360 Horizon: Oil

On March 1, 2015, Carlo Civelli, Swiss Billionaire and Venture Capitalist, was interviewed by Future Money Trends.

He thinks the Swiss Central Bank did the right thing when it unpegged the Swiss Franc from the Euro recently. He said, even though, the Swiss Franc appreciated against the Euro, it has enabled the Swiss citizens the ability to run across the border and by goods produced elsewhere at a 20% discount.

However, this recent rise in the Franc vs. Euro means Swiss exports will be 20% more expensive.

Where this interview shines is where Civelli says he's never been a fan of gold, he has been a fan of gold stocks.

He says it was the introductions of ETFs that cross whipped gold prices up and down.

"Gold has become a "normal" commodity," says Civelli.

He says, "gold is not a hedge" against all the money being printed around the world.

He says about the Quantitative Easing going on around the world, "the verdict is still out," on whether it is going to work.

However, Civelli cautions investors to think what might happen when interest rates finally go back up one day with all the trillions of dollars of different currencies sloshing around the planet.

"Nobody knows what is going to happen then . . . but you certainly cannot flee into gold because IF we all talk about the end game and the scenario of a total collapse, I can see the governments telling everybody, 'Your money is now worthless, and the bonds you own are now worthless, and everyone will have to take a haircut.'" Then he ponders after saying that, "Would they let the people who own gold get away with it? I don't think so."

Civelli goes on, "So then the governments will say, 'Okay, guys, those of you who own gold will have to give it back to the Central Bank within a certain period of time, and we'll pay you whatever the gold price is at that time . . . So whoever owns gold at that time will not be spared."

"There is no way out, so let's live the good times for as long as they go."

Civelli talks about investing in oil. He's big on the "3 Ps", which stands for 1. Price, 2. Project, 3. People behind the project. He feels this is not the time to buy oil plays. He buys in the exploration phase. Today, Big Oil is buying up smaller companies already in the "production" phase.

There's more to the interview, and Civelli even gives the name and stock symbol of one Canadian mining company in which he's personally investing.

The name of that company is Callinex Mines, which trades on the Toronto exchange. It is a Canadian company, a penny stock at this moment. The stock symbol for stockcharts.com would be CNX.V. It closed at .37 cents per share yesterday.

You can watch the remainder of the video to hear why Civelli is hawking this as his one "idea" stock.

04 March 2015

Oil Sector Stocks Are Cruising For More Of A Bruising (Or Who's Afraid Of The Paper Price Of Oil?)

At this moment, up in the shale play of North Dakota, there are some out of work roughnecks, shivering the night away, inside their idling camper vans. These wiry men, running low on the savings they put together from their last paychecks, are wondering in their dreams when they will be called back to work.

Outside these tiny homes on four wheels, there are bug-eyed oil field accountants in Gortex snowsuits, taking giant puffs from the exhaust pipe bongs that burn the refined North Dakota black.

These barrel counters are getting ready for next month’s quarterly reports for their respective shale play companies. Both March Madness in College Basketball and St. Paddy's Day approach, but another more important date in March has already ambushed any distractive relief that basketball and heavy drinking might have brought in this most bitter of months.

Yes, a very important date in the oil patch, March 2nd, has already come and gone. And that day was not favorable for the barrel counters. On that date, just a couple of days ago, the price of a barrel of oil left the numbers guys a tab that many of them will not be able to pay.

In their oil price shock, the dazed accountants are coming to grips with last quarter’s smoke and mirrors oil reserves and earnings. And last quarter was very bad. This current quarter they are realizing will be a bitch. And the 2nd quarter of this year will be even worse if Oil doesn't get its price on - and it looks like it won't.

When this quarter's oil reserves, profit margins, and earnings publish in April, the gambling money in the fracking belt will flare off into the night sky. The last few dollars remaining will be revealed as the “chump change” investors were chasing as the coins rolled through the sewer grates outside Williston’s now closed stripclubs.

Or in other words, if you thought the recent oil patch downturn was bad in early 2015, wait until the curtain pulls back on the real Shit Show next quarter.

Before we go to the tape, let's run some very simple and basic capitalistic ideas by you who’ve been sucking on the sweet tailpipes in the oil patch too long:

If you're an oil sector company needing to borrow money for capital expenditures or just to keep the lights on, you will need high oil prices to get financing.
The more reserves you can claim you have underground, the more financing for which you might apply and might actually receive.
When oil prices come down - and recently they have fallen off a cliff - you’ll show smaller profit margins for the oil you pump to the surface. Smaller margins usually mean smaller profits unless you cut other expenditures (such as labor) to the bone.
Reserves - the underground stuff oil companies list as collateral for loans - reduce in size when oil prices crater. Lenders want to know not how much oil is down there in your lease, but how much of that oil at today’s prices can be profitably extracted.

So how do we account every quarter for a barrel of oil when the price is always moving? How can the accountants adjust the reserves, the profit margins, and earnings when a barrel of oil is whipsawing like it has over the past six months?

Here's how: the price of oil in accountant's bookkeeping resets constantly once every quarter. This "factor" price is an average of the 12 preceding month's first trading days all averaged together.

Well, can't this "average" be overly compensated for on the low side or high side, depending on the trend price of oil?

Oh yes. And sometimes in a big way as we are about to see going forward this year.

And next quarter, when we report this quarter's (Q1 2015) earnings, we are going to witness the Big Hurt.

You see, in last quarter's (Q4 2014) accounting, the price of oil was averaged over 12 months to be $95 a barrel. We call this the "paper price".

(Note: oil stocks began tanking because of the decline in the price of oil to $50 a barrel, not because of the actual accounting of oil last quarter was at $95 a barrel. Meaning all those reserves, margins and profits (for the most part) for Quarter 4 sounded better than expected in the just released earnings reports for Q4.)

So, what are we looking at as the new "averaged" price of oil (or paper price) for this current quarter's accounting?

Come closer to the page, this is going to get interesting.

The closing prices for sweet crude on the first trading days of January, February and March of 2015 are the following:

2 Jan 2015 - $52.81
2 Feb 2015 - $49.83
2 Mar 2015 - $49.79

If you are an investor or swing trader who has been playing the oil sector recently, and you think the bad news is all factored in, you need to question your assumptions.

Seriously, if you think we have hit bottom in the oil sector stocks, you need to consider what is going to happen next month, April 2015. That's when companies report their earnings built on a new price of oil for this first Quarter we are still in. And this new price of "paper" oil is quite a bit lower than last quarter's overly-generous $95 per barrel.

Don't just take my word for it. (And we'll do some math to illustrate in just a second.) As a just released Bloomberg article’s headline says:

“The Price of Oil Is About To Blow A Hole In Corporate Accounting”

Yes, and that hole will look like a howitzer shell went through a paper target just 100 yards away.

And the reason for this is the price of oil for corporate accounting purposes is lagging, by almost 50% now, the real market price of oil at this morning’s opening.

The wise will take a few minutes now to think about what a new paper price portends for the oil sector plays when this current Quarter's (Q1 2015) earnings begin reporting next month.

But before highlighting some of that Bloomberg article, let’s talk about these SEC guidelines which gave accountants in corporate suites the $95 a barrel price for Q4's earnings reports. How was that paper price of $95 derived?

Very simply, the price of oil used in corporate accounting for earnings season is set like this:

You take the price of oil on the opening trading day for a month and write that down. You also take the price of oil on the opening trading day for the preceding 11 months and write them down.

Once you have those 12 months opening trading days’ prices, you add them all and divide by 12 to get this magic number accountants used in any earnings season for the price of oil.

Again, last quarter, the paper price of oil per barrel was $95 for accounting purposes. And yet, on the last trading day of 2014 (which was December 31) the price of a barrel of West Texas Sweet Crude closed at $53.71.

Even the blind sees where this is leading.

So that you just don’t take my word - or Bloomberg's - let's do some simple math right now. Let us see how and why $95 was the magical number used by oil sector accountants back in Q4. Let’s go back to 2014 and average in all 12 of those closing prices of the first trading days of each month:

2 Jan 2014 - $ 95.44
3 Feb 2014 - $ 96.64
3 Mar 2014 - $104.86
1 Apr 2014 - $ 99.69
1 May 2014 - $ 99.21
2 Jun 2014 - $102.45
1 Jul 2014 - $105.20
1 Aug 2014 - $ 97.62
2 Sep 2014 - $ 93.25
1 Oct 2014 - $ 90.70
3 Nov 2014 - $ 78.19
1 Dec 2014 - $ 69.31

If you add those 12 opening day prices for a barrel of oil for the respective 12 months of 2014, the total comes to $1,132.66.

If we take that number and divide by 12, we get an average price of $94.38.

I am guessing the accountants round up to the next even dollar. Or maybe Bloomberg's writer did? Regardless, the figure used in the Bloomberg article was $95 per barrel for accounting purposes for Q4 '14.

What might be the new number for Q1 2015 be?

Well, let’s go back to the past 12 months and their opening day prices, shall we?

1 Apr 2014 - $ 99.69
1 May 2014 - $ 99.21
2 Jun 2014 - $102.45
1 Jul 2014 - $105.20
1 Aug 2014 - $ 97.62
2 Sep 2014 - $ 93.25
1 Oct 2014 - $ 90.70
3 Nov 2014 - $ 78.19
1 Dec 2014 - $ 69.31
2 Jan 2015 - $ 52.81
2 Feb 2015 - $ 49.83
2 Mar 2015 - $ 49.79

Adding those 12 opening day prices for the past 12 months we get $988.05 as the total. We must divide that total by 12 to get our new "paper price" of a barrel of oil for this current quarter of Q1 2015

So,

988.05/12 = $82.33

Let’s round that up to $83, assuming that’s what the accountants will do.

Okay, last quarter (Q4 2014) oil was pegged in quarterly reports at $95 a barrel. This current quarter (Q1 2015) corporate accountant will peg "paper oil" in quarterly reports at $83 a barrel.

That right there means the price of a barrel of oil has dropped by 13% when accounting begins for this new quarter ending March 31st. In turn, we will see smaller margins, smaller profits, and fewer "recoverable" reserves. (We already know through numerous reports from the shale fields that oil rig counts are falling rapidly.) All of this will make it harder for the oil companies needing loans to find financing.

Let's finally read a few paragraphs from this Bloomberg piece I've been referencing:

“Companies use the first-trading-day-of-every-month calculation to estimate future cash flow and to tally how much crude can be profitably pumped out of the ground. The SEC introduced the formula in 2009 as part of wider changes in how the regulator required drillers to report reserves. Prior to the shift, the value of the reserves was measured based on the oil price on the last day of the year, which also caused distortions.
There are no current plans to revisit or modify SEC reporting rules, Erin Stattel, an SEC spokeswoman, said in an e-mail. She declined to comment further.
Most shale drillers are reporting increases in what’s known as proved reserves. The SEC requires oil producers to submit an annual tally, along with an estimate of the present value of the future cash flow from those properties. The estimates are limited to what the firm is reasonably certain it can extract from existing wells and prospects scheduled to be drilled within five years. The reports are based on factors such as geology, engineering, historical production -- and price. To count as proved, the resources must be economic to develop given existing market conditions.”

Please note that last sentence which I have highlighted. Let's drive this thought home: Reserves are not real "reserves" unless we can profitably bring them above ground. Period.

Thought for the day: Some of those "reserves" which were profitable at $95 a barrel last quarter are not going to be profitable this quarter at $83 a barrel. Hence, per SEC regulations, those newly "unprofitable" barrels underground will not longer be counted as "reserves".

As has been said time and again, we will never run out of oil underground. Some of it will always remain because the energy expended to bring it to the surface would exceed the energy the hard to get at oil would supply. Or, in easier to understand words: this hard to get at oil is nowhere near as profitable at $83 a paper barrel as the stuff in the desserts of the Middle East and North Africa.

When oil margins shrink in the shale regions, there’s only one way to keep the earnings up: pump more oil. But as mentioned moments ago, oil rig number are declining with the real spot price of oil

If you can’t get the loans needed to keep the oil coming to the surface, and the depletion rates of the fracked wells are speeding up, when does a company pull the plug on wells? Or do the companies simply layoff more workers, and stop adding to the glut so as to preserve some borrowed cash to continue making interest payments on their loans?
I don't know, but I do know I don't intend to be in any oil sector stocks during the next 6 months.

Here's my bet: next quarter when oil sector companies begin reporting this current quarter’s reserves, margins and earnings, I believe we will see many of their charts take out their recent lows.

Or as the Bloomberg headline once again warns:

“The Price of Oil Is About To Blow A Hole In Corporate Accounting.”

If you’re playing the oil sector now and are dozing at the “sell” button on your trading screen, you might want to put on a big pot of coffee and check your assumptions at the next closing.

Things will only get worse going forward if oil continues to bump along at $45 to $55 a barrel going into Summer. Think about it: oil going sideways for the next three months means an even lower "paper price" for Q2.

Now is not the time to be going long on oil stocks, at least in my mind.

25 February 2015

Reads for Wednesday, 25 February 2015

U.S. Postal Service, FedEx Have New Competition…from Waffle House: Roadie Is Going To Be The Uber Of Package Delivery (MSN Money)

Oldie, but Goodie: Co-Founder of Motley Fool, Dave Gardner, On "The Greatest Secret Of All" (Motley Fool)

What Dodd-Frank Didn’t Fix: The Worst Conflicts on Wall Street (Wall Street On Parade)

The Easy Oil Is Gone So Where Do We Look Now? (Oilprice.com)

President Obama Vetoes Keystone Pipeline Bill; Republicans Gear Up For Override Bill But Might Not Have The Votes (Politico)

Oil rigs fall idle after global crude prices drop (BBC)

Nobel Prize Winner Robert Shiller: Buying A Home Isn't Necessarily A Good Investment (Yahoo Finance)

Bill O Reilly Threatens Another Reporter (Talking Points Memo)

Another Big Merchant Dumps American Express (Megan McArdle for Bloomberg)

Apple now twice as big as world's second-largest company, ExxonMobil (The Daily Telegraph - UK)

Investigation: Why are cargo pilots excluded from new rest rules? (CBS News)

Two Ex-Army Rangers Believe Flip Flops And Sarongs Will Defeat ISIS (Gizmondo)

Goodbye, Putin (Foreign Affairs Magazine)

U.S. military vehicles paraded 300 yards from the Russian border (Washington Post blog)

75% of Air and Rain Samples Contain Monsanto’s Round Up (Natural Society)

Obama administration to allow sales of armed drones to allies (Washington Post)

17 September 2014

Business Week: Have We Reached Peak Burger?

Facebook (Nasdaq: FB) investors need to closely follow wireless app advertising to see if it is sustainable with established businesses, not just startups

USA asks Turkey for help in starving ISIS of oil revenue

Russian leaders tells public not to panic over Ruble's record fall

USDA Chief Urges Warren Buffett to Ready His Railroad for Bumper Fall Crop Shipment

20 March 2014

Overnight News, Views, Charts & Graphs for Friday, 21 March 2014

Europe strikes deal to complete banking union
Gold is losing its ‘safe-haven hat,’ some say, as economy stabilizes

Asian stocks rocket upward overnight after biggest decline in 7 months

Colombia's Economy Grows 4.3% in 2013 - Beats Expectations

Two Palladium ETFs To Launch In South Africa Next Week

How brick and mortar retailers aim to fight "showrooming" in their stores by using "Big Data"

Ukraine, Chevron, Condi Rice and shale gas . . . join the dots

Carson, CA , an oil rich town, bans all new oil drilling, fracking - even temporarily

Rockin' and Reelin' with the new Google Android Watch feelin'

Time: Starbucks Is Going To Start Selling Booze Almost Everywhere

Oil's Not Scarce, But Cheap Oil Is

Brazil launches price-fixing probe against 18 multi-national corporations

Google (Nasdaq: GOOG) Works Out The Kinks In "Same Day Delivery" In San Francisco. Will Shopping Express Take Off In NYC and LA?

Elon Musk and Tesla (Nasdaq: TSLA) could lead other new car companies in an overthrow of the archaic dealership franchise agreements

19 March 2014

Overnight News, Views, Charts & Graphs for Thursday, 20 March 2014

Largest Steelmaker In Shanxi Province, China Defaults On 3 Billion Yuan Debt

American Pay TV Providers Suffer First Yearly Loss of Subscribers Ever

Why $100 Oil Is The New $20 Oil

Chart Showing Economic Productivity Per Hr. vs. Median Family Income

Pater Tenebrarum: US Stock Markets - More Bubble Evidence (Bear Assets and Money Market Assets Are At 16 Year Lows!)

Dow Still Down For The Year - Click To Enlarge

Zero Hedge: The Music Just Ended: "Wealthy" Chinese Are Liquidating Luxury Offshore Homes In Scramble For Cash

Zero Hedge: China's Credit Nightmare Explained In One Chart

As China's Credit Bubble Begins To Blow Up, Physical Gold, Not Paper Gold, Will Be In Demand

Aden Sisters: Expect Gold Shares To Outperform Gold Going Forward

How Gold Performs During FOMC Weeks (Spoiler Alert: Not Good)

Clive Maund: Monster Silver Rally Brewing

Asian Stocks Falling Overnight On Yellen's Remarks

New Fed Head Janet Yellen Delivers Agressive Jab At Markets: QE Set To End This Fall, Higher Rates Maybe 6 Months Later

CEO Says This Winter, Especially January and February, Was the Worst Ever for Fed-Ex

19 August 2013

West Texas Towns Running Out Of Water Due To Fracking

13 August 2013

Australian Gasoline Heading Toward $10 Per Liter

27 August 2012

Business Insider: The Secret Of Bridgewater's Success Is In Its Understanding Of The Recession"

The Automatic Earth: "Global Demise Of Pension Plans"

Mish shows us that the Australian Housing Crash is now "ON"

Republicans to discuss putting US back on the gold standard, which would explode gold prices to $10,000 an oz. and beyond

Dr. Housing Bubble blog looks at housing's future with a shrinking middle class and an overburdened younger demographic

Gasoline/Oil Futures Jump On Hurricane Issac Closures In The Gulf And the Massive Refinery Explosion In Venezuela

14 June 2012

Begin Planning For A Post Growth World Due To Peak Oil

07 March 2012

XL Pipeline Would Not Lower Energy Prices In The U.S.

13 June 2011

Gerald Celente On Surge In Oil Prices And The Giant Ponzi Scheme In The FIRE Economy

15 October 2010

Business/Economic/Housing/Layoff News for October 15, 2010

OPEC Members Seek $100 Oil to Counter Dollar Weakness

Foreclosure Crisis Slams Into Banks

Bank of America Downgraded by Bond Market on Foreclosures: Credit Markets

How a rickety $75,000 home and a retired lawyer in Maine brought about a national foreclosure freeze

Washington Policy Makers Resist Calls for a Big Fix in Foreclosure Crisis

Must Read: From Carolyn Walker's "Truth To Power" website, the introduction to a new book, "The Montster: How A Gang of Predatory Lenders And Wall Street Fleeced America" by Michael W. Hudson

QE 2 And The Nominal Man

Caroline Baum: Fed Wants to Hoodwink Public, Only Fools Itself

02 September 2016

01 September 2016

31 August 2016

16 March 2015

A Guide To Not Retiring (WSJ - Yahoo)

A Dozen Things I’ve Learned from Morgan Housel about Investing and Life (25iq)

Oil Hits New 6 Year Low As US Storage Capacity Strains (Yahoo)

Was the Apple Watch made with China in mind? (Time Magazine)

Venezuela Parliament Grants Extraordinary Powers To President Nickolas Maduro To Rule By Decree For The Next 9 Months In Answer To Perceived Threats By The USA (The Guardian)

05 March 2015