Headlines (Scroll down for complete stories):
1. Analyst: Oil ‘Ought to be $35 to $40 a Barrel'
2. Fed's Kohn: ‘Too Early to Relax' on Inflation
3. Cancellations Continue to Hit Homebuilders
4. OPEC Scrambles as Oil Plunges
1. Analyst: Oil 'Ought to be $35 to $40 a Barrel'
Regular readers of MoneyNews know that our sister publication, Financial
Intelligence Report, is predicting that oil prices could return to its $40 a
barrel level in the next 12 months.
We're not alone. Mark Gilman, oil and gas analyst with Benchmark Co., a New
York-based investment firm, tells CNNMoney.com, "In our view, with the current
supply demand environment, the price ought to be $35 to $40 a barrel."
Story Continues Below
Gilman tells CNN that geopolitical tensions may account for another $5 to the
price of oil, but investors should "chalk up the rest to money flows."
According to the analyst, institutional money from mutual funds, pension funds,
and hedge funds is artificially propping up the price of oil. As oil prices
skyrocketed, fund managers poured good money after bad into crude oil
investments. Now, there is so much money invested in oil, it's difficult for
fund managers to extract it without losing their shirts.
"There is no fundamental reason for [the price of oil]," Stephen Schork,
publisher of the industry newsletter the Schork Report, tells CNN. "This is a
market that is trading on speculation."
According to Schork, you can measure the amount of speculative buying in oil by
the open interest in crude futures contracts. Open interest contracts mean the
buyer doesn't intend to take delivery of crude so the contracts aren't
exercised, sold, or delivered on a commodity exchange.
Schork says open interest for crude was 1.06 billion barrels of oil on the New
York Mercantile Exchange last December. That's double the 2004 average and
higher than the number of physical barrels of oil in the U.S. on a given day,
according to CNN.
But there will come a day when fund managers choose to take the hit and unwind
these oil positions. When that day comes, watch out!
Editor's Note:
2. Fed's Kohn: ‘Too Early to Relax' on Inflation
The U.S. economy is poised for moderate growth and lower inflation, but there is
no guarantee core inflation will continue to ease, Federal Reserve Vice Chairman
Donald Kohn said on Monday.
"A very gradual decline in the trend rate of inflation continues to be the most
likely outcome, but that path is still by no means assured," he said in remarks
to the Atlanta Rotary Club. A text of his remarks was distributed in Washington.
"And in my judgment, such a decline remains critically important to the
sustained prosperity of the U.S. economy," he added.
Kohn said a period of below-trend economic growth may ease some pressures on
tight labor and product markets. But some of the recent easing in inflation may
reflect one-time events, such as a drop in energy prices, he added.
"It is still too early to relax our concerns about whether the run-up in price
pressures in the spring and summer of last year is truly unwinding and whether
it is unwinding rapidly enough to forestall a pickup in inflation expectations,"
he said.
It is uncertain whether housing markets, which along with car industry weakness
contributed to slower economic growth in 2006, have reached bottom, Kohn said.
"In my own judgment, housing starts may not be very far from their trough, but
the risks around this outlook still are largely to the downside," Kohn said.
© 2007 Reuters.
Editor's Note:
3. Cancellations Continue to Hit Homebuilders
Despite the headlines, D.R. Horton isn't exactly jumping for joy that
cancellations for home sales are running at a 33 percent rate in its fiscal
first quarter, down from a 40 percent rate in its fiscal fourth quarter.
"Although our cancellation rate decreased . . . we continue to experience
higher-than-normal cancellation rates and an increased use of sales incentives
in many of our markets," Chairman Donald Horton said in a prepared statement.
D.R. Horton's cancellation rate historically has averaged between 16 percent and
20 percent, according to Banc of America Securities analyst David Oppenheim.
So, an improvement to a 33 percent cancellation rate isn't exactly a sign of
recovery for Horton. That's one in every three homes canceled due to buyer
remorse. As buyers see home prices continue to decline and incentives bumped up
for their neighbors, they're ripping up their contracts and renegotiating. Or
stepping aside altogether to wait for prices to settle.
Horton's home sales plunged 23 percent in the quarter ended Dec. 31 compared to
a year ago. Horton is building just 8,771 homes compared to 11,463 homes it was
building last year. Plus, Horton's seen the value of its orders fall to $2.29
billion from $3.17 billion, a 27.7 percent drop.
Scottsdale, Ariz.-based Meritage Homes is also feeling the pinch — or more like
the vise grip of the slowing housing market. Quarterly net sales orders plunged
42 percent in its fiscal first quarter ended Dec. 31. Meritage, a considerably
smaller builder than D.R. Horton, had home orders of 1,201 in the fourth
quarter, down from 2,072 a year ago.
The cancellation rate for Meritage Homes was a whopping 48 percent – a record
for the company. The company plans to take pre-tax charges of $55 million to $65
million on unexercised land options. The company tries to renegotiate its sales,
but, often times, fails.
"But when these negotiations are unsuccessful, we must sometimes make the
difficult decision to forfeit the option deposit and leave the project," said
Meritage CEO Steven Hilton. "We plan to continue to operate cautiously until we
are confident that housing demand is strengthening in our markets."
That certainly doesn't sound like a rebound to us.
Editor's Note:
4. OPEC Scrambles as Oil Plunges
OPEC's president is holding intensive phone consultations with fellow oil
ministers on further action by the exporter group to stem a sharp price drop,
OPEC sources said on Tuesday.
Mohammed al-Hamli, also UAE oil minister, has spoken to counterparts from
several Gulf states, Nigeria and Venezuela, the sources said. It was unclear
whether any course of action was decided to stem a price drop of nearly 12
percent this year.
Oil prices have fallen below $54 a barrel to the lowest since June 2005 in a
sell off triggered by mild weather, blunting the impact of supply cuts agreed by
the Organization of the Petroleum Exporting Countries.
"Today there are intensive and wide consultations among OPEC ministers through
the OPEC secretariat about recent developments in the market," one source said.
"More consultations will likely take place between members to formulate a
position on the recent market developments."
An OPEC spokesman confirmed ministers were holding phone consultations over the
price slide.
On Monday, Venezuelan Oil Minister Rafael Ramirez had called for an emergency
OPEC meeting before the group's scheduled March 15 session to discuss prices.
OPEC agreed last month to cut oil output by 500,000 barrels per day from Feb. 1,
adding to a 1.2 million bpd reduction from November. So far, members have
implemented just over half of the first cut, according to Reuters estimates.
Oil has plunged well below an undeclared target of $60 a barrel for U.S. crude
that analysts believe OPEC to be defending. Top OPEC producer Saudi Arabia is
thought to want U.S. crude between $55-$65.
Problems could arise for Saudi Arabia's economy if the retreat continues, Hamas
Saud al-Sayyari, governor of the Saudi Arabian Monetary Agency, has said.
A senior OPEC delegate said on Monday the group stood ready to act to stabilise
oil markets and Saudi Arabia was among OPEC members "open to all possibilities."
UAE Oil Minister Hamli took over as OPEC president this month after Nigeria's
Edmund Daukoru finished his one-year term in December.
Some ministers and officials have said the group, which pumps a third of the
world's oil, should wait to assess the impact of the Feb. 1 cut before deciding
any further steps.
"I don't think we are taking any action immediately on this matter unless the
price continues to go down," an OPEC source said. "It's more likely we will wait
to see how the market reacts to the Feb. 1 cut."
Daukoru on Friday urged caution on reacting to the price drop, saying OPEC
should wait to see the impact of the supply curbs already agreed before making
any further reduction.
© 2007 Reuters.
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