Oil speculators pushing prices to new levels - Part 2

Lehman Brothers, the investment bank, has estimated that fuel is 30 per cent overpriced because of an influx of money into the oil market from investment funds.

It believes that hot money accounts for between $20 to $30 of the recent increase in oil prices and that about $40 billion (£20 billion) has been invested in the sector so far this year — equal to all the money pumped into oil last year.

The price hit a record of nearly $120 a barrel on 28th April 2008, after North Sea production was shut down because of the Grangemouth refinery strike. In early trading, the price of US light crude rose $1 to $119.93. Prices later retreated to settle up 23 cents at $118.75 a barrel.

The situation may get even worse in the coming months. Chakib Khelil, the Algerian Energy Minister and president of Opec, said that crude could reach $200 a barrel.
The price rise comes despite a 400,000 barrel-a-day reduction in physical demand from the United States, which is consuming less because of its economic slowdown. This has been more than offset by funds seeking alternative investments to the falling US dollar.

Michael Waldron, energy analyst for Lehman Brothers, said: “There has been an increase in financial demand as many funds have poured into oil as a hedge against inflation and the weakening US dollar. This has been the main factor in driving the price in recent months. We do not think the fundamentals justify oil at $120 and, without financial demand, we think it would be trading at $20 to $30 below that level.”
Analysts fear that the price will rise even higher as supply shortages get worse in the coming months while both physical and financial demands increase.
On the supply side, shortages may occur if there is a bad hurricane season in the Gulf of Mexico and because the oil industry typically saves maintenance work at fields such as the North Sea for good weather.
Rapid economic growth in the Middle East has led to a large increase in energy consumption, which is diverting oil and gas away from export markets to feed domestic needs. This has exacerbated the effect of rising energy demand in the region.
Yesterday’s increases came as the workers at Grangemouth, which is operated by Ineos, a chemicals company, began the second day of a two-day strike over pension benefits.
This forced the closure of the 700,000 barrel-a-day Forties pipeline and sparked fears that Scotland and the North of England could face petrol shortages. Grangemouth supplies 10 per cent of the UK’s petrol but also produces power for BP’s Kinneil plant, which processes the oil from the Forties pipeline.

The impact:
The high price of oil is having an impact on the global economy, with airlines failing and drivers paying more to fill their cars. Eos, the business-class-only airline, went into Chapter 11 bankruptcy protection yesterday and joins at least six other carriers that have also been grounded in the past two weeks by high costs.

Conclusion:

Though the report is not all conclusive, and I would further investigate into the matter but seems as of now is:

• Lot of fund managers are putting money in Oil to hedge against weakening dollar and recession.
• Lack of sentiments in equity market world over is driving money towards Oil & Oil bonds.
• When the physical demand for oil would join the financial demand, the prices would accelerate northwards without any brakes...all leading to a bubble.

Mars and Buffett bid $23bn for Wrigley.

Mars, the world's largest chocolate maker, and the investor Warren Buffett confirmed on 28th April 2008 that they would pay $23 billion (£11.5 billion) cash for Wrigley in an agreed deal with America's largest chewing-gum maker. A combined Mars-Wrigley entity would overtake Cadbury Schweppes as the world's biggest confectionery company.
Shares in Wrigley rose 23.5 per cent to $77.13 after the $80-a-share cash deal was announced.
Mars is offering a substantial premium for Wm Wrigley Jr, which had a stock market value of about $17.3 billion at Friday's $62.45 closing price. The offer price represents a 28.1 per cent premium. Under the terms of the agreement, Wrigley will become a standalone subsidiary of Mars.
Berkshire Hathaway, Mr Buffett's investment vehicle, has agreed to provide financing to Mars for the deal alongside Goldman Sachs and JPMorgan, and will take a minority equity stake in the Wrigley subsidiary. Mr Buffett is well-known for his preference for strong consumer brands; however, he usually embarks on acquisitions without a partner.
Analysts said that if the deal went ahead, Mars would be the biggest player in the global confectionery industry with a market share of 14.4 per cent, overtaking Cadbury's 10.1 per cent.

Warren Buffett tells investors ' The party is over'.

Warren Buffett, the world’s third-richest man, declared that the insurance “party is over”, as his Berkshire Hathaway investment vehicle reported that fourth-quarter insurance underwriting profit fell 46 per cent to $465 million (£235 million), while insurance investment income rose 12 per cent to $978 million.
Mr Buffett, who typically makes about half his profits from insurance companies such as Geico and National Indemnity, said that Berkshire Hathaway had been reducing new underwriting as rising competition in the absence of any disaster since Hurricane Katrina in 2005 pushed rates down, especially on coastal properties.
He also gave warning that, after two years with no significant disasters, it was only a matter of time before one happened, affecting claims.
“That party is over,” Mr Buffett said in his annual letter to Berkshire Hathaway shareholders. “It’s a certainty that insurance industry profit margins, including ours, will fall significantly in 2008. Prices are down, and exposures inexorably rise . . . So be prepared for lower insurance earnings during the next few years.”
The decline in underwriting revenues dragged down the group’s fourth-quarter net income from $3.58 billion to $2.95 billion. However, for all of 2007, Berkshire’s profits rose by 20 per cent to $13.21 billion.
Mr Buffett, 77, whose Berkshire Hathaway owns 2.9 per cent of Tesco, 4.8 per cent of Coca-Cola and 2.2 per cent of Johnson & Johnson, said that he had drawn up a shortlist of four candidates to succeed him when he finally retires. He would not name names.

Brand TATA, biggest Indian brand in the world!

Tata, one of India’s biggest group of companies on an acquisition spree, has emerged as one of the largest global brands, according to a UK-based independent consultancy firm. Valued at $11.4 billion, Tata is ranked 57th among top 100 brands listed by Brand Finance, an independent company focused on the management and valuation of brands. Coca-Cola heads the list followed by fellow American companies Microsoft, Google, Wal-Mart, IBM and GE while UK’s HSBC is placed 7th.

Expressing his happiness, Tata Sons executive director R Gopalakrishnan said it was a first for an Indian brand to be listed among the world’s largest. “For the first time, an Indian brand has got into the list of the largest global brands, although it is number 57 and they have valued it at $11.4 billion,” said Mr Gopalakrishnan who is also a member of the Tata group corporate centre.

Tata has three biggest acquisitions in value, the Anglo-Dutch steel company Corus is the biggest. When completed and approved, Ford’s Jaguar and Land Rover will be second and the third will be Tata chemicals’ purchase of General Chemicals. The total amount of acquisitions done by Tata is probably around $25 billion in the last 4-5 years.

Hats off to you guys!

Sources: ET

Oil Rally - a bubble in the making! Part 1

It started with financial asset bubble burst in Japan with the Collapse of banking system, followed by Technology bubble burst then with recent and most devastating real estate bubble burst. I believe oil rally is yet another bubble in the making, which would burst and would impact several economies severely.

Oil's meteoric rise to near $120 a barrel looks like more than just another economic bubble - growing demand and tighter supplies are likely to keep prices high. Some analysts say even $200 a barrel would not be out of the question.

The latest price surge - pushing crude to record heights in recent weeks, and to nearly double its level a year ago - has some key components of a classic bubble, when market prices climb far above their intrinsic value. The burst comes when investors realise the assets are overvalued. But growing worldwide thirst for crude, in large part from the rapidly developing economies of China and India, means frustrated consumers probably won't get any relief.

"We can do our homework, but prices are going to go where they want to go at this point," said Jeff Spittel, an analyst at investment bank Natixis Bleichroeder.

Oil came close to $120 a barrel on 25th April 2008, on news that a ship under contract to the US Defence Department fired warning shots at two boats in the Gulf that may have been Iranian. The markets were also weighing the effects of a pipeline attack in Nigeria and a looming refinery strike in Scotland. Retail gas prices, which at times rise in tandem with crude oil, moved further into record territory near $3.60 a gallon.
 

The Organisation of Petroleum Exporting Countries - which supplies about 40 per cent of the world's crude - insists it's supplying more than enough oil. Instead, many observers blame speculative traders for bidding up the price as a hedge against inflation and as protection from the sinking dollar. Some see that as evidence of a bubble.
 

It's also becoming harder and more expensive for oil companies to find and tap new petroleum reserves - a troublesome scenario given forecasts that the world's energy needs will escalate by more than 50 per cent in the next two decades. Toss in the weak dollar and political instability in some oil-producing countries, and it seems unlikely that oil will fall below $100 a barrel anytime soon, if ever.
 

Widely watched oil price prognosticator Goldman Sachs has said oil could average $110 a barrel by 2010, up from a previous forecast of $80, and that a spike as high as $200 a barrel is possible in case of a major supply disruption.

Cell phones still fiercely opposed on plane!

The very idea of airlines allowing passengers to talk on cell phones during flights reminds frequent flier Alvin Kolchins of the movie Snakes on a Plane.
"I'm not sure which would be worse, but my vote goes to . . . cell phones," said Kolchins, a Penn Valley resident who sells life insurance and annuities. "At least with the snakes, they are quiet and can only bite and kill you."

Kolchins is one of millions of airline customers and employees who were horrified at a recent report that the European Union had cleared the way for carriers to allow the use of cell phones while planes are in the air.
"What a horrible thought," said Priscilla Sharpless, a travel agent who lives in Phoenixville. "Flying is miserable enough these days without having to listen to people yakking on their cell phones at close quarters."
The FCC ban - originally adopted in 1961 and later updated - was meant to prevent any interference with a plane's navigational instruments or disruption of phone service on the ground.
U.S. airlines aren't clamoring to change the rule. Flight attendants in particular are adamantly opposed to ending the ban, fearful that without it, confrontations between passengers would become common. And just in case an airline were to consider it, members of Congress are introducing legislation to enshrine the FCC ban in federal law.
The broad opposition may be a telling sign of the times. A dozen years ago when private cell-phone use was exploding and talking anywhere was considered a convenience more than nuisance, trade groups for the airline and electronics industries were expressing hope for easing of the rules due to traveler demand. But recently conducted survey showed that more than three dozen others who responded said they were opposed. None was in favor of lifting the ban.
"Cell phones on planes. . . . Four words that strike fear in my heart," wrote Wendy Earle, a marketing specialist from Kulpsville. "Who hasn't experienced the blowhard whose loud end of the conversation can be heard from 100 feet away? Wouldn't you just love to be sitting near him [or her] on a plane?"
Although cell phones increasingly are used for silent text-messaging and e-mailing, it was the prospect of gabby, one-sided conversations popping up throughout a confined aircraft cabin that elicited dread.

Don Goldkamp, a frequent business traveler who lives in Cedars, Montgomery County, called cell phones on planes "invasive to other passengers. I can't imagine why the airlines would want to make flying less pleasant than it already is," he added.
Objections to changing the rule started soon after the E.U. said on April 9 that midair cell-phone usage could start as soon as airlines could install onboard base stations in their planes. Passengers could turn on phones once a flight has reached 10,000 feet, when other electronic devices such as laptops are allowed.

After the E.U.'s decision, a bipartisan group of members of the U.S. House Transportation Committee quickly decided not to take a chance that the airlines would seek to change the regulation. They introduced the HANG UP Act - for Halting Airplane Noise to Give Us Peace - that would ban the practice.

"In far too many easily foreseeable operational scenarios, cell-phone use could be worse than a mere nuisance," Friend said. "It could have catastrophic effects on aviation safety and security."
The Air Transport Association, which represents the major carriers, hasn't taken a stand on the European Union decision. Were the restriction to be lifted in this country, "the airlines would have to weigh the benefits," spokesman David Castelveter said. "But you don't want to benefit a few and annoy the many."
Among the reasons airlines should not want to change the rule would be a loss of business from some customers, one of them added.
"The thought of allowing cell-phone use on planes terrifies me," said Earle, the traveler from Kulpsville. "If it happens in the U.S., that will be the final straw. If I can't get there by car or train, I ain't going!"


Source: world news network

Las Vegas experiencing the economic downturn.

MGM Mirage Inc., the largest casino operator on the Las Vegas Strip, told that more than 400 middle management employees would be terminated immediately in a cost-saving move. The decision will save $75 million annually and came after the company saw weakness since August at its properties, which include Bellagio, MGM Grand, Mirage and Mandalay Bay, spokesman Alan Feldman told The Associated Press recently.

The move is the largest and swiftest by a casino operator in the current economic downturn, although the use of so-called "extra board" employees such as dealers and busboys who take fill-in shifts as needed has been down citywide.Budget-tight guests have shown a tendency to spend less in all major segments of the business, Feldman said."Instead of four days, people stay for three. Instead of a five-star experience, they are going for four stars. Instead of two shows, they're going to one," he said. "There certainly is the possibility that there are people who are also making a decision to gamble less."

My take:

This was bound to happen. The sub prime has badly hit the investing upper class. Huge capital is eroded. So, the expenses on luxury will come down drastically. Las Vegas Mirage loss is just one of the many companies and sector that would soon follow the trend.

Sources: Detroit News.