Tuesday, July 31, 2012

BP Announces Second Quarter 2012 Results

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BP today reported its quarterly results for the second quarter of 2012. Underlying replacement cost profit for the quarter, adjusted for non operating items and fair value accounting effects, was $3.7 billion, compared with $5.7 billion for the same period in 2011 and $4.8 billion for the first quarter of 2012.

Compared to the previous quarter, the underlying results were depressed by weaker oil and US gas prices together with reductions in output due to extensive planned maintenance, particularly affecting high margin production from the Gulf of Mexico, and lower net income from TNK-BP. This was partly offset by a beneficial consolidation adjustment to unrealised profit in inventory.

BP’s share of net income from TNK-BP was $700 million lower than the first quarter, driven by the impact of the rapid fall in oil prices amplified by the lag in Russian oil export duty, which is based on earlier higher oil prices. At current Urals prices, net income in the third quarter is expected to show some positive reversal of the duty lag.

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Bob Dudley, BP group chief executive, said: “We recognise this was a weak earnings quarter, driven by a combination of factors affecting both the sector and BP specifically. “The effects of price movements have impacted our earnings in the quarter. Our extensive turnaround and maintenance programme, which will continue into the third quarter, is also affecting some aspects of our near term results. All of this will take time, but it is important investment that will enhance safety and reliability for the long term.

As we deliver this major transformation, we are also committed to generating sustainable efficiencies in our operations. “Rebuilding trust with our shareholders and other stakeholders is vitally important. We are making progress against the critical strategic and operational targets we have set ourselves and are confident that this will deliver long term, sustainable value.”

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Anadarko Announces Second Quarter 2012 Results [APC]

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Anadarko Petroleum Corporation (NYSE: APC) today announced a second quarter 2012 net loss attributable to common stockholders of $380 million, or $0.76 per share (diluted). These results include certain items typically excluded by the investment community in published estimates. In total, these items decreased net income by approximately $804 million, or $1.61 per share (diluted), on an after-tax basis.(1) Cash flow from operating activities in the second quarter of 2012 was approximately $2 billion, and discretionary cash flow totaled $1.951 billion.(2)

Second Quarter 2012 Highlights

* Delivered record daily sales volumes of 742,000 barrels of oil equivalent (BOE)
* Increased oil sales volumes by approximately 20,000 barrels per day over first quarter 2012
* Generated more than $1.9 billion of discretionary cash flow from operating activities
* Discovered second major natural gas complex offshore Mozambique
* Increased estimated recoverable resources at the Gulf of Mexico Vito field to more than 300 million BOE

"Anadarko's positive momentum continued through the second quarter of 2012 with strong operating performance, delivering record sales volumes and enabling us to increase the midpoint of our full-year sales-volumes guidance by 3 million BOE without increasing capital," Anadarko President and CEO Al Walker said. "With record sales volumes and significant free cash flow during the first half of the year, our deep portfolio and efficient capital allocation continues to deliver growth and value in the current price environment. We are committed to operating within cash flow and selectively accelerating the value of longer dated projects, as we did at the Gulf of Mexico Lucius development and the Salt Creek field in Wyoming during the quarter. The execution of our strategy is expected to continue to deliver industry leading operating performance and exploration success, offering very competitive value creation opportunities."

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Monday, July 30, 2012

The Federal Reserve, Gold, Crude Oil and the Dollar’s Demise

The Federal Reserve through its various monetary mechanisms has a major impact on the value of the U.S. Dollar and over time has destroyed the purchasing power of the fiat base currency used in the United States.
Interestingly enough, the following quote comes directly from the Federal Reserve’s website regarding one of its primary mandates, “In setting monetary policy, the Committee seeks to mitigate deviations of inflation from its longer-run goal and deviations of employment from the Committee’s assessment of its maximum level.”
The chart below illustrates the horrific job the Federal Reserve has done of protecting the purchasing power of the U.S. Dollar since its creation.
Dollar Creation By The Federal Reserve
In light of the longer-term malaise seen above, the Dollar Index futures have recently rallied sharply higher as Europe continues to flail in a slow and agonizing decline which will ultimately lead to a complete fiscal disaster.
Sovereign debt concerns continue to mount regardless of what the European technocrats spew publicly and the U.S. Dollar has been the primary beneficiary of these seemingly growing concerns.
This brings me to the purpose of this article. Most of the articles I write are focused on option based trades, but I decided it was time to put forth a more comprehensive scenario that could unfold over the next few years as a result of excessive monetary stimulus through various quantitative easing mechanisms developed by the Federal Reserve Bank.  “A mild change” to say the least . . .
As discussed above, the U.S. Dollar Index futures have moved higher throughout most of 2012. Any significant increase in the U.S. Dollar is a growing concern among central bankers as it correlates toward deflation. Deflation is the Fed’s biggest enemy, besides themselves of course.
Next week the Federal Reserve will release statements relating to the economic condition of the United States. Furthermore, the Fed also will discuss if it will initiate another dose of monetary crack for a capital market place that is addicted to cheap money and zero interest rates. At this point, the so-called marketplace is the antithesis of free by all standard measures.
Consider the long-term monthly chart of the U.S. Dollar Index futures illustrated below:
Dollar Index Value Chart
The U.S. Dollar Index futures are in an uptrend that dates back to mid 2011. The orange line illustrates the uptrend and represents a key price level for the U.S. Dollar Index. For those unfamiliar with basic technical analysis, the rising orange trendline will act as buying support until the Dollar eventually breaks down through it signaling the bullish move higher has ended.
This brings us to a rather interesting potential observation. Today Mario Draghi, Chairman of the European Central Bank (ECB), made public comments regarding the readiness of the ECB to act if need be to safeguard the European Union. The Dollar Index Futures plummeted on the statement and remained under selling pressure most of the trading session on Thursday.
If a mere comment from the ECB can have such a damaging impact on the valuation of the Dollar, what would happen to the Dollar if the Fed initiated a new easing mechanism?
The answer is simple, the U.S. Dollar would immediately be under selling pressure. Selling pressure in the U.S. Dollar Index generally leads to a rally in risk assets such as equities and oil futures. Over the longer-term, a weak Dollar is also positive for precious metals and other hard assets.
As an example to illustrate the power of Quantitative Easing as it relates to the price of both gold and oil, consider the following chart:
Spot Gold Price Chart
Obviously the price action is pretty clear that Quantitative Easing has a positively correlated impact on the price performance of hard assets, specifically gold and oil. Now consider a price chart of the Dollar Index shown below courtesy of the Federal Reserve Bank, the annotations are mine.
Quantitative Easing Effects
The chart above tells an interesting story about the impact that Quantitative Easing has on the Dollar. How can the Federal Reserve claim to be protecting the purchasing power of the U.S. Dollar when its actions have a direct negative correlation to the greenback’s price?
Furthermore, based on the chart above I am of the opinion that Quantitative Easing III is a foregone conclusion. The current price of the Dollar Index is clearly above the previous high where QE2 was launched. So far, the rally in the Dollar Index has not pushed equity prices considerably lower. However, should the Federal Reserve refrain from initiating additional easing measures it is likely based on the chart above that the U.S. Dollar Index will rally.
Upon the conclusion of both QE and QE2, the Dollar Index rallied sharply higher. With the Fed announcement coming closer by the hour, financial pundits will attempt to predict the future action of the Fed.
I have no interest in making predictions about what the Fed will do. It is a certainty that QE3 will take place at some point in the future whether it be sooner or later. The Federal Reserve simply has no choice, otherwise the Dollar would continue to rally and we would begin to go through a deflationary period which the Federal Reserve simply cannot tolerate.
The scenario that I would urge inquiring minds to consider would be as follows. If the Fed does nothing we can likely assume that the U.S. Dollar Index will continue to rally to the upside. Based on the price chart of the U.S. Dollar Index shown above, we can expect that sellers would certainly step in around the 86 – 88 price range based on previous resistance.
If the U.S. Dollar makes it anywhere near the 86 – 88 price range without the Federal Reserve initiating QE3 it would be expected that risk assets would be under considerable selling pressure somewhere along the way. Should the Fed act to break the Dollar’s rally either through more easing or “other” mechanisms, the result would be a potentially monster rally for risk assets, at least initially.
Equities, oil, and precious metals would rally on a falling Dollar as shown above. The question then becomes what if this is the last gasp rally before a monster selloff ensues in the Dollar Index?
If the Fed breaks the rally early or initiates a monster-sized easing program, the initial reaction will be quite positive, especially for equities. As the selloff in the Dollar Index worsens, equities would eventually begin to underperform as oil prices would surge putting pressure on the economy.
In addition to oil rallying on the weaker Dollar, we could also see sellers start to show up in droves dumping U.S. Treasury’s to any buyer left standing. International debt holders would especially have incentive to sell Treasury’s as the real purchasing power of the bonds’ interest payments would decline as the Dollar fell in value.
The way I see it, whether the Fed launches QE3 now or later, the outcome will not change. An extremely weak Dollar could wreak havoc across a variety of assets and the broader economy. Imagine where gasoline prices would be if oil prices hit $125 / barrel. The average price in the U.S. would be well above $5 / gallon based on current prices and possibly higher.
What happens to the economy if interest rates start to react violently to the price action in the Dollar? What if Treasury’s start to sell off viciously and interest rates start to rise wildly and volatility among bond holdings runs rampant? Are we to believe that the very entity that has created boom and bust cycles through easy monetary policies and has been oblivious to the bubbles that it has created is capable of solving the issues that would potentially arise from a currency crash in the U.S. Dollar?
The track record of the Federal Reserve is quite clear. They are generally late to the party and rarely are able to forecast events in the future with any clarity. Do you really think they will know what to do? The free market wants to destroy debt through deflationary pressure and price discovery and the Federal Reserve continues to get in the way.
The free market will win as it always does, but the American people will lose. This process may take months, years, or even decades to play out. Eventually the game will end. There is only one certainty should any portion of the scenario discussed above come to fruition, when the Dollar is inevitably broken the only safe place to hide during the potential currency crash will be in physical gold and silver. Paper money and paper assets will come under extreme selling pressure and in some cases will simply........disappear.
Here’s to hoping I am totally wrong!
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Sunday, July 29, 2012

Crude Oil Prices Will Be Driven by the Externals This Week

From CME Group contributor Dominick Chirihella......

Last week was all about jawboning out of Europe. First from ECB President Draghi followed up by comments from Germany's Merkel reinforcing Draghi's main comment that the ECB will do everything to support the euro. Support for this type of comment from Merkel is very important as Germany is where the money is. For now the jawboning was enough to send many risk asset markets into a modest end of the week short covering rally. However, we can't lose sight that these type of comments have been coming out of Europe for the last three years and so far the sovereign debt issues are still not solved.

The big question is will the bold comments finally be converted to actions. Especially this coming week as the ECB holds its monthly meeting on Thursday August 2. Will the ECB initiate a bold solution that puts the EU problems on the back burner once and for all which has not been the case for the last several years. Will they simply lower short term interest rates and issue the usual support of the euro comments or will their actions include stimulus and some form of bond backing or buying of bonds from the troubles EU member states?

Whatever the ECB decides to do this week the market is now expecting actions that will support the debt problems and drive down the bond yields of the problem countries as well as send the euro into a much longer lasting rally that goes well beyond a simple modest short covering rally like we saw the last two trading days of last week. With the market now trading over the last few session with a strong ray of hope that the ECB and the EU will finally get a handle on the problems any disappointment next week will result in a huge push to the downside in the euro as well as in global equity markets.

Who said August is a quiet and sleepy time for global risk asset markets? Yes many participants are at the peak of the summer vacation season coupled with the London Summer Olympics at its peak but that is not going to prevent the markets from potentially active and volatile trading over the upcoming week and possibly for the rest of the summer. In addition to what is setting up to be a major ECB meeting on Thursday the US Federal Reserve FOMC will meet on Tuesday and Wednesday with many expecting the Fed to embark on a new round of quantitative easing of some form. The US economy has slowed to just a 1.5% growth rate a decline of 0.5% from the first quarter. The employment situation is not getting any better and the plethora of economic data that has hit the media airwaves over the last month or so has been supportive of further slowing of the US economy.

Is there enough negative data to support the Fed taking action now (as a recent WSJ article suggested) or will the Fed take a wait and see of what comes out for the ECB on Thursday while it awaits more data points like Friday's latest nonfarm payroll data? A new round of easing out of the US Fed is not a slam dunk at this meeting in my opinion. I think there are many reasons why it will be prudent for the Fed to wait another month or two before initiating a new round of easing that many believe will have limited success in bolstering the US economy and spurting the private sector hiring process. I do not think the Fed will act at this meeting and save their next so called silver bullet until the end of August at the Jackson Hole symposium (possibly mentioned in Bernanke's speech) or until the mid September FOMC meeting.

Just click here to read Dominick Chirihellas entire article

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Saturday, July 28, 2012

Still Doubting COT Favorite SeaDrill? SDRL

If you are still doubting the crew at Seadrill's (SDRL) ability to keep up with the current dividend this may be yet another reason to....think again. The latest news of a $4 billion commitment for the use of three offshore rigs in the Gulf of Mexico should assuage concerns about the company's ability to contract out all the rigs it has ordered as speculation rigs. Calculating the contract works out to $576,800 per rig per day over six plus years and increases SDRL's contract revenue backlog by nearly a third.

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EIA: Rail Deliveries of Crude Oil and Petroleum Products up 38% in First Half of 2012

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Railroads are playing a more important role in transporting U.S. crude oil to refineries, especially oil production from North Dakota's Bakken formation where there is limited pipeline infrastructure to move supplies. The amount of crude oil and petroleum products transported by U.S. railways during the first half of 2012 increased 38% from the same period in 2011, according to industry data.

The number of rail tanker cars hauling crude oil and petroleum products totaled close to 241,000 during January-June 2012 compared to 174,000 over the same period in 2011, according to the Association of American Railroads (AAR). Rail deliveries of crude oil and petroleum products in June alone jumped 51% to 42,000 tanker cars from a year earlier to an average weekly record high of 10,500 tanker cars for the month.

One rail tanker car holds about 700 barrels. This would be equivalent to about 927,000 barrels per day (bbl/d) of oil and petroleum products shipped, on average, during the first half of 2012 versus 673,000 bbl/d in the same period in 2011, and June 2012 shipments were almost 980,000 bbl/d.

graph of Average weekly U.S. rail carloads of crude oil and petroleum products, as described in the article text
Source: U.S. Energy Information Administration, based on Association of American Railroads.
Note: Crude oil and petroleum products rail shipments do not include ethanol. 



In 2009, crude oil accounted for 3% of the combined deliveries in the oil and petroleum products category tracked by AAR. The trade group estimates crude oil now accounts for almost 30% of the rail deliveries in this category, and says that crude oil is responsible for nearly all of the recent growth.

Much of the growth in shipping oil by rail is due to the rise in North Dakota's oil production, which has more than tripled in the last three years. North Dakota surpassed California in December 2011 to become the third biggest oil producing state and took over the number two spot from Alaska in March 2012.

Most crude oil is moved in the United States by pipeline. However, because of limited pipeline infrastructure in North Dakota's Bakken region, oil producing companies there rely on rail to move their barrels. Shipping oil by rail costs an average $10 per barrel to $15 per barrel nationwide, up to three times more expensive than the $5 per barrel it costs to move oil by pipeline, according to estimates from Wolfe Trahan, a New York City based research firm that focuses on freight transportation costs. Wolfe Trahan also notes that using rail tank cars allows oil producers to separate grades of crude more easily and ensure their purity than when different oils are mixed in a pipeline.

Argus Media reports that rail rates for unit trains moving Bakken oil to major refining centers on the Gulf Coast are about $12.75 per barrel to St. James, Louisiana and $12.25 per barrel to Port Arthur, Texas. The unit train delivery rate to New York Harbor is around $15 per barrel.
BNSF is the biggest railway mover of U.S. crude, transporting one-third of Bakken oil production alone with unit trains carrying up to 85,000 barrels of oil. The company's carloadings of crude oil and petroleum products increased 60% during the first six months of 2012.

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Friday, July 27, 2012

Chevron Reports Second Quarter Net Income of $7.2 Billion

SP500, Russell 2K, Dollar Index and Gold’s – Fake out or Shakeout?

Chevron Corporation (NYSE: CVX) today reported earnings of $7.2 billion ($3.66 per share – diluted) for the second quarter 2012, compared with $7.7 billion ($3.85 per share – diluted) in the 2011 second quarter.

“Our second quarter earnings and cash flow were among our strongest ever, even with softer oil markets,” said Chairman and CEO John Watson. “Despite current weakness in the global economy, we continue to invest in our long term growth projects to help deliver affordable energy to meet future demand. We took several important steps to advance our major upstream capital projects, in particular achieving milestones in our natural gas development projects in the Asia-Pacific region. We also expanded our global exploration resource acreage, including new leases in the Gulf of Mexico where we already hold a significant position.”

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Thursday, July 26, 2012

SP500, Russell 2K, Dollar Index and Gold’s – Fake out or Shakeout?

Today has been quite a trading session with risk assets rocketing higher after Mario Draghi of the European Central Bank reiterated what has already been stated. The S&P 500 Index (SPX) is posting some nice gains, but price has not taken out the recent ascending trendline illustrated in the daily chart of SPX shown below. Until that ascending trendline is taken out, the bears remain in control of the price action.
S&P 500 Index (SPX) Daily Chart
SPX Index Chart
Today’s rally has certainly served to work off short term oversold conditions. With the first GDP estimate for the 2nd Quarter scheduled for tomorrow things could get interesting. In the meantime, the closing price today is key. My expectation is that we will not see the S&P 500 Index push back above the ascending trendline today. For the price action to flip back bullish, we need a much stronger than expected GDP result tomorrow.
Another key daily chart which helps provide support that the bears remain in control of the price action is the Russell 2000 Index (RUT). The RUT has given back roughly 50% of its entire move and at this point has failed to even regain the 200 period moving average on the daily chart. Price action would need to climb over 20 points to simply backtest the breakdown level illustrated below.
Russell 2000 Index (RUT) Daily Chart
IWM Index Chart
As long as the RUT holds below the key rising trendline, the bulls must be questioned. However, should the S&P 500 Index and the RUT push back above the ascending trendlines on their daily charts I will become much more constructive regarding the short to intermediate time frames for risk assets.
The other key chart of the day can be found no further than the U.S. Dollar Index futures. The U.S. Dollar Index futures absolutely collapsed today and move all the way down to test the 50 period moving average on the daily chart. So far, the short-term rising trendline has offered support along with the 50 period moving average and the Dollar has bounced sharply higher.
U.S. Dollar Index Futures Daily Chart
UUP Dollar Index Chart

As long as price holds above the short-term rising trendline, the Dollar will be able to continue to push higher from this level. Should a breakdown occur we have even more support below around the $81 price level. After a move this strong, it could take days and maybe even weeks for the Dollar to regain its footing. However, the forthcoming Federal Reserve announcement next week will likely seal the Dollar’s fate.
Gold and silver futures are both trading nicely higher on the session in light of the weaker Dollar. However, both precious metals have faded later today as the Dollar started to drift back to the upside. Gold and silver are trying to breakout, but we need to see some continuation before I intend to get involved.
Gold Futures Daily Chart
Gold Bullion Chart
Sometimes weak breakouts in price action can lead to ugly reversals. I’m not suggesting that a failed breakout will occur in gold and silver futures, but I remain cautious as the breakout so far does not have me totally convinced. Volume in silver is not spiking like it should be and gold volume is also weak considering the possibility that major breakouts are taking place.  Another element that is simply not confirming with strong price action or volume is the gold miners. On a day like today, all that they can muster is a relatively small gain on super light volume. Caution is warranted!
Oil futures are also not shooting considerably higher even though the Dollar remains under pressure. To me, today seems like it could be a misdirection day based on the price action and lack of volume we are seeing to the upside in hard assets like gold, silver, and oil. In addition, volume in the major equity indices and futures is super light. For now, I am going to remain cautious and will likely look to avoid taking on any major risk until the dust settles on the GDP number and the Fed’s future decision. Sometimes sitting in cash is not so bad after all!

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Is Gold Ready to Run to All Time High?

Just under two weeks ago I updated my subscribers with a chart pattern on the GLD ETF, and in that update we discussed what to look for to find clues in this GOLD consolidation that has continued from last August-September highs. My theory all along has been that we peaked in a “Wave Three” top at 1900-1920 last fall after a Fibonacci 34 month rally from $681 per ounce. The ensuing corrective patterns are part of a normal “Wave 4” consolidation that works off the sentiment and overbought nature of that wave 3 updraft. Following this consolidation, I fully expect GOLD to continue past the $1900 per ounce area and run to $2300 per ounce or higher in a Wave 5 rally into the summer of 2013.

What can we continue to watch for clues though as to when this new uptrend begins? Specifically a close over 158 on the GLD ETF (About $1630 on the GOLD Charts) would confirm that the wave 4 lows are in at the $1520 area and the early stages of Primary wave 5 to the upside have begun. The only downside risk I have near term between now and October is if we drop below 153 on the GLD ETF, it would likely point to GOLD dropping to the $1445-$1455 per ounce area, the same low target I have had for 9 plus months now as the worst case downside.

Advice would be to start scaling into long positions on a break over 158 on the GLD ETF and adding on pullbacks along the way up. If we can’t break 158 then the advice is to sit back and watch before acting.

Below is the chart I completed for my subscribers about fourteen or so days ago, and we continue to use it as our short term indicator for the next leg up or down. Eventually, gold will run to all time highs, we simply would like to time our entry and reduce our risk as much as possible.

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National Oilwell Varco Announces Second Quarter 2012 Earnings

How To Position Yourself for a 10 Year Pattern Breakout

National Oilwell Varco, Inc. (NYSE: NOV) today reported that for its second quarter ended June 30, 2012 it earned net income of $605 million, or $1.42 per fully diluted share. Earnings per share increased 26 percent compared to the second quarter of 2011 and were sequentially flat compared to the first quarter of 2012. Excluding transaction charges of $28 million pre tax, second quarter 2012 net income was $626 million, or $1.46 per fully diluted share.

The Company’s revenues for the second quarter of 2012 were $4.7 billion, which improved 10 percent from the first quarter of 2012 and 35 percent from the second quarter of 2011. Operating profit for the second quarter of 2012 was $907 million or 19.2 percent of sales, excluding transaction charges. Year over year second quarter operating profit increased 27 percent and sequentially second quarter operating profit increased three percent.

Backlog for capital equipment orders for the Company’s Rig Technology segment was $11.28 billion at June 30, 2012, up nine percent from the end of the first quarter and up 46 percent from the end of the second quarter of 2011. During the second quarter of 2012 the Company’s Rig Technology segment booked incoming new capital equipment orders of $2.73 billion (through a combination of $2.22 billion in new orders and $0.51 billion in orders through acquisitions completed during the quarter) offset by revenues out of backlog of $1.82 billion.

Pete Miller, Chairman, President and CEO of National Oilwell Varco, remarked, “Our Company achieved strong earnings this quarter, thanks to the hard work of our many dedicated employees. All three segments posted higher sequential and year over year revenues and operating profit, and we are pleased at the high level of demand we continue to see for new drilling equipment.

The Company continues to expand organically as well as through acquisitions. We closed six transactions during the quarter for total consideration of $2.0 billion, to strengthen the technology, product and service offerings we provide our oil and gas customers around the globe. Most markets we serve have remained buoyant, despite lower commodity prices, and we therefore expect solid results for the second half of the year.”

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