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BP’s oil disaster and what’s next

British Petroleum is in hot water, but it’s nothing like what they’ve done to our now 40% oil slicked Gulf.  Tony Hayward’s company has lost about 50% of its market capitalization or roughly $90 billion since the rig exploded and the violent gusher of a spill began.

Investors and money managers don’t even want to touch BP’s stock, unless it’s the sell (or short) button.  Adding to that the US government has negotiated with BP to limit their liability to $20 billion in an escrow fund apparently designated to help with spill clean-up efforts.

Rumor has it that BP’s own engineers as well as third party firms, such as Schlumberger, knew of the danger and warned the company’s executives only to be repeatedly shot down.  Schlumberger apparently even helo’d out its own engineers just prior to the explosion after they were convinced the rig and well were unsafe.

In other disasters like this in the past, such as the Gulf of Mexico spill in 1979, the only “fix” that worked to stop the gushing was to drill at least one relief well.  All of the other attempts to cap the well have not only been ineffective, but in some situations, such as the Top Kill attempt, have made the spill worse by widening the tear.

Currently BP is attempting to siphon off tens of thousands of barrels a day so they can burn the oil at sea in an attempt to buy time and slow criticism before they can get in to drill a relief well.   The irony is that the amount of oil that is being acknowledged as having spilled on a daily basis is increasing at what seems a parabolic rate and BP is not even preventing as much oil from spilling as they were claiming was first leaking.

The relief well is months away and it may or may not be an effective long term solution.  The first problem is that there is a risk that drilling the relief well could damage the well site further, creating a massive breach and significantly increasing the oil spill’s flow rate.  The second problem is that the relief well’s rig could also explode or the well itself could collapse at any time.

There is also a high likelihood that BP will not be BP in the next year or so.  That is to say that the firm has hired the likes of Goldman Sachs, Blackstone and Credit Suisse to explore the “options” it has moving forward.  Maybe they’ll give their assets to the US government for the clean-up effort that is expected to cost in upwards of a trillion dollars.  After all, Hayward claimed he does care about the “small people of the world” in another foot in mouth media gaffe.

In the future, should there be one for US offshore drilling, there should be significant safety precautions for all rigs, such as having backup rigs and relief well plans in advance of drilling the initial well.  This seems to be the only way to deal with the chance of another disaster expediently.

In summary, it looks like BP’s reckless disregard for safety and lust for easy profits has not only sewn the seeds for a horrifying environmental disaster, but the potential destruction of their company and many British pension funds.

European Union losing strength

Update: The Fed is moving in to further appease Europe’s ailing banks by restarting the US dollar currency swap program they used during the last financial crisis.

As the EU moves to establish a 750 billion Euro bailout slush fund, political opposition in Germany and the UK is growing and the problems within the EU may be getting more serious.

Hiding the truth

EU politicians claim the fund is being created to defend against the “wolf pack” of banks betting against the Euro and EU sovereign debt.  They say they will defend the Euro at “any cost”.

The reality is that Greece misrepresented its debt, hiding it with the help of Goldman Sachs.  This fraud triggered the downfall of Greece’s bonds once it was discovered.  Other EU countries are now struggling to get their house (of cards) in order.

The contagion could spread

Greece is struggling, if not failing, and with it may come a domino effect. The other “PIIGS” (Portugal, Ireland, Italy and Spain) may also begin their descent on debt woes and poor economic performance.

Even the UK is not immune to these problems as its economy is in bad shape and the debt keeps mounting.  The UK government is facing uncertainty as recent elections delivered a hung parliament, the first such event since 1974.

Germany’s Merkel has potentially exhausted all her political favors as she offered the German taxpayers’ money to Greece in the form of a debt bailout.  Her party has suffered significant losses in recent elections as a result.

Anger grows

Meanwhile, in Greece, where severe austerity measures are being forced on to a weary population, the result has been much civil unrest and violence in the streets.

There have been several deaths, property has been destroyed and no compromise has been reached to temper the rage of the population.

No end in sight

The EU is in a panicked state.  There isn’t any meaningful resolution within reach as they frantically create more debt in a naive attempt to solve a debt crisis.  When other member countries begin to falter the volatility of their bonds, stock markets and currencies may increase dramatically.

Such a significant disruption will spread beyond the EU to the US and Asia.  These headwinds are blowing strong now and could jeopardize the very fragile global economic recovery.

That is, if you believe there was a recovery in the first place.  So much for the Euro being the next world reserve currency.

Thoughts on equity, energy and metals markets

At this point there is some distortion between energy and metals which have a direct relationship as energy must be expended to mine the metals. usually the ratio is 10x the price of a barrel of oil for an ounce of gold, but now it’s been in a range of 12.5x-15x.

Either oil is very undervalued (which is unlikely) or gold is overbought at these levels.

Today’s close of the stock markets and oil seems to indicative of a risk repricing that began last week.

960 (around the 50 day moving average) on the S&P 500 and $65 a barrel on light sweet crude are my downside targets short term, but if either breaks we could trade to much lower support levels.

In addition, when examining the huge sell off in natural gas prices, it’s near certain that energy has more negative catalysts than positive because industrial utilization continues to lag despite the green shoots propaganda that we keep hearing.

Finally, there are a growing number of bears calling for a shake out of March’s lows coming this fall because of a new leg down in commercial real estate that will bleed liquidity out of the equity markets and REITs.

Potential risk reversal in global markets

It looks like safe haven assets like bonds, yen and dollars are becoming more attractive vs. risky assets like commodity currencies, commodities, equities and emerging markets in general.

I think we may be entering the next leg down as Mohamed El-Erian and others have expressed the same sentiment I have. The rally is running on fumes.

We probably will retest the lows in the market and bring some fear back in to the trading. VIX is up 6%+ today and we’re seeing a lot more put buying as institutions either bet against or insure profits in stocks.

Consumer sentiment was terrible and there is now some question as to whether the FDIC is solvent after taking over Colonial Bank. All the Maes are probably completely toxic now, too. I hope foreign central banks continue their generosity or the falloff here could become a disaster.

Bye bye Dubai

In the downdraft of oil prices and the global recession taking full grip, a once bustling city in the United Arab Emirates is collapsing at an alarming rate. Dubai’s foreign workers are leaving in droves, their investments are drying up and new problems seem to be arising on a daily basis.

Recent incidents have highlighted the deterioration of competence.  Only a few weeks ago, raw sewage was discovered on tourist beaches.  Apparently being pumped in to the ocean by poorly run industry.  Just a few days ago a tanker collided with a freighter offshore creating a lot of debris and a necessitating more clean ups.

Dubai Towers
Above: The planned Dubai Towers project.  On hold.

I remember only a few years ago I would read that record breaking skyscrapers were being planned and even erected on a seemingly never ending basis. Now that the local economy is collapsing the government has passed a law that forbids talking badly about the city and fines those that would dare to about $250,000.

Tourism has been dropping as other destinations or staycations (staying home on vacation) become more desirable. Certainly many of the lofty projects will be put on hold if not outright abandoned as income dries up in energy and tourism. Many speculate this may be the end of a city that never really reached its planned potential.

Natural Gas Traders Sell Off Futures On Inventory

Natural gas traders sold off the December 2007 futures today by nearly 2% on inventory data that showed a draw of 9 billion cubic feet, within the expected range, but nonetheless disappointing traders who were hoping for a larger draw. This was the first draw of this winter season, and even though natural gas is at record storage levels, we also have had the coldest start to November in four years.

As these natural gas traders hyper-focus on last week’s inventory data, many major weather forecasting institutions have predicted a cold snap hitting the East and colder air hitting the Mid-West, the nation’s largest residential natural gas consumers, this week. I believe floor traders have oversold Natural Gas on today’s inventory data. They tend to myopically focus on what was, not what is. The data we got today was backward looking and is of no use when attempting to forecast the future draw. The best indication there is the weather and I’ll tell you as a natural gas heat user, I’m keeping the furnace on because it’s COLD!

In summary, the cold snap that traders are hoping for may well be on the way.

http://www.weather.com/newscenter/fcstsummary.html?from=wxcenter_news

http://www.accuweather.com/news-story.asp?partner=google&traveler=0&article=0

http://www.cpc.noaa.gov/  (see 6-10 day and 8-14 day temp outlook).

Peter Linder, an energy analyst and senior adviser with Calgary-based DeltaOne Energy Fund, expects any price decline to be short-lived. Buyers may return if gas falls below $7.70 per million British thermal units as they examine the prospect for colder weather later this month and into early December.

Natural gas ETF tests 200 day moving average

Be ready for a surge in natural gas prices as speculators enter natural gas during what is shaping up to be an usually cold week in November.

nattynov.jpg

Should this trend continue, natural gas may start to catch up with the momentum crude oil experienced as traders shift out of that expensive trade and in to the more fairly valued natural gas plays. For more information on natural gas, see the Moo Natural Gas Center.

Natural gas poised for breakout rally

UNG is poised for a rally. The three month chart suggests that the seasonal uptrend in natural gas is about to begin. UNG has broken out of its 50 day EMA and if this trend continues based on seasonal demand, storms damaging equipment and other factors, we’ll likely realize at least a 20-25% appreciation in value up from this $40 range that UNG is trading at. In addition, natural gas futures contracts are trading at a curve that suggests a generous appreciation in value. This suggests that investors believe natural gas will appreciate in value over what’s expected to be a bitter winter.

United States Nat Gas (UNG)