By Popular Demand: Oil Sands

Oil sands are beginning to show up more and more on the radar of investors with an interest in commodities. But what are they?

Wikipedia defines oil sands as: "Bituminous sands - colloquially known as oil sands (and sometimes referred to as tar sands) - are a type of unconventional petroleum deposit. The sands contain naturally occurring mixtures of sand, clay, water, and a dense and extremely viscous form of petroleum technically referred to as bitumen (or colloquially "tar" due to its similar appearance, odour, and colour). Oil sands are found in large amounts in many countries throughout the world, but are found in extremely large quantities in Canada and Venezuela."

Bitumen is, or course, "a mixture of organic liquids that are highly viscous, black, sticky, entirely soluble in carbon disulfide, and composed primarily of highly condensed polycyclic aromatic hydrocarbons".

So that's nice and all. But why do investors care?

Well, because you can process the bitumen out of the bituminous sands. And then you can process the bitumen in similar fashion to crude oil, producing most of the same products that you can get from crude oil (gasoline, plastics, fertilizer, and so forth). The Athabasca oil sands of Canada are already producing about 1.1 million barrels of crude bitumen per day, and some projections estimate that this will be up to 4.4 million barrels by 2020.

There are, of course, some problems with this. Bitumen just does not go "as is" to crude oil refineries. It has to be mined first (unlike crude oil, which you can just pump out once you have the well in place), and this often involves strip mining. It also has to be pre-processed (aka upgraded), which goes through the following stages:

1. remove water, sand, physical waste, and lighter products
2. catalytic purification by hydrodemetilisation, hydroesulfurization, and hydrodenitrogenation
3. hydrogenation through carbon rejection or catalytic hydrocracking.

All of this is expensive, of course. And much more of an energy hog than drilling and pumping. And it can generate anywhere from 10% to 45% more greenhouse gasses than conventional crude oil production. Even a decade ago, this wasn't really worth it.

That was, of course, a decade ago. Rising crude oil prices have made the oil sands much more competitive now. And, from a US perspective, they're also safer sources of crude oil than the Middle East[1]. After all - and let's be serious here - Canada is far less likely to dissolve into civil war than any given nation in the Middle East at this moment.

And why are Canadian oil sands so popular right now? Well, while a lot of countries have oil sands, only Canada and Venezuela have enough oil sands to make them commercially viable at this time. The US could deal with Venezuela[2], but we don't exactly have the best relations with that nation[3]. So Canada it is.

Is any given company that works oil sands a good investment? I'm not going to make a recommendation[4], but here are a few things to keep in mind, however:

• Producing oil from bituminous sands is expensive. This means that oil sand companies produce less revenue per barrel than traditional oil companies.
• The expense of producing oil from bituminous sands also means that they are far more vulnerable to fluctuations in the price of crude. If peace suddenly breaks out in the Middle East, or if OPEC decides to reduce its target price for oil (or increase production quotas), this could also have a negative impact on the profits of the oil sand companies.
• If you have concerns about the environment, production of oil from oil sands makes the production of oil from traditional oil wells look like a green alternative energy.
• Even if you don't have concerns about the environment, a lot of people do. Some of those people are writing laws. Some of those laws are aimed at capping and/or taxing greenhouse gas emissions. Taxes will cut into revenue, and caps on emissions could reduce production (or require the purchase of additional emissions under a "cap and trade" system, which then cuts into revenue).

So do your homework, and make sure you understand what you're buying and why you're buying it. Don't just buy something because some guy on TV throws a chair and screams "buybuyBUY!" That will most likely end in tears and the color red.

[1] Canada already produces as much crude from their oil sands as flows through the SUMED pipeline on a daily basis.

[2] Currently ruled by President Hugo "I blamed the Haitian earthquake last year on United States scalar weapon tests" Chavez.

[3] "I hereby accuse the North American empire of being the biggest menace to our planet," is one of the nicer things he's had to say about the United States.

[4] So you can put the baseball bats down, Compliance.

Metrics: European And Canadian

Let's start with Europe, shall we? We've got economic data flowing in from Switzerland, Germany, France, and the EU as a whole.

In Switzerland, seasonally adjusted unemployment remains flat at 3.6% (missing expectations by 10 bps), while non-seasonally adjusted unemployment rises 20 bps to a level of 3.8% (also missing expectations by 10 bps).

Germany's got a ton of data coming out, and it's all bad. First off, their merchandise trade[1] surplus dropped E2.4 billion (brutally missing expectations, which anticipated an increase in the trade surplus to E15.0 billion) to a level of E11.8 billion in November. Imports jumped 380 bps for the month to a level of 4.1%, while exports rose 160 bps to a level of 0.5%. Retails sales fell 250 bps in November, dropping from a revised 0.1% (revised downward from the original 2.3% reported for October[2]) increase to decline 2.4% (also brutally missing expectations, which anticipated a decline to an increase of only 1.0%). Finally, to round out this trifecta of misery, industrial production fell 370 bps in November from a revised 3.0% increase to a 0.7% decline (missing expectations by 40 bps).

France is not experiencing much joy either. Their merchandise trade figures for November can be read in one of two ways: either as a E7.3 billion shift from a E3.43 billion trade surplus in October to a E3.87 billion trade deficit in November, or (using the revised October figures) as E0.16 billion shift from a E3.71 billion trade deficit to a E3.87 billion trade deficit. The first is an almost inexplicable single-month face-heel turn, and the second smacks of sheer incompetence amongst the offices of the French equivalent of the Department of Labor[3].

Do things get any better for the European Union as a whole? Well, their Q3 final revision for GDP cuts the quarter over quarter growth to 0.3% (down from the previous revision of 0.4%, and missing expectations that the final figure would remain 0.4%). Year over year GDP remains unchanged at 1.9%. the EU's unemployment rate remains unchanged at 10.1% in November, exactly meeting expectations.

On to Canada, where the Labor Force Survey shows things improving by at least a small amount. Employment rose 22,000 in December (up 6800) beating expectations by a small margin (analysts were expecting to see 20,300 new jobs). As a result, the unemployment rate for the year comes in at 7.6%, beating expectations by 10 bps.

Coming up next, we'll be looking at the US Employment Situation!

[1] Merchandise trade is imports and exports of tangible goods and services.

[2] There's no real explanation about how 0.1% was mistaken for 2.3% in the original data.

[3] I mean, really. How else do you look at the trade figures one month and say "Aha! We exported 3.43 billion more Euros worth of goods than we imported! Viva la France!" and then the next month say "Our bad. We made a 7.3 billion Euro mistake in our calculations"? Were they holding the balance sheet upside down?

ADP: Employment Is Good. (Also, Other Metrics)

Starting in Europe, the European Union reported its November PPI around 5 AM EST today. October saw a 0.4% increase (for a 4.4% increase year over year), and the consensus expectation was for an additional 0.1% increase (keeping the year over year figures flat). The EU actually came in at a 0.3% increase, bringing the year over year PPI to 4.5%. Not great, but not terribly bad.

Hopping across the Arctic to Our Neighbors to the North, Canada has released its Industrial Product Price Index (IPPI). Which has missed expectations. For November, analysts were expecting to see a 0.3% increase, and they actually had a 0.5% increase. Oddly, however, their year over year IPPI has declined 20 bps to 2.1%, so investors probably won't take this all that badly.

Here in the states, the Mortgage Bankers Association released its Weekly Mortgage Applications Survey figures for the week ending 12/31. The Market Composite Index (which measures margin loan application volume) was up 2.3% for the week, while the Refinance Index (which tracks refinancing volume) was up 3.9% and the Purchase Index (which tracks volume for first-time mortgages) was down 0.8%. Refinancing made up 71.0% or all mortgage activity for the week, and the average contract interest rate for 30-year fixed-rate mortgages fell to 4.82%.

The implication is that we're starting to find ourselves in a more favorable interest rate environment and that banks are more willing to refinance, but that that we may be expecting home sales to remain soft. Still, while interesting, this report isn't a huge deal for the markets.

ADP has released its monthly National Employment Report for December, and the word is, well, surprisingly good. November saw 92,000 new nonfarm private sector jobs (revised downwards from the original release of 93,000, but we can live with that[1]) . The Street doesn't make predictions for this one, so I'll just go ahead and tell you that ADP sees nonfarm private-sector employment increasing by 297,000 in December. Here's the breakdown:

• Service sector jobs increased by 270,000[2], the single largest monthly increase in the history of the report. Financial services, a subset of this sector, shed 8000 jobs.
• Goods-producing sector jobs rose 27,000. As a subset of this, manufacturing sector jobs increased 23,000 and construction sector jobs remained unchanged (meaning they didn't drop for the first time since June 2007)
• The greatest gains came from medium businesses, which hired 144,000 new employees. Small businesses hired 117,000, and large businesses hired 36,000.

At 10 AM EST we're looking for the Institute for Supply Management's Non-Manufacturing Index. This tracks the health of all of the various sectors of the US economy that aren't factories - agriculture[3], mining, construction, retail trade, whatever. Just so long as it doesn't come from a factory. Anything over 50% is considered a growing economy. November had a 55%, and we're looking for a 56% for December.

Then at 10:30 EST, we get the Energy Information Administration's weekly figures on petroleum inventories. This has an inverse impact on oil prices in the US - if supplies are increasing, prices tend to fall (and vice-versa). It's not a huge market mover, but commodities traders and people who invest in oil stocks tend to like it.

[1] Unless you're one of the 1000 people revised downwards, anyway.

[2] No word on how many of these are seasonal jobs, though, so this could be a fluke driven by the Holiday shopping season. I'm not saying it is, since I don't know. I'm just saying that January's employment situation report could be a letdown in the face of this explosive growth.

[3] Yeah, yeah, factory farming. Doesn't count.

Metrics? Yeah, We've Got Them

From all over the world, we have them. The majority are from the United States today, but we have an international coalition of economic activity to review.

Right off the bat, New Zealand has had some bad economic performance. Their Q2 GDP was revised downward to 0.1% growth. Analysts were looking for 0.2% growth for Q3, and were rather surprised to instead see a 0.2% decline. This puts their GDP up 1.4% for the rolling year, missing the expectation of 1.9% by 50 bps. The decline is largely blamed on the manufacturing sector (particularly petroleum, chemicals, plastics, rubber, and machinery and equipment manufacturing), although construction and real estate took a dive as well.

French Consumer Manufactured Good Consumption and PPI are out as well. October was a bad month for French manufacturers. Their PPI was up 0.8% (making production more expensive), and simultaneously consumption of manufactured goods was down a revised 0.6% (down 0.3% year over year). Greater costs plus less actual sales equals a manufacturing sector rocking back and forth in the corner muttering "Redrum, redrum, redrum"[1] over and over again. Did things get better in November, or do all work and no play make Jacque a dull boy?

Well, French manufactured good consumption was up 2.8% in November, beating expectations by 180 bps and bringing the rolling year figures up to 1.5% growth - most of it driven by a 15% increase in automobile sales. The PPI, meanwhile, was up 0.4% (exactly in line with expectations). After that, you'd think the CAC 40 would be doing better than it is today.

Leapfrogging across the Atlantic we arrive in Canada, where GDP (which was down 0.1% in September) is anticipated to be up 0.3% for October. Hope springs eternal, but has been dashed by a dose of cold reality - there was growth, but only 0.2%. This has also pulled their rolling year GDP down to only 3.3%. Weep for the Loonie, my friends. Weep for the Loonie.

And now, the United States! Right now we've got Durable Goods Orders, Personal Income and Outlays, and Jobless Claims. Later, we add Consumer Sentiment and New Home Sales to the mix.

Durable Goods Orders were down 3.3% in October, with analysts predicting a less pessimistic (but still not confident) increase to only down 1.0% for November. The actual Census Bureau report shows that we missed expectations, coming in at a 1.3% decline in durable goods orders. This was largely driven by a 11.9% decline in transportation equipment orders, mostly from nondefense aircraft and parts.

October Personal Income was up 0.5%, with consumer spending up 0.4% and the core PCE price index unchanged. For November, analysts are looking for 0.2% growth in personal income, 0.5% growth in consumer spending, and 0.1% growth in the price index. The Bureau of Economic analysis has not yet seen fit to make the official press release available, so we turn to Econoday to find Personal Income up 0.3% (beating expectations), consumer spending up .4% (missing expectations) and the core PCE price index up 0.1% (right in line with expectations).

First time jobless claims were revised upwards to 423k (up from the original report of only 420k) for the week ending 12/11, and analysts are expecting that same number to happen again for the week ending 12/18. Turning to the US Department of Labor, we see that the advance figure for the week ending 12/18 is 420k new claims - exactly in line with expectations. No single state really stood out with significant increases in first time jobless claims, while New York and North Carolina led the pack in reductions in new claims.

Consumer Sentiment, due at 9:55 AM EST, is expected to climb 80 bps to 75.0%. New Home Sales, due at 10 AM EST, are expected to climb 17k to 300k new units.

[1] Maybe that should be "Ertruem, ertruem, ertruem"?

Canada Has An Economy Too, Folks

And why should we care? We should care because Canada is the single largest trading partner the United States has. Our total trade[1] with Canada, for October alone, was $45.48 billion[2]. So it strikes me as just slightly important to pay attention to how they're doing.

Canada's CPI for November, and their retail sales figures for October, are out now. In October, Canadian CPI was up 0.7% for the month (and 2.4% for the rolling year). Expectations going in to this morning were an additional 0.3% increase for November (with the rolling year declining to a 2.3% increase). Meanwhile, Canadian Retail Sales were up a revised 0.4% in September (up 3.3% for the rolling year) with expectations for a slightly better October (up 0.5%).

How did our neighbors to the north fare? The CPI was up only 0.2% (2.0% for the rolling year), with 7 of the 8 CPI components increasing in cost[3]. The good news, for certain cynical values of "good", is that the core CPI was absolutely unchanged[4]. Turning to Retail Sales, October saw a 0.8% increase (maintaining the 3.3% rolling year increase).

[1] Defined here as the sum of exports and imports. Why the US Census Bureau doesn't break those out separately, I don' t know.
[2] China, our second largest trading partner, was only $44.12 billion.
[3] The exception was clothing and footware, which were down 3.2%.
[4] The Bank of Canada excludes the following extremely volatile consumer goods from their calculation of the core CPI: fruit, fruit preparations and nuts; vegetables and vegetable preparations; mortgage interest cost; natural gas; heating oil and other fuels; gasoline; inter-city transportation; and tobacco products and smokers' supplies.

For Your Consideration...

Just a little information, relevant to the whole PIIGS situation.

Everyone is concerned about the inability of these nations to service their debts, because of their terrifying debt-to-income ratio. Now, the least bad off of the PIIGS nations - in terms of public debt to GDP - is Spain. Its ratio is only 53.20%. For your convenience, I have bolded the names of any nation on this list that is equal to or worse than this.

Member Nations of the European Union
Nation	Public Debt as a % of GDP	Tax Revenue as a % of GDP
Austria	66.40%	43.40%
Belgium	101.00%	46.80%
Bulgaria	14.80%	34.40%
Cyprus	56.20%	36.60%
The Czech Republic	34.00%	36.30%
Denmark	41.50%	50.00%
Estonia	7.10%	11.60%
Finland	40.30%	43.60%
France	77.60%	46.10%
Germany	73.20%	40.60%
Greece	113.40%	33.50%
Hungary	78.00%	37.30%
Italy	115.80%	42.60%
Latvia	36.60%	30.40%
Lithuania	29.50%	20.90%
Luxembourg	14.60%	36.40%
Malta	69.00%	35.20%
The Netherlands	60.90%	39.50%
Poland	46.40%	33.80%
Portugal	76.80%	37.00%
Republic of Ireland	64.80%	34.00%
Romania	24.00%	28.10%
Slovakia	35.70%	29.50%
Slovenia	31.30%	39.30%
Spain	53.20%	37.20%
Sweden	41.60%	49.70%
The United Kingdom	68.20%	36.60%
The BRIC Nations
Nation	Public Debt as a % of GDP	Tax Revenue as a % of GDP
Brazil	56.50%	Unknown
Russia	8.30%	36.90%
India	57.30%	17.70%
China	16.90%	17.00%
The United States
Nation	Public Debt as a % of GDP	Tax Revenue as a % of GDP
United States of America	53.50%	28.20%
Japan	192.90%	27.90%
Canada	82.50%	33.30%
The Whole World, on average	56.00%	Unknown

Comforting, isn't it?