Oil Prices May Plunge : ‘Super Contango’

It looks to be a volatile final few weeks for crude oil prices. So far, the low for WTI oil prices (WTI) in 2015 of $37.75 a barrel set in August stands as the low price point — but not for long.

There is a global supply glut, not just of crude oil, but, increasingly, refined products that will likely break the back of price support in the market, sending oil prices into a holiday plunge. So much so, land based storage tanks are filling up and increasing numbers of volumes are being stored on tankers.


In a recent report, the International Energy Agency highlighted the fact that global inventories of all petroleum products were at 3 billion barrels, which was a record. And just over 2 billion of those barrels are resident here in the U.S.

Read More Contango explained

Each week, in the summary page of its petroleum-status report, the U.S. Energy Information Administration references the fact that U.S. crude-oil inventories are at levels not seen in over 80 years. Inventories of gasoline are well-above their average and diesel fuels are also well-supplied.

The vast crude oil glut or mega-glut is manifest in the West Texas Intermediate (WTXR) and Brent crude oil price curves, which have moved into a “super-contango.” (Yup, there are lots of superlatives needed to describe the current state of the market.)

Contango refers to when the front-month or near-term futures contract are trading less than or at a discount to longer-dated futures contracts.

The difference between Brent crude-oil contracts, one year apart, recently hit a record $8 a barrel. The January 2016 WTI futures contract is trading at a hefty discount of $1.50 per barrel to the February contract. In tightly-supplied markets, when crude oil prices are strong, that spread value is the complete opposite.

Oil prices have gotten some support this week from the heightened military action and worry over the situation in Syria and Northern Iraq , especially withthe downing of the Russian fighter jet by Turkey. How Russia responds could plunge the region into deeper turmoil, putting a great deal of oil infrastructure and supply in the cross hairs. But these fears simply do not haunt the market for very long last these days.


The market also got a taste of Saudi Arabia ‘s power this week, when a flip comment by the Saudi oil minister at a cabinet meeting was taken to signal a change in production policy by the Kingdom, as a way of “cooperating” with the other OPEC and non-OPEC producers. With the OPEC meeting looming next week, the comments were seized upon.

The reality is that nothing will come of the OPEC meeting. The Saudis are set to hold their ground. They see little to gain in assisting their oil market and regional rivals, Russia and Iran , by helping to “stabilize” the oil markets. In fact, the Saudis don’t see a market that needs stabilizing.


The lone bright spot for the oil market has been the strong demand for gasoline. The demand in October in the U.S. was the highest in eight years. But, once the holidays pass, that demand will drop off, too.

The downward pressure remains intense on the petroleum complex from the mega-glut and the hit to demand from the economic softness in China and Europe. The strengthening dollar is also a negative for prices.

U.S. motorists will be filled with glee this holiday season, as they buy sub-$2.00 per gallon gasoline, courtesy of $30 crude oil.

Commentary by John Kilduff, a partner at Again Capital, an investment-management firm that specializes in commodities. Follow him on Twitter @KilduffReport.

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Opko Health’s New Era Begins : Motley Fool

Following massive investments over the past two years that have swelled spending on research and development and included a slate of acquisitions, Opko Health (NYSE:OPK) could soon be on its way to delivering consistent quarterly profit to shareholders.

Bigger is better
Opko Health’s billionaire founder, Philip Frost, is legendary for orchestrating acquisitions that add value. After acquiring IVAX Pharmaceuticals in the 1980s and then growing it through M&A, he sold the company to TEVA Pharmaceuticals for $7.4 billion in 2005.

Frost could do even better than that with Opko Health.

After inking a slew of deals in the past to boost Opko Health’s drug pipeline, Frost bought the specialty laboratory company Bio-Reference Labs for $1.5 billion this past summer.

Because Bio-Reference Labs is the third largest laboratory services company, with roughly $200 million in pre-acquisition quarterly sales and $0.24 in quarterly pre-deal earnings, the acquisition significantly increases Opko Health’s sales while also giving it valuable cash flow to advance its pipeline and the potential for ongoing profitability.

Delivering on deals
One of Opko Health’s first acquisitions was rolapitant, a phase 3-ready drug that treats chemotherapy-induced vomiting and nausea, that Frost bought from Schering-Plough in 2009.

In 2010, Opko Health turned around and licensed rolapitant to Tesaro (NASDAQ:TSRO) for up to $121 million in milestone payments and tiered double-digit royalties and in September, the FDA-approved rolapitant for use under the brand name Varubi.

Since Tesaro was founded by Lonnie Moulder, the guru who helped launch the successful chemotherapy nausea drug Aloxi, and antinausea drugs like Merck’s Emend generate hundreds of millions of dollars in sales annually, Opko Health could start seeing meaningful revenue from Varubi soon.

Opko Health is also about to find out whether its acquisition of Cytochroma to get its hands on the vitamin D prohormone Rayaldee pays off.

Rayaldee is under FDA review for approval as a therapy to boost vitamin D in patients suffering from chronic kidney disease.

Stages 3, 4, and 5 CKD patients often suffer bone loss tied to imbalances in vitamin D that require treatment and that treatment typically consists of supplements that can deliver vitamin D inadequately or medicines that aren’t all that effective. If approved, Opko Health believes that Rayaldee could offer a better alternative in a market it estimates to be worth $12 billion.

Of course, no one knows how much of that market Rayaldee can capture, but investors should get a better idea next year given that the FDA’s decision on Rayaldee is expected on March 29.

Opko Health’s long-acting human growth hormone, hGH-CTP, which can be dosed once weekly instead of daily like current therapies, is also nearing the finish line.

The company acquired hGH-CTP when it bought Prolor for $480 million and earlier this year, Pfizer (NYSE:PFE) inked a deal that could be worth hundreds of millions of dollars to Opko Health, plus royalties and potential profit sharing.

Specifically, to protect the market share for its human growth hormone Genotropin, Pfizer paid Opko Health $295 million in up-front cash and agreed to pay another $275 million in potential milestones, plus royalties, to license hGH-CTP. Pfizer also agreed to split profit on Genotropin with Opko Health if hGH-CTP notches approval for use in children.

Results from hGH-CTP’s phase 3 trial are anticipated in the second half of 2016 and if those results are good and hGH-CTP eventually wins the FDA go-ahead, then it will compete in a market worth over $3 billion annually.


Looking forward
Opko Health’s C-suite is packed with former IVAX leaders, including Jane Hsiao, who is vice chairman and worked at IVAX with Frost for more than a decade, and Steven Rubin, Opko Health’s executive vice president, who worked at IVAX for five years.

That team appears to have cobbled together an intriguing mix of drugs, products, and services and their efforts could soon pay off.

Given Opko Health’s upcoming catalysts including Varubi royalties, Rayaldee’s FDA decision, and hGH-CTP late-stage trial results, 2016 is shaping up to be a critical year for Opko Health that investors shouldn’t ignore.


Baltic Dry Index Keeping Iron OreMiners Afloat

AS OF 08:03 EDT

These are nervous times for iron ore producers.

Fortescue Metals, the fourth-largest miner of the steel-making material, starts to lose money if prices at Chinese ports fall below $39 a metric ton. After a 37 percent drop this year, Metal Bulletin’s benchmark is now just 16 cents above its record-low $44.59 a ton.


So it’s no surprise the Australian company’s chief executive officer, Nev Power, is pulling every lever to keep his red dirt in the black. He’s reducing the cost of mining, processing and then hauling the ore to port to $15 a ton from its current $18 a ton, according to a presentation last month. Interest expenses add another $4 a ton, so Fortescue announced Nov. 10 a tender offer aimed at paying back as much as $750 million ofdebt early.  Beyond that, he’s looking at developing a joint venture with Baosteel and Formosa Plastics to produce magnetite, according to Bloomberg’s David Stringer. That variety of iron ore requires costly processing but attracts a higher price and a lower government royalty tax than the hematite Fortescue mines at present.

One unexpected benefit comes from the Baltic Dry index, a benchmark for the cost of hiring freight ships that dipped below 500 on Friday for the first time since it started in 1985. When China’s industrial demand was strong, the cost of both raw materials and the ships used to transport them soared. Now that it’s slumping, commodity prices and ship rates will have to fall to clear supply gluts built up during the boom.

Looking at the cost of hiring a Capesize ore carrier gives you a sense of the benefit:

Flat Iron
The cost of hiring a large ore carrier has been slumping
Source: Baltic Exchange

Fortescue probably pays more than the current spot rate so as to reserve its cargo space and lock in prices for months at a time, but the benchmark is a good guide to the general direction of its expenses. A Capesize vessel carrying up to about 170,000 metric tons of iron ore will spend some 30 days making the round trip to deliver its cargo and get back to port, judging by the last voyage of the Bulk Prosperity, a bulker owned by China Development Bank that anchored off Australia’s Port Hedland on Monday after returning from Qingdao.

At current rates of $4,713 a day, transport on the spot market for the whole voyage would come to about 83 cents a metric ton on a fully laden ship. 12 months earlier, the day rate was $22,192, and transport was $3.92 a ton. When you’re only making $5.75 a ton of profit, as Fortescue is now, that’s a significant difference.

There’s potentially a virtuous circle here for iron ore producers. With operating costs for a capesize vessel averaging about $7,400 a day, according to consultancy Moore Stephens, shipowners are mostly losing money at current rates. But the alternative is less attractive these days, too. Thanks to that glut of iron ore, breaking up a ship and turning it into steel scrap only nets about half what it did a couple of years ago:

Breaking Up Is So Very Hard to Do
Low scrap prices are making it more difficult to remove ships from the market
Source: Metal Bulletin

That may keep more vessels on the market and ensure shipping costs stay lower for longer, helping iron ore miners stay in the black.

Don’t get too comfortable. Companies only book a ship if they have real cargo to move, so there’s no speculative activity in the Baltic Dry to take the edge off price swings. The index almost doubled during June and July and Capesize rates were above $14,000 a day as recently as September. Fortescue’s cushion is thin enough now that even a small spike could leave investors feeling sore.


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Baltic Dry Index At New Low : Shipping Sector Sinking Lower

LONDON, Nov 20 (Reuters) – A slump in dry bulk shipping is set to worsen as the meltdown in global commodities and too many ships free for hire rock the sector used by investors to gauge the health of world trade.

Slower coal and iron ore demand from China – the world’s biggest industrial importer – have battered the dry bulk sector, already in the midst of its worst ever downturns that is expected to extend well into next year.

This week the Baltic Exchange’s main sea freight index , which tracks rates for ships carrying dry bulk commodities and seen by investors as a forward-looking indicator of global industrial activity, plunged to an all-time low.

A slump in oil and other commodity prices, due to slowing Chinese demand, has widely been seen as one of the reasons for U.S. Federal Reserve hesitancy in tightening policy.

“Dry bulk demand is very much dependent on the world economy,” said Symeon Pariaros, chief administrative officer of Athens-run and New York-listed shipping firm Euroseas.

“The slowdown in the world economy has caused both dry bulk and container shipping to suffer a lot lately. Euroseas, having exposure in both these sectors, is facing the consequences of this very low rate environment.”

There have already been casualties. In September, Japanese bulk carrier Daiichi Chuo Kisen Kaisha filed for protection from creditors. This followed private equity backed Global Maritime Investment Cyprus Ltd, which filed for Chapter 11 bankruptcy protection in the United States.

While prospects for commodities markets are shaky, the dry bulk freight players will also need to contend with more ship deliveries hitting the water in coming months.

“More vessels have to be scrapped, no additional newbuildings (new ship orders) and further delay deliveries – all these take time, more than one year, implying that in the interim the market will be ugly, and a great number of shipowners will not have the cash to bridge the weak market,” said Basil Karatzas, head of New York consultancy and brokerage Karatzas Marine Advisors & Co.

“Some may be flexible to get money from funds for working capital … and otherwise sacrifice some equity to save the business, but many small shipowners will be washed out.”

Gaga Over Amazon’s Blockbuster Earnings Report

Amazon Readies Kindle Fire Update to Keep Up With Apple, Google

Shares of Amazon.com Inc. spiked in the after-hours session on Thursday, with the firm reporting a surprising third-quarter profit on better than anticipated sales.

The more than double-digit gains propelled Jeff Bezos, chief executive officer of the e-commerce and cloud computing company, to third on the list of America’s richest people.

The strength of Amazon’s quarterly results can be judged not only by the jump in Bezos’ net worth, but also by the effusive praise these numbers inspired.

Commentary from analysts show that they believe the company’s performance and growth prospects are robust, as well as increased faith that Bezos’ intense expansion plans, which crimped on profitability in the past, will continue to bear fruit going forward:

Morgan Stanley‘s Brian Nowak (Overweight, Price target to $750 from $740)

Amazon’s 3Q results reinforce our view that the company’s business is inflecting around the globe as YoY ex FX revenue growth in all 4 of its main retail segments accelerated…for the 3rd straight quarter. Retail gross profit dollars per customer – which we view as a proxy for retail same store sales – accelerated to 27% growth…the fastest growth in company history and 2.5X higher than the long-term ~11% average rate… In effect, we see AMZN’s accelerating SSS growth leading to a period of sustained, rising profitability.

Stifel‘s Scott Devitt (Buy, Price target to $750 from $700)

Winning in All Facets of the Game. We believe the company has emerged from its recent investment cycle well-positioned to extend its competitive advantages through the Prime platform, enhanced logistics and AWS services. The rapid adoption in Prime membership has been a boost to NA retail and is in the early stages of driving international retail… Overall we believe this quarter’s results indicate that Amazon has reached a critical level of scale which allows it to build a robust global ecosystem while maintaining profitable top-line growth.

Goldman Sachs‘ Heath Terry (Buy, Price target to $760 from $680)

We believe this quarter is further evidence that Amazon’s investment in infrastructure, logistics, and web services is accelerating market share gains, cash flow growth, and continued high returns on invested capital.

Nomura‘s Robert Drbul (Buy, Price target $700)

We do not expect investment spending to abate, especially in Prime and AWS, but believe the company has proven that profits can be realized regardless. We expect AMZN to simultaneously focus on cost reduction and efficiency, and believe that continued strong revenue growth (~20% in FY15-17) will support the profit equation.

Barclays‘ Paul Vogel (Overweight, Price target $700)

Although margin outperformance was the center of attention, Amazon’s core retail business out performed expectations as well, led by continuing acceleration of International revenue and aided by Prime. Both North American and International EGM growth, on an fxneutral basis, have accelerated in each quarter this year, with EGM now comprising 79% of North American Revenues and 71% of International Revenues.

Jefferies‘ Brian Pitz (Buy, Price target $730)

After speculation for about 1.5 years that Amazon might in-source last-mile fulfillment, it seems the company is getting serious about this. According to media reports, Amazon has hired an executive search firm to build a management team to lead the effort. We believe this is Amazon’s next major step in its evolving fulfillment strategy which is focused on reducing friction for shoppers by offering better selection, product availability, & high service levels…As the company enables a mix of all these expedited delivery services into the top 50 US markets, traditional retailers with slower and more expensive shipping options should be feeling increasing pressure and start losing market share.

Raymond James‘ Aaron Kessler (Strong buy, Price target to $745 from $640)

Amazon reported strong 3Q revenues driven by accelerating retail sales (in part driven by Prime Day) and continued AWS outperformance (78% y/y). Additionally, Amazon continued to see significantly improved margins for North America retail and AWS (non-GAAP OM increased ~400 bp y/y ). Given the strength, we are increasing our 2015/2016 non-GAAP operating income by ~11/6% and believe estimates could prove conservative.

Macquarie‘s Ben Schachter (Outperform, Price target to $740 from from $660)

The bottom line is that AMZN continues to deliver against the long-term bull thesis: increasing share, rising margins. Finally, something notable this earnings season thus far is that EBAY, AMZN, and GOOG have all highlighted growth in India (AMZN has tripled fulfilment capacity y/y). While not quantified, these companies are all seeing an uptick meaningful enough to highlight.

Deutsche Bank‘s Ross Sandler (Buy, Price target to $725 from $665)

Retail is charging into 4Q with 75m+ prime members globally (DB est). We think shares can drift higher in the near-term, but admittedly are due a breather as margins level out a bit in 2016, which we don’t think will come as a surprise…Try as we might, we struggle finding anything to nitpick. The obvious point would be that 4Q guidance was below Consensus, but this was largely expected by the buy side.

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Natural Gas Breaks Three-Year Low

The U.S. EIA said producers added 98 billion cubic feet of natural gas to storage last week

Natural gas plummeted to a new three-year low as heavy surpluses deepen a selloff.

It is the latest leg down for a commodity that has struggled for years under the weight of a record-setting oil-and-gas boom. Production has hovered around all-time highs for about a year, which eventually became too much for prices that had managed to stabilize and outperform most other commodities for the past several months.

Prices for the front-month November contract fell 9.1 cents, or 3.6%, to $2.433 a million British thermal units on the New York Mercantile Exchange. It is the largest one-day loss in seven weeks and the lowest settlement since June 13, 2012.

Gas had managed to tread water this summer and even briefly hit a bull market in the spring because of surging demand from power plants that are switching away from coal. But in recent weeks that demand has subsided along with hot weather and the use of air conditioners, causing surpluses to build up and prices to fall.

The U.S. Energy Information Administration said Thursday morning that producers added 98 billion cubic feet of natural gas to storage in the week ended Sept. 25. It follows a 106-bcf addition last week, the largest weekly additions since early June.

The EIA update is widely considered one of the best measures of supply and demand for the natural gas market. Tudor, Pickering, Holt & Co., a Houston investment bank, had estimated before the data that a weekly addition of this kind would equate to about 3 bcf of oversupply last week.

Storage levels are threatening to start the winter heating season at record highs. Last week’s addition put them at 4.5% above their five-year average level for this week of the year and 15% above their level at this time a year ago.

That helped push prices below those multi-year lows, which could also encourage chart traders to push even lower, said Scott Gettleman, an independent trader in New York. He has been in spread trades Thursday that would benefit as prices fall, he said.

“I just don’t see a reason to rally right now,” Mr. Gettleman added. “You’ve got to wait until at least some cold weather comes in.”

Weather forecasters are predicting a mild start to autumn and heavy East Coast rains from Hurricane Joaquin. Both can lead to soft demand for natural gas, and have traders and analysts expecting more large weekly surpluses in the months to come.


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