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Robert Kientz
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I am an investor and author who has owned and managed real estate, precious metals, stocks, and bond investments.
  • Natural Gas Liquids: No More Running On Empty

    I have written in the past that natural gas is our answer for a potential supply shortage in oil. Natural gas is cleaner than gasoline produced from oil, it is currently cheaper for the same energy output, and it is being produced in abundance in the United States which makes it a good current substitute for potentially stressed oil production. Not only that, but gas reserves are being found in abundance all over the world.

    To be clear, oil supplies have kept up with demand owing to new discoveries and technology which has allowed economical oil extraction from sands and shales. It also does not hurt to have high oil prices driving recovery from unconventional sources now made profitable. But if global demand keeps growing at current levels, at some point in the future a supply deficit may emerge in oil which will require alternatives to balance energy demands. Please read my analysis of current oil supply and demand factors for background.

    While natural gas meets the needs for a fuel alternative to oil for the foreseeable future, detractors of natural gas have pointed out that petrochemical production, which in the past have been largely dependent on rich, liquid-heavy content that oil provides, cannot be met by the lighter hydrocarbon profile that natural gas provides. This article will examine the potential petrochemical content provided by natural gas contained in Natural Gas Liquids [NGL's] content.

    I will attempt to make the argument that this analysis is not zero sum, requiring us to forego one resource for the other; but rather that both resources together provide an abundance of options for fuel and petrochemical needs.

    Understanding the relationship between oil and natural gas for petrochemical production is crucial for investors putting money into any company involved in the energy sector. Indeed, in several future articles we will use this knowledge to assess which companies are the very best candidates to own against the evolving energy landscape.

    Petrochemical Production

    Let us start with a quick analysis of petrochemical production. Elmhurst College has provided three diagrams to aid us in tracing feedstock materials to end petrochemical product.

    Raw Materials

    (click to enlarge)

    Intermediates and Derivatives

    (click to enlarge)

    End Use Markets

    Both natural gas and oil provide resources to a range of end products including plastics, adhesives, papers, textiles, fibers, solvents, chemicals, synthetics, rubber, and foam products.

    Typical oil cracking leads to butadiene, benzene, toluene, and xylene production while natural gas leads to methanol, ethylene, and propylene production. If we stop our analysis there, then supply issues of one natural resource would imply difficult choices to be made on production of key products. But a deeper analysis suggests that both feedstocks provide a range of petrochemical choices.

    Olefins Production

    These include ethylene, propylene and butadiene and have predominantly been produced by catalytic cracking of oil. However, the build-out of steam cracking facilitiies which process both oil and NGLs into olefins are receiving the majority of funds in the industry, largely in response to the increased role natural gas reserves are playing in petrochemical production.

    Ethylene and propylene account for 50-60% of all petrochemical feedstocks, and as such NGLs are a key component of future supply of these chemicals. Both ethylene and propylene are currently produced about half and half from oil and gas feedstocks.

    Butadiene can be produced from natural gas liquids but on a smaller scale than oil-based production, and therefore there is a scarcity premium priced in that market. I'll get to the importance of butadiene production later [think tires].

    Aromatics

    Aromatics includes benzene, toluene, and xylene, often referred to as BTX. Benzene is an intermediate where 80% is used to produce other chemicals. In the US and Europe, about 50% of benzene is used in the production of styrene [ethylbenzene], 20% is used in production of cumene [plastics, adhesives, pharmaceuticals], and 15% is used in production of cyclohexane [think nylon].

    Benzene originally came from coal production, but oil's emergence shifted production so that coal produces a very small amount of the world supplies. Toluene can be used to manufacture benzene, and benzene can also be made from ethylene [natural gas] . A lot of benzene comes from pygas [oil].

    (click to enlarge)

    Image courtesy of Chemsystems.com

    Toluene is used as a feedstock for production of other petrochemicals, as an octane booster in vehicles, in solvents, as a component of polyurethane foam, and as a disinfectant. This chemical can be produced from NGLs but the majority share is from oil cracking.

    Xylene products include polyesters including soda bottles and fabrics. Xylene can be produced from NGLs, but also predominantly comes from oil.

    So which is more important, oil or natural gas? That depends on market factors for each petrochemical product. Typically, oil cracking leads to a more rich diversity of some chemical products, some of which command a premium in the market. Natural gas liquids , however, offer an abundance of supply are are less costly to produce, making them a very attractive feedstock for many chemicals also in high demand in the market.

    In addition, it depends on the supply of substitute products. For example, while benzene and xyelne are used in the production of nylon and polyester fabrics, cotton is a viable alternative fabric that is regaining popularity.

    Ethane, in particular, is very cheap to produce from steam cracking NGLs. Ethane produces critical ethylene [and to a smaller extent propylene] which are used in over half of all petrochemical production.

    Image courtesy of Dow.com

    Butadiene

    Butadiene, most often used in the production of synthetic rubber, is the one petrochemical in which oil supply shortages can really drive price quickly. While natural gas feedstocks do produce this important chemical, they make a relatively small dent in the overall world demand for it. The market has tried to find alternatives such as natural rubber, soy, plants, and others but none have been perfected as a true substitute for butadiene. Companies that can capitalize on the premium priced into butadiene stand to gain handsomely in the immediate future.

    Ethane vs. Propane Debate

    NGLs give us a key choice in feedstocks for our natural gas steam crackers. Part of the debate within natural gas cracking is which feedstock offers more value. Ethane is currently in such oversupply that the market is rejecting some supplies and companies are investing in storage facilities for the gas.

    Propane cracking provides a richer portfolio of products which tend to command higher prices in the market. Demand and supply tends to swing from ethane to propane cracking and back again, depending on whether the market needs production of ethylene or butadiene, propylene, etc..

    Essentially, we have enough feedstock to satisfy demand and keep a lid on excessive price growth of both of these important petrochemicals.

    At the end of the day, investors and consumers should feel confident that the rise of natural gas production will satisfy 1) transportation fuel demand 2) petrochemical fuel demand and ultimately 3) solidify supplies of products we use everyday for the immediate term. Without natural gas production, the story would be quite different.

    As the natural gas industry builds key infrastructure and can provide for transportation of the gas and it's constituent liquids, pressure will be taken off the oil market until the markets for both fuels complement each other.

    This will reduce the doom and gloom over looming oil supply shortages and allow us more time to develop technologies outside of these fuels for even longer term sustainability.

    A last point to be made is that current use of natural gas stocks as a grid power solution alongside coal, nuclear, solar, and wind will adversely affect supplies of natural gas for transportation and petrochemical products. We consume so much energy on the grid that we can burn through natural gas supplies in very short order. Luckily, the thorium nuclear revolution has come along just in time to alleviate this potential energy problem.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Jan 09 9:54 AM | Link | Comment!
  • Revisiting The Mortgage Mess In Light Of QE3

    Mortgage companies tried several approaches to reducing defaults in bad loans. These included:

    Refinance - for those that could afford it, have refinanced at a lower rate. Must be employed to qualify and many didn't on income requirements.

    Modification - mostly reduced the rate and did not reduce principal by as much. Most borrowers who are in trouble don't qualify for this because they lack income and have high other expenses such as credit cards and car payments. Modifications did not significantly reduce overall late payments and default accounts.

    Pick a pay - most people chose to pay interest only which did not pay down their loan. Now, with falling real estate prices, a large percentage of these are either underwater or have lost equity on the deal. This makes people less likely to stay in the home and may lead to more strategic defaults.

    However, few of these programs have been ultimately successful in dealing with the mortgage fiasco.

    (click to enlarge)

    Data Courtesy of SNL, Credit Suisse

    Of 10.8 million upside-down borrowers, the average mortgage balance is $216,000 and the average underwater amount is $51,000, according to new data released from Corelogic. That equates to $2.3 trillion of impaired loans with an underwater balance of $550 billion.

    The number one predictor of foreclosure is negative home equity. People have no financial reason to stay, and may turn to renting in the meantime.

    (click to enlarge)

    Image Courtesy of Mortgage Bankers Association

    American's with mortgages have lost almost 40 percentage points of equity over a 6 year period of time, which is astounding.

    Using Citi as an example, defaults on loans are very high and the company is finding it increasingly hard to liquidate toxic debt onto the markets. Citi has hundreds of billions of delinquent or defaulted loans on the books.

    (click to enlarge)

    Image Courtesy of Motley Fool

    At the end of Q2 this year, 17% of homeowners fit into the 80% to 125% LTV range and may qualify for government assistance, though at this pace not many of them will get modified by government programs anytime soon.

    In my experience working for a mortgage lender for 2 years, the pace of modifications on bad loans meant it would have taken 15 years to fix the lender's portfolio, assuming the economy did not get worse. That company was also more efficient at loan modifications and subscribing to government requirements than the larger banks were, so it was a rosy scenario when compared to the mortgage lending industry as a whole.

    Accounting rules have allowed banks to leave the mortgages at full value despite the declines in property prices. These assets are not showing their true worth on the balance sheets which would result in larger losses and more bank going bankrupt.

    However, as time has passed and unemployment has not improved, more of these loans are going delinquent over time resulting in higher amounts of non-performing loans. The Federal Reserve now has reason to participate in the mortgage market, buying up toxic MBS and moving them from the private to public balance sheet. The banks could not fix the problem themselves and had to be bailed out in 2012.

    The open ended QE3 program is designed to absorb billions of these bad debts each month, which will have the effect of understating the housing problems nationally and also saves the private banks from becoming insolvent on bad loans that were destined to fail. Never has it been a better time to be a banker in the United States.

    The large private banks never paid for the mortgage crisis. With QE3, they never will. Who will pay then? It will be me and you. As the Federal Reserve is saturated with more and more debt, eventually the dam will break and the central bank will be broken. What to do then? Well, most likely the bank will fail and another currency scheme will be announced by the government with backing from large financial institutions, of course. Most likely it will involve several nations tied together in a regional fiat arrangement. Will this be too politically difficult to accomplish in the US?

    Recently, leadership in Europe has already begun discussing the danger of allowing separate nation states in Europe and has advanced the idea of a global power of a true European Union. This is being driven by the economic situation and pending failure of the Euro upon trillions in bad debt. Once the European Union is fully integrated into one national government, a new currency will be announced to replace the old one.

    The subsequent buildup and destruction of that fiat currency will ensure therewith. It may take decades again for that currency to fail, but not before the bankers have plundered as much wealth as they can from the people by more and larger fraudulent financial schemes.

    Back to the US, once the one-nation European approach is announced, similar calls will be made in the houses of US Congress. The people will dissent and even loudly, as the European people did when the Euro, Lisbon Treaty, EFSF, and finally the intent to form a single European nation were announced. But popular dissent alone has not stopped the forced European integration as it rolls along unabated.

    At the end of the day, the cries of the people may not stop the runaway fascist government-financial complex from taking national sovereignty away from America and handing it to a select few technocrats intent on ruling each continent as one nation as is happening in Europe. The only thing that will stop it is the people refusing to accept the plans of the technocrats and to walk away from the corrupt system. As long as Americans accept bureaucratic collectivist solutions, whether actively or passively, the centralization of finance and government will continue until a few rule the whole of the Western world.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

    Tags: real-estate
    Sep 26 10:00 AM | Link | Comment!
  • Yen Pound Cross: Reversal Coming?
    The economic news keeps coming for Japan and Britain, and not a lot of it is good. It has been interesting to see the strengthening of the Yen against the pound since April. 

    Post Fukushima, it has been a fairly orderly direction the pair has taken to the Yen side, no doubt on fears of sovereign and banking collapse in Europe and Britain. While Japan is deep in the red on public debt, they are a nation of savers and many analysts feel as though the risk of economic collapse before the Tsunami and Nuclear disaster were somewhat remote. While the hit to Japan's economy was substantial and will continue to affect the country, the current reality is that Japan is holding steady and seeing some modest improvements in their economic indicators.

    I graphed a Fibonacci retracement on the pair since the Tsunami and you can see that weakening of GBP to the Yen has steadily moved past lowest support. What had been support at 122.207 has now become short term resistance to the upside.



    Sept 15's morning trading has been to the upside. The question is, will the pound continue to rally to the upside confirming long-term support at 122.207, or will the trend continue to the downside upon fears of sovereign and banking contagion?

    Economic Indicators

    Economic indicators this week have been clearly on the side of the Yen. Japanese industrial and manufacturing reports have been supportive of expectations, while British visible trade balance and retail price indexes have been misses. Jobless claims in Britain were favorable, however.

    Next week is a big news week for the pair. Bank of England minutes, public sector borrowing, YoY housing prices, and loans for house purchases are on the docket for the Pound. The Yen will see the JPY leading index, merchandise trade balance, and all industry activity index news.

    In two weeks, Japan will release data on retail sales, housing starts, jobless rate, household spending, and consumer price index news while Britain will announce consumer confidence, mortgage approvals, consumer credit, and nationwide house prices.

    September is an important pivot month for the pair as economic indicators and the playout of banking sector troubles in Britain will put pressure on the currency pair. Continuing supportive numbers in the Japanese indicators along with deteriorating data in Britain could continue to push the pair to the downside, and that is what many analysts are expecting.

    Technical Indicators

    Stochastics show the shorts have moved into oversold territory with a possible breakout to the upside possible. Any value below 20 is potentially bullish to the upside.



    The MACD is continuing bearish and continues momentum below the signal line.



    Both are rear looking indicators and may not point the direction forward, however.

    Trader sentiment with my forex broker reached a ratio of 16:1 long buyers to short, but has since decreased to 11:1, correlating with this morning's move to the upside as traders expect reversal above 122.207 support. However, trader sentiment is typically a contrarian indicator at levels above 3:1. Therefore, sentiment indicator also indicates a move to the downside could be coming.

    With calls for double dip recession deepening in much of the West, and the worst of the bad Japanese news in the rear view mirror, my hunch is that the pair will continue to trade lower but within a reasonable range below 122.207. If banking fears are assuaged in Europe and Britain and Greece somehow avoids meltdown sending Europe into a tailspin, the pair could reverse to the upside. But my hunch is the economic data continues to get worse for Western nations while the recent bad news out of Japan gets relatively better than before.  

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Sep 15 11:37 AM | Link | 1 Comment
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