Not all stocks are in positive territory these days. Even though the major indices have been nearly unstoppable this summer, a handful of companies are watching their Street values drop lower and lower.

There is no debating the world is using less oil these days. With many producers still pumping the thick, black stuff from the ground at pre-collapse levels, inventories are on the rise and storage facilities are screaming, “no mas.”

It is no wonder companies like General Maritime (NYSE:GMR) are forced to endure reduced demand and lower revenues. The world is simply sending less oil across its oceans. For crude tanker companies like General Maritine, a slow economic recovery that includes rising oil prices is bad news.

But some analysts believe the worst is over. One of them is Robert MacKenzie of FBR Capital Markets. After falling by more than 20% in the last two months, shares of the company are now in “attractive” territory according to the industry export.

Thanks to MacKenzie’s boost, shares of the company are up by over 6% today.

Pump you up

Even after today’s surge, investors are getting a good deal, as long as they are in it for the long haul.

Over the past two months, General Maritime has been an industry laggard. A lackluster Q2 earnings report and a slashed dividend had many investors jumping ship. Because the industry relies heavily on contracted prices and avoids the volatile spot market, we will not see General Maritime’s revenue stream surge anytime soon.

But thanks to healthy leverage ratios and plenty of liquidity, the company is in good position to control its financial future.

As one of the smaller players in the industry, the General Maritime can use the depressed market as a springboard towards renewed growth. Expansion efforts will be the key to increasing shareholder value over the next 12, 24 and 36 months.

The announcement of new ship acquisitions will do little to get share price moving over the next several quarters, but sure enough investors will begin to realize the revenue gains in upcoming years.

General Maritime is far from an in-and-out trade, but if your portfolio needs long-term exposure to a lagging cyclical sector, it is worth a look.

Compare the company to competitors like Frontline (NYSE:FRO) or Teekay (NYSE:TK) and you will like what you see. A 6% dividend should be the icing on the cake.

Source: General Maritime: Ready to Catch Up with the Market?

This from Mike:

It’s not the time to try to call a bottom… but it is time to plan for it.

Our favorite leading indicator of economic activity, the Baltic Dry Index, will likely be the first to signal the end of a recession. And it provides a convenient clue to one stock I believe will comeback faster than most others, once the market-wide comeback is underway.

The Baltic Dry measure shipping costs, and therefore shipping activity, and is therefore a great “boots on the ground” measure of what’s going on in the world economy. When costs are up, it benefits shipping companies. My favorite right now is Frontline (NYSE: FRO).

Frontline focuses specifically on tanker ships for transporting oil. When economic activity picks up, so will oil prices and shipping rates. And that plays right into Frontline’s hands.

The oil focus means Frontline’s recent quarters haven’t been as bad as other shippers because of oil stored offshore to take advantage of the contango situation.

Overall, the company still posted growth for 2008, but last week’s quarterly numbers were certainly lackluster. Earnings per day on a “very large crude carrier” dropped to $61,500 from $96,500 a year earlier.

Still, Frontline management seems to be making the right moves in tough times. It’s proceeding with cautious investment in new capacity, switching some of its more profitable daily arrangements to more predictable long-term contracts.

Even so, the stock is getting hammered again today, down another 4% as of this writing.

But that puts the stock price at about two times trailing earnings. And with enough cash flow to cover interest costs, I’m sure Frontline can remain a going concern through the crisis.

When spending does pick up those who buy Frontline at, or near, the market bottom will likely be the first to benefit.

Source:  Frontline (NYSE: FRO): Stock of the Day

This from Money Morning:

Many investors have given up on oil, fearing that a fall from grace precludes a rise in price from the ashes. But it’s worth noting that the oil markets are right now in a rare state of  ’super contango,’ which suggests that the markets expect far higher prices by next year.

Here’s what you need to know.

In case you’re not familiar with the term, ‘contango‘ denotes a normal and very specific condition associated with futures contracts in which the price of oil for distant delivery months from now exceeds the price of oil being traded right now on the spot market. Typically, the price difference is related to the cost of storing and insuring the oil itself.

An example might help. On Tuesday, oil traded at $38.81 a barrel on the New York Mercantile Exchange (NYMEX) spot market. So if we bought a barrel and put it into storage for the next five months, and assumed that would cost us 90 cents per barrel per month, under normal market conditions, we’d expect the June crude oil contracts to be priced roughly at $43.31 ($38.81+ the cost of storage for five months = $43.31).

However, according to the New York Mercantile Exchange, June crude oil contracts settled at $52.14 on Tuesday, which represents a state of ’super contango’ – and an excess potential profit of $8.83 per barrel ($52.14 – $43.31 = Excess Potential Profit of $8.83). But only for traders who can buy oil now and store it until then.

There are obviously wrinkles, of course, depending on where the oil is stored and how it is priced for delivery. But, in general, the spreads we’re seeing now are at, or near, their highest levels since April 2004, when the government started collecting Cushing data. Cushing is the delivery point for all NYMEX futures.

Super contango is a rare situation that causes most traders to drool – myself included – because it signals an arbitrage opportunity that’s literally too good to pass up if you’ve got the means to capitalize on it.

But, as usual, there are all sorts of unanticipated consequences – including a phenomenon we don’t see very often – hoarding at sea.

Tanker rates are skyrocketing as companies literally top off very large crude carriers with the 2 million gallons they’re designed to carry – and then park them offshore until prices rise. In the meantime, they’re also selling the June futures and locking in profits above and beyond what it costs them to buy and store their stash of this ‘black gold.’

Of course, with every tanker that’s stuffed to the gills as a storage container, there’s fewer of the big boats in circulation. And that’s caused benchmark supertanker rental rates to rise more than 56% since Jan. 1. But the perceived profit potential is so high right now, that even investment banks, which are hardly in the market for super tanker rentals under normal circumstances, are getting into the game.

According to recent reports by Bloomberg News, Phibro LLC, the commodities trading arm for Citigroup Inc. (C), has booked two supertankers to hoard crude oil supplies. Phibro recently stationed the 1-million-barrel carrier ‘Ice Transporter’ off the coast of Scotland and the ‘Ashna’ waits patiently on the U.S. Gulf Coast. Assuming they capture the entire $8.83 a barrel in excess profits we cited in our example, that’s a cool $8.8 million in the bank, just from the Ice Transporter cargo alone.

Based on my experience, traders tend to run in packs, so it’s highly likely that all the usual suspects are involved including most notably Morgan Stanley (MS), which owns half of tanker group operator Heidmar Inc. and Goldman Sachs Group Inc. (GS), which executes commodities trades and structures related deals through J. Aron & Co.

As many as 80 million barrels of crude are being stored at sea around the globe, according to Frontline Ltd. (FRO), the world’s largest owner of supertankers. That’s nearly enough to supply the entire world’s demand for a day.

As for what caused the super contango, the most common and widely accepted argument is that falling global demand has caused a current glut in supply that will be rectified by production cuts by the Organization of Petroleum Exporting Countries (OPEC) later this year. That’s certainly plausible and there is no shortage of data to support this contention.

‘That’s really what they’re betting on,’ said Opportunities in Options‘ Paul Forchione, a veteran trader with 30 years in the commodities markets. ‘A significantly higher price for the deferred contract month in excess of storage and insurance costs typically means traders expect demand to grow in the future.’

In his experience, Forchione said that ‘this situation is hardly the panacea that everybody thinks it is because it’s hard to put a limit on how far out of whack prices can get.’

However, there’s also another plausible explanation that seems entirely likely, based on conversations I’ve had with traders, officials and company officers in the oil business all around the world.

Basically, the super contango we’re seeing now could suggest that future pricing is as much about the fear of supply interruption as it is about present demand dropping. And that’s entirely logical given the constant state of warfare in the Middle East, threatened production in Africa, an unsteady South America, and China, which is structuring oil-supply deals with rogue nations as fast as it can.

I know from having addressed crowds of investors all over the world that this seems impossible, but at a time when China and India, for instance, are doing everything they can to stave off a global recession, it’s certainly not inconceivable. Moreover, if this is even remotely true, as a growing trail of evidence suggests, then the present super contango could also imply that traders believe oil will be increasingly hard to find, refine and transport in the months ahead. That, too, suggests higher prices to come

Now for the million-dollar question: What can investors do about it?

The most obvious choice for investors who think prices will indeed be higher come next June is to buy any of the half dozen oil-related ETFs. That includes The United States Oil Fund LP (NYSE:USO) or iPath S&P GSCI Crude Oil Total Return ETF (NYSE:OIL).

The problem, of course, is that the spreads companies are counting on for profits could drop rapidly between now and then. This would force companies currently hoarding oil to begin dumping it, thereby reinforcing even lower prices going forward. There is also the possibility that OPEC production cuts never happen, or are ineffective, which would also point to lower prices.

History suggests that far safer bets include mid-process transportation companies like TeeKay Corp. (NYSE:TK) or land-based alternatives like Kinder Morgan Energy Partners LP (NYSE:KMP). Both pay healthy dividends that can help stave off a personal recession no matter what happens with oil prices. That’s always important in rough markets.

For futures-savvy investors, there’s an even more direct bet. Data shows that ‘mean reversions’ are particularly powerful phenomena when it comes to commodities, so the fact that spreads have risen to all-time highs suggests that it’s only a matter of time before they reverse. One way to potentially capture that would be to buy March futures while selling June futures.

Risk management is paramount, regardless of which path investors choose. Super contango sounds to good to be true and we all know the old adage: If it sounds too good to be true …

Source: Contango Isn’t A Dance In Argentina: It is a Shot at Windfall Profits

Why a Jim Morrison market? Because the future’s uncertain and the end is always near.

(I thought that was too good not to share. For those of you who aren’t fans of The Doors, we’ll move right along…)

Something’s Happening Here…

Something very strange is going on with the price of oil. Not just in terms of straight-up price, but in regard to the huge discrepancy between the near-month and far-month futures contracts.

As I write, the going price for near-month West Texas Intermediate crude is $36.51 per barrel. The December 2009 contract, on the other hand, is trading at $55.13.

That is a monster spread. We’re talking a difference of more than $18 a barrel between spot crude – the stuff you can buy in the cash market – and crude slated for delivery at the end of this year.

The technical name for this situation is contango. That’s what they call it when a forward-month commodity contract is trading at a higher price than the near month. (You don’t really need to know this right now, but the opposite of contango, when near-term prices are higher than the back months, is backwardation.)

The reason this is strange is because of the massive profit opportunity embedded in the crude market.

Assuming you had the means, you could go out right now and sell millions of dollars worth of December crude contracts at $55 dollars a barrel… buy the equivalent amount in the cash market for $37 a barrel or less… and then just wait until it’s time to deliver the oil (and lock in your $18 profit).

The only hitch in the deal is finding a place to store the stuff. If you were to buy crude on the cheap now, you would have to take delivery and store it until late November (or whatever month your delivery date rolls in, when you close the trade and take your locked-in profit).

A number of big, savvy players are making exactly the trade I just described. They are selling millions of barrels worth of expensive far-month futures contracts, buying the equivalent amount of cheap oil in the cash market, and storing that oil in huge supertankers moored off the coast of Scotland and the Gulf of Mexico.

Storage and financing are counted as part of the trade, of course, and those big tankers don’t come cheap. Costs can run as high as $68,000 per day to keep one sitting idle.

But when you can lock in $18 a barrel, who cares? When the outlays are spread over millions of barrels – and a single ship can hold 2 million barrels of crude – there is still an obscene amount of profit left in the trade.

Frontline Limited (FRO:NYSE), the world’s biggest owner of supertankers according to Bloomberg, estimated last week that 80 million barrels worth of oil are being “stored” this way – the most they’ve seen in 20 years.

Not only are some big Wall Street players making this trade (Citigroup, Morgan Stanley, etc), big oil exporters are doing it too. Iran is filling up tankers with crude, no doubt waiting for the opportunity to sell at higher prices.

What It Is Ain’t Exactly Clear…

The puzzling question is why the anomaly persists. Why has the spread not come in?

Remember that once the far-month contracts are sold, price risk is removed from the equation. If you’ve entered into a deal to sell 2MM barrels of crude at $55 after buying at $37, you don’t have to worry about where prices go between now and your delivery date. You can just sit and wait.

When a no-brainer opportunity like this comes along, Wall Street normally jumps all over it. Traders exploit the anomaly in size until it disappears.

If markets weren’t so out of whack, you would gradually see the spread between near-month and far-month crude contracts get smaller and smaller as more and more players piled in. The profit in the spread would be reduced to the point where putting on the trade no longer made sense.

Two constraints that keep this from happening now are financing and storage.

First the finance angle: This is a trade that requires a serious cash outlay (or a major line of credit) to pull off. To fill up a supertanker with crude and sit on it for a year, you’re talking $50 million to $100 million as table stakes. The big Wall Street houses have been so bruised and battered, it’s hard for them to come up with that kind of dough – even for slam-dunk opportunities.

The other major constraint to the trade is storage. Such huge volumes of cash market crude are being held off the market now, traders are literally running out of places to put it. (It’s not like you can just pop into the local EZ-storage or stash a million barrels of oil in the shed.)

Curiouser and Curiouser

The storage issue is also creating headaches for the New York Mercantile Exchange (NYMEX) as traders question the pricing of West Texas Intermediate (WTI crude). The Financial Times reports:

The surge in oil inventories in Cushing, Oklahoma, where WTI is delivered into America’s pipeline system, has depressed its value not only against other global benchmarks, such as Brent, but also against other domestic US crudes.

Julius Walker, an oil market analyst at the International Energy Agency in Paris, said there was “anecdotal evidence” of traders moving away from WTI and “doing deals based on other US oil benchmarks.”

In other words, we’ve got oil coming out of our ears in the short-term… but the price of oil is still head-scratchingly higher – much, much higher – in the longer term.

So what does all this mean for us small-fry traders, i.e., those of us who can’t dial 1-800-TANKERS-R-US like the big boys?

I can think of at least a few takeaways worthy of food for thought:

• Why aren’t the big oil exporters all over this trade? Iran has locked up a few tankers, and it’s likely Russia and Venezuela etc. have too. But these guys are supposed to have lots of oil in the ground… and OPEC just made a big fuss of capacity cuts…. so why aren’t they selling the hell out of the far-month crude contracts, locking in $18 a barrel, and bringing the spread back in with their size? Could it be capacity constraint? Could it be these guys don’t actually have all the spare capacity they’re letting on?
• Why are the drillers and oil service names so depressed? Stock markets are supposed to discount the future, not the past. Equity valuations are supposed to be forward looking. And yet, at current multiples, most of the high-quality drillers and oil service names are trading as if oil were headed to $20, not back to $60. Yet the December crude contract says otherwise… and the huge spread between near-month and far-month contracts persists. What gives?
• Could Wall Street still be “broken” in the aftermath of 2008? After the year we just went through, anyone who still believes in perfectly efficient markets should have their head examined. Markets operate in a range from “mostly efficient” to “wildly, insanely INefficient.” When credit mechanisms and normal channels break down, things just stop making sense. Could the huge disconnect between forward-month oil contracts and insanely cheap oil service names be yet another example of Wall Street not making sense?
• Could December crude contracts be expressing an opinion on the inflationary effects of U.S. debt monetization…. or rebound possibilities for emerging markets…. or both? It’s widely recognized that the U.S. Fed and Treasury are embarking on a “great experiment” now that has never before been tried – one that could be summed up as, “Print like crazy and see what happens.” Some observers, like Joachim Fels of Morgan Stanley’s Global Economics Team, further believe that emerging markets could outperform in 2009 due to better internals than they get credit for. Could the persistent crude spread be reflecting both views?

Yep, no question… something’s happening here. I’ll stay on top of things and keep you posted. If an opportunity arises in the drillers or the oil service names, or in crude itself, you can be sure we’ll be exploiting it to the fullest via Macro Trader.

And by the way, another great thing about Taipan Daily is the largely untapped resource of reader knowledge… so if you have any ideas or insights on this “crude conundrum,” I’d love to hear from you: justice@taipandaily.com.

Source: Something’s Happening Here with the Price of Oil