March 2012 - Money Morning - Only the News You Can Profit From
Oil and Gasoline: A Tale of Two Prices
A number of you have contacted me asking some variation of the same question.
How can the price of oil be declining, yet the price of gasoline remain so high?
At close of trade yesterday, the West Texas Intermediate (WTI) benchmark futures crude oil contract for the near out month in NYMEX trade had declined 2.6% for the week and 4% for the month.
However, the same contract for RBOB (Reformulated Blendstock for Oxygenate Blending) – the NYMEX gasoline futures standard – was up 1.6% for the week and 4.2% for the month.
Normally, we expect that movements in the crude oil price, as the single-largest component in oil product prices, would pretty much dictate where gasoline is headed.
And in normal circumstances, that is usually the case.
Welcome to the Unusual Pricing Case
The current gasoline phenomenon results from several factors:
- Refinery capacity utilization;
- The continuing outsized spread between WTI and Brent oil prices in London; and
- The mix of increasing unconventional domestic oil flow (shale, heavy, tight oils produced in the U.S., synthetic oil from oil sands coming down from Canada); and
As to the last point, the unconventional production actually adds cost to the extraction-upgrading-processing sequence.
Put simply, while we are using more of this new "replacement oil" than we ever have (a good thing for those concerned about reliance on imports from abroad), its use is also adding to the price at the pump.
Of greater importance, however, is the second element: the WTI-Brent pricing environment.
We have talked about this spread on a number of previous occasions. Brent is again selling higher by about 20% to the price of WTI.
That's important when factoring in the actual cost of the feeder stock for refineries.
While the WTI price has been going down (until this morning), Brent has been more subdued. In fact, the Brent price is down only 0.5% over the past month and is slightly higher (also about 0.5%) over the past week.
This year, the U.S. market is likely to be importing on average about 45% to 47% of what it needs on a daily basis. Only a few years ago, that market was dependent on imports for two-thirds of its requirements.
Additionally, American domestic daily production will be close to 10 million barrels, a level not seen since the mid-1990s. That is a result of the acceleration in unconventional extractions in places like the Bakken in North Dakota, the Monterey in California, and Eagle Ford in Texas, as well as for prospects for new basins like the Utica in eastern Ohio.
There's another important question that needs to be asked at this point.
The Banks Win, Again
Finally, some well-deserved help for beleaguered monster banks is on its way.
Make that, well on its way.
Those poor big banks accidently and inadvertently got caught up making so many easy loans to deserving, hard-up borrowers, who wanted to buy overpriced dream homes, and a few million other folks who deserved two homes and McMansions to keep up with the Joneses (you know the Joneses… most of them were "friends of Angelo").
But now, at last, the banks are making profits again.
After suffering the indignity of insolvency and near collapse for all their hard work, the New Samaritans are still being haunted by their generosity, as regulators hound them into settlement submission, merely for doing God's work.
So, what's the good news?
The second quarter may be a good one for the three biggest servicer banks, namely Wells Fargo (NYSE:WFC), Bank of America (NYSE:BAC), and – the little bank that could, run by that kid named Jamie – JPMorgan Chase (NYSE:JPM).
What's strange is that these do-gooders are being helped by some of the same government folks who are still attacking them in public venues where voters hang their hats.
What's not strange is that tons of underwater homebuyers, who are drowning in debt on dwellings whose prices have fallen 30% to 40%, aren't blaming banks and are running to their rescue.
Okay, maybe they're not running, maybe it's more that they're being corralled, like sheep. But either way, they are helping banks fatten their profits pools (make that bonus pools) again.
They're repaying the banks' favor of giving them loans in the first place by coming (more like being forced) back to the banks to get refinanced on better terms.
But they're not doing it on their own. The banks have a partner helping to round up their old customers and corral them into the breeding profits barn.
That Partner is HARP 2.0
The original Home Affordable Refinance Program, which was launched in April 2009, failed miserably (because there was nothing in it for banks). But the powers that be (the banks… DUH) harped for a new HARP, and they got it last November.
The new program is known as HARP 2.0 (that's because it's twice as profitable for the big banks that sunk the economy and the world under Housing Bubblemania 1.0).
Okay, enough sarcasm; let me slice and dice this succinctly for you.
Obamacare in the Balance: Key Takeaways from the Affordable Health Care Act Hearings
Three fast-paced days was all it took for nine justices to grill advocates arguing for and against the Affordable Care Act – better known as Obamacare.
A decision is expected in late June, just months before 2012 presidential elections.
Although it is notoriously difficult to predict U.S. Supreme Court decisions purely based on their questioning, here are my takeaways from these momentous three days.
U.S. Housing Market Forecast: How to Profit as Real Estate Rebounds
It was the most atrocious bubble in U.S. history, pushing tens of millions of Americans into financial misery.
Even today, the last of the lawsuits have yet to be filed.
But five years later it's finally coming back.
The housing market has bottomed and there's money to be made on its return.
Are High Taxes About to Make Silicon Valley Pack Up and Leave?
California Governor Jerry Brown is at it again.
He's cut a deal with the teachers' unions that would take the top rate of state income tax from 10.3% to 13.3%.
If passed on the November ballot, that would increase taxes on the top tier by a hefty 29%.
Since that would be the highest rate in the nation, it begs the question: How high would taxes have to go before Silicon Valley's zillionaires decided to make the great escape?
It's a very important question considering the condition of California's state budget.
After all, the Facebook IPO alone is expected to produce $2.5 billion in state tax revenue over the next five years. What if high tax rates set in motion the law of unintended consequences?
Like in the late 1990s when dot-com revenues enabled the state to go on a massive spending spree.
Not long after the tech bubble burst, the sudden budget crunch that followed in 2001-02 caused Governor Gray Davis to be recalled in a referendum.
It's a different set up this time, but the results could be the same.
Before Making That 2011 IRA Contribution, Make Sure Your Pension Plan Assets are Safe
The middle of April is fast approaching and everyone knows what that means – time to get those 2011 income tax returns filled out and filed.
What few people realize is that they also have until Monday, April 16, to open a new individual retirement account (IRA) for 2011 or make your annual contribution to an existing one.
With the limit for contributions this year set at $5,000 – or $6,000 for those over age 50 – putting cash in a regular or Roth IRA can shave a big chunk off your personal tax bill.
In addition, this year you may also be eligible for a special "Savers Credit" of up to $1,000 for contributions to either an IRA or an employer-sponsored retirement plan.
I like getting added deductions or credits for putting my money in my retirement plan, if only because I'm a big fan of giving the government the least amount of cash I can legally get away with.
I can't, however, say whether such contributions are right for you – your accountant or tax adviser will have to help you with that decision.
What I can say is this…
If you do put money in a pension plan, whether self-directed through a custodial agent or via an employer-sponsored plan, make sure you know exactly where your money is going – and who's really managing it once it gets there.
Secret Chinese "Coup" Could Send These Stocks Higher
Reports of a coup in the past week have startled many long-time China watchers.
Of course, we've seen next to nothing in the Western media about it despite the fact that what is going on behind the scenes now may be the biggest political play we've seen in decades.
Not to mention a massive opportunity for Money Morning readers.
Call it a "coup" or a "power play" if you like. Either way, recent events in China suggest the Chinese Communist Party is badly fractured at the very top.
Former Ambassador Jon Huntsman notes that the split may be the most significant since the tumultuous Tiananmen Square era – a sentiment I share based on more than 20 years of involvement with Chinese markets.
Why talk about Chinese politics here? For three good reasons…
The power play we've just witnessed – albeit from the fringes – is likely to result in a stronger "order" in China, along with increased spending and a big global expansion from China in the months ahead.
Let me explain.
Behind the Scenes in the Chinese Coup
Western media widely reported that Premier Wen Jiabao, China's No.2, unceremoniously and very publicly sacked rising star Bo Xilai on March 14.
But nobody went any further, nor did they bother to understand that what's happening behind the scenes is the real news.
Not only is the way in which this was handled uncharacteristically public, but the sacking itself is unusual. Bo is the son of a revolutionary hero and wildly popular for his anti-corruption initiatives in Chongqing, one of China's largest megalopolises.
Bo was known to be angling for a seat on China's standing nine-person politburo working committee, which would make him one of the most powerful men in China. That's not a problem in and of itself, as many people ultimately want to be on that committee and spend their entire lives working toward that goal.
However, Bo is the only politician to move his agenda independently of Beijing's ruling elite in nearly 40 years. That makes him – or made him — dangerous because he single-handedly threatened the political status quo.
To call his rise to prominence divisive is an understatement.
Premier Wen Jiabao voted against Bo's promotion to vice premier. President Hu Jintao is rumored to dislike his money-grubbing ways.
Yet, none other than Jiang Zemin, the former leader of the Communist Party and the real No.2 in the CCP's Standing Committee, has helped further Bo Xilai's career as has Zhou Yongkang, who is also a Standing Committee member and hardliner.
Fast forward to March 19.
That's when reports of gunfire, military vehicles and plainclothes police swarming the central government leadership compound of Zhongnanhai in Beijing surfaced.
Retail Stocks: Best Buy (NYSE: BBY) Not a Good "Buy" At All
After years of slipping sales and struggling performance among retail stocks, Best Buy Co Inc. (NYSE: BBY) has decided to revamp — a long overdue move to hold on to customers and investors.
Best Buy announced today (Thursday) that it would close 50 stores and redesign its big box business model to compete with online retailers.
Best Buy, the world's largest consumer electronics retailer, has suffered six straight quarterly sales declines at stores open at least 14 months. It also reported Thursday a fourth-quarter loss of $1.7 billion.
The news triggered Best Buy shares to slide almost 10% in early morning trading.
Best Buy's initiative to finally update its business model and adapt to a changed retailing landscape could be too late to salvage sinking investor confidence, signaled by today's selloff.
"We are concerned that a turnaround of this magnitude will further weaken Best Buy and increasingly distance it from its vendor partners and core customers in an already very precarious environment," Oppenheimer analyst Brian Nagel told MarketWatch.
How to Beat High Gas Prices
Are high gas prices giving you road rage? Well, wait "til you see what's coming.
Prices at the pump currently average $3.89 for a gallon of regular unleaded, up 30 cents in the last month.
But it's already over $4.00 per gallon in many cities – more than double the $1.85 a gallon that prevailed when President Barack Obama took office.
And most analysts are predicting gas prices will go much higher.
The national average gas price should reach $4.25 by the end of April as refiners shift over to more expensive summer blends, Tom Kloza of the Oil Price Information Service told the Wall Street Journal.
As prices shoot through the previous high-water mark of $4.11 in 2008, filling your tank could soon hit you for $75-$90.
And the sky's the limit if Iran decides to block the Strait of Hormuz in retaliation for economic sanctions that go into effect in June.
The Truth About $6 Gas, $200 Oil and the Quest for Energy Independence
No one needs to tell the average American about the impact of oil and gas prices. If they don't feel it in their wallets every day, they hear about it on the news every night.
But surprisingly, amid all the rhetoric, there have been no real answers to some of the key questions driving the energy debate… until now.
Is President Obama truly responsible for high gas prices, and can his opponents really bring them back down?
What role has Federal Reserve Chairman Ben Bernanke's loose monetary policy played in soaring energy costs?
Is more domestic drilling the answer?
Renowned energy expert Dr. Kent Moors answers all of these questions – and more – below.
Dr. Moors, an adviser to six of the world's top 10 oil companies and a consultant to governments around the world, also talks about the effect political turmoil in the Middle East could have on energy prices in the immediate term and how North America will gain energy independence in 15-20 years.
Here's what else Moors – a bona-fide energy expert – had to say…
Dr. Moors on Gas Prices
Can a U.S. President actually impact gas prices- at least enough to get gasoline back to $2.50 a gallon? Or is this just talk? I don't know whom to believe anymore…