| MARKET ROUNDUP | |
| Dow | -36.87 to 18,126.12 |
| S&P 500 | -2.69 to 2,120.79 |
| Nasdaq | -8.61 to 5,097.98 |
| 10-YR Yield | -0.005 to 2.13% |
| Gold | +2.60 to $1,188.20 |
| Crude Oil | +$0.36 to $57.87 |
Bloomberg didn’t mince any words with its headline here. It reads: “The Tanker Market is Sending a Big Warning to Oil Bulls,” with a picture of an oil ship anchored off the coast of California thrown in for good measure.
The gist of the story: Demand for oil supertankers is surging. The rate to charter an oil-hauling behemoth recently jumped 57% in only two weeks. It now costs a whopping 69% more, or roughly $45,000 per day, to hire a 2 million barrel tanker, compared with May 2014.
In the Middle East region alone, spare capacity is the tightest it’s been since at least 2009. That has helped send shares of supertanker operators up by 20% or more year to date.
And all of this is characterized as “bad” news. A major warning for anyone who owns energy stocks. After all, clearly every charterer of these ships – especially the giant OPEC producers with decades and decades of experience in the energy market – know nothing.
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| Oil tankers: Meeting worldwide demand. |
They’re hiring ships left and right because they want to flood the world market with oil forever. They want to cut off their noses to spite their faces. They’re going to … I don’t know … pay tens of thousands of dollars a day for these ships to sail around in figure eight patterns across the Atlantic, Indian and Pacific Oceans because they have nothing better to do.
Or maybe there’s a much simpler explanation: They have customers for the oil! People want it. Demand is on the rise, and the companies hiring these ships are trying to meet it.
With so much attention focused on oil supply lately, few in the mainstream press are talking about oil demand. Like the fact global demand growth bottomed out a year ago, according to the International Energy Agency (IEA). Then it accelerated to 900,000 barrels per day in the fourth quarter of 2014, and is accelerating again to around 1.1 million or more BPD now.
Here’s something else to ponder: Do you know when tanker demand and tanker rates last plunged severely? In 2008-09, when the global economy and crude prices were crashing. Those tanker declines were therefore “bad” news for investors, particularly in energy stocks.
So how in the world is the exact opposite thing – a rise in tanker rates and demand – now “bad” news, too? Or a harbinger of doom for energy stocks? Does that make sense to you? Or could it be that demand is actually improving, and with energy stocks already priced for Armageddon, there’s value to be had?
| “People want it. Demand is on the rise.” |
It should be obvious which way I’m leaning. But let me open the floor up to you.
Do you think this rise in tanker demand is bullish or bearish for oil and energy investors? Is it a sign that OPEC wants to hold tanker races in the middle of the ocean? Or could it be that demand is actually picking up? Where would you invest in the energy sector in light of this news? Let me know over at the Money and Markets website.
| Our Readers Speak |
What to make of the latest “non-confirmation” of new highs in the markets by the Dow Transports? Is it a major warning sign, or just another minor hiccup? You weighed in on that topic over at the website, so let’s briefly recap.
Reader Frank said: “It has been six months since the Dow Transports hit their high and the same for Dow Utilities. But the Dow Industrials just keep humming along. Does the Dow Theory not apply anymore?”
Reader Al added: “You ever hear the old saying, ‘The bigger they are, the harder they fall’? Well, that’s the stock market. The higher it goes, the lower it’s going to fall.”
As for the reasons behind the transport weakness, Reader Tommr offered this theory: “I have contended here before that the Federal Reserve is NOT acting to ‘stimulate’ the economy at all, but rather to suppress it! How? By pushing interest paid on savings down to next to nothing.
“By doing this ‘financial repression,’ as it is called, it is depriving most people of the income they would otherwise receive on their wealth. How could this condition allow and encourage those same people to spend and consume? Obviously, it does not! The sooner the Fed takes its foot off our necks, the sooner people will start to spend again!”
Thanks for sharing your thoughts. I agree with Reader Frank that Dow Theory is still important in this day and age, and the nonconfirmation from transports and utilities is a yellow flag for markets overall. And Reader Tommr is on the mark with the Fed – trying to hold down borrowing costs for debtors is shafting savers and crushing interest income.
I’ve been coping with this environment by not just “buying the Dow.” Rather, I’ve been focusing on a few beaten-down sectors where virtually every piece of negative news is already discounted. I have also been zeroing in on a few “private bull market” sectors that have powerful sector-specific fundamentals driving them.
Lastly, Reader Steven made a funny observation on the FIFA scandal – which looks a lot like the scandals rocking the banking sector. His take: “So FIFA has been making ‘soccers’ out of us, while playing us for the fool for years? I wonder if they have been taking any pages out of NFL’s playbook?”
Great stuff! Make sure you add to the discussions at the website when you have time if you haven’t already. This link will get you pointed in the right direction!
| Other Developments of the Day |
There’s another mega-merger in technology today – Avago Technologies Ltd (AVGO) is buying Broadcom (BRCM) for $37 billion in cash and stock. The deal will broaden Avago’s line of semiconductors.
What do you think about the fraying of the pension system? The latest mega-merger in tech? Or other topics in the news? Let me know over at the website.
Until next time,
Mike Larson
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
{ 47 comments }
Mike:
One more possibility, while not likely it may still be a possibility, especially if used in combination with a flooding the market option.. If OPEC is producing more oil then the demand then rather then slowing down the production or pumping it to land based storage tanks they could use tankers store it until the demand increases or an opportunity presents itself, assuming that either occur. That would put them in a position to immediately respond to any demand possibly before others can.
Yes, they are in competition with American producers who are already doing the same thing.
hope they own the tanker, at 45,000 a day isn’t any profit in it for long term.
The thing that makes oil prices so volatile is that the amount of oil in inventory is minute compared to daily consumption – especially when you consider how essential oil is. Trying to impact pricing by holding inventory in tankers is a waste of time so I think these ships are for moving product to places that want it.
The US has 480,000,000 B stored commercially, and the US Strategic Reserves has 691,000,000 B stored. That is 1.17 Billion Barrels of crude stored, just in the US. The US imports 9,000,000 B/day, so we have 130 days of storage. That is a lot. China is rapidly expanding their SPR, the Saudis have a massive storage program, and there are probably at least 60,000,000 B floating.
So the Shanghai Stock Market now has the latest in stock broker playground equipment, Market Swings.
Look at the Daily Chart for the price of Oil. It is in decline, but on a daily basis erratic. Saudi Arabia is pumping as much oil as possible regardless of price because of the Yemen conflict and the “fracking effect” on prices. Iran is pumping like crazy. Oil will sit on the high seas until it gets a buyer because all the storage facilities seem to be filled. Considering all of this, I would guess that oil prices are doomed to go much lower. If not, what am I missing? Which economy on the planet is cooking on all cylinders??? Like…. none?
Regis, “Because all storage facilities seem to be filled” your out of your mind wrong!!!! I am an oil producer and can tell you for a fact that production is WAY down in the U.S. just wait till this summer… they won’t be able to hide the numbers by then. And the flooding in Texas has REALLY put a damper on output in this state.
One more point. I learned today that a lot of Bankers are holding oil contracts for near $80 per bbl. and they have no market because of the oil flood at lower prices. Could it be that there may be some Bankers playing in the “Price of Oil Game”. . .?
Regis,
You should check out the charts Raymond James has just released and the amounts would shock you. Wells Fargo and Bank of America alone could go broke if this thing doesn’t work out right – and soon.
China is slowing, Europe is slowly growing, the U.S. is still in a snail’s pace growth, automobiles are more fuel efficient, inventories are dropping at 20% the rate they were climbing in December, January and February, drilling rig count has bottomed out, and you say that the demand for oil is so strong that every supertanker is in service. I still think oil has one more leg lower into the upper 40’s before it is all over.
Any chance of somebody other-than Mike Larson writing the afternoon reports..He’s become a boring one-trick pony..A year ago he jumped up&down screaming “buy energy stocks!” when oil was $100 barrel..Oil’s in the midst of a bear-market..please focus elsewhere
one-trick pony is quite generous, Lee. peruse back to say 2009. one-trick something seems more appropriate.
Your analysis overlooks the possibility that the Saudis have run out of oil storage facilities.
balderdash!
balderdash!
During the Great Depression, the stock market collapsed, then rose gradually for a number of years, then collapsed until the big industrialization of World War II began a new boom. We had a collapse in 2008, then a gradual rise until now. As Mike pointed out yesterday, the Dow Transportation averages have begun a roll over to a decline. This seems like a harbinger of things for the broad markets. Moving to cash may be the smartest move, as Dr. Weiss’s dad did in 1929.
Are tanker rates surging because demand for crude is high, or because demand for crude is low? Tough Question. Getting reliable crude demand figures out of China or other parts of the world is hard. The crude markets have been in a very wide contango for the last 6 months. Contango means the front month of the futures contract is cheaper than the second month, which is cheaper than the third month, etc. Crude is cheap in the front month because there is too much supply (cushing storage is almost full, at record levels), too little demand, or both. You can sell your crude cheap in the prompt month, or sell outter month crude futures, and use that profit to hire a tanker to store crude on for future delivery. When the contango is wide enough, that works. There is a massive amount of floating storage right now, which pushes up freight rates, and narrows the contango to the point that floating storage does not work anymore (which is where we are right now). So now current oil production has to compete with floating storage, and with oil stored in storage facilities. The oil has not been consumed, it is just piled up. So that means prompt oil prices have to get cheaper in order to clear sales, which also starts the funding of storage all over again.
Rick, I think you have a better handle on the oil markets than Mike does. A market decline often starts big, as oil did last year, then bounces up a bit, as oil has recently, then drops again, before finding a true bottom area, which can last longer than anyone thinks. All that oil stored in tankers, which are more expensive than land storage, are going to make oil very cheap, as owners do their best to sell it off. Many of those owners are going to go broke, and tanker companies are going to buy their holdings for pennies on the dollar. Producers will have very little market for their product for years. Oil users, on the other hand, will benefit greatly.
Thanks Chuck, and I agree with your analysis too. Crude is of no use to anyone, until it has been refined. All of this cheap crude will be great for refiners…go long refiners.
Just from memory, oil fell about 60 odd percent over the last year, then bounced almost 50%. Another 60% drop would put it in the upper $20s. Even 50% would mean oil around $30, as Larry has said.
I get savaged every time I throw cold water on the oil bears, but here I go again. The top twelve producers have all turned in static or declining production numbers over the last ten years except the US. The Great American Shale Boom has increased worldwide production by 4 per cent. I have personally participated in the drilling in the legendary Bakken Field. The last one was drilled by Whiting Petroleum 30 months ago in Billings County, North Dakota, a pretty hot area. Initial production was 360 BPD. Last month the well averaged 12 BPD, a 95 per cent depletion, and still falling. There us nothing unusual about this well. While it has almost paid for itself, it has certainly not generated enough cash to drill a second well on the property, which brings me to my point. Whiting and every other company like it are classic “junk bond junkies” with negative cash flows. The all great and powerful Continental Resources during this great “boom” has increased its debt level from $300 million to $8 billion. While there are certainly no flies on a 12bpd well, a few thousand of them aren’t going to put the Saudis out of business when their wells initial at several thousand BPD and settle at several hundred BPD. The real question you have to ask yourself about shale is will the junk bond money be there to restart the “boom” or won’t it if prices rise. I contend that it will not and that the plunging rig count indicates higher prices ahead as it always has. Ignore the tankers, watch the drill rig count. Jim
Another completely unmentioned factor here is the damage done to the US oil industry. Our business requires a lot of highly trained, hard working individuals which are increasingly difficult to find. We are also an “old” business. A sixty year old petroleum engineer like myself is the norm. There are very few youngsters taking up the baton. Seems a degree in environmental sciences is more important than engineering. My son won’t come near the oilfield. Every time our “friends” the Saudis pull this crap hundreds of thousands of fine young men and women lose their high paying jobs with virtually no warning. Those with any common sense will never return once they have found jobs elsewhere. They might as well be sending over the Luftwaffe to bomb us out of existence, and most Americans applaud their actions. When I started out there was one inspector from one agency monitoring my activities. At last count I have 28 from six agencies enforcing a six hundred page code. Don Henley was hiring private detectives at one point to look for pollution. I am routinely accused of gouging the public and destroying the planet. I have seen $6 oil and $147 oil. I too am almost to the point of cashing in my chips and opening a barbecue stand just to get a shred of sanity and predictability in my life. Jim
That is heartbreaking. I agree, kids do not want to get real degrees anymore. I still think there is nothing on the horizon to compete with oil, so I think it is a good field to be in if you can weather the booms and the busts. There is no doubt, all the kids are getting global warming hammered into their heads from first grade on, so there will be more and more government oversight/hindrances going forward.
Doesn’t anyone know whether these leased supertankers are moving oil cargos from one place to another? Or are they just sitting at anchor somewhere because they are waiting for oil prices to rise? That would tell us a lot about future market directions.
I think some are at anchor in sheltered waters, while others move the oil to near prospective markets, then anchor.
The Bloomberg article has some silly numbers: 20 million bbls in floating storage. That’s 1/5 of the world’s daily demand, an insignificant number. There is 485 million bbls. that will be transported to customers by ship between now and June 6, 10 days from now or the equivalent of 48.5 million bbls per day. That’s a little less than 1/2 worldwide demand, which sounds about right as that much probably needs to be shipped to keep the world supplies. As to playing the contango, that was done by many when front month was $42 bbl. They’ve made their profit and likely sold their oil already.
If anyone thinks that demand is suddenly soaking up supply, then you have not been paying attention. Exactly nothing is different now than it was 6 months ago. There is no significant growth in the US and unlikely to be any for quite awhile. The small blip in Europe was a QE seizure and will fall flat going forward. As far as China is concerned, their reported 7% GDP is a dream. Oil is about to roll over following a nice bear market rally. I would not be surprised to see it undercut its previous lows and fall into the $30’s. I think Rick and Chuck are absolutely right in their assessment.
Remember, the cure for high prices is high prices, as oil demand starts to rise and prices go up more shale oil will be coming back to the market. That’s what oil drillers do to make a living – produce oil, even marginally profitable oil will give them a paycheck.
every one talks about the tankers
but
1)are the refiners refining that much more ?
2) are the ships sitting or actually delivering the oil ? [ i have heard both ]
3) is the cost of these ships costing us at the pumps now or later or both ?
why the guesinggame? tell us exactly what u believe will happen. thanx lenny
The benefits promised to public-sector retirees is beyond belief. On this web site, http://www.transparentnevada.com, I see there are about 1000 retirees collecting pensions of at least 100K. I’m assuming these pensions include inflation protection.
Using the four percent withdraw rule, a 100K annual pension is equivalent to 2.5 million in savings.
What’s atrocious is that a former football coach at University of Nevada Reno receives a pension of 270K annually.
Given Nevada has one of the smallest public sectors, I can only imagine how huge this problem is on a national scale.
Mike: It is obvious to me and I am sure to you that the Saud’s want to drive our frackers out of business. In order to balance supply and demand, Congress should permit the exportation of oil. Putin has the Europeans by the throat. Lets loosen the noose and give Putin some hard competition. We should also sell oil to Japan who is devoid of natural resources. We also need to expand our refining capacity. We need to get the EPOA out of the way! Our refining capacity will reach its limit nexr month. Regards, Robert Calabro.
If the demand for oil is rising, why is the price of crude falling? It’s down to 57 from 63 just a week ago.
Our refineriens are dnensigned to crack heavy oil that comes from the middle east.. We don’t have much refining capacity for WTI. That is why Congress should allow the exportation of oil. Some tankers are being used to store oil. Some American oil companies are drillling but noot completing wells. They are storing the oil in the ground.
I’m a layman at this, but it seems to me if a refinery is designed to handle high density, heavy crude, which would need high heat to crack loose the lower density components, it should easily handle WTI, which is already at a lower density. Please explain if I am wrong, and how.
a) the Chinese are buying large quantities for spot and future delivery, which lays a floor on daily tanker rates
b) oil demand is rising due to improved economies and the summer season nearing (airco’s)
b) traders may be expecting crude and product prices to rise again after the summer, so buy spot, charter tanker space to store and deliver once prices have actually risen. This is called the contango game.
Good morning, Mike – The US retirement industry is in crisis. We’ve seen a precipitous decline in the use of DB plans (from 146,000 in ’86 to <24,000 today), and the economic and social consequences will be grave. We are asking too much of our untrained employees to fund and manage their retirement plans through a DC structure. Do we really believe that a non-investment professional can handle this task? DB plans need to be preserved, but the industry has been approaching the problem incorrectly. We need to focus more on the plan's specific liabilities and not the ROA to drive asset allocation decisions. Lastly, there are hybrid DB plan designs that can stabilize funding, which will help with state and municipal budgets. Happy to discuss further.
The BEA says our GDP DECLINED .7% in the first quarter. That does not sound like an improving economy. Yes, horrible weather may have contributed to this, but what kind of weather do we have in the 2nd quarter? Floods and tornados in the South and Southwest and middle states, drought in California, now mid-summer heat starting in the East. That will not improve things. We have actually been in a Depression since 2008, despite the rising stock market, and it is not getting better, and has started transferring to the rest of the world, even China, as their U.S. markets dry up. That is why they are trying to develop their domestic consumption economy, and they might ultimately be our salvation, as they become a bigger market for our products, if Washington politicians get off their butts.
It is the crude coming from Canada soon to export through the US gulf distribution that is forcing the middle east to ramp up export surplus to block the competition and over supply the far east now. There is little indication of a world wide demand side need for the extra oil.
BAD SIGN INVENTORY FROM EVERYWHERE COMING HERE FOR STORAGE.
Demand for tankers could be due to many tankers are being used for storage as onshore oil storage fills up.
This would make it appear there’s a shortage.
carefull Mike about being too bullish oil now! time will tell?
Mike – I am long crude oil futures and a 2X long crude oil ETF (wanted to buy the 3X but my brokerage firm would not do it). I’m also long several common stocks involved in the oil business.
The Money Code? Are you serious.. Stop putting stupid advertisements from other idiots into the Weiss newsletters. The more of this garbage and sales crap that I’m seeing from you guys the less professional you seem. I subscribed to Martins stuff over 10 years ago and came back at the end of last year to and now have 4 of the services. If you want to keep me subscribing stop sending out garbage from hucksters.
Storage: traditiona land-based storage is overflowing with crude. There is nowhere else to store crude but at sea.
Producers need to maintain staff and facilities so storage at sea is the name of the game.
These monster producers know that in time the world economies will improve…demand for crude will increase and they will unload sea stored crude in the future.
In the mean time fracked crude drops in price and eventually less wells are producing at a profit,and in fact cheap competition dies.
We do not have enough means to play this game…so invest in best dividend returns in
line with our risk level…….sit it out
I would invest in the tankers. The middle east oil producers want to float the tankers, full with oil, in order to force world oil prices to rise. America’s shale oil producers really put a dent in middle eastern oil profits.