Of course, it's a blip next to the mortgage mess. Seven percent of mortgages are late, and another 3 percent are in foreclosure? That's 10 percent of the market, or about $1.4 trillion. Credit card debt totals only $822 billion. Even if all credit card debt were running late or being charged off, it wouldn't be nearly so bad as the mortgage disaster.Oil's Slide Set to Leave Dark Trail
Price Dive Threatens Renewables Push, Production Projects; a Bust in Texas
Already in free fall, the price of oil could soon push much lower as the effects of a global recession take hold.
Crude fell $3.12, or 6.7%, to settle at $43.67 a barrel on the New York Mercantile Exchange on Thursday. Many oil-industry insiders and traders now say prices could slump much lower, into the $30s, before supply cuts push prices back up, perhaps much later into next year. The changes come from a combustible mix of factors -- a rise in inventories, shifts in the quality of oil used by refiners, and severely deteriorating demand.
"I don't think we're through with the drop. I don't know where it stops, but I don't think we're through," said Steve Chazen, president and chief financial officer of Los Angeles-based Occidental Petroleum Corp.
Lower oil prices are a short-term gain for consumers and businesses, from carpooling parents to households using heating oil to airlines. But a sustained decline in the price of oil also has painful downsides. Energy-driven economies -- in areas from Texas and Alaska to Venezuela and Russia -- can face huge busts, with job losses affecting employment for engineers and roughnecks on rigs as well as the accountants, hotels and restaurants that support them.
Sinking oil prices also reduce the political will to push ahead with costly renewable-energy projects, and reduce the urgency to prioritize energy-policy debates on topics ranging from auto efficiency to offshore drilling. The danger is that when demand does bounce back, prices will boomerang far higher because the supply cushion has shrunk.
The swift decline in prices -- crude hit an intraday high this summer of $147 a barrel -- is hurting industry players, who have less cash to spend on projects as lower prices hurt their revenues.
They also have less incentive to invest as their margins get crushed. Wednesday,Schlumberger Ltd., the world's largest oil-field-services firm by market capitalization, said its 2008 earnings will miss analysts' estimates as oil and gas production slows world-wide. Industry drilling-rig counts have begun falling sharply.
Research firm Sanford C. Bernstein & Co. puts the oil industry's average break-even cost zone at $35 to $40 a barrel, though the figure can vary by project and based on other factors. Thursday's closing price is well below the $70 to $75 marginal cost at which producers this year could earn an expected return of roughly 9% on new drilling projects.
North America is likely to see the sharpest retrenchment, but Schlumberger's announcement suggests international projects could follow. Projects that revived long-dormant wells in Oklahoma, used new technologies to salvage old West Texas oil fields or extracted oil from tar sands in Canada require prices above current levels, in some cases far above, unless costs also fall. Some deepwater projects in the Gulf of Mexico or the North Sea would be imperiled if prices fell below $40 for an extended period.
Occidental's Mr. Chazen says even announced production cuts may be months from taking place, adding to the glut. "Slowing it down is hard. You sign contracts, you make plans," he says. "It may take you two or three quarters. It can't be done instantly."
A further collapse in prices could be forestalled by unexpected supply disruptions. Producers are still struggling long-term to keep pace with global consumption trends. The price drop could stiffen the resolve of the Organization of Petroleum Exporting Countries to slash production when members meet in Angola Dec. 17. King Abdullah of Saudi Arabia, the world's largest oil exporter, recently was quoted as saying $75 a barrel is the "fair price" of oil. If anything, unpredictability is the only certainty in today's volatile oil markets.
But a growing number of industry insiders say conditions are now ripe to test the market's lows. It has historically taken OPEC many attempts to stem price declines. A sea of excess inventory is building from Cushing, Okla., to Singapore. Even in China, one of the few growing markets around the globe, stockpiles are rising.
One of the most striking short-term pulls on oil prices is a futures-market condition called contango. Simply put, oil is vastly cheaper to lay hands on now than it is for delivery months or years in advance. Thursday's settlement for January delivery, $43.67, is roughly $14 cheaper than delivery a year from now, $23 cheaper than two years from now, and a whopping $39 cheaper than delivery in 2016.
Not only does the opposite condition often occur, where spot oil is more expensive, but the contango conditions present today also feature spreads at their widest in years, Barclays Capital says. Contango incentivizes those who can afford to hold oil to hold on to it. Storage fills up, and that causes the spot price to fall because people need to unload oil.
The debt crisis is one reason for the imbalance, since inventories tie up scarce working capital. "Even people who require physical barrels are trying to take it on Jan. 2, so it won't show up on their balance sheet at the end of the year," says Mike Loya, an executive with large international oil trader Vitol Group.
Industrialized countries in the Organization for Economic Cooperation and Development saw stocks rise to 56 days of forward consumption as of the end of October, well above historic levels, according to the Energy Information Administration.
In the U.S., crude-oil stocks are above five-year averages. Traders have also found it profitable to lease tankers for floating storage, which helps inventories to build.
It isn't just financial maneuvers threatening the price of oil. The premium that the market gave light, sweet crude oil, which is well-suited for making diesel, has dwindled as diesel demand has shrunk.
Deutsche Bank AG analyst Adam Sieminski expects further weakness in the widely quoted Nymex and London light, sweet oil benchmarks "that generate pricing headlines" because substantial new refining capacity is starting up in India and China designed to make products from lower-quality crude.
For example, Reliance Industries Ltd.'s Jamnagar refinery complex in India, set to become the world's largest single-location refinery with a major new expansion, is expected to start full operations in the first quarter of 2009.
On top of this are stark demand statistics. Despite a drop by more than half in the price of gasoline, consumption until last week remained listless, and only jumped slightly. In China, inventories have risen in recent months after the government increased retail prices for gasoline, diesel and jet fuel by nearly 20% in June. In India, car sales recently saw their first decline in three years, says Sanford C. Bernstein.
A popular research note brimmed with pessimism from energy executives at the end of Thanksgiving week, when Houston research firm Tudor, Pickering, Holt & Co. Securities Inc. invited clients to help write its morning missive. One unnamed exploration and production executive wrote in: "Is E&P where the banking sector was six months ago -- recognizing the fundamentals have deteriorated but not yet seeing the cliff we're headed for?"
Write to Ann Davis at ann.davis@wsj.com, Ben Casselman atben.casselman@wsj.com and Carolyn Cui at carolyn.cui@wsj.com
by CalculatedRisk on 12/04/2008 10:50:00 AM
From the WSJ: November Is as Bad as Feared
Retailers reported some of the weakest sales figures in years for November, with many missing downbeat expectations, but Wal-Mart Stores Inc. continued its recent outperformance as it topped estimates on increased store traffic and transaction size.Layoffs everywhere it seems:
State Street Corp., the world’s largest money manager for institutions, plans to cut 1,700 jobs, the latest in a wave of financial-sector layoffs during the worst year for U.S. stocks since the Great Depression.From MarketWatch: DuPont cuts view, plans major workforce reduction
State Street will shed about 6 percent of its 28,700 employees by March ...
DuPont Co. slashed its fourth-quarter earnings forecast on Thursday and announced plans to dismiss 6,500 workers, including contractors, due to the downturn in the construction market and a sharp drop off in consumer spending.And from the WSJ: Nokia Sees Shrinking Handset Market
Nokia Corp., the world's largest mobile handset maker, Thursday cut its global handset market forecasts for the second time in three weeks, warning that the slowdown has accelerated more rapidly than expected.From Bloomberg: Factory Orders in the U.S. Decrease 5.1%, Most in 8 Years
Orders placed with U.S. factories in October fell by the most in 8 years, signaling a decline in manufacturing will contribute to deepening the recession.This isn't intended to be exhaustive - just a sample of the headlines.
Demand dropped 5.1 percent, more than forecast and the biggest fall since July 2000, after a revised 3.1 percent decrease in September, the Commerce Department said today in Washington. ...
``The general deterioration in both domestic and external demand suggests bleaker times lie ahead for America's factories,'' Sal Guatieri, a senior economist at BMO Capital Markets in Toronto, said before the report.
You've likely never heard of Katherine McIntosh, 76, a housecleaner in Modesto, Calif., but you'd recognize Dorothea Lange's iconic Great Depression photograph in which the then-4-year-old girl clings to her mother while hiding her face from the camera.
In the black-and-white photograph, known as "Migrant Mother," Katherine is the child on the left. Her mother, then-32-year-old Florence Owens Thompson, had seven children at the time, who worked with her in the fields, picking cotton.
Lange was traveling through Nipomo, Calif., taking photographs of migrant farmworkers for the government when she shot the defining image of the Great Depression. McIntosh told CNN: "She asked my mother if she could take her picture -- that ... her name would never be published, but it was to help the people in the plight that we were all in, the hard times. So mother let her take the picture, because she thought it would help."
The next day, when the photograph ran in a local paper, the family had already moved on, but they heard about it. "The picture came out in the paper to show the people what hard times was. People was starving in that camp. There was no food," McIntosh said. "We were ashamed of it. We didn't want no one to know who we were." Living in tents and cars, sometimes her mother would go hungry so her children would have food.
Florence Owens Thompson died at age 80 in 1983. The inscription on her gravestone reads: "Migrant Mother: A Legend of the strength of American motherhood." In these tough economic times, her daughter has this message for President-elect Barack Obama: "Think of the middle-class people."
Let us be the first to suggest that McIntosh would make a wonderful honored guest at Obama's inauguration in January.
It is in times like these that it is very helpful to pause and reflect on the past and the great words of former US president Franklin D Roosevelt.
"We have nothing to fear but fear itself," he told the American people at the onset of the Great Depression.
So what does that statement have to do with the Baltic Dry Index.
The BDI is a valuable tool that helps indicate where we are in the economic cycle and can point to future directions and changes in the markets.
Founded in 1774, the BDI traces its roots and takes its name from the Virginia and Baltick coffeehouse in London's financial district.
Every day the Baltic talks to brokers around the globe and asks how much it costs to ship a cargo of raw materials on a given route, for example iron ore to China from Australia?
According to the Baltic Exchange, the index provides an assessment of the price of moving raw materials by taking into account 26 different routes on a time charter and voyage basis.
It covers the voyages of the big bulk carriers, known variously as supramax, panamax and capesize, that carry various commodities such as coal, iron ore and grain.
Why is this important? Well, economists will argue over the leading economic indicators and these will sometimes frustrate even the wisest. Rather than poring over unemployment numbers and discussing consumer spending and confidence and its impact on gross domestic product, an easier and simpler way to take the pulse of the economy is to consider the BDI.
Put simply, as the BDI goes up so does the cost of raw materials.
What makes the BDI special is that it is a leading indicator that is, it tends to move ahead of the price of commodities and is therefore more valuable than a backward looking or lagging indicator.
It is also one of the purest indicators as it is virtually devoid of speculative players, being limited to member companies, parties securing contracts, cargo suppliers and shipowners.
From 2005 to last year, we saw a massive increase in the BDI primarily due to Chinese demand in combination with other factors such as a shortage of supply in dry bulk cargo ships and a backlog at shipyards.
Early this year, we saw investors trying to hedge against inflation by shoring up their portfolios with hard assets.
This in turn contributed to the rapid increase in commodity prices. But price does not always indicate demand as there are substitution effects and the impact of futures contracts sometimes makes it difficult to gauge fair value and true price.
In other words, commodity prices can remain elevated in spite of the supply and demand situations that indicate differently.
The index has now plummeted to 2003 levels. Chief among the causes for the plunge is the rapid slowdown in the global growth phenomenon.
In addition to this, credit has been nearly impossible to get for the purchase of goods and the payment of time chart ers on vessels. Here we have another victim of the credit crunch as letters of credit and the credit lines for the shipping trade are currently frozen.
Nothing is moving because no trader wants to take the risk of putting cargo on the boat and finding that nobody can pay.
There are many statistics that can be controlled, but the one that authorities cannot control is the Baltic Dry Index.
Julian Galvin is an Associate Director at Tyche Group, an independent financial advisory firm based in Hong Kong
email: julian.galvin@tyche- group.com
