Popular Tags
9 posts tagged with "Power Dividend"
Montana and North Dakota Have 3B to 4.3B Barrels of Oil
Posted by Louis Navellier on 6/30/08 1:16 pm
The Bakken Formation has received glowing press recently. Some sources are calling it the most significant opportunity for U.S. energy independence. Is this also a significant investment opportunity?
Answer: Yes. This is a big deal. The oil field is found in Montana and North Dakota and it contains light, sweet crude oil that is trapped in a shale rock formation only about 150 feet wide, so horizontal drilling is necessary to exploit this resource. According to the U.S. Geological Survey (USGS), there are 3 to 4.3 billion barrels of recoverable crude oil in the Bakken Formation, which makes it the largest land-based oil field in the lower 48 states. This will naturally help oil service companies and is very exciting for U.S. energy independence.
There are five publicly traded companies with interests in the Bakken Formation, but only one passed my stringent stock selection process: XTO Energy. (XTO); 1-yr Chart; Profile. XTO is a top-10 holding in our Power Dividend portfolio.
I should also add that there are also some small Vancouver-based oil companies trying to exploit the Bakken Formation by drilling or acquiring leases in Saskatchewan, Canada. I would rather not mention these companies, since they are saying the USGS found 400 billion barrels, which is a blatant lie and 100 times what the USGS has actually said. Always be careful of small Canadian oil companies without proven reserves and poor financials.
Investment in equity strategies involves substantial risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any securities recommendations made by Navellier & Associates, Inc. in the future will be profitable or equal the performance of securities made in this report. For a list of recommendations made by Navellier & Associates, Inc., for the preceding twelve months, please contact Tim Hope at (775) 785-9416.
To receive email updates from Navellier All Cap Blog, click here.
Morgan Stanley’s Second-Quarter Profit Dropped 60%
Posted by Louis Navellier on 6/18/08 12:05 pm
U.S. stocks had another rough session today after Morgan Stanley announced a substantial decline in profits. The Wall Street powerhouse suffered from challenging credit-market conditions during the quarter.
The fact that credit problems are continuing to escalate, lately due to rising interest rates, is good news for our strategies, since it accelerates the shift out of value (massive financial bias) into growth.
My newest strategy, called Vantage, is looking for opportunities around the globe.
If you’re interested in a total return strategy, take a look at our Power Dividend portfolio.
To receive email updates from Navellier All Cap Blog, click here.
Rising Steel Prices Show Few Signs of Abating
Posted by Patrick O'Connor on 6/5/08 1:27 pm
This post contains steel stocks that are Navellier top-10 holdings (see bottom of post).
Recent news has been filled with talk of rising oil and food prices, and understandably so, their increases over the past year have sparked riots in some countries. But also worth mentioning is the rising cost of steel. Steel prices have almost tripled in the past year, according to industry newsletter World Steel Dynamics—and in our opinion, will likely continue to climb. In the following column, we will examine some of the reasons for the rise in steel prices and discuss the industry outlook.
Steel basics
Steel is an alloy—a solid solution of two or more elements, at least one of which is a metal. It consists mostly of iron, with a carbon content that ranges from 0.2% to 2.04% by weight, depending on grade.
Steel is not a single product, however. There are more than 3,500 different grades available, according to the International Iron and Steel Institute (IISI). The carbon level changes the type of steel, as do various other alloying elements—such as manganese, chromium, vanadium, and tungsten—that may be added during the production process. In general, the lower the carbon content, the softer but more easily formed the steel.
Carbon steel—the most commonly used type of steel, which accounts for the majority of world steel production—is a combination of iron and carbon, with the only other alloying elements allowed in quanitites that are too small to affect the steel’s overall properties.
Steel prices are often referred to in metric tons (also commonly spelled “tonne”). One metric ton equals 1,000 kilograms or 2,204.6 pounds.
Steel production
Numerous raw materials are needed to produce steel. Under one production method—called the integrated method—iron ore is generally combined with coke (a product made by baking coal without oxygen at high temperatures), fuel (often natural gas), and oxygen in a blast furnace. Under another method—the electric arc furnace (EAF) method—scrap metal is used to create steel. Of all the steel produced in 2005, 65.4% was produced via the integrated method, 31.7% was produced via EAF, and 2.9% was produced via other methods, according to World Steel in Figures 2006. As a result, the steel industry relies heavily on raw materials such as iron ore.
At a steel mill, the production process turns raw materials into a product called pig iron, which is refined into a semi-finished product called crude steel. A variety of finished products are then forged from crude steel, including bars, hot-rolled sheets, and wire.
How important is steel?
In 2007, world crude steel output reached 1,343.5 million metric tons, according to the IISI—an increase of 7.5% over 2006. That was the fifth consecutive year that world crude steel output grew by more than 7%. Moreover, it is the highest level of crude steel output in history.
China is the driving force behind world steel production. According to the IISI, in 2007 China produced the most steel of any country: 489 million metric tons, a 15.7% increase over 2006. Without China, world crude steel production would have only grown at 3.3%. Other major producers are Japan, followed by the United States and Russia, as the chart below shows.
| Country | 2007 | 2006 | Growth |
|---|---|---|---|
| China | 489.0 | 422.7 | 15.7% |
| Japan | 120.2 | 116.2 | 3.4% |
| United States | 97.2 | 98.6 | –1.4% |
| Russia | 72.2 | 70.8 | 2.0% |
| India | 53.1 | 49.5 | 7.3% |
| South Korea | 51.4 | 48.5 | 6.0% |
| Germany | 48.5 | 47.2 | 2.8% |
| Ukraine | 42.8 | 40.9 | 4.7% |
| Brazil | 33.8 | 30.9 | 9.3% |
| Italy | 32.0 | 31.6 | 1.2% |
Source: IISI. Data shown is in million metric tons.
The world’s largest individual producers are Luxembourg’s ArcelorMittal, which produced 117.2 million metric tons of crude steel in 2006; Japan’s Nippon Steel, which produced 34.7 million metric tons; and Japan’s JFE Holdings, which produced 32.0 million metric tons (according to World Steel in Figures 2007).
Soaring prices show few signs of abating
In 2007, U.S. hot-rolled steel cost around $400 per metric ton. According to industry newsletter World Steel Dynamics, the cost had risen to $1,154 per metric ton by mid-May.
This spring, many steel companies raised prices, and U.S. Steel Chairman and CEO John Surma told Wall Street analysts that flat-rolled steel prices in the second quarter could be as much as $300 per metric ton higher—almost 50 percent above the average $646 first-quarter price.
Many companies are also implementing surcharges to cover raw material costs. AK Steel, for example, recently advised customers of a $640-per-metric-ton surcharge to be added to invoices for certain products shipped in June.
| Hot- Rolled Steel Coil | Hot- Rolled Steel Plate | Cold- Rolled Steel Coil | Steel Wire Rod | Medium Steel Sections | |
| 02/07 | $562 | $748 | $654 | $507 | $751 |
| 03/07 | $577 | $758 | $670 | $533 | $768 |
| 04/07 | $617 | $788 | $698 | $577 | $798 |
| 05/07 | $623 | $800 | $696 | $606 | $815 |
| 06/07 | $611 | $800 | $686 | $602 | $812 |
| 07/07 | $599 | $808 | $681 | $590 | $819 |
| 08/07 | $603 | $814 | $686 | $594 | $825 |
| 09/07 | $602 | $810 | $673 | $580 | $821 |
| 10/07 | $611 | $826 | $680 | $584 | $844 |
| 11/07 | $615 | $833 | $688 | $584 | $853 |
| 12/07 | $630 | $837 | $705 | $598 | $859 |
| 01/08 | $639 | $847 | $716 | $621 | $871 |
| 02/08 | $699 | $887 | $772 | $687 | $905 |
Source: Steelonthenet.com, from MEPS Steel Prices Online, as of May 2008. To obtain current steel prices including forecasts, please visit www.meps.co.uk/world-price.htm
Sky-high raw material prices
According to AK Steel, its price increases are partially due to “the need to recover unprecedented increases in steelmaking inputs,” a claim that has been echoed by most other steel companies worldwide.
Perhaps the most significant raw material used in the making of steel is iron ore. Every year, around February, the three major iron ore companies—Brazil’s Companhia Vale do Rio Doce and Rio Tinto, and Australia’s BHP Billiton—sit down with two European and Japanese steel mills to negotiate an iron ore price for the year. That price is generally accepted across the global steel industry.
For almost two decades, the price of iron ore barely moved. But that all began to change in 2001, when the Brazilian iron ore companies negotiated a 71.5 percent price increase from Japanese and European steel mills, and BHP Billiton gunned for even more on the grounds that due to soaring shipping costs, it was significantly cheaper for Asian companies to buy iron ore from Australia. Those price increases have only continued. In 2008, for example, the Brazlian producers agreed on a 65% price increase.
Even steel producers who use scrap metal instead of iron ore are paying record prices. According to trade reports, auto factory scrap now sells for $690 to $710 per ton, around 70 percent higher than in March.
Another factor in rising steel prices is increased shipping costs. The Baltic Dry Index, a benchmark of freight costs for bulk commodities such as iron ore, coal, and grains, has risen by more than 60 percent since the start of the year on surprisingly strong demand for steel. Peter Norfolk, the director of SSY Consultancy & Research, told The Financial Times average day rates for the largest class of vessels rose from less than $80,000 a day in late January to more than $160,000 in late April.
| April 2005 | April 2008 | Percent Increase | |
| Thermal coal | $54.9 per ton | $123 per ton | 124% |
| Iron ore | $0.65 per unit | $1.41 per unit | 117% |
| Natural gas | $182.2 per 1000m3 | $428.4 per 1000m3 | 135% |
Source: Steelonthenet.com, from the International Monetary Fund (IMF).
Increasing global demand
While it is clear that raw material costs are increasing, many industry analysts are asking to what extent the rise in steel prices reflects this. They suspect that steel manufacturers may be taking advantage of global demand to increase their profit margins.
World steel demand has indeed continued to grow, most notably from newly industrialized countries building up their economies, such as China.
“Vertically integrated mills like U.S. Steel are benefiting from controlling some of their own raw material costs…making record margins…” writes Stuart Burns in MetalMiner, an industry newsletter. “Their rival Nucor, which is a scrap-based producer, should be suffering terribly from the high price and scarcity of scrap [but] Nucor profits…have been rising steadily as the company passes on raw material prices rises and then ‘adds a little for the house.’”
| Country | % Of World Steel Output Consumed |
|---|---|
| China | 30.9% |
| European Union | 17.1% |
| NAFTA countries | 14.5% |
| Other Asian countries | 14.0% |
| Japan | 6.7% |
| CIS | 4.7% |
| Central and South America | 3.4% |
| Middle East | 3.2% |
| Other European countries | 3.0% |
| Africa | 1.8% |
| Australia and New Zealand | 0.7% |
Source: World Steel in Figures 2007.
How long can steel companies increase prices?
Clearly, steel companies have to increase prices to the extent that their raw material costs are rising; they are, after all, in the business of making money. But as noted above, some industry experts argue that they are raising prices more than warranted since they know demand will allow it. The question then is this: will steel prices will reach a point at which demand decreases?
According to the law of supply and demand, it should. When supply and demand are equal, an economy is said to be at equilibrium, because sellers are selling all the goods they have produced, and buyers are getting all the goods they have demanded. But when the equilibrium tips, and there is too much demand, prices tend to rise, because producers can get more for their goods. Ultimately, however, when the price of a good exceeds equilibrium, a surplus of the good will result (because buyers can no longer afford it), and producers will be motivated to lower their prices.
This process may already be in motion. In Turkey, a number of construction companies have gone on strike to protest steel price increases. In India, transportation and housing projects have been put on hold. Other countries are limiting the amount of steel that can be exported while reducing tariffs to increase imports. In January, for example, China implemented an export tax on raw steel. As a result, according to the Steel Business Briefing, based on U.S. import license applications, it appears that for April China will likely fall to fifth place among the largest steel exporters (behind the United States, Canada, Mexico, and Japan).
At some point, customers could even start looking for cheaper substitutes, such as aluminum and strong plastics. In response, some steel companies are attempting to reduce their raw material costs. It has been reported, for example, that Nucor has applied for permits to build a Louisiana facility that will produce 3 million tons of iron per year.
Looking forward
If recent price increases cannot be warranted by raw material price increases alone, then prices now being charged may be unsustainable. If that is the case, steel prices could peak soon, according to at least two industry analysts.
Michael Locker of Locker Associates, a steel industry consulting firm, told Reuters he thinks prices for U.S. hot-rolled steel will decline to $800 or $900 per ton in 2008 as consumer spending on steel-intensive goods is drowned out by spending for fuel, food, and other staples.
Meanwhile, Michael Willemse of CIBC Capital Markets has said that “while there is a chance prices could remain at or over $1,000 per ton for the rest of the year, historical pricing trends would suggest otherwise [and] steel producers will soon once again focus on pricing that generates a fair return on capital, rather than test the upward limits of the market.” He believes a correction over the summer is possible.
But, just as many analysts think prices will keep on rising. For example, Michelle Applebaum, an independent steel industry analyst in Chicago, told Reuters in May that prices have not peaked.
There are a number of reasons. First, increased demand for oil has fueled demand for the capital assets used by the oil industry, such as drilling machinery made of steel, and meeting the demand for these capital assets could take years. Second, construction, which depends heavily on steel, is still strong in many places outside the United States, particularly developing countries. Third, automotive manufacturers show no sign of decreasing their use of steel.
This last point may be worth exploring more. It is hard to imagine that the beleaguered U.S. automotive industry could help another industry, but it uses a great deal of steel. According to Investor’s Business Daily, 20 percent of the annual U.S. steel usage of 125 million metric tons goes into cars. Today’s average vehicle includes about 1,800 pounds of steel, which accounts for about 55% of the vehicle mass. Due to steel price increases, the big three U.S. automakers have been hit by a $350 steel price increase per vehicle compared to the average for 2007, and $421 per vehicle compared to February of last year, according to Lehman Brothers. Still, the amount of steel used to make cars has remained roughly constant through the years—primarily because steel companies have continually improved the performance of their materials, severely limiting opportunities for competing materials such as aluminum. According to the IISI, during the past two decades, automakers’ use of high-strength steel sheet has outpaced aluminum by 13 percent, making it the fastest-growing automotive lightweight material. It is not surprising then, that Toyota Motors recently agreed to a steel sheet price hike exceeding 20,000 yen per metric ton from Nippon Steel ($192.47 as of 5/30/08).
In any case, if Applebaum is right and prices continue to rise, the worst-case scenario could be a repeat of 2004, when manufacturers of many products made from steel, from cars to washing machines, faced severe shortages. That is not happening yet, but the Precision Metalforming Association, an industry trade group, says we should watch for it.
The reason is limited exports from two of the world’s biggest steel suppliers, China and Russia. The share of world production from the so-called BRIC countries (which include China and Russia as well as Brazil and India) has been growing rapidly since 2000, from 31% of total world production in 2001 to 48.2% in 2007, according to the IISI. But, as noted above, the steel supply from China has dried up as a result of export taxes. We should also keep an eye on Russia, which is one of the largest steel exporters in the world, exporting around 30 million metric tons in 2007, according to Steelonthenet.com. Like China, the Russian government has proposed export taxes in response to rapidly rising domestic prices. At the same time, there are suggestions that Russian import taxes will be reduced or removed to attract foreign steel. This could add further tightness to the global steel market and raise prices everywhere.
The United States could suffer significantly, as much of the steel that U.S. manufacturers use comes from overseas. But in the face of limited supplies, imports are down, according to the Precision Metalforming Association, in 2007 U.S. imports of hot-rolled steel were down almost 50% from the year before. They have continued to decline in 2008, falling 23% between February and March alone. According to preliminary data released by the U.S. Commerce Department, total steel imports are 9% lower in 2008 than they were at this time in 2007. But, other sources argue that U.S. imports could begin to rise, according to the Steel Business Briefing, U.S. import license applications came in at 2.64 million metric tons in April, 16 percent higher than the March preliminary import count of 2.28 million tons, which in turn was higher than February. It is a situation worth watching.
Other impacts
It is worth mentioning that rising steel prices are reverberating through the world economy in a number of ways. Of course, they are driving up the cost of goods that are manufactured from steel. But they may also be driving up the costs of goods made from the raw materials used to produce steel.
U.S. Trade Representative Susan Schwab recently told the World Economic Forum that China is driving up costs for non-Chinese steel companies by limiting its export of raw materials used to produce steel, including coke, tin, and zinc. According to Schwab, when China imposed an export tax on steel in January, its steel exports slowed, creating an oversupply of raw materials used to make steel. That allowed other Chinese companies who use the same raw materials—such as ceramics and fiber optics producers—to buy them cheaply.
That is good for the Chinese, but bad for American companies producing the same goods, because their prices are no longer competitive.
The financial markets
Rising steel prices are certainly reflected in the stock prices of many steel companies. To illustrate, we can look at the Market Vectors exchange-traded fund (ETF), SLX, which contains a number of steel industry companies weighted based on their exposure to the price of steel. As of 5/30/08, it was trading at around $108, up from its 52-week low of $52.11 and near its 52-week high of $114.12.
Are those levels sustainable? It is impossible to predict the future, but in our opinion, they could be, at least in the near term. While raw material costs are increasing for steel companies, so is demand. As a result, steel companies are able to raise prices to keep up with costs—and in some cases, raise them even more to generate higher profit margins. In our opinion, steel prices could stay high through 2008 and into 2009—and that could support the prices of steel stocks.
Below are Navellier steel stocks that are top-10 holdings.
Power Dividend Portfolio
Steel Dynamics, Inc. (STLD); 1-yr Chart; Profile
Cleveland-Cliffs, Inc. (CLF); 1-yr Chart; Profile
Vantage Portfolio
Gerdau S.A. (GGB); 1-yr Chart; Profile
Companhia Siderurgica Nacional (SID); 1-yr Chart; Profile
All Cap Core Portfolio
AK Steel Holding Corp. (AKS); 1-yr Chart; Profile
Investment in equity strategies involves substantial risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any securities recommendations made by Navellier & Associates, Inc. in the future will be profitable or equal the performance of securities made in this report. For a list of recommendations made by Navellier & Associates, Inc., for the preceding twelve months, please contact Tim Hope at (775) 785-9416.
To receive email updates from Navellier All Cap Blog, click here.
Rising Oil Prices Series: Part I
Posted by Patrick O'Connor on 6/4/08 1:53 pm
This post contains top-ten energy stock holdings from Navellier & Associates’ all-cap portfolios.
This article is the first installment of a six-part series about rising oil prices. In this column, we’ll explain why rising oil prices are of so much interest. In Part II, we’ll explain how the oil market works. In Parts III and IV, we’ll address the two main reasons for rising oil prices: increasing demand and limited supply. In Part V, we’ll delve into some peripheral issues: the weak U.S. dollar and the role of speculation. Finally, in Part VI, we’ll end with an outlook for the oil market.
Looking behind rising oil prices
Robust demand for oil has pushed prices from below $50 per barrel of crude at the start of 2007 to approximately $120 a barrel in 2008—above the inflation-adjusted $101.70 peak hit in April 1980, a year after the Iranian revolution.
To some, the price of oil comes as no surprise. In 2000, Sadad I. Al Husseini—head of exploration and production for Saudi Aramco, the Saudi Arabian state-owned oil company—tallied up some numbers he had been gathering since the mid-1990s and determined that oil output would level off around 2004, plateau for a maximum of 15 years, then begin a gradual but irreversible decline.
That’s hardly the kind of forecast we’ve been hearing from oil companies, especially Saudi Aramco, which sits atop some of the world’s largest proven oil reserves (including the Ghawar field), which altogether hold around 260 billion barrels of oil, around a fifth of the world’s known supply, according to National Geographic. And true to form, Saudi Aramco and Saudi Arabia’s oil minister downplayed the data.
Now, as in the past, when oil pessimists contended that a peak in oil supply was imminent, many naysayers, including oil companies, point out that much of the world’s conventional oil supplies are untapped; unconventional oil supplies, such as tar-sand pits, are yet to be fully explored; and constantly improving technologies are allowing us to dig deeper and extract more oil than we ever expected we could. These naysayers argue that today’s rising prices cannot be the result of dwindling supply, but instead are the result of sharply rising demand (especially from Asia). To illustrate their point, they recall past doomsayers who have predicted an oil shortage that never occurred.
While all of that may be true, today’s oil situation is a far cry from what we have seen in the past. Ordinarily, for example, higher prices encourage oil companies to produce more by investing in new technology and pursuing harder-to-reach deposits. This happened during the Iran-Iraq war in the 1980s, leading to a glut of oil. In the past few years, however, global output of conventional oil has hovered around 85 million barrels per day despite skyrocketing prices. Something is clearly different.
Some industry experts argue that oil companies are intentionally withholding supplies to keep prices artificially elevated. The Organization of Petroleum Exporting Countries (OPEC)—a group of 12 countries formed to maintain the price of oil at a level that is beneficial to its members—is the most widely cited culprit because it is often considered a cartel. Although OPEC’s ability to control the price of oil has diminished somewhat as oil reserves have been discovered in other countries, including Russia, OPEC nations still account for around two-thirds of the world’s oil reserves, and 35.6% of the world’s oil production as of March 2008. This undoubtedly gives the organization considerable control over the global oil market.
But other industry experts have suggested that there just isn’t enough oil, and in a few years, demand will outpace supply. Last fall, the International Energy Agency forecast that global demand would rise to 116 million barrels a day by 2030. But Cristophe de Margerie, head of French oil company Total, has said the world can produce at most 100 million barrels a day. And Royal Dutch Shell CEO Jeroen van der Veer has said demand will outpace supply as soon as 2015.
Asking how we got here results in a number of convoluted answers, perhaps none that are “right.” But, we know this: world demand is increasing as oil supplies dwindle - and why supplies are dwindling is an issue in and of itself.
Certainly, there are physical limitations: no one would argue that the world’s oil supply will last forever. Indeed, the volume of oil discovered has fallen each year since the 1960s despite technological advances such as seismic imaging that allows an oil company to see oil deep below the Earth’s surface.
But there are political issues as well. War-torn countries such as Iraq, for example, cannot access their full production potential due to security problems. Other countries, including Russia and Venezuela, cannot access their full potential because of restrictive laws prohibiting foreign involvement. Edward Morse, an oil expert who was formerly with the U.S. Department of State and now analyzes the industry for Lehman Brothers, says political obstacles may be larger than production issues. Many oil company CEOs, including van der Veer, have echoed that thought.
There is also the perhaps peripheral issue of speculation and the weak U.S. dollar. Earlier this year, Michael Masters, a portfolio manager for Masters Capital Management LLC, told a U.S. Senate committee on homeland security and governmental affairs that the real culprits behind rising oil prices are institutional investors such as hedge funds and sovereign wealth funds. The credit crunch has brought some markets, such as the U.S. asset-backed commercial paper market, to a virtual standstill. At the same time, the lowering of interest rates has created a supply of money for institutional investors. They, say Masters and others, are pouring billions of dollars into commodities such as precious metals and oil, which are a hedge against the declining U.S. dollar. The more the dollar slumps, the more attractive U.S. dollar-denominated oil is to foreign investors. This, in turn, is distorting markets and driving prices to unprecedented levels. Indeed, Masters says institutional investment in commodities indices has risen from $13 billion at the end of 2003 to $260 billion at the end of March 2008.
In this series, we’ll review these issues. But first, let’s take a look at the world oil market—how it has evolved and where it is today. Go to Part II.
Navellier energy stocks that are top-10 holdings
Vantage Portfolio
Petroleo Brasileiro (PBR); 1-yr Chart; Profile
Sasol Ltd. (SSL); 1-yr Chart; Profile
Power Dividend Portfolio
Noble Energy Inc. (NBL); 1-yr Chart; Profile
Devon Energy Corp. (DVN); 1-yr Chart; Profile
XTO Energy Inc. (XTO); 1-yr Chart; Profile
All Cap Core Portfolio
Occidental Petroleum Corp. (OXY); 1-yr Chart; Profile
We want to hear your thoughts! Comment to this post by clicking the ‘comments’ link below.
Investment in equity strategies involves substantial risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any securities recommendations made by Navellier & Associates, Inc. in the future will be profitable or equal the performance of securities made in this report. For a list of recommendations made by Navellier & Associates, Inc., for the preceding twelve months, please contact Tim Hope at (775) 785-9416.
To receive email updates from Navellier All Cap Blog, click here.
Rising Oil Prices Series: Part II
Posted by Patrick O'Connor on 6/4/08 1:39 pm
This post contains top-ten energy stock holdings from Navellier & Associates’ all-cap portfolios.
This article is the second installment (Read Part I) of a multi-part series about rising oil prices. In this column, we’ll review how the global oil market works—which is essential for understanding the economic analysis in the installments to follow.
A primer on the world oil market
In the mid-1980s, the price for a barrel of crude oil, adjusted for inflation to 2007 dollars, was under $25—and there it stayed until September 2003, when it began a gradual ascent that would take it to a peak of $135.09 in May 2008. That far exceeds the inflation-adjusted $101.70 peak oil hit in April 1980, a year after the Iranian revolution—so what gives? What’s driving up prices, and will they ever decline? We’ll get to that, but first, it’s important to understand the factors that influence the global oil market, including the role of the producers and refiners who impact not just oil prices, but the prices consumers pay for gasoline, heating fuel, and other oil-based products.
What is “oil”?
There are many varieties of oil, which is also known as crude oil or petroleum, but all are naturally occurring, flammable liquids found in the Earth’s rock formations. Because there are so many varieties, buyers and sellers refer to a limited number of “benchmark” oils. In North America, for example, the most widely used benchmark is West Texas Intermediate (WTI) oil, which is a light, low-sulphur crude. Varieties other than the benchmark are typically priced at a discount or premium to the benchmark, depending on how their quality compares to that of the benchmark.
Who produces oil?
A number of countries worldwide have crude oil deposits, and many are active producers. There is a great deal of concentration in the global oil industry; however, just 10 companies control 68 percent of the world’s proven crude oil reserves (and nine of these 10 companies are state-owned), according to Natural Resources Canada.
Since 1960, the global oil market has been significantly influenced by the Organization of the Petroleum Exporting Countries (OPEC), a consortium of 12 countries—Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela (plus Indonesia, which will quit after 2008)—formed to maintain the price of crude oil at a level that is beneficial to its members. Together, OPEC nations hold around two-thirds of the world’s crude oil reserves and produce 35.6% of the world’s supply as of March 2008, according to the Energy Information Administration (EIA), part of the U.S. Department of Energy.
TOP 10 OIL RESERVE HOLDERS
1. Saudi Arabia
2. Canada
3. Iran
4. Iraq
5. Kuwait
6. United Arab Emirates
7. Venezuela
8. Russia
9. Libya
10. Nigeria
Source: Oil and Gas Journal, 2006
TOP 10 OIL PRODUCERS
1. Russia
2. Saudi Arabia
3. United States
4. Iran
5. China
6. Mexico
7. Norway
8. Canada
9. United Arab Emirates
10. Nigeria
Source: Oil and Gas Journal, 2006
Who prices crude oil?
Traditionally, the law of supply and demand has determined the price of crude oil. When supply exceeds demand, producers try to sell excess inventory, and prices decrease. But when demand exceeds supply, consumers compete with each other for limited resources, bidding up the price.
Moreover, crude oil prices tend to be the same worldwide because the market is global. If there’s a shortage of crude oil in one part of the world, prices will rise in that market, attracting producers until supply and demand are in balance. Similarly, if there’s a surplus of crude oil in one part of the world, prices will fall in that market, attracting buyers who will bid up prices until they reach “equilibrium.” As a result, the only variation in world crude oil prices tends to reflect the cost of transportation.
That said, the crude oil market isn’t totally free because of the involvement of OPEC, which many people consider a cartel. To a great extent, OPEC sets the price of world crude oil, because when it wants to raise the price, it simply reduces production. How can this happen when many other countries also produce crude oil? - Because OPEC reportedly tracks the production of these nations and then adjusts its own production to maintain its desired price. (We say “reportedly” because OPEC has often denied this.)
Another factor influencing the price of crude oil is speculation. Crude oil is a commodity, and like other commodities, such as soybeans, it is widely traded by investors who see an opportunity to make money. These traders—called speculators because they’re not involved in the actual production or use of crude oil, but instead buy and sell paper contracts—can often influence market prices significantly. The two key markets where crude oil contracts are traded are the New York Mercantile Exchange (NYMEX) and the International Petroleum Exchange (IPE) in London. These are “futures” markets, meaning contracts are bought and sold based on expected market conditions in the coming months or even years. When the media quotes a price for crude oil, it typically quotes the futures market price in the most recent month.
Ultimately, crude oil ends up with refiners who convert it into gasoline and home heating oil, and marketers who sell it to consumers. Although refiners and marketers don’t directly influence the price of crude oil—except by demanding more or less of it based on consumer demand—they can influence the price of crude-based products. In March 2001, for example, the U.S. Federal Trade Commission (FTC) concluded that a spike in Midwestern gasoline prices was caused by one firm not selling its excess supply because doing so would have pushed down prices and thereby reduced the profitability of its existing sales.
Who uses crude oil?
According to the EIA, as of 2006 the United States used the most crude oil (20,687,000 barrels per day), followed by China, Japan, Russia, Germany, India, Canada, Brazil, South Korea, and Saudia Arabia.
As you may have noticed, many of these countries are developed. Indeed, the countries that make up the Organization for Economic Cooperation and Development (OECD)—a group of 30 countries that accept the principles of a representative democracy and free market economy—use the bulk of the world’s crude oil. Together, the United States, Europe, and Japan consume about half of the world’s annual oil output, according to Natural Resources Canada.
However, consumption in other countries, especially China, is expanding as these markets grow rapidly. According to the EIA, total energy demand in non-OECD countries is expected to increase by 95 percent from 2004 to 2030, while total energy demand in OECD is expected to increase by just 24 percent.
The transportation sector accounts for about two-thirds of the crude oil used in the world, and for about half of it used in the United States, according to Natural Resources Canada.
That’s important, because in our next installment, we’ll talk about demand—which many industry analysts say is the key factor in today’s skyrocketing oil prices.
Navellier energy stocks that are top-10 holdings
Vantage Portfolio
Petroleo Brasileiro (PBR); 1-yr Chart; Profile
Sasol Ltd. (SSL); 1-yr Chart; Profile
Power Dividend Portfolio
Noble Energy Inc. (NBL); 1-yr Chart; Profile
Devon Energy Corp. (DVN); 1-yr Chart; Profile
XTO Energy Inc. (XTO); 1-yr Chart; Profile
All Cap Core Portfolio
Occidental Petroleum Corp. (OXY); 1-yr Chart; Profile
We want to hear your thoughts! Comment to this post by clicking the ‘comments’ link below.
Investment in equity strategies involves substantial risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any securities recommendations made by Navellier & Associates, Inc. in the future will be profitable or equal the performance of securities made in this report. For a list of recommendations made by Navellier & Associates, Inc., for the preceding twelve months, please contact Tim Hope at (775) 785-9416.
To receive email updates from Navellier All Cap Blog, click here.
Rising Food Prices Series: Part VII
Posted by Patrick O'Connor on 5/28/08 2:11 pm
This article is the seventh and final part of a multi-part series about rising global food prices. In this installment, we will discuss some of the investment opportunities presented by the global food crisis. For further information, read parts I, II, III, IV, V, and VI.
Opportunities in the global agribusiness sector
In free markets, according to the law of supply and demand, a shortage will eventually remedy itself. As demand for a rare good rises, so will its price. When the price exceeds equilibrium—that is, the place at which supply and demand are equal, so sellers are selling all the goods they have produced, and buyers are buying all the goods they have demanded—a surplus of the good will result, because buyers can no longer afford it. Producers will thus be motivated to lower the price.
However, as noted in Part VI of this series, the world’s food market is not totally free; it is rife with trade restrictions, such as import and export quotas and bans, as well as tariffs. And even if it were totally free, reaching equilibrium would take time.
As a result, it appears that sky-high food prices are here to stay for some time. But, the crisis is not insurmountable. New technology, such as genetic modification and improved fertilizers, could increase crop yields. The diversion of crops to biofuels could end once politicians realize that voters care more about eating than driving green cars. And governments and businesses alike are working to combat the effects of climate change.
Meanwhile, astute investors could seek to take advantage of the situation by investing in companies that fall under the “global agribusiness” umbrella—for example, food producers, such as farmers and livestock raisers; food refiners; and industrial infrastructure companies that are responsible for the distribution of food throughout the world. Below we offer a few examples of industries that could benefit from the global food crisis, explain why they have potential, and list a few stocks that are Navellier top-ten holdings.
Farming machinery manufacturers
This one is obvious: in order to meet increasing demand by producing more food, farmers will need more equipment.
All Cap Core Portfolio
Cummins Inc. (CMI); 1-yr Chart; Profile
Power Dividend Portfolio
Joy Global, Inc. (JOYG); 1-yr Chart; Profile
Sun Hydraulics Corp. (SNHY); 1-yr Chart; Profile
Fertilizer companies
The price of fertilizer, which is essential for maximizing a crop’s potential, has risen in response to increased demand for food and high natural gas prices, according to the Tennessee Farmers Cooperative. For example, one fertilizer, DAP, cost $398 a ton last year; this year, it costs $1,000 a ton, according to Arkansas-based Oakley Fertilizer. It is not surprising, then, that some fertilizer companies are doing well. Read More
Vantage Portfolio
Chemical & Mining Co. of Chile (SQM); 1-yr Chart; Profile
Terra Nitrogen Co., L.P. (TNH); 1-yr Chart; Profile
Dynamic MPT Portfolio:
Mosaic Co. (MOS); 1-yr Chart; Profile
Potash Corp. (POT); 1-yr Chart; Profile
CF Industries Holdings, Inc. (CF); 1-yr Chart; Profile
Terra Industries, Inc. (TRA); 1-yr Chart; Profile
Water treatment companies
Climate change, as we noted earlier in this series, is leading to water shortages in some parts of the world. Moroever, it has been estimated that most of the 3 billion people projected to be added to the world population by mid-century will be born in countries already experiencing water shortages. This could create opportunities in water treatment, such as desalination, and irrigation improvements.
Small-to-Mid Cap Growth Portfolio
Valmont Industries, Inc. (VMI); 1-yr Chart; Profile
Food producers
Food producers may seem an odd choice to benefit from rising global food prices since their input costs are rising. But they may be able to pass on these rising input costs to the consumer due to dominant market positions and growing sales.
Biotechnology companies
Genetic modification of crops—such as the development and production of hybrid seeds—could improve crop quality and yield, which we believe could become far more important as countries look to produce more food on the same amount of land. However, biotechnology companies tend to not have earnings early on. As such, they’re usually too risky for our strategies.
Shipping-related companies
As demand from growing populations such as those of China and India skyrockets, the United States’ opportunity to export increases. That could bode well for companies involved in shipping—port operators, cargo container manufacturers and shippers. The first two may be particularly promising. Increased demand combined with a weak U.S. dollar has led to an increased demand for U.S. exports. But American agricultural producers cannot find enough empty cargo containers to ship their goods overseas, according to the Agriculture Transportation Coalition, a Washington-based lobby that seeks to help food producers become more competitive internationally. Port operators are also intriguing, as they have high barriers to entry, which could decrease competition, thereby increasing the profability of companies within the industry.
Power Dividend Portfolio
CSX Corp. (CSX); 1-yr Chart; Profile
Fundamental ‘A’ Portfolio
TBSI Int’l Ltd. (TBSI); 1-yr Chart; Profile
DryShips, Inc. (DRYS); 1-yr Chart; Profile
Dynamic MPT Portfolio
Excel Maritime Carriers, Ltd. (EXM); 1-yr Chart; Profile
Risk mitigation technologies
At least one major world insurer has said that there is an increasing need to mitigate risks in global agriculture. Climate change advisory services and related companies could help do this. For example, one company offers a geospatial information service that monitors more than four million square kilometers via five observation satellites—an increasingly important service when weather volatility could create cash flow risks for insurers.
Finally, a word of caution. As you may have guessed, many companies that could potentially benefit from the global food crisis are global, and global investing presents risks not associated with domestic investments, such as lack of transparency, political and economic changes and currency fluctuations. This could result in greater price volatility, so be sure to consider your suitability for a foreign stock before investing.
Navellier’s International Growth Portfolio has positions in some of the aforementioned industries.
We want to hear your thoughts! Comment to this post by clicking the ‘comments’ link below.
Investment in equity strategies involves substantial risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any securities recommendations made by Navellier & Associates, Inc. in the future will be profitable or equal the performance of securities made in this report. For a list of recommendations made by Navellier & Associates, Inc., for the preceding twelve months, please contact Tim Hope at (775) 785-9416.
To receive email updates from Navellier All Cap Blog, click here.
Oil Prices Will Likely Remain High This Summer
Posted by Louis Navellier on 5/21/08 10:09 am
This post contains energy stocks that are in our top-ten holdings.
We are now entering the peak season for worldwide oil demand. As such, you will not likely see any significant relief, if any, at the gas pump until after Labor Day, when the summer driving season ends. However, you might be able to limit some of the pain at the pump by investing in companies that are well positioned for this energy-inflation environment. At the end of this post, I’ll share with you some of our top-ten holdings that are in this space.
If you are wondering why diesel prices are so high, it is because the U.S. is now making “clean diesel” that is in high demand in Europe and the rest of the world, so U.S. diesel is now being exported. In turn, the U.S. continues to import gasoline from other countries to meet demand requirements.
These gasoline imports must then be blended with ethanol before they are transported to the pump. If Barack Obama is elected our next president, it is widely assumed that the ethanol mandates and federal subsidies will likely continue, since Southern Illinois is a major corn-growing region, and Obama will probably protect his home state’s subsidies. If John McCain is elected, it is expected that the federal ethanol subsidies will be cut off and cheaper Brazilian ethanol will likely be increasingly utilized.
Goldman Sachs recently rattled markets with its dire prediction that $150 to $200 per barrel oil is now possible within the next 6 to 24 months. Yikes! However, Goldman Sachs admitted that predicting the “ultimate peak” in oil prices and the duration of the current updraft “remains a major uncertainty.” Since Goldman Sachs correctly predicted $100 per barrel oil more than two years ago, its newer warning carries credibility. I suspect that Goldman Sachs is also long crude oil and is profiting from its meteoric rise.
One of the big problems emerging is that Mexico, Norway, Russia, and Venezuela are now experiencing declining crude oil production. As a result, the world has become increasingly dependent on the Organization of Petroleum Exporting Countries (OPEC) for any production increases. Recently, President Bush visited Saudi Arabia for the second time this year (Vice President Cheney also visited Saudi Arabia in between President Bush’s trips) in an attempt to coax the oil-rich nation to produce more oil. When President Bush met with King Abdullah back in mid-January, he asked Saudi Arabia to increase production, but received a chilly response.
Officially, President Bush’s most recent visit was to celebrate 75 years of formal U.S.-Saudi Arabia relations, and to agree on several matters, such as cooperation on nuclear energy, the protection of Saudi Arabia’s vast oil infrastructure, and nonproliferation. Complicating matters, the Senate Democrats introduced a resolution that would block $1.4 billion in arms sales to Saudi Arabia unless Riyadh agrees to increase its oil production by one million barrels per day. The Democrats said they introduced the measure to coincide with President Bush’s trip in order to send a message to Saudi Arabia that it should pump more oil to reduce the cost of gas for Americans.
Interestingly, Saudi Arabia has been exceeding its OPEC quotas for the past six months. Specifically, in April, OPEC said Saudi Arabia produced 9 million barrels a day, which was down slightly from March, but 100,000 barrels per day over its quota. However, more importantly, Saudi Arabia’s output consistently topped its 8.9 million barrel-quota for the past six months, which is indicative that the country is trying to make sure there is sufficient global supply. After increasing its oil production above the OPEC quota, Saudi Arabia still holds excess capacity of about 1.9 million barrels a day, which represent virtually all of OPEC’s surplus capacity.
After President Bush’s visit, Saudi Arabia pledged to increase its crude oil production by approximately 300,000 extra barrels per day. Ali Naimi, Saudi Arabia’s oil minister, said after the meeting with President Bush that the kingdom’s crude oil output would hit 9.45 million barrels per day by June, just in time for peak demand during the summer. It will be very interesting to see whether crude oil prices will stabilize with the increased Saudi Arabian production.
In the interim, the search for more crude oil around the globe is relentless. But the normal link between high crude oil prices and increasing production has been disrupted since most of the new sources of crude oil are much more expensive to find or extract. It can also take several years to bring new oil fields online. Russia is expected to provide new incentives to coax Western oil companies to help it find new crude oil and natural gas deposits.
The biggest news in the energy business is that Brazil recently announced a second major oil find off the east coast of Brazil. The head of Brazil’s National Petroleum Agency, Haroldo Lima, said the oil find could be one of the world’s biggest discoveries in decades, containing as much as 33 billion barrels in oil equivalent, which would make it the third largest oil field in the world. Additionally, in 2006 Brazil’s Petrobras discovered the Tupi oil field, which the company says has an estimated eight billion barrels. That was the biggest strike anywhere in the world since 2000.
Even though these new oil discoveries could be very large, the oil would not hit the market anytime soon. Petrobras’ discovery is in an area known as the “presalt area,” which lies at a water depth of more than 6,500 feet, an additional 9,800 feet of sand and rock, and another 6,500 feet of salt. This makes crude oil production very challenging and expensive, similar to new deep-water finds in the Gulf of Mexico that have not yet been brought online.
After Petrobras’ discovery, the oil service industry went straight to West Africa, since the East Coast of Brazil and the West Coast of Africa were connected in the Pangaea era, when the earth had one giant super-continent. This was before the Mid Ocean Ridge and the Atlantic Ocean were formed over 200 million years ago. As a result, both Brazil and West Africa are now the hot spots for oil exploration.
Below is a list of Navellier energy companies that are top-ten holdings in our all-cap portfolios.
Vantage Portfolio:
Sasol Ltd. (SSL); 1-yr Chart; Profile
Petroleo Brasileiro (PBR); 1-yr Chart; Profile
EnCana Corp. (ECA); 1-yr Chart; Profile
Cameron International Corp. (CAM); 1-yr Chart; Profile
All Cap Core Portfolio:
Occidental Petroleum Corp. (OXY); 1-yr Chart; Profile
Power Dividend Portfolio:
Noble Energy, Inc. (NBL); 1-yr Chart; Profile
Devon Energy Corp. (DVN); 1-yr Chart; Profile
XTO Energy, Inc. (XTO); 1-yr Chart; Profile
We want to hear your thoughts! Comment to this post by clicking the ‘comments’ link below.
Investment in equity strategies involves substantial risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any securities recommendations made by Navellier & Associates, Inc. in the future will be profitable or equal the performance of securities made in this report. For a list of recommendations made by Navellier & Associates, Inc., for the preceding twelve months, please contact Tim Hope at (775) 785-9416.
To receive email updates from Navellier All Cap Blog, click here.
Famous Analyst and Billionaires Predict Deepening Credit Crisis
Posted by Patrick O'Connor on 5/20/08 12:44 pm
The analyst who was the first to boldly predict serious problems in the banking sector last year said today that the credit crisis is going to get worse.
Oppenheimer analyst Meredith Whitney estimated that banks will need to set aside an additional $170 billion for loss reserves just to keep up with estimated loan losses. Read More
Billionaires Warren Buffett and George Soros also said the credit crunch is far from over. Watch video below.
As a result, the banking sector suffered major losses today.
Navellier’s strategies are underweight financial stocks. You can view our top-ten holdings for our all-cap portfolios by clicking these links:
Vantage Top 10
All Cap Core Top 10
Fundamental ‘A’ Top 10
Power Dividend Top 10
Dynamic MPT Top 10
We want to hear your thoughts! Comment to this post by clicking the ‘comments’ link below.
To receive email updates from Navellier All Cap Blog, click here.
Stocks Surge on CPI Data
Posted by Louis Navellier on 5/14/08 11:46 am
U.S. stocks rebounded today after a key consumer prices report revealed that inflation was less than expected in April. The Consumer Price Index (CPI) rose 0.2% in April, slightly less than the 0.3% rate expected by economists. And the more important core rate (consumer prices minus food and energy) edged up just 0.1%, half as much as the 0.2% consensus. CPI Full Report
Overall, the CPI data are good news, but the Fed will not cut rates further, since the core CPI & PCE are still above the Fed’s “comfort zone” of 1%-2% inflation. The CPI’s year/year core rate was up 2.3% in April; however, the 3-month annualized rate is down to 1.2%. The big drop-off in the past three months is due to the economic slowdown. In fact, some believe it’s indicative of a recession even though we haven’t seen official recession numbers yet.
That could change though. The Q1 GDP data still have to go through two more revisions. The first estimate was 0.6%, so there’s not much room on the downside to stay above official recession territory.
Moreover, the May CPI headline number is supposed to be bad, largely due to the big run-up in food and energy prices this month. But, that doesn’t necessarily mean the food and energy prices will get passed through enough to increase the core rate if the overall economy is still slowing.
In the meantime, we’re still underweight consumer stocks in Vantage, All Cap Core, Fundamental ‘A’, Power Dividend, Dynamic MPT, and our other portfolios, too.
To receive email updates from Navellier All Cap Blog, click here.
All Cap Portfolios
View Top 10 Stock Holdings, News, Charts and Fundamentals
Quick Links
Subscribe to this Blog
Sign up to get updates by email
