Why “Energy Rebalancing” Means Huge Profits This Year

by Dr. Kent Moors 

Marina and I have a little less than a week left on the island before we head back to the mainland. I hope our pipes haven’t frozen back in Pittsburgh!

As we head home to begin the New Year, there are several new wrinkles in the energy market that I have my eye on.
And as always, I’m looking for new ways to profit from them.
These new wrinkles revolve around what I call the “energy balance” – and its changing fast.
It involves big shifts in sourcing and systems that will combine with some major revisions in finance that will alter the landscape for investors.
It’s not about new energy breakthroughs or big oil discoveries. And it’s certainly not about entirely new structures.
Rather, it’s about the accelerating changes in elements you’re familiar with.
Think of it, if you will, as a “rebalancing” of what already exists.
It’s an unstoppable trend that promises to hand us huge profits…

The 2014 Plan: Leveraging a Gigantic Advantage

For us, of course, this “rebalancing” gives us a gigantic advantage: we identified this trend a long time ago. In fact, I’ve discussed it in these pages before.
At present, there are three overarching dimensions to these changes: the energy network itself, the geographical considerations, and the financial arrangements.
As as the market rebalances, it will require we change our investment strategy to profit from it -especially the with first two.
As for the third, we have just about single-handedly revised the approach to finance all by ourselves.
Today, however, I want to talk about the networking dimension.

Networking involves the entire sequence of energy (oil, natural gas, electricity) transmission from production, through gathering and transit, to refining, distribution and retail. This remains the upstream-midstream-downstream sequence that has become a mainstay of the energy sector.
In the case of operating companies, our target interests will consider the basins worked, the company’s focus, market cap and field size, along with the more or less traditional considerations of management style, balance sheet, and market position.
We will also see some interesting rebalancing in the refinery space, as those processors able to bridge the domestic market and rising oil product exports, as well as the conventional/unconventional sourcing mix, will have a substantial advantage.
And then there are the huge transport revisions that are on the way. We have talked about two of these primary developments before, but will be watching their progress with added interest this year.

Fundamental Changes = Big Opportunities

The first is the fundamental change in the worldwide balance occasioned by the rapid expansion of the liquefied natural gas (LNG) market.
This remains the single most significant revision globally to take place over the next decade. The rise of LNG exports from the U.S., fueled by the largess of shale and other unconventional gas sources, will be fundamental to this revolution.
On the other hand, there is another revision that may be just as significant in generating investor profits from the export trade.
I’m referring to crude oil, but with some new elements contributing to another change in the balance. I’m talking about oil exports.
In the future, we will see a concerted move to export oil in new directions – starting with transit from the U.S. For some time, exporting oil from the states has been considered a national security issue, making the trade very difficult.
In this case, two exceptions have been allowed: one permitting the export of heavy, lower quality crude from California (for which the argument can be made of an insufficient domestic demand); the other allowing certain tolling contracts.
Tolling is a process whereby raw materials are exported to be processed abroad with the finished product then imported back in. The justification for this allowance has been the concern over maintaining sufficient domestic stock of oil products, especially diesel. That concern has now abated with the advent of significant reserves of tight oil (“shale” oil actually being only one category of such unconventional sourcing).
None of this would have been considered possible only a few years ago. Being dependent on imported oil, American policy makers were understandably dismissive about allowing the export of finished products from U.S. refineries.
But not any longer…
As is the case with natural gas and LNG, there is now ample local supply. That opens up the market for rising oil product exports.
As a result, I suspect that tolling will rise again – owing to the limitations on overall U.S. refinery capacity – but will increasingly service a jump in the exports of those products. The cost differential in utilizing foreign processing facilities makes this approach quite profitable.

The Big (And Profitable) Global Changes Ahead

Then there is the expanded use of the completed East Siberia-Pacific Ocean (ESPO) pipeline in Russia.
An earlier spur from ESPO has for several years moved oil south to China. But the new impact of the pipeline on wider Asian demand will become far more pronounced.
ESPO export oil will become a new benchmark crude rate, a major development for all of Asia. As this develops, the ESPO benchmark will replace London’s Brent as the standard for trade in wide portions of that market.
This is what makes this so significant. End users in Asia have paid a premium over what it costs to buy the same quality oil for delivery to Europe. ESPO will undercut that tradeoff and provide a genuine boost to Asian economic development. ESPO oil has a lower sulfur content as well meaning it is “sweeter” than Saudi export. That is another big advantage for Asia.
Other export changes will come from a number of geographic market-specific revisions. Western Europe will be importing more LNG as nations like Germany also phase in a wider usage of renewables.
These LNG imports will add pressure on the pricing points for long-term pipelined gas contracts, while improving prospects for investments in the expanded liquefied trade.
What’s more, a matter I have addressed before and had meetings about over the last several weeks, has begun to change how people view oil and gas sourcing in the Caribbean.
It involves the emergence of China as a major conduit of energy funding in South America and the rapidly accelerating networking of production, refining, and transport throughout northern South America and the Caribbean basin.
The combination rising Chinese influence and an existing system called “Petrocaribe” will produce some major changes that will impact North American markets. 

Thomas Edison's secret war with the Federal Reserve decades back has led to a new currency rising up today. It threatens the dollar, EURO, Pound, and the entire international monetary system. But it's also making everyday Americans rich. A Silicon Valley venture capital veteran investigates this exciting phenomenon.

FX Update: Ugly US Housing Data no big deal?

FX Update: Ugly US Housing Data no big deal?

The zany action in risk markets continued, with yesterday's big rally in risk on no real catalyst yielding to a sell-off in risk on no new catalyst before the US opened strongly despite ugly housing data. This leads us to believe that short term movements are paying little attention to fundamentals, which continue to tell a rather depressing story. The question, as we cover in our latest FX Monthly is whether the complacency we have seen in recent days is something that can support markets for another month or even throughout the summer, or whether we are simply seeing a short term bump in a new downtrend in the risk appetite. Stay tuned.

Elsewhere, one of the more interesting data releases was the UK Nationwide confidence number, which plummeted all the way to 65, a full 7 points worse than expected and a level that takes us back to nearly a year ago. The weekly ABC US confidence level also disappointed once again and seems terminally stuck in a low range until the job market improves.

EuroZone woes: focus on Spain
The general EuroZone fears are fading somewhat as the main focus now is the situation in Spain, where banks are unable to get funding in the interbank market. Spanish 2-year notes are now yielding almost 3.30%, about 280 bps above German 2-year notes. Spain is currently denying rumors that the US, IMF and EUR are planning to extend a large credit line to the Spanish government.

In contrast with the situation in Spain, the risk premium on holding Italian debt, for example, actually continues to fall (though Italy has a very high public debt figure, it features much less private debt than elsewhere, a reasonable savings rate, and a far smaller budget deficit than even France, for example, so the short term funding needs are not particularly pressing).

Russian Central Bank to add AUD and CAD

An almost sure sign that it is about time to sell the AUD and CAD as the Russian Central Bank says it is planning to add the two currencies to its international reserves. The bank announced some time ago that it had "added" the Canadian dollar to its reserves, though it apparently hadn't yet "begun operations", meaning apparently that it had approved the addition without actually going to market. While the bank's potential purchases could represent a significant new support for the currencies on a day to day basis because of their relatively thin liquidity compared with the supermajor G3 currencies, central banks are notoriously bad timers of the market and Russia's exasperation with the Euro should be used as a contrarian signal on the likes of EURCAD and EURAUD in the coming weeks and months. One also wonders how much the central bank will add as a percentage of reserves when the British Pound makes up only 10% of reserves and the Japanese Yen only makes up 2%. Russia's FX and Gold reserves stand at some USD 460 billion, so 1% is a fairly hefty USD 4.6 billion, certainly enough to move markets day to day, but hardly enough to alter the landscape for the commodity currencies.

US Data
US data was a slightly mixed bag, with a marginally higher PPI than expected - pulling the rug out slightly from the deflationists, especially considering the rising dollar during late April and throughout May and plunging oil prices for most of May, though the effect of that sharp fall may not work its way into price until the June figure (and oil has rallied strongly from the May low...)

Much more attention was focused on the very ugly US Housing Starts and Building Permits numbers for May, the first full month of such data since the home buying incentives expired in late April. Housing starts were well below expectations and the lowest since December (when the first round of home buying tax incentives was expected to expire) and the Building Permits were also well below expectations and at the lowest level in 12 months. In our book, it is a bit hard to understand why this numbers are a surprise, but the building permits drop is perhaps more alarming since this is the first phase of the housing construction life cycle and suggests that builders don't expect demand to pick up a again in the near future. The takeaway from the data is that housing demand is understandably lower with the expiration of the incentives, but another month of data this low or lower should raise the level of concern as it would suggest that housing demand is actually weakening from already very low levels - especially considering the drop in mortgage rates in recent months. With the lack of any real improvement in the job market, it is hard to see housing bouncing back anytime soon, anyway.

The Industrial Production data, on the other hand, came in rather strong, though the cynics can attribute this to the later phases of the inventory rebuilding cycle.

Chart: US Industrial Production
The May Industrial Production release saw one of the steepest increases in recent history. The chart below shows where production is currently versus the last twenty years. We have just now recovered back to a level that was reached about 10 years ago for the first time.

Looking ahead
The action this morning suggests that the worst case scenario for both bulls and bears is playing out - a choppy market that makes it look like something directionally interesting is getting started, only to see an immediate direction change at the last moment. The risk rally yesterday took the bears to the maximum pain level yesterday and just beyond through key resistance, only to see that apparent "break" faded in today's trading -though we haven't yet full reversed back into the old trading range as oft his writing. Elsewhere, bond markets have snapped higher this morning from yesterday's low and suggest that equity markets and the perhaps even more emotional FX market (especially AUD and CAD crosses) have seen the pendulum swing too far in the direction of optimism. If bonds were to crumble more convincingly, then we would be more happy to jump on board for the shorter term risk rally - until then, we remain wary of this latest rally.

Later today, we have the ECB's Bini Smaghi speaking in the US, and the BoE's King is also out speaking. Bernanke is set to give a speech about financial regulation. In Asia, there is little of interest Thursday, while Europe see the SNB's Libor-target announcement (and perhaps the latest on its intervention thoughts) and the US will release the latest CPI, Weekly Jobless Claims, and Philly Fed data.

Recall that this is triple witching week for equity markets - with expiration of options, futures, and options on futures. This could be yet another reason for the treacherous back and forth trading this week in equities and the highly correlated FX risk trades.

Economic Data Highlights

• US Weekly ABC Consumer Confidence fell to -45 vs. -43 expected and -43 last week
• New Zealand Q2 Westpac Consumer Confidence rose to 119.3 vs. 114.7 in Q1
• UK May Nationwide Consumer Confidence fell to 65 vs. 72 expected and vs. 75 in Apr.
• Australia Apr. Leading Index fell to 0.0% vs. 1.0% in Mar.
• Australia Q1 Dwelling Starts rose 4.3% QoQ vs. +7.0% expected
• UK May Jobless Claims Change fell -30.9k vs. -20k expected
• UK Apr. Average Weekly Earnings ex Bonus rose 1.9% YoY vs. 2.0% expected and 2.0% in Mar.
• Switzerland Jun. ZEW Survey out at 17.5 vs. 40.5 in May
• EuroZone May CPI rose +0.1% MoM as expected
  US May Producer Price Index fell -0.3% MoM and rose +5.3% YoY vs. -0.5%/+4.9% expected, respectively
• US May Producer Price Index ex Food and Energy rose +0.2% MoM and +1.3% YoY vs. +0.1%/+1.1% expected, respectively
• US May Housing Starts out at 593k vs. 648k expected and 659k in Apr.
• US May Building Permits out at 574k vs. 625k expected and 610k in Apr.
• US May Industrial Production rose +1.2% MoM vs. +0.9% expected
• US May Capacity Utilization rose to 74.7% vs. 74.5% expected and 73.7% in Apr.

Upcoming Economic Calendar Highlights

• US Weekly DOE Crude Oil and Product Inventories (1430)
• EuroZone ECB's Bini Smaghi to Speak (1715)
• US Fed's Plosser to Speak (1815)
• UK BoE's King to Speak (1945)
• US Fed's Bernanke to Speak on Financial Regulation (2145)
• New Zealand Jun. ANZ Consumer Confidence (0300)

Weekly Fundamental Outlook for Energies and Metals - A Disastrous Week for Commodities

Greek sovereign crisis continued to grab the center stage last week. Investors remained skeptical about the ability of the110B-euro bailout plan in containing deficit problems in the country. Worse still, investors' confidence over bonds in peripheral European economies such Spain, Portugal and Ireland tumbled amid contagion fear and downgrades by rating agencies. Yield spreads and CDS rose sharply.

The ECB left the main refinancing rate unchanged at 1% and did not implement further easing measures (such as bond purchase) to alleviate the problem unnerved investors and triggered further selloff in the euro.

UK's general election resulted in the first hung parliament since 1974. While the Conservative Party got the most votes and the most seats, it was short of a majority. Sterling tumbled as investors worried the situation will delay legislations to reduce deficits.

Dataflow was generally encouraging. What caught the most attention was US non-farm payrolls which rose 290K, the strongest gain since March 2006, in April while February's reading was revised to show a jobs gain. Although unemployment rate rose to 9.9% from 9.7% in March, it was due to the increase in participation rate - individuals who had given up looking for jobs returned to the market. This is a good sign somehow as it signals better confidence. We would say this set of data encouraging but stocks and most commodities failed to recoup losses. Rather, the dollar strengthened amidst expectations for an earlier Fed rate hike.

Crude Oil

Oil prices weakened again after brief recovery to 78.19 earlier on Friday. Concerns that Greek sovereign crisis will dampen global growth momentum overshadowed encouraging economic data. The front-month contract of WTI crude oil price slid -2.6% Friday. Settling at 75.11, the contract slumped -12.8% last week, the worst since December 2008. Brent crude, losing -10.5% during the week, performed relatively better than WTI crude.

The US inventory report was disappointing. Crude oil inventory surged +2.76 mmb to 360.6 mmb in the week ended April 30, despite rise in utilization rate. Compared with market expectation of a +1.1 mmb build, the actual increase was more than double and a large part of it was driven by Cushing stock which soared +1.68 mmb to a record high of 36.2 mmb. Surge in Cushing stock was the reason causing Brent-WTI Premium to widen.

Gasoline stockpile rose +1.26 mmb as decline in production was more than offset by surge in imports. Demand was flat during the week. We expect inventory to being dropping in coming weeks as the driving season arrives. Distillate stockpiles climbed +0.57mmb but demand improved +8.28% to 3.895M bpd.

Look at a bigger picture, demand outlook in the US has indeed been improving, albeit at as modest pace. Preliminary data from the US Energy Department showed that oil demand rose +2.1% y/y in April, following +2.9% and +3.3% gains in March and February. Demand for gasoline and distillate also showed impressive growth with the former rising +3.1% y/y and +1.5% y/y in April and March respectively while the latter reversed from decline to growth of +5.1% y/y in April. Mind that preliminary data are usually subject to downward revision. However, these are initial signs of oil market recovery in the US.

Utilization rate advanced to 89.59% last week. This was the 7th consecutive weekly increase and marked an over 10% rise from the trough of 77.7% in the beginning of the year. Improved refinery revenues as suggested by rising cracking spreads will continue to boost refinery runs. Although demand outlook has been recovering, we concern that the still-sluggish US oil consumption will not be able to take up a faster increase in supplies.

While the market has attributed this week's crude oil selloff to strength in USD, a more prominent driver was slump in stock market. It's true that oil and USD had traded with strong inverse correlation, especially in 2007 and 2007. Such correlation diminished in late-2008. In 3Q09, USD index reversed its multi-month decline and made a bottom at 74.27 but crude oil continued to rise, failing to drop although the dollar rose. This signaled the relationship between oil and USD has collapsed temporarily.

On the other hand, correlation between equities and oil has increased since September 2009. Despite periods of decoupling during late-2008 and 1Q09, the 2 have been moving in tandem for most of the time in 2009 and so far in 2010. 

Natural Gas

Gas was one of the very few commodities what move 'steadily' last week. Moving with a range of 3.855 and 4.101, gas price remained in 8-month lows on oversupply concerns.

Gas storage increased +83 bcf to 1995 bcf in the week ended April 30, worse than market expectation of a lower build of 80 bcf and bringing stockpile to +18.8% above 5-year average. However, this was later offset by a 5-unit-drop of gas rigs to 953 units this week. Higher-than-expected payroll figure also lent support to price.

In coming weeks, gas price may continued to be less affected by macroeconomic news and sovereign crisis in the Eurozone as it has been severely dumped over past few months due to its own surplus concerns. However, risk is tilted to the downside as inventory remains ample and there's no positive catalyst in the near-term.

Precious Metals

Gold shone and rose above 1210 (record high at 1227.5) Friday as sovereign crisis deteriorated. The benchmark contract gained +2.52% last week despite euro's slump of over -4%. Price action in recent weeks suggests gold and USD is moving tandem, a phenomenon usually occurs at period of extremely high uncertainty or during crisis. The last time this happened was in late-2008 to early-2009, when the market was nervous about the collapse of global financial system after Lehman Brothers went bankrupt in September 2008.

SPDR Gold Trust, the world's biggest gold ETF reported that bullion holdings in the fund surged to a new record high of 38.21M oz on May 7. The weekly increase of +2.54% was the strongest since March 2009.

Apart from ETFs, demands for gold coins and bars were also strong, signaling investors' need for safe haven assets.

Silver jumped in NY session Friday, resulting in a one-day rally of +5.34% and paring the weekly loss to -1%. Silver, as well as PGMs, performed more similarly to industrial metals during the current crisis given their heavy reliance on industrial demand. Should European fiscal problems result in global economic slowdown, these metals will be negatively affected.

Platinum and palladium also plummeted last week. Platinum, losing -4.54% to settle at 1665.8, marked the deepest weekly decline since July 2009. Palladium was hit harder, plunging -8.2%, last week. The steeper correction was due to the stronger rally it had over the past months. Despite the decline, we remain bullish on the long-term fundamentals of PGMs. Note that redemption of PGM ETFs was minimal, suggesting investors are confident on the outlook.

Closing A Real Estate Deal In A Down Market

When the housing market slumps, it's often best to take your home off the market and wait it out - but not everyone has that luxury. Many people are forced to go through with a sale because of a job transfer or a personal liquidity crisis. But even if you're selling in a very bad market, there are things you can do to make the best of a raw deal. Read on for the top tips on how to close a real estate deal in a down market. (For related reading, see Selling Your Home In A Down Market.)

Tip No.1: Sweeten the Deal
In declining markets it is extremely important to be cognizant of comparable properties in the surrounding area and to price your home at a level that will entice potential buyers to view it and ultimately bid on it. In other words, the seller must reject the temptation to hold out for top dollar or to price the home at the upper end of what the market will bear.

There are three easy steps you can take that will give you sense of what similar homes are selling for:

* Attend open houses
* Peruse the newspaper for local listings
* Ask a real estate agent to print up comparable listings on the multiple listing service (MLS)

Tip No. 2: Keep It Simple
In a down market, buyers have a lot to choose from, so it's important that you try not to give them a reason to turn down your property. Therefore, you should eliminate or reduce the number of "contingencies" that you may have otherwise insisted be in the contract. In other words, be flexible and don't make the sale contingent upon any factor that isn't absolutely essential. Make your conditions as simple and straightforward for the buyer as possible and you'll find that they'll be more apt to sign on the dotted line. (To learn what buyers are looking for, read Buying A House In A Down Market.)

Tip No.3: Throw Some Bones
Let's face it - there is a lot of competition out there when it comes to selling a home. In fact, at any one time, there are literally millions of homes for sale throughout the country! In order to make your home stand out from the crowd, you may have to take some extraordinary measures. These extras don't have to cost you a lot of money - you just need to give an interested buyer that extra push toward choosing your house over another.

For example:

* Compensate the buyer for any points he or she might have to pay in order to obtain a mortgage. You can do this by reducing the price. (Read more in Mortgage Points – What's The Point?)
* Offer to pay for any attorney's fees the buyer might incur with the sale. (See The Benefits Of Using A Real Estate Attorney for the advantages of consulting these professionals.)
* Be more flexible with regard to the buyer's requests. More specifically, if the buyer requests that a window be replaced or a room be painted, consider satisfying that request. (Read more about which home improvement projects are the most valuable come resale time in Fix It And Flip It: The Value Of Remodeling.)

Remember, in a down market it's the little things that will help close the deal. Also remember that if you are not accommodating in this type of market, a buyer will simply move on.

Tip No.4: Hire a Professional
Real estate agents often charge commissions that can range up to 6% of the sale price of the home. That's expensive! And it is a major reason why so many individuals decide to place a "For Sale By Owner" (FSBO) sign on their front lawn and try to go it alone. (Read about the advantages of selling your house yourself in Cut Commissions With "For Sale By Owner" Sales.)

The problem with FSBOs is that they often fail to draw traffic. In fact, very few people ever see the sign on the seller's front lawn or the tiny postage-stamp-sized advertisement they've placed in the local paper. Real estate agents, on the other hand, are motivated by a commission, and will aggressively contact potential buyers and direct them to your home. Plus, they offer multiple listing services, which makes your listing accessible to anyone who's looking to buy.

There are no guarantees that a real estate agent will ultimately be successful at selling a home, but hiring a good real estate agent tends to increase the likelihood that a qualified buyer will come out to see your house, making an offer more likely. (Read more in Do You Need A Real Estate Agent?)

Tip No. 5: Get Out of Town
Before an individual buys a car, he or she typically wants to sit in the vehicle and test drive it to see if it "fits". The same is true for a home. In fact, would-be buyers want to walk through a home and take their time exploring every nook and cranny to make sure that they are making a wise choice.

Open houses are designated points in time when potential buyers can walk through a home and ask questions. They can be a very valuable tool when it comes to marketing a home - especially when they are held by a real estate agent. Folks shopping for a home don't feel comfortable opening up closets and drawers and talking with their spouses about what they like and don't like in front of the homeowner - they want adequate time and freedom while doing their due diligence.

The seller should also be prepared to place a key box on the home's front door so that the home will be accessible to real estate agents at all times. The advantage of having a key box is to make sure that would-be buyers will have the ability to walk through the house when you are at work or out running errands. Nobody wants a seller lurking nearby while they peruse the home - it's uncomfortable.

Tip No.6: Raise the Bar
In a buyer's market, the onus is on the seller to make the home as attractive as possible and to make it stand out from the pack. That is why many sellers retain home stagers to help them sell their home. A home stager is a consultant who will recommend cosmetic changes so that the home is more attractive to would-be buyers. Typical recommendations include removing clutter from a room, rearranging furniture, painting or adding more appealing décor. Your home should also be spotlessly clean. (Read more in 12 Worst First-Time Homeseller Mistakes.)

Stagers' fees vary, but they usually range from a couple of hundred dollars to just over $1,000, depending on the services provided. If you think you have a keen eye for detail, you could also take this task on yourself.

Tip No. 7: Don't Be Cheap
In order to make sure that real estate agents pay attention to your property and are eager to show the home to prospective buyers, sellers must provide incentive. That is, they must be willing to pony up the full 6% commission to the broker who sells their home. You can negotiate, of course, but remember that the idea is to give the broker/agent an adequate incentive to market your home ahead of others that he or she maintains in inventory. (For tips on successfully navigating any negotiation, read Getting What You Want.)

If you want to negotiate your agent's commission, consider establishing "breakpoints" in the listing agreement. In other words, establish terms so that the agent of record will receive 6% if, for example, the home sells within the first 60 days. If the home sells within 60-90 days, a 5% commission might be agreed upon, and so forth. Again, the idea is to persuade the agent and the listing firm to give your property as much attention as possible.

Bottom Line
Sellers looking to unload their homes in a down market must be flexible with regard to both price and contingencies. They should also be prepared to enlist the help of an agent or broker to help them better market the home. For those who follow the above tips, it is possible to sell your house successfully, even in a faltering real estate market.

source:
http://investopedia.com/

Hot Market Of the Week - Currencies

Check Out this Recent Opportunity for the Japanese Yen
Japanese Yen Drops Against Majors
The market moved up 219 ticks.
219 ticks = $2,737.50 per contract(about 9 trading days)

When the blue line (forecast) crossed above the black line (actual), VantagePoint predicted the market to trend up. The Neural Index at 1.00 also indicated an expected up trend.

The Japanese yen lost ground across the board on Wednesday morning in Asia plunging to multi-day lows against its major counterparts.

Traders are eagerly awaiting the Bank of Japan's rate decision today. At the end of a two-day monetary policy meeting, the Bank of Japan is expected to keep its target for the unsecured overnight call money rate unchanged at 0.1%.