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Today's Market WrapUp 04.04.2007 Mon Tue Wed Thu Fri Puplava Archive
The United States has been dependent on foreign oil imports for years now as U.S. production has been in decline since the 1980s. Falling production and rising demand has led to an increased need for imports, with many of these imports coming from politically unstable regions. The two figures below explain the “dependent” subtitle to the article. Figure 1
Figure 2
The subtitle, “deprived,” is explained by a tight global energy market with U.S. dependency on regions with flat to declining production as well as dependency on politically unstable regions. Global demand for crude oil has outstripped production from 2001 to 2005 leading to a surge in the price of oil (Figure 3). Despite a surge in OPEC production from 2002 to peaking in late 2004, the increased production from OPEC was not enough to cover the global demand that rose over the same period (Figure 4). Figure 3
Figure 4
Since 2004, OPEC has been unable to increase production past the 30,540 (thousand barrels/day) mark, with production cuts in late 2006 to defend the price of oil. Since 2005, exports to the U.S. coming from our top six exporters have been falling despite increased U.S. demand. Exports to the U.S. really fell off a cliff in late 2006 as OPEC made good on its production cuts. However, OPEC production ramped back up since the start of the year as the price of oil stabilized and rebounded (Figure 4), yet U.S. imports of crude oil have recovered very little as seen by the figure below. Figure 5
Figure 6
Of the top six crude oil exporters to the U.S., more half of them are OPEC members that include Saudi Arabia, Nigeria, Venezuela, and Iraq (Iraq has no quota). When breaking down the exports to the U.S. by OPEC vs. non-OPEC, both show a significant drop in exports to the U.S., with there being a strong correlation in directional similarity between OPEC and non-OPEC exports. Figure 7
The reason why U.S. imports of crude oil from OPEC countries has fallen despite increased OPEC production is revealed when breaking down OPEC imports by country. The main culprit has been Venezuela as Hugo Chavez shifts his country’s exports to China and India. This should not come as a surprise as Hugo Chavez is quite open about his distaste with President Bush, even referring to him as the Devil. India and China are capitalizing on the political disfavor the U.S. has with Venezuela by redirecting exports towards their countries as both countries continue to expand. Figure 8
Not only are crude imports to the U.S. falling from political disfavor (Venezuela), but also from unstable regions such as Nigeria and Iraq, with both countries' exports to the U.S. falling since 2004. Figure 9
Even countries that are stable and have close ties to the U.S. are exporting less oil to the U.S., as both Canada and Mexico have yet to increase exports to the U.S. this year, with exports resting at levels below the 2001 recession. The fact that our two closest trading partners haven’t increased their exports to the U.S. is troubling and has led to a decrease in U.S. crude oil inventories. Figure 10
Figure 11
This trend in falling exports to the U.S. may continue as Mexico’s state-owned Petroleos Mexicanos (Pemex) has witnessed flat production that has ranged between 1650-1900 thousand barrels per day (BPD). Not only are crude imports slowing to the U.S., but so are natural gas imports from Canada as the Canadian oil sands require more natural gas to process the oil sands. Figure 12
Canadian exports of natural gas to the U.S. have shown a flat to falling trend since peaking in late 2001, with a significant drop in exports to California after exports peaked in 1996. Figure 13
Figure 14
Not only is the U.S. seeing its imports of crude oil falling from politically unstable and friendly trading partners alike, but we are also seeing offshore drilling rigs leave the Gulf of Mexico and heading to the Middle East and Asia. Offshore oil and gas drilling contractor GlobalSantaFe (GSF) provides economic data on offshore rigs. The company publishes its SCORE indexes (Summary of Current Offshore Rig Economics), which reflects current rig dayrates as a percent of the estimated rate required to justify building new rigs on speculation. The GSF’s SCORE compares the profitability of current mobile offshore drilling rig dayrates to the profitability of day rates at the 1980-1981 peak of the offshore drilling cycle. In the 1980-1981 period, when SCORE averaged 100 percent, new contract dayrates equaled the sum of daily cash operating costs plus approximately $700 per day per million dollars invested. The SCORE indexes for the four regions GSF monitors as well as the worldwide index are provided below. Figure 15
As seen by the various SCORE indices, the economics for rigs has surpassed the profitable economics of the early 1980s and has never been higher. The inflation rates (Producer Price Index, PPI) for oil and gas field machinery has remained near a 10% annual rate of change with the active world rig count reaching new highs. There is a strong correlation between the S&P oil and gas equipment and service industry’s relative strength to the S&P 500 and the PPI for oil and gas field machinery. The sell off in the oil service industry appears to have overshot to the downside when looking at Figure 17, and appears to be rebounding as drilling inflation rates have remained elevated and the price of crude has rebounded. Figure 16
Figure 17
With ever-increasing dayrates and a tight supply of offshore drilling rigs, drilling companies are moving their rigs to regions offering the highest dayrates. This had led to rigs in the Gulf of Mexico leaving our waters to move overseas seeking higher dayrates. This can be seen in the figure below that shows the SCORE for the Gulf of Mexico lagging the worldwide SCORE index, which will lead to falling U.S. offshore crude oil production. Figure 18
A Bloomberg article released on December 12th of last year entitled, “Rig Shortage Slows Chevron Bid to Tap Offshore Fields,” demonstrates the tight supply of offshore rigs and the higher rates drillers are able to command as a result, with commentary from the article provided below. A global shortage of deep-sea drilling rigs is costing Chevron precious time as it taps the Gulf, and the equipment deficit may keep oil prices high. A prime example is the $3 billion field dubbed Jack. Chevron and partner Devon Energy Corp. announced the deepest-ever well test there on Sept. 5 (2006). Politicians backing energy independence exulted. Investors sent Devon shares up 12 percent and Chevron's up 2.3 percent. They didn't know the drilling rig Cajun Express had already plugged the Jack well and moved to another urgent job. Drilling at Jack won't resume until at least July (2007), Thornburg (a senior drill-site manager for Chevron Corp.) says. “There's a lot of prospects out here we'd like to drill but can't yet because there aren't enough rigs,'' says Thornburg, 58, who's overseeing drilling at another site, called Tahiti, that needed the Cajun Express to meet a more pressing deadline. The Cajun Express is one of just 18 rigs worldwide capable of tapping the deepest discoveries. For the test at Jack, the platform-shaped vessel, which motors from site to site, needed to drill 4 miles (6.4 kilometers) below the sea floor. Rental Fees Double The Cajun Express is owned by Houston-based Transocean Inc., the world's biggest offshore driller. While record lease rates of as much as $520,000 a day are funding expansions by Transocean and other rig operators, shipyards from South Korea to Singapore to Scandinavia are backlogged with orders. Growth of the offshore drilling fleet will be gradual, says Kenneth Sill, a Houston-based analyst at Credit Suisse Securities USA LLC. Daily rental fees on the most sophisticated and rugged drilling vessels are double 18 months ago, Sill says. “Day rates have climbed aggressively because demand for these rigs far outweighs the ready supply,” says Clayton Ballard, the top-ranking Transocean employee aboard Discoverer Deep Seas, another rig at the Tahiti field. Worldwide, there are 31 rigs on order that will be able to handle deepwater projects such as Jack, according to Houston-based Rigzone, which compiles data on the drilling industry. Two are scheduled to be finished next year and 13 are slated for delivery in 2008. $1.5 Billion Order Earlier this year, Chevron ordered two new rigs from Transocean at a cost of about $1.5 billion. They will be able to drill a mile deeper than the most sophisticated existing vessels. The first of the new vessels, which at a cost of $670 million will be the most expensive rig in history, won't be ready until 2010. Transocean will own the rigs and lease them to Chevron. Even when available, the rigs are costly to operate. Chevron and its partners on the Tahiti field, Statoil ASA and Royal Dutch Shell Plc, are spending $1 million a day to rent, staff and supply the Cajun and Discoverer Deep Seas with fuel, food and hardware. The price tag will rise to $1.6 million a day by the end of this month as more cost-intensive phases of well preparation get under way, says Donald LeGros, Tahiti's drill site manager and Thornburg's No. 2. “If people wonder where their money goes when they're paying $2.50 a gallon for gasoline, this is it,” says LeGros, 45, who began working in oil fields the day after he finished high school in 1979. Rising U.S. demand for petroleum products with declining domestic production increases our dependence on foreign suppliers. Our top six foreign crude oil suppliers are from politically unstable regions, politically unfriendly towards to the U.S., or are either experiencing flat or declining production. Dependency on foreign suppliers who are shifting exports to other regions or cutting back will only lead to higher energy prices and more pain for the U.S. consumer’s pocket book. A more comprehensive and faster implemented national alternative energy plan needs to be enacted to reduce the U.S. dependency on foreign nations; otherwise we will remain dependent and deprived for crude oil. TODAY'S MARKET - Economic Reports ISM Non-Manufacturing Index – March The ISM non-manufacturing business activity index fell to 52.4 in March from 54.3 in February, falling in contrast to the consensus estimate calling for a rise to 56.0. There were more negative components to the report, as the prices paid index rose to 63.3 from 53.8 in the prior month, the highest level since August of last year. The employment index fell to 50.8 from 52.2 in February, the lowest reading since June 2004. The export index also witnessed strong deterioration, falling to 48.5 from 59.0 in February, the lowest level since July 2003. Falling business activity, employment, exports, and rising prices point to weakening underlying fundamentals and a deteriorating economy.
MBA Mortgage Applications Survey – Week of 03/23/07 Mortgage demand fell 3.2% last week led by a 4.5% decline in refinance applications with purchase applications falling 2.0%. The decline in mortgage activity was likely the result of rising mortgage rates as the contract rate on the 30-year FRM increased 8 basis points to 6.13% while the 1-year ARM rose 2 basis points to 5.87%.
Factory Orders – February Factory orders rose 1.0% in February, a smaller advance than the 1.8% consensus estimate. Inventories remained unchanged for February while shipments fell 0.5%, leading to an increase in the inventory-to-shipments (I/S) ratio to the highest level since 2003. The last time the I/S ratio rose sharply was prior to the 2001 recession.
Oil & Gas Inventories – Week of 03/23/07 Crude oil inventories rose 4.3 million barrels last week, well above expectations of a 0.6 million barrel increase. However, gasoline inventories experienced a huge drop, falling 5.0 million barrels, well above expectations calling for a 0.3 million barrel decline. Distillate inventories were essentially flat, falling 0.1 million barrels while expectations were for a 0.6 million barrel drawdown. All three energy levels are below last year’s levels, with crude inventories down the greatest (-2.8%) followed by distillates (-2.6%) and gasoline (-2.6%). Refinery activity was unchanged at 87.0%.
Source: Energy Information Agency (EIA)
The Markets Stocks rose today on news that Iran would return the British Sailors with President Mahmoud Ahmadinejad calling the return of the sailors an Easter gift to the British people. The news initially sent the markets higher before a weaker than expected ISM non-manufacturing report led to a decline in the markets to session lows before the markets rebounded into afternoon trading. The Dow, S&P 500, and NASDAQ were all up on the day with the Dow posting a modest gain, rising 19.75 points to close at 12530.05, the S&P 500 rose 1.60 points to close at 1439.37, and the NASDAQ climbed 8.36 points to close at 2458.69. Investors purchased Treasuries today with the 10-year note yield at 4.652%, falling 1.2 basis points. The dollar index was down on the day, falling 0.19 points to close at 82.96. Advancing issues represented 52% and 45% for the NYSE and NASDAQ respectively, with up volume representing 55% and 64% of total volume on the NYSE and NASDAQ. Energy prices were mixed on the day after release of petroleum inventories. The large drawdown in gasoline and build in crude led to a 17.48% spike in refining margins (3-2-1 crack spread), with gasoline one month futures rising 4.48%, while West Texas Intermediate Crude (WTIC) fell 0.40%. Precious metals were up with gold rising $10.25/oz to $674.20/oz (+1.54%) and silver finishing up $0.21/oz to close at $13.61/oz (+1.57%). Base metals were all up with zinc showing the greatest strength on the day (+2.76%) while aluminum displayed the weakest performance (+0.03%).
Overseas markets were mostly up with Japan’s Nikkei 225 putting in the strongest showing, up 1.74% while London’s FTSE 100 index was down 0.02%. The move in the markets was mixed as half of the ten S&P sectors were down, with technology (+0.59%) and health care (+0.47%) putting in the best performances, while the telecommunications (-0.62%) and utility (-0.36%) sectors showed the greatest weakness. Chris Puplava Copyright © 2007 All rights reserved.
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