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In a new report, United States Secretary of the Interior Ryan Zinke suggested the US could use the Navy to block Russian energy from hitting Middle East markets. But the head of the Russian Senate’s Information Policy Committee, Aleksey Pushkov, said that act would mean “war” with the US.

Zinke appeared to be concerned that the real reason behind Russia’s involvement in Syria is trade expansion. Pushokov said that that is “absolute nonsense,” according to Russia Today. The idea that Russia could potentially supply energy to the Middle East, which is literally “oozing with oil,” is absolutely detached from reality, Pushkov said. Russia does not supply any energy to the region, which is itself a major oil exporter and has never announced any plans to do so.

The Russian senator added that Zinke’s statement is “on par” with Sarah Palin’s claim that she was qualified to talk about Russia since “they’re our next-door neighbors, and you can actually see Russia here from Alaska.” The former Alaska governor made the statement in an interview when she was the Republican vice-presidential candidate in the 2008 US election. -RT

Attempts to exert further pressure on Russia “are not going to end in anything good,” a member of the Russian Senate’s Defense and Security Committee, Franz Klintsevich, told journalists, according to RT. Klintsevich added that these attempts would lead “to a major scandal” at the very least, and Washington “should clearly understand it.”

The Trump administration has been seeking to replace Russia as Europe’s gas supplier by boosting exports of its liquefied natural gas, even though Russian gas is a cheaper option for Europe. The Trump Administration is also going to have a tough time convincing countries to do more business with them in light of an economically disastrous trade war and ever-increasing tariffs on imported goods.

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

Turns out, OPEC Isn’t Dead Yet

June 18, 2016

Turns out, OPEC Isn’t Dead Yet

In War for Market Share with US shale oil.

Mayhem has crisscrossed the global oil markets since 2014: Huge losses for Big Oil, including teetering, over-indebted, state-owned giants like Mexico’s Pemex and Brazil’s Petrobras; bankruptcies among some of the smaller players; cuts in production in the US, Canada, and China where production plunged 7.3% in May from a year ago, the biggest decline since February 2001; hundreds of thousands of people losing their jobs across the globe; deep trouble in Brazil, chaos in Venezuela….

Record levels of crude oil stocks have become a global phenomenon. In the US, crude oil stocks are at 532 million barrels, a record for this time of the year in EIA’s data series going back 80 years. Even driving season has barely made a dent so far; stocks remain 63.6 million barrels above the mega-record levels a year ago. Gasoline and distillate stocks are 19.2 million and 18.6 million barrels above their levels a year ago.

Oil tankers full of crude are lined up outside the port of Singapore and others, some waiting to unload cargo, others being used for crude oil storage at sea. Across OPEC, storage levels of petroleum products rose to 3,046 million barrels in April, or 13% above the five-year average.

The world is awash in oil.

In the process, OPEC has been declared dead or dying because it was unable to agree on anything, refused to cut production, and brushed off calls to do something, for crying out loud, about the collapsed prices — which, despite the mega-rally, remain down over 50% from where they’d been before the oil bust began.

But there was one thing OPEC was able to accomplish by not agreeing to buckle under pressure and cut production: it increased its market share.

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

China Furious After US Launches Trade War “Nuke” With 522% Duty

May 19, 2016

China Furious After US Launches Trade War “Nuke” With 522% Duty

Now that China’s brief infatuation with “rationalizing” excess capacity in its massively glutted (and insolvent) steel sector is over after lasting all of 2-3 months, China is back to doing what it did in late 2015 (and what it has always done) when as we reported, a surge in Chinese exports led to the first salvos in the trade war between China – the world’s biggest exporter of various steel products and is responsible for half the entire world’s steel output – and countries who are importing dumped Chinese products at the expense of their own steel and mining industries.

Nowhere has this trade tension been more obvious than in the UK, where in recent months angry, protesting steel workers have been demanding rising protectionist steps against a country they, rightfully, see as unleashing a global commodity deflation driven by out of control, and unprofitable by highly subsidized, production by Chinese steel mills.

The US was not left unscathed: we reported in December that “The Trade Wars Begin: U.S. Imposes 256% Tariff On Chinese Steel Imports” and since then things have progressively turned worse, finally culminating overnight with an outburst of anger from Chinese officials who, after attempting to flood not just the US but also the entire world with their commodity in general and steel in particular, exports…

… Pushing prices even lower…

…. have criticized U.S. anti-dumping penalties imposed on Chinese steel amid mounting complaints Beijing is exporting at improperly low prices to clear a backlog at home.

The numbers, however, do not lie and confirm that China is engaging in massive global commodity dumping.

Chinese exports hit a record 112 million tonnes last year, with rivals claiming that Chinese steelmakers have been undercutting them in their home markets. According to Reuters, in the four months to April, China’s steel exports have risen nearly 7.6% to 36.9 million tonnes.

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

The “Terrifying Prospect” Of A Triumph Of Politics Over Economics

March 9, 2016

The “Terrifying Prospect” Of A Triumph Of Politics Over Economics

The Triumph of Politics

All of life’s odds aren’t 3:2, but that’s how you’re supposed to bet, or so they say. They are not saying that so much anymore, or saying that history rhymes, or that nothing’s new under the sun. More and more theys seem to be figuring out that past economic and market experiences can’t be extrapolated forward – a terrifying prospect for the social and political order.

Consider today’s realities:

Global economies have grown to their current scale thanks to a glorious secular expansion of worldwide credit – credit unreserved with bank assets and deposits; credit extended to brand new capitalists; credit that can never be extinguished without significant debt deflation or hyper monetary inflation

Economies no longer form sufficient capital to sustain their scales or to justify broad asset values in real terms

Markets cannot price assets fairly in real terms without risking significant declines in collateral values supporting them and their underlying economies

Politicians that used to anguish (rhetorically) over the right mix of potential fiscal policies, ostensibly to get things back on track (as if somehow finding the right path would have actually been legislated into existence), have come to realize the limits of their power to have a meaningful impact

Monetary authorities have become the only game in town,assassinating all economic logic so they may juggle public expectations in the hope – so far successfully executed – that neither man nor nature will be the wiser.

The good news for policy makers is that man remains collectively unaware and vacuous; the bad news is that nature abhors a vacuum. The massive scale of economies relative to necessary production (not to mention already embedded systemic leverage) suggests this time is truly different.

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

The Birth Of The PetroYuan (In 2 Pictures)

January 21, 2016

The Birth Of The PetroYuan (In 2 Pictures)

Give me that!!

It belongs to the Chinese now!

h/t @FedPorn

As we previously detailed, two topics we’ve deemed critically important to a thorough understanding of both global finance and the shifting geopolitical landscape are the death of the petrodollar and the idea of yuan hegemony.

In November 2014, in “How The Petrodollar Quietly Died And No One Noticed,” we said the following about the slow motion demise of the system that has served to perpetuate decades of dollar dominance:

Two years ago, in hushed tones at first, then ever louder, the financial world began discussing that which shall never be discussed in polite company – the end of the system that according to many has framed and facilitated the US Dollar’s reserve currency status: the Petrodollar, or the world in which oil export countries would recycle the dollars they received in exchange for their oil exports, by purchasing more USD-denominated assets, boosting the financial strength of the reserve currency, leading to even higher asset prices and even more USD-denominated purchases, and so forth, in a virtuous (especially if one held US-denominated assets and printed US currency) loop.

The main thrust for this shift away from the USD, if primarily in the non-mainstream media, was that with Russia and China, as well as the rest of the BRIC nations, increasingly seeking to distance themselves from the US-led, “developed world” status quo spearheaded by the IMF, global trade would increasingly take place through bilateral arrangements which bypass the (Petro)dollar entirely. And sure enough, this has certainly been taking place, as first Russia and China, together with Iran, and ever more developing nations, have transacted among each other, bypassing the USD entirely, instead engaging in bilateral trade arrangements.

Falling crude prices served to accelerate the petrodollar’s demise and in 2014, OPEC nations drained liquidityfrom financial markets for the first time in nearly two decades:

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

Trapped Inside The Zero-Bound: Crossing The Economic “Event Horizon”

January 14, 2016

Trapped Inside The Zero-Bound: Crossing The Economic “Event Horizon”

A friend of mine, a very successful tech CEO who is also profoundly astute in matters of finance, once asked his economics prof during a lecture on interest rates in his university days “could interest rates ever go negative?”.

The professor, gazing over his glasses and down his nose at what obviously had to be an imbecile in his lecture hall calmly set aside a second of his podium time to shoot the idea down: “No.”, he said quite simply, as if he couldn’t believe he had to be explaining this to university level students, “it has to be a positive number….”.

My colleague believed him. After all, being in technology he was familiar with the computer code analogy of a negative interest rate, that being the dreaded divide by zero error. Coders take great pains to avoid these because if it actually happens, the currently running program basically “shits the bed” and all bets are off.

If the currently running program was generating a balance sheet, it may set the line printer on fire instead. If it’s deploying an airplane’s landing gear it may jettison everything in the cargo bay. It’s impossible to guess what will happen. So when people who viscerally understand the kind of consequences the ERR:DIV0 can cause extrapolate it out to an entire economy, they’re the ones that end up “shitting the bed”. It’s really bad.

I always knew that ZIRP was bad, but I just thought it would be normal, run-of-the-mill bad. You know, where most normal people get screwed for a long time, and then “suddenly” everything comes unglued and the financial system implodes, followed by a government intervention while the usual suspects (free markets and capitalism) get hung from telephone poles.

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

The Big Short is a Great Movie, But…

January 5, 2016

The Big Short is a Great Movie, But…

Paris — Michael Lewis is the chronicler of Wall Street. He takes the complexity behind which the inhabitants of the financial world hide and weaves a tale that is both understandable and compelling. Starting with the classic “Liars Poker” (1989), Lewis has produced a number of books about the financial markets including “Flash Boys: A Wall Street Revolt” (2014) and “The Big Short: Inside the Doomsday Machine” (2010). Working with director Adam McKay and some great actors and screen writers, Lewis has managed to produce what is perhaps the most accessible and relevant treatment of the mortgage boom and financial bust of the 2000s, and the subsequent 2008 financial crisis.

The beauty of “The Big Short,” both as a movie and a book, is that it provides sufficient detail to inform the general audience about events and issues that are not part of everyday life. Wall Street is a secretive place, but “The Big Short” manages to convey enough of the details to make the story credible as a journalistic effort, yet also enormously entertaining. Lewis does this with two essential ingredients of any film: a simple story and compelling characters.

Images of greed and stupidity are presented like Italian frescos in “The Big Short,” pictures that are memorable and thought provoking. Indeed, what many people know and remember years from now about the 2008 financial crisis will be shaped by creative efforts such as “The Big Short” for the simple reason that Lewis has simplified the description into a manageable portion. Unlike hedge fund manager Michael Burry (played by Christian Bale), most people lack the patience and expertise to sift through and understand reams of financial data.

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

Oil Bankruptcies Hit Highest Level Since Crisis And There’s “More To Come”, Fed Warns

December 25, 2015

Oil Bankruptcies Hit Highest Level Since Crisis And There’s “More To Come”, Fed Warns

“Two things become clear in an analysis of the financial health of US hydrocarbon production: 1) the sector is not at all homogenous, exhibiting a range of financial health; 2) some of the sector indeed looks exposed to distress [and] lifelines for distressed producers could include public equity markets, asset sales, private equity, or consolidation. If all else fails, Chapter 11 may be necessary.” That’s Citi’s assessment of America’s “shale revolution”, which the Saudis have been desperately trying to crush for more than a year now.

As Citi and others have noted – a year or so after we discussed the issue at length – uneconomic producers in the US are almost entirely dependent on capital markets for their continued survival. “The shale sector is now being financially stress-tested, exposing shale’s dirty secret: many shale producers depend on capital market injections to fund ongoing activity because they have thus far greatly outspent cash flow,” Citi wrote in September. Here’s a look at what the bank means:

Of course this all worked out fine in an environment characterized by relatively high crude prices and ultra accommodative monetary policy. The cost of capital was low and yield-starved investors were forgiving, allowing the US oil patch to keeping drilling and pumping long after it should have been bankrupt. Now, the proverbial chickens have come home to roost. In the wake of the Fed hike, HY is rolling over and as UBS noted over the summer, “the commodity related industries total 22.8% of the overall HY market index on a par-weighted basis; sectors most at-risk for defaults (defined as failure to pay, bankruptcy and distressed restructurings) total 18.2% of the index and include the oil/gas producer (10.6%), metals/mining (4.7%), and oil service/equipment (2.9%) industries.”

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

“I Know Of No One Who Predicted This”: Russian Oil Production Hits Record As Saudi Gambit Fails

December 21, 2015

“I Know Of No One Who Predicted This”: Russian Oil Production Hits Record As Saudi Gambit Fails

In late October, we noted that for the second time this year, Russia overtook Saudi Arabia as the biggest exporter of crude to China.

Russia also took the top spot in May, marking the first time in history that Moscow beat out Riyadh when it comes to crude exports to Beijing. “Moscow is wrestling with crippling Western economic sanctions and building closer ties with Beijing is key to mitigating the pain,” we said in October, on the way to explaining that closer ties between Russia and China as it relates to energy are part and parcel of a burgeoning relationship between the two countries who have voted together on the Security Council on matters of geopolitical significance. Here’s a look at the longer-term trend:

You may also recall that Gazprom Neft (which is the number three oil producer in Russia) began settling all sales to China in yuan starting in January. This, we said, is yet another sign of the petrodollar’s imminent demise.

On Monday, we learn that for the third time in 2015, Russia has once again bested the Saudis for the top spot on China’s crude suppliers list. “Russia overtook Saudi Arabia for the third time this year in November as China’s largest crude oil supplier,” Reuters writes, adding that “China brought in about 949,925 barrels per day (bpd) of Russian crude in November, compared with 886,950 bpd from Saudi Arabia.”

This is an annoyance for Riyadh. China was the world’s second-largest oil consumer in 2014 and closer ties between Moscow and Beijing not only represent a threat in terms of crude revenue, but also in terms of geopolitics as the last thing the Saudis need is for Xi to begin poking around militarily in the Arabian Peninsula on behalf of Moscow and Tehran.

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

Saudis Planning For A War Of Attrition In Europe With Russia’s Oil Industry

November 16, 2015

Saudis Planning For A War Of Attrition In Europe With Russia’s Oil Industry

Russia’s central bank recently warned about the growing financial risks to the Russian economy from Saudi Arabia encroaching upon its traditional export market for crude oil. Russia sends 70 percent of its oil to Europe, but Saudi Arabia has been making inroads in the European market amid the oil price downturn.

The result is a heavier discount for Russia’s crude oil, the so-called Urals blend. Bloomberg reported that the Urals typically lands in Rotterdam, a major European destination, at a discount to Brent of around $2 or less. But the discount has widened to $3.50 lately due to increased competition from Saudi Arabia. “Oil supplies to Europe from Saudi Arabia are probably adversely affecting Urals prices,” the Russian central bank warned in a recent report.

Russian officials have accused Saudi Arabia of “dumping” its oil in Europe, a move that Rosneft chief Igor Sechin said would “backfire.”

Russia’s economy has been battered by the collapse in crude prices, compounded by the screws of western sanctions. The Russian economy could shrink by 3.2 percent this year.

Oil exports account for around half of the revenue taken in by the Russian government. And for an economy so dependent on oil, it is no surprise that the plummeting crude oil price has led to a dramatic depreciation of the ruble, although over the past month the currency regained some lost ground. The weakening currency has pushed up inflation, which creates a conundrum for the Russian central bank.

To stop the ruble from plunging further and to keep inflation from spiraling ever upwards, the Russian central bank took aggressive action by hiking interest ratesto as high as 17 percent at the beginning of 2015.

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

2-Mile Long Stretch Of Iraqi Oil Tankers Bound For U.S. Shores

November 12, 2015

2-Mile Long Stretch Of Iraqi Oil Tankers Bound For U.S. Shores

After some initial excitement, November has seen crude oil prices collapse back towards cycle lows amid demand doubts (e.g. slumping China oil imports, overflowing Chinese oil capacity, plunging China Industrial Production) and supply concerns (e.g. inventories soaring). However, an even bigger problem looms that few are talking about. As Iraq – the fastest-growing member of OPEC – has unleashed a two-mile long, 3 million metric ton barrage of 19 million barrel excess supply directly to U.S. ports in November.

Crude prices are already falling:

(Click to enlarge)

But OPEC has another trick up its sleeve to crush US Shale oil producers. As Bloomberg reports,

Iraq, the fastest-growing producer within the 12-nation group, loaded as many as 10 tankers in the past several weeks to deliver crude to U.S. ports in November,ship-tracking and charters compiled by Bloomberg show.

Assuming they arrive as scheduled, the 19 million barrels being hauled would mark the biggest monthly influx from Iraq since June 2012, according to Energy Information Administration figures.

The cargoes show how competition for sales among members of the Organization of Petroleum Exporting Countries is spilling out into global markets, intensifying competition with U.S. producers whose own output has retreated since summer. For tanker owners, it means rates for their ships are headed for the best quarter in seven years, fueled partly by the surge in one of the industry’s longest trade routes.

Worse still, they are slashing prices…

Iraq, pumping the most since at least 1962 amid competition among OPEC nations to find buyers, is discounting prices to woo customers.

The Middle East country sells its crude at premiums or discounts to global benchmarks, competing for buyers with suppliers such as Saudi Arabia, the world’s biggest exporter.Iraq sold its Heavy grade at a discount of $5.85 a barrel to the appropriate benchmark for November, the biggest discount since it split the grade from Iraqi Light in May. Saudi Arabia sold at $1.25 below benchmark for November, cutting by a further 20 cents in December.

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

Goldilocks and the three prices of oil

October 19, 2015

Goldilocks and the three prices of oil

We all know Goldilocks from the story of Goldilocks and the Three Bears in which the young maiden wanders into the home of the bears and samples some porridge that happens to be sitting on the dinner table. The first bowl is too hot, the second is too cold and the third is just right.

Like a corporate version of Goldilocks, the oil industry has been wandering into the world marketplace in recent years often finding an oil price that is either too high such as in 2008 and therefore puts the brakes on economic growth undermining demand and ultimately crashing the price as it did in 2009. Or it finds the price too low as it is today therefore making it impossible to earn profits necessary for exploiting the high-cost oil that remains to be extracted from the Earth’s crust. Oil that hovered around $100 per barrel from 2011 through much of 2014 seemed to be just right. But those prices are now long gone.

Violent swings in the price of oil in the last decade have made it difficult for the industry to plan long term to produce consistent supplies at moderate prices. This has important implications for future supplies which I will discuss later.

The great political power of the oil industry has led many to conclude erroneously that the industry must also somehow control the price of oil. If the industry has such power, it is doing a really lousy job of using it.

It is true that in times of robust demand, OPEC can maintain high prices by limiting oil production in member countries. But when demand softens, OPEC rarely exhibits the necessary discipline as a group to cut production. Typically, Saudi Arabia shoulders most of the burden of reduced production under such circumstances.

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

Saudis Poke The Russian Bear, Start Oil War In Eastern Europe

October 18, 2015

Saudis Poke The Russian Bear, Start Oil War In Eastern Europe

Any weakening of Russian support for Mr. Assad could be one of the first signs that the recent tumult in the oil market is having an impact on global statecraft. Saudi officials have said publicly that the price of oil reflects only global supply and demand, and they have insisted that Saudi Arabia will not let geopolitics drive its economic agenda. But they believe that there could be ancillary diplomatic benefits to the country’s current strategy of allowing oil prices to stay low — including a chance to negotiate an exit for Mr. Assad.

That’s a quote from a New York Times article that ran in February of this year.

At the time, we pointed to the piece as evidence that yet another conspiracy “theory” has become conspiracy “fact” as it effectively served to validate (to the extent The New York Times is validation) the thesis that at the end of the day, this is all about energy.

If the Saudis could use oil prices to force Moscow into ceding support for Bashar al-Assad in Syria, then the West and its regional allies could get on with facilitating his ouster by way of arming and training rebels. Once Assad was gone, a puppet government could be installed (after some farce of an election that would invariably pit two Western-backed candidates against each other) then Riyadh, Doha, and Ankara could work with the new government in Damascus to craft energy deals that would not only be extremely lucrative for all involved, but would also help to break Gazprom’s iron grip on energy supplies to Europe.

Those are the “ancillary diplomatic benefits” mentioned in The Times piece.

Only it didn’t work out that way.

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

The Economist Rings Out Cognitive Dollar Dissonance

October 11, 2015

**The Economist Rings Out Cognitive Dollar Dissonance**

Two years ago, prior to travelling to Sydney to present at the Annual Precious Metals Symposium, I prepared an article for the Gold Standard Institute Journal titled Cognitive Dollar Dissonance: Why a Global De-Leveraging Requires the De-Rating of the Dollar and the Remonetisation of Gold (see here). This article highlighted the growing inconsistency between those arguing on the one hand that the dollar’s role in international trade and finance was clearly diminishing; yet denying that it was in any danger of losing the near-exclusive monetary reserve status it has enjoyed since the 1940s.

This apparently contradictory yet mainstream thinking about the future of the international monetary system continues to the present day. Indeed, earlier this month the Economist magazine ran a special feature on fading US economic power replete with dollar dissonance. The experts cited note the accelerating trend towards bilateral trade settlement, say between Russia and China, who plan to finance their multiple ‘Silk Road’ infrastructure projects using their own currencies and their own development bank (The Asian Infrastructure Investment Bank or AIIB: See http://www.aiib.org/). They also observe that Russia, China and the other BRICS are no longer accumulating dollar reserves (although curiously overlook that they continue to accumulate gold). They acknowledge that not only the BRICS but many other countries have repeatedly expressed their desire that the current set of global monetary arrangements should be restructured in some way, although they are not always clear as to their specific preferences.

Note the sharp contrast in these two paragraphs, both on the very same page of the Economist feature:

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

Wall Street Banks Admit They Rigged CDS Prices Too

October 2, 2015

Wall Street Banks Admit They Rigged CDS Prices Too

Back in June, we noted that a group of investors which included hedge funds, pension funds, university endowments, and others were looking to push forward with a lawsuit that alleged Wall Street had conspired to limit competition in the CDS market.

Of course the whole case was based on what amounts to tautological reasoning.

That is, everyone knows that Markit effectively monopolized the CDS market and because Markit was owned by Wall Street, it was self evident that big banks both monopolized and manipulated the market.

Amusingly, one of the firms that plaintiffs alleged was kept out of the credit default swap market as a result of Wall Street’s absolute stranglehold was Citadel. As we joked a few months back, this meant that by conspiring to keep the Fed’s plunge protection team shut out in 2008, Markit and Wall Street robbed the world of the chance to see what happens when VIX 90 meets HFT, meets CDS market making.

In any event, earlier this month, the Street agreed to settle for nearly $2 billion and today we learn that none other than JP Morgan – whose offshore, taxpayer sponsored hedge fund at CIO seems to have quite a bit of trouble trading CDX without losing billions – is set to bear the brunt of the pain. Here’s Bloomberg:

JPMorgan Chase & Co. is set to pay almost a third of a $1.86 billion settlement to resolve accusations that a dozen big banks conspired to limit competition in the credit-default swaps market, according to people briefed on terms of the deal.

JPMorgan is paying $595 million, with the lender’s portion of the accord largely based on the plaintiffs’ measure of market share, said the people, who asked not to be identified because the firms haven’t disclosed how they’re splitting costs. The settlement also enacts reforms making it easier for electronic-trading platforms to enter the CDS market, according to a statement Thursday from the attorneys for the plaintiffs, which include the Los Angeles County Employees Retirement Association.

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

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