Market Recap and Petro-thoughts

December 11th, 2006: The market was generally positive today with all three major indexes making gains. The Dow was up $21, the Nasqaq up $5.5, and the S&P 500 was up $3.20. The market was largely driven by mergers and acquisitions last week, but today's gains came with very little big news... at least very little mainstream news.

I spend nearly all my time in the oil patch, and therefore spend way too much time tracking developments associated with the petroleum industry, and there were some big under the radar goings on today.

1. Oil trades in US dollars; hence, OPEC countries are awash in dollars. However, they've been panicky over the fall in the dollar and have been diversifying the currency baskets. This could lead to a slide in the dollar and could lead to several Middle Eastern currencies that are pegged to the dollar relatively undervalued. This could definitely hurt the US in the long run. If petroleum starts trading in another currency (Euros?), then watch out for major problems in the US.
2. Shell and Sahkalin-1: Shell is really close to getting kicked out of Russia and losing their $20 Billion dollar stake in the Sahkalin-1 project unless they agree to cede a vast stake to Gazprom (state-owned). Nationalization is a growing trend in Russia. Losing this deal would really hurt Shell, and they are close to losing their permits because of falling behind schedule - look for a big drop in stock if they can't pull a deal. Exxon is safe with the Sahkalin-2 project because Rosneft has about a 20% stake... that will likely keep the Kremlin at bay.
3. Anadarko Firesale: It was announced internally today that Anadarko (APC) is going to start selling off several of their properties. I would look for them to dump everything but their deepwater Gulf of Mexico and Rocky Mountain tight-gas plays. This means they will probably sell of all the mid-continent, Texas, shallow gulf, Brazil, and yes, even Algerian holdings. Thiw will do two things: It will get them out of debt (they hold about $15 billion in debt from buying Kerr-McGee and Western Resources), and it will position them for a takeover. So, if you like to play for oil field takeovers, go with Anadarko (I think Shell will buy them up within 2 years).
4. Nationalization: Back to Anadarko -- they will have trouble dumping Algeria for a premium because Algeria is going to nationalize their petroleum in 3 months. Russia is trending toward nationalization, which is scary because they are the world's biggest producer on an energy equivalent basis. I predict that in 15-20 years there will only be 2 majors. Exxon and a Shell-BP combo. This will probably be a necessity if these companies are to survive in an ever nationalizing world. Their role will be drastically changed and competing with the likes of Gazprom, Saudi Aramco, and CNOOC/Sinopec will be very difficult.