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Oil Surges On Report China Buying For Strategic Reserve, Hopes For Saudi-Russia Truce

Oil Surges On Report China Buying For Strategic Reserve, Hopes For Saudi-Russia Truce

Oil surged as much as 13% this morning following a report that China is planning to start buying cheap crude for its strategic reserves, as well as speculation that President Trump said he thought Saudi Arabia and Russia would resolve their differences in the oil price war that has sent supply soaring even as global oil demand tumbles.

Following massive builds in crude in the US as reported by the DOE and API, and amid sporadic reports that various storage facilities are starting to fill up:

  • SALDANHA BAY OIL-STORAGE FACILITY SAID TO BE NEAR CAPACITY
  • OIL TANKS AT VITAL AFRICA HUB ALMOST FULL AS CRUDE FLOODS MKT

… overnight, Bloomberg reported that Beijing instructed government agencies to start filling state stockpiles after oil plunged 66% over the first three months of the year, while the global benchmark’s nearest timespread also rallied strongly.

Beijing has asked government agencies to quickly coordinate filling tanks, Bloomberg source said. In addition to state-owned reserves, it may use commercial space for storage as well, while also encouraging companies to fill their own tanks. The initial target is to hold government stockpiles equivalent to 90 days of net imports, which could eventually be expanded to as much as 180 days when including commercial reserves.

According to Bloomberg calculations, 90 days of net crude imports translated to about 900 million barrels. By comparison, the U.S. currently holds about 635 million barrels in its Strategic Petroleum Reserve, according to government data.

And while the current size of China’s state reserves is unknown, and Beijing could use a different method for calculating net imports, oil traders and analysts at SIA Energy and Wood Mackenzie estimated it could amount to China buying an additional 80 million to 100 million barrels over the course of the year before it ran into logistical and operational constraints.

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

WTI Extends Losses After Biggest Crude Build Since 2016

WTI Extends Losses After Biggest Crude Build Since 2016

After its worst quarter ever, as COVID-19 lockdowns crushed demand, raising fears about overflowing storage tanks amid a price war that has flooded the market with extra supply, all eyes are glued to today’s official inventory data (after API reported a major surprise build in crude and gasoline stocks) as Standard Chartered analysts, including Emily Ashford warned in a report, oil tanks around the world could fill in six weeks, a move that will likely force significant production shut-downs,

“Huge inventory builds, potentially exhausting spare storage capacity, will mean that market balance requires an unprecedented output shutdown by producers,” they wrote.

So, eyes down…

“There is the very real possibility that this week’s storage reports could be the energy patch version of last Thursday’s Weekly Jobless Claims,” Robert Yawger, Mizuho Securities USA’s director of energy said in a note.

“I would expect the numbers to be supersized and challenge multi-year highs/lows on multiple data points. Of course, I have been expecting big numbers for the past couple week, but the fireworks have not happened. That leads me to believe that the data explosion will likely happen this week … Exports will likely be down big, and refinery utilization will likely pull back dramatically. That will leave a lot of crude oil on the sidelines … EIA crude oil storage has been higher for nine weeks in a row. Storage will likely double up and increase at the rate of around 10 million for another nine weeks…at least.”

API

  • Crude +10.485mm (+4.6mm exp) – biggest build since Feb 2017
  • Cushing +2.926mm – biggest build since Feb 2019
  • Gasoline +6.058mm (+3.6mm exp) – biggest build since Jan 2020
  • Distillates -4.458mm (-600k exp)

DOE

  • Crude +13.833mm (+4.6mm exp) – biggest since Oct 2016
  • Cushing +3.521mm – biggest build since Mar 2018
  • Gasoline +7.524mm (+3.6mm exp) – biggest build since Jan 2020
  • Distillates -2.194mm (-600k exp)

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

Whiting Petroleum Files For Prepackaged Bankruptcy

Whiting Petroleum Files For Prepackaged Bankruptcy

Talk about a coincidence: just as we were discussing why April would be “apocalyptic” for the oil industry, as Saudi Arabia just unleashed an unprecedented record amount of oil to buyers in a scramble to put its high-priced competitors out of business, warning that “countless oil producers would file for bankruptcy”, former shale darling Whiting Petroleum did just that, filing a pre-packaged Chapter 11 deal in the Southern District of Texas Bankruptcy Court after reaching an agreement with certain note holders to pursue a “comprehensive” and “consensual” financial restructuring.

Whiting, which in Q4 pumped 123,000 bpd of which 80,000 bpd was nat gas, said it concluded that given a “severe downturn” in oil and gas prices resulting from the Saudi Arabia-Russia oil price war and COVID-19-related impact on demand a financial restructuring was the “best path forward.” Creditors may disagree: the company’s bonds due March 2021 were trading at par as recently as mid-January, even though we warned as far back as 2015 that it would be the first company to go under: truly a testament to how idiotic the junk bond market has been for the past 4 years.

The company said that the plan provides for de-leveraging of capital structure by more than $2.2 billion, and listed $1-$10 billion in debt and more than $585 million of cash on its balance sheet, noting that it expects to have sufficient liquidity to meet its financial obligations during the restructuring without the need for additional financing.

More importantly, it will continue to operate its business and pump oil for the duration of the Chapter 11 proceedings, meaning that oil production won’t decline by even one drop.

The bankruptcy press release is below:

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

‘Texas Miracle’ “On Ice For Time Being” As Crude-Carnage & COVID-Chaos Double-Whammy Strikes Lone-Star State

‘Texas Miracle’ “On Ice For Time Being” As Crude-Carnage & COVID-Chaos Double-Whammy Strikes Lone-Star State

West Texas Intermediate (WTI) spot prices plunged 7.5% to the 19-handle on Sunday evening, hitting lows not seen since 2002. 

WTI has crashed 70% in the last 56 trading sessions amid the COVID-19 crisis triggering a demand bust across the world. As a result, an economic storm risks triggering a shale debt bomb in Texas, jeopardizing the state’s $1.8 trillion economy and may damage crude output from the Permian basin that has more than quadrupled in a decade.

In three weeks’ time, Saudi Arabia and Russia launched an oil price war that has sent WTI prices tumbling 57% and now risks imminent doom for US shale (and its junk bonds). More specifically, Texas accounts for 42% of US crude output and has been hit with twin shocks: one from waning crude demand, and another from the COVID-19 outbreak forcing the state to issue a “stay at home” public health order – restricting the travel of residents.

The collapse in oil prices this time around is more unique than past ones, mostly because demand has evaporated overnight due to a pandemic with no clear timetables of when it will return. A major concern for producers is that the recovery might not be V-shape… 

 “As much a tragedy as the coronavirus is, most states are dealing with one problem. Texas is dealing with two because we’re dealing with coronavirus and the dramatic drop in oil and gas prices,” Dale Craymer, president of the Texas Taxpayers and Research Association and a former state budget director, told Financial Times.

Plains All-American, a pipeline company, was offering WTI per barrel for $17.50 on Friday, a drastic discount from $63 in January. Drillers need about $49 per barrel to stay profitable, a prolonged downturn under $40 for several years could bankrupt 40% of all US shale.  

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

After Worst Quarter Ever, WTI Extends Losses On Massive Crude & Gasoline Build

After Worst Quarter Ever, WTI Extends Losses On Massive Crude & Gasoline Build

After its worst quarter ever, as COVID-19 lockdowns crushed demand, raising fears about overflowing storage tanks amid a price war that has flooded the market with extra supply, all eyes are glued to new inventory data as Standard Chartered analysts, including Emily Ashford warned in a report, oil tanks around the world could fill in six weeks, a move that will likely force significant production shut-downs,

“Huge inventory builds, potentially exhausting spare storage capacity, will mean that market balance requires an unprecedented output shutdown by producers,” they wrote.

So, eyes down…

“There is the very real possibility that this week’s storage reports could be the energy patch version of last Thursday’s Weekly Jobless Claims,” Robert Yawger, Mizuho Securities USA’s director of energy said in a note.

“I would expect the numbers to be supersized and challenge multi-year highs/lows on multiple data points. Of course, I have been expecting big numbers for the past couple week, but the fireworks have not happened. That leads me to believe that the data explosion will likely happen this week … Exports will likely be down big, and refinery utilization will likely pull back dramatically. That will leave a lot of crude oil on the sidelines … EIA crude oil storage has been higher for nine weeks in a row. Storage will likely double up and increase at the rate of around 10 million for another nine weeks…at least.”

API

  • Crude +10.485mm (+4.6mm exp) – biggest build since Feb 2017
  • Cushing +2.926mm – biggest build since Feb 2019
  • Gasoline +6.058mm (+3.6mm exp) – biggest build since Jan 2020
  • Distillates -4.458mm (-600k exp)

While analysts expected the trend of crude builds to continues they unexpectedly saw a gasoline inventory build last week – bucking the 8-week trend of draws… and it with a huge crude and gasoline build last week

Source: Bloomberg

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

Texas Or Canada: Where Will Oil Hit $0 First

Texas Or Canada: Where Will Oil Hit $0 First

Looking at the future of oil prices, Goldman was downright apocalyptic in its short-term forecast, when in a note published this morning, the bank’s chief commodity strategist Jeffrey Currie speculated that as the current production glut “shock” cripples the crude transportation networks, “a producer would be willing to pay someone to dispose of a barrel, implying negative pricing in landlocked areas.” To wit:

The global economy is a complex physical system with physical frictions, and energy sits near the top of that complexity. It is impossible to shut down that much demand without large and persistent ramifications to supply. The one thing that separates energy from other commodities is that it must be contained within its production infrastructure, which for oil includes pipelines, ships, terminals, storage facilities, refineries, and distribution networks. All of which have relatively small and limited spare capacity. We estimate that the world has around a billion barrels of spare storage capacity, but much of that will never be accessed as the velocity of the current shock will breach crude transportation networks first, which we are already seeing evidence of around the world. Indeed, given the cost of shutting down a well, a producer would be willing to pay someone to dispose of a barrel, implying negative pricing in landlocked areas.

A quick look at two of the most popular landlocked oil producing areas demonstrate that Goldman is spot on, and as the following chart shows as of this moment Texas Midland WTI was trading at just baove $10/barrel, while the price of oil produced in the notoriously landlocked Western Canada, as represented by Canada Western Selected index, was just above $4 per barrel, or a little more than what a gallon of gas costs in California.

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

Energy Collapse, Earnings Ennui, & Consumer Credit Cracks

Energy Collapse, Earnings Ennui, & Consumer Credit Cracks

Summary:

The energy sector has lost extraordinarily $1.15trn in market value this year as oil prices have plunged to almost unimaginable levels. 

In this equity update we provide investors with different ways to play the havoc in the energy sector. We also take a look at earnings this week with especially Carnival earnings being the most interesting to watch as the cruise industry is in a severe crisis due to COVID-19.

Lastly, we focus on consumer credit and the apparent weakness observed in China and how that could be a forewarning of what to come in the US and Europe. As a result we recommend investors to add Mastercard and American Express to their watchlists.

The global energy sector has been punched in the gut by first a slowing economy last year and then this year by an oil price war between Russia and Saudi Arabia. Making things worst the sector is now experiencing an abrupt 20% oil demand reduction equivalent to 20mn barrels a day or the entire consumption of the US. The oil futures curve is in steep contango as the active contract in Brent today went below $23/brl and stories have recently surfaced that physical oil is being transacted at $8/brl and oil storage is running out of capacity. As we talked about on our Market Call this morning the constraint on physical storage and ongoing demand destruction could push the front-end of oil futures down even further.

The current oil price creates extreme shareholder destruction with the MSCI World Energy Index losing $1.15trn in market value this year.

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

“This Is The Largest Economic Shock Of Our Lifetimes”: Goldman Sees Negative Prices Amid Oil Devastation

“This Is The Largest Economic Shock Of Our Lifetimes”: Goldman Sees Negative Prices Amid Oil Devastation

Over the weekend, we reported that with the oil industry oversupplied by a mindblowing 20 million barrels daily as roughly 20% of total global output ends up unused in a world economy that has ground to a halt, and instead has to be parked in storage either on land or sea, the unthinkable is about to happen: oil storage space is about to run out, and as that happens the price of oil will continue sliding ever lower and lower until it finally goes negative as some such as Mizuho’s Paul Sankey predict it will, over the next few months, leading to an unprecedented shockwave across the global energy market.

Then overnight, more eulogies for the oil market emerged, with Bank of America writing that oil has now slumped “into the abyss” and it expects to see the “steepest decline in global oil consumption ever recorded, with our base case reflecting a 12mn b/d drop in 2Q20 and a 4.5mn b/d contraction on average for the year” and on a net basis, BofA now expects global oil demand to contract by almost 17mn b/d in April with consumption recovering modestly into 3Q20 and beyond.

The bank also adjusted its oil price forecasts for 2020 and 2021 down to $37 and $45/bbl for Brent and to $32 and $42/bbl for WTI respectively, but in the near-term, it sees both benchmarks temporarily trading in the teens in the coming weeks.

However, by going all “there will be blood” on oil, BofA has only caught up where Goldman has been for the past two weeks, ever since it predicted that the “physical end was near.” Meanwhile, in a note of unprecedented gloom, Goldman now says that “the physical end is here” as the coronacrisis goes global.

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

THE ENERGY DISASTER KICKING INTO FULL GEAR: World Is Totally Unprepared For What’s Ahead

THE ENERGY DISASTER KICKING INTO FULL GEAR: World Is Totally Unprepared For What’s Ahead

There’s more evidence finally surfacing in the media of the dire energy predicament the world is now facing.  The negative ramifications of peak oil and the falling EROI were going to hit the world economy within the next 2-5 years, but the global contagion has sped up the process considerably.  Unfortunately, the world will never return back to the energy consumption and GDP growth experienced in 2019.  I believe the peak of unconventional oil production has finally arrived… FOREVER.

Here are a few highlights describing the ongoing ENERGY DISASTER taking place

U.S. Bakken Oil Production Peaked Oct 2019 While Setting A New Record In Wastewater Production

According to Shaleprofile.com, the Bakken’s production peaked in October 2019 at 1,506,358 barrels per day (bd) and fell to 1,462,025 bd in December.  When the data comes out for Mar-Apr-May, I believe that Bakken’s oil production will begin to drop off considerably.

Furthermore, even without the global virus destroying oil demand, the Bakken was going to peak shortly due to a key indicator… a tremendous increase in the amount of associated wastewater production.  Surging wastewater production is a bad sign signaling reservoir depletion.  Using the data from the North Dakota Department of Mineral Resources, the Bakken is now producing nearly 1.5 barrels of wastewater for each barrel of oil:

In January 2016, the Bakken was producing 115% more wastewater than oil, but that has surged to 149% during January 2020. While oil production increased by 8.2 million barrels (per month) since January 2016, wastewater surged by an additional 23.2 million barrels (per month).

The Death of the Bakken has finally arrived.  Due to the collapse in U.S. oil consumption, I see a huge decline in Bakken oil production over the next three quarters.

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

What Happens If Oil Prices Go Negative?

What Happens If Oil Prices Go Negative?

Oil Price War

Various reports hit the news feeds today quoting a deliberately headline-grabbing statement by Paul Sankey, managing director at Mizuho Securities, in which he is reported as saying, “Oil prices can go negative.” That is, they could as a combination of Saudi Arabia (and Russia) flooding the market with increased oil and the market running headlong into COVID-19-induced curtailment of activity that is suppressing consumption, which combined will create the perfect storm of excess supply.

In reality, inventory levels are already rising.

CNN quotes Sankey, who said global oil demand is only around 100 million barrels per day.

However, the economic fallout from the coronavirus pandemic could crash demand by up to 20 percent.

This would create a 20 million barrel-per-day surplus of oil in the market that would rapidly exceed storage capacity, forcing oil producers to pay customers to buy the commodity – hence, in effect, negative oil prices.

The American government plans to purchase a total of 77 million barrels of oil starting within weeks the article states, but according to Sankey, this can only be done at a rate of 2 million barrels per day, leaving a massive excess that will be looking for a home.

Brent oil prices have already fallen to the lowest level for 17 years. The consequences for the U.S. oil industry if a coronavirus-induced recession drives down demand could be catastrophic.

West Texas Intermediate crude (WTI) collapsed by a staggering 19.2 percent to $22 while the Mexican Basket is down 22.4 percent.

For a short while, hedges will protect producers and they will continue to pump oil. While that will protect producers for a while, it encourages counter-cyclical practices; producers should be cutting back but instead will probably continue to pump and ship into store.

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

The Inevitable Outcome Of The Oil Price War

The Inevitable Outcome Of The Oil Price War

Putin MBS

One might reasonably posit that when Crown Prince Mohammed bin Salman (MbS) signalled that Saudi Arabia was once again going to produce oil to the maximum to crash oil prices in a full-scale oil price war, Russian President Vladimir Putin probably fell off the horse he was riding bare-chested somewhere in Siberia because he was laughing so much. There is a phrase in Russian intelligence circles for clueless people that are ruthlessly used without their knowledge in covert operations, which is ‘a useful idiot’, and it is hard to think of anyone more ‘useful’ in this context to the Russians than whoever came up with Saudi’s latest ‘plan’. Whichever way the oil price war pans out, Russia wins.

In purely basic oil economics terms, Russia has a budget breakeven price of US$40 per barrel of Brent this year: Saudi’s is US$84. Russia can produce over 11 million barrels per day (mbpd) of oil without figuratively breaking sweat; Saudi’s average from 1973 to right now is just over 8 mbpd. Russia’s major oil producer, Rosneft, has been begging President Putin to allow it to produce and sell more oil since the OPEC+ arrangement was first agreed in December 2016; Saudi’s major oil producer, Aramco, only suffers value-destruction in such a scenario. This includes for those people who were sufficiently trusting of MbS to buy shares in Aramco’s recent IPO. Russia can cope with oil prices as low as US$25 per barrel from a budget and foreign asset reserves perspective for up to 10 years; Saudi can manage 2 years at most.

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

Oil Plunges To 17 Year Low As One Bank Predicts Negative Prices

Oil Plunges To 17 Year Low As One Bank Predicts Negative Prices

Late on Tuesday, WTI plunged as low as $26.20 taking out the lows from the 2015/2016 oil recession, and sending it to a level last seen when US president was George W. Bush, people were listening to Get Busy by Sean Paul and Dogville was one of the most popular movies: May 2003.

While there was no immediately clear catalyst, earlier in the day, Goldman’s commodities team published a report in which they discuss the need for commodity prices to drop below cash costs to generate supply curtailments as demand losses across the complex are now unprecedented, as Goldman now believes oil use is down an unprecedented 8 million b/d: 

Large commitments from core-OPEC for April/May deliveries pushes the net supply increase near c.3m b/d, which, when combined with the demand losses, results in an April/May surplus of 7mb/d, which will likely breach system capacity during 2Q20.

As Goldman’s Jeffrey Currie wrote, “the system strain creates a physical end, even though when COVID-19 will end is unknown, pushing our forecasts to shut-in economics. We now forecast 3m GSCI -25%.” As a result of price wars in oil and gas and uncertain policy responses in bulks and base metals, all a direct result of the sharp fall in demand resulting from the COVID-19 containment measures, Goldman has cut its 2Q Brent price target to just $20/bbl from $30/bbl. 

But that was not the worst of it for what little is left of oil bulls.

Outdoing not only Goldman, but virtually every single bearish oil analyst in existence, Mizuho’s Paul Sankey not only estimated that Goldman is too optimistic by half, calculating a whopping 15MM b/d in oversupply currently, but that crude prices could go negative – yes, as in you would be paid to take delivery – as Saudi and Russian barrels enter the market. 

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

Black Swans, Dead Cats, Live Bats, and Goodbye to All That

Black Swans, Dead Cats, Live Bats, and Goodbye to All That


Had enough excitement yet? At least the stock markets are following an established script: the bubble pops, the elevator drops, for a while it stops… and then investments sink to the deepest sub-basement, where they linger for a long, long time. Hello, next great depression…. We know how that story goes, even if it hurts.

This corona virus is something else. It engulfs whole populations in a fog of confounding narratives. Is it no worse than a bad common cold, except for old folks already half-gone with chronic illness? Or does it really slam people even in the midst of life? Well, Wuhan hospital director Liu Zhiming, 51, went down two weeks ago, and gastroenterologist Xia Sisi, 29, and Dr. Peng Yinhua, also 29, and some prominent Iranian politicians, and lots of very sick healthcare workers from Korea to Italy. Whatever corona virus is, I’m not persuaded that it’s a hoax.

One monster banging around in that fog is the narrative that China started this thing simply to get rid of Mr. Trump. There’s a real baby-and-bathwater proposition. Would China, in effect, blow up its export economy for that, i.e. commit suicide? Because a lot of those prior arrangements will probably not come back — the manufacturing supply lines for this-and-that, the fabulous cornucopia of plastic goodies extruded from all those smoking factories and flushed out to the world, the whole glorious let’s-get-rich extravaganza that Deng Xiaoping kicked off forty years ago. It’s looking like the global economy is on the rocks, perhaps for good, as we knew it. Is China as plumb crazy as, for instance, America’s political Left?

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

Toxic Loans Around the World Weigh on Global Growth

Toxic Loans Around the World Weigh on Global Growth

Preface.  Obviously endless growth on a finite planet is impossible.  Clearly the main “benefit” of debt is being able to rape and pillage the planet immediately.  The accumulating debt can never be paid off, because energy is required to grow GDP (they’re locked in a death embrace) and death begins when oil declines, so will GDP, and most debts won’t be repayable.  All of this debt allows us to extract resources NOW at the expense of future generations.

Here’s a recent article about debt, though not as good as it could be, since as usual, it’s energy and resource blind, but it’s probably clear to most people who read it that this can’t end well: December 2019 The Way Out for a World Economy Hooked On Debt? Yet More Debt (Bloomberg).

February 5, 2016 The Chart of Doom: When Private Credit Stops Expanding

***

Eavis, P. February 3, 2016. Toxic Loans Around the World Weigh on Global Growth. New York Times.

Beneath the surface of the global financial system lurks a multi-trillion-dollar problem that could sap the strength of large economies for years to come.

The problem is the giant, stagnant pool of loans that companies and people around the world are struggling to pay back. Bad debts have been a drag on economic activity ever since the financial crisis of 2008, but in recent months, the threat posed by an overhang of bad loans appears to be rising.

China is the biggest source of worry. Some analysts estimate that China’s troubled credit could exceed $5 trillion, a staggering number that is equivalent to half the size of the country’s annual economic output.

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

Only 5 Shale Drillers Are Still Profitable At $31 Oil

Only 5 Shale Drillers Are Still Profitable At $31 Oil

Haynesville

Most shale oil wells drilled in the United States are unprofitable at current oil prices, Rystad Energy has warned. The Norwegian consultancy said, as quoted by Bloomberg, that drilling new wells would be loss-making for more than 100 companies.

Just five shale drillers—Exxon, Chevron, Occidental, and Crownquest—can drill new wells at a profit at $31 per barrel of West Texas Intermediate.

The problem is the nature of shale oil wells: while quick to start production and expand it, they are also quick to run out of oil, so drillers need to keep drilling new ones to maintain production, which is what U.S. shale patch players have been doing for years. However, this has affected investor returns, Bloomberg notes, and now it is affecting spending plans.

“Companies should not be burning capital to be keeping the production base at an unsustainable level,” Tom Loughrey from shale oil data company Friezo Loughrey Oil Well Partners LLC told Bloomberg. “This is swing production — and that means you’re going to have to swing down.”

The situation is more positive for drilled but uncompleted wells, according to Rystad. The consultancy said yesterday that as much as 80 percent of DUCs in the U.S. shale patch have a breakeven price of less than $25 per barrel of WTI. Yet this is dangerously close to current prices.

If nobody blinks in this supply war, prices may have to go this low in order to properly reduce production and get supply-demand back in balance,” Rystad’s head of shale research, Artem Abramov, said in the news release.

“This could turn out to be one of the greatest shocks ever faced by the oil industry, as coronavirus containment measures will add to the headache of producers fighting for market share. And OPEC has clearly stated that it won’t be coming to the rescue in the second quarter of 2020,” he also said. 

Olduvai IV: Courage
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Olduvai II: Exodus
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