Stocks Tumble Amid Bank Tax Proposal

President Obama’s latest economic folly — proposing to tax America’s biggest banks and extract $117 billion from bank capital – is already causing headwinds in the financial markets. Not surprisingly, stocks tumbled amid concerns corporate profits could be crunched.

The president is working to seek approval for proposals that would prohibit banks from proprietary trading or investing in either hedge or private equity funds. Obama also proposed limiting consolidation of the financial sector by putting broad limits on the growth of the market share of liabilities at the largest financial firms, supplementing existing caps on the market share of deposits.

“It just doesn’t make any sense to me,” said Warren Buffett, whose Berkshire Hathaway Inc. is an investor in Wells Fargo and Goldman Sachs — two banks that would be affected by the tax even though they have already repaid bailout funds.  “What was done in the fall of 2008 was to save the American economy. It wasn’t to save the banks.”

At midday, the Dow Jones Industrial Average was 1.88% lower, the Standard & Poor’s 500 was 1.6% lower and the Nasdaq Composite had shed 1.11%.

Among the decliners were JP Morgan and Morgan Stanley, each down more than 5%. Goldman fell 5% even after it reported better than expected fourth-quarter results. Bank of America and Citigroup also fell.

The Chicago Board Options Exchange Volatility Index, or VIX, which is known as Wall Street’s ‘fear gauge’ surged 12.7% to 21.06.

The selling in the financial sector spilled into other sectors too. Exxon Mobil and Freeport-McMoRan Copper slid, following oil and metal prices lower. Part of the reason why commodities fell was linked to concerns that China is prepared to slow economic growth.

Chinese authorities this week said they have told that country’s bankers to slow lending.

Oil fell below US$77 a barrel for the first time this year, while gold fell almost 2% to US$1090 an ounce, its lowest so far in 2010.

The Dow Jones Stoxx 600 dropped 1.4% to 252.71. Seventeen of the 18 national benchmarks in Western Europe fell. The FTSE 100 fell 1.6%, Germany’s DAX fell 1.8% and France’s CAC 40 dropped 1.7%.

The European equivalent of the VIX, the VStoxx Index, surged 12% to a six-week high of 26.14.

At a Hong Kong financial conference, Nouriel Roubini issued a warning for investors about the outlook for global equities.

“The real economy is gradually recovering but since March, asset prices have gone through the roof,” Roubini said, according to Bloomberg. “If I’m correct, by the second half of the year, there’s going to be a slowdown of growth in U.S., Europe and Japan. That could be the beginning of a market correction because the macroeconomic news is going to surprise on the downside.”

Any decline in commodities might be limited because of demand for raw materials from emerging markets, he said.

Obama’s bank plans reverberated through the currency market with the yen the key beneficiary.

The euro decreased 0.8% to 127.69 yen at 12:14 p.m. in New York, from 128.68 a day earlier. The dollar fell 1% to 90.30 yen, from 91.24. The dollar slid 0.2% to US$1.4139 versus the euro, compared with US$1.4106.

The Kiwi dropped 2.3% to 64.34 yen. Sterling fell after a report showed the U.K.’s budget deficit widened last month. The U.K. Office for National Statistics said in London that Britain had a 15.7 billion-pound budget deficit last month, compared with 13.8 billion pounds a year earlier.

The Dollar Index, which measures the greenback against a basket of six major currencies, fell 0.096% to 78.28.

The Reuters/Jefferies CRB Index, which tracks 19 raw materials, fell 0.55% to 277.95.

U.S. copper futures edged higher on hopes for continued Chinese demand. Benchmark copper for March delivery HGH0 rose 1.20 cents to US$3.3670 per pound at 10:21 a.m. EST on the New York Mercantile Exchange’s COMEX division.

Peak Oil Reality: Industry Experts Warn About Looming World Oil Supply Constraints

Groups and individuals speaking out about forthcoming world oil supply challenges are frequently stereotyped as a fringe element with little knowledge about the oil industry. But their warnings are increasingly supported by some surprising allies: senior petroleum industry officials, consultants and analysts. Call these serious-minded critics the Harsh Realists.

Most prominent are CEO’s from several large oil companies. Christophe de Margerie, CEO of France’s Total SA, said earlier this year, “world oil production may plateau below 90 million barrels a day (mb/day)” — marginally more supply than today’s 85 mb/day rate. Last month, CEO’s James Mulva (ConocoPhillips) and John Hess (Hess Corp.), sounded similar warnings, though with less specificity about the numbers, at the Oil & Money Conference in London. At ASPO-USA’s October conference in Denver, Ray Leonard, CEO of Hyperdynamics Corp., said, “world oil was nearing peak oil at 90 mb/day, and that isn’t changed by recent events.”

During September, ASPO-USA representatives interviewed numerous oil industry experts from the UK, Ireland and the Middle East. Links to those online videos are below. Featured is Sadad al Husseini, former exploration and production VP with Saudi Aramco and currently a consultant. Said Husseini, “There is not enough new capacity coming on line, within say the next five to six years, to make up for global declines. And that’s assuming a very moderate level of declines.” For groups that remain in fundamental denial about upcoming world oil supply constraints, Husseini said, ” these centers of information or knowledge that try to pacify people — telling them there is no challenge, with good intentions — are probably compromising the solutions. They’re not helping.”

Talisman Energy’s former CEO James Buckee wonders why major oil companies “aren’t more forthcoming on the peak oil issue.” He then opines, “if Exxon were to come out [about peak oil], it would be world-shaking, and political, and maybe they don’t want to go there.”

Jeremy Gilbert, former Chief Petroleum Engineer with BP and now a consultant, stated “I find it hard to believe that the [oil] companies cannot see that the exploration record suggests that there’s a real problem with new discoveries.”

Jeremy Leggett, former petroleum geologist and lead author of the UK’s Industry Task Force on Peak Oil and Energy Security, worries that “we’re dealing with dysfunctional culture in the energy industry in the same way the world had to deal with the really dysfunctional culture in the investment banking community. It’s different [from the financial crisis] in that this time, there are many people warning. Many people in and around the oil industry…But most governments are not listening.”

Related links

IBISWorld industry reports:

-Oil Drilling & Gas Extraction in the U.S.
-Global Oil and Gas Exploration and Production
-Mining, Oil & Gas Machinery Manufacturing
-World Production – Oil
-World Price – Energy – Crude Oil

Survey: Americans Underestimate Role of Crucial Economic Resources

A new survey conducted by the American Petroleum Institute finds that while Americans now recognize the United States will need more energy in the coming years, they continue to underestimate the amount of oil and natural gas that government experts predict will be needed to meet that demand. Conversely, respondents overestimate the role that renewable energy sources will play in meeting future demand, the amount of oil the U.S. imports from the Middle East, and oil and natural gas industry earnings.

According to market research firm IBISWorld, the US leads the world in petroleum refining output, with an emphasis on the processing of light, low sulfur crude oil. It has about 20% of the world’s crude oil distillation capacity and about 30% of the more complex cracking and reforming capacity.

The new administration and Congress are currently underway in pursuing energy and climate policies that will determine America’s economic competitiveness for years to come.

“Americans understand fundamentally that we need more energy to grow our economy but they continue to undervalue oil and natural gas in meeting expected demand,” said Jack Gerard, API’s president and CEO. “We stand ready to work with the White House and Congress on policies that encourage the development of America’s vast resources, which would strengthen our nation’s energy security, create new jobs and increase government revenues by trillions of dollars.”

“The American public wants to believe there is a silver bullet answer to our energy challenges despite what government experts predict,” said Jim Hoskins, senior vice president for Harris Interactive. “Americans have become more aware of how current policies limit increased domestic production but they also continue to subscribe to common, yet critical, misperceptions regarding how the industry operates and the energy we’ll need to meet growing demand.”

Comparing the results to last year’s survey, respondents showed a continued misunderstanding on key issues such as the significance of North American oil and natural gas resources, the number of people employed by the oil and natural gas industry in the U.S., and the amount of taxes the industry pays every year.

API commissioned the online research by Harris Interactive of 1,298 U.S. adults between April 30 and May 8, 2009. Results were compared to the previous two years’ responses. Among the survey’s key findings:

More Americans understand that U.S. energy demand will increase during the next 20 years, but they underestimate the vital role that fossil fuels will play in meeting demand.

While the U.S. Energy Information Administration (EIA) projects that U.S. energy demand will increase 9 percent during the next 20 years, only 5 percent of respondents chose the correct answer. The majority overestimated this number, believing that U.S. demand would increase 16 to 21 percent.

When asked what percent of global energy demand will be met by fossil fuels such as oil, natural gas and coal, according to government projections, only 10 percent of respondents answered correctly that fossil fuels will meet 85 percent of energy demand. This is the second consecutive year this number has dropped even though the EIA figure for future U.S. reliance on fossil fuels has risen by five percent since 2008.

Similarly, while the EIA projects that more than 55 percent of U.S. energy demand in 2030 will be met by oil and natural gas, only 16 percent of respondents chose this answer.

Those surveyed overestimate the amount of oil and natural gas supplied to the U.S. by the Persian Gulf countries and underestimate the amount that is supplied from North America.

According to the U.S. Department of Energy (DOE), 12 percent of the oil consumed last year in the U.S. came from the Persian Gulf countries. Only 7 percent of respondents chose correctly, while more than 40 percent of respondents believed that over 30 percent of our oil supply came from the Persian Gulf.

Fifty-three percent of respondents believed that Saudi Arabia was the largest U.S. supplier of imported crude oil. In fact, according to the DOE, Canada is the largest supplier of imported crude oil.

Only 5 percent of respondents knew that more than 73 percent of oil and natural gas consumed in the U.S. was produced in North America. This is down 3 percent from last year’s survey. A surprising 42 percent were under the misconception that the answer was less than 35 percent.

Rising Energy Demands Necessitate Capacity Additions in Oil and Gas Refineries

Oil and gas account for 41 percent of India’s energy consumption and there is unlikely to be any significant scaling down of dependence on these fuels in the next five to ten years.

New analysis from Frost & Sullivan, Strategic Analysis of Oil and Gas Sector in India, finds that the output of the Indian oil and gas sector was 184.3 million tonnes oil equivalent in 2008 and expects this to reach 339.6 million tonnes oil equivalent in 2015.

“To meet this considerable demand, the oil and gas sector is expanding its refining capacity to drive output and export of petroleum products,” says Frost & Sullivan Industry Analyst Siddhartha Saha. “However, this is likely to widen the gap between domestic demand and supply of crude oil.”

A substantial increase in the domestic supply of natural gas and reduced prices of liquefied natural gas (LNG) are likely to encourage gas consumption in power, fertilizer, city gas distribution, and other industrial segments. Owing to the rising consumption of oil and gas, the Government has framed favorable policies to promote exploration and production. This move has caused a quantum leap in domestic natural gas supply. Government policies have also supported the growth of export-oriented refining capacity in the country.

Natural and technological limitations in enhancing global oil production are likely to restrain supply from keeping pace with the demand. This, in turn, could lead to a continued increase in the base-level prices of crude oil.

“In India, the pricing of petroleum products and natural gas continues to be regulated by the government,” observes Saha. “Though international crude oil prices have come down in the short term, they are expected to rebound and rise in a sustained fashion in the long term.”

The oil and gas sector will have to strategize to deal with volatile prices on the supply side and government-regulated product prices in the coming years.

With margins under pressure, Indian refiners have begun to integrate with value-added products such as petrochemicals and invest in methods to improve distillate yields. Moreover, in response to the regulated product prices in the domestic market, the private sector refiners have moved to sell major shares of their products in the export market.

“As crude prices have increased, the spotlight is on widening the gross refining margins by up-grading heavy gas oils and vacuum residue to fuel products,” notes Saha. “To gain additional revenue, Indian refineries are also integrating horizontally to venture into the production of more value-added products.”

Strategic Analysis of Oil and Gas Sector in India is part of the Energy & Power Growth Partnership Services program, which also includes research in the following markets: APAC generator sets market, Chinese power plant market, European nuclear power sector, world alkaline battery market. All research services included in subscriptions provide detailed market opportunities and industry trends that have been evaluated following extensive interviews with market participants.

According to Platts, a leading global provider of energy and commodities information, China consumed 33.23 million metric tons of oil in May, up a strong 6% from the same month in 2008. The data means Chinese demand has shown a year-on-year increase for a second consecutive month, evidence that demand for fuel in the world’s second largest oil-consuming nation is in recovery. In April, Chinese oil demand rose for the first time in six months. However China’s own crude oil production slipped by more than 1% in May.

“Falling crude oil production in China means its rebounding demand is having a disproportionally large affect on international oil trading. China imported 17.09 million metric tons – about 4 million barrels a day of crude oil last month. That was the second highest month of crude oil imports into China, ever,” said Dave Ernsberger, senior editorial director for Asia at Platts.

According to industry market research firm IBISWorld, US crude oil production meets only about one-third of its oil requirements; the rest is imported. Despite overall growth, industry revenue is expected to slump by about 41% in 2009 –in response to much lower crude oil and natural gas prices. However industry performance is expected to gain ground during the outlook period in response to rising oil and gas prices and higher levels of output.

Current Global Oil & Gas Company Market Trends

North America leads the inventory with over $9 billion (or roughly 45% of value); followed by Africa (22%) with the North Sea, Rest of Europe, South America, Asia, Australia and Middle East rounding out the pack with deals valued at between $500 million to $1.5 billion.

In North America, the most prized deal is the multi-billion dollar interest Devon Energy is offering in its four discoveries (Kaskida, Cascade, Jack and St. Malo) in the emerging Lower tertiary trend in the deepwater Gulf of Mexico. Onshore resource style plays (shale gas and oilsands) remain quite active. Notably, Shell and EnCana are looking for a partner to develop 30,000 acres of exploration leases in the Haynesville shale gas play of north Louisiana and east Texas. In Canada, UTS Energy rejected the revised $677 million cash bid by Total E&P Canada in April as inadequate and continues working with its financial advisors, RBC Capital and TD Securities, to maximize shareholder value. UTS Energy has 1.7 billion barrels of net contingent bitumen resources in the Athabasca Oil Sands area of Alberta.

Internationally, Africa is exciting with numerous deals. West Africa now offers “unparalleled opportunities” for major and independent oil and gas companies, writes Patrick Morris, CEO of Vancouver-based Gold Star Resources Corp. Changing geopolitics, reduced security and political risks, the recent 1.8 billion barrel discovery in West Africa’s largest oilfield, and a new African foreign policy by recently elected U.S. President Barack Obama have all helped in making West Africa a “desirable destination for oil and gas exploration and production.” In Ghana, two partners have put interests on the market in the world class offshore Jubilee field (estimated 1.2 billion barrels equivalent of gross recoverable reserves). Other deals are available in Uganda, Angola, Kenya, Egypt, Cote D’Ivoire, Nigeria, Gabon, Cameroon and Namibia. In other parts of the world, significant deals in play include development projects in the Kurdistan region of Iraq, which now has an improving political and security environment.

In Indonesia, BP is seeking to harvest its 46% interest in the prolific Offshore North West Java block, which includes 670 producing wells, 170 platforms and 1,600 km of subsea pipelines.

Chevron has retained Scotia Waterous to sell its interest in 13 separate concessions in the Austral and Nequen basins of Argentina which were producing nearly 4,500 b/d of gross oil and 54 MMcf/d of gross gas in late 2008.

In Australia, Woodside Petroleum has put its Otway project, offshore Victoria, on the market. “Due primarily to the whipsaw in oil and gas prices over the past 12 months, our analysis highlights an unusually high quality and diverse set of world class opportunities, particularly for well-heeled buyers seeking long term assets in early stage development,” according to Yashodeep Deodhar, CEO of Derrick Petroleum Services. “These are not distressed assets put on the market by distressed companies. Quite the contrary, we have identified numerous opportunities by first class operators who are simply managing their forward risk profiles and laying off a portion of development capital. We foresee the recent trend of national oil companies (NOCs) and government backed oil companies dominating the buy side to continue.” In completing the study, Derrick also reviewed past M&A activity and trends. “In contrast to the first half of 2008 where seven of the top ten buyers were western companies; so far this year, only three of ten buyers are western. Buyers of significant deals have recently been mostly NOCs and government-backed companies such as IPIC (Abu Dhabi), CNPC (China), KNOC (Korea) and Ecopetrol (Colombia),” according to Deodhar. “In addition to tracking deal activity, value trends regionally and globally, and deals in play, we also continuously monitor companies with financial dry powder and a desire to do more deals. Currently, notables on this list include Norway’s StatoilHydro, Colombia’s Ecopetrol, China’s Sinopec, France’s Total, United States’ Apache Corporation and Canada’s Talisman Energy. These companies alone have over $20 billion of capability,” concludes Deodhar.

“The role of junior exploration companies is to set the trend,” said Patrick Morris of Gold Star Resources Corp.  For example, Gold Star Resources is the first and only junior company to go after onshore oil and gas opportunities in Cote d’ Ivoire and Liberia since the 1970s. Larger players are competing for offshore blocks all along the coast – but with no plans for any onshore exploration.

Market research firm IBISWorld forecasts that industry revenue for oil will grow at an average annualized rate of 9.8% over the five years to 2014, where new capacity is expected to come on stream in several oil producing countries, which will help to moderate the upward price pressure, which is expected to emerge as demand starts to revive.

Oil a hot commodity with investors

Prospects for the oil market are looking good, according to industry analysts. Although high prices have caused consumers to use less fuel, the market is continuing to rise thanks to the growing demand from emerging markets like China, the world’s second-largest consumer of energy. Oil prices have gained more than 30 percent this year, breaking $60 a barrel during trading last Tuesday in New York. According to an Energy Department report issued May 6th, US crude supplies rose 605, 000 barrels to $375.3 million, the highest it’s been since 1990.

The oil market is certainly ahead of itself, despite a continual decline in total fuel-demand. Meanwhile, major independent oil companies have halted exploration budgets and cut back on planned capital expenditures, waiting for a rebound. The latest U.S. employment data is suggesting the economic slump is bottoming out, all of which means that if and when demand for oil rebounds, a surge in supply will ensue.

The growing consensus among industry analysts is that we can anticipate seeing stocks propel even higher. But, “The question is not if, but how fast? How much?” says Oppenheimer analyst Fadel Gheit. Given the current economic conditions, it may seem counterintuitive to go bullish on oil prices. But investors are betting that as the economy gets better, the commodity market for oil is a lucrative place to be.

Mina Kimes, of Fortune magazine, gives her two cents on which companies to bet on:

One tried-and-true approach to betting on oil is to buy the biggest, most stable company in the sector. That, of course, is Exxon Mobil (XOM, Fortune 500), which, with $477 billion in revenues, is by far the largest of the supermajors and has the best return on equity. But many oil investors aren’t wild about the stock at its current price. While Exxon is the largest holding in T. Rowe Price’s $2.9 billion commodity-focused New Era Fund, manager Charles Ober says the stock, though ultrasafe, isn’t worth its premium over its peers. Exxon has a P/E ratio of 8, the highest of the majors. Plus, Exxon’s very size and stability mean that it probably won’t rise as much as its smaller rivals if there’s a strong move up in crude. “Right now, I’d rather have something that’s more levered to the price of oil,” says Ober.

Where should you look beyond Exxon? With future capacity in short supply, the best way to pick winners, analysts say, is to focus on the few companies that are positioned to sharply increase production. And among the oil giants, the company with the brightest outlook is Chevron (CVX, Fortune 500). Barclays estimates that Chevron will increase production by 2.7% annually through 2012, the best rate among the super majors. “Right now, Chevron has more resource opportunity than they’ve had in a long time,” says J.P. Morgan analyst Michael LaMotte, who expects the company to work deals to get access to new reserves in countries like Iraq and Brazil. With a P/E of 6, Chevron is also cheaper than Exxon, and its dividend yield of 3.8% is nearly twice that of its bigger rival.

A pair of mid-majors also offer robust growth prospects. According to Barclays, Hess (HES, Fortune 500) will increase its production capacity by an average of 2.4% a year through 2012. But J.P. Morgan’s LaMotte believes the company’s holdings in Brazil and West Africa give it the potential to far surpass that estimate. “When you look at exploration upside, Hess has considerably more than any other company,” he says. Marathon Oil (MRO, Fortune 500), which Barclays expects to boost production by a robust 4.3% this year, is a particular favorite of Ed Maran, the manager of the $2.1 billion Thornburg Value Fund. “It’s trading far too cheap relative to the value of its assets,” says Maran.

But perhaps the most impressive growth story in the oil world belongs to Petróleo Brasileiro (PBR), or Petrobras, the giant Brazilian oil company based in Rio de Janeiro. Over the past two years the company has announced three deepwater discoveries that are potential mega-fields. While they’ll take years to develop, they have vast potential. “If you look across all the companies you can buy as an oil investor, there’s only a handful of companies that can grow organically, and we like Petrobras the most,” says Cheng of Barclays. He also points out that while new investors have flocked to the company’s common stock, they have largely ignored its preferred shares, which currently trade at a significant discount. If you’re going to play the oil rebound, you might as well start from the lowest point possible.