“The stock market has firmed up, which is giving the energy market some strength,” said Phil Flynn, of Alaron Trading. “It’s clear that an awful lot of bearish news has already been priced in.”

The Energy Information Administration’s weekly inventory report, delayed a day by the Veteran’s Day holiday, did little to move the market. Crude stocks were near-flat, rising by only 22,000 barrels, far below the forecast for a 1 million barrel gain.

But gasoline supplies rose by 2 million barrels, more than double the 850,000 barrel estimate.

The Organization of Arab Petroleum Exporting Countries, a subset of OPEC, is scheduled to meet in Cairo on November 29. However, non-Arab members of the cartel, such as Venezuela, Iran and Angola, will be invited to take part in talks about the oil market afterwards, OPEC President Chakib Khelil said.

And Brazil’s Petrobras has thrown open the newly-discovered fields off its coast to foreign Big Oil companies. Chevron and Shell expect to begin pumping in 2010, while Exxon, Mobil, Hess and Devon are engaged in exploration. It’s estimated that 50-70 billion barrels of oil could lie beneath Brazilian waters

Source: Crude Edges Higher, Brazil Welcomes Big Oil

Oil Shortages Within 5 Years

The Financial Times wrote: “Fears of a shortage within five years propelled long-term oil futures prices well above $130 yesterday, further stoking inflationary pressures in the global economy. Investors rushed to buy oil futures contracts as far forward as December 2016, pushing prices as high as $139.50 per barrel, up $9 on the day.”

Wow. The price rises $9 in just one day? People are rushing to trade out eight years. I had to e-mail Kevin Kerr to find out if that really happens in trader land (yes). Oil traders are saying that they have never seen such a jump.

Apparently, investors are betting that oil production will soon peak due to geopolitical and geological constraints. According to Robert Hirsch, who wrote a major energy study for the U.S. Department of Energy in 2005, we are more likely to see a several-year-long plateau than an actual “peak.” Still, the Peak Oil viewpoint is establishing a beachhead in the futures markets and supporting high prices. Greed and fear are just plain hitting the fan on this one.

Veteran oilman T. Boone Pickens has been beating the drum on this topic for quite a while. In Houston last October, Mr. Pickens told me, “All the world can produce is 85 million barrels of oil per day. But the world demand is nearer 87 million. Something has to give. It’s the price.” And Mr. Pickens has repeated that comment many times since then.

Apparently, the markets are listening to Mr. Pickens. On a large scale, investors are shifting their energy focus from the short to the medium term. Beyond the medium term, fears for future oil supply dominate the thinking. Since January 2008, long-term futures oil contracts, such as those for delivery in 2016, have jumped almost 60%. Near-term prices have gone up 35%.

I just hope that you have been following the Outstanding Investments energy recommendations over the past year or so. My goal has always been to align the portfolio with the energy-scarce future. I want you to benefit from these macro trends.

The View From Chevron

I had the recent opportunity to interview Peter Robertson, vice chairman of the giant oil company Chevron Corp. The American Petroleum Institute arranged the call. Mr. Robertson was in Washington, D.C., to testify before the U.S. Congress on — you guessed it — energy issues. Mr. Robertson made some time available to talk about the oil business with your humble editor.

Mr. Robertson focused on the oil markets from the perspective of what he knows best. That is, what does he see every day as he runs Chevron? “The U.S. market is well supplied” with oil and refined products, he said. In fact, “gasoline demand is down” in the U.S. That is, Chevron has seen a 1.5% decrease in gasoline demand. (Exxon has reported as much as 4% demand drop in some parts of the country.)

“What is causing angst is crude prices,” Mr. Robertson added. But Chevron has no control over the world price of oil. Chevron just accepts whatever price the world marketplace sets. With 9,800 gas stations nestled among the 160,000 total in the U.S., Chevron is hardly in a position to move the U.S. market for motor fuel one way or the other. Chevron just reacts to demand trends. Chevron does not cause them.

Chevron buys and sells about 2 million barrels of oil per day, according to Mr. Robertson. But these are “real” barrels, as opposed to trading futures. That is, Chevron either takes delivery or releases crude from inventory. So the company gets its hands dirty in the old-fashioned oil business. It does not speculate in the futures markets.

According to Mr. Robertson, in the first quarter of 2008, Chevron “made no money in the downstream business,” referring to the refining and marketing of refined products. He characterized it this way: “Downstream operations are not taking money out of the market. It’s all the cost of crude oil and taxes.”

This made me wonder how much higher fuel prices would be if refining DID take money out of the market. From what I know, gasoline at $3.75 per gallon reflects oil at $110-115 per barrel. At $140? The price of gasoline has more to go on the upside. Time to stop driving that SUV down to the strip mall to buy a box of Kleenex, right?

As an aside to Mr. Robertson’s comment on taxes, let me note that one recent study reviewed the total taxes paid by the top 27 energy-producing companies in the U.S. In 2006, the 27 largest energy companies paid more than $81 billion in income taxes, resulting in a 37% overall effective tax rate. That figure is higher than the top U.S. corporate tax rate of 35%.

Mr. Robertson notes that over the past six years, Chevron has earned about $72 billion total in after-tax profits. And it has invested over $73 billion in new energy and energy-related projects. So Chevron is investing more into its future asset base than it earns.

Interestingly, Chevron is the largest private producer of geothermal power in the world. Chevron sees a solid investment climate and return for geothermal in the U.S. This is of interest to me because I have five much smaller geothermal companies listed in my Energy & Scarcity Investor publication. All five aspire to be the Chevrons of the geothermal future. I won’t list the five names here, but I have recommended geothermal player Ormat (ORA: NYSE) for Outstanding Investments.

Mr. Robertson discussed Chevron’s efforts to assure future supplies of oil and natural gas. In the Gulf of Mexico alone, Chevron is the lead player or interest-holding partner to 40 different projects. Each project represents a commitment in excess of $1 billion by Chevron. The major constraint for Chevron to invest more hinges on its ability to obtain skilled personnel and to find vendors that can supply equipment and services.

According to Mr. Robertson, “Our personnel constraints are not just within Chevron, but with our contractors. The contracting community shrank in the days of cheap oil. Now the contractor community needs to grow.”

Of interest, about two-thirds of the total Chevron investment of $73 billion over the past six years has been outside the U.S. This is because of the level of restrictions on investing in energy projects domestically. Chevron would like to invest more in the U.S., but the national (and some state) investment policies discourage it.

For example, Chevron has struggled for several years just to obtain permits to upgrade its refinery at Richmond, Calif. Chevron is still waiting for approvals, but meanwhile, it’s operating one of the oldest refineries on the West Coast.

During this same time, India’s Reliance Industries Ltd. has constructed a new, state-of-the-art 600,000 barrel per day refinery in India. That refinery exports product to the U.S. West Coast market. So instead of having a more efficient Chevron refinery near San Francisco, drivers in California are buying fuel imported from India.

New world record, for both longest well bore and extended reach.

As the Senators insulted the oil executives, I was wondering if the politicians would prefer to trade managements with the National Oil Companies of other countries. Would you trade the guys who run Exxon for the guys who run Pemex? How about trading the Chevron leadership for the fine people at Petroleos de Venezuela (PdVSA)?

BWK

Source: Oil Service Companies Doing Well…

In Russia, they elect the former president of Gazprom as president of the country.

Hmmm… Russia or the USA… Which country does not have an “energy crisis?”

“People we represent are hurting,” says Sen. Leahy of Vermont to the oil company executives. “The companies you represent are profiting.”

Yeah? So what? Oil companies make about 4-cents per gallon gas. The federal govt makes at least 18-cents, and state govts make much more than that. Besides, most oil companies are actually “losing” money on downstream operations. The refining margins just plain suck right now.

And whose fault is it that people “are hurting?” People in the US have made several generations of bad choices in energy policy, to include electing guys like Patrick Leahy to the US Senate. The Patrick Leahys of the world have never done a darn thing to increase the energy supply of this country. They just sit back, pass legislation to lock up areas the size of Maine — as well as 85% of the US Outer Continental Shelf — and then take potshots at the people who put gas into the fuel tanks of America.

Really, Senator… Would you trade the management team of Chevron or Exxon for the mangers of Pemex? You want gas lines? Try that, genius.

Here is the scoop, if you missed the story.

Until we meet again

Byron King

Note: Byron King is a frequent contributor to the free e-letter Whiskey & Gunpowder. To receive daily insights into energy, oil, commodities and other natural resources sign up here!

Source: Congress Beats Up On Oil Execs…

To answer those questions we turn to a report published in late March by UBS energy analyst Jon Rigby and his team in London. Their incredibly useful report is called, “Will there be enough production capacity?” UBS has been battered by its huge sub-prime related losses. But their work on where future oil production will actually come from nearly redeems them. They have asked just the right question at the right time, and answered it in detail.

The report reaches a number of surprising conclusions about the global oil market. It also includes a useful database of oil projects scheduled to enter production in the next five years. These are projects which could add meaningful capacity (100kbpd or more) to global oil production. We’ll look at who stands to benefit in a moment. But first, some of the report’s findings [emphasis added is ours]:

• “Declining existing basins, rising costs, increased technical challenges, stretched supply chains, geopolitical blocks and tightening fiscal terms all seem impediments to growing global production capacity for oil and gas, despite the clear pricing signals.
• “There is no obvious wall of new production coming to the market in response to high prices.”
• New projects scheduled to come on-line from National Oil Companies (NOCs) belong mostly to three major firms: Aramco, Petrobras, and Gazprom.
• New project cost is rising and becoming more technologically challenging, especially deep-water.
• “Nominal growth rates tied to global GDP now look more unrealistic as potential upstream growth slows. This appears reasonably consistent with a growing view that oil production may actually not exceed 100Mbbl/d.”

The idea that global oil production may never exceed 100mbbl/d is worth a much closer look. I’ll get to that later. But before we look at the end, let us look at the beginning of the end and where new production might come from as the world’s oil producers try to bridge the gap between 87mbpd and 117mbpd.

The good news is that there IS new production capacity in the pipeline this year and next. Keep in mind that the final investment decision on the projects entering into production this year was made anywhere from 3-6 years ago. That shows you how far in advance you have to plan for new production (assuming you’ve even found oil in the first place).

There is no such thing as just-in-time oil production. But let’s take a look at projects that will come on line between now and 2010. We’ve selected only those projects that will produce more than 200kbp or more:

If you include LNG and the barrels of oil equivalent produced from it, your list expands a little more to include the following projects:

Beyond 2010, the future is murkier. But the UBS team has identified projects for which the final investment decision has been made. Assuming cost blowouts can be avoided and the projects aren’t cancelled, here are some of the bigger projects that could come on-stream between 2011 and 2015:

There are some massive LNG and natural gas projects coming on-stream between 2011 and 2015. Gazprom, Shell, BP, and ExxonMobil all look like big winners, should oil prices stay high and pass through to higher LNG prices.

The new oil finds off-shore in Brazil’s Santos Basin are not included in the UBS report because they are not likely to enter into production during the next five years. They will be difficult to produce in any event. Petrobras says the Tupi find may contain as many as 8 million barrels, while the Carioca field may have 33 billion barrels of reserves, of which about 10 billion could be recoverable, according to Citigroup.

Current Production Trumps Reserves

One UBS claim which may surprise older oil hands is that, “the capacity to produce—not reserves—is critical to energy markets.” UBS does not conclude that current producers should be valued differently that companies with large reserves but current production challenges. But it’s worth thinking about.

I don’t put a lot of faith in macro predictions – as no one can predict the future. But you can study track records. You can look at history. History reveals some interesting clues about what the future may hold.

The quick take? It doesn’t look like the party is over just yet. But even if it is, past peaks in oil give us clues. When you dig a little deeper into those relationships, you find a great road map for making money.

If you look at the price of oil, you find something interesting. Since January 2001, you can explain the move in the price of oil largely as a function of increasing money supply. As the amount of money grows, the price of oil rises. In fact, almost 87% of the move in the price of oil can be explained by the increase in money supply, as this next chart shows:

Basically, $100 per barrel oil is what we would expect to see, given this relationship between the oil price and money supply. Given that we are still in the midst of a credit crisis of sorts, it seems unlikely the Fed will tighten money in any way at all. That leaves a clear path for the price of oil and commodities to continue to rally in nominal terms.

The other thing to remember – and people forget this by worrying excessively about a U.S. recession – is that the story of oil is no longer a U.S.-centric story. You’ve surely heard about how the rapid growth in China and other emerging markets drives oil demand. Well, it’s good to keep that in mind.

China and India are only beginning to consume oil at any meaningful level. Right now, they are consuming oil at a rate the U.S. did in the early years of the 20th century. But look, we don’t need China to start guzzling oil like we do. Even if it moves half the distance between it and Hong Kong, that’s a lot of extra demand. The way I look at it is this: What’s more likely, China stays at 1910 oil usage or moves somewhere closer to, say, 1950s U.S. oil usage? I think the latter.

Mark Mobius, in a column he wrote for the Financial Times , points out that the fundamentals in emerging markets are better than they’ve been in a long time. The future looks bright. “The Chinese and Indian consumers are the world’s new consumers and they, along with consumers in Brazil, Russia, Turkey, the United Arab Emirates, Egypt, Mexico, Poland and many other emerging markets, are becoming an important force in global markets.”

All that bodes well for oil demand. But I haven’t really gotten to the best parts yet…

Even if oil has already peaked, that doesn’t mean oil is headed back to $40 per barrel or lower. In fact, if this oil boom follows history at all, we’re looking at years of oil prices right around $100 per barrel.

It is important to realize that in no prior oil boom did the price of oil retreat rapidly toward where it was before the boom began. In each case, the price of oil stayed up for years after the peak. That ought to give you some comfort about our current situation. The price of oil should stay up here for years. If his estimate of 2013 is at all close, we’ve got plenty of time left to make a lot of money.

So where do you go to make that money?

The one obvious place people will automatically look to is to own oil and gas producers. That’s not a bad idea at all. But I’ve got another angle here. The next two charts are amazing. They show you the capital and exploration spending of both Exxon and Chevron from 1928-2007. They show spending bottoms in 1948 and 1974. After each bottom, there was a long run of spending. Spending peaked nine years after 1948. Spending peaked seven years after 1974. If 2005 proves to be the bottom on capital spending – and it seems so, since Exxon only recently announced it would increase its capital spending to $25-30 billion over the next few years, a 25% increase -we won’t see capital spending peak until 2012 at the earliest.

Now, why is this important? Think about what the oil companies spend money on. Where do they go shopping? They go shopping at the oil field services and equipment companies.

So that is where we want to be. Because even if oil has peaked, we’re still looking at years of strong spending by the oil companies. You want to have some exposure to the receiving end of all that spending. Such companies will mint cash. And they give you a little different payoff than owning a straight producer. It can sometimes be better to own the picks and shovels. You don’t actually own or produce the oil or gas, but your equipment is vital to those that do.

Newmont Mining, the big gold producer, is an example of a producer that has profoundly disappointed investors amid what may be the greatest gold bull market in history. Newmont’s costs rose so fast and so much that it never really enjoyed (at least not so far) the higher price in gold. But if you were in some mining equipment manufacturer, you got paid.

So the key takeaways here are these: The price of oil has room to run yet, in part because of the growth in money supply and in part because of pressing international demand. Secondly, even if we already saw oil peak, history says that prices won’t retreat by much over the next several years. And finally, the capital spending boom by the big oil companies is just getting started, which is great news for investors in oil field services companies.

The big idea here is well servicing…

It’s really a great and kind of sneaky way to play an undeniable trend in oil and gas: the depletion of older wells past their peak production. Well servicing helps you get a little extra out of every well. A well service rig is the workhorse that does the well servicing.

Here’s the life cycle of a typical oil well…

Every time somebody drills a well, it creates an annuity for the well service industry. That’s because the maintenance work follows the life span of a typical well. If you don’t service your well, your production rate declines much more rapidly. So if you want to stay in business, you keep servicing your existing wells. You may not drill new ones, but you keep what you have.

The second key to remember is this: The more mature the oil or gas field, the more well servicing work needed. Well servicing doesn’t typically have the same ups and downs as exploration. Well service fleets provide much more durable and predictable cash flows. I expect all that money the big majors spend on exploration will lead to a lot of new drills and a long tail of new business for well servicing companies.

Chris Mayer
for The Daily Reckoning Australia

P.S. to get The Daily Reckoning direct to your inbox sign up to our free e-mail newsletter or if you prefer to use RSS, subscribe to the Daily Reckoning RSS feed.

Source: Has Oil Hit Its Peak Price?

When oil sells for $125 a barrel, it creates a two-pronged situation in the oil industry: 1) It encourages producers to turn on the pumps at full blast. This depletes fields faster… 2) It creates unbelievably large cash flows for the “biggies” like Chevron, Gazprom, and ExxonMobil. And they can direct those cash flows toward finding more oil… It adds up to huge demand for pumps, drill steel, offshore platforms, pipelines, and valves.

Those fundamentals sound great… but what is the market saying about it?

The market says, “I like it… Let’s send Tenaris, the world’s top maker of drilling pipe, to a new all-time high. Don’t forget new highs for Flowserve, the big maker of pipe valves, and Gulf Island Fabrication, the rig builder. New highs for everyone who operates land drills as well. And heck, let’s include the infamous Halliburton. After all, it’s a bull market in oil services!”

Source: The Market Likes the Bull Case for Oil Services

Still, a few prominent players are set to report this week led by The Walt Disney Co. (DIS) (entertainment), Cisco Systems Inc. (CSCO) (tech), and American International Group Inc. (AIG) (financial services).

The Microsoft Corp. (MSFT)/Yahoo Inc. (YHOO) (and occasionally Google Inc. (GOOG)) soap opera will be worth watching – if only to make sure that Microsoft’s withdrawal isn’t a cover ploy for a hostile run at Yahoo [For a related news story in this issue of Money Morning that details Microsoft’s decision drop its pursuit of Yahoo, please click here].

A slow schedule on this week’s economic calendar will prompt a much greater focus on the dollar as investors speculate on whether the price run-up in commodities – and oil – is at, or near its end. Gold prices will help make that determination [For a related news analysis of gold prices in this issue of Money Morning, please click here].

U.S. Federal Reserve Chairman Ben S. Bernanke is scheduled to address the Columbia Business School on mortgage issues, though he’ll surely also be asked about central bank policies by a rapt audience whose members will hang on his every word. [Wasn’t he supposed to be on vacation?]

Last week’s earnings saw some energy companies that were benefiting from the most recent surge in energy prices. Though Exxon Mobil Corp. (XOM) only claimed the second-highest profit ever (it also holds the title for the single best quarter ever), the results nevertheless disappointed Wall Street, which was obviously pulling for a new record.

Likewise, Chevron Corp. (CVX) and BP PLC (BP) reported favorable periods. In the wake of the recent initial public offering (IPO) of credit-card processor Visa Inc. (V), rival MasterCard Inc. (MA) doubled its earnings last quarter as its international business helped overcome domestic weakness. Consumer-products giant The Procter & Gamble Co. (PG) also received good news from overseas with higher sales of consumer goods like diapers (Pampers), razors (Gillette), and shampoo (Head & Shoulders) from certain emerging markets.

Not all was rosy, however, as Sun Microsystems Inc. (JAVA) and food giants Kellogg Co. (K) and new Warren Buffet favorite Kraft Foods Inc. (KFT) each fell prey to the continued economic “challenges” in the U.S. market.

On the transactional front, investor Kirk Kerkorian will boost his stake in Ford Motor Co. (F), in turn a nice boost for the domestic auto industry. Time Warner Inc. (TWX) will be spinning off its 84% stake in its cable operation, Time Warner Cable Inc. (TWC).

And privately held M&M’s-maker Mars Inc. will buy Wm. Wrigley Jr. Co. (WWY) for over $20 billion in cash with financing help from famed sweet-tooth junkie, Warren Buffett.

Market Matters

Recession? What recession? For days, weeks, even months now, naysayers had been predicting the emergence of that dreaded “R” word with the release of 1st quarter GDP. Additionally, they claimed that the labor picture would continue to worsen, gas prices would hit $4 a gallon by summer, the dollar would be worth next to nothing, corporate earnings would signal more “gloom and doom,” and high-net-worth investors would be making dramatic allocation shifts from the “risky” equity markets.

Not so fast … the data released last week appeared to portray an economy closer to a rebound – far from the dire business climate the gloom-and-doomers had been predicting. A stronger dollar that may have placed a ceiling on oil (and other commodities) prices, and rich folks seemed to be looking for bargains in stocks.

Do we here at Money Morning buy into that totally bullish scenario?

Not necessarily.

But we do agree that the next few days, weeks, and months are going to get more interesting.

The latest Fidelity Investment’s Millionaire Outlook reported (mildly) bullish findings among its surveyed investors who have average investable assets topping $4 million. Instead of decreasing their equity allocations, 27% of these millionaires plan to add stock positions during the next 12 months. Only 7% expect to sell out of equities, which logically deduces 66% will be staying the course. Real estate seems to be another “favored” asset class, as 14% of respondents say they will increase exposure to related investments. That doesn’t quite sound like “gloom and doom” at once.

Oil flirted with the $120 a barrel level before sliding on a stronger dollar and news that the Fed may play the “wait and see” game (see below). Equity investors again took a “things could have been worse” approach and sought out value in the aftermath of last week’s economic and earnings reports. Some analysts believe that a stronger dollar will mean the end to the rally in commodities, and investors (hedge funds) will take some related profits and move back into stocks.

Despite all the recent negativity, the Dow Jones Industrial Average surged more than 500 points in April, and the Standard & Poor’s 500 Index and Nasdaq Composite Index both rose about 5% – hardly the recessionary results many had been anticipating.

• The U.S. Treasury Department announced yesterday (Wednesday) that it would bring back the one-year Treasury bill at its next quarterly refunding auction, MarketWatch reported. “The majority of members believe that the addition of the year bill combined with increases to the size and frequency of existing coupon debt over coming quarters will still not be sufficient to satisfy the increased financing needs of the Treasury over the intermediate and longer term,” a panel of experts said in a government report, stating the next option could be to bring back the 3-year note as well.

• United Online Inc. (UNTD), the owner of Internet service providers NetZero and Juno, announced it would acquire online florist FTD Group Inc. (FTD) for about $456 million in cash, stock and notes, The Wall Street Journal reported. “This transaction will meaningfully diversify our revenue base within a large global market experiencing significant migration to the Internet,” said United Online Chief Executive Mark R. Goldston.

• Descendents of oil scion John D. Rockefeller, the founder of Standard Oil from which both Exxon Mobil Corp. (XOM) and Chevron Corp. (CVX) can trace early roots, have called upon Exxon to be more environmentally conscious, despite the company’s record recent profits, Forbes reported. Neva Rockefeller Goodwin, a great-granddaughter of John D. Rockefeller, said yesterday (Wednesday), “The truth is that Exxon Mobil is profiting in the short term from investments and decisions made many years ago, and by focusing on a narrow path that ignores the rapidly shifting energy landscape around the world, including developing nations.”

• Slowing demand and increasing competition are to blame for Garmin Ltd. (GRMN), navigation device maker, to miss market estimates for the first quarter. Garmin’s shares dropped as much as 14.4% on the day to its 52-week low of $39.75 a share as it posted a profit of $147.8 million, or 67 cents a share. Analysts expected the company to earn 74 cents a share, according to Reuters Estimates.

• Soft-drink titans PepsiCo. Inc. (PEP) and The Coca-Cola Co. (KO) continue to push their battle into uncharted waters, as Pepsi announced it acquired V Water, Britain’s vitamin-enhanced bottled water, for an undisclosed amount. V Water is very similar to vitaminwater, which Coca-Cola bought last year for $4.1 billion. Sales of non-carbonated drinks are growing considerable faster than carbonated beverages, and Pepsi already owns SoBe Life Water, Gatorade sports drink and Aquafina bottled water. 

• Brazil’s Bovespa stock index jumped to a record after Standard & Poor’s unexpectedly raised the country’s credit rating to investment grade. The Bovespa Index of the most-traded stocks on the Sao Paul exchange surged 6.38% to 67,896.13 at 3:32 pm EST, its biggest gain in three months.

• Kraft Foods Inc. (KFT) reported first-quarter profit of $608 million, a 13% drop from a year ago, yesterday (Wednesday). Though sales improved 21% despite economic pressures and rising commodities prices, as Kraft raised prices on 90% of its products.

• Kellogg Co. (K) reported yesterday (Wednesday) that first-quarter profit fell 2% despite recent price increases. Net earnings fell to $315 million compared with $321 million a year ago. Earnings per share increased from 80 cents a share to 81 cents a share because of a $650 million share-repurchase program, the Associated Press reported.

“If you lived your life in London you would often be left with the impression that the economy is about to fall off a cliff. From my visits around the country I can assure you it is not.”

Its annual conference starts today, and a recent survey of British business finds “resilience” in the face of the credit crunch. Only about a quarter of firms have found it tougher to raise finance and 60% have left their business plans unchanged. The pound’s fall against the euro also helps exports and rebalance Britain’s yawning current account deficit.

*** News from the mortgage frontline…

“Mortgage fees have tripled,” Quentin tells me at the week-end.

He plies a book-keeping and mortgage business from a quiet village in Gloucestershire and gave us an update on the credit crunch from the business end.

Continues below …

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And the new HSBC offer to match your previous fixed rate appears to co

“A client looking to re-mortgage £150,000 on a £400,000 valuation and more than £70,000 income can get the money at the same rate, but HSBC want a fee of £4,900 for their trouble! When I suggested that was verging on the extortionate for a quality customer they said they might be able to do something if my client agreed to swerve his property insurance to them. They’re not supposed to be able to do that anymore!”

Well, business is business. The strong survive and charge ‘what the market will bear’. The weak get crushed. The bit part players of the UK mortgage scene have either been extinguished or sidelined. The door is now wide open for those left standing to pick up both market share and margin.

*** Brazil may have struck oil big time with first its Tupi discovery (est. 8bn barrels), and more recently its Carioca discovery (est. 33bn barrels), which jointly could put them into the super league of oil exporters but but but… the technical changes are greater than ever.

Their latest offshore find will have go six miles below sea level, reports Bloomberg. It’s almost twice as deep as the world’s current deepest offshore well. To suck out the oil they will need for equipment that can withstand pressure that would crush a truck, pipes that can carry boiling hot oil at 500 o Fahrenheit (260 o Celsius) and drill bits that can bore through a mile of rock salt sea bed.

Exxon Mobil and Chevron’s deep water drilling attempts in the Gulf of Mexico saw diamond encrusted drill bits disintegrate and steel pipes crumple.

Such a huge engineering challenge calls into question whether the discovery is of any use. It may useless, says Tina Vittal, an S&P oil analyst:

“A big find might not be a good find if it costs so much to develop that it’s not commercially viable. We don’t have any idea at all yet of all the costs that are going to be involved. Those costs are going to set the floor for oil prices.”

And today’s floor for the oil price is almost $119.

Today, OPEC president Chakib Khalil gives warning oil could hit $200 on account of a weak dollar. Though, interestingly, Lehman Bros note though that about $20-30 of the price is “hot money”. It believes the oil boom may be coming to an end as new refineries and new projects come on stream.

So are commodities another bubble in search of a pin? The FT’s Neil Hume adds his thoughts on the subject at the week-end. He looks at the similarities between the mining boom and the dotcom bubble:

1. The Mega takeover. The Vodafone takeover of Mannesmann was the peak of dotcom mania. Will BHP Billiton’s bid for Rio Tinto prove likewise?
2. The FTSE takeover. In 2000, there were ten tech companies and eight telcos in the FTSE100. Today there’s a “similar concentration” of mining and oil groups and accounts for a third of the market cap of the index. A new name arrives to join them (possibly in the FTSE 100) next month – New World Resources. Remember Lastminute.com..?
3. Valuations. Mining companies, while not wildly expensive, are at the top end of their historical range while a bullish consensus prevails among analysts.

Regards,

Rob Mackrill
The Daily Reckoning

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