Monday July 21, 2008

1) Oil futures: Know when to hold 'em

By Steve Hargreaves, CNNMoney.com staff writer

Last Updated: July 17, 2008: 5:35 PM EDT

NEW YORK (CNNMoney.com) -- In the last three days oil prices have fallen by roughly $10 a barrel. Many analysts say slackening demand, or the threat of it, is the main culprit.

But another force could be at work in the background. Last week various analysts said there was talk that Mexico, the world's fifth largest oil producer, was hedging its bets - the country was said to be signing contracts to deliver oil several years into the future at today's prices. Essentially, it was betting oil prices have peaked.

"This is a smart move," said Phil Flynn, senior market analyst at Alaron Trading in Chicago, who also thinks there's a good chance prices have peaked. "If I were an oil producer, I'd want to lock in these prices."

Analysts say if other oil producers follow suit and lock in future contracts that could be one thing that would cause oil prices to fall, far and fast.

But it's hard to tell if that's happening because information about who is buying what is kept private for competitive reasons.

"I don't know who else is doing it," said Nauman Barakat, an energy trader at Macquarie Futures, and one of the traders who mentioned the Mexico news in a research note. "There's been a lot of talk, but it's kept very confidential."

One analyst, speaking on background only, said he had confirmed Mexico was locking in futures contracts. He said it was being done at the behest of the Mexican government, eager to balance a long-term budget, rather than a bet by state oil company PEMEX, that prices will fall.

But could Mexico's move inspire similar steps from other oil producers, and cause oil prices to fall further?

"Absolutely," said Neal Dingmann, senior energy analyst at Dahlman Rose & Co., a New York-based energy investment boutique. "It could create a top in [oil prices] in the near term."

Dingmann said about 50% of the production from the firms he covers - mostly small firms - has been sold for future delivery at today's prices.

Why isn't everyone doing it?

The selling from Mexico also raises another question: Oil companies and OPEC have long said oil prices are too high - driven by Wall Street speculators and a falling dollar rather than supply and demand.

So if they really think prices are too high, why aren't they all locking in contracts now?

For starters, it's believed some heavyweights, like Saudi Arabia and Exxon Mobil, don't play the futures market at all - they don't get into the complicated dance of buying and selling futures contracts on NYMEX or any other markets.

In vastly simplified terms, they take whatever price is being offered when their tankers pull into port.

Second, there aren't enough takers for these types of contracts. There simply aren't enough people who are willing to pay $135 dollar for a barrel of oil delivered in 2013, said Fadel Gheit, a senior energy analyst at Oppenheimer.

"Exxon produces 1.2 billion barrels of oil a year," said Gheit. If someone locked in all that production for five years out at today's prices, and crude fell 20%, "it would be a disaster," he said.

For Saudi Arabia and other OPEC counties, non-OPEC oil producers like PEMEX locking in future contracts is a problem.

When the price of oil falls OPEC likes to pump less oil to keep prices up. If producers sign long term contracts, they're obligated to pump that oil making it more difficult for OPEC to control prices.

"You get stuck with this extra production that's out there," said John Kilduff, an energy analyst at MF Global in New York. "Then OPEC has to reduce market share just to maintain price."

On the New York Mercantile Exchange, things are looking fairly balanced for the first time in a long time.

Big commercial users of oil, like refineries, trucking companies and airlines, are holding just slightly more "short" contracts - contracts where they are betting the price of oil will fall - than "long" contracts, according to Addison Armstrong, director of market research at Tradition Energy Futures, an energy brokerage based in Stamford, Conn.

Previously, commercial users had overwhelmingly been betting prices would fall, and much of the runup in oil prices over the last few months was a result of them selling or closing out those short contracts and buying long ones, said Armstrong.

Meanwhile, non-commercial users - like banks and pension funds - are holding just slightly more long positions. The market, said Addison, is pretty well balanced.

However, that doesn't mean we won't see more of the huge price swings of the last few days, swings that have come to characterize the oil market of late.

"I wouldn't bet on less volatility," said Armstrong.

2) Commentary by David Zwebner, CEO of CommStock Trading 

U.S. Economy
Here is a hint of how bad things are - Citigroup lost $2.5 billion in the second quarter, but investors are relieved (?) that it was not as bad as analysts expected.

Grains
Dow Jones Newswires reported that Egypt bought 145,000 tons of wheat - 60,000 tons from Russia, 25,000 tons from Ukraine, and 60,000 tons from either Canada or the U.S. December wheat closed down 5.25 cents at $8.285.

December corn dropped 21.5 cents to $6.285, the lowest close in seven weeks, with favorable growing conditions in the Midwest.

Lumber
September lumber was up $1.10 at $246.60, still helped a little by yesterday's reported 9% gain in June's housing starts.

Cocoa
The National Confectioners Association said that the U.S. cocoa grind totaled 80,415 tons in the second quarter, down 16% from a year ago. September cocoa fell $127 to $2,799, the lowest close in six weeks, also blamed on fund selling.

Orange juice
September orange juice was up 1.30 cents to $1.2610 ahead of next Thursday's USDA orange juice outlook report. The Asian citrus psyllid remains a threat to California's orange groves.

Currencies
European Central Bank President Trichet said that he expects weak growth in the second and third quarters of 2008, but also anticipates a return to moderate growth in 2009. The September euro closed up .0026 at $1.5796.

Statistics Canada said that the composite index of leading indicators was virtually unchanged in June. In May, wholesale sales were up 1.6% from the previous month and up 2.9% from a year ago, stronger than expected. The September Canadian dollar was up .03 at 99.30.

The U.K.'s Office for National Statistics reported a budget deficit of 24.4 billion pounds in the April to June quarter, more than expected and the largest quarterly deficit since records began in 1946.

David Zwebner, CEO
CommStock Trading Ltd.
Tel: +972-(0)2 624-4963
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www.ecommstock.com

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4) Closing Prices for Friday, July 18, 2008 

Amidex: Amidex35 (Class No Load Shares), $15.39; Index, 2226.59, Daily Change,-2.02%; “A” Shares NAV, $11.99.

Global Asset Management: Capital Appreciation, $258.99; Composite Absolute Return, $912.10; Diversity, $741.05; GAMCO, $861.56; Interest Trend, $260.12; Trading IV-US$ Class, $150.26; US$ Special Bond Fund, $442.32.

Invesco: Asian Equity Core, $4.65; Bond, $25.93; Emerging Markets Bond, $19.74; European Bond, EUR 4.2576; Gilt, GBP 11.76; Global High Income, $11.60; Japanese Equity Core, $1.36; UK Equity, GBP 4.80. 

JPMorgan Fleming: JF Eastern Smaller Co., $99.24; JF Japan, JPY 16,769; JF Japan Equity, $12.72;

JF Japan OTC, JPY 1,038; JF Japan Smaller Companies, JPY 37,690; JF Japan Technology, JPY 47,554;  JF Korea, $38.22; Pacific Securities, $192.20; Pacific Smaller Companies $22.19; Global Bond & Currency, $22.18;

JF America, $42.67; JF Europe, $46.38; JF Germany, EUR 20.39; JF Global Equity, $39.88.

PCP: North America, $12.16; Europe, $19.40; Emerging Markets, $18.37; Balanced, $8.50; Aggressive, $7.21.                                                                                      

Platinum (updated once a month – June 2008 Prices): All Weather, $127.43; Equity Plus, TBA; Prot. Equity Plus, TBA; Cap. Prot. Income Plus, TBA; Cap. Prot. Income Plus A, TBA.

Scottish Provident: Adventurous 1, GBP 2.723; Balanced 1, GBP 2.264; USD Adventurous 1, $2.212;

USD Balanced 1, $2.161; USD Cautious 1, $2.055; For Preference: Baring GUF Eastern Europe, $154.99; Fidelity Funds International, $34.660; Invesco Asian Equity Core, $4.660.

CommStock Trading Ltd
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Jerusalem 91077
Tel: +972-2-6244963
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