showing a very poor return of -8.03% for the period, euro investors are completely under water to the tune of -21.02%. For the year to date the figures are -11.78% (US dollar) and -15.50% (euro).

    With the falling dollar the US is becoming like a candy store for foreign investors, but that does not mean that the focus will necessarily be on run-of- the-mill portfolio investments in US stocks and bonds as a case can be made that neither asset class offers particularly appealing value. As a matter of fact, any sell-off in the US markets could result in large-scale foreign liquidations. Capitalizing on the favorable exchange rate, foreign investments may for a while be directed more towards picking out the gems by means of corporate deals. That certainly seems to be the emphasis of the Sovereign Wealth Funds.


    Article printed from Investment Postcards from Cape Town: http://www.investmentpostcards.com

    URL to article: http://www.investmentpostcards.com/2008/03/07/picture-du-jour-plunging-dollar-erodes-non-us-investors-returns/

    URLs in this post:
    [1] : http://www.investmentpostcards.com//?p=607&preview=true
    [2] Image: http://www.investmentpostcards.com/2008/03/07/picture-du-jour-plunging-dollar-erodes-non-us-investor

    [3] StockCharts.com: http://www.stockcharts.com/
    [4] StockCharts.com: http://www.stockcharts.com/
    [5] Did you enjoy this posting? If so, click here to subscribe to updates to Investment Postcards from Cape Town by e-mail.: http://www.feedburner.com/fb/a/emailverifySubmit?feedId=921608&loc=en_US

    Click here to print.

    Copyright © 2008 Investment Postcards from Cape Town. All rights reserved.

  59. 59
    Denise Says:

    Z-Sorry I did not mean to paste all that at the bottom-free blog so I assumed it was ok

  60. 60
    doc Says:

    Suggest this board get serious on Commodities. dba
    today sold DBA July 30 3x gain & rolled over to Oct 50 @1.75

  61. 61
    zman Says:

    D – no problem.

    Doc – how does that add value? Get serious on commodities?! You mean like oil and gas? I think we are pretty serious on those around these parts.

  62. 62
    zman Says:

    Re 58

    Denise – just saw the system blocked it so I approved it manually. A lot of times the system will block anything with more than 2 links in it as spam. If you send more than 2 links in a comment let me know and I’l go find it and approve it.

  63. 63
    zman Says:

    Goldman Sachs $200 oil theory:


  64. 64
    Denise Says:

    This is hard to articulate-I have been fighting the urge to go to cash all day in all my accounts(does not happen often-usually when we are about to have a big move )(no clue which way)

    Not helping matters all afternoon I have been reading worrisome comments from a many “smart” people insinuating we could crash next week-which is adding to my stomach churning

    Just read this from my wave/voodoo man-
    (Jeff Cooper)
    that he thinks we will hold the Jan lows-
    has never seen a crash with the amount of puts that are in place

  65. 65
    ram Says:

    Are we panicing yet?

  66. 66
    zman Says:

    Ram – with 15 minutes to go I’d say no…we’re well off the lows in the broad market and slightly better than that for the energy stocks. Down is still down and that stinks as I was having a very good week through Wednesday’s close but the selling does not look capitulatory in the least to me. If it drops 100 more points in the next 10 minutes I reserve the right to alter that statement however.

  67. 67
    Sambone Says:

    D – I don’t see a crash, just a slow burn downwards. Too many shorts out there to have a crash.

  68. 68
    Sambone Says:

    Another FARC leader dead according to Columbia.

  69. 69
    zman Says:

    That’s probably worth a buck on oil. Did they say which side of the border he was on?

  70. 70
    zman Says:

    it was in Columbia, Hugo should have nothing to say about it.

  71. 71
    Sambone Says:

    Only headline I got is “Columbia Defense Minister confirms death of second rebal leader” at 3:51 PM EST

  72. 72
    ram Says:

    “Can’t we just all get along?”

  73. 73
    Denise Says:

    Wish Goldman would add there stock to the $200 theory (long my ex employer)

    Good bounce sign-
    Cramers latest post was that he thought we could have some bank failures (WM), WB) , (COF) , (NCC) , (HBAN) , (DSL) , (BKUNA) (CORS) .
    I keep telling myself things could be worse-I could own a retail store!

  74. 74
    Sambone Says:

    Tini time! Have a good weekend!

  75. 75
    zman Says:

    D – or a restaurant…I came close to making that mistake when I left the Street.

  76. 76
    zman Says:

    Beer Thirty! Have a good weekend gang!

  77. 77
    apbd Says:

    Did anybody make any $ this week?
    Or, did DRYS let us all down again?
    Have a great weekend.

  78. 78
    kaman Says:

    No joy on $, cheers all…K

  79. 79
    Popeye Says:

    Well I’m with you Z, let’s unwind to Wed. and sell.

  80. 80
    bill Says:


  81. 81
    low credit profile Says:

    making Money online


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