December 27th, 2010 at 05:57pm
Under Crude oil
OPEC Production Cut Fails to Inspire Oil Market; Oil Drops to Four-Year Low
Article by Jason Simpkins
Oil prices fell again yesterday (Wednesday) – dropping below for the first time in four years – as weak demand and growing inventories overshadowed a record cut in production by the Organization of Petroleum Exporting Countries (OPEC).Light, sweet crude for January delivery fell .54 to settle at .06 a barrel on the New York Mercantile Exchange – the lowest level since 2004. Oil futures actually traded as low as .88 during the day yesterday. The slide came in spite of an announcement by OPEC that the cartel would cut its production quotas by 2.2 million barrels per day (bpd), a record amount.”The Conference observed that crude volumes entering the market remain well in excess of actual demand: This is clearly demonstrated by the fact that crude stocks in OECD countries are well above their five-year average and are expected to continue to rise,” the group said in a statement. “Moreover, the impact of the grave global economic downturn has led to a destruction of demand.”Since September, OPEC – supplier of 40% of the world’s oil – has issued three production cuts totaling 4.2 million bpd, or nearly 12% of its capacity. Still, the cartel has failed to establish a floor for oil prices, which have tumbled more than 70% from their July 11 peak of 7 a barrel. Oil has now given up all of the price gains it has made since 2004, in just the past five months.The main reason for the decline is that the global recession has curtailed demand significantly, leaving many developed nations, as well as the cartel, with a significant buildup of inventories.The U.S. Energy Information Agency reported yesterday that crude oil inventories increased 500,000 barrels from the previous week, while OPEC’s commercial inventories now stand at 57 days’ worth of supplies. OPEC President Chekib Khelil, said that his group wants to push inventories down to 52 days’ worth of supply and lift prices back up to – a barrel.However, OPEC may find it difficult to achieve those goals without help from non-OPEC nations, which balked at efforts to make a coordinated global production cut. After rumors circulated prior to the meeting that Russia and Azerbaijan might take part in the cuts, their contribution to OPEC’s effort came out flat.”Russian oil companies have already made a decision to cut deliveries to the market… approximately equivalent to 350,000 barrels per day,” Russian Deputy Premier Igor Sechin told The Associated Press. Sechin added that the cuts had already been implemented in November.Russia’s lack of involvement did nothing for an oil market that was crying out for a coordinated global effort. In fact, the statement came off as a thinly veiled attempt to repackage the already apparent decline in Russian oil production that has resulted from a lack of investment. Even before Sechin’s comments, analysts had forecast a 1% decline in Russian oil output for this year, and a 2% drop in 2009.Azeri Energy Minister Natik Aliev said it would back OPEC’s move by cutting production by 300,000 bpd, more than a third of its total capacity. Still, analysts estimate that an accident that took place on the country’s main pumping platform in October had already cost the country 500,000 bpd in output.”We want non-OPEC countries to contribute, and not just benefit from the impact of our cuts,” a frustrated Khelil said after the meeting in Oran, Algeria. “It’s in their own interest as well as in ours.”A lack of foreign cooperation will put even more pressure on OPEC, and could force the group to call another “extraordinary” meeting before its next scheduled gathering, set for March 25, 2009.”I hope we surprised you,” Khelil said when asked whether the size of the cut would provide enough of a spark to ignite oil markets. “If you’re not surprised we need to so something about it.”To read more Go:http://www.moneymorning.com/2008/12/18/opec-production/
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By Oilism.com
December 27th, 2010 at 05:57pm
Under Crude oil
Investing in the Oil ETF: Go Liquid or Pass on the Gas?
Article by B. Patrick Regan
The launch of the US Oil Fund (ticker: USO) gave investors an easy way to invest in the hottest commodity of the day: oil. Still reeling from the post-Katrina boom that has kept gas prices over .00 a gallon, investors bought over five million shares in the ETF’s first day.
The concept is an easy sell: it’s a fund that invests in oil contracts with the purpose of mirroring the value of West Texas Intermediate (WTI) light, sweet crude oil at a ratio of one barrel contract per share. One share, one barrel.
Easy, right?
Riiiiiiiight…
The Well-Known Risks of Commodities
Everyone knows about the risks of investing in commodities, but it is worth repeating the main points.
Commodities prices fluctuate quickly and widely. An announcement from any OPEC country could send oil prices up or down 10% within minutes. With every word spoken by the prime minister of Iran oil pushes upward.
Oil investments are also subject to operational risks: environmental hazards such as oil spills, leaks, fires and discharges of toxic chemicals.
This is not rational long-term investing. This is short-term, profit-taking trading, and it should be treated as such.
Commodities have long been considered a hedge against market fluctuations, not a primary holding. Now they are suddenly an investment strategy. Any commodity — oil, gold, pork bellies — should be considered a hedge against a bond or equity market downturn.
Like gold and other commodities, oil futures have enjoyed a long bull market in the post 9-11 world, but commodities and hard assets tend toward modest gains over the long term. And they are all subject to sudden, harsh corrections.
Specific Risks of the Oil ETF (USOF)
Though any commodity investment involves certain general risks, the US OIL Fund (USOF) ETF has specific risks that make it particularly unstable.
Price Risk – This is the risk that the NAV of the fund will not equal the price of WTI light, sweet crude, as the fund intends. The fund’s prospectus outlines three reasons why this could happen:Market Risk – The trading price per share of the ETF may not correlate with the value of the NAV, which is calculated by dividing the total value of the fund’s assets by the number of shares. The ETF, then, could trade at a premium (more than the underlying assets are worth) or a discount (less than the value of the underlying assets).Management Risk – The NAV may not match the value of the benchmark oil contract. The underlying assets of the fund, then, could stray from the value of the contracts the fund trades.Futures Arbitrage Risk – The price of the benchmark does not closely correlate with the price of WTI light, sweet crude. In this case, futures contracts may differ in price from the underlying asset (barrels).
Any one of these risks would be enough to make USOF a questionable investment, but there’s more…
Strategy Risk – Rather than profit from speculative short-term futures trading, the USOF tries to track the price of the underlying assets (oil), using futures contracts. This is all to be carried out by the General Partner (manager), Victoria Bay Asset Management, described in the prospectus as “lean staffed,” which “relies heavily on key personnel to manage trading.” As the prospectus notes, “there is no assurance that the General Partner will successfully implement this investment strategy.” Like stocks, futures contracts can be over- or undervalued with respect to their underlying assets. Further, the fund can be manipulated by short-term trading tactics (i.e. short selling). This fund’s reliance on a “lean-staffed” manager which does not actively manage the fund’s assets, but rather attempts to track an index price, does not bode well for the fund.Legal RisksAside from the organizational risks, the USOF has two outstanding legal claims to contend with.NYMEX – The New York Mercantile Exchange (NYMEX) is the exchange through which WTI light, sweet crude is traded. As the publisher of the price of that asset, NYMEX is challenging USOF’s use of the price as a benchmark. NYMEX is seeking a licensing agreement with the fund, or threatening legal action to prevent the fund from using it as a benchmark. According to the prospectus, “USOF is unable to determine what the outcome from this matter will be…This may adversely affect USOF’s ability to achieve its investment objective.” Goldman Sachs – One of the world’s largest investment banks, Goldman Sachs, has two patents pending which may be infringed upon by the fund’s methodology. Both patents define a means for creating a pooled fund that trades futures contracts and issues the equity interest of the fund to investors through publicly traded shares. Should the patents be granted, USOF may be held liable for patent infringement, if it were to “operate as currently contemplated after the patents were issued.” If either of these patants is granted, the fund may be liable for royalties, which would come from the fund’s assets.
These are complicated matters for attorneys in the specialized areas of Intellectual Property and Finance, and this author is unqualified to make a determination as to the merits of the claims made. As investors, however, we are all qualified to say, “nope, too much risk for me.” Pure oil contracts are less risky than this fund. Should USOF be held liable for either of these claims, any damages or royalties will be taken directly from the fund’s investors, which could negatively affect performance by 4-5 basis points (0.4%-0.5% annually, which can negate any positive performance or exacerbate the losses of a hedging investment).
Conflicts of Interest
The fund makes no bones about it: a whole section of its prospectus is entitled, “The General Partner Has Conflicts of Interest.” The management of this fund has other investment interests that may be of more importance (to them) than this fund. “For example,” it states, “a conflict may arise because the General Partner and its principal and affiliates may trade for themselves.”
Essentially, this is an open invitation for the management to prioritize their own holdings (and holdings they have a vested interest in) over the USOF holdings.
Better Options Abound
Usually there are better options around, no matter what you’re looking at. But when it comes to USOF, there are few worse options.
The management has not proven itself as a consistent performer. The underlying commodity is near an all-time high. The strategy is subject to pending legal decisions.
There are better options in mutual funds that specialize in commodities producers. And even these funds should not comprise more than 5% of an individual’s portfolio.
If you still feel the need to invest in the “pure oil play” that’s getting all the press these days, please read The Prospectus before investing.
About the Author
B. Patrick Regan is a freelance writer and a staff writer at Stocks And Mutual Funds.com. He had no vested interest in any securities discussed in this article at the time of publication.
By Oilism.com
December 27th, 2010 at 05:57pm
Under Crude oil
Home Heating Oil Prices Soar
Article by Gloria Smith
Prices of oil have a domino effect on the prices of many major products worldwide. As oil prices go up, so does the price of food especially those that use oil in manufacturing them. Soon enough, prices of other commodities go up as well.
With high oil prices, many people regardless of their status in society are very much affected and worried. Homeowners who use fossil fuel in their heating systems are not exempted. It is because they will have to spend more this time to have their regular stock of fuel and this a major concern for them. The Federal government already foresees a 30 percent increase in the fuel expenditures of an average household that uses oil as its primary heating fuel compared to the 2007 winter season. Apart from oil, they will also have to deal with the high electricity rates which have gone up as well.
As of August 2008, the average cost of home heating oil is pegged at .13 per gallon. This is still considered quite steep despite the recent drop in the price of crude oil.
Home heating oil prices are affected by several factors including supply, demand, geography, weather conditions and politics. Prices have become very volatile in that they can change several times in a single day mainly because of a variety of world events. However, as weather is another major factor, it is typical for home heating oil prices of oil to increase during the winter season despite a drop in the price of crude oil.
The Department of Energy’s Energy Information Agency projects that for 2008 to 2009, the prices of residential heating oil during the regular heating season covering the months of October to March will average .34 per gallon. This is an increase of 31 percent from last year’s .31. Home heating natural gas prices are also seen to go up by 22 percent during the same heating period to an average of .58 per Mcf.
Because of a weak economy and high prices of crude oil and other products, a survey by the Energy Information Administration projected a decline on U.S. petroleum and other liquids consumption by about three percent. The first half of the year alone showed a drop in total consumption by an average of 930,000 barrels per day compared to the same period a year before. The decline is seen to continue for the rest of the year despite a rise in domestic and worldwide crude oil production.
Fortunately, some concerned legislators are taking steps to help provide relief to the situation. A move in the works is the expansion of the Federal Low Income Home Energy Assistance Program (LIHEAP) that is aimed at providing direct assistance to low-income families and the elderly people experiencing high home heating bills. A noteworthy action is the introduction of the “Warm in Winter and Cool in Summer Act†which would allot .53 billion in additional emergency LIHEAP funding for this 2008 winter.
Other lawmakers, in their own way, are offering tips to consumers that will help lower their energy bills ahead of the winter months.
About the Author
Learn more about Alternative Heating Systems by visiting:http://www.homeheatingsystemhelp.com/alternative-heating-systems.html
By Oilism.com