Goldman and Oil, and Semgroup

[Supercilious]

GRG55, isn't it sad to see Goldman slandered in the media ?

http://www.forbes.com/forbes/2009/04...goose-oil.html

It's hard to choose a favorite quote from this article, but I'll do my best:

How Goldman Sachs was at the center of the oil trading fiasco that bankrupted pipeline giant Semgroup.

When oil prices spiked last summer to $147 a barrel, the biggest corporate casualty was oil pipeline giant Semgroup Holdings, a $14 billion (sales) private firm in Tulsa, Okla. It had racked up $2.4 billion in trading losses betting that oil prices would go down, including $290 million in accounts personally managed by then chief executive Thomas Kivisto. Its short positions amounted to the equivalent of 20% of the nation's crude oil inventories.
[...]
"What transpired at Semgroup was no less than a $500 billion fraud on the people of the world," says John Catsimatidis, the billionaire grocer turned oil refiner who is attempting to reorganize Semgroup in bankruptcy court. The $500 billion is how much the world would have overpaid for crude had a successful scam pushed up oil prices by $50 a barrel for 100 days.
[...]
Shortly before it filed for bankruptcy, Semgroup sold its trading book to Barclays (nyse: BCS - news - people ) Capital. Barclays' bold bet was that the price of crude would fall, erasing the losses. It is believed that 30 days later Barclays was sitting on a $1 billion gain as oil indeed fell, to $114 a barrel. Barclays wouldn't comment other than to confirm it still owns the book. That prices plunged after Semgroup failed is more evidence of manipulation, says Catsimatidis: "With the portfolio in Barclays' hands they could not squeeze the shorts anymore. The jig was up, and oil collapsed."

[GRG55]

Re: Goldman and Oil, and Semgroup

GRG55, isn't it sad to see Goldman slandered in the media ?

http://www.forbes.com/forbes/2009/04...goose-oil.html

It's hard to choose a favorite quote from this article, but I'll do my best:

It's a brutal world out there...

But like the man sez, you places your bets and you takes your chances. What the hell was a pipeline company doing speculating on the oil price?

I remember reading a story back early this decade about one of the Tisch family [Loews Corp] starting to short the Nasdaq in 1999, and steadily building an increasing short position as the tech bubble insanity was approaching its peak. They finally threw in the towel in early 2000, costing their shareholders a billion dollars [back then I suppose a billion dollars was a lot of money :rolleyes:]. Within weeks the Nasdaq broke down and the rest is history...

Maybe I am blind, but I still don't see anything much different in what happened in oil that didn't also happen in wheat, zinc, copper, natural gas, uranium, solar energy stocks, and so forth. All the charts seem to have much the same pattern.

The only difference, and the reason I like oil, is that for every barrel that gets oxidized another barrel has to be found, developed and produced [there's no recycled scrap for new supply to compete with like copper, and no yield improvement from more fertilizer like wheat]... and now at a higher full cycle cost than the netback on the barrel just sold. That's not a sustainable business model for the global oil industry. So either the industry shrinks starting with least profitable players (Chavez's PDVSA comes to mind ], or we set up for another price spike. You probably know which I think will happen. ;) And given your interesting ETF pair trade you would appear to be in much the same camp, albeit perhaps for different analytical reasons.

[cobben]

Re: Goldman and Oil, and Semgroup

"It's a brutal world out there..."

And this is a prime example of why the big sharks have to be gotten rid of, otherwise any form of normal business will become nigh impossible in the wild volatility in all markets.

[GRG55]

Re: Goldman and Oil, and Semgroup

"It's a brutal world out there..."

And this is a prime example of why the big sharks have to be gotten rid of, otherwise any form of normal business will become nigh impossible in the wild volatility in all markets.

A pipeline company speculating on the oil price is not "normal business" imo.

That's just pure FIRE economy stupidity. And they are by no means alone. Most of the pure exploration and production companies were also persuaded to "manage risk" by hedging part of their production. In every instance they cost their shareholders tens of millions [and in some cases billions] of foregone profits year after year during the re-flation run from the recession low early this decade. The amounts that they are making for their shareholders since the price peak last summer, and that they are trying to use as a demonstration of their business acumen, is nowhere near enough to offset what they lost in years just past. Guess who gave these companies this valuable advice, and were on the opposite side of these trades...yep, Goldman, Morgan Stanley, all the usual culprits.

[GRG55]

Re: Goldman and Oil, and Semgroup

...I remember reading a story back early this decade about one of the Tisch family [Loews Corp] starting to short the Nasdaq in 1999, and steadily building an increasing short position as the tech bubble insanity was approaching its peak. They finally threw in the towel in early 2000, costing their shareholders a billion dollars [back then I suppose a billion dollars was a lot of money :rolleyes:]. Within weeks the Nasdaq broke down and the rest is history...

I wonder if the Tisch family broker was Goldman :eek:

[cobben]

Re: Goldman and Oil, and Semgroup

"A pipeline company speculating on the oil price is not "normal business" imo."

I was not thinking of them, I was thinking of everyone else not being able to plan their businesses in a reasonable way because of the volatility, and not just in oil - the forex market is being gamed by the big banksharks also, or do you consider for example a 14% swing in the USDSEK exchange rate within one week a normal business risk? It shouldn't be.

[GRG55]

Re: Goldman and Oil, and Semgroup

"A pipeline company speculating on the oil price is not "normal business" imo."

I was not thinking of them, I was thinking of everyone else not being able to plan their businesses in a reasonable way because of the volatility, and not just in oil - the forex market is being gamed by the big banksharks also, or do you consider for example a 14% swing in the USDSEK exchange rate within one week a normal business risk? It shouldn't be.

I agree. I have no idea how anyone can run a production economy business any more, unless perhaps it's restricted to a single currency domain and all its physical inputs are locally sourced only.

Basically "the system" is forcing everyone to become a FIRE economy player, if for no other reason than one must hedge currency risk on every significant business transaction if one is doing business across borders.

I have a friend who owns a petroleum equipment supply firm here in Canada. A typical order will be between $50 million and $200 million. Been around more than 30 years. Most of his business is international. He's having a hell of a time pricing his bids and quotes because of the wild exchange rate changes in days or weeks, because he cannot hedge the currency risk until he has a firm order.

[Supercilious]

Re: Goldman and Oil, and Semgroup

I remember reading a story back early this decade about one of the Tisch family [Loews Corp]

Ha ha ha! I was thinking about the same thing reading the article.

Maybe I am blind, but I still don't see anything much different in what happened in oil that didn't also happen in wheat, zinc, copper, natural gas, uranium, solar energy stocks, and so forth. All the charts seem to have much the same pattern.

Yup. Since I'm obsessed with real wealth flows in an economy, I believe this was typical case of creating artificial scarcity in order to ramp up the profits. What I believe was absolutely novel this time is that most of the profits were not made by over priced selling but by attaching a casino enterprise to the price fluctuation of commodities. The bet was not on the price level, but on the rate of price change ... well, we were speaking of derivatives.

This new innovation is applied to everything including currency exchange, and everywhere we see the usual suspects at work.

So either the industry shrinks starting with least profitable players (Chavez's PDVSA comes to mind ], or we set up for another price spike. You probably know which I think will happen. ;) And given your interesting ETF pair trade you would appear to be in much the same camp, albeit perhaps for different analytical reasons.

I agree, although there are some fine points to make. First the system has an inbuilt instability. A lot of national type producers are now in a serious squeeze and their only way to increase revenues is to produce more regardless of price. In current conditions all talk about OPEC doing production cuts is a joke. Even if they approved such a resolution, everybody would cheat.

The second aspect is the future impact of carbon tax credit trading.... Again the synthetic ETF/ETN-style game will be played creating another mechanism of artificial scarcity for oil, on top of the existing ones. The question is how much of this profit extracted by this new carbon credit toy will be taken from the profits of oil producers and how much it will result in price increases for the end consumer. My bet is that there will be wide swings of profit distribution between oil producers/trading and carbon tax trading. The winners will be the ones who will control both trades, and they will be 'semgrouping' everybody else.

The third thing is that the green energy miracle foretold by Al Gore the Prophet of Noble and Oscar will have in the first stage an effect of increasing oil consumption since at the current stage of technology most alternative energy sources have actually a negative energy balance.

I believe the fourth factor will be a surprise coming out of the blue (actually an unintended consequence generated by the green revolution) which will take us once again from the "sustainable" mindset.

So probably for the next few years energy trading would be in for a very tough ride.

[due_indigence]

Re: Goldman and Oil, and Semgroup

As some analysts have noted, the oil business is stupidly arranged. It's a price taker market. That's no way to run a railroad, let alone the world's lifeblood. And yes the paper oil market is destroying the production industry. The greatest enemy is not high prices, but volatility.

As for investment themes? Fight paper with paper. Oil's 2008 bubble has derailed the industry's rational planning for future demand. OPEC was right when they kept insisting last year's prices were completely unhinged from reality. We are similarly unhinged today (though less-so than we were a couple of months ago.) My sense is current price has lurched a bit ahead of demand growth and recovery.

When the tail wags the dog, the dog dies. I don't want to get arrested so I won't say hang the banksters. Woops, there I went and said it. Usury. It's a disease.

[GRG55]

Re: Goldman and Oil, and Semgroup

Ha ha ha! I was thinking about the same thing reading the article.


Yup. Since I'm obsessed with real wealth flows in an economy, I believe this was typical case of creating artificial scarcity in order to ramp up the profits. What I believe was absolutely novel this time is that most of the profits were not made by over priced selling but by attaching a casino enterprise to the price fluctuation of commodities. The bet was not on the price level, but on the rate of price change ... well, we were speaking of derivatives.

This new innovation is applied to everything including currency exchange, and everywhere we see the usual suspects at work...

An interesting point of view, as always, $#*.

I agree, although there are some fine points to make. First the system has an inbuilt instability. A lot of national type producers are now in a serious squeeze and their only way to increase revenues is to produce more regardless of price. In current conditions all talk about OPEC doing production cuts is a joke. Even if they approved such a resolution, everybody would cheat...

This is OPEC's tried and true, consistent historical behaviour...I don't see anything unique about "current conditions", other than OPEC is again trying to appear as though it actually has some real influence. We even have the media spin machine spreading the word from "experts" that the oil price would have fallen even more if "OPEC had not acted with discipline".

On this point you and I are in agreement. Most OPEC nations are still producing at [generally diminishing, other than Angola] capacity. The exceptions being Saudi, Abu Dhabi and Kuwait.

With the decline in non-OPEC production now underway, OPEC may be able to regain some of the influence it held very briefly in the early 1970s. But I doubt it. The members can't stop squabbling. So the influence shifts not to OPEC, but to Saudi Arabia. And therefore at some point soon the question becomes, does it serve the consuming nations interests to maintain political stability in Saudi Arabia? As long as it serves consuming nations mutual interests, not much will likely change. But if or when the USA ever gets its act together and manages to wean itself off such a high oil dependence [and perhaps the carbon trading cost burden you expect will be part of this process], then an active abandonment of support for the Al Saud family, perhaps to the point of undermining that regime, may serve US geopolitical interests more than just taking a neutral stance...

Like I said, it's a brutal world out there...

The second aspect is the future impact of carbon tax credit trading.... Again the synthetic ETF/ETN-style game will be played creating another mechanism of artificial scarcity for oil, on top of the existing ones. The question is how much of this profit extracted by this new carbon credit toy will be taken from the profits of oil producers and how much it will result in price increases for the end consumer. My bet is that there will be wide swings of profit distribution between oil producers/trading and carbon tax trading. The winners will be the ones who will control both trades, and they will be 'semgrouping' everybody else...

No doubt there will be a major battle over the profits from carbon tax policy. However, I see one of the players that is going to try to stack the system as being governments themselves, all of whom will be searching for new forms of tax revenue. That's why it's quite likely most of the burden will fall on the end consumers most of the time.

The third thing is that the green energy miracle foretold by Al Gore the Prophet of Noble and Oscar will have in the first stage an effect of increasing oil consumption since at the current stage of technology most alternative energy sources have actually a negative energy balance...

Conservation initiatives, prompted as much by volatile energy prices as by higher prices [as a percentage of disposable income] seem set to play a much larger role than alternative energy technologies. Maybe we'll see the carbon tax give credits for conservation as a sop to the voters to gain their support for higher retail energy prices. More cash subsidies to insulate McMansions will surely follow, thus allowing the government to "manage" those credits on behalf of the collective voters :p

I believe the fourth factor will be a surprise coming out of the blue (actually an unintended consequence generated by the green revolution) which will take us once again from the "sustainable" mindset...

Any speculations as to what this surprise may be?

[Supercilious]

Re: Goldman and Oil, and Semgroup

This is OPEC's tried and true, consistent historical behaviour...I don't see anything unique about "current conditions", other than OPEC is again trying to appear as though it actually has some real influence. [...]

That is absolutely true. Still the media keeps talking nonsense. That is also consistent historical behavior...

No doubt there will be a major battle over the profits from carbon tax policy. However, I see one of the players that is going to try to stack the system as being governments themselves, all of whom will be searching for new forms of tax revenue. That's why it's quite likely most of the burden will fall on the end consumers most of the time.

I think I disagree with you on this point. If we think at what happened when cod was securitized in Iceland (the government imposed individual fishing quota's based on previous catch history of each fisher man/captain) and made those allocation tradeable by the banks, the fish producers in aggregate saw their profits cut, and the profits concentration increased (only a few captains made better money while the majority was barely afloat), the price of fish increased at consumer levels, and the profits of the entities trading the quota papers (fish harvest futures) soared.

The interesting part is that the fish quota masters made profits much higher than the difference between price paid by consumer and gross earnings of fishermen. That differential was good money but it was supplemented from profits made by ... lending necessary in order to allow fishing to continue with increased securitization tax. So basically, the system instead of resulting in increasing tax revenues for the government and increased profits for the fishermen, it resulted in increasing government debt and lower profits for the fishermen in order to compensate for higher profits of the fish-quota traders.

I suspect the same will happen with the carbon tax credits.

Conservation initiatives, prompted as much by volatile energy prices as by higher prices [as a percentage of disposable income] seem set to play a much larger role than alternative energy technologies.

I agree. Common sense conservation (simply reducing unnecessary waste) would do more than all the Alternative Revolution circus.

Any speculations as to what this surprise may be?

Unfortunately for time being not. I have to study the subject more before opening my mouth. I usually don't like to talk nonsense, even if I do engage often in such behavior ...

[cjppjc]

Re: Goldman and Oil, and Semgroup

Go back and look at how long Freddie and Fannie stock held up after the New centuries of the world cratered. Then the Banks cratered. I bet against Freddie and Fannie. They stay strong. I was like "What's going on here. How can they not be getting slammed." I threw in the towel and then they started down, down, down......

[GRG55]

Re: Goldman and Oil, and Semgroup

...This is OPEC's tried and true, consistent historical behaviour...I don't see anything unique about "current conditions", other than OPEC is again trying to appear as though it actually has some real influence. We even have the media spin machine spreading the word from "experts" that the oil price would have fallen even more if "OPEC had not acted with discipline".

On this point you and I are in agreement. Most OPEC nations are still producing at [generally diminishing, other than Angola] capacity. The exceptions being Saudi, Abu Dhabi and Kuwait...

OPEC March oil output still above target-Petrologistics
Fri Mar 27, 2009 3:10pm GMT

LONDON, March 27 (Reuters) - OPEC's oil output in March is expected to average around 1 million barrels per day (bpd) above its target as Iran and some other members pump above agreed levels, an industry consultant said on Friday.

Output from the 11 OPEC members with production targets is expected to average 25.9 million bpd, compared with a revised 25.93 million in February, Conrad Gerber, head of Petrologistics, told Reuters.

The estimate implies the group delivered on around 75 percent of 4.2 million bpd of output cuts agreed since last year, according to Reuters calculations -- less than the 80 percent found by many analysts for February.

"They are still around 1 million barrels above the target," Gerber said. "The Iranians are over their target, the Angolans are well over and the Venezuelans are over."

The Petrologistics estimate suggests OPEC is pumping 1.06 million bpd above a collective target of 24.84 million bpd that took effect on Jan. 1...

...Top world oil exporter Saudi Arabia has led the OPEC cutbacks. It is pumping 8.05 million bpd in March, in line with its OPEC target, and down from an upwardly-revised 8.13 million bpd in February, Gerber said.

But Iran, OPEC's second-largest producer behind Saudi Arabia, is expected to pump 3.75 million bpd in March, he said. Iran's OPEC target is 3.34 million bpd.

Gerber did not provide exact figures for Angola and Venezuela's supply...

...Geneva-based Petrologistics measures OPEC supply, which excludes oil produced and placed in storage, by tracking oil tanker shipments and estimating domestic consumption.

OPEC does not issue timely estimates of its own production.

[GRG55]

Re: Goldman and Oil, and Semgroup

...Conservation initiatives, prompted as much by volatile energy prices as by higher prices [as a percentage of disposable income] seem set to play a much larger role than alternative energy technologies. Maybe we'll see the carbon tax give credits for conservation as a sop to the voters to gain their support for higher retail energy prices. More cash subsidies to insulate McMansions will surely follow, thus allowing the government to "manage" those credits on behalf of the collective voters :p...

This didn't seem to get much airplay yesterday.

From Reuters:

$3.2B Available in Block Grants for Local Energy Efficiency Upgrades

Fri Mar 27, 2009 9:48am EDT

Further energy efficiency project funds from the U.S. government's stimulus package were released this week by the Obama administration in the form $3.2 billion in block grants for cities, counties, states, territories and Native American tribes.

On Thursday, Vice President Joe Biden and Energy Secretary Steven Chu announced the availability of money from the American Recovery and Reinvestment Act through the Department of Energy's Energy Efficiency and Conservation Block Grant program.

"These investments will save taxpayer dollars and create jobs in communities around the country," Biden said in a statement. "Local leaders will have the flexibility in how they put these resources to work -- but we will hold them accountable for making the investments quickly and wisely to spur the local economy and cut energy use."

The money being made available for block grants is in addition to the $8 billion in recovery act funds for weatherization and energy efficiency projects that the DOE released to states two weeks ago.

Of the $3.2 billion in block grant funds, $1.9 billion is to go to cities and counties; $770 million goes to states, which administer the money for counties and cities not large enough to directly receive DOE funding; and tribal governments get more than $54 million. The remaining $456 million is for local energy efficiency projects that will be funded on a competitive basis in solicitation that will be made later.

"The block grants are a major investment in energy solutions that will strengthen America's economy and create jobs at the local level," said Chu.

For running totals on how much stimulus money is being made available through the DOE, click here or visit energy.gov/recovery.

The block grant money is to support energy audits and energy efficiency retrofits in residential and commercial buildings; the development and implementation of advanced building codes and inspections; and the creation of financial incentive programs for energy efficiency improvements.

Other eligible efforts include transportation programs that conserve energy; projects to reduce and capture methane and other greenhouse gas emissions from landfills; renewable energy installations on government buildings; energy efficient traffic signals and street lights; and deployment of cogeneration (Combined Heat and Power) and district heating and cooling systems.

Grant recipients will be required to report on the number of jobs their funded projects create or retain, energy savings, the amount of renewable energy capacity installed, reductions in greenhouse gas emissions, and funds leveraged.

[GRG55]

Re: Goldman and Oil, and Semgroup

...I think I disagree with you on this point. If we think at what happened when cod was securitized in Iceland (the government imposed individual fishing quota's based on previous catch history of each fisher man/captain) and made those allocation tradeable by the banks, the fish producers in aggregate saw their profits cut, and the profits concentration increased (only a few captains made better money while the majority was barely afloat), the price of fish increased at consumer levels, and the profits of the entities trading the quota papers (fish harvest futures) soared.

The interesting part is that the fish quota masters made profits much higher than the difference between price paid by consumer and gross earnings of fishermen. That differential was good money but it was supplemented from profits made by ... lending necessary in order to allow fishing to continue with increased securitization tax. So basically, the system instead of resulting in increasing tax revenues for the government and increased profits for the fishermen, it resulted in increasing government debt and lower profits for the fishermen in order to compensate for higher profits of the fish-quota traders.

I suspect the same will happen with the carbon tax credits...

From an interview with Entergy CEO J. Wayne Leonard in this weekend's Wall Street Journal:

The Carbon Cap Dilemma

...Entergy belongs to the swarm of major energy companies that are -- contrary to type -- practically begging Washington to create a cap-and-trade program. Mr. Leonard supports President Barack Obama's plan to slash emissions 80% by 2050. It sounds strange: Lobbying the government to tax your products is generally not taught in business school.

But then, a lot of companies stand to make a bundle off cap and trade. Once Congress puts a ceiling on emissions, and then allows businesses to sell any of its extra allowances that stand for the right to emit, it is essentially creating the world's largest commodity market -- in carbon-backed securities. These will be extremely valuable, and everything comes down to how the government chooses to distribute them

Mr. Leonard thinks the allowances should be auctioned off, rather than given away. So does the White House. Then the billions in new revenues that cap and trade would raise every year should be returned to the public. "Ideally you want to recycle it all, give all the money back," he says.

That's the purist's view on cap and trade -- and it puts him at odds with many of his peers at big coal-fired utilities like Duke Energy and American Electric Power that emit the most carbon. These companies signed on in the expectation that the allowances would be handed out at no charge. But economically, that is the same as selling them and giving the money to businesses -- i.e., as subsidies and corporate welfare....

...Still, the government is not exactly run by omniscient technocrats. Does he believe that Congress -- with its entrenched constituencies, its own self-interest, its many antibusiness biases -- can actually create a climate system that is as sensitive and efficient as he envisions? That is, can the political class actually write the same bill that economists would write?...