Stephen Schork: Consumer Inelasticity at the Pump Wanes

Equity markets in the U.S. got a boost yesterday morning after the U.S. Commerce Department showed a large 1.1% jump in advanced retail sales for the month of September. A survey conducted by Bloomberg showed a consensus forecast 0.8% rise.

However, similar to what we saw back with the July report, it seems that the Commerce Department factored in a heavy (843 bp) upward bias in its headline figure for September. Had the Commerce not adjusted last month’s figure, then sales would have come in close to market expectations of 0.8% growth; which btw, is a healthy number.

The adjustment amounted to a $22.2 billion boost to September retail sales to $412.9 billion.

The upward dollar adjustment was 1.8× greater than last year’s figure and 1.5× greater than the 2006-2010 average. Moreover, it was the largest, by far, such adjustment of past 20 Septembers.

Retail sales data is adjusted by Commerce to account for seasonal, business day and holiday differences. To this effect, this year’s Labor Day holiday fell on the first business day of the month, i.e. September 03rd.

Given when this year’s holiday fell, there were only 19 business days this September; as opposed to 21 business days for September 2011.

As such, the Commerce Department’s statistical hocus pocus is designed (in theory) to adjust for the loss of 2 business days this September.

Bottom line, like all models, forecasts are only as good as the assumptions programed into them. Therefore, we will take the adjusted 1.1% growth in September sales as a positive for the economy. After all, the stock market loved this report… and those guys are never wrong.

Yet, just keep in mind that Commerce’s seasonal factor will subtract 423 bps from October retail sales… and, that is even before we can talk about the 5.4% spiked in California’s retail gasoline prices this month.

While we are on the subject of retail sales and gasoline, according to yesterday’s report, gasoline station receipts (unadjusted) tumbled in September as consumers turned a blind eye to the cost of whatever Apple is selling, but balked as retail gasoline climbed above $3.80 on the national average.

Receipts fell to $46.56 billion, down from $49.49 billion in August. In comparative terms, retail gasoline averaged around $3.722 per gallon in August and then climbed to $3.849 in September. In other words, a $0.127 per gallon rise in price generated a $2.92 billion drop in receipts.

If that seems counterintuitive to you, don’t fret, you are correct.

September’s receipts decoupled from the polynomial regression for this timestep, i.e. receipts were out of line with historical norms given the cost per gallon.

How much longer can NYMEX gasoline (RBOB) futures maintain these lofty levels if motorists are unwilling (or unable) to pony up when gas at the pump moves above $3.60?

Thus, we are left to surmise that in spite of strong consumer spending elsewhere in the economy, consumers pulled back at the pump.

As illustrated in today’s issue of The Schork Report we see that this event has clearly taken hold. As the real cost of gasoline rises above $3.60 per gallon, consumers respond by driving fewer miles. Therefore, fewer miles and $115/b Brent crude oil means fewer dollars on the bottom line for refiners and marketers.

This story has been provided compliments of CME Group. To request today’s FULL research note, email Subscriptions@SchorkReport.com or register for a complimentary trial here, placing CME in the source code field.


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Murphy Oil Making Big Dividend and Buy Back News

Murphy Oil Corporation (ticker MUR) is up +7.3% premarket after announcing it will spin off its U.S. downstream business into an independent company.

MUR also authorizes a $2.50 per share special dividend and $1 billion share buyback program, and says it’s still working to divest its U.K. downstream operations and continuing to review options with respect to "selected assets."

Murphy Oil's move to spin off its U.S. fuel making and distribution business into a new company could unlock up $5 per share in trapped enterprise value, Simmons analysts say, and "could be a sign for more aggressive moves to continue to improve the valuation in shares".

Here is today's video on the stock market and commodities talking about a possible 6-12 week pullback in stocks

Natural Gas Prices Extend Rally Amid Cooler Weather

Benchmark U.S. natural gas prices rose for the third week in a row, extending a rally to reach the highest levels since December as cooler weather boosted heating demand, the Energy Information Administration said.

Henry Hub gas as of October 10 was $3.26 per million British thermal units, up 5 cents from a week earlier. In midday NYMEX futures trading October 12, November gas fell 0.7 cent to $3.597, up 5.9%, from the end of last week. Futures earlier hit $3.638, the highest price for a nearby contract since early December.

During the week ended October 10, overall U.S. gas demand rose 6% from the previous week, led by a surge of 44% in residential and commercial use.

Working natural gas in underground storage increased to 3.725 trillion cubic feet as of October 5, an implied net injection of 72 billion cubic feet from the previous week and 6.8% over year ago levels.

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Seadrill Partners SDLP Announces Launch of Initial Public Offering

Seadrill Partners LLC ("Seadrill Partners"), a wholly owned subsidiary of Seadrill Limited (NYSE: SDRL) today announced that it has commenced an initial public offering of 8,750,000 common units, representing limited liability company interests, pursuant to a registration statement on Form F-1 (including a prospectus) previously filed with the U.S. Securities and Exchange Commission.

Seadrill Partners intends to grant the underwriters a 30 day over allotment option to purchase up to 1,312,500 additional common units. The common units being offered to the public have been approved for listing on the New York Stock Exchange under the symbol "SDLP," subject to official notice of issuance.

Based on the number of common units to be offered, Seadrill Limited will own a 78.8% limited liability company interest in Seadrill Partners following completion of the Offering (or a 75.7% limited liability company interest, if the underwriters exercise in full their option to purchase additional common units.)

Seadrill Partners was formed by Seadrill Limited to own, operate and acquire offshore drilling rigs under long term contracts. Seadrill Partners' initial fleet will consist of two semi-submersible rigs (West Capricorn and West Aquarius), one drillship (West Capella) and one tender rig (West Vencedor).

The offering of the common units will be made only by means of a prospectus. A written prospectus meeting the requirements of Section 10 of the Securities Act of 1933, when available, may be obtained from the offices of.....Here is a complete list.

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Natural Gas Sentiment Continuing to Change

The US natural gas market is sounding and acting like a market that has no intention of collapsing as it did last winter. More and more signs are pointing to a market that is currently looking higher and not lower. The injection season has been a huge surprise this year with the majority of the weekly injections under performing both last year and the five year average. The surplus of natural gas in inventory peaked versus the same period last year and the five year average in at the end of March when there was about 890 BCF more in inventory than the previous year and about 935 BCF more than the five year average. Since peaking the surplus has steadily declined throughout the inventory building season.

Basis the latest inventory report the surplus declined by 651 BCF or 73% since peaking in the last week of March and 665 BCF or 71% versus the five year average for the same period. This has been a significant turnaround and one that not many analysts were predicting back in the first quarter of 2012. The combination of an above average level of coal to natural gas switching due to very low nat gas prices at the end of the winter, a very early start to a very hot summer period resulting in an increase in nat gas for cooling related power generation demand and a slow but steady reduction in the number drilling rigs deployed to the nat gas sector. In fact rigs deployed to nat gas are now at a 13 year low.

Although natural gas inventories are going to end the season at a new record high the level will be less than 2% above last year. With a more normal winter forecast coupled with supply not soaring it is likely that the price of nat gas will settle into a much higher trading range than last winter and spring. I would expect the futures market to trade in a wide range of about $3 to $3.20/mmbtu on the low side to even as high as $4 to $4.25/mmbtu on the high side if the winter weather truly materializes as forecast.

I am expecting a wide trading range as the winter forecast is uneven with mild temperatures forecast for the first part of the winter heating season (October through December) and much colder and snowy conditions predicted for the second half of the season (January through March). Certainly the forecast can change significantly as time moves forward and any repeat of last winter will change everything as prices will plummet once again as another surplus would build in inventory.....Read the entire Dominick Chirichella CME Group article.

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Weekly Crude Oil, Natural Gas and Gold Technical Outlook for Sunday October 14th

Time for our weekly visit with the staff at Oil N' Gold.com to get their call on crude oil, natural gas and gold......

Despite a brief breach, crude oil failed to stay above 93.33 minor resistance and thus, near term outlook remains unchanged. The fall from 100.42 is still in favor to continue for 61.8% retracement of 77.28 to 100.42 at 86.12 and possibly below. Though, in that case, we'd expect strong support ahead of 77.28 to contain downside. Meanwhile, break of 93.33 will flip bias to the upside for a test on 100.42 resistance.

In the bigger picture, current development suggests that price actions from 114.83 are a triangle consolidation pattern. Fall from 100.42 is likely the fifth and the last leg of such consolidation. Having said that, downside should be contained above 77.28 and bring an upside breakout eventually. Break of 110.55 will strongly suggest that whole rebound from 33.29 has resumed for above 114.83.

In the long term picture, crude oil is in a long term consolidation pattern from 147.27, with first wave completed at 33.2. The corrective structure of the rise from 33.2 indicates that it's second wave of the consolidation pattern. While it could make another high above 114.83, we'd anticipate strong resistance ahead of 147.24 to bring reversal for the third leg of the consolidation pattern.

Nymex Crude Oil Continuous Contract 4 Hour, Daily, Weekly and Monthly Charts

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Natural gas' rally continued last week and reached as high as 3.638 so far. Near term outlook stay bullish as long as 3.327 support holds. Current rise from 1.902 is expected to continue towards medium term channel resistance next (now at around 3.94).

In the bigger picture, the strong break of 55 weeks EMA, as well as the break of 3.255 support turned resistance indicates that medium term decline from 6.108 is completed at 1.902 already. It's bit early to confirm but bullish convergence condition in weekly MACD suggests that the down trend from 13.694 (2008 high) is possibly over too. Sustained break of the channel resistance (now at around 3.94) will set the stage for a test on 4.983 key resistance next. Meanwhile, break of 2.575 support will argue that the rebound from 1.902 is over and the medium larger down trend is still in progress for a new low.

In the longer term picture, decisive break of 3.255 resistance will be an important signal of long term bottoming reversal and could at least give a push to 4.983/6.108 resistance zone.

Nymex Natural Gas Continuous Contract 4 Hour, Daily, Weekly and Monthly Charts

Gold's correction from 1798.1 continued last week. Further decline could be seen. But as long as 1720 minor support holds, current rise is still expected to continue. Decisive break of 1792.7/1804.4 resistance zone will have larger bullish implication and would pave the way to 1923.7 historical high. Though, break of 1720 will indicate near term reversal and will turn outlook bearish for 1674/1 support first.

In the bigger picture, price actions from 1923.7 high are viewed as a medium term consolidation pattern. There is no indication that such consolidation is finished, and more range trading could be seen. In any case, downside of any falling leg should be contained by 1478.3/1577.4 support zone and bring rebound. Meanwhile, break of 1792.7/1804.4 resistance zone will argue that the long term uptrend is possibly resuming for a new high above 1923.7.

In the long term picture, with 1478.3 support intact, there is no change in the long term bullish outlook in gold. While some more medium term consolidation cannot be ruled out, we'd anticipate an eventual break of 2000 psychological level in the long run.

Comex Gold Continuous Contract 4 Hour, Daily, Weekly and Monthly Charts

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Dodd-Frank Poses Unique Challenges for Energy Firms

New Dodd-Frank financial regulation poses unique challenges for energy companies, forcing them to establish proper compliance and regulatory reporting mechanisms and making sure they have the right people to carry out these tasks, industry consultant Mayra Rodriguez Valladares said in a report.

Energy and other commodity businesses recently caught a break when a U.S. District Court judge ruled against a Dodd-Frank provision on trading position limits. But because Dodd-Frank focuses substantially on regulating over the counter derivatives and making them more transparent, companies using energy derivatives will be impacted just as much, if not more so, than banks in some ways, she said.

"For energy companies, the biggest challenge will be juggling how to live in an environment of uncertainty and possible increases in costs," Valladares wrote in the first of a series of reports on Dodd-Frank's potential impact on various sectors of the business world.

Valladares, a CME Group featured contributor, is managing principal with MRV Associates, a New York based capital markets and financial regulatory consulting firm.

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New Application of Existing Techniques in Old Fields Helps Russia Increase Oil Production

Russia was the world's largest producer of crude oil in 2011. As Russia's use of multistage hydraulic fracturing and horizontal drilling has increased, preliminary Russian crude oil production figures indicate that production has risen in 2012.

West Siberia, Russia's main producing region, accounts for around 6.5 million barrels per day (bbl/d) of liquids production, nearly two thirds of Russia's total production. While this region is mature, new applications of existing technologies have boosted recovery rates at oil fields that had stopped growing or begun declining.

TNK-BP has announced that it is the first company in Russia to apply a unique improved multistage fracturing technology to develop reserves in mature oilfields in West Siberia. A pilot at the Samotlor oil field has tested a six-stage hydraulic fracturing technology, which resulted in reduced well completion times and increased reservoir productivity. TNK-BP now plans to expand the pilot project to 25 more wells in the Samotlor field by the end of 2012, and, starting in 2013, the company plans to use the technology to fracture about 50 horizontal wells each year across its subsidiaries in Western Siberia.

 

Production from Samotlor, which accounts for about one-quarter of TNK-BP's output, fell 7% in 2011. The drop was low, however, compared to previous years, indicating that the field's future annual declines may be less severe. Continued use of multistage hydraulic fracturing may result in a decline rate of only 1% by 2016.

In addition to TNK-BP, LUKoil is fighting declining crude oil production in the region using multistage hydraulic fracturing at its Tevlinsko-Russkinskoye, Uryevskoye, Vat-Yeganskoye, and Pokachevskoye fields in Western Siberia. According to LUKoil, use of this technique led to a halt in field declines, although the use of the technology may be limited because of its high cost.

LUKoil and TNK-BP were the second- and third-largest producers of oil in Russia in 2010 at approximately 1.8 and 1.4 million bbl/d, respectively.

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Crude Kickbacks Between China and Venezuela

Venezuelan President Hugo Chavez has been in power for 14 years. On Sunday he earned the right to remain there for another six (though he’s battling cancer).

Chavez is often characterized as a dictator, but the truth is, Venezuela’s election process has been lauded by international observers. So if not through brute force, how does a president, whose country has the world’s highest rate of inflation (28%) and a soaring crime rate, win re-election?

Answer: He buys it....Read the entire EconMatters article


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Musings: Is America Knocking On The Door Of Energy Independence?

A phrase introduced into the modern lexicon by President Richard Nixon in the early 1970s was "energy independence". Ever since then, as the nation's domestic oil production declined and our natural gas output stagnated resulting in ever increasing imports of foreign oil and Canadian gas, national politicians campaigned on plans to make America energy independent.

Nearly 40 years after President Nixon uttered the phrase, the shale revolution has transformed America's petroleum industry into an engine for hydrocarbon production growth. With that additional oil and gas production, America's dependence on petroleum imports has declined. Increasingly, not only are the politicians talking about energy independence, but energy industry executives along with energy economists and consultants are also openly talking about the day when the U.S. meets all its power needs from domestic resources.

In late September, the Energy Information Administration (EIA) released data showing weekly domestic crude oil production had reached the highest level since January 1997, some 15 years ago. Reports are that despite the slowdown in drilling in the Bakken formation in North Dakota and Montana, production there should continue to rise during the second half of 2012.

Two charts demonstrate the significance of the increase in domestic production. The first chart shows the weekly estimate of domestic crude oil production since January 1990 with a red line showing how the September 21 data compares with production in early January 1997.......Let's go to the charts.
 

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