 |
 |
|
Trust Department Quarterly Newsletter 2nd Quarter 2010
The BP Problem The most devastating news that has taken place in the last three months has been the oil spill on the deepwater oil rig in the Gulf of Mexico. It is estimated that over the 2 ½ months since the accident there has been approximately 160 million gallons of oil that has spilled into the Gulf. The last spill of this magnitude in the Gulf took place in 1979 when it took Mexico’s state-owned oil company three months to stop the leak and 140 million gallons spilled into the Gulf over a 10-month period. Thirty years ago the solution to the spill was to drill relief wells, which appears to be the ultimate solution to the current disaster. The first of those two wells is reportedly 7 to 8 days ahead of schedule as of the end of June. As a backup, the second relief well is targeted to be completed a few weeks later than the first one. The overall reservoir of oil where this well is located is 2.1 billion gallons. It is reportedly pouring approximately 2 million gallons of oil into the Gulf on a daily basis. Do keep in mind that the wellhead is almost a mile under the surface of the water and the casing goes down another 13,000 feet below that. It is estimated that BP has already expended $3.1 billion in costs through the weekend of July 5. This does not include the $20 billion that they have set aside for damages. BP appears to be much more responsive to the damages that are being caused by this disaster than was Exxon with the spill in Alaska and is working diligently to not only stop the flow, but to expedite the cleanup process. Some of the engineering ideas that have been put in place, such as the top hat and clearing of oil and gas brought to the surface, have worked very well to contain part of the flow. Skimmer ships are being utilized to collect the oily water and extract the oil from the seas. A new larger skimmer that is designed to collect up to 500 thousand barrels of oily water on a daily basis is currently in the area, but is being hampered by high seas. In spite of the concerns from this spill the price of oil has not gone up substantially. Look for deals to be made between the federal government and the existing oil companies to put new safety measures into place and that drilling will resume. Roughly 20% of our nation’s oil supplies come from the deepwater wells located in the Gulf of Mexico. The magnitude of this oil spill and the damage to our fishing industry, wildlife and beaches in total has yet to be determined. There are somewhere in the neighborhood of 5,000 wells that operate in the Gulf of Mexico. The incident rate is low and it appears that some of the safeguards were not adhered to. Even though this spill will hopefully be stopped in the next few weeks the damage that it has caused will go on for quite some time. Stock Market Through the end of the second quarter the Dow Jones Industrial Average was down 10% from the beginning of the quarter. The S & P is down approximately 11.9% since the end of March. Even with that much of a decline over the last quarter the markets are still up over 50% from their low point on March 9, 2009. On average the stock market has shown a slight decline over the summer months when we look back over the last 20 years. The year of 2009 was an exception as the market was up 11.7% during the three summer months. We would anticipate the balance of the summer months to be choppy and the market still having some downward pressure as we get into the September – October period. By year end we are looking for the market to show an overall return of somewhere between 6% and 10% from the first of the year to the end of December. The Bond Market During the last quarter we have seen the yield on the 10-year and 30-year treasury notes drop almost a percent in each case. While the government continues to issue a greater supply of government bonds and notes the demand for this product continues to be high, which has kept the rates lower. Problems in European countries, such as Greece, only drives more and more investment dollars towards what is still perceived to be a safe haven in the form of U.S. Treasuries. Also contributing to the demand for safe investments has been the exit of some investors from the stock market as well as the fact that the savings rate of the U.S. population has increased since the recession started. Currently, mortgage rates remain relatively low, with the 30-year conventional mortgage somewhere in the neighborhood of 4.65%. In spite of this, the new mortgages coming into place have been low, as housing sales have dipped since the rebates came off at the end of April. The Federal Reserve has continued to lean toward lower interest rates. We would anticipate the rates to rebound and that we’ll see the rates back somewhere in the neighborhood of where they were at the beginning of the year. |
||||||||||||||||||||||||
