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The buyout of GI
At a substantial premium could forecast other mergers and buyout.
At a substantial premium could forecast other mergers and buyout.
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Worth watching
ALJ - pulled back to the 20-day EMA, from where it's been bouncing higher.Comment
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IWOV overbought?
Very extended here (short-term) and a bearish candlestick so far today. Completing the fifth wave up (could be a truncated fifth) and it looks ripe for a pullback to the 10.25 range.Comment
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UCTT starting to move
Weekly chart shows an ascending triangle. Volume is good.Comment
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Can hedge fund performance be replicated?
Comment
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Worth watching
CVO - has been holding support quite nicely every time it pulls back to its 20-day EMA.Comment
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Long IWOV
For a day or swing trade.Comment
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GIGM b/o
On very heavy volume. Highest high since 2000. If/when it gets above 12, the IBD crowd is going to be all over this one.Comment
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GIGM news
On Briefing.com:
With GIGM making a new 5-year high today, we thought we'd update investors on the name. GIGM is a Taiwan-based provider of online entertainment and broadband services. It develops software for online gaming, operates a casual game portal, and provides broadband Internet access in Taiwan. All of the co's revenues are generated outside the US... Since our last GIGM update on Apr 28, the co has reported two quarters of solid growth, with EPS up 633% & 200% YoY and revs up 92% & 82% in Q2 & Q1, respectively. Its most recent earnings (Q2) were reported on Aug 8, and the co attributed the solid results to continued growth in poker software products and margin expansion in all business units. Revenues in the poker and traditional gaming software business (55% of total revs) rose 124% YoY and 32% sequentially. The co said it remains excited about the prospects for real-money MahJong and other Asian cash-wager software which will start to roll-out this quarter... In early May GIGM announced an expansion of its China market reach through a strategic investment in online casual game company T2CN Holding, and on May 16 the co announced the sale of its legacy A.D.S.L. Internet service provider business as part of its ongoing restructuring to focus on the high-margin, high-growth online entertainment sector. While the co has said Q3 is traditionally a period of decreased Internet activity, mgmt expects moderate rev growth in their poker software product will largely offset the impact of seasonality on Q3 revenues for the entertainment software business and continue to support good growth going forward... The stock has been chopping around for the past four months in a range of $6.18-$10.78 and today broke above its range high to set a new 5-year high. Although the stock looks extended today, GIGM is a name to watch for continued momentum, especially if it closes above the $10.78 level. Mkt cap: $539 mln, float: 34.7 mln, avg daily volume: 1.1 mln shares. (PROFX)Comment
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Worth watching today
MTW - tight daily range the past few days.
TPX - bearosh divergence between price and indicators on the daily chart.
WRLD - tight daily range the past few days. Disclosure - I own this one.Comment
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Morgan Stanley on oil
Global: Oil Update: Easing Has Started, but Mind Short-Term Risks
Eric Chaney (London) and Richard Berner (New York)
The decline of crude oil and refined products has accelerated over the past few days: One month ago, Brent for delivery in September was priced at $77.6/bl. As we write this note, Brent for immediate delivery is priced $14 lower. Oil markets are so volatile that this could be just another dip in what is fundamentally a bull market, as has happened systematically since early 2004. We take a different view. We think that the current correction, although probably calling for some reversion in the winter season, is the beginning of a structural change in the market that should bring crude quotes down to around $50 in the next two-to-three years, if not significantly lower.
Earlier this year, as the global economy was accelerating, the lack of spare capacity in the global supply chain of oil products convinced us that markets would ask for a heftier risk premium and that prices were more likely to rise than to decline. In our oil price update of April 21, we pencilled in a peak at $80/bl in August-September, during the hurricane season in the Gulf of Mexico. On August 8, the price of dated Brent reached $79/bl, after BP shut down the Prudhoe Bay field in Alaska. Since then, neither spot nor future markets has revisited the $80 region. Not that geopolitical risks have suddenly vanished: Not only has Iran continued and is still continuing to enrich uranium but, in addition, the tension between Hezbollah militias and Israel at the Lebanese border turned into a full-scale war. In our view, the message from the markets is two-fold:
1. On the demand side, the main piece of news is the cooling of the US housing market, inasmuch as it could foreshadow a significant slowdown in the largest oil importer in the world;
2. On the supply side, the geopolitical risk premium associated with risks of supply disruptions that has built up since 2004 is now large enough to cope with potentially dangerous events in the Middle East.
Although risks remain, we now think that the $80 peak we had called is indeed the peak and that the ebb of crude oil and refined products prices has started. While risks are probably tilted to the upside over the next six months, as we enter the heating season in the Northern hemisphere, with a global economy still growing at a rapid pace, we have marginally revised down our baseline price trajectory, by 8.7% and 12.2% for 3Q and 4Q 2006, and by 4.3% for next year. We feel vindicated by market developments in our medium-term view, i.e., crude quotes ebbing toward $50/bl in 2008, if not even considerably lower, as we will describe in one of our alternative scenarios.
Hurricane threat is serious but less than anticipated
In our April oil price forecast update, we thought that hurricane-induced supply shocks to the US Gulf Coast energy complex would again threaten energy supplies. After all, US hurricane forecasters in May were calling for 4-6 major hurricanes (Category 3 or higher, with wind speeds over 111 mph) this season. And the memory of 2005’s record-breaking season — with four Category 5 storms, including Katrina and Rita — still lingered for market participants. Moreover, even a year after Katrina’s and Rita’s devastation, the industry has not fully restored Gulf oil and gas production. Correspondingly, we believed that even if the forecast fell short, the hurricane threat alone, combined with tight energy markets, would put a strong bid under refined product and crude quotes through the third quarter.
While the hurricane threat seems to have faded, it is premature to sound the all-clear in our view. To be sure, forecasters earlier in August downgraded the number of major hurricanes to 3-4, because water temperatures cooled somewhat, and there is no upper-level ridge pattern over the eastern US and western Atlantic to incubate an active season, as occurred in 2003-2005. Echoing those conditions, no hurricanes of any magnitude have yet appeared this season. But that does not mean they won’t; September and October are still prime hurricane months and storms can materialize in a few days, as Ernesto and Florence confirm. As a result, there is still a risk that supply shocks — or the fear of them — will lift prices from current levels.
The rise and the fall of crack spreads in the US
In our last update, we also focused on the dynamics of refined products, especially gasoline, in the US market. Refinery operators raised seasonal maintenance in the spring by as much as 20% over normal to finally catch up with downtime deferred after Hurricanes Katrina and Rita, and as they modified operations for new environmental regulations. That drew refined product inventories down to record lows in advance of the summer driving season. Several factors reduced supplies, snarled production at some refineries and put upward pressure on pump prices: the phase-in of Tier 2 gasoline requirements in the US to cut sulfur content that began on January 1; the renewable fuels mandate; the introduction of ultra-low-sulfur diesel fuel starting in the summer of this year; and the phasing out of methyl tertiary butyl ether (MTBE) and increased use of ethanol. As a result, crack spreads widened to as much as $22/bbl. and pump prices rose above $3/gallon by early August.
That was then. With the completion of refinery maintenance, the end of the summer driving season approaching, and the market having finished absorbing some of the dislocations from the environmental change, wholesale gasoline quotes have plunged more than 50 cents from their early August peak in the past month. Pump prices, as they typically do, are declining with a lag, having fallen more than 30 cents over the past four weeks. Barring further shocks, the weakness in product prices could put further pressure on crude quotes in the very short term, in our view.
The meaning of the recent ‘bear steepening’
However, our baseline scenario reflects the fact that crude and product markets are still dangerously tight, the hurricane season is far from over, and the winter heating season lies ahead. Interestingly, the recent decline in spot and short-term contracts has increased the slope of the future curve, enhancing the contango that has characterized the future curve since the beginning of the rally in 2004. The Brent future curve was practically flat when the spot price peaked out close to $80, before getting steeper, as short-term futures dipped. This was the mirror image of the ‘bull steepening’ observed earlier this year, when the slope of the curve increased, without significant changes at its short end. Our interpretation is that, this time, the markets do not yet anticipate a structural change in the relative dynamics of supply and demand in the next 8-12 months: inventories might look high in the OECD area compared to 2004, but this only offsets the fact that risks of supply disruption are also higher than they were two years ago.
Demand may be underestimated (the ‘missing barrels’)
Another reason, more analytical, makes us cautious: on the latest data gathered by the International Energy Agency (IEA), demand from OECD countries for oil products declined by 1% in the first half of this year, compared to one year ago. According to the IEA, this was enough to contain global demand significantly, despite strong consumption in non-OECD countries, particularly from Asia and the Middle East. For this year, the IEA is still betting on a modest 1.4% increase (1.2 mb/d). We are skeptical. Past experience has shown that reporting countries, especially non-OECD countries, often underestimate their own domestic demand, sometime by very large amounts. The paradox is striking: global GDP growth is likely to reach 5% this year, a speed close to the 30-year record rate recorded in 2004 (5.3%), and yet demand for crude oil would be as weak as it had been in years of much weaker GDP growth such as 2002 and 2003. Our demand equation, which dynamically links GDP growth and changes in real crude price to demand for oil, would rather suggest a 2.5 mb/d increase (+3.1%). While we easily concede that some structural changes may be underway, such as stronger conservation in OECD countries in reaction to permanently higher prices, data are still fragile and likely to be biased by under-reporting (the infamous ‘missing barrels’). Hence, we suspect that demand is actually higher than currently estimated and forecasted. Needless to say, stronger demand implies upside risks to prices.
The ‘middle distillates conundrum’ has not been solved
The ‘middle distillate conundrum’ we had stressed in our last note, namely the mismatch between marginal supply (heavy sour crude) and marginal demand (middle distillates such as diesel and jet fuel) is still making the market more imbalanced than overall numbers would suggest. To put it simply, most of the existing refinery capacity has a low middle distillate yield (below 50%, according to our consultant Bjorn Dingstor from Norwegian Energy), so that, at the margin, two barrels of crude are needed to produce one barrel of highly wanted middle distillates, the rest being either high grade products (gasoline) or heavy fuel. High yield technologies such as hydro crackers do exist, but they are very expensive and their assembly takes years. Things are likely to change in the coming years, not in the coming months.
Conservation is accelerating
A few years ago, it would have been unimaginable that a major oil company would spend millions of dollars in an advertising campaign on the theme of conservation. This is now a reality, as readers may see in their favorite financial newspapers. This is no coincidence, we believe. While in the short term, demand is inelastic to prices, this is not true in the long run. Looking at annual averages, the real price of crude oil has tripled since 1999. By its magnitude, this shock is comparable to the 1979-1981 episode, but, this time, the increase was spread over seven years. Such a time span easily qualifies as ‘long run’, we think. Whether we call it conservation or price elasticity or capital to energy substitution (substituting expensive but energy-efficient technologies for cheap but energy-intensive ones), the result is the same: oil consumption per unit of GDP is now declining faster than it did during the period of cheap oil prices that followed the collapse of crude prices in 1986. The higher the price of energy relative to the cost of conservation, the stronger the incentive to be more energy-efficient. The important point here is that substitution fundamentally differs from the direct impact of higher energy prices on GDP growth. While the latter is negative but reversible (permanent oil price shocks do not have a permanent effect on GDP), the former is neutral for growth and irreversible. Despite the reservations we have made on demand data, it remains true that oil demand from OECD countries has started to slow, if not decline, despite robust GDP growth. In the US, energy consumption per unit of real GDP has declined faster in 2005 and 2006 (on our estimates) than in previous years, a pattern similar to the post 1979-1980 oil price shock.
The case of Europe, where GDP growth has sharply accelerated so far this year but where consumption of refined products has stagnated, is also striking. Going forward, slower global growth — our economics team currently anticipates 4.1% GDP growth next year, almost one full point lower than this year — will also contribute to reduce oil demand. Overall, actual demand is likely to be even lower than the 1.7 mb/d suggested by our equation.
The two-to-three year view: crude at $50 if not lower
On the supply side, our oil analysts confirm that 1) the supply of light sweet crude is due to increase by around 1 mb/d each year in 2007 and 2008, and 2) that overall refinery capacity should increase in 2007 and accelerate in 2008. In particular, the incremental gap between demand and supply of light products should shrink further over the next two years (see Easy Money Made, Douglas T. Terreson and team, September 5, 2006). Our end-2008 $50/bl target fits perfectly with our analysts’ estimate for the ‘normalized’ price of crude.
From the hot to the ultra-cool scenario
Against a backdrop of high uncertainties, both geopolitical and economic, we have kept our main alternative scenarios practically unchanged. With UN sanctions against Iran looming, we continue to see the main upside risk to crude price as triggered by a large supply disruption. In our hot scenario, we assume that Iran exports would be temporarily suspended, OPEC and non-OPEC producers having too little spare capacity to fully compensate for the loss of Iranian exports. Crude quotes would rapidly rise above $100/bl in our view, and would stay elevated for some time, before the unavoidable slowdown of the global economy would take its toll on oil demand and therefore on prices. Our ‘cool’ scenario is justified by the uncertainties on the nature of the slowdown in the US and of its consequences on Asian economies. Since the US and China are the most important marginal importers, the impact of a synchronized slowdown — not our baseline macroeconomic scenario — would probably cut prices below our medium-term target.
Several pieces of news led us to consider a third alternative scenario. First, investments in alternative (to traditional oil) sources of energy, from bio-fuel in Brazil to sand oil in Canada without forgetting very deep oil, are soaring. Second and maybe even more importantly, the main bottleneck in the global supply chain, i.e., the limited capacity to refine heavy sour crude, might disappear faster than expected. In Saudi Arabia, two giants’ refineries are now firmly on track in Jubail, one by Aramco and ConocoPhillips, the other by Aramco and Total. Together, they will produce 800 kb/d from heavy grade crude oil. In India, our analyst, Vinay Jaising, expects the refining capacity to increase to 3.4 mb/d by 2009 from 2.4 mb/d currently. The bulk of the increase will be on account of two key greenfield projects:
1) Reliance Petroleum’s project to set up a 580kb/d refinery at Jamnagar, Gujarat, at an investment of approximately US$6 billion. The refinery is likely to be commissioned in 2009.
2) Essar Oil’s project to set up a 220 kb/d refinery at Jamnagar, Gujarat. This project has been under construction for some time now and is likely to be fully commissioned in January 2007.
According to press reports (Wall Street Journal, August 29), the Reliance-Chevron project could be completed before the end of 2008. We are not qualified to discuss these projections. But one thing strikes us: so far, major oil companies were very reluctant to invest in large greenfield projects, having had their fingers burnt by overly optimistic price assumptions made in the early 1980s. But several years of very high refinery margins and the emergence of new investors such as Reliance in India, or the ambition of states such as Saudi Arabia seem to have changed their views. In our ‘ultra-cool’ scenario, a combination of a longer-than-expected economic slowdown and unexpected increases in global refinery capacity could well send the price of crude where it was in 1999, in the aftermath of the Asian crisis. This is an outlier scenario, but history has taught us that the markets tend to under-estimate the reaction of economic agents to very large changes in relative prices.Comment
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Thanks for the post, Dave. I found the article very interesting!Comment
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Crude dips below the 200DMA
But that area has served as support since late 2003.
Also, regarding the article that Dave posted: can the US conserve and substitute energy more quickly than India and China will increase their energy consumption?
"energy consumption per unit of real GDP" - This is an interesting concept, but is also a specific example of the more general idea of "energy intensity."
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Many factors influence an economy's overall energy intensity. It may reflect requirements for general standards of living and weather conditions in an economy. It is not untypical for particularly cold or hot climates to require greater energy consumption in homes and workplaces for heating (furnaces, or electric heaters) or cooling (air conditioning, fans, refrigeration). A country with an advanced standard of living is more likely to have a wider prevalence of such consumer goods and thereby be impacted in its energy intensity than one with a lower standard of living.
Energy efficiency of appliances and buildings (through use of building materials and methods, such as insulation), fuel economy of vehicles, vehicular distances travelled (frequency of travel or larger geographical distances), better methods and patterns of transportation, capacities and utility of mass transit, energy rationing or conservation efforts, 'off-grid' energy sources, and stochastic economic shocks such as disruptions of energy due to natural disasters, wars, massive power outages or unexpected new sources or efficient uses of energy may all impact overall energy intensity of a nation.
Thus, a nation with mild and temperate weather, demographic patterns of work places close to home, and uses fuel efficient vehicles, supports carpools, mass transportation or walks or rides bicycles, will have a far lower energy intensity than a nation with extreme weather conditions requiring heating and cooling, long commutes, and extensive use of generally poor fuel economy vehicles.
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Here is a key graphic, GDP per Capita vs Energy Efficiency for the top (by GDP) 40 world economies:
That graphic is a snapshot created in 2005 (but with the timeframe of the underlying data uncited). I would like to see how each nation's location in that plot has changed over time. Notice that the chart shows both China and India as being more energy efficient than the US, but while being much less productive at per capita GDP. Also notice the most productive in GDP and with best energy efficiency (Hong Kong, Austria, and Switzerland). Are their economies predominantly service-oriented? Answer: yes, yes, and yes (thanks Diogenes). But the U.S. economy is also service-dominated; however, we are much LARGER in sq. miles of territory, so not surprisingly we use more energy to move our GDP around domestically.Last edited by Guest; 09-10-2006, 04:32 AM.Comment
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Hong Kong (stale data): http://en.wikipedia.org/wiki/Economy_of_Hong_KongOriginally posted by ParkTwain View Post
Edit: Better data:
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