When Oil Is “Just Right”

August 26, 2014

  • Crude prices in the “Goldilocks” spot
  • Buffett’s juicy deal with Burger King… and a little-known Oracle strategy you can use yourself
  • Counting down to China-Russia “de-dollarization” summit next month
  • What people really do on conference calls… reader goes toe-to-toe with bureaucracy… a conspiracy theory with at least a ring of truth… and more!

   Crude appears to be holding the line on $94 a barrel this week.

As Matt Insley of our energy desk explained last week, anything substantially below $94 puts us in uncharted waters in light of crude’s steady uptrend the last five years. The chart he shared with us is worth another look…

If crude stays in the low $90s for a while, that’s good news for the U.S. and Canada, adds our resident oil field geologist Byron King.

Think Goldilocks. On the one hand, “motorists and energy-intense businesses — trucking, railways, airlines, refining, chemicals, etc. — can expect relatively lower energy prices in the near term… certainly through the fall and into early winter.”

And on the other hand, prices won’t fall so low that production for U.S. shale operators starts losing money…

   The lower prices of late aren’t all about growing U.S. production. For one thing, Saudi Arabia is goosing its output.

“In reaction to conflict in Iraq, and elsewhere across the Middle East,” says Byron, “Saudis have opened valves and are filling tankers with oil that traders label ‘swing’ capacity. From what I hear, Saudi leadership is more concerned with war-caused oil shortages, and an upward price spike (which destroys economies and oil demand) than with any temporary price decline. So more oil from Saudi in the near term means generally lower global prices.”

   Lower oil prices also put the squeeze on Russia — something Washington would like very much at the moment.

While the U.S. benchmark West Texas Intermediate sits near a seven-month low at $94, world benchmark Brent crude is close to a two-year low of $103.

The Russian government counts on Brent prices of $110 or better. “Anything under $110,” says Byron, “and Russia has to dip into reserve accounts to fund state activities. The Saudis know this, in case you’re wondering.

“The background,” he goes on, “is that one of the largest export destinations for Russian oil in recent years has been the refinery complex in Rotterdam, Netherlands.”

Remember the downing of MH17 over Ukraine last month? Western governments are convinced Russia’s government is complicit. Thus, “Dutch traders are spurning Russian oil and purchasing more oil from West Africa,” says Byron.

Those West African barrels used to be shipped to the United States. But we don’t need as many of them anymore… thanks again to America’s shale bounty.

[Ed. note: The “$1 million challenge” at Real Wealth Trader is still on. We got a healthy response last week. If you missed our initial announcement, here’s the deal: The aforementioned Matt Insley is out to show our readers how they can pull down a total $1 million in profits from America’s energy boom before year-end.

Since Real Wealth Trader’s launch seven months ago, the average closed position pulled in an 82% gain in 51 days. So the $1 million goal is entirely reachable. To start grabbing your share, click here.]

   The S&P 500 reached another intraday high this morning. The index couldn’t manage a close above 2,000 yesterday. Maybe today will be the day.

In the meantime, traders are chewing on a handful of economic numbers…

  • Consumer confidence: At 92.4, according to the Conference Board. That’s the highest reading since October 2007 (when the stock market peaked and subsequently cratered for 18 months. Just sayin’…)
  • Durable goods: Up a silly-good 22.6% in July, but that’s thanks to aircraft orders. Back out transportation and there was a 0.8% drop
  • Case-Shiller home price index: Down 0.2% in June. Year over year, it’s still an 8.1% increase, but the trend is in the direction of easing.

But for sheer Street buzz this morning, there’s nothing like Burger King’s planned takeover of the Canadian coffee-and-doughnut chain Tim Hortons for $11.4 billion. It’s another so-called “inversion” — allowing the firm to be headquartered in Canada, where corporate income taxes run about 27%. In the United States, they’re closer to 40%.

   Away from the Street, there’s much gnashing of teeth over the deal. Business Insider grabbed a few of these comments off Facebook…

Heh… If only they knew who was helping finance the deal…

“Can I get a Cherry Coke with my Whopper?”

The Wall Street Journal says Warren Buffett’s Berkshire Hathaway will furnish about 25% of the deal’s funding. In exchange, it will get preferred shares of the merged company.

“The investment would also thrust Mr. Buffett, known for championing American companies like Coca-Cola Co. and for advocating that wealthy individuals pay their fair share of taxes, into an uncomfortable position at the center of a spirited debate over U.S. tax policy,” the paper adds circumspectly.

   We won’t be so circumspect. Buffett likes having one set of rules that apply to himself… and another set for everyone else.

Every so often we cite this passage from the book Endless Money by our acquaintance Bill Baker, founder of Gaineswood Investment Management: Buffett knows “full well the burden [of higher progressive taxation] would fall primarily upon members of the upper middle class, who have not yet achieved the threshold that would permit them to shift income to tax-minimizing structures.”

Not all of the details of Buffett’s involvement in the Burger King deal are public yet. But almost every deal Buffett does includes a specific kind of vehicle that’s allowed him to collect billions in just the last six years.

Before you let your outrage get the better of you, you should know this type of vehicle isn’t limited to the uber-rich. And it can pay you up to 19 times what you’d get from regular stocks. Check it out for yourself at this link.

   “It is the intention of the SCO to do away with the U.S. dollar for trade settlement,” writes Alasdair Macleod from GoldMoney.

Earlier this month, we noted how a group of six nations called the Shanghai Cooperation Organization is looking to bypass the dollar. The SCO’s two biggest members by far are China and Russia.

Next month, the SCO is set to bring in four new members — including Iran, India and Pakistan. “This will increase the population of SCO members to an estimated 3.05 billion,” Mr. Macleod writes.

   “Fundamentally, the SCO is about resources and the production of goods: Russia controls Asia’s resources and China turns them into goods,” Macleod goes on to explain.

“One of the first persons to identify the geopolitical importance of Russia’s resources was Halford Mackinder in a paper for the Royal Geographical Society in 1904. He later developed it into his Heartland Theory. Mackinder argued that control of the Heartland, which stretched from the Volga to the Yangtze, would control the ‘World-Island,’ which was his term for Europe, Asia and Africa. Over a century later, Mackinder’s theory resonates with the SCO…

“The SCO is the greatest challenge yet mounted to American economic power, and Russia and China are clearly determined to ditch the dollar. We don’t yet know what will replace it. However, the fact that the Central Bank of Russia and nearly all the other central banks and governments in the SCO have been increasing their gold reserves could be an important clue as to how the representatives of 3 billion Euro-Asians see the future of trans-Asian money.”

   Gold is perking up a bit, the bid $1,283 at last check.

   Ah, the wonders of the smartphone: You can read The 5 while you’re on a conference call.

The world’s biggest conference call company, InterCall, recently surveyed its users and found a slight increase in the number of people using mobile phones to dial in to conference calls — from 19.4% in 2011 to 21.2% last year.

Asked what else they were doing while on a call, the results look like this…

Meanwhile, nearly 40% of those surveyed say they’ve hung up without announcing they’ve done so — leaving the impression they’re still on the call.

Now that’s productivity!

   “This comes from a Canadian subscriber, but has a distinctly American angle,” writes a reader, speaking of productivity.

“My company ships agricultural products to the U.S., a relatively minor component of our business. Generally speaking, we can ship ‘premix’ (a vitamin and mineral mix for livestock) across the border with a minor headache. However, once we include fish meal and cattle whey in the premix, the USDA requires a ‘BSE inspection’ [for mad cow disease] by the Canadian Food Inspection Agency.

[Warning: The reader is about to shower us with unfamiliar acronyms. But we get the idea…]

“You see, fish meal and cattle whey are considered animal protein, which triggers a different review. So yesterday, I spent 2½ hours with my HACCP coordinator and three (yes, three!) CFIA representatives reviewing vitamins (yup, now they have to be reviewed, but they are OK in regular premix) and fish meal (it’s fish — they don’t get BSE!) and cattle whey (milk products are also considered exempt — in other scenarios).

“So my 2½ hours, my HACCP coordinator’s 2½ hours, plus prep time (four hours?), plus my purchaser’s time chasing down paperwork (two hours?) cost me probably more than 11 hours of productivity. At let’s not start down the path of my tax dollars, either! All of this for a form that, well, essentially accomplished nothing.

“I could go on with more details, but you get the idea. Is it worth it for a small company like mine to keep shipping into the U.S.? Oh, and you’ll be delighted that your friends ‘in the swamp’ doubled the size of the accompanying ‘BSE questionnaire’ the CFIA representatives are to fill out from last year to this year!”

The 5: Here’s the flip side. Ten years ago, Kansas-based Creekstone Farms built a testing lab for BSE — the first inside a U.S. meatpacking plant. But the U.S. Department of Agriculture refused to sell Creekstone enough testing kits to test all its cows.

Creekstone sued. The USDA argued in court — get this — that allowing a meatpacker to privately test its cows would undermine confidence in the USDA’s random inspections. The National Cattlemen’s Beef Association also objected: “If testing is allowed at Creekstone, we think it would become the international standard and the domestic standard, too.” God forbid the factory-farm companies respond to competition and spend a whole $20 per animal for testing.

In 2008, a federal appeals court told Creekstone to get lost.

   “Conspiracy theory,” reads the subject line of an email in our inbox.

OK, we’ll bite…

“I believe there is a fully orchestrated plan to divide the U.S. into the haves and have-nots in such a way that the direction of our country and our collective thinking will be centered upon the group in which we identify ourselves.

“The arming of police departments with surplus military weapons and vehicles is not a simple process to discard, without objectives, the remnants of war. While our members of Congress are serving a common direction of our country, little is focused on dealing with the major issues we face in our current financial, infrastructure condition, environmental messes, population shifts and global warming crises.

“Congress has created the great divide as a smoke screen to remove the responsibility to pass legislation to deal with the issues, so they create diversionary issues that have little value or effect but to fill the news with sensations. While the rich control virtually all the necessities for survival, and garner the financial returns, the middle class is disappearing into the swamp of urban poor.

“Rebellion is very likely, and the government is preparing for it. Unless we can find a cast of believers to fill the Congress with activists that honestly approach the future with the hard decisions that need to be made, our America will sink to the levels of the rest of the world, in chaos.”

The 5: See above about Mr. Buffett.

We don’t know whether the hollowing out of the middle class is “purposely orchestrated.” Even if it were, would it change anything you’d do about it?

Good luck finding a “cast of believers” to run for office. And depending on what they “believe” in, we’re not sure it would be much improvement, and indeed, the results might be much worse. (See “Terror, Reign of.”)

Best regards,

Dave Gonigam
The 5 Min. Forecast

P.S. Far better than political action, we think, to put matters in your own hands. Here’s where to start.


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