NEW YORK: With the economy in the throes of a global recession, oil producers are facing the toughest business environment in 25 years.
Oil demand is set to decline this year and next, the first drop since the energy shocks of the early 1980s. As economic growth slows down sharply, oil prices have collapsed from their summer peaks in record time.
The stunning speed of the downturn has fast become a nightmare for producers, who face shrinking revenue next year. Oil has lost 70 percent of its value, or $100 a barrel, since July and many analysts forecast further declines as the global economy worsens.
The OPEC cartel is meeting Wednesday in the coastal city of Oran, Algeria, to try to stem the drop in prices. Chakib Khelil, OPEC’s president and the Algerian oil minister, suggested last week that producers would make “a severe production cut to stabilize the oil market.”
Many analysts expect the cartel, which accounts for about 40 percent of the world’s oil exports, to cut production by about 1.5 million barrels a day.
The problem is that OPEC’s actions so far have had little effect on the market. Members of the Organization of Petroleum Exporting Countries have already met three times since September, and agreed to trim their output by two million barrels a day, to no avail. Since the last time OPEC promised to cut production, the price of oil has dropped by 30 percent.
With demand falling rapidly, there are few reasons to expect the drop in prices to slow down. Oil futures in New York closed at $46.28 a barrel on Friday, after touching a low of $40 a barrel earlier this month. That is down from a peak above $147 a barrel in July.
With stagnating growth next year, global consumption could fall by 1.3 million barrels a day, or 1.5 percent, in 2009, according to Deutsche Bank. Many analysts now expect oil prices to reach $30 a barrel next year if the slowdown spreads to China, which is increasingly likely.
“With demand uncertain, the ball remains in OPEC’s court,” analysts at Raymond James, a brokerage firm, wrote in a market commentary last week. “Short of dramatic action by the group, crude has few near-term catalysts.”
The OPEC meeting in Algeria will also feature a proposal by Russia, which is not a member, to reduce its own output along with OPEC.
Russian officials have been cozying up to the oil cartel in recent months as the drop in prices stings the country’s petroleum-dependent economy. Last week, President Dmitri Medvedev signaled that Russia wanted closer cooperation with OPEC, and did not rule out joining the group.
But Russia’s proposal is unlikely to weigh much on the market. Some analysts see the move as window dressing for the fact that Russian production will drop this year because of the government’s restrictive policies, insufficient investments and hefty export taxes.
Part of the problem for OPEC is that producers simply cannot reduce their production fast enough to match the drop in consumption.
OPEC has found it much easier to keep discipline within its ranks when prices rise than when they fall. To prevent their revenues from falling too quickly, some producers have failed to trim their production as much as they promised.
Estimates of how much OPEC is currently pumping vary, as the cartel does not supply production numbers. Petrologistics, a consulting firm that tracks the movement of oil tankers, estimates that producers have reduced their output by about a million barrels a day in November.
Platts, an authoritative energy publication, estimated that OPEC’s overall output dropped by 880,000 barrels a day in November, following the cartel’s last agreement to curb production. That is still 852,000 barrels a day above the group’s latest quota.
There is also some uncertainty about the level of Saudi production.
The cartel’s top producer reduced its output by 500,000 barrels a day, bringing down its daily production to 8.9 million barrels a day, from 9.4 million barrels a day in October, according to the survey by Platts. That would mean the kingdom is pumping 400,000 barrels a day more than its official quota of 8.477 million barrels a day.
Uncertainty and a lack of proper data led the producers to defer a decision to cut production when they met in Cairo on Nov. 29. It takes about four to six weeks for any decision by OPEC to translate into lower imports for consumers.
But while the market doubts the determination of producers, the Saudi oil minister, Ali al-Naimi, indicated last week that the kingdom was pumping 8.5 million barrels a day in November, a drop of 1.2 million barrels a day from its August peak production level. The announcement helped oil prices rebound last week.
Most OPEC members want to see prices rise from their current levels.
According to the Middle East Economic Survey, most producers have drawn budgets for 2009 that assume oil prices will be above $50 a barrel. Even Saudi Arabia has recently pointed out that it considered $75 a barrel to be a “fair price.”
Members of the cartel know they cannot get to such prices anytime soon. The best the group can do is set the stage for a recovery in prices when the global economy eventually improves.
“There is going to be a lot of pressure on the OPEC ministers to defend prices,” said Geoff Porter, an analyst at the Eurasia Group in New York. “OPEC has to strike the balance between an aggressive cut which will slow down the price fall, but it can’t be so aggressive that it erodes their credibility if the members do not comply. They can’t push too hard and have their members not respond.”
After plummeting about 40 percent in the second half of this year, they are looking attractively priced to some of biggest investors as they position themselves for 2009.
While the precipitous drop in crude oil and natural gas prices from their record highs in July have pounded the sector, money managers are betting oil will inevitably rebound. That's because as demand is falling amid a global slump, production cuts mean supply is falling faster.
Once the economy begins to stabilize, demand will return with a vengeance, they said.
"We very rarely invest in energy ... but I think there are some great opportunities," Whitney Tilson, founder of hedge fund T2 Partners told the Reuters Investment Outlook Summit in New York this week.
Bob Doll, global chief investment officer of equities at BlackRock and Margaret Patel, senior portfolio manager at Evergreen Investments, also see energy as among the most compelling sectors, while renowned hedge-fund manager Jim Rogers said the credit crisis had not killed the bull market in commodities, including oil, but only dealt it a "horrible setback."
An S&P index of energy companies .GSPE is currently down 41 percent in the second half, during which the benchmark S&P 500 .SPX index fell 34 percent. An index of oil services companies is currently down 67 percent from its record high of $364.26 hit on July 2.
"We are in a nasty global recession and oil demand will be affected by that, no question about it," Doll of BlackRock said. "But we are still not drilling enough holes to get enough out of the ground to replace that which we are even using at these lower levels. So oil prices, as the economy recovers, have to come back."
As the global economic slump has crushed demand for energy, some U.S. refiners, facing dismal profit margins, have scaled back production, with more cuts likely. This week, the OPEC president called for more "severe" production cuts.
Doll recommended selling retailers that have rallied in recent weeks and buying energy companies instead.
"Some of the big integrated oils, we think, represent reasonable value," he said, adding he would stay in the defensive names such as Chevron and Exxon for now. Doll said buying ConocoPhillips, Occidental Petroleum and some of the bigger, more conservative exploration and production companies like Apache Corp would also "make sense."
For her part, Evergreen's Patel said energy services companies would do well, "as it gets more and more technically difficult to bring gas and oil out of the ground."
T2 Partners' Tilson, a value investor, said the energy sector had attracted "a lot of momentum-oriented investors, investors on leverage, and you are seeing all of that unwind like crazy." Tilson owns natural gas company Crosstex Energy and natural gas company Contango Oil & Gas.
Renowned commodities investor Jim Rogers is also betting that dwindling reserves of oil will drive a recovery in energy, but he said he's investing directly in the commodity. He told the Reuters Summit that he bought oil last week as crude prices collapsed to near four-year lows.
Jim O'Shaughnessy, chief investment officer at O'Shaughnessy Asset Management, owns Exxon Mobil, which he said has attractive valuation.
Like other money managers, he's focusing on sectors expected to fare well even in a recession.
O'Shaughnessy said he owns a number of consumer companies catering to people who are pinching their pennies, such as discount retailers Wal-Mart and Dollar Tree and satellite TV provider DirecTV.
"Do we see a theme here? People are going to sit at home, watch DirecTV, go to Costco, buy their cheap beer there, and try to weather out the recession," O'Shaughnessy said.
NEW YORK (Reuters) - Renowned commodities investor Jim Rogers said on Thursday that he bought oil last week as crude prices collapsed to near four-year lows and that the world is running out of known oil reserves.
Rogers told the Reuters Investment Outlook Summit in New York that he also closed his bets against the U.S. stock market in October, and plans to use the dollar's rally as an opportunity to exit dollar-denominated assets.
Rogers, who spoke via a conference call from Miami, said he is the world's worst market timer and a horrible short-term trader, but a sharp sell-off in oil prices suggested a bottom.
"Oil collapsed last week. Whenever you've had that sort of selling climax throughout any period in history, you are usually well-rewarded to buy it. It may not be the final bottom, but a bottom, so I'm buying oil again," he said.
Rogers, who remains bullish on commodities, estimated known world oil reserves at today's consumption rate are about 16 years, which indicates crude prices will again trend higher.
"We're going to see $200 oil at some point, it may be by 2013. It's a sad fact but the world is running out of known oil," he said.
Many of Rogers's investments reflect a bearish view of the U.S. economy, which he said is poised to enter a period of stagnation, just as Japan suffered during its "lost decade" in the 1990s.
Rogers rose to fame in the investment world as co-founder with George Soros the Quantum Fund in 1970. The fund returned 4,200 percent over the next decade, compared with a 50 percent gain in the S&P 500 index.
"We have unbelievable mistakes every week coming out of Washington, just as Japan did in the 1990s, just as America did in the 1930s," he said. "This could turn into a gigantic mess."
Rogers attributed his grim outlook to worries about the size of the U.S. government's growing deficit and the unwillingness on the part of authorities to let banks fail. He said he expected the U.S. economy to be in bad shape for a considerable time.
"I am most worried about the United States and what's going on," said Rogers, who said he is proud to be American but he has serious doubts about the country's future.
Rogers also said he covered most of his bets that the U.S. stock market would decline in October, when "that too felt like a selling climax," he said.
He also said he plans to get out of U.S. securities he's owned for more than two decades if there is a rally soon.
"The market will probably rally for a while into January or March, and then we'll have more problems next year and perhaps into 2010," he said.
"I plan to get out of all of my U.S. dollars at some time throughout this rally. The dollar is a terribly flawed currency, and perhaps a doomed currency," he said.
Rogers said that he is investing on growth areas in China and Taiwan, such as shares in water treatment, tourism and agriculture.
He is bullish on Asia because the region has savers and thus creditor nations.
"This is where the money is, and throughout history the world has moved to where the money is," he said.
"To me it's incomprehensible that people would lend to the United States government for 30 years at 3 or 4 percent," he added.
Rogers sold his New York mansion in December and has been living in Singapore. He is long-term bull on China, where he first traveled on motorcycle in the early 1980s. He again traveled on motorcycle through China and six continents a decade later, a trip that formed his book "Investment Biker."
Radical US Federal Reserve action expected with rate cut
Gary Duncan December 15, 2008
The US Federal Reserve is tipped tomorrow to pave the way for it to take more extraordinary measures to kick-start the American economy after it cuts interest rates to an historic low of only 0.5 per cent. The Fed is expected to cut the key US official interest rate, its Fed Funds target rate, by another half-point from the present 1 per cent level that matches past record lows.
But with still lower official rates seen as unlikely to deliver much of an extra boost to stalled US growth, markets are on alert for the Fed to map out action through radical measures to pump funds into the economy.
Another cut in the official rate is seen as likely to prove mainly symbolic. This is because this official rate is in reality only a target for the cost to US banks of borrowing from each other overnight, through the Fed. In practice, distortions in the marketplace have already pushed the true rate at which the US banks can borrow overnight well below the Fed target, to levels approaching zero.
With serious practical dangers to the US economy likely to be posed by cutting rates much below 0.5 per cent, the Fed is likely to use its statement to set out alternative, aggressive action that it can take in place of conventional cuts in interest rates.
Measures open to Ben Bernanke, the Fed Chairman, include a series of steps known by experts as “quantitative easing”, which is already being used unadvertised by the US central bank on a more limited scale. These could involve giving the American economy extra money through the Fed buying up commercial debt in bonds or asset-backed commercial paper held by US banks, or directly buying government bonds from the US Treasury. This would aim to drive up the amount of money in circulation and drive sharply downwards the true cost of borrowing for businesses and consumers.
The Fed is expected to make clear whether official rates will be pushed below 0.5 per cent amid fears that any such move would trigger a destabilising flood of money out of money market mutual funds that would no longer deliver any return — a development that could wreak havoc in US credit markets.
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Oil producers could face prolonged buyers’ market
By Jad Mouawad
15 December 2008
NEW YORK: With the economy in the throes of a global recession, oil producers are facing the toughest business environment in 25 years.
Oil demand is set to decline this year and next, the first drop since the energy shocks of the early 1980s. As economic growth slows down sharply, oil prices have collapsed from their summer peaks in record time.
The stunning speed of the downturn has fast become a nightmare for producers, who face shrinking revenue next year. Oil has lost 70 percent of its value, or $100 a barrel, since July and many analysts forecast further declines as the global economy worsens.
The OPEC cartel is meeting Wednesday in the coastal city of Oran, Algeria, to try to stem the drop in prices. Chakib Khelil, OPEC’s president and the Algerian oil minister, suggested last week that producers would make “a severe production cut to stabilize the oil market.”
Many analysts expect the cartel, which accounts for about 40 percent of the world’s oil exports, to cut production by about 1.5 million barrels a day.
The problem is that OPEC’s actions so far have had little effect on the market. Members of the Organization of Petroleum Exporting Countries have already met three times since September, and agreed to trim their output by two million barrels a day, to no avail. Since the last time OPEC promised to cut production, the price of oil has dropped by 30 percent.
With demand falling rapidly, there are few reasons to expect the drop in prices to slow down. Oil futures in New York closed at $46.28 a barrel on Friday, after touching a low of $40 a barrel earlier this month. That is down from a peak above $147 a barrel in July.
With stagnating growth next year, global consumption could fall by 1.3 million barrels a day, or 1.5 percent, in 2009, according to Deutsche Bank. Many analysts now expect oil prices to reach $30 a barrel next year if the slowdown spreads to China, which is increasingly likely.
“With demand uncertain, the ball remains in OPEC’s court,” analysts at Raymond James, a brokerage firm, wrote in a market commentary last week. “Short of dramatic action by the group, crude has few near-term catalysts.”
The OPEC meeting in Algeria will also feature a proposal by Russia, which is not a member, to reduce its own output along with OPEC.
Russian officials have been cozying up to the oil cartel in recent months as the drop in prices stings the country’s petroleum-dependent economy. Last week, President Dmitri Medvedev signaled that Russia wanted closer cooperation with OPEC, and did not rule out joining the group.
But Russia’s proposal is unlikely to weigh much on the market. Some analysts see the move as window dressing for the fact that Russian production will drop this year because of the government’s restrictive policies, insufficient investments and hefty export taxes.
Part of the problem for OPEC is that producers simply cannot reduce their production fast enough to match the drop in consumption.
OPEC has found it much easier to keep discipline within its ranks when prices rise than when they fall. To prevent their revenues from falling too quickly, some producers have failed to trim their production as much as they promised.
Estimates of how much OPEC is currently pumping vary, as the cartel does not supply production numbers. Petrologistics, a consulting firm that tracks the movement of oil tankers, estimates that producers have reduced their output by about a million barrels a day in November.
Platts, an authoritative energy publication, estimated that OPEC’s overall output dropped by 880,000 barrels a day in November, following the cartel’s last agreement to curb production. That is still 852,000 barrels a day above the group’s latest quota.
There is also some uncertainty about the level of Saudi production.
The cartel’s top producer reduced its output by 500,000 barrels a day, bringing down its daily production to 8.9 million barrels a day, from 9.4 million barrels a day in October, according to the survey by Platts. That would mean the kingdom is pumping 400,000 barrels a day more than its official quota of 8.477 million barrels a day.
Uncertainty and a lack of proper data led the producers to defer a decision to cut production when they met in Cairo on Nov. 29. It takes about four to six weeks for any decision by OPEC to translate into lower imports for consumers.
But while the market doubts the determination of producers, the Saudi oil minister, Ali al-Naimi, indicated last week that the kingdom was pumping 8.5 million barrels a day in November, a drop of 1.2 million barrels a day from its August peak production level. The announcement helped oil prices rebound last week.
Most OPEC members want to see prices rise from their current levels.
According to the Middle East Economic Survey, most producers have drawn budgets for 2009 that assume oil prices will be above $50 a barrel. Even Saudi Arabia has recently pointed out that it considered $75 a barrel to be a “fair price.”
Members of the cartel know they cannot get to such prices anytime soon. The best the group can do is set the stage for a recovery in prices when the global economy eventually improves.
“There is going to be a lot of pressure on the OPEC ministers to defend prices,” said Geoff Porter, an analyst at the Eurasia Group in New York. “OPEC has to strike the balance between an aggressive cut which will slow down the price fall, but it can’t be so aggressive that it erodes their credibility if the members do not comply. They can’t push too hard and have their members not respond.”
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Energy shares rank among top picks in '09
By Kristina Cooke
Dec 12, 2008
NEW YORK (Reuters) - Energy shares are hot again.
After plummeting about 40 percent in the second half of this year, they are looking attractively priced to some of biggest investors as they position themselves for 2009.
While the precipitous drop in crude oil and natural gas prices from their record highs in July have pounded the sector, money managers are betting oil will inevitably rebound. That's because as demand is falling amid a global slump, production cuts mean supply is falling faster.
Once the economy begins to stabilize, demand will return with a vengeance, they said.
"We very rarely invest in energy ... but I think there are some great opportunities," Whitney Tilson, founder of hedge fund T2 Partners told the Reuters Investment Outlook Summit in New York this week.
Bob Doll, global chief investment officer of equities at BlackRock and Margaret Patel, senior portfolio manager at Evergreen Investments, also see energy as among the most compelling sectors, while renowned hedge-fund manager Jim Rogers said the credit crisis had not killed the bull market in commodities, including oil, but only dealt it a "horrible setback."
An S&P index of energy companies .GSPE is currently down 41 percent in the second half, during which the benchmark S&P 500 .SPX index fell 34 percent. An index of oil services companies is currently down 67 percent from its record high of $364.26 hit on July 2.
"We are in a nasty global recession and oil demand will be affected by that, no question about it," Doll of BlackRock said. "But we are still not drilling enough holes to get enough out of the ground to replace that which we are even using at these lower levels. So oil prices, as the economy recovers, have to come back."
As the global economic slump has crushed demand for energy, some U.S. refiners, facing dismal profit margins, have scaled back production, with more cuts likely. This week, the OPEC president called for more "severe" production cuts.
Doll recommended selling retailers that have rallied in recent weeks and buying energy companies instead.
"Some of the big integrated oils, we think, represent reasonable value," he said, adding he would stay in the defensive names such as Chevron and Exxon for now. Doll said buying ConocoPhillips, Occidental Petroleum and some of the bigger, more conservative exploration and production companies like Apache Corp would also "make sense."
For her part, Evergreen's Patel said energy services companies would do well, "as it gets more and more technically difficult to bring gas and oil out of the ground."
T2 Partners' Tilson, a value investor, said the energy sector had attracted "a lot of momentum-oriented investors, investors on leverage, and you are seeing all of that unwind like crazy." Tilson owns natural gas company Crosstex Energy and natural gas company Contango Oil & Gas.
Renowned commodities investor Jim Rogers is also betting that dwindling reserves of oil will drive a recovery in energy, but he said he's investing directly in the commodity. He told the Reuters Summit that he bought oil last week as crude prices collapsed to near four-year lows.
Jim O'Shaughnessy, chief investment officer at O'Shaughnessy Asset Management, owns Exxon Mobil, which he said has attractive valuation.
Like other money managers, he's focusing on sectors expected to fare well even in a recession.
O'Shaughnessy said he owns a number of consumer companies catering to people who are pinching their pennies, such as discount retailers Wal-Mart and Dollar Tree and satellite TV provider DirecTV.
"Do we see a theme here? People are going to sit at home, watch DirecTV, go to Costco, buy their cheap beer there, and try to weather out the recession," O'Shaughnessy said.
Rogers buys oil last week as price drops
By Herbert Lash
Dec 11, 2008
NEW YORK (Reuters) - Renowned commodities investor Jim Rogers said on Thursday that he bought oil last week as crude prices collapsed to near four-year lows and that the world is running out of known oil reserves.
Rogers told the Reuters Investment Outlook Summit in New York that he also closed his bets against the U.S. stock market in October, and plans to use the dollar's rally as an opportunity to exit dollar-denominated assets.
Rogers, who spoke via a conference call from Miami, said he is the world's worst market timer and a horrible short-term trader, but a sharp sell-off in oil prices suggested a bottom.
"Oil collapsed last week. Whenever you've had that sort of selling climax throughout any period in history, you are usually well-rewarded to buy it. It may not be the final bottom, but a bottom, so I'm buying oil again," he said.
Rogers, who remains bullish on commodities, estimated known world oil reserves at today's consumption rate are about 16 years, which indicates crude prices will again trend higher.
"We're going to see $200 oil at some point, it may be by 2013. It's a sad fact but the world is running out of known oil," he said.
Many of Rogers's investments reflect a bearish view of the U.S. economy, which he said is poised to enter a period of stagnation, just as Japan suffered during its "lost decade" in the 1990s.
Rogers rose to fame in the investment world as co-founder with George Soros the Quantum Fund in 1970. The fund returned 4,200 percent over the next decade, compared with a 50 percent gain in the S&P 500 index.
"We have unbelievable mistakes every week coming out of Washington, just as Japan did in the 1990s, just as America did in the 1930s," he said. "This could turn into a gigantic mess."
Rogers attributed his grim outlook to worries about the size of the U.S. government's growing deficit and the unwillingness on the part of authorities to let banks fail. He said he expected the U.S. economy to be in bad shape for a considerable time.
"I am most worried about the United States and what's going on," said Rogers, who said he is proud to be American but he has serious doubts about the country's future.
Rogers also said he covered most of his bets that the U.S. stock market would decline in October, when "that too felt like a selling climax," he said.
He also said he plans to get out of U.S. securities he's owned for more than two decades if there is a rally soon.
"The market will probably rally for a while into January or March, and then we'll have more problems next year and perhaps into 2010," he said.
"I plan to get out of all of my U.S. dollars at some time throughout this rally. The dollar is a terribly flawed currency, and perhaps a doomed currency," he said.
Rogers said that he is investing on growth areas in China and Taiwan, such as shares in water treatment, tourism and agriculture.
He is bullish on Asia because the region has savers and thus creditor nations.
"This is where the money is, and throughout history the world has moved to where the money is," he said.
"To me it's incomprehensible that people would lend to the United States government for 30 years at 3 or 4 percent," he added.
Rogers sold his New York mansion in December and has been living in Singapore. He is long-term bull on China, where he first traveled on motorcycle in the early 1980s. He again traveled on motorcycle through China and six continents a decade later, a trip that formed his book "Investment Biker."
Radical US Federal Reserve action expected with rate cut
Gary Duncan
December 15, 2008
The US Federal Reserve is tipped tomorrow to pave the way for it to take more extraordinary measures to kick-start the American economy after it cuts interest rates to an historic low of only 0.5 per cent. The Fed is expected to cut the key US official interest rate, its Fed Funds target rate, by another half-point from the present 1 per cent level that matches past record lows.
But with still lower official rates seen as unlikely to deliver much of an extra boost to stalled US growth, markets are on alert for the Fed to map out action through radical measures to pump funds into the economy.
Another cut in the official rate is seen as likely to prove mainly symbolic. This is because this official rate is in reality only a target for the cost to US banks of borrowing from each other overnight, through the Fed. In practice, distortions in the marketplace have already pushed the true rate at which the US banks can borrow overnight well below the Fed target, to levels approaching zero.
With serious practical dangers to the US economy likely to be posed by cutting rates much below 0.5 per cent, the Fed is likely to use its statement to set out alternative, aggressive action that it can take in place of conventional cuts in interest rates.
Measures open to Ben Bernanke, the Fed Chairman, include a series of steps known by experts as “quantitative easing”, which is already being used unadvertised by the US central bank on a more limited scale. These could involve giving the American economy extra money through the Fed buying up commercial debt in bonds or asset-backed commercial paper held by US banks, or directly buying government bonds from the US Treasury. This would aim to drive up the amount of money in circulation and drive sharply downwards the true cost of borrowing for businesses and consumers.
The Fed is expected to make clear whether official rates will be pushed below 0.5 per cent amid fears that any such move would trigger a destabilising flood of money out of money market mutual funds that would no longer deliver any return — a development that could wreak havoc in US credit markets.
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