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RBC Explains What The Hell Is Going On: “Prudent” Fed & Chinese Intervention

RBC Explains What The Hell Is Going On: “Prudent” Fed & Chinese Intervention

A “prudent” Fed (and China’s “National Team”) have spurred a risk-on rally, as RBC’s head of cross-asset strategy Charlie McElligott notes the market’s ‘Pavolovian’ response to Fed’s ‘dovish hints’ contained within the Minutes – despite simultaneously staying ‘on message’ with hiking / tapering commentary – prompts a “QE of old” response: stocks and Treasuries bid, while the USD faded.

China further perpetuates the ‘risk rally’ via apparent market interventions:

1.       Intervention in FX markets to strengthen the Yuan overnight, with speculation of a number of Chinese banks selling Dollars in the onshore market overnight which drove the Yuan higher.

2.       Chinese “National Team” stock market inventions as well, with sharp-turns higher off of an initially weaker equities opening and again-weaker industrial metals.   Major reversals off lows saw nearly all domestic markets close at highs (Shanghai Prop +2.8%), while Hong Kong’s Hang Seng closed at highs since July 2015, with Chinese real estate developers leading.

Initial (and expected) ‘sell the news’ on the snoozer OPEC outcome, as they extend the output cut 9 months per expectations—which disappointed the ‘bullish surprise’ camp which anticipated more OPEC-‘gaming’ of the market, thinking it was possible for a deeper-cut in conjunction with the consensus extension.

This move lower in crude is notable if it were to escalate the current rollover in ‘inflation expectations’ (10Y BE’s below 200dma) which continue to show as the largest price drivers of risk-assets and major rates markets currently per the QI factor PCA model—although should be noted that both SPX and HYG (US HY proxy) are both deeply OUT OF REGIME with low r-squareds / low explanatory power.

Due to my much-discussed “Chinese deleveraging / Fed tightening / ECB pivoting ‘less dovish’” trifecta, we are seeing good buying in cash USTs and receiving in swaps (strong 5Y auction as well) keeping rates pinned despite the ongoing risk-asset rally.

…click on the above link to read the rest of the article…

Today’s Stunted Oil Prices Could Cause Oil Price Shock In 2020

Today’s Stunted Oil Prices Could Cause Oil Price Shock In 2020

Refinery

As oil prices remain unsteady and OPEC continues to make headlines every hour, the world is focused on oil’s immediate future. As Saudi Arabia announces plans to slash production and move their economy away from oil dependency, many industry insiders are predicting that the now over-saturated market will reach an equilibrium with higher commodity prices by 2018 and U.S. shale production will continue to grow along with global demand.

Robert Johnston, the CEO of one of the world’s biggest political risk consultancies, is unconvinced. In a speech made at the Association of International Petroleum Negotiators’ 2017 International Petroleum Summit, Johnston laid out his concerns for the future of oil.

What I don’t hear people asking is, ‘then what?’ Are the Saudis going to maintain these production cuts forever, or at some point do they have to start reversing that? I think in 2018 they will be reversing those production cuts,” he said. These important questions aren’t getting enough attention according to Johnston, whose firm Eurasia Group foresees a fast-approaching supply gap that Saudi Arabia and U.S. oil may not be able to fill.

Eurasia Group forecasts about 7 million barrels per day (MMbbl/d) of new crude supply by 2022. This includes about 5 MMbbl/d of U.S. shale growth and about 2 MMbbl/d from oil sands and deepwater extraction. But by the year 2022, another 15 MMbbl/d of new supply may be needed, as demand trends predict an annual growth rate of about 1 MMbbl/d. With this kind of impending discrepancy between supply and demand, the industry needs to start looking for new sources of oil, and quickly.

…click on the above link to read the rest of the article…

Lower 48 Production Nears Cycle Highs As Rig Count Rises For 18th Straight Week

Lower 48 Production Nears Cycle Highs As Rig Count Rises For 18th Straight Week

While much was made of this week’s drop in US crude production, it was driven by an Alaskan supply drop, not the Lower 48 whose production is at Aug 2015 highs. WTI back above $50 on the back of more OPEC jawboning appears to have everyone convinced this time is different, but for the 18th week in a row US oil rig counts rose (by 8 to 720).

  • *U.S. OIL RIG COUNT +8 TO 720 , BAKER HUGHES SAYS :BHI US
  • *U.S. GAS RIG COUNT 180 , BAKER HUGHES SAYS :BHI US

The 18th weekly oil rig count rise…

Production from the Lower 48 continues to soar…

And WTI dipped a little on the print…

And while prices hover above $50, OilPrice.com’s Brian Noble warns that as breakeven prices converge an oil price crash nears…

No one should underestimate the impact of AI (artificial intelligence) on the future of the entire capital markets complex. The LinkedIn group, Algorithmic Traders Association, has recently been running a series of articles warning of the seismic shift that is and will continue to be felt in the global hedge fund industry as machines take over from people on trading desks.

But what intelligent human being would ever suddenly have turned bullish on the morning of Monday 15 May 2017 just because of renewed jawboning from Saudi Arabia and Russia, indulging in the same old two-step as they did at Doha in April 2016 and Vienna in November of last year. That is however precisely what the machines did. Hallelujah.

…click on the above link to read the rest of the article…

Do Saudi Arabia And Russia Really Want Higher Oil Prices?

Do Saudi Arabia And Russia Really Want Higher Oil Prices?

Russia and Saudi Arabia

The jawboning of oil prices by the Saudi Arabian/Russian tag team should be wearing off after more than a year of actions that don’t measure up to the words. Oil prices slumped recently, dropping from around $54 per barrel to just below $50 as of Friday’s close.

As if on cue, the Russian energy minister announced Friday that Russia has now met its target of reducing oil production by 300,000 barrels per day. It took four months to do something that should have taken just weeks. (The agreement came into force on January 1.) And, of course, we’ll have to see if the Russians have actually done what they say they’ve done.

Only a week earlier, the Saudi energy minister indicated that there is momentum growing in OPEC for extending production cuts beyond June for another six months. This announcement comes only six weeks after the same minister said that OPEC would NOT be considering extending the cuts. This is reminiscent of last year’s run-up to the production agreement in which Russia and Saudi Arabia kept alternating in making often contradictory announcements to sow confusion about the possibility of a production agreement and keep markets on edge without actually having to do anything.

I continue to question the sincerity of Saudi Arabia and Russia who I believe remain committed to undermining the production of tight oil (shale oil) in the United States. Despite the cuts agreed to for this year through June, the March numbers suggest substantial non-compliance among non-OPEC signers of the production agreement and a reminder that major producers Libya, Nigeria and Iran have been exempted from cuts. Do Saudi Arabia and Russia really want prices to rise enough to make tight oil profitable all across the United States (and not just sweet spots in the Permian Basin)? I’m not convinced. Related: Saudis To Boost Oil Export Capacity To 15 Million Bpd In 2018

…click on the above link to read the rest of the article…

Why We Should Be Concerned About Low Oil Prices

Why We Should Be Concerned About Low Oil Prices

I recently tried to explain how the energy-economy system works, including the strange way prices fall, rather than rise, as we reach limits, at a recent workshop in Brussels called “New Narratives of Energy and Sustainability.” The talk was part of an “Inspirational Workshop Series” sponsored by the Joint Research Centre of the European Commission.

Figure 1. Empty Schuman room of the Berlaymont European Commission building, shortly after we arrived. Photo shows Mario Giampietro and Vaclav Smil, who were the other speakers at the Inspirational Workshop. Attendees started arriving a few minutes later.

My talk was titled, “Elephants in the Room Regarding Energy and the Economy.” (PDF) In this post, I show my slides and give a bit of commentary.

Slide 2

The question, of course, is how this growth comes to an end.

Slide 3

I have been aided in my approach by the internet and by the insights of many commenters to my blog posts.

Slide 4

We all recognize that our way of visualizing distances must change, when we are dealing with a finite world.

Slide 5

…click on the above link to read the rest of the article…

Saudi Arabia Vs. Russia: The Next Oil Price War

Saudi Arabia Vs. Russia: The Next Oil Price War

Oil Refinery

International oil markets could be heading towards a new war, as leading OPEC and non-OPEC producers are vying for increased stakes. The unexpected cooperation between OPEC and non-OPEC countries, instigated by the full support of Saudi Arabia (OPEC) and Russia (non-OPEC) has brought some stabilization to the crude markets for almost half a year. The expected crude oil price crisis has been averted, it seems, leaving enough room when looking at the fundamentals to a bull market in the coming months. As long as Saudi Arabia, Russia and some other major producers (UAE, Kuwait), are supporting a production cut extension, financials will be seeing some light at the end of the tunnel.

The effects of the 2nd shale oil revolution, as some have stated, have been mostly mitigated by a reasonably high compliance of OPEC and non-OPEC members to the agreed upon cuts, while geopolitical and security issues have prevented Libya, Iraq, Venezuela and Nigeria, from entering with new volumes. Stabilization in the crude oil market, as always, is not only fundamentals but also geopolitics and national interests. The latter now could also be the main threat to a successful extension of the OPEC production cuts in the coming months.

Fears are growing that OPEC’s leading producer, Saudi Arabia, is no longer happy with the overall effects it is generating by taking the brunt of the production cuts, while at the same time, other OPEC members, such as Iran and Iraq, are looking at production increases. Saudi Arabia’s other main rival Russia is also not sitting idle. Even if Moscow is still fully behind the official production cuts, Russian oil companies have been aggressively fighting for additional market share in Saudi Arabia’s main client markets, China, India and even Japan. Iraq and Iran, in contrast to what was expected, have been cutting away share in Europe.

…click on the above link to read the rest of the article…

Oil Rigs Rise For 12 Straight Weeks; Threaten Oil Price Recovery

Oil Rigs Rise For 12 Straight Weeks; Threaten Oil Price Recovery

For the 12th week in a row, the number of US oil rigs rose (up another 10 to 672 – the highest since September 2015). US Crude production continues to track the lagged rig count, pouring more cold water on OPEC’s production cut party.

The rig count grows, tracking the lagged oil price in a self-defeating cycle.

And crude production appears to have plenty more room to run.

OPEC’s No.2 Goes Rogue: Plans 600,000 Bpd Oil Output Increase

OPEC’s No.2 Goes Rogue: Plans 600,000 Bpd Oil Output Increase

Iraq oil field

Iraq has plans to boost its crude oil production by 600,000 bpd to 5 million bpd by the end of this year, regardless of its participation in OPEC’s production cut deal. Iraq is the cartel’s second-biggest exporter of crude and has been the most disinclined of all parties to the agreement since its inception, with a lot of observers expecting it to be the first one to cheat.

Iraq’s first problem is that as much as 95 percent of its budget revenues come from crude oil. There are no viable alternatives in sight for revenues at the moment. The second problem that the country has to contend with is its war with Islamic State, which makes these revenues more important than ever.

Amid the final push against IS in Mosul, Iraq is working hard to ensure the sustainable growth of its oil and gas industry—OPEC deal or no OPEC deal. Three months ago, Oil Minister Jabar al-Luaibi saidthat Baghdad is planning to build five new refineries on an investment basis, in addition to fixing and expanding existing refineries that were damaged in the war with IS.

While Al-Luaibi has repeatedly assured media—and indirectly, investors—that Iraq will stick to its OPEC commitment, Iraq is doing whatever it can to boost its returns from its only significant natural resource. Related: Don’t Be Fooled By Daily Oil Prices

As part of these efforts, the government recently started a review of the contracts it has with foreign oil companies operating local fields in a bid to better match its interests to those of the operators. Currently, international oil companies in Iraq are working under the so-called technical service contracts, which a few years ago, forced them to reduce production from some of the country’s biggest fields because Baghdad had no money to pay them for operating the fields.

…click on the above link to read the rest of the article…

Will The Oil Price Slide Lead To A Credit Crunch For U.S. Drillers?

Will The Oil Price Slide Lead To A Credit Crunch For U.S. Drillers?

Shale drillers

The recent drop in oil prices, which has almost wiped out the price gains since OPEC announced its supply-cut deal, is coming just ahead of the spring season when banks are reassessing the credit lines they are extending to support drillers’ growth plans.

WTI front-month futures have been trading below $50 a barrel for a couple of weeks, while Brent crude slipped briefly below $50 on March 22, dropping below that psychological threshold for the first time since November 30, the day on which OPEC said it agreed to curtail collective oil production in an effort to rebalance the market and lift prices.

Lenders review the oil and gas companies’ creditworthiness twice a year, in April and in October, in the so-called borrowing base redetermination. The recent drop in the price of oil may prompt banks to be more cautious in their assessments, but still, things look brighter for oil firms than they did in March last year when oil prices were consistently below $40 a barrel.

This time around, analysts expect reductions in credit lines should oil prices drop below $45 until creditworthiness reviews are over, according to Bloomberg.

These assessments are closely connected to the price of oil, given the fact that the value of the companies’ oil and gas reserves serve as the basis for their creditworthiness assumptions.

Nonetheless, reviews are less likely to lead to drastic credit cuts this spring because the companies that have survived the oil price crash have emerged leaner after major cost cuts, asset sales, and focus shifting to easier, cheaper, and more lucrative areas, such as the Permian. U.S. shale players have been locking in future production, and the best drilling areas are now estimated to be profitable at as low a price as $40 per barrel.

…click on the above link to read the rest of the article…

Venezuela In Dire Straits As Oil Production Falls Further

Venezuela In Dire Straits As Oil Production Falls Further

Oil Pipe

Venezuela’s economic crisis continues to deepen. The South American OPEC member is thought to be sitting on nearly 300 billion barrels of oil, far more than any other country in the world, including Saudi Arabia (estimated at 268 billion barrels). But the economy has been in freefall for several years, with conditions continuing to deteriorate.

The economic crisis has morphed into a full-blown humanitarian disaster. Just this week the Wall Street Journal reported on Venezuelan women traveling to neighboring Colombia to give birth because the state of Venezuela’s hospitals are horrific, with shortages of medical supplies and trained staff. Infant mortality is worse than in war-ravaged Syria.

Food and other essential items are also painfully scarce, leading to long lines at shops. Tensions run high because there is not enough to go around.

Now even gasoline is running low in Caracas, Reuters reports, an unusual development for the capital city.

Gas shortages suggests problems for Venezuela’s state-owned oil company PDVSA are deepening. The government depends on oil production for more than 90 percent of its export revenues, and the collapse of oil prices back in 2014, coupled with a long-term slide in output, have ruined the company’s finances.

That, in turn, puts even more pressure on PDVSA. A shortage of cash is straining the company’s ability to import refined products as it falls short on bills to suppliers. PDVSA needs to import refined products to dilute its heavy crude oil, but without enough cash, tankers are sitting at ports unable to unload their cargoes. Reuters also says that “many tankers are idle because PDVSA cannot pay for hull cleaning, inspections, and other port services.”

…click on the above link to read the rest of the article…

How OPEC Lost The War Against Shale, In One Chart

How OPEC Lost The War Against Shale, In One Chart

At the start of March we showed a fascinating chart from Rystad Energy, demonstrating how dramatic the impact of technological efficiency on collapsing US shale production costs has been: in just the past 3 years, the wellhead breakeven price for key shale plays has collapsed from an average of $80 to the mid-$30s…

… resulting in drastically lower all-in breakevens for most US shale regions.

Today, in a note released by Goldman titled “OPEC: To cut or not to cut, that is the question”, the firm presents a chart which shows just as graphically how exactly OPEC lost the war against US shale: in one word: the cost curve has massively flattened and extended as a result of “shale productivity” driving oil breakeven in the US from $80 to $50-$55, in the process sweeping Saudi Arabia away from the post of global oil price setter to merely inventory manager. 

This is how Goldman explains it:

Shale’s short time to market and ongoing productivity improvements have provided an efficient answer to the industry’s decade-long search for incremental hydrocarbon resources in technically challenging, high cost areas and has kicked off a competition amongst oil producing countries to offer attractive enough contracts and tax terms to attract incremental capital. This is instigating a structural deflationary change in the oil cost curve, as shown in Exhibit 2. This shift has driven low cost OPEC producers to respond by focusing on market share, ramping up production where possible, using their own domestic resources or incentivizing higher activity from the international oil companies through more attractive contract structures and tax regimes. In the rest of the world, projects and countries have to compete for capital, trying to drive costs down to become competitive through deflation, FX and potentially lower tax rates.

…click on the above link to read the rest of the article…

Oil Production Vital Statistics February 2017

Oil Production Vital Statistics February 2017

Joint post with Neil Mearns who made all the graphs (CV for Neil).

January was the month that OPEC was supposed to reduce production by 1.2 Mbpd and Russia + others were supposed to cut a further 0.6 Mbpd. Now that the January production data are in we can see that OPEC cut by 1.04 Mbpd and that Russia + FSU cut by 0.1 Mbpd (well within the noise of revisions) and well short of the 0.3+ Mbpd expected. But global C+C+NGLs were down 1.46 Mbpd suggesting that other countries may have intentionally or unintentionally chipped in. Brent began January on $55.05 and ended the month on $54.77. Today it is $55.56. As explained in the feeble OPEC deal the depth of proposed cuts were to shallow when compared to the scale of over-supply and stocks to make a decisive impact on the direction of the oil price.

In January, Libya produced 690,000 bpd, up 70,000 bpd on the month but well short of their target of soon reaching 1 Mbpd. But if Libya (inset map up top) does manage to keep growing production throughout this year this will continue to undermine OPEC efforts to support price.

On 24 February there were 602 oil rigs operating in the USA up from 529 on 6th January as reported last month (Figures 4, 5, 6 and 7). Rising oil drilling activity in the USA will inevitably lead to more oil production at some point. US production was 12.48 Mbpd in January down from 12.51 Mbpd in December (Figure 12). Middle East drilling remains on a cyclical high (Figure 9) while drilling remains in the doldrums everywhere else (Figures 8 and 10).

The following totals compare January 2016 with January 2017:

  • World Total Liquids 96.62/96.39/ -230,000 bpd
  • OPEC 32.00/31.86/-140,000 bpd
  • Russia + FSU 14.19/14.43/ +240,000 bpd
  • Europe OECD  3.55/3.55/ no change
  • Asia 7.67/7.42/ -250,000
  • North America 19.81/19.48/ -330,000 bpd

…click on the above link to read the rest of the article…

Bankrupting OPEC… One Million Barrels Of Oil At A Time

Bankrupting OPEC… One Million Barrels Of Oil At A Time

The world hasn’t really caught on yet, but OPEC is in serious trouble.  Last year, OPEC’s net oil export revenues collapsed.  How bad?  Well, how about 65% since the oil price peaked in 2012.  To offset falling oil prices and revenues, OPEC nations have resorted to liquidating some of their foreign exchange reserves.

The largest OPEC oil producer and exporter, Saudi Arabia, has seen its Foreign Currency reserves plummet over the past two years… and the liquidation continues.  For example, Saudi Arabia’s foreign exchange reserves declined another $2 billion in December 2016 (source: Trading Economics).

Now, why would Saudi Arabia need to liquidate another $2 billion of its foreign exchange reserves after the price of a barrel of Brent crude jumped to $53.3 in December, up from $44.7 in November??  That was a 13% surge in the price of Brent crude in one month.  Which means, even at $53 a barrel, Saudi Arabia is still hemorrhaging.

Before I get into how bad things are becoming in Saudi Arabia, let’s take a look at the collapse of OPEC net oil export revenues:

The mighty OPEC oil producers enjoyed a healthy $951 billion in net oil export revenues in 2012.  However, this continued to decline along with the rapidly falling oil price and reached a low of $334 billion in 2016.  As I mentioned before, this was a 65% collapse in OPEC oil revenues in just four years.

The last time OPEC net oil export revenues was this low was in 2004.  OPEC oil revenues that year were $370 billion based on average Brent crude price of $38.3.  Compare that to $334 billion in oil revenues in 2016 on an average Brent crude price of $43.5 a barrel.

This huge decline in OPEC oil revenues gutted these countries foreign exchange reserves.  Which means, the falling EROI- Energy Returned On Investment is taking a toll on the OPEC oil exporting countries bottom line.  A perfect example of this is taking place in Saudi Arabia.

…click on the above link to read the rest of the article…

Chinese Import Data Suggests OPEC Is Lying About A Production Cut

Chinese Import Data Suggests OPEC Is Lying About A Production Cut

To those cynics who accuse the self-monitoring OPEC, and its various adjunct agencies, of lying that it has implemented last year’s agreed upon production cuts, China just released January crude import data, which validates this skepticism.

As JPMorgan writes, while IEA estimated the OPEC crude oil production fell by 1mbd to 32.06mbd in January, suggesting an initial compliance of 90% with the output agreement reached end 2016, the latest oil supply details released by China customs today suggest a reduction of supplies was not yet seen by China, the world’s largest oil importer. 

In fact, quite the contrary: crude oil shipments from the 11 OPEC nations committed to a 1.2mbd output cut increased by 28% yoy, and more importantly, rose 4% from December 2016 – in a time when production was supposed to be declining – to 4.6mbd in January, accounting for 57% of China’s total oil imports. 

Ironically, if anyone was cutting it was the non-OPEC nations, mostly Russia, who foolishly assumed that Saudi Arabia et al would be true to their word: non-OPEC countries led by Russia that also agreed to a cut boosted their January supplies to China by 40% yoy, but saw a 10% drop sequentially, in line contractual expectations. Comparing January 2017 levels with the 2016 average, China’s crude oil imports from the committed OPEC and non-OPEC producers gained 6%/13% respectively, while the country’s total oil imports gained 5%.

 Some details:
  • Saudi, Angola and Iran lead OPEC supply growth to China. According to the China Customs’ buy country oil supply data, Saudi Arabia boosted shipments to China by 19% yoy and 41% mom to 1.19mbd in January (16% growth versus the 2016 average). Imports from Angola increased by 63% yoy and 46% mom to 1.17 mbd last month (33% higher than 2016 average), while volumes from Iraq jumped by 43% yoy  and 12% mom to 0.83mbd (14% higher than 2016 average).

…click on the above link to read the rest of the article…

 

Rising oil production will push Alberta economy to fastest growth in country in 2017: Conference Board

Rising oil production will push Alberta economy to fastest growth in country in 2017: Conference Board

Solid increases in oil production, Fort McMurray rebuild will be the difference in Alberta this year

The Conference Board of Canada forecasts Alberta will see a 2.8 per cent growth in real GDP in 2017.

The Conference Board of Canada forecasts Alberta will see a 2.8 per cent growth in real GDP in 2017. (Larry MacDougal/Canadian Press)

After two difficult years, Alberta’s economy is climbing out of recession thanks in part to oil prices, but the Conference Board of Canada warns the road to a full recovery will be long.

In its winter quarterly report released Thursday, the board projects Alberta will lead the country in terms of real GDP growth in 2017, which is forecast at 2.8 per cent.

“The recent stability in oil prices has encouraged optimism that the worst is over, laying the foundation for a modest gradual recovery in capital spending in the energy sector,” the report said.

Oil prices are expected to remain low, which will hinder economic recovery and pull overall real GDP growth down to 1.9 per cent in 2018, the report says.

The OPEC factor

However, an agreement made between Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC countries in late 2016 to cut crude oil production by 1.8 million barrels per day supports a stronger price outlook for Alberta’s energy sector, the report says.

While OPEC restrains itself, Alberta’s output is forecast to increase, as new oilsands projects come online.

The price of crude oil is also expected to rise to almost $60 US by the end of 2018.

That energy sector recovery is good for the Canadian economy as a whole, according to Marie-Christine Bernard with the Conference Board.

“There was very weak growth for Canada as a whole in the last two years,” she said.

“The difficulties in the resource sector and in particular in the energy sector really hurt investment. That really pulled economic growth down in Canada to one and one-and-a-half per cent on average over the last two years.”

…click on the above link to read the rest of the article…

Olduvai II: Exodus
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Olduvai
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Olduvai II: Exodus
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Olduvai III: Cataclysm
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