When You are at Peak, Which Way is Next?

To appreciate the amount of oil that we consume I have added a video (two years old, but not much changed) that illustrates the amount. I have also  added a thoughtful analysis on the current demand for housing in the US. Gasoline at the pump is rapidly increasing to the $4 per gallon mark. Oil price reachesd to a new 30-month high of $108 per barrel. Where is this going? Where do you think?

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US peak profits warning from Chris Mayer
Posted on 02 April 2011 Arabian Money

Rising star of the US financial newsletter world Chris Mayer has a stark warning for readers in his latest issue of Capital & Crisis. Profit margins in the US have reached unprecedented levels and can now only fall as commodity price inflation hits home.

‘One of the vulnerabilities in today’s market is that profit margins are near peaks’, he says. ‘Investors tend to like companies with fat profit margins, but high profit margins are like honey pots that attract competitors. They are rarely sustainable for long’.

Top ten crisis

If you take a list of the top 10 technology stocks in the US Nasdaq market then the average net profit margin is around 25 per cent, and similar high profit margins are also seen across the S&P 500 stocks. The boost to profit margins has come from cost cutting in the downturn, mainly in the form of job cuts that do nothing to boost domestic consumer demand.

‘Today, though, I doubt many of these firms have much more to cut,’ suggests Mayer. ‘Instead, the focus is now growing sales and taking business from competitors or defending an existing business. The focus, too, is how to deal with rising raw material costs. All of these put enormous pressure on margins. We should expect to see them fall.’

That of course is the contrarian view. It is not what the bulls of Wall Street are saying. They see a recovery in the US economy that is raising all boats.

If the Wall Street consensus is again wrong then the reverse will be true and all boats will sink. Mr Meyer is stock picking to locate the boats that will stay afloat, so at least he is thinking in the right direction. But the tendency always is for the good to get cast down with the bad, particularly if the numbers are overwhelming.

Naturally this situation is most dangerous when company profits have recovered sharply and the domestic economy is still in the dumps. And what do US auto and house sales figures quite clearly show us?  The domestic US economy is still in a depression with activity well down on the boom years.

Domestic depression


(US auto sales down 19% last year and that’s for smaller cars)
(US disposable incomes drop for the first time since September)

Now if domestic demand is not rising, and indeed consumer personal disposable income is falling  then what prospects are there for pushing up company revenues to keep profits surging ahead? You have to look to exports and repatriation of multinational income.

Yes but does the world not have a few worries of its own right now? To briefly summize: Japan just had its worst earthquake in history and nuclear reactors are leaking plutonium; the UK is facing three years of austerity; the eurozone has a massive debt crisis; and the Middle East and North Africa is in a state of revolution, civil war and protest that has pushed oil prices to a two-year high.

Will Asian sales hold up under these circumstances? Or will stocks sell-off and the dollar rally, making US exports uncompetitive again? This peak profits warning is very well timed.

More Whirled in Oil

‘Rogue broker’ blamed for oil spike

By Javier Blas and Izabella Kaminska in London FT

Published: July 2 2009 12:07 | Last updated: July 2 2009 20:26

The startling spike in oil prices to their highest level this year on Tuesday was caused by a rogue broker who placed a massive bet in the Brent oil market, triggering almost $10m (€7m) of losses for his company.

PVM Oil Associates, the world’s largest over-the-counter oil brokerage, said on Thursday it had been the “victim of unauthorised trading”. The privately owned company said that as a result of the unauthorised trades it had been forced to close substantial volumes of futures contracts at a loss.

London-based PVM said it had informed the Financial Services Authority, the UK regulator. But officials at the Commodity Futures Trading Commission, the US regulator, claimed they had been kept in the dark for several hours in spite of an agreement between the watchdogs last year to exchange such market-sensitive information spontaneously.

Oil traders in London and New York said the “unauthorised trading” explained the exceptional spike in business activity and prices in the early hours of Tuesday that some initially thought must have been caused by a geopolitical event. “Trading volumes rose overnight and prices jumped more than $2 a barrel without apparent justification,” a senior oil trader in New York said.

Prices rose in one hour from $71 to $73.5, the highest level for the year, according to Reuters data. In total, futures contracts for more than 16m barrels of oil changed hands in that hour – equivalent to double the daily production of Saudi Arabia, the world’s largest oil producer, and far more than the traditional 500,000 barrels for that time of the day.

Traders said the broker implicated had allegedly accounted for at least half of the unusual activity, with the rest the result of others chasing the rally. Oil prices on Thursday fell to $66.5 a barrel, down almost 10 per cent from Tuesday’s peak.

The Financial Times has identified the PVM broker as Steve Perkins. PVM declined to comment and Mr Perkins could not be reached. Fellow traders said Mr Perkins was considered an experienced broker, well-regarded in the market.

This is the second episode of rogue trading in the oil market this year. In May, an oil trader at Morgan Stanley was banned by the City watchdog after he hid from his bosses potential losses on trades made under the influence of alcohol.

The incidents come as regulators are considering tougher oversight of the commodities markets after policymakers complained that speculators fuelled last year’s surge in oil and agriculture prices.

The involvement of PVM is ironic considering the company’s head, David Hufton, has been an outspoken critic of speculators in the oil market, calling some of the exchanges “electronic oil casinos”. In 2006, he said that “if futures exchanges did not exist, oil prices would be a lot lower”.

The $10m loss is a heavy blow for PVM, which reported profits of just $5.6m in the year to July 2008, according to its accounts.

Additional reporting by Brooke Masters

Mission accomplished. China's two biggest state-owned oil companies pursuing a joint venture in Iraq.

China's motivation in the area is not purely financial. The past few months has seen the country's state-owned commodities giants embark on a shopping spree among recession-hit Western rivals, including Rio Tinto, Oz Minerals and Fortescue. Trying to secure access to much-needed raw materials, the most significant deals have been for oil. China Development Bank is lending $35bn (£23bn) to tottering state oil companies in return for 400,000 barrels of oil per day (bpd) for decades to come. A toehold in Iraq would provide yet more security.

The battle for Iraq's oil

Major oil companies and their state-owned counterparts are all jostling for a slice of the world's third-largest reserves. Sarah Arnott reports

Wednesday, 15 April 2009 Independent

Royal Dutch Shell is talking to two of China's biggest state-owned oil companies with a view to pursuing a joint venture in Iraq. Although Shell would not confirm details of the talks, a possible tie-up with China National Petroleum Corporation (CNPC) and China Petrochemical Corporation (Sinopec) is reported to focus on a bid to develop the Kirkuk field in the north of the country. "Discussions with potential partners are at a very early stage," a spokesman for Shell said yesterday.

The putative deal is just the latest move as both international oil companies and their state-owned counterparts jostle for position in the vast and underdeveloped Iraqi oil market.

The prize is huge. The country has proven reserves of 115 billion barrels, the third largest in the world after Saudi Arabia and Iran. "Iraq is a jewel for the international oil companies and always has been," said Manouchehr Takin, a senior petroleum analyst at the Centre for Global Energy Studies. "Not only does it have large proven reserves but there are also big estimates for undiscovered resources. People agree or disagree on the detail, but many think there may be even more yet to be found."

But the country's oil sector is inefficient and under-resourced after years of war, upheaval and sanctions against Saddam Hussein's Ba'athist regime. Of the 80 known oilfields, only 15 are developed – between them producing about 2.4 million barrels per day.

For Iraq itself, oil exports make up 95 per cent of government revenue and are the only way to fund the rebuilding of the shattered country. With the price of crude back down to $50 per barrel from last July's unprecedented $149, making the most of the nation's vast resources is an even more pressing priority.

Oil companies large and small have been lining up for a piece of the action since Saddam was deposed in 2003 and there have been some isolated deals, often not involving putting people on the ground. From 2004, BP, for example, was involved in the Rumeila field in the south, analysing geophysical data and providing guidance on ways to boost recovery rates. But the unclear legal position of the new government, and the dangerous security situation, counselled against more serious involvement.

The first attempt to bring in foreign expertise, in the form of two-year service contracts, collapsed last year and was superseded by the current plan for a series of 20-year service and investment deals. Thirty-two companies are bidding for the first round of contracts, which will cover six oilfields and two gas fields. According to the timetable, the first deals could be signed by the end of the year, although insiders are sceptical. A second round, launched in December, is looking for developers for another 11 fields and has attracted a further nine bidders in addition to the original 32.

But the contracts are not of the production-sharing type common elsewhere in the world. The winning bidder will not take over the operations entirely. Instead, it will establish a joint venture with whichever Iraqi state company is responsible for the field, working with them to expand and develop it. The proposal may not be the free-for-all the internationals dream of, but it is still a significant chunk of business. An estimated $50bn in investment is needed to meet Baghdad's target to raise output to six million bpd by 2014, and the collapsing price of oil has already changed the dynamic between the government and its potential partners.

Under the proposed arrangements, a proportion of the investment will come from the oil major and a proportion from the Iraqi state company. Assuming success, and production improved in line with targets agreed at the outset, the international company will recover its costs and receive a fee. In February, the contractor's stake was raised from 49 per cent to 75 per cent, and the production targets demanded by Iraq have also been lowered.

But even with softened terms, the attraction of the deals is more the foot in the door than the contracts themselves. "These are quite sophisticated arrangements, but they are very, very different from the contracts you might have elsewhere in the world, where the reserves can be booked in your accounts," a source at one major oil company said last night.

There are two problems that need to be overcome before any greater involvement. One is that deals with foreign oil companies are a thorny issue. Saddam's nationalisation of the industry in 1972 is one of very few aspects of his rule that is not criticised within Iraq, and any sense that the country's resources are being sold out to the West would be viewed as a gross betrayal.

The other is Iraq's internal politics. Since 2003, about 30 smaller oil companies have signed traditional production-sharing agreements with the government of the semi-autonomous region of Kurdistan in the north, which has fewer than 10 per cent of the country's total oil reserves. But major companies including BP and Shell pulled out after Baghdad branded the deals illegal and threatened to ban any company pursuing such arrangements from bidding for work elsewhere in the country.

The row, which centres on whether the Kurdistan Regional Government (KRG) has the right to make deals in its own right or must get them signed off by Baghdad, shows little sign of resolution. As well as holding up investment in the region itself, the stand-off is also scuppering the progress of the post-Saddam government's planned hydrocarbon law, which would provide a framework for rights and revenues, not to mention the involvement of foreign oil companies, for the country as a whole.

Despite years of discussion, and numerous different drafts, the law is still not on the statute books and attempts to revise it may require a revision of the Iraqi constitution governing the relationship between Baghdad and the KRG.

"There is a huge internal debate in Iraq about whether the government should make these types of deal," Mr Takin said.

Against such a background, the oil ministry is trying to get on with increasing production – and raising revenues for the state – within its existing remit. As well as the long-term services contracts, it has also put together a number of isolated deals, awarded without a competitive tendering process. Last autumn, Shell joined a $4bn joint venture to collect and market the 700 million cubic feet of gas flared from 19,000 square kilometres of oil field in the Basra region.

In August, CNPC – now in talks with Shell over Kirkuk – signed a $3bn deal to develop the Ahdab field in central Iraq, thus agreeing the first oil deal since the fall of Saddam. But as Baghdad and the KRG do not even agree whether Kirkuk is in Kurdistan or not, even the smallest steps are worth taking.

Past Time to Rethink Transportation and Fuel

Alternative Transportation Need Not Be all That Bad

Car sales last year were up 60 percent in Russia, up 30 percent in Brazil and up 20 percent in China. Imagine India with $2500 cars. Friends, the era of getting 300 miles on a twenty gallon gas tank is rapidly coming to an end. Electricity, propane, hydrogen or perhaps a motorbike are in the future. What is clear is that the existing automobile fleet is going to be replaced sooner than you think. Ford (F) closing at $7.50 may be the buy of a lifetime.

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Oil prices to double by 2012: Canadian study Breit Bart

U.S.: biodiesel usage to increse to 1 billion gallons per year by 2012.

The price of oil is likely to hit 150 dollars (Canadian, US) a barrel by 2010 and soar to 225 dollars a barrel by 2012 as supply becomes increasingly tight, a Canadian bank said Thursday.

The CIBC report says the International Energy Agency's current oil production estimates overstate supply by about nine percent, since it wrongly counts natural gas liquids -- which are not viable for transportation fuel -- in its numbers.

Analyst Jeff Rubin in his report noted accelerating depletion rates in many of the world's largest and most mature oil fields. He estimates oil production will hardly grow at all, with average daily production between now and 2012 rising by barely a million barrels per day.

"Whether we have already seen the peak in world oil production remains to be seen, but it is increasingly clear that the outlook for oil supply signals a period of unprecedented scarcity," said Rubin.

"Despite the recent record jump in oil prices, oil prices will continue to rise steadily over the next five years, almost doubling from current levels."

The CIBC report also notes that while production increases are at a virtual standstill, global demand continues to grow.

An expected drop in demand in the United States due to higher prices and a weak economy will be more than offset by demand growth in developing nations, it says.

Rubin cites, for example, the recent launch of Tata's 2,500-dollar car that will allow millions of households in India to soon own automobiles.

He also notes that car sales last year were up 60 percent in Russia, up 30 percent in Brazil and up 20 percent in China.

Transport fuel now accounts for half of the world's oil usage.

Although US oil consumption is likely to fall by over two million barrels a day over the next five years as pump prices rise, he says, more drivers on the road in Russia, China and India will surely pick up the slack in demand.