Con-tango

Archived entries for Views

July 25, 2006
In Economy, Views
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CDO or collateral damage?

I was participating in JD Hamilton’s excellent presentation on the yield curve — I sure do recommend a visit, when I ran into the CDOs or Collateralized debt obligations.

All I can say this stuff is literally… dynamite; and the whole financial industry is sitting on top of them…

July 25, 2006
In Views
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There we go again. It’s not enough to have the very complicated Mid East crises; additionaly, two refineries shut down, with the Venezuelan refinery shut in at 956,000 bpd for 7 months… that’s going to ignite gasoline prices and hold WTI/Brent oil prices in the face of rising oil inventories.

According to the Forbes feed:

The market was reacting to supply concerns after refinery shutdowns in Venezuela and the United States, said Mark Pervan, senior resources analyst at Daiwa Securities in Melbourne.

Cooling towers at a ConocoPhillips refinery at Wood River, Illinois, have been temporarily shut down after suffering storm damage.

Meanwhile the Amuay refinery in Venezuela, which exports fuel to the United States, is set to be shut down for up to seven months after a fire last week, trade sources said.

The fire occurred at the Paraguana oil complex which produces about 956,000 barrels of oil a day.

According to Reuters, although the Wood River refinery was hit by a second storm, Connoco Philips expects the refinery to be up and running next week:

NEW YORK, July 21 (Reuters) – ConocoPhillips (COP.N: Quote, Profile, Research) on Friday said preparations for a restart of its 306,000 barrel-per-day Wood River refinery in Roxana, Illinois, will not be completed until sometime next week.

Considering the 1.3 million barrels lost by Valero’s St. Charles refinery, and the 28 days lost at the SK Corp. refineries at 425,000 bpd, the refinery disruptions is potentially the main issue pushing oil and gasoline prices higher.

We all know that its been 30 years since the last refinery was built in the US; plenty of expansions though…

Could it be that oil companies have found a way to avoid the downturn in oil prices by resisting the temptation to build new refineries with the pretext of the NIMBY public policy?

July 20, 2006
In Views
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Who gets what from oil?

I thought the following OPEC chart was enlightening and one more piece of the oil puzzle worth posting:

Is Japan’s low taxing fostering a higher cut for the oil industry? …which would be very bad news for the average japanese.

And what are Italy and Germany doing to get those sweet breaks in industry margins? There could be a lesson to learn there too…

BTW, according to a recent Reuter’s article dated July 17, OPEC forecasts a 1.3 million bpd increase in demand for 2007 to 85.9 mbpd, slightly less than the 1.4 mbpd increase expected for 2006.

OPEC further predicts a slower 4.2% world GDP growth for 2007, compared to an expected 4.7% growth for 2006.

June 29, 2006
In Economy, Views
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Liquidity ramblings

Let me start by suggesting that you read what Morgan Stanley’s economists have to say. It’s a rare occassion when they get together to discuss the prospects of the economy, so I encourage you not to miss this opportunity to read (part I and part II of) their debate.

With a very broad brush, we may describe the discussion as focussing on the effects of shrinking global liquidity. Joachim Fells sets the tone by positing the following remarks:

With less liquidity available to chase asset prices higher, a correction in asset prices seemed like a logical response.
Note that both the 1994 bond market crash and the popping of the equity
bubble in 2000 were preceded by sharp contractions in excess liquidity. The contraction in 1994 was of course due to the Fed’s tightening operation in that year and caused a major bond market crash. And the contraction of 2000 reflected global monetary tightening and preceded the bursting of the equity bubble.

Richard Berner highlights the chilling similarities of the pre downturn markers of ’94 to our actual situation,

Call me old-fashioned but I think the common thread between 1994 and
today is the Fed’s and other central banks’ efforts to pre-empt
inflation in the context of upside surprises to growth. At the start of 1994, no trader I spoke to thought that rates could go up by 100bp, much less 300bp. Growth kept surprising to the upside through the end of the year. The dollar sank, core intermediate PPI prices accelerated sharply, core CPI inflation rose by 50bp, and University of Michigan inflation expectations were rising.
Sound familiar? In my view it’s the shift in market expectations from a
Fed that simply normalizes rates to one that could actually hurt you
that triggered the mini global margin call.

June 20, 2006
In Views
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A new competitor for ethanol?

Biobutanol is the name of a new biofuel that BP and Dupont are presenting today as an alternative to ethanol with a 30% more punch. The following is an excerpt from Forbes’ Kerry Dolan’s recollection:

DuPont and BP (nyse: BP–news–people )
have been working on the new fuel since 2003. The two companies plan to
introduce the first generation of biobutanol in the U.K. by the end of
2007. And they hope to roll out an improved second-generation
biobutanol by 2010. DuPont and BP aim to make the fuel competitive with
gasoline, even when oil is priced as low as $30 to $40 a barrel. In the
U.K., the partnership will produce the new fuel by extracting
fermentable sugar from sugar beets and converting that into a fuel,
similar to the way ethanol is produced.

Currently, biofuels
account for just 2% of all fuel consumption. But biofuels could account
for 30% of all fuel consumption by 2020, some sources predict. Dupont
and BP estimate the global market for biofuels could reach 87 billion
gallons by 2020, up from just under 11 billion gallons today.

June 15, 2006
In Views
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Verasun soars on debut

According to Anuj Gangahar from the FT:

Shares in VeraSun opened for trading nearly 22 per cent above the offer price at $28. The stock closed at $30 in New York.
The company and stockholders had sold 18.25m shares at $23 each through the IPO, according to the company, exceeding the $21 to $22 range forecast in an earlier regulatory filing.