Wednesday, September 5, 2012

Strait of Hormuz is Chokepoint for 20% of World’s Crude Oil

International crude oil and liquefied fuels movements depend on reliable transport through key chokepoints. In 2011, total world crude oil and liquefied fuels consumption amounted to approximately 88 million barrels per day (bbl/d), and more than one half was moved by tankers on fixed maritime routes. Chokepoints are narrow channels along widely used global sea routes, some so narrow that restrictions are placed on the size of the vessel that can navigate through them. The map shows chokepoints that are critical areas for global energy security because of the high volume of oil that moves through waterways.

The Strait of Hormuz, located between Oman and Iran, is the world's most important oil chokepoint due to its daily oil flow of about 17 million bbl/d in 2011, roughly 35% of all seaborne traded oil and almost 20% of oil traded worldwide. More than 85% of these crude oil exports went to Asian markets, with Japan, India, South Korea, and China representing the largest destinations. The blockage of the Strait of Hormuz, even temporarily, could lead to substantial increases in total energy costs.

 map of chokepoints for oil movements, as described in the article text

Among the major oil exporters that ship oil through the Persian Gulf, only Iraq, Saudi Arabia, and the United Arab Emirates (UAE) presently have pipelines to bypass Hormuz, and only the latter two countries currently have unutilized pipeline capacity on these pipelines. At the start of 2012, the total unused pipeline capacity from Saudi Arabia and the UAE combined was approximately 1 million bbl/d. The amount available could potentially increase to 4.3 million bbl/d by the end of this year, as both countries have recently completed steps to increase their capacity to bypass the Strait (see table).

 table of oil pipelines bypassing the Straight of Hormuz, as described in the article text
Notes: All estimates are as of August 17, 2012 and expressed in million barrels per day (bbl/d).
1
Although the Kirkuk-Ceyhan Pipeline has a nominal nameplate capacity of 1.6 million bbl/d, its effective capacity is 0.4 million bbl/d because it cannot transport additional volumes of oil until the Strategic Pipeline to which it links can be repaired to bring in additional volumes of oil from the south of Iraq.
2
"Unused Capacity" is defined as pipeline capacity that is not currently utilized and can be readily available.
3
All estimates for 2012 are rates around the mid-year point; not the forecast average for 2012.
4
Throughput rates for 2012 are assumed to be the same as average throughput rates in 2011.
*   Iraq cannot send additional volumes through its Kirkuk-Ceyhan (Iraq-Turkey) Pipeline to bypass the Strait of Hormuz unless it receives more oil from southern Iraq via the Strategic Pipeline linking northern and southern Iraq, but portions of the Strategic Pipeline are currently inoperable.

*    Saudi Arabia recently increased its additional unused pipeline capacity to 2.8 million bbl/d when it converted one of the two pipelines connected to the Petroline system back to transporting crude oil.

*   The UAE recently opened a 1.5 million bbl/d Abu Dhabi Crude Oil Pipeline, which runs from Habshan, a collection point for Abu Dhabi's onshore oil fields, to the port of Fujairah on the Gulf of Oman, allowing crude oil shipments to circumvent Hormuz.

*   EIA's World Oil Transit Chokepoints analysis brief contains additional information on Hormuz and the other chokepoints, and the Middle East & North Africa overview contains additional information about countries in the region.

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My buddy Doc is really ticking Some people off today

Doc Severson, is making some really big waves...

He just came out with a video presentation that's probably going to tick off a lot of people (especially if you're still struggling to make money trading and investing).

But I've got to say, he makes a REALLY good point...Click here to check out the video that's raising all the fuss.

Seriously, you've got to check out this video, it's a real shocker!

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Ignoring Liquidity is a Recipe for Option Trading Losses

One of the traps for budding options traders is to attempt to apply various strategies to any underlying that exhibits a familiar technical pattern. This is a mistake. Option trading strategies must only be applied to underlying assets that have very liquid options.

To attempt to trade thin options puts the trader at serious risk of the situation the Eagles described in their signature song. You may be able to negotiate reasonable prices to enter the trade, but your exit will not reliably be so easy to exit due to low volume levels and generally wide bid / ask spreads.

So what are the bench marks that allow the new trader to recognize what are liquid options and what are not? Perhaps the easiest fundamental characteristic of an option that is liquid is to glance at the bid / ask spread of the front series option at-the-money strike. These strikes will almost always be the most active series and have the tightest bid / ask spread.

In the modern world, that spread should be 6¢ or less for “normal” priced stocks such as XOM, CAT, or GS. For “super size” stocks such as AAPL, GOOG, or AMZN spreads are a bit wider but typically around 25-30¢ or less.

In stocks with lower price points that have very liquid option series such as XOM and INTC, it is not uncommon to see markets quoted a penny wide during periods of relatively calm markets. However, and this is an important point, in times of market turmoil, the spreads typically widen much beyond their normal size. In severe market turmoil the spreads may reach a point even in liquid underlying assets that precludes any semblance of reasonable ability to execute trades.

The higher-priced underlying assets such as GOOG, because of their characteristically wider spreads, are more easily executed at negotiated prices in which the bid ask spread is reduced. This is particularly the case on multi legged positions; the spreads usually give the counter party, in this case our beloved option market makers, a straightforward way to hedge their risk. For this the trader will often be given a discount.

The rule of thumb for calculating this discount is to reduce the aggregate bid / ask spread by one third. A corollary of this is not to waste your time trying to negotiate out the total 2 – 4¢ spread that may exist in the most liquid series. Ultimately these strategies will not work – the market maker’s kids need to eat too.
Let us look at a practical example of what might be an appropriate starting point. Consider GOOG, one of our super sized stocks that recently trades on average a bit over $33 million of options per day.

GOOG has recently climbed to multi year highs in a parabolic move with a very aggressive angle of attack and currently trades a bit over $678 / share. It may be ready for a pull back or at least a period of price consolidation before resuming its course.

For those who agree with this hypothesis and may be considering an actionable idea, consider the September 680/685 call credit spread, a bearish play. This spread is constructed by selling the September 680 call and buying the September 685 call. As is readily apparent from the option chain, the bid ask / spread for each of these is 30¢.

To introduce another term useful for options traders, consider the “natural” price of this spread. You would sell the 680 strike at the quoted bid, $14.10 and buy the 685 strike at the quoted price of $12.10 for a “natural” price of $2.00 credit. The aggregate bid / ask spread for this is 60¢ – the sum of the spread for each of the two legs.

Using our rule of thumb to expect a 33% discount on such spreads, we should be able to execute the spread for a net credit of $2.20 ($2 plus one-third of the 60¢ spread). This obviously increases our net credit and potential profitability by 10% and would result in significant improvement of trading results over a series of similar trades.

Just so you have seen an example of an options board in which the Hotel California syndrome could be expected to occur, consider the pricing in this option chain for symbol STRA:

As you can see, the spreads for the 65 strike, the current at-the-money strike, are in excess of $1. Stay away from these sorts of traps; the only one who can make money with any reasonable probability is the market maker.

The point of today’s missive is that you should choose carefully the field on which you wish to play. Careless selection of the underlying to trade can put you at a significant disadvantage regardless of the attractive chart pattern of the underlying stock in question.
Happy Trading!

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Tuesday, September 4, 2012

Crude Oil Falls as U.S. and European Manufacturing Pulls Back

Crude oil fell as U.S. and euro-area manufacturing contracted in August, raising concern that slower economic growth will reduce demand. Prices dropped 1.2 percent after the Institute for Supply Management’s U.S. factory index declined more than analysts forecast. Manufacturing slipped more than initially estimated in the euro area, London based Markit Economics reported yesterday.

“We are seeing downward prices because of the poor economy,” said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. “The ISM number compounds the earlier manufacturing number from Europe, and overall, the economic data is weak.” Oil for October delivery decreased $1.17 to settle at $95.30 a barrel on the New York Mercantile Exchange. Prices are down 3.6 percent this year.

Brent oil for October settlement fell $1.60, or 1.4 percent, to end the session at $114.18 a barrel on the London based ICE Futures Europe exchange. The U.S. manufacturing index decreased to 49.6 in August from 49.8 a month earlier, the Tempe, Arizona based ISM said today.

Economists in a Bloomberg survey projected an August reading of 50, which is the dividing line between expansion and contraction.....Read the entire Bloomberg article.

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Sunday, September 2, 2012

ONG: Crude Oil Weekly Technical Outlook for Saturday Sept. 2nd

It's time for our weekly call from the staff at Oil N Gold.....

Crude oil continued to consolidate below 98.29 short term top last week and overall outlook remains unchanged. Further rally is still expected with 92.94 support intact. Above 98.29 will extend the rise from 77.28 to 100 psychological level and above. However, as noted because, such rise could be the fourth leg inside the triangle patter from 114.83. Hence, we'll be cautious on topping between 100 and 110. Meanwhile, break of 92.94 will be the first signal of reversal and turn focus to 86.92 support for confirmation.

In the bigger picture, price actions from 114.83 are viewed either a three wave consolidation pattern that's completed at 77.28, or a five wave triangle pattern that's still unfolding. In any case, break of 110.55 resistance will strongly suggest that whole rebound from 33.29 has resumed for above 114.83. While another fall could be seen before an eventual upside breakout, downside should be contained above 77.28 support.

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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Wednesday, August 29, 2012

The Precious Metals MAJOR Breakout Part II

It has been a year since the price of gold bullion topped out and even longer for silver. Many traders and investors have been patiently waiting for this long term consolidation pattern to breakout and trigger the rally for precious metals and miner stocks. Most of gold bullion is used for investment purposes. As a result, it rises when there is economic weakness and investors lose confidence in the fiat currency of a country.

With continuing economic weakness in the United States it will almost certainly lead the Federal Reserve to act in way that is more powerful than Operation Twist which is the selling of short term securities to buy those with a longer term. Based on the most recent data, economic growth in the United States is falling as the unemployment rate rises. A recent statement by the Federal Reserve was unusually clear in calling for greater action in the future.  

Gold, Silver and Dollar Weekly Price Chart:

Take a look at the weekly charts below which compare gold and silver to the US Dollar index. You will notice how major resistance for metals lines up with major support for the dollar. As this time metals are still in consolidation mode (down trend) and the dollar is in an uptrend.

Weekly Metals Outlook

Gold Miners ETF Weekly Chart:

Gold miners have been under pressure for a long time and while they make
money they have refused to boost dividends. That being said I feel the time
is coming where gold miner companies breakout and rally then start to raise
dividends in shortly after to really get share prices higher.

GDX - Gold Miner Stock ETF

On August 13th I talked about the characteristic’s and how to trade the next
precious metals breakout and where your money should be for the first half
of the rally and where it should rotate into for the second half. Doing this could
double you’re returns. Click here to read part one "Gold Mining Stocks 

Overall I feel a rally is nearing in metals that will lead to major gains. It may
start this week or it still could be a couple months down the road. But when
it happens there should be some solid profits to be had. I continue to keep
my eye on this sector for when they technically breakout and start an uptrend.

 If you would like to get my weekly analysis on precious metals and the 
board market be sure to join my free newsletter at The Gold & Oil Guy.com 


Monday, August 27, 2012

EIA: Projected Natural Gas Prices Depend on Shale Gas Resource Economics

Considerable uncertainty exists regarding the size of the economically recoverable U.S. shale gas resource base and the cost of producing those resources. Across four shale gas resource scenarios from the Annual Energy Outlook 2012 (AEO2012), natural gas prices vary by about $4 per million British thermal units (MMBtu) in 2035, demonstrating the significant impact that shale gas resource uncertainty has in determining future natural gas prices. This uncertainty exists primarily because shale gas wells exhibit a wide variation in their initial production rate, rate of decline, and estimated ultimate recovery per well (or EUR, which is the expected cumulative production over the life of a well).

 If a resource assessment of a shale formation relies on "sweet spot" production rates, where wells produce at rates higher than expected elsewhere in the formation, then the productive and economic potential of the entire formation could be exaggerated. On the other hand, future technological improvements that reduce production costs and/or enhance well productivity, along with closer well spacing, would increase the economic potential and resource recovery of the U.S. shale gas formations.

graph of historical and projected Henry Hub spot natural gas prices in four shale gas resource cases, as described in the article text


AEO2012 includes an analysis of varying future shale gas well production estimates and the associated EUR, along with a change in shale gas well spacing, to test the influence of shale gas resource uncertainty on future natural gas prices.

In addition to the reference case, the three AEO2012 shale gas resource scenarios are.....

* Low well productivity case (green line in chart). The EUR per shale gas well is assumed to be 50% lower than in the Reference case, nearly doubling the per-unit cost of developing the resource. Unproved shale gas resources are reduced to 241 trillion cubic feet (as of January 1, 2010), as compared with 482 trillion cubic feet of unproved shale gas resources in the Reference case.

* High well productivity case (light blue line). The EUR per shale gas well is assumed to be 50% higher than in the Reference case, nearly halving the per-unit cost of developing the resource. Unproved shale gas resources are increased to 723 trillion cubic feet.

*  High resources case (orange line). The well spacing for all shale gas plays is assumed to be 8 wells per square mile, which increases the well density in about half the shale gas plays, and the EUR per shale gas well is also assumed to be 50% higher than in the Reference case. Unproved shale gas resources are increased to 1,091 trillion cubic feet, more than twice the unproved shale gas resources in the Reference case.

These cases do not represent a confidence interval for the shale gas resource base, but rather illustrate how different assumptions can affect projections of domestic production, prices, and consumption.

U.S. natural gas prices are determined by supply and demand conditions in the North American natural gas market, in which the United States constitutes the largest regional submarket. Future natural gas prices reflect the cost of developing incremental production capacity. Because shale gas production is projected to be a large proportion of U.S. and North American gas production, changes in the cost and productivity of U.S. shale gas wells have a significant effect on projected natural gas prices. In the Reference case, for example, shale gas production accounts for 49% of total U.S. natural gas production in 2035.

In 2031, natural gas prices dip in the low EUR case as model results reflect completion of an Alaska gas pipeline, which would transport about 1.6 trillion cubic feet per year of gas from the North Slope to the lower 48 states. Because an Alaska gas pipeline would make up for some of the reduction in lower 48 states' shale gas production, the difference between projected prices in the Reference and Low EUR case is reduced after the pipeline is completed.

SeaDrill [SDRL] Releases 2nd Quarter 2012 Earnings Report

COT fund favorite SeaDrill released their 2nd quarter 2012 earnings report. Sending it higher pre market Monday morning......



Highlights

* Seadrill generates second quarter 2012 EBITDA*) of US$634 million.

* Seadrill reports second quarter 2012 net income of US$554 million and earnings per share of US$1.12.

* Seadrill increases the ordinary quarterly cash dividend by US$0.02 to US$0.84.

* Seadrill commences operations with the ultra deepwater newbuilds West Capricorn and West Leo in the Gulf of Mexico and Ghana respectively.

* North Atlantic Drilling Ltd (NADL) secures a two year extension for the semi-submersible rig West Alpha, with a total revenue potential of US$410 million.

Subsequent events

* Seadrill secures a commitment for 19 rig years for the ultra deepwater newbuilds West Auriga and West Vela, and an ultra-deepwater unit to be announced, with a total revenue potential of US$4 billion.

*Seadrill secures a commitment for a five-year contract for the ultra-deepwater drillship West Polaris with a total revenue potential of US$1.1 billion.

* Seadrill secures an aggregated seven-year commitment for the ultra-deepwater drillships West Gemini and West Capella with a total revenue potential of US$1.6 billion. The contracts are subject to formal approvals to be received no later than end of October.

* Seadrill refinances a credit facility of US$585 million related to the majority of our tender rig fleet increasing the nominal amount to US$900 million and also including one additional newbuild unit. The new facility increases liquidity by US$588 million.

* Seadrill Partners LLC (the MLP) submits its first draft to the SEC for review. * Seadrill reduces its ownership in SapuraKencana to 6.4%, releasing proceeds of approximately US$200 million.

*) EBITDA is defined as earnings before interest, depreciation and amortization equal to operating profit plus depreciation and amortization.

Condensed consolidated income statements, second quarter and six months 2012 results

Consolidated revenues for the second quarter of 2012 amounted to US$1,122 million compared to US$1,050 million in the first quarter 2012.

Operating profit for the quarter was US$483 million compared to US$456 million in the preceding quarter.
Net financial items for the quarter showed a gain of US$114 million compared to a gain of US$24 million in the previous quarter, as we in the second quarter recorded an accounting gain of US$169 million largely related to the merger of SapuraCrest Petroleum Bhd (SapuraCrest) and Kencana Petroleum Bhd (Kencana). In addition we recorded a gain on sales of 300 million shares in SapuraKencana of US$84 million.

Income taxes for the second quarter were US$43 million, up from US$41 million in the previous quarter.
Net income for the quarter was US$554 million or basic earnings per share of US$1.12.

Chief Executive Officer in Seadrill Management AS Alf C Thorkildsen says in a comment, "We are pleased to deliver another strong quarter, reflecting our solid operational performance. Since our last reporting we have secured new contracts with an estimated revenue potential of US$7.6 billion, reflecting both our clients satisfaction with our operations and the strong demand for high-specification quality equipment. In reflection of our strong operational performance, record high orderbacklog and the strong market outlook we are pleased to announce a quarterly cash dividend of US$0.84."

Click here to get the entire 2nd quarter earnings report

Look for 3rd quarter results November 30th 2012

Analyst contact
Rune Magnus Lundetræ
Chief Financial Officer
Seadrill Management AS      +47 51 30 99 19

Saturday, August 25, 2012

Good Dividend Payer BreitBurn Energy Partners Brightens Its Future With New Oil Asset Purchases

The newest addition to the COT Fund, BreitBurn Energy Partners, is getting some well deserved attention. With some new acquisitions complete and blow out EPS numbers BBEP is sure to keep gathering new investors.

From guest blogger David White......

BreitBurn Energy Partners LP (BBEP) is an oil and gas E & P company. It seemed to right the boat in the last earnings report with adjusted EPS of $1.29 versus an estimate of $0.21, a beat of $1.08. Net production increased 18% year over year, and adjusted EBITDA increased 28%. Logically good results should continue next quarter as natural gas prices, NGLs prices, and oil prices have rebounded from their Q2 lows recently. There is no reason to believe production will shrink. Rather BreitBurn's recent purchases ensure that production will increase.

On June 28, 2012, BreitBurn completed the acquisition of oil properties in Park County in the Big Horn Basin of Wyoming from NiMin energy Corp. for approximately $93 million. On July 2, 2012 BreitBurn completed the acquisitions of two largely oil properties in the Permian Basin in Texas from Element Petroleum LP and CrownRock LP for approximately $150 million and $70 million respectively. Production from all of the above will be accretive to BreitBurn's Q3 production and earnings.

Further BreitBurn at its Q2 earnings announced that it was increasing its 2012 capital program by $50 million. This expands the total 2012 capital program to $137 million, and it will be allocated mostly to oil development activities on the newly acquired assets and the legacy partnership assets. This is good news for the future because natural gas prices have fallen much further than oil prices in the past few years (even in the last year).

BreitBurn does have good hedges on both natural gas and oil, and these have largely saved the company with the recent fall in natural gas prices. These charts specifically delineates the hedging..... Here's the charts and the entire article.

Crude Oil, Natural Gas and Gold all Head South into Fridays Close


October crude oil closed lower on Friday due to profit taking as it continues to set back from the 62% retracement level of this year's decline crossing at 98.22. The low range close sets the stage for a steady to lower opening when Monday's night session begins. Stochastics and the RSI are overbought but are turning bearish hinting that a short term top might be in or is near. Closes below the 20 day moving average crossing at 93.47 would confirm that a short term top has been posted. If October extends the rally off June's low, the 75% retracement level of this year's decline crossing at 102.50 is the next upside target. First resistance is Thursday's high crossing at 98.29. Second resistance is the 75% retracement level of this year's decline crossing at 102.50. First support is the 10 day moving average crossing at 95.59. Second support is the 20 day moving average crossing at 93.47.

September Henry natural gas closed lower on Friday as it extends the trading range of the past two weeks. The low range close sets the stage for a steady to lower opening on Monday. Stochastics and the RSI are turning neutral to bullish hinting that a low might be in or is near. Closes above the 20 day moving average crossing at 2.877 are needed to confirm that a low has been posted. If September renews the decline off July's high, the 62% retracement level of the April-July rally crossing at 2.626 is the next downside target. First resistance is the 20 day moving average crossing at 2.877. Second resistance is the reaction high crossing at 3.120. First support is Thursday's low crossing at 2.682. Second support is the 62% retracement level of the April-July rally crossing at 2.626.

October gold closed slightly lower on Friday as it consolidates below the 2011-2012 downtrend line crossing near 1674.00. The high range close sets the stage for a steady to higher opening when Monday's night session begins trading. Stochastics and the RSI are overbought but remain neutral to bullish signaling that sideways to higher prices are possible near term. If October extends this month's rally, the 38% retracement level of the 2011-2012 decline crossing at 1683.10 is the next upside target. Closes below the 20 day moving average crossing at 1620.10 would confirm that a short term top has been posted. First resistance is Thursday's high crossing at 1675.10. Second resistance is the 38% retracement level of the 2011-2012 decline crossing at 1683.10. First support is the 10 day moving average crossing at 1629.00. Second support is the 20 day moving average crossing at 1620.10.

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