Crude Is Going Back to $150, Own Big Oil Stocks: Fund Manager

It was a hot July in 1969, when Blood, Sweat & Tears immortalized the phrase "what goes up, must come down" when their hit song "Spinning Wheel" got all the way to #2 on the charts.

Today, more than 40 years later, it is still hot and July but that famous phrase looks set for a slight revision, at least as it applies to the price of oil and the outlook of fund manager Tim Parker. If there were a new version, it might go something like "what goes up, could come down, but not for long."

"Despite the high (crude) prices we saw earlier in the year" the T. Rowe Price New Era Fund (PRNEX) manager says, "developing markets like China, India etc really didn't show any break in demand." This is why he is "constructive" on oil for the medium-term, can't rule out a decline in the short-term, but worried about the longer term when he thinks prices will reach an "untenable" level of $150 a barrel again, perhaps not until 2014.

"There's always risk to the demand side. If there's another global financial crisis, demand will fall sharply," Parker says while acknowledging about 55% of his fund is invested in Energy sector stocks (XLE). Ultimately, he says when oil prices reach those record-high 2008 levels, "you price out demand" but that's a problem for a later day.

"This is a multiple year trade ahead for oil I don't think we're talking a year or two. More like 2, 3, or 4 years," says Parker.

In the meantime, he prefers the Oil Service (^OIH) plays at this phase of the cycle and fittingly Schlumberger (SLB) is his single biggest holding, accounting for 5% of his portfolio.

He says offshore and international spending growth will benefit the world's largest oil services company and feels that a better strategy than speculating purely on the direction of crude.

Parker says "oil prices can go higher but not double or triple like a few years ago, so it is better to rely on the cash flow of companies rather than the price of oil to drive earnings higher."

FMC Technologies (FTI) is another top services holding he likes.

He also likes the long-term prospects for Natural Gas, especially companies that deal with LNG due to its exposure to the kitchens of Asia. Here a name like BG Group (BG.L) makes the cut. Parker calls the formerly named British Gas "the world's largest freelance LNG player" that also has fast growing oil and gas exploration and production portfolio. "So you got that strong cash flow from the LNG business which gives it the flexability to spend. It's just a really well manged well positioned company," he says.

This on a day when analysts are saying BP (BP) would be worth much more if broken up and sold piece by piece; a valid but unlikely scenario according to Parker.

"I don't think it's likely. BP has too proud a culture. If they were to do it, they would have done it at the heights of Macondo (Gulf of Mexico spill)". He also says the idea of raising tons of cash then having "plaintiffs come after me" makes a break-up unappealing and unlikely too.

He says he doesn't currently own BP but probably will at some point in the future. He does, however own major oil names like Royal Dutch (RDS-A), Chevron (CVX), and Exxon Mobil (XOM).

"I own them partially for that stability, that ballast there is a lot of volatility in natural resources and I like those good dividends and strong balance sheets to mute some of that volatility. It just takes a little bit of that churn out of my stomach," says Parker.

Greece default ‘virtually 100 percent’

Moody’s Investors Service again downgraded Greece’s credit standing Monday, setting the stage for a likely declaration that the country is in default as a newly approved rescue planmoves forward.

In the first review by a ratings agency of the plan approved by European leaders last week, Moody’s cast doubt on the long-term impact on the conditions under which heavily indebted euro zone countries will be able to borrow money.

The ratings service said the plan does improve Greece’s financial prospects for the next few years and probably will stop the problems in that country from undermining confidence in weaker nations such as Ireland and Portugal — diminishing the risk that Europe’s financial troubles will spiral into a broader crisis.

But the fact that Greece is likely to default on one or more of its outstanding bonds sets a “negative precedent” that will diminish faith in other nations. Now that the 17-nation euro zone has shown it is open to a default, Moody’s said, it is more likely that other nations might try to follow suit.

European officials have tried to anticipate that possibility, and declared last week that the new program for Greece — a combination of $150 billion in new loans and expected concessions from private bondholders — won’t be repeated for other countries.

The many positive aspects of the plan, Moody’s said, needed to be judged against “the negative implications of this precedent-setting package should any country face financing challenges similar in severity to Greece’s. On balance, Moody’s says that, for creditors of such countries, the negatives will outweigh the positives.”

Details of last week’s agreement are still to be worked out. The International Monetary Fund must review and approve an expected increase in its lending to Greece. Greek finance minister Evangelos Venizelos is in Washington on Monday for meetings at the IMF and the U.S. Treasury to continue talks about the new package.

The opinion by Moody’s gives the most concrete glimpse so far of how the three major bond rating agencies, key players in the unfolding Greek and euro zone crisis, will interpret last week’s action by European leaders.

The good news: The default by Greece won’t be “disorderly,” but will proceed on a step-by-step basis as banks and other private investors sign up for a bond exchange program negotiated on the behalf of major financial institutions by the Institute of International Finance.

The private-sector contribution will lower Greece’s need for cash in coming years by an estimated $70 billion, which the IIF said amounts to about a 20 percent cut in the value of the bonds that will be exchanged. As big investors make those exchanges, Moody’s said the likelihood of a default declaration “is virtually 100 percent” on those particular bond issues.

The good news, however, is that the agency said it would then reevaluate all of Greece’s other outstanding bonds, and any new ones, on the basis of a financial situation that would have been strengthened.

The E.U. program and proposed debt exchanges “will increase the likelihood that Greece will be able to stabilize and eventually reduce its overall debt burden,” Moody’s said. “The support package for Greece also benefits all euro area sovereigns by containing the severe near-term contagion risk that would likely have followed a disorderly payment default.”

Pierre Lassonde - Coming Mania in Gold Will Dwarf that of ‘70s

With gold over $1,600 and silver breaking back above $40, today King World News interviewed one of the greats in the gold world Pierre Lassonde. When asked about the action in gold Lassonde stated, “The one thing about the gold market right now is I think it has confounded an awful lot of the skeptics. Summers are a low period for gold price during the year and look at what you have, record high $1,600 gold in the last week and looking really good to attack the next level.”

read more here

Technically Precious with Merv

It looks like a top forming in gold. Caution ahead although the possible top is based upon very short term action so even if the top materializes it might not last long.

NO COMMENTARY TODAY

It’s just too darn hot to do any thinking so I’ll forgo the usual and just post the short term chart and Technical Table. Long term readers of this commentary should be able to guess where we are and project what to expect.

Just one comment, I see that media commentators are highlighting the lack of “quality” gold stocks following the lead of gold itself. The suggestion seems to be that the “quality:” gold stocks should be ready for a rally following that of the recent gold move. As I have often mentioned in these commentaries, the stocks are very often leading not lagging indicators. It just might be that gold will end its rally and follow the stocks into a listless market, but who knows?

SHORT TERM CHART

Well, that’s it for this week. Comments are always welcome and should be addressed to mervburak@gmail.com.

By Merv Burak, CMT

Prepare for a rough ride, US warns world stock markets

President Barack Obama and senior politicians are locked in talks about tackling a problem which some experts fear could lead it to default on loan repayments.

America is due to reach its self-imposed borrowing limit of $14.3 trillion (£8.7 trillion) on August 2.

Ken Clarke, the former British chancellor, described the deadlock across the Atlantic as the “next iceberg”.

The outline of a deal to reduce spending is expected to be presented to Congress today and negotiations are likely to dominate the next week there.

Bill Daley, the White House chief of staff, warned that the talks were moving into “difficult days” and said it was crucial for the confidence of markets and businesses to get a deal soon.

“In the end, we may have a few stressful days coming up – stressful for the markets of the world and the American people,” he said.

Timothy Geithner, the US treasury secretary, said it was “unthinkable” that America would “not meet its debt obligations”.

He indicated that a deal could be reached to delay major decisions for 18 months, until after the next presidential election. Should America fail to tackle its debt crisis, Britain faces the prospect of another international economic meltdown in the next fortnight, senior Cabinet ministers said.

Politicians had hoped that last week’s eurozone deal would calm market nerves but the situation in Washington is set to renew turbulence.

The stock market in London may fall today if US politicians do not indicate progress on a deal to cut federal spending or raise taxes.

Vince Cable, the Business Secretary, called yesterday for the Bank of England’s £200 billion quantitative easing programme to be extended amid separate concerns that the British economy has stagnated, and may even fall back into recession.

Official figures are expected to show tomorrow that it grew only marginally between April and June.

In an interview yesterday, Mr Cable said that further emergency actions may be necessary.

“It isn’t great,” he said. “It isn’t surprising it isn’t great because of the problems we inherited in the aftermath of the banking collapse and the recession, the unsustainable boom.

“We have got chronic finances and difficulties in Europe as well.”

The Business Secretary was asked whether the Bank should increase quantitative easing, to which he replied: “The Bank of England is an independent body, we need to stress that. They need to make their own judgments — but it is about the Bank of England pursuing policies of low interest rates, keeping our exchange rates down, but also using quantitative easing, perhaps in more imaginative ways, not just acquiring government securities.

“But it is for them to form the judgment on what they do on that.”

Mr Cable added: “There are members of the monetary policy committee that have floated different ideas about how you do quantitative easing – we get into very technical issues here – but it is for them to form their own judgment.

“But I think that if we have a continuing problem of weak demand that is the way to deal with it.”

The Labour Party and some Conservative MPs believe that Britons should be offered tax cuts to encourage them to spend and kick-start the economy.

However, Mr Cable ruled out any relaxation of “fiscal discipline” by the Coalition, which has increased taxes including VAT to raise money to help pay off Britain’s own record debts.

This week, David Cameron is expected to focus on the economy and enterprise amid growing concern over lacklustre growth.

A survey of economists predicted that growth in the second quarter would average just 0.2 per cent. Some think the economy may have shrunk.

Ministers will outline measures to cut red tape and help entrepreneurs, but a number of experts believe more drastic action will soon be required. George Osborne, the Chancellor, will today unveil new trade deals with India.

Mr Clarke, the former chancellor who steered the recovery from the 1990s recession, said it could take four years for the economy to return to normal.

He welcomed last week’s European Union bail out to rescue Greece and shore up other beleaguered economies, but said: “I think the icebergs are probably the worst in the lifetime of anyone now living and we did have some good news last week – we have had some very weak leadership in Europe, but at last they demonstrated they were able to reach a political decision.

“We are now waiting to see if the American political class can do the same thing in the next fortnight or so and if they don’t do it by early August that is the next big iceberg coming towards us.”

George Soros, Feds Seize Control of America’s Flooded Farmland

By Frank Whalen

Amid the chaotic weather systems thus far in 2011, the federal government has twisted and exacerbated a natural catastrophe to victimize
American farming families, while subsequently staging a land grab to further the UN’s Agenda 21 protocols, all at once.

Despite record amounts of snowfall this past winter, the snowpack was measured and melted predictably. Yet the U.S. Army Corps of Engineers claimed to be surprised by themelt-water amounts. As a result, they planned to detonate the Birds Point levee in Missouri to prevent runoff water from devastating the town of Cairo, Ill. Bizarrely, the feds thought it more intelligent to flood 130,000 acres of rural farmland, and thus a necessary part of the food supply, than to affect an urban zone of 2,800 people, one-third of whom already live below the poverty level.

Detonated levees might bring the Ninth Ward of New Orleans to mind, and one might suspect the federal government was attempting to avoid another accusation of racism, classism and inaction. However, commodities broker Ann Barnhardt has revealed another possible scheme at work.

She wrote on her website: “A Missouri farming and ranching contact just got off a conference call wherein he was informed that the federal government is sending out letters to all of the flooded farmers in the Missouri River flood plain notifying them that the Army Corps of Engineers will offer to buy their land.”

The Kansas City Star supports this claim, reporting that 17 Missouri families received a letter from the Army Corps of Engineers “offering to buy private land along the Missouri River for a wildlife conservation project. The letter was dated June 6, when floodwaters were beginning to rise.”

Later in the article, it was noted that “Karl Mueller, chief of civil works for the Army Corps’ Kansas City office, said the agency was not taking advantage of the flooding to buy farmland” and that the letters were a case of “unfortunate timing.”
When asked if the government would be compensating them for losses, Ms. Barnhardt told this reporter: “Of course not. The feds are calling it an act of God.” Ms. Barnhardt also makes the stunning connection of George
Soros and a company he is investing in called Ospraie Capital Management. It seems Ospraie is also buying farmland, and Soros’s investments have netted him control of “the third-largest grain company in the U.S., with 280 million bushels of storage capacity.”

The liberal Center for American Progress receives large donations from Soros. Plus, its former executive vice president for policy, Melody Barnes, was recently named to the White House Rural Council.

According to a popular news website, The Blaze, this council “makes recommendations to the president on streamlining and leveraging federal investments in rural areas to increase the impact of federal dollars and create economic opportunities to improve the quality of life in rural America.” The group’s staffers also “coordinate federal efforts directed toward the growth and development of geographic regions that encompass both urban and rural areas” which, The Blaze states, “sounds very similar to the language found in the UN plan for sustainable cities known as Agenda 21.”

Ms. Barnhardt says, “This is about driving everything toward a Marxist utopia. They are attempting to control the food supply and are seeking to make private agricultural banking virtually impossible by forcing all agricultural lending through the USDA and the government.”

Frank Whalen has been a radio talk show host for the past 17 years, and worked as a consultant for Maxim magazine. For more news and views from Frank, seewww.franklyspeakingradio.com.

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China And Iran To Bypass Dollar, Plan Oil Barter System, And A Deeper Dive Into The Iranian Oil Bourse

One of the more notable events in the past week was the previously discussed reopening of the Iranian Oil Bourse, an attempt by Iran to launch a venue that bypasses US sanctions against Iran which has prevented payment in the world's reserve currency for Iranian goods. "Big deal", some will say, this is not the first time Iran has attempt to upstage the Great Satan. Well, true, although as OilPrice said last week, "what it would take for Iran’s new exchange to survive and flourish are some heavy-duty customers that Washington would be wary of picking a fight with, and Tehran already has one – China... China, the world's largest buyer of Iranian crude oil, has renewed its annual import pacts for 2011. In 2010 Iran supplied about 12 percent of China's total crude imports. According to the latest report of the China Customs Organization, Iran's total oil exports to China stood at 8.549 million tons between January and April 2011, up 32 percent compared with the same period last year. Iran is currently China's third largest supplier of crude oil, providing China with nearly one million barrels per day." Still, the perceived provocation to Uncle Sam should China go ahead and slap America in the face by accepting the existence of the Kish exchange, would echo around the world. Which is why many don't think much if anything will happen. Until today, that is: according to the FT, China has decided to commence an barter system in which Iranian oil is exchanged directly for Chinese exports. The net result: not only a slap for the US Dollar, but implicitly for all fiat intermediaries, as Iran and China are about to prove that when it comes to exchanging hard resources for critical Chinese goods and services, the world's so called reserve currency is completely irrelevant. The implications of this are momentous, especially for US debt, whose indomitability is only predicated upon the continued acceptance of the currency it backs as a global reserve. If China is now openly admitting to the world that it does not need US monetary intermediation, and by implication, the "debt" backing said intermediation, what then? And who will follow China next?

From the FT:

Tehran and Beijing are in talks about using a barter system to exchange Iranian oil for Chinese goods and services, as US financial sanctions have blocked China from paying at least $20bn for oil imports.

The US sanctions against Iran, which make it extremely difficult to conduct dollar-denominated business, mean that China could owe the oil-rich nation as much as $30bn, according to people familiar with the problem.

They said the unpaid oil bills had built up over the past two years and the governments, which are in early-stage talks, were looking at how to “offset” the debt.

Some Iranian officials are growing increasingly angry about the inability of the country’s largest oil customers to pay cash, a problem that has contributed to a shortage of hard currency and has hindered the central bank from defending the Iranian rial, which has been sharply devalued over the past month.

China and India together buy about one-third of Iran’s oil, the country’s economic lifeblood. China’s oil imports from Iran have risen 49 per cent this year, according to Reuters.

While Iran can do without India, it needs China:

Iran last week threatened to cut off oil exports to India, which owes $5bn for oil but has not been able to move the money out of an escrow account to Tehran.

Unlike India, which exports almost nothing to Iran, China is dominant in Iranian business and could use a barter system to balance trade between the two countries. Beijing is involved in everything from building tunnels to exporting toys and has been expanding into Iran’s oil sector, where European companies such as Shell and Total have been deterred by the difficulties of operating without contravening sanctions.

China and Iran’s bilateral trade totaled $29.3bn last year, up almost 40 per cent from 2009. The two countries this month signed several infrastructure and trade collaboration agreements that would see Chinese companies invest in big infrastructure projects in Iran, while Iran would export large quantities of chrome ore to China, according to local reports.

“Both China and India are happy to keep Iran’s money in their banks and try to get Iran involved in barter deals to sell their junk, or give yuan and rupees instead of hard currencies,” said one Iranian former official, on condition of anonymity. Iran had not yet accepted the alternatives, he added.

While Iran would have very little use for a non-convertible Yuan (for now), direct barter is something that will be far more useful to the resource-rich country. Yet, as Isaac Newton once cautioned, "in order to measure, you must define your unit." What will China and Iran agree on as the unit of exchange, if not monetary intermediate, especially in those cases when there is no preset barter agreement?

If said neutral monetary "hard asset" ends up being a precious metal, look out US Dollar.

And for those curious to learn some more about the Iranian Oil Bourse, here is Grant Williams with his latest "Things that make you go hmmm."

Hmmm Jul 23 2011