[seahorse2]

My two cents worth regarding the chances of a soft landing in the US housing market - it won't be soft. First, when the pundits on t.v. talk about a soft landing, I think they mean soft for the banks. This real estate market is going to be hell on the builders and subcontractors; whether or not that bleeds over to hell on the banks and companies like Home Depot, I don't know. However, from personal experience doing construction law, we are now only seeing the beginning of the downturn; therefore, its impossible to declare a soft landing when the bankruptcies and foreclosures are only beginning. We aren't even close to the middle yet. In my area of the world, many small builders are out of business, several filing bankruptcy, one of the largest builders gone, and many more on the way. The banks are only beginning to foreclose on entire subdivisions that the builders are walking away from, therefore, the fallout can't be known. I don't see how the banks can come away unscathed with all these bad loans hitting their books and them filing suit to take over properties that either won't sell or aren't finished yet. If they won't sell for the builders, they won't sell for the banks, not at the price of materials in them. People will take hits, lots of them. Give this real estate market at least a year before any predictions of what type of landing is made.

[MrBill]

seahorse wrote:
$this->bbcode_second_pass_quote('', 'M')y two cents worth regarding the chances of a soft landing in the US housing market - it won't be soft.

[seahorse2]

In my area, the NW Arkansas area, a bank did a study which said there is a 6 year supply of ready to build lots and homes on the market, assuming demand stayed constant. So, we have serious oversupply here. This means, building will and is stopping, meaning the builders, subs are going out of business and laying people off. Already, there is some suggestion that many of the hispanic workers are leaving the area, bc they were doing lots of the labor.

Here's some examples of what I'm seeing personally:

(1) Our offices represents a material supply company in a foreclosure suit brought by a bank to foreclose on 40 homes, none of which have sold, many of which are not completed. The bank and all the other material suppliers will be arguing the lien isssues for at least 6 months to a year, meaning best case scenario these finished and unfinished homes will just sit there. Then, no matter who has lien priority, the homes have to sell, but at what price? Just bc you have a lien, doesn't mean you will get your money back if property values drop.

(2) I represent another plumbing wholesaler. I have filed two $160,000+ liens for plumbing materials against two different subdivision that are finished, but lots aren't selling. Mine are one of many liens.

(3) I'm defending a small builder who owes over $1.2 million on different lots and homes he was building. Foreclosure trial set for next week, there is no defense, just going through the motions.

(4) A marble company I represent has seen its sales drop by over half for two months in a row now (averaged $40k a month, now to $20k month). He called today to ask me about filing bankruptcy (which I don't do debtor bankruptcy). He is laying off some employees and trying to keep his doors open. One of his competitors shut there doors last month.

I do not know how the banks will have a "soft landing." I note that a local VP of a bank here has filed bankruptcy on a bunch of businesses and homes he had been doing the last few years. In my opinion, this is just getting started.

[MrBill]

Thanks for giving some color commentary behind the data. Very much appreciated. Cheers.

[cube]

hmmm?.....It seems that the Iran nuclear drama has fallen of the edge of the world into obscurity. I guess that's how financial "news" / entertainment works. Much like a soap opera a story is first introduced, then over-exaggerated, and finally either ends in a anti-climatic fizzle or a dramatic bust. Luckily for America and the rest of the world, the neo-cons are now on the defensive.

My prediction for 2007:

We'll hear MUCH less of Iran and more so of other factors that could effect the oil markets.....crude oil inventory numbers perhaps? Granted maybe such stories may not generate the same amount of sensationalism (not that the media doesn't thrive on that *sarcasm* ) but who knows maybe crude inventories might actually *gasp* be more significant?

[MrBill]

Looking forward. Looking back.

It is almost year-end here. Time to review events in 2006 and think about 2007.

We are still struggling here with a mild winter that is causing the market to be soft, but several factors lead me to believe this is rather temporary. However, first, let's recognize that in the absence of a BIG event like another Katerina/Rita/Wilma, or a disaster/terrorist strike in the Straits of Hormuz, that multi-year price increases are succeeding in bringing more supply onto the market.

So the global surplus will grow to 2-3 mbpd from 1-2 mbpd in the absence of dramatic, concerted and sustained supply cuts from OPEC. Keeping in mind that the US dollar is under pressure, so some may be tempted to keep pumping to make up for a drop in purchasing power per barrel by exporting more drums. The worldwide demand increase for crude in 2007 may be around 1.5-1.7%. Not bad when you think that annual growth is about 4-5% in GDP terms with trade increasing by almost 7% per year. At some level high prices must be filtering down into efficiency gains. I know, hard to believe, but there you have it.

The fly in the proverbial ointment is as usual geopolitical events. I think that Russia is a big question mark here as we can pretty much assume that when it comes to producers like Iran, Iraq and Nigeria that it is SNAFU. Whereas you cannot count on those three oil stooges, so far Russia has been coming up with the goods. But the horizon is dark as I have to believe that Russia's energy policy is to maximize insider shareholder gains versus re-investing that wealth into better infrastructure. That means Russia as a reliable producer and exporter becoming more not less like PVDSA or PEMEX.

This is not to say that Russia will not continue to be an important player, as a swing producer and the main supplier of energy to the EU, but that they have consciously chosen to freeze out foreign participation and have conducted consolidation in the Russian oil patch not in the name of efficiency and transparency, but to concentrate operations in fewer hands and make transactions more opaque. That translates into more uncertainty and thus a higher risk premium. In this respect, 2007 will be another interesting year for foreign investors in Russia.

Also, resource nationalism was a large theme in 2006 in places like Equador and Bolivia as well as ongoing problems in the Niger Delta, so I expect those problems to persist so long as energy prices remain high and the spoils from re-distribution of existing assets are higher than the gains from new exploration and development. C'est la caca as the French would say.

Even in Canada the politics of envy are in play due to the easy money being made in the energy sector as different levels of government are eager to increase their overall take even at the expense of choking the flow of black gold.

Here I must say, oil companies have not helped their own cause. Exempt royalty payments until capital costs are recovered is not a carte blanche to ride rough shod over Canadian taxpayers. Entertainment, bonuses and travel are NOT capital costs. Clearly, Provincial and Federal governments are correct to demand clarification over what is and what is not considered a capital investment or a sunk cost into future development, and not a blank cheque for greedy companies to export low value added synthetic oil south of the border for refining elsewhere while paying pennies to the government. Checks and controls are essential to a functioning free market to make sure it is a fair market.

But regardless moves on income trusts in Canada, and the threat of carbon taxes aimed squarely at energy producers as opposed to energy users, are worrying question marks over investment and therefore over future production in the Canadian oil sands even as mild weather continues to eat into cash flows from natural gas operations. Those may be temporary concerns, but all investment decisions are made in the present with long-term payoffs and future consequences.

Never the less, OPEC has probably taken 50 mio barrels off the open market since its first production cuts and this is starting to show-up in the weekly inventory numbers where we have seen draw downs these past few reports. And demand on the other side has remained relatively buoyant given the slowdown in America. Not withstanding Seahorse's comments about the state of the union south of the border, and the housing market down there, the forecasters still call for 'a soft-landing' and several cuts in benchmark interest rates by the FED. That will be the red flag to watch for going forward. Any downward revisions to housing starts, building permits, construction spending or property values may be continuing proof that the landing will be harder than expected or that a recovery will not be quick in coming.

As Cube mentioned, we may be more focused on crude inventories than on geopolitics in 2007 than 2006, but my feeling is that oil markets will concentrate on macroeconomic indicators like the overall housing sector when judging how strong demand will be in the next six to 12-months.

Just as an aside looking at forward-looking indicators. It has been said many times on these boards that we will probably miss peak oil as it passes us by, and it will only be apparent looking back. I have to agree. I think for many Canadians and Americans that zenith was in the 1970s already. Incomes are still rising, but what those incomes will buy is dropping. Even though I work harder and made mostly the right decisions like education and to save and invest rather than spend my standard of living as measured by what I can afford to easily buy is lower than my parents.

Peak oil realization is when you think that no matter how hard that you work that your standard of living will not on average be any better than your parents, and may instead be more similar to your grandparents. And, of course, your children and grandchildren also can no longer expect on average to have it even as good as you did. A pretty sobering thought.

Yes, our individual choices do matter, as we still have to make the most of the time, money and resources that we still have to provide for our own and our family's future, but the tide is against us due to global population growth and declining natural resources. I think for me that is why I try so hard to understand the events unfolding around me. It is not about making money or being right about the markets, but about preparing for an uncertain future. I hope on average I can be correct in my predictions 60-percent of the time, and then use that small advantage to my best use. If not, perhaps I can just minimize the fallout from my poor judgment. In either case clearly thinking about it is half the battle. Cheers.

[DoubleD]

Nice recap Mr. Bill.

[MrBill]

After an aggressive sell-off in crude on DEC 22nd ahead of Christmas, and one assumes position squaring for year-end, we have a bounce today in Asia and in Europe as Iran makes it clear they WILL use oil as a weapon in their dispute with the West over their right to develop nuclear technologies. Still, muted trading here on Boxing Day, so we may or may not see follow through tomorrow once the major market participants return. At the moment trading around the $63 area in Brent and WTI, which is at the top end of recent ranges.

Not new news, but a recap on Russia and resource nationalization in general.
$this->bbcode_second_pass_quote('', ' ') The larger message from Russia concerns developing nations, which collectively harbor the only real potential for new energy discoveries. Unfortunately, the lesson seems to be that it's okay to nationalize energy projects. That is, nationalize after private oil companies spend billions locating and developing the opportunities, as Shell did in Russia. Then, when it's clear that there's gas and oil to be had, the state will take over.

The example in Russia for private, for-profit oil companies isn't encouraging when it comes to making fresh capital committments for investing in new energy projects. What's true for Russia will be true for other regions of the world where the rule of law resides on even shakier ground.

The problem all of this carries for the West is that the main opportunities for increasing oil production reside in Russia and other nations where political risk is high--and rising. After reading the news today, it's hard to imagine the major oil firms will find new inspiration for sinking billions of dollars into projects in faraway lands that run the risk of being snatched away at the 11th hour.

[MrBill]

Today a Federal Minister vowed that Athabasca oilsands would go nuclear despite loud protests from the UN. The IAEA is to investigate dual use technology over fears Albertans may turn to bomb making destabilizing the entire area. Canada has never signed the NPT.

The matter will be refered to a Security Council vote, but China and Russia along with France have so far refused to comment on whether they would support sanctions against Canada, a member of the so-called coalition of the unwilling.

$this->bbcode_second_pass_quote('', 'I')t is only a matter of time before Canada builds a nuclear power station to help extract oil from the massive tar sands in northern Alberta, the federal natural resources minister said in an interview published on Thursday.

Gary Lunn told the Sun chain of newspapers he wants Atomic Energy of Canada Ltd. (AECL) -- which builds Candu nuclear reactors -- and a private Alberta company to form a partnership to build a power station.

"It's not a question of if, it's a question of when in my mind," the Sun quoted Lunn as saying. "I think nuclear can play a very significant role in the oil sands. I'm very, very keen."

AECL and Energy Alberta Corp. say nuclear power is the obvious way to produce the massive amounts of super heated steam needed to extract oil from the tar sands.

Opponents say nuclear power stations are too expensive and have a patchy operating record in Canada.

Lunn's ministry said in October that about 80 percent of Canadian crude oil production in 2020 was expected to come from northern Alberta's oil sands, double the current contribution.

[drew]

$this->bbcode_second_pass_quote('MrBill', 'T')oday a Federal Minister vowed that Athabasca oilsands would go nuclear despite loud protests from the UN.

[MrBill]

Drew wrote:
$this->bbcode_second_pass_quote('', 'O')f course we could just stop the environmental nightmare that is going on up there, but that's not likely is it?

[gt1370a]

Does anybody have a good insight on what is driving the current oil price? On the bullish side we have:

(1) Weakening dollar - and may further weaken if recession leads the Fed to lower interest rates
(2) Large inventory drops - another 7.4 million barrels this week
(3) Gasoline below average inventories
(4) Growing risk premium in the Middle East - sanctions on Iran and the oil price drops $4?
(5) OPEC cuts

On the bearish side we have:

(1) Mild weather
(2) Large natural gas inventories
(3) Crude inventories still above average
(4) Low projections for demand growth; possible recession (although unclear whether this will happen and how oil demand will be affected)
(5) Slightly high inflation might drive interest rate hike?
(6) OPEC spare capacity?

I guess I'm just surprised that the recent action in the Mideast hasn't built back in ~$10 risk premium - one would think that given the risk there that very high inventories would be desirable.

[cube]

Maybe a bit early but happy new years everybody.

Aside from that I don't have much else to say......see you next year.

[MrBill]

gt1370a wrote:
$this->bbcode_second_pass_quote('', 'I') guess I'm just surprised that the recent action in the Mideast hasn't built back in ~$10 risk premium - one would think that given the risk there that very high inventories would be desirable.

[gt1370a]

$this->bbcode_second_pass_quote('MrBill', '[')b]Basically, WHY does a country that does NOT even have one nuclear reactor need to enrich nuclear fuel on an industrial scale? It is MUCH cheaper to just buy the needed fuel on the open market from a willing supplier, like Russia. But that IS the point. Iran does NOT need nuclear fuel because they do NOT have any nuclear power plants. They WANT to tinker with weapon quality plutonium or whatever it is that makes bombs go boom. It is quite plain and simple and anyone that does not get it by now is an idiot!

[MrBill]

Wow, keeping me busy right up to the last minute here! Oh well, I am off for the first week of January in any case. My year is all but over.

Well, in the summer of 2005 inventories kept increasing everyweek as well while prices continued to climb on potential geo-political supply concerns that never materialized and some destructive hurricanes that did.

I think some of the wall of speculative capital invested into commodities was positioning for a repeat of the summer of 2005, and when it did not happen, once some of those longs started selling to lock-in profits, they found out that there were not that many natural buyers. And all of a sudden that $20 risk premium looked like far too much.

I do not get any special reports like Platt's unfortunately, and due to Chinese Walls my own company also does not supply me with any detailed supply & demand forecasts. Therefore, I rely pretty much on public information like anyone else. However, my feeling from looking at the forward curve is that the market was in a very strong contango indicating that physical markets were over-supplied. The forwards were trading at or over the full cost of carry.

That tells me there was no shortage and why likely the natural buyers were not there on the way down. They also knew there was no physical shortage. In otherwords it was speculative buying by the paper traders. Once that reversed it was into a vacuum. Think Amaranth and other funds who's long bets all of a sudden looked a lot less attractive. We had inter-month spreads of $1.50-2.00, and as wide as $4.00, between the first and second months. So front months had a lot of long speculation in them, but physical buyers were in no hurry to take delivery.

The key was Iran. What I suspect, and this has been confirmed to me after the fact from a British colleague of mine in Germany, that the decision to invade Iran, or make a preventive strike against their nuclear activities, was on the table for discussion. I think that the heads of major investment banks either have close personal contacts or friends in government as well. No one is going to aggressively short the market if an invasion is imminent.

Apparently it was discussed and the powers that be decided against it. And once the word got out about it, formally or informally, the price of crude collapsed like a house of cards. Once they got the unofficial green light, I am sure that the investment banks and brokers aggressively sold into any strength, while the hedge funds tried to lock-in gains. The buyers would have been the slow and dimwitted or the contrarians looking for the bounce that never came.

Now the reason I suspect this is how it happened is because my friend also spoke to one of his buddies that works in the government in the UK and that is what he confirmed. It was on the table, talked about and then a decision was made not to strike Iran. I assume they asked Isreal also not to provoke an incident. All it would take is a few phone calls between ex-college roommates in New York and Washington and the word would get around pretty quickly. And it did. The largest move in 16-years. Hardly a coincidence in my opinion.

As for me, I was simply gutted. My own models were 100% short. I sold several times and got stopped out. Then it would be down $1.50 or $2.00. I would wait for the bounce that never came, and then it would drop another $1.50 or $2.00, until I was sure I had missed the move lower. And then down it would go again. I felt like I was sleeping through history? In the end, I made peanuts when my models should have ensured I made buckets! In trading, he who hesitates is lost!

That is why I have pretty much been on the sidelines this past two months. One, I was away, and two, I did not have any strong ideas. My models were sending mixed signals as well. So I just sat on my hands waiting for some sort of after the fall pattern to emerge. And here we are. Year-end and it is $60.25.

Fortunately for me, energy company shares have outperformed crude futures. The S&P energy index is off its highs, but still a strong close for the year. Russian shares are up even more since their swan dive in August and September. So it was not a bad year, it just could have been a lot sweeter had I followed my models and shorted the market in size up in the mid-$70s!

So I hope that helps a little? I am not changing any positions heading into the new year. I am still long my energy companies. And I sold dollars and bought some more euros today. Just in case. As it is I am off for the first week of January. Back around the 8th after the Orthodox holidays.

I would just like to wish everyone a healthy and prosperous new year, and thank you for all your comments this year. Good luck and God bless. See you next year!

[cube]

This will be my last post for this thread.

My next post will be in --- "Trader's Corner 2007"



WOW...what a difference. You guys may remember exactly 1 year ago on this day...crude prices were rocketing higher on the mere mention of the word Iran. As of this writing it has tumbled $2 from yesterday...ouch!

Is this a "hint" of what the general mood for the rest of this year will be like? Only time will tell.

I guess we're starting a tradition here at PO....It's time for another poll:

what do you think the price of crude will be in December?

[mefistofeles]

$this->bbcode_second_pass_quote('', 'W')OW...what a difference.

[MrBill]

Welcome to 2007 everyone! Wow, what a dump we have seen in the first week of the year!! Totally unexpected on my behalf. Both my calls - not to sell my energy stocks, and to stock up on euros early - were both off the mark. Oh well, it is a new year!

I am going to let this thread die and start Trader's Corner 2007 now. But first just to recap the voting for 2006.

The closing price was around $61.00 for year end. About 3% said around $60, so I guess those are the winners. 11% said between $60 - 65, which is where it did trade in the last month of the year. The 3% that said between $50 - 55 were just a week too early. Here we are! Fully 84% who guessed between $70 - 80 were caught up in the bull rally. Hats off as we did touch $78.40 on the way up, but the hype could not sustain the rally. The year end close more closely reflected supply & demand fundamentals. Mind you weather, as always, played an important role in the weaker close. Thank you to everyone for participating. Cheers.

[mefistofeles]

$this->bbcode_second_pass_quote('', 'W')elcome to 2007 everyone! Wow, what a dump we have seen in the first week of the year!! Totally unexpected on my behalf. Both my calls - not to sell my energy stocks, and to stock up on euros early - were both off the mark. Oh well, it is a new year!