Tuesday Morning…OPEC Eve

129 thoughts on “Tuesday Morning…OPEC Eve”

1. Oil Higher As Market Looks To OPEC, Fed Cuts

   By Lananh Nguyen
   Of DOW JONES NEWSWIRES

   LONDON — Crude oil futures were higher in London Tuesday as traders awaited key decisions from the Organization of Petroleum Exporting Countries and the U.S. Federal Reserve.

   Market expectations were firming for OPEC to cut crude oil output by a substantial amount at its Wednesday meeting in Algeria in an effort to stop oil prices from collapsing further.

   “Oil bulls have to throw their lot in with OPEC and hope that the cartel comes through, not only with a substantial cut, but with a Russian agreement to pare production as well,” said Edward Meir, an analyst at MF Global in New York.

   At 1158 GMT, the front-month January Brent contract on London’s ICE futures exchange was up $0.78 at $45.38 a barrel ahead of its expiry later Tuesday.

   The front-month January contract on the New York Mercantile Exchange was trading $0.77 higher at $45.28 a barrel.

   The ICE’s gasoil contract for January delivery was down $7.25 at $477.25 a metric ton, while Nymex gasoline for January delivery was up 156 points at 105.25 cents a gallon.

   Participants cast their eyes forward to the oil producers’ summit Wednesday in Oran, Algeria, ahead of which OPEC officials have sent strong signals indicating their preference to balance oversupplied markets. The extent of potential output cuts is still being debated.

   “OPEC tomorrow (Wednesday) is the main attraction,” a crude oil broker in London said.

   Saudi Arabia wants OPEC to cut output by as much as 1.2 million barrels a day, a person familiar with the matter said Tuesday.

   “The Saudis are worried of a complete collapse in prices, but they believe a reduction of 2 million barrels a day, which is called for by some other member states in OPEC, is a bit too much. They will be pushing for a 1 million-1.2 million barrels a day cut during the meeting,” said the Gulf-based oil executive.

   Separately, Iran’s oil minister, Gholam Hossein Nozari, said a 1.5 million- 2 million barrel a day OPEC output cut can create stability in the oil market and keep crude prices at a “suitable” level, the IRNA state news agency Tuesday.

   Some market participants said support for oil prices would hinge on OPEC announcing a sharp rollback in production, particularly against the backdrop of eroding demand and a slowdown in global growth.

   “The cartel now have to cut quotas by more than 2 million barrels a day to see a positive price effect,” said Torbjorn Kjus, oil market analyst at DnB NOR in Oslo. A glut of inventories was reflected not only in onshore inventories, but also oil being stored in supertankers, Kjus said.

   One of the world’s largest tanker owners Frontline Ltd. (FRO) Tuesday said between 20 and 25 oil supertankers have been hired for floating storage in recent weeks, for up to 50 million barrels of oil.

   “OPEC therefore have to get rid of these floating stocks before reported OECD stocks will start to fall to the wanted level of 51-52 days,” Kjus said.

   Oil market participants are also looking ahead to the Fed decision later Tuesday, when central bank is widely expected to cut interest rates by 50 basis points. A Fed cut would likely spark a short-term rally oil rally, a broker in London said.

   —By Lananh Nguyen, Dow Jones Newswires

2. Oil Supertanker Owner Says 20-25 Hired For Storage

   Dow Jones Newswires

   LONDON — One of the world’s largest tanker owners Frontline Ltd. (FRO) Tuesday said between 20 and 25 oil supertankers have been hired for floating storage in recent weeks, for up to 50 million barrels of oil.

   Jens Martin Jensen, acting managing director and chief executive of Frontline, told Dow Jones Newswires that the Very Large Crude Carriers — which can carry 2 million barrels of oil — had been booked within the last two months to store crude oil for future delivery.

   “There’s been some increased activity” in tanker markets, Jensen said, owing to the oil market’s contango structure — where near-term futures contracts are cheaper than contracts further into the future. Contango gives producers an incentive to store crude and capture higher anticipated returns in the future.

   Market participants were looking to the Organization of Petroleum Exporting Countries’ meeting Wednesday in Algeria to gauge how long companies would continue to store crude, Jensen said.

   “The increase in floating storage has developed as a result of abundant prompt supplies having a hard time finding customers, further supported by lower freight rates,” the International Energy Agency said Thursday in its widely-watched monthly oil market report.

   The locations of storage vessels include the U.S. Gulf of Mexico, North Sea, India and Malaysia, the agency added.

   Royal Dutch Shell PLC (RDSB), BP PLC (BP) and Koch Industries Inc. are among the companies thought to have made storage bookings in recent weeks, according to shipping sources contacted by Dow Jones Newswires.

   The cost of storage in VLCCs is around 90 cents a barrel per month and an additional 30 cents a barrel or more to cover capital costs, insurance and other costs, the IEA said, citing shipping sources.

   Company Web site: http://www.frontline.bm

   —By Lananh Nguyen, Dow Jones Newswires

3. The cost of having to issue B1/BB- rated debt in this market… if you can issue at all. Good news: KCS got it done. Bad news: not many companies can afford to service 16.5% debt.

   Kansas City Southern Sells $190 Million of Notes Due in 2013
   2008-12-16 00:07:09.306 GMT

   By Bryan Keogh
   Dec. 15 (Bloomberg) — Kansas City Southern, the fifth- largest U.S. railroad, sold $190 million of senior unsecured notes, more than planned, according to a person familiar with the offering.
   The 13 percent notes due in 2013 priced to yield 88.4 cents on the dollar to yield 16.5 percent, or 15 percentage points more than Treasuries of similar maturity, said the person, who declined to be identified. Kansas City Southern received $164 million in proceeds, the person said.
   Proceeds from the sale and other borrowings will be used to repurchase $200 million of 7.5 percent senior securities due in 2009, the Kansas City, Missouri-based company said today in a statement distributed by Business Wire. Its Kansas City Southern Railway Co. unit issued the debt.
   Kansas City Southern, which had planned to sell $175 million of notes, hired Morgan Stanley and Bank of America Corp. to manage the offering. The notes are rated B2, five steps below investment grade, by Moody’s Investors Service and two levels higher at BB- by Standard & Poor’s.
   Spreads on junk-rated bonds widened 52 basis points today to a record 21.8 percentage points, compared with 5.92 percentage points at the end of last year, according to Merrill Lynch & Co.’s U.S. High-Yield Master II Index.
   High-yield, or junk, debt is rated below Baa3 by Moody’s and lower than BBB- by S&P.

4. Thanks BOP – wonder if the TARP could have been used as a way to keep usorious deals from occurring.

   Snow in SoCal foothills, and we’re at much colder than normal temps here and covered in ice this morning.

   http://news.yahoo.com/s/ap/20081216/ap_on_re_us/cold_snap

   Something tells me the HDD forecast for this week will prove low.

5. COP and BTU on the tape signing a coal to gas project in KY into being. Wonder how Obama feels about coal to gas tech, its pretty proven technology, can be done cleanly, though it starts out using dirty Appalachian coal, and would create a lot of jobs.

6. z – ha! Just so happens, I know a little bit about usury laws… They are set at the state-level and — believe it (or not) — don’t kick in until around 40%. (at least, in the cases I’ve seen)

   Fun Fact for Tues Financial Day

7. Credit market sentiment (as measured by the Investment Grade and High Yield indices) a little better this morning. Light volumes mean they can be pushed either way, pretty easily tho.

   IG 257

   HY 73 1/4

8. BOP – thanks, still like using the word as an adjective, as in the sentence, “The usorious-seeming rates might have been avoided through proper allocation of the TARP”.

   For you fans of GE, big $3 billion contract with Iraq signed today.

   On #5, also have to wonder if EEE or some other users of Fischer-Tropsch tech will find smoother sailing under Obama or if they get lumped in with dirty coal and shot.

9. Z,

   Do you have a read on this week’s withdrawal numbers? Also, I gotta think this deep freeze from Alberta to Denver has dampened a lot of production. Any thoughts?

   Thanks,

   Bill

10. z – you just like using words like “Fischer-Tropsch” 😉

11. BDI +25 828
    TED -.05 1.81

    Slow Progress, but maybe the world isn’t coming to end.

12. Bill – I don’t know where the Street is at just yet, BOP, you have a screen that shows that I think. I’ll have it sometime later today or tomorrow at latest if the reporters aren’t too focused on OPEC to cover natural gas. For myself, I’m thinking 80 but have not done much besides ballpark it yet. Gas moves at least Thursday and Friday’s in relation to the storage change to the Street’s estimate, not mine so I can wait.

    Degree days were 200 last week and normally I’d be looking for a number in the 120s but we are not in normal times, both on the demand side due to the economy which has more than offset the low prices being offered and on the supply side, both from a production standpoint and from lower fractionation activity. As to well freeze ups, yep they have to be occurring although I have not yet seen any stories pointing to them. Will snoop about a bit.

13. BOP – it’s proven tech, very old school. Heat a lump of coal while under extreme pressure and you get a lighter (drier) cleaner, higher BTU lump at the end of the process. Sassol has been doing it in various forms forever.

14. Nice big fat ups on the open today, lets see if we can hold them.

15. z – yep. know the process. Came out of Germany’s drive for energy independence in the 30s and 40s.

16. Housekeeping watch: For you new guys and holdouts. There is a Bios tab at upper right. Lot of talent in here which can help you direct questions to the right folks. If you’d care to pen a couple of lines about yourself in a purely anonymous format, please do and send to zmanadmin@gmail.com. Thanks.

17. Charts I find sort of interesting today,

    Majors: XOM and COP,

    E&P: HK (an awful lot of E&P charts look like this), NFX, PQ

    Oil Service: HAL, SLB, WFT

    Refiners: TSO, VLO,

18. can you round out comment #17

19. reading various headlines this morning… the newest trend in “We’re OK!” press releases: “We don’t have any investments in Bernard Madoff managed funds and we no current need to raise added capital.”

    Pretty much says it all.

20. ETSWD – how so?

    BOP – too true, its the counter-party risk of the week.

21. refining trivia question: where (city, area) are the top 3 largest refinery capacity operations in the world?

22. BOP – dunno, is it outside the U.S.?

    Energy matching strength in the broad market. Majors > E&P > Service which is the opposite of yesterday’s action. I think the numbers still have a ways to fall in the service space but that the group has largely discounted a bad 2009 for activity and pricing and that the larger caps may be approaching a turn with the beginning of the new year. Reading more people saying you gotta take another look at WFT (which is like a mini SLB) down here at $10. Interesting.

23. Z, I’m looking to roll my CHK to Jan but selling the rest of my Dec calls today (COP, SWN, EOG, HK)..

24. somewhere in norway – #21

25. (there is a point to the question)…

    I’ve been told the 3 areas with the largest concentration of refining capacity are Netherlands, Singapore, and Houston/Texas City areas. I can’t recall if The Netherlands, or Singapore was number 1.

    But, the point is that BP just announced they are going to run their Rotterdam Refinery at 50% capacity. I would think we will see more of this.

26. The BP decision is linked to a “fault” in one of its two crude distillation units… but I’ll bet they are in no hurry to bring it back on line.

27. BOP – agreed, seeing quite a few maintenance outages and throughput snags this week.

    Azerbaijan to attend the OPEC meeting as an observer. They hit 1 mm bopd this past year, production is now at 780,000 bopd after some offshore problems.

28. “only” 2mm/day cut… is that enough to keep oil prices in the 50s?

29. i was thinking of rotterdam. i did not do well in geography.

30. 1520 – you did better than I did. I came up with Singapore and Houston… but missed The Netherlands area entirely.

31. Orion – I’m looking for exits on those a little later this week, post OPEC. We have not had much of a reaction to the coming cuts as of yet so we may not be in for a case of buy the rumor sell the news as we’ve really already sold off. Depends on today’s move in crude, now up $2 if that last holds true. Anyway, I still think we could see mid $50s on crude short term and a spike in the stocks to match which gives me a little bailout hope for some of the December names although not EOG from where I’m positioned. That one had a couple of down $10+ for no other reason than it has held up well so far during the 4q. On the right day, it can move up $10+, but I’d not expect that in the later half of the week.

32. BOP – I think the complexion of the cut is at least as important as the size. 2 would likely do it if they signal they are willing to do more if need be and that the majority of it comes from credible players. Also, the size of Russia’s commitment is going to be important.

33. If Naimi is calling for 2 mm bopd from OPEC and you get Medeyev to give up 500,000 bopd and maybe a smidge from some other non-OPECs so that you get to 2.75 mm bopd that should put oil into the $50s. I think the willingness to cooperate with the Cartel on the part of the Russians is a rather a big deal (not since just post 911 have they done so) but the economics are easy to calculate and even a $2.50 jump in price would offset the lost production for Russia.

34. z – so, like, if more of the cut was taken by countries like SA, that would be good. right? or, are you speaking to the quality of which oil that is cut.

35. z – got it. was asking the question as you were posting the answer.

    darn. you’re good!

36. BOP – yep, if Saudi says it people put something like a 75% chance of it actually happening. If Iran or Vz say they are taking a big cut, no one will believe them. Someone sent me a Gartner piece on the levels for oil under which the OPEC nations feel pinched which I will post in a second.

37. Prices put out by Gartman for what oil price needed to be to balance budgets for ‘09:

    Venezuela 97,
    Nigeria 71,
    Saudia Arabia 62
    Iran 58,
    UAE 51,
    Kuwait 48,
    and Algeria 35.

    These have all been moving higher over last few years.

    Thanks Tom for sending that.

38. PQ has a new December presentation up for those of you still holding the name. I’ll have a look.

39. uso diving is their news on opec out?

40. audi Arabia Says OPEC Will Cut Output 2 Million Barrels a Day
    2008-12-16 15:48:36.517 GMT

    By Maher Chmaytelli and Ayesha Daya
    Dec. 16 (Bloomberg) — Saudi Arabia, the world’s largest oil exporter, said OPEC will cut production by about 2 million barrels a day at tomorrow’s meeting.
    “Supply is somewhat in excess of demand, inventories are also higher than normal,” Saudi Arabian Oil Minister Ali al- Naimi told reporters today after arriving in Oran, Algeria. “To bring things in balance there will be a cut in production of about 2 million barrels.”
    The Organization of Petroleum Exporting Countries, supplier of more than 40 percent of the world’s oil, is gathering for the fourth time in as many months after crude prices plunged more than $100 from July’s all-time high. Prices fell to $43.67 a barrel in New York after al-Naimi spoke. Output targets for 11 members with quotas stand at 27.3 million barrels a day.
    World oil demand will fall 0.2 percent next year as the global recession cuts energy consumption, OPEC said today in its monthly report. Europe’s manufacturing and service industries have contracted in December at the fastest pace in at least a decade, a report today said.
    Iran, OPEC’s second-largest producer, supports a reduction of 2 million barrels, a delegate from the country said today.
    Venezuelan Oil Minister Rafael Ramirez said a “big” cut of between 1 million and 2 million barrels a day is needed.
    Oil stockpiles are rising as the winter approaches, which is abnormal, so a production cut of 2 million barrels is needed to restore the balance of supply and demand, the Iranian official, who declined to be identified by name, said in a telephone interview today.

    Reduce Stockpiles

    The Iranian delegate said OPEC should aim to reduce oil industry stockpiles to about 52 days worth of forward demand, from recent levels of more than 56 days. The final decision on supply cuts will depend on what price level OPEC members want, the official said.
    “We have to make a very strong decision,” Ramirez told reporters after arriving in Oran for tomorrow’s meeting.
    “What’s important is that there’s consensus to cut and that we have to make a big cut.”
    Angola’s oil minister, Jose Maris Botelho de Vasconcelos said today members will cut oil production as much as 2 million barrels a day at this week’s meeting to get prices near $75 a barrel. Oil ministers from Algeria, Kuwait, Qatar and Libya have said this month they support a cut in production.
    OPEC will probably lower output targets by at least 2 million barrels a day, or 7.3 percent, when its members meet Dec. 17, according to 18 of 33 analysts surveyed by Bloomberg.
    All those canvassed expected OPEC to make a cut.
    The price slump spurred the OPEC to cut output for the first time in two years when it met in October. The group deferred a decision on further cuts at its Nov. 29 consultative meeting in Cairo.

41. G – Crude market just looks nervous. You have repeated stories of “deep cuts” and then Saudi saying 2 mm bopd cut, which doesn’t seem to wow traders. Buying on the weak close yesterday got you a 5% up day today at peak so I’d say its profit taking. Going to be volatile until be have numbers in hand as this is one of the most anticipated meetings in recent memory. Also, OPEC is pretty good at floating numbers as trial balloons. Naimi said 2 mm bopd as he was getting of the plane in Oran, then we get an immediate reaction in crude futures of down about $2.50 from that point. So, now they know what 2 mm bopd gets you, at least on the surface, again without know the complexion of the cut.

42. This still excludes the non-opec nations but it seems to me like, no matter what was said, oil was going down because they would either be deemed not credible or insufficiend.

43. Market is currently gamed is what I’m saying…

44. Is there more bang for buck on SU then on USO.

45. I hear ya V, I think they will take a look at the number tomorrow and where it comes from and run oil one way or the other. I would not say that a 2 mm bopd cut is really factored into the price at present though. Also think that now more than ever, the Cartel wants to get prices up. In the past they have said they just wanted to balance S/D and that its not about price. Now they say its about price so this down move has be telling them what they need to do. It certainly isn’t a 1.5 mm bopd cut, not unless they want to see oil with a $3 handle on it.

    MD – in the past, SU has traded over 100% in the direction of crude, so yes, I’d say so.

46. MD- take a look at DXO

47. ELd – good point, double x oil ETF.

48. Pearl, let me know when you login and also check out the Bios tab. Thanks.

49. Tater – so far you are spot on with your XOM TA comments. Thanks again for that color. For those of you who don’t check out Tater’s site it can be found in the link list at upper right or here:

    http://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID2933882

50. Z – logged in

51. Thanks P, don’t be shy.

52. z was just trying to get a handle on your observation on what was interesting. im new to charts(ta)
    thanks
    i enjoy the site

53. ETS – oh, ok. First let me say I’m no chart guy. I can read one like the next guy but there are others here that far surpass my TA abilities. I was just musing that many of the energy charts have held well from the markets October lows and look to be trying to break out from a 2 month long base at present. But they also look pretty correlated to the S&P500 at present meaning that the broad markets and not oil or gas prices are in control of the action at present. Several of the E&P names have had positive news of late (HK, CHK for instance) which I don’t see as fully reflected in the stock right now. In the case of HK, you combine that with a more friendly looking chart and despite the upper quartile valuation (relative to its peers at present and not history) and your left with what looks like a not so scary mid cap E&P holding.

    CHK on the other hand has had chart trouble of late and despite the fact that the company rescinded the Shelf that originally torpedoed the stock from $20 to $10, it faces resistance in the near term. Long term, those guys are going to look very smart with their hedges but I was simply looking at some charts on a slow day and if I knew nothing else (and in the case of many fund managers I think little else matters at present) the CHK chart looks less than friendly. I think it goes higher soon but I left it out of that comment simply based on the chart.

54. z – do you have a separate link to all your haynesville data? or, do i have to remember the day you posted all that great info. thanks.

55. Most recent stuff should be on the E&P tab. If you are looking for something specific and its not there let me know.

56. Since I’ll be out tomorrow I’m going to include some quick trades on what I’d do under a few different OPEC decisions in the morning post. Not recommendations in any way, shape, or form but probably things I’d be close to or actually would pull the trigger on if I weren’t playing catcher and cutting the cord on intern #2.

57. thanks Z, your comments related to one that i currently own. i feel that it has value LT

58. By Neil King Jr. and Spencer Swartz
    Of THE WALL STREET JOURNAL

    ORAN, Algeria (Dow Jones)–Saudi Arabia opened the door for OPEC’s most
    dramatic output reduction in decades by calling for the group to slash world
    oil supplies by at least another 2 million barrels a day to keep abreast of
    faltering world demand.
    Saudi oil minister Ali Naimi, arriving for a key summit here of the
    Organization of Petroleum Exporting Countries, told reporters that a cut of
    that size was the only way for the group, which supplies more than 40% of the
    world’s oil, “to bring things into balance.”
    OPEC has already trimmed output by around 1.7 million barrels since August,
    when oil prices began to plummet on the heels of the world financial crisis and
    sharply weaker energy demand around the world. The two cuts would represent
    4.3% of current world demand of 85.8 million barrels a day.
    The cuts would also mark the cartel’s largest ever in such a short time –
    nearly 4 million barrels a day in four months – to halt rising oil inventories
    and falling crude prices amid the deterioration in global economic conditions.
    (This story and related background material will be available on The Wall
    Street Journal Web site, WSJ.com.)
    Implementing another round of deep cuts could prove difficult for the cartel,
    which is already feeling the financial squeeze from falling prices and
    diminished oil exports. As always, much of the burden of another deep cut would
    fall on Saudi Arabia, the world’s largest oil exporter.
    Naimi, normally tight-lipped in advance of big OPEC summits, clearly wanted to
    send a signal to the oil market that Saudi Arabia was serious about curtailing
    excess supply and buttressing prices. But his announcement also came on a day
    when the U.S. released another round of grim economic data, including a steep
    drop in U.S. housing starts, illustrating how difficult it will be for the
    cartel to impress a market now captivated by pessimistic economic tidings on
    all sides.
    Traders on the New York Mercantile Exchange seemed unimpressed by the Saudi
    show of resolve. The price of U.S. benchmark crude, already down more than 70%
    from its all-time high this summer, fell 3.8% in midday trading.
    OPEC, which meets officially on Wednesday, is eager to win support for
    production cuts among big non-OPEC producers such as Russia and Azerbaijan,
    both of which have sent delegations to this week’s summit. Russian officials
    are expected to show solidarity with OPEC, but the country’s oil fields are
    already declining due to limited investment and aging infrastructure. Few
    analysts believe that Moscow will offer cuts beyond the 300,000 barrels a day
    Russia is expected to lose in pumping capacity next year.
    Arriving at the airport, Russia’s top energy official, Deputy Prime Minister
    Igor Sechin, said that Russia was prepared to cut its output by 1.5 million
    tons. Sechin didn’t elaborate on the figure, but Russia typically measures its
    oil output in tons per month, so a monthly cut of that size would be the
    equivalent of around 300,000 barrels a day.
    Saudi Arabia, OPEC’s de facto leader because of its huge pumping capacity, has
    already cut production by 1.2 million barrels a day since August and is now
    producing 8.5 million barrels a day, down from an August peak of 9.7 million
    barrels a day, Naimi said. OPEC’s other 11 members had reduced output by a
    total of 500,000 barrels a day since August, he said.
    Not since 2002, when the world was still recovering from the shock of the
    terrorist attacks on the U.S. the year before, has Saudi oil production
    averaged below 8 million barrels a day.
    After years of steadily climbing demand, the world’s thirst for oil has fallen
    sharply in recent months. OPEC members expect demand, already set to be
    negative for this year, to fall by another 1.4 million barrels by the middle of
    2009.
    Demand has gone so slack that many oil traders, as well as big oil companies
    such Royal Dutch Shell and BP, are simply stashing supply in supertankers. The
    amount of oil in floating storage off of Texas, West Africa, Iran and other big
    producing regions has more than doubled in the last two months, to at least 40
    million barrels, oil analysts say.
    OPEC’s challenge now will be to cut swiftly enough to soak up that excess
    supply and perhaps even drive prices back above $50 or $60 a barrel.
    -By Neil King Jr. and Spencer Swartz, The Wall Street Journal (Hassan Hafidh contributed to this report.)

    Dow Jones Newswires
    12-16-08 1256ET

59. Interesting to see XOM at HOD at 81.40. Would like to see that hold near these levels into the close and then friendly word from OPEC tomorrow.

    Is the latest on the Fed 75 bps or 50 ?

60. according to fed funds futures trading, there is a 54% probability of a 25 bps cut and 46% of 50 bps. We are currently at a 1.00% Fed Funds rate.

61. Sorry, meant how big a cut. Talking heads were saying yesterday look for 75 bp cut to 25 bp.

62. Not sure if anyone caught this or not

    http://www.financialpost.com/news/story.html?id=1068172

63. i got it… guess i was just jumbled in my answer.

    according to the way Fed Fund futures are trading, no one is expecting a 75% cut. 46% are expecting a 50 bp cut. 54% expect 25 bps.

    A month ago, 84% believed the next cut would be 50 bps. That dropped to 2% a week ago, but jumped back to 32% yesterday, and is currently at 46%. The trend is therefore all over the place recently.

    Basically, a 50/50 chance of 25-50 bps.

64. Thanks P, I’ll let V comment on that one.

    Thanks BOP. Not that I think cutting by 50 bips will matter but I assume the market would rather have 50 than 25 any day.

65. make that “no one is expecting a 75 bps cut.”

    This is based on data from the Fed Funds Futures pit. Not on what economists/talking heads/ex-Fed Govs are saying.

66. z – about the only thing a fed funds rate cut will do right now is to make it even less attractive for people in “treasury-only” money market funds. But, as those funds were willing to buy 3-month T-bills at a NEGATVE interest rate last week, maybe no one cares.

    As long as credit spreads continue to widen, rate cuts have little affect on non-govt, non-intra-bank borrowing costs. They should, someday. Someday people will care that they are are “earning” close to zero on short-term treasuries.

67. Thanks BOP, the guy was indicating fed funds futures were leaning towards 75 cut as of yesterday morning on CNBC. Usually one of their smarter guests.

    P – I should add re oil sands that VTZ is in the business and has been commenting on the recent decisions to delay expansion projects for the last couple of weeks. I would say price takes care of price so never say never on a re-invigoration of the space. But for now, yeah, pretty dead in terms of non-maintenance level capex or capex that is for new projects. If its something that is already underway companies must decide if they want to finish on schedule or slow down or mothball.

68. BOP – I think all that free money is starting to weigh on the dollar. A strong dollar has made the fall in oil prices a little more palatable to OPEC and large foreign producers. As it falls off their daily receipts look doubly bad. So all the more impetus for them to cut production big time tomorrow.

69. thanks z..

70. Off subject

    Ok, help me out. You lose $4.97 a share. The “ANAL”yst had expected $3.73 loss. You expect times going forward to be difficult. Ok, who am I and why am I up 11% today. I have scratched my head so hard, I am bleeding.

71. z – tough to see the dollar going up from here. it benefitted from the knee-jerk “flight to quality” trade. But, most of the foreign money went into the under 1-yr US Treasury maturities (and out of longer dated notes, bonds, and US stocks). At some point, that foreign money is going to want to sell almost-zero-yielding paper. Question is, will they roll the proceeds into longer duration US assets (bonds and stocks), or take their proceeds, sell US dollars, and reinvest in their home currencies. Depends on what our overall economy does, more than the amount of paper we print, I think. It comes down to: does foreign money want to invest in US corporate entities? Or, take their ball and go home and invest in their own playing fields.

72. GOLDMAN SACHS!!

    amazing.

73. Yep, doubt that would ever happen to XOM if they lost $2+B.

74. …and were cut, 4 notches, by Moody’s on the same day.

75. wow. a 75%+ rate cut!

76. Target range of 0 to 0.25% for Fed Funds established.

77. good stuff. great move. will keep rates low for “some time.”

78. Here comes “0”

79. this will kick oil prices up a notch

80. Kinda reminds me of Japan. Eh?

81. Lots of language about the Fed buying agencies and MB securities.

82. XOM going for escape velocity on that 82 level.

    Sam – yep, didn’t work for them too well, did it.

83. IG rallying pretty hard… 250 bps now

84. $ taking it on the chin, down 1.4% on the day now. Chart has rolled over there now. Oil ticking positive, should be an interesting NYMEX close in 10 minutes.

85. of course, with a rate cut this large, comes a lot of language about how dismal the economic outlook is. And the “keeping rates low for some time” implies that no one is seeing the economic light at the end of the tunnel, either.

    IG 251

86. BOP – That “light at the end of the tunnel” is a train.

87. Oil getting dropped, oddly into the close, down almost a dollar. Double wammy for foreign oil producers who all get paid in $.

88. By Isabel Ordonez
    Of DOW JONES NEWSWIRES

    HOUSTON (Dow Jones)–Cash-rich oil companies are not going to save the
    holidays for disheartened investors as the economic crisis forces Big Oil to
    cut back on share-buyback programs.
    Major oil companies made investors happy in recent years by steering billions
    they garnered from high oil and natural gas prices to share repurchases. When
    oil prices soared, companies had money to invest in these programs, and
    increase dividends, boost their spending in capital projects and even make some
    acquisitions.
    But as the financial crisis worsens and oil prices fall – hovering at about
    $44 Tuesday or more than $100 below its all-time high in July – major oil
    companies now have to be cautious and prioritize spending.
    The result: Some companies like BP PLC (BP) have stopped buying their own
    stock as a way to preserve liquidity. The company has also hinted it will
    reduce its program substantially next year. More oil majors are expected to
    follow suit.
    These revisions are the first sign that even financially strong international
    integrated energy companies are changing course in order to weather the
    economic crisis. Cuts in the buyback programs are also pushing analysts to
    reduce their earnings per share estimates for next year.
    However, oil majors are expected to continue with their generous annual
    dividend increases and remain a favorite destination for “safe-haven” inflows,
    analysts said.
    “If oil prices stay at these levels it’s almost certain they (major oil
    companies) will want to cut their share-buyback programs,” said Jason Gammel,
    an energy analyst at Macquarie Securities in New York. “But this won’t
    necessarily move investors from these stocks.”
    Shares of most major oil companies were up Tuesday. Exxon Mobil Corp.’s (XOM)
    stock rose 1.5% to $81.16, shares of BP were 1.2% higher at $48.33, and
    ConocoPhillips (COP) gained 1.4% to $52.61.

    Spending Priorities

    On Dec. 5, Credit Suisse cut its earnings-per-share estimates for BP mainly
    because the British oil giant recently said it will stop repurchasing shares,
    and that it will reduce its program over time. After spending $2.9 billion in
    share buybacks in the first nine months of 2008, BP decided to halt the program
    in the fourth quarter.
    Other smaller producers such as Devon Energy Corp. (DVN) have also put on hold
    their share-buyback programs. All major oil companies have made it clear that
    buying back stock is not a priority for them in the current environment.
    ConocoPhillips on Monday said it would delay its announcement of its capital
    spending and share-buyback plans until January.
    “Our concentration is to live within our means, which is going to be a strong
    balance sheet, maintain liquidity and cash position, and credit capacity; fund
    our capital program,” said Conoco Chief Executive Jim Mulva in a recent
    conference call with analysts. “And as to the extent that we see a better
    market price and better credit markets, then we would consider taking leverage
    up and buying our shares.”
    Exxon and Royal Dutch Shell have echoed this approach, saying their top
    priorities are to fund robust investment programs and increase dividends.
    Before the downturn, executives felt that by reinvesting in their companies’
    stock, shareholders would get better returns than alternative investments. But
    some analysts disagreed, as they thought oil companies should be investing in
    high-return projects or buying other companies, which would offer higher
    returns and help firms increase declining reserves.
    “Part of the problem with the share buybacks is that as we got to the end of
    that cycle, the companies were having increasing difficulty showing what the
    benefits were going to be of that capital staying in the share buybacks,” said
    Amy Myers Jaffe, an energy researcher at the Baker Institute at Rice University
    in Houston.
    Market observers said Exxon Mobil, the largest U.S. oil company by market
    value, is probably one of the few majors that can afford to keep buying back
    stock at the same pace, as it has about $37 billion in cash reserves. In the
    third quarter, the Irving, Texas, company spent $8 billion buying back shares.
    Exxon Mobil typically doesn’t provide guidance on how much it will spend
    repurchasing shares, but Exxon Chief Executive Rex Tillerson said Thursday that
    the cash the company has available will continue to be targeted at dividends
    and share buybacks, as well as capital projects.

    (Isabel Ordonez covers U.S. integrated oil companies for Dow Jones Newswires.

    Dow Jones Newswires
    12-16-08 1400ET

89. hmmm… looks like oil prices trading off the weak eco-outlook and not the weak-dollar, for now.

    nothing is trading in credit. could break either way. that said, it’s Holiday Volumes… pretty light, fluffy stuff

90. NEW YORK, Dec 16 (Reuters) – Retail gasoline demand in the world’s
    largest consuming nation fell 2.5 percent in the week ended Dec. 12 even as
    prices at the pumps dropped more than a dime, according to a MasterCard
    SpendingPulse report released Tuesday.
    Gasoline demand averaged 9.098 million barrels per day during the week,
    down 2.5 percent from the previous week and down 5.4 percent from the same
    week a year ago, according to the weekly report.
    The decline in consumption came even as pump prices fell 11 cents to
    average $1.67 a gallon, according to the report.
    U.S. fuel demand has declined in recent months despite falling energy
    prices as a financial crisis stemming from the soured housing market
    squeezed consumer spending and confidence.
    The U.S. Energy Information Administration forecast that global energy
    demand will drop for the first time since 1983 this year, and shrink again
    in 2009 — led by declines in the United States.
    Members of the Organization of Petroleum Exporting Countries were set
    to meet Wednesday amid widespread expectations they would slash production
    in an effort to stem a dramatic slide in crude oil prices since summer.
    MasterCard Advisors estimates retail gasoline demand based on aggregate
    sales activity in the MasterCard payments system, coupled with estimates
    for all other payment forms including cash and checks. MasterCard Advisors
    is a unit of MasterCard Inc MA.
    (Reporting by Richard Valdmanis; Editing by John Picinich)

    Tue Dec 16 19:00:00 2008

91. Pearl- That article is accurate. I can say that our costs are roughly 38$/bbl and some are up to 42$/bbl for integrated mining/upgrading operations. I can also say that 90$/bbl would be required to justify any additional capex although the existing climate is still superheated (but cooling off).

    The cost climate has not yet come down and costs continue to rise although consultants such as Colt, Bantrel, Amec, Fluor and Jacobs are becoming more available and should help to reduce costs.

    If prices increased to 100$/bbl I still don’t think it would be a favorable environment for anyone who is not currently generating cash flow with low debt. Currently I foresee the only companies that will even CONSIDER expansions as Suncor, Shell and potentially CNRL if they can generate enough cash flow off of their project that is slated to startup in the 1H 2009. Opti/Nexen will likely start theirs up 1H 2009 and Shell will start up Expansion 1 in late 2010.

    Other than those projects I do not foresee any additional mine capacity being built although some companies may consider insitu projects.

    Keep in mind that the capital cost for a new mining/upgrading oil sands plant is currently in the order of ~175,000 $/bbl/day meaning that with a margin of ~5-10$/bbl in this current price environment it would take over 23000 days to pay off the capital (not discounted using 7.5$/bbl margin). This is obviously not economic considering most companies want a payout of ~2 years.

    I can tell you that when oil prices were over 100 dollars, we would still use 55-65$ oil in our economics.

92. Also keep in mind that most companies do not have fresh capital and need to seek debt, and we all know how well that’s going. UTS and OPC are perfect examples of companies with great projects who have been pummeled because of the risk they will need new debt.

93. 2:31 (Dow Jones) A lot was expected from this FOMC meeting, and central
    bankers delivered. In cutting rates to a target range of 0% to 0.25%, they have
    effectively acknowledged the way the funds rate actually trades. In any case,
    that action merely ratifies where the funds rate was anyway, so there’s little
    in the way of fresh economic benefit. More importantly, the Fed is taking steps
    toward quantitative easing, and has tipped its hat about how that might happen.
    It’s signaled it will push very hard with low interest rates, and it is mulling
    buying longer-dated Treasurys. Given the depth of economic worry, the Fed’s
    words seem to suggest this action is more and more likely, and it could happen
    by early next year. DJIA up 215. (MSD)
    2:26 (Dow Jones) Key passages from the Fed’s statement: “The focus of the
    committee’s policy going forward will be to support the functioning of
    financial markets and stimulate the economy through open market operations and
    other measures that sustain the size of the Federal Reserve’s balance sheet at
    a high level…The Federal Reserve will continue to consider ways of using its
    balance sheet to further support credit markets and economic activity.” DJIA up
    166. (MSD)
    2:24 (Dow Jones) FOMC says it is reviewing the benefits of buying longer-term
    Treasury securities to conduct policy, and expects funds rate to stay at
    “exceptionally low levels” for some time. (MSD)

94. From the greenies:

    “Just in case you needed another reason to cut back on your gasoline consumption, you might consider the pollution catastrophe we are creating in Canada, America’s main oil supplier. A new report (PDF) released by Environmental Defense, using industry figures, estimates that tailings ponds created by oil sands projects may be leaking 2,750,000 gallons of contaminated water every day. While that sounds like a lot, the problem may actually be even worse considering the conservative methodology used to reach the conclusion. Titled “11 Million Litres a Day, The Tar Sands Leaking Legacy ” and produced by Pembina Corporate Consulting, the report also states that if future projects go ahead as scheduled, this number would increase by five-fold by 2012. That’s about 18,041,400 gallons a day. Yikes!”

95. You’re right re oil trading BOP. Should steel Cartel resolve on cuts too.

96. Odd countergroup move in SLB today, anyone see a broker note there?

97. That was a short lived rally on my screen.

98. Indeed Popeye. In my book we got worry about what the Fed wouldn’t or would do out of the way nicely though. If OPEC comes through tomorrow it should set the stage for the energy equities to rally out of their bases for a bit.

99. The Rally Monkey has broken out of his cage and wants to dance around the room.

    People SO WANT this whole credit/stock/economic crash to be over. It can be… if investors step up and buy corporate bonds starting Jan 2nd. If they don’t, it can’t last.

    IG 249

100. And just buying bonds of various gov’t-backed programs/issues does NOT count. We need real corporate bond buying. The kind that will lower the cost of funds for the likes of Kansas City Southern Railroad.

101. BOP – Thanks so much! We have been mulling so many names for the new intern it would make your head spin. Famous oil men, names of great meaning, family names… the list goes on and on. But “Rally Monkey Z” has such a nice ring to it I have to run it by the wife!

102. well, then… here ya go!

     http://www.youtube.com/watch?v=aziWSxqGBD4

     And if he doesn’t work out, you can always default to this:

103. and if he doesn’t like it, tell him that there are WORSE rally-nicknames out there…

     http://www.thehammerstone.com/rallydance.html

104. Thanks BOP, at least he’s working today. XOM approaching 83 now, level not seen since end of July.

105. Better move in COP and then SU and PBR. FSLR trying to be interesting again today as well.

106. Also Pearl, you should know that I saying that the proposed projects weren’t going to be built ever since capital costs increased so much, even when oil was 140$/bbl it would likely be reasonably hard to justify the haeavy capex.

     Popeye – Regarding the tailings ponds, the water that goes into those ponds is essentially clean water mixed with sand and some heavy oil. Keep in mind that the bitumen is in the groundwater already. If you look at the Athabasca river, sometimes it has a sheen and black oil in it and this was noticed in the late 1800s. Any water that “leaks” is essentially clean with some ions because it is no longer an emulsion with the sand and oil.

107. IG 245 1/2

108. SLB – FBR reduced target from $71 to $40.

109. Thanks Sam

     Thanks V for fielding those questions.

110. Wow, 2.36 for a 10 year, 1.35 for 5 year, 30 year is 2.89. Anybody wanta buy a US Government Tresury for 2.89% for 30 years. Unbelieveable times!!!!!!

111. No argument from me on that VTZ, just noting the bad press.

112. Popeye – Before you start telling me how “dirty” my oil is, please have a look at http://www.energy.gov.ab.ca/Org/pdfs/AB_ProvincialEnergyStrategy.pdf page 17 and tell me how dirty your tailpipe is, in fact it’s roughly 3 times dirtier than the CO2 from production, and transport.

113. Ok, sorry for getting defensive but people are largely misinformed which is the whole reason I wrote that article.

114. By Brian Baskin
     Of DOW JONES NEWSWIRES

     NEW YORK (Dow Jones)–Crude oil futures fell Tuesday, as the weak economy
     trumped the Federal Reserve’s interest-rate cut and OPEC’s plans to reduce
     production.
     Light, sweet crude for January delivery settled 91 cents, or 2%, lower at
     $43.60 a barrel on the New York Mercantile Exchange. January Brent crude on the
     ICE futures exchange closed up 35 cents at $44.95 a barrel.
     The U.S. Federal Reserve cut its benchmark interest rate by three-fourths of a
     percentage point, at the higher end of market expectations. The cut sent the
     dollar sharply weaker against the euro, a move that normally would have spurred
     investors to buy crude futures as a hedge.
     Instead, oil prices fell sharply after the announcement, sinking as low as
     $42.70 a barrel after pit trading closed.
     “The implication could be that the fed thinks the economy is in worse shape
     than earlier thought,” wrote Nauman Barakat, senior vice president at Macquarie
     Futures in New York. Economists also say deflation looms as a threat, removing
     inflation as a reason to buy oil after the dollar weakens, Barakat said.
     The drop also came soon after several influential members of the Organization
     of Petroleum Exporting Countries said the group had agreed to a production cut
     of 2 million barrels a day. A cut of that size would match what many believed
     was the minimum needed to counter expected declines in oil demand.
     “All the news is supportive … yet oil is coming back off,” said Tom Bentz, a
     broker and analyst with BNP Paribas in New York. “It doesn’t mean it will stay
     down, but it doesn’t look good.”
     OPEC meets on Wednesday in Oran, Algeria, where the group will formally
     announce its production decision. Saudi Oil Minister Ali Naimi said that a cut
     of “about 2 million barrels” a day would be necessary to stabilize prices.
     Later, OPEC Secretary General Abdalla Salem El-Badri said that the group had
     “almost” reached agreement on a cut of that size.
     Global oil demand is widely seen falling next year, with OPEC predicting on
     Tuesday that demand would drop 150,000 barrels a day in 2009, a sharp
     turnaround from forecasts of robust growth made earlier in the year.
     A cut of 1.5 million barrels a day in October was seen as too small in the
     face of such a massive loss in demand. Oil prices dropped 5% after that
     reduction was announced, though market participants are not anticipating as
     drastic a reaction after Wednesday’s meeting.
     “For the market to drop (sharply), it would have to be completely
     demoralized,” said Andy Lebow, senior vice president for energy at brokerage MF
     Global in New York. “Which maybe it is.”
     Front-month January reformulated gasoline blendstock, or RBOB, settled 31
     points, or 0.3%, higher at $1.0400 a gallon. January heating oil settled 2
     points higher at $1.4603 a gallon.

     More information on settlements and highs and lows for futures on Nymex and
     ICE platforms can be found by searching for the following headlines:

     Nymex Light Crude Oil Close
     Nymex Harbor RBOB Gasoline Close
     Nymex Heating Oil Close
     ICE Brent Crude Oil Close
     ICE Gas Oil Close

     -By Brian Baskin, Dow Jones Newswires (Spencer Swartz and Benoit Faucon in Oran, Algeria contributed to this
     article)

     Dow Jones Newswires
     12-16-08 1511ET

115. $ is getting murdered almost seems like oil should rally tomorrow no matter what OPEC does (ok barring something like no action) just because the uncertainty will be gone

116. dollar should be getting murdered, 0.25%!!!!

117. inflation using the old metrics (Pre-Certer and Pre-Clinton) quoted on shadowstats is over 12%.

118. G – agreed. Fed basically shot the dollar in the head. Them’s fightin’ words to OPEC. If the U.S. is going to go into “export your way out of a recession mode” by abandoning the dollar I think OPEC and Friends are likely to respond with an historic press release of their own, a well delivered, joint OPEC / Non-OPEC supply cut, clearly defined with no boiler plate language from the last press release, in a similar style to the Fed’s today, going so far as to set a price target range for oil that is good for the long term economic health of the planet. Saudi Aramco still hits this site daily (nightly actually) and my invitation to write the Cartel’s next press release is still open.

119. xom will never be $60 again, unless they split, how likey next year?

120. z – weak dollar + high cost oil gets the US focused on where we need to be: rejuvinating manufacturing (and the middle class) + pushed into oil conservation and nat gas usage. Key is, doesn’t work well if the drop in the dollar is sudden. But, about the last thing we need right now (from a manufacturing perspective) is a strong dollar. Of course, all this presumes that someday we get back to paying down all the debt on Uncle Sam’s balance sheet.

121. Never say never. Market has a way of haunting those kind of statements, lol. How likely a split, unknown. I don’t recall them talking about it any time recently and I’m not a big fan of splits in general. Right now they are happy to build cash and buy back shares. Looks like they are not really all that concerned much about their financial situation as they see no reason to trim capex forecasts. By no means my favorite name in the energy space but in times of uncertainty, it is a no debt, cash rich, big fat, safe, household name that investors can flock to.

122. I agree BOP but from OPEC’s view, the last thing they want is falling oil prices and a declining dollar as they sit on oil revenues based on the US dollar.

123. Nice close, declaring beerthirty 2 minutes early.

124. z – yep. totally understand OPEC’s position on the US dollar. Which is what makes a supply cut just that much more important (as you pointed out).

125. nice day

126. This sums it up nicely… especially the last point.

     Don’t Fight the Fed
     By Tony Crescenzi
     RealMoney.com Contributor
     12/16/2008 3:06 PM EST

     The Federal Reserve took dramatic steps today to combat the financial and economic crisis, meeting hopes on two key fronts and putting an exclamation point on its efforts with two others. The two most important features of the Fed’s policy statement consistent with my note from earlier today were:

     The Fed reinforced the theme of “low for longer.”
     The Fed indicated it would purchase “large quantities of agency debt and mortgage-backed securities,” adding that “it stands ready to expand its purchases.”
     The two unexpected features that many thought possible were:

     The Fed cut the funds rate more than expected, to a range of 0 to 0.25%.
     The Fed said it is “evaluating the potential benefits of purchasing long-term Treasury securities.”
     The impact of the Federal Reserve’s actions will likely be as follows:

     LIBOR will collapse; three-month LIBOR will likely fall below 1% by early January.
     Through the expectations theory on interest rates, the theme of “low for longer” will push interest rates lower across the yield curve. Remember, long-term rates are in essence a series of bets on where short-term rates will be in the future.
     Mortgage rates will fall much further, with the average 30-year fixed-rate mortgage rate likely to move toward 5.0% or lower from 5.5%, currently.
     Investors will move one layer out the risk spectrum (see the concentric circle published by Bill Gross at Pimco in November). Investment-grade corporate bonds might begin to see increased demand, and this will rally corporate equities.
     If you do not believe in any of the four conclusions I just made, remember that you are fighting the Fed’s balance sheet, which is impossible for any investor. The negative implications of the Fed’s actions are for another day (or year).

127. SD SandRidge Energy announces reduced 2009 capital budget and revised 2009 production guidance (6.58 +0.30)

     Co announces a revised 2009 capital expenditure budget of $500 mln and production guidance of 110 Bcfe. Compared to the $1.0 bln budget announced October 2, 2008, this represents a $500 mln reduction in capital expenditures. The revised budget permits SandRidge to operate within its cash resources and increase production by 10% over expected 2008 production. The co plans to reduce its rig count from a high of 47 rigs in September 2008 to 12 rigs at year-end 2008. Additions to the co’s natural gas and oil derivatives contracts for 2009 production have resulted in swaps and collars covering a total of 79.8 Bcfe, or approx 83% of expected natural gas production and 73% of expected total production, which is hedged at an average NYMEX price of $8.61 per Mcfe, and basis swaps covering 65.7 Bcf at an average differential to NYMEX prices of $0.74 per Mcf. SandRidge also announced that it received several bids for its East Texas sales package that would have been accepted had there been certainty with respect to capital availability.

128. SD cuts capex in half (again) to $500 M for 2009. Reduces rig count from 47 in Sept to 12 in Dec.

     http://investors.sandridgeenergy.com/phoenix.zhtml?c=196066&p=irol-newsArticle&ID=1236881&highlight=

129. VLO deepens gasoline output cuts on bad margins.

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