January 2007 Archives

In my article on Sunday, I referenced a NY Times article that claimed Saudi Arabia was content to let oil prices fall to about $50. In today's Wall Street Journal is an article Saudis to Pare Oil Output Again (subscription required).

Saudi Arabia, which already has aggressively shaved its oil output in a battle to shore up prices, is tightening its spigots further this week.

A senior Saudi oil official said yesterday the kingdom had advised its customers of the impending 158,000 barrel-a-day cut, which takes effect Feb. 1. The reductions, part of a broader campaign by the Organization of Petroleum Exporting Countries, are intended to shrink inventories of oil that had ballooned last year as demand growth for petroleum faltered.

"After these cuts, our oil production will have declined by about one million barrels a day since last summer," said the senior Saudi oil official.

If Saudi Arabia or other OPEC members are deliberately sending out confusing signals, then they are succeeding masterfully and it is having its intended effect. People are becoming increasingly uncertain. Continued and increased uncertainty will slow other non-OPEC large megaprojects, such as the oil sands activities in Alberta. Investors prefer steady and predictable prices. Perhaps OPEC is going to start throwing some volatility into the picture to keep everyone off balance. If OPEC wanted to send a strong signal of uncertainty, it could drive prices into the low $40s for several months. And then just as the world began to reacclimatize itself to lower energy prices, OPEC could bring the prices back into the $60s.

I just finished watching The Apprentice Season 6: Los Angeles fourth episode. I thought it was difficult to determine who should be fired on today's show. If given the choice, I would have fired Heidi, not Marisa. I must say, though, it was a close call either way.

Marisa was clearly a pain. She kept harping on the same points over and over and over again. But that is not reason why the team lost. The team lost because of lack of drive and lack of marketing. The team captain failed to motivate the team. I did not see that fire-the-belly spirit. And the marketing was rather bland. Even Marisa's chicken suits idea had merit.

While I appreciate that Marisa did not gel with her team, that often happens in teams. Often one of the more productive members just does not fit—initially. Perhaps narrowly escaping being fired would have changed Marisa's attitude and her infectious spirit would catch on. Trump's vote of confidence, had he given it, for Marisa would have been a strong signal to the rest of the team members. However, getting rid of Marisa will make the Kinetic team happy. They can comfort themselves that one member—an outspoken and often boisterous member—is gone.

It is interesting how the two different teams are very different in their personalities and cultures. One is quiet and cerebral. The other is loud and active. I suspect different tasks will favor different teams. That is, one team is not always destined to win whatever task is assigned.

Two articles worth reading on the future oil production and prices are as follows:

• The Wall Street Journal: Mexico's Oil Output Cools (subscription required); and
• The New York Times: Saudi Officials Seek to Temper the Price of Oil (free registration required).

According to the WSJ, oil production from Cantarell, world's second largest in terms of production at the start of last year, is falling faster than anticipated. Production in December was only 1.5 million barrels per day, down from an expected 1.99 million barrels. The article goes on to suggest that the problems associated with Cantarell might hold grave consequences for Mexico and are symptomatic of problems are most of the world's large but aging oil fields.

The NY Times article suggests that Saudi Arabia has sent signals that it wants oil prices near the $50 mark. The article provides several political factors that might be influencing Saudi Arabia's decision to keep oil prices lower than they have been in the recent past.

As I have stated in the past, it is impossible to understand where short term oil prices will be. Longer term, however, higher prices are likely to prevail, as older fields are unable to sustain their production. There have been no new large elephant fields discovered in decades, and the oil from oil sands, while plentiful, are expensive and are not well suited to gasoline production.

Both articles are worthwhile reading. The Cantarell field is important not only to the world oil market, but also to Mexico and the U.S. So it will be interesting to follow its developments. Saudi Arabia's decision to keep prices lower is interesting.

I recommend reading The Wall Street Journal article OUTSIDE INFLUENCE: How Borrowed Shares Swing Company Votes (subscription required). The article describes how some funds borrow a company's shares temporarily to vote, often to detriment of the shareholders and the company, and then short the shares.

Henderson Land Development Co., Hong Kong's third-largest property developer, owned 73% of a subsidiary called Henderson Investment. It offered a rich premium in November 2005 to buy the rest. It had failed in a similar effort three years earlier, but this time it came back with a better offer. Under Hong Kong law, the deal would go through unless 10% of all the shares opposed it. Since the parent owned such a large stake and large institutions backed the deal, passage was considered a foregone conclusion.

Yet the acquisition was voted down early last year by a slim margin. Several market participants were quoted in news reports saying there was a surge in borrowed shares by at least one hedge fund ahead of the vote, compared with little if any lending in Henderson shares over the previous seven months.

By borrowing the shares and simultaneously shorting the underlying stock, the hedge funds gained the voting rights to squash the deal and stood to profit when the stock dropped 18% the next day. After the Henderson vote, the Hong Kong regulator said it was examining voting practices.

"It appears that one or more hedge funds borrowed Henderson Investment shares before the record date, voted against the buyout, and then sold those shares short, thus profiting from its private knowledge that the buyout would be defeated," the Texas professors wrote in the May 2006 Southern California Law Review. A Henderson spokeswoman declined to comment.

If your shares are held in a margin account, your shares and your voting rights can be transferred to others. They might vote against your interests. One way to prevent this situation is to hold your shares in a cash account.

I found this article interesting because the problem, although not widespread, is not uncommon. Yet, I do not know how regulators could or should stop it from happening. I generally prefer less regulation—so long as the markets continue to act in a fair and transparent manner. I am not sure, however, if this situation is either fair or transparent. Again, I recommend reading this well written article.

I watched President Bush's State of the Union Address on CNN before heading off to the gym last night. I found his comments regarding a reduction in gasoline consumption to be aggressive. And I am not sure that ethanol is the answer. That said, I hope that the U.S. is able to reduce its gasoline consumption by 20 percent over the next decade. I am sure other nations would follow and that would be good for our tiny planet as a whole.

Aside from the energy discussion, which has implications to energy related stocks, I did not find much noteworthy in terms of investments.