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A Glimpse At 2019​​

A Glimpse At 2019​​

Markets In Critical Transformation, Chaotic Behaviour Has Just Began.

Our inability as market participants to properly frame market fragility and the inherent vulnerability of the financial system makes a market crash more likely, as it helps Systemic Risk go unattended and build further up. For the first time in a while, elusive economic narratives started to fail at blaming market weakness on secondary-order factors: Trade Wars, the FED, Oil prices. Attempts at dismissing market events as no more than a temporary turbulence miss the bigger picture and cast the fishing net on unaware investors looking for a dip to buy. In contrast, over the last month, conventional market and economic indicators (e.g. breaks of multi-year equity & home price trend-lines, freezing credit markets, softening global PMIs/orders) have all but confirmed what non-traditional measures of system-level fragility signalled all along: that a market crash is incubating, and the cliff is near. Nothing has happened yet.
1.      Early Tremors, Not Market Bottoms
2.      Elusive Narratives Fail, Unveiling a Deeper Malaise
3.      Mainstream Investment Strategies Face a Tougher New Year
4.      Triggers For Market Chaos: A Timeline For 2019
Early Tremors, Not Market Bottoms
After a slow start, the season of market chaos has taken off.
In the last few months, global markets have visibly entered the ‘phase transition zone’, a process of critical transformation that will eventually lead to a new equilibrium at significantly different levels, after severe ruptures and a possible full-cycle market crash.
Rather than ‘a short-term correction in a structural bull market’, or a ‘temporary turmoil in healthy economic conditions’, this is the beginning of a structural adjustment after a decade of liquidity abundance and market manipulation, which reflexively changed the structure itself of the market for private investors in hazardous ways, making it insensitive to fundamentals, passive or quasi-passive, overly-correlated and overly-concentrated. 

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

Oil’s Wild Price Swings Set to Create Global Chaos

Oil’s Wild Price Swings Set to Create Global Chaos

Volatility is here to stay — and the political and economic implications will touch us all.

As the current global oil glut shakes up petro states around the world, oil prices are becoming more volatile than Donald Trump tweets.

Neither Canada, now the dumb owner of a marginal 65-year-old pipeline, nor Alberta, a key exporter of bitumen, a cheap refinery feedstock, has paid much attention to this revolution.

As a consequence Canada has no strategy to deal with the new normal of highly volatile oil prices.

Government incompetence explains the hew and cry in Alberta about its overproduction crisis and the various proposals to solve it, ranging from the purchase of rail cars (a bad idea) to the decision to order companies to cut production of heavy oil by about 325,000 barrels a day (a sensible idea).

Alberta’s panic attack is based on the idea that bitumen from the province’s oilsands producers is selling at a discount because of a lack of pipeline capacity.

The reality is that the dramatic 30-per-cent drop in oil prices since the beginning of October, from more than US$70 to US$50, is upsetting oil exporters, producers and markets around the world.

Different kinds of oil fetch different prices, based on their quality and transportation costs. And all are experiencing dramatic price drops. Alberta’s bitumen, a cheap refinery feedstock, is not the only crude languishing during a global market glut.

Refineries in Japan and Korea, for example, scooped up cheap U.S. oil earlier this year.

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

Evidence Mounts For Shale Slowdown

Evidence Mounts For Shale Slowdown

frack crew

There is a growing pile of evidence pointing to a slowdown in the U.S. shale industry, as low prices take their toll.

The rate of hydraulic fracturing began to decline in the last four months of 2018, a sign that U.S. shale activity began to slow even before the plunge in oil prices. According to Rystad Energy, the average number of fracking jobs declined to 44 per day in November 2018, down from an average of between 48 and 50 for the five-month period between April and August 2018.

“After reaching a peak in May/June, fracking activity in the Permian Basin has gradually decelerated throughout the second half of 2018,” Rystad Energy senior analyst Lai Lou said in a statement.

“Looking at preliminary data for November, we see evidence that seasonal activity deceleration has likely started in all major plays except Eagle Ford,” Lou added. “There has been a considerable slowdown in Bakken and Niobrara in November, our analysis shows.” Rystad said that much of the slowdown can be attributed to smaller companies.

The drilling data echoes that of the Dallas Fed, which reported last week that drilling activity began to slow in the Permian in the fourth quarter. Whether measuring by production, employment, business activity, equipment usage rates – a wide variety of data from the shale industry points to an unfolding slowdown.

Moreover, independent data also suggests that a lot of shale drillers are not profitable with oil prices below $50 per barrel. Breakeven prices on the very best wells can run in the $30s or $40s per barrel, but industry-wide all-in costs translate into much higher breakeven thresholds. The rig count has also already plateaued after growing sharply in the first half of 2018.

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

New Data Suggests Shocking Shale Slowdown

New Data Suggests Shocking Shale Slowdown

Shale rig

U.S. shale executives often boast of low breakeven prices, reassuring investors of their ability to operate at a high level even when oil prices fall. But new data suggests that the industry slowed dramatically in the fourth quarter of 2018 in response to the plunge in oil prices.

A survey from the Federal Reserve Bank of Dallas finds that shale activity slammed on the brakes in the fourth quarter. “The business activity index—the survey’s broadest measure of conditions facing Eleventh District energy firms—remained positive, but barely so, plunging from 43.3 in the third quarter to 2.3 in the fourth,” the Dallas Fed reported on January 3.

The 2.3 reading is only slightly positive – zero would mean that business activity from Texas energy firms was flat compared to the prior quarter. A negative reading would mean a contraction in activity.

The deceleration was true for multiple segments within oil and gas. For instance, the oil production index fell from 34.8 in the third quarter to 29.1 in the fourth. The natural gas production index to 24.8 in the fourth quarter, down from 35.5 in the prior quarter.

But even as production held up, drilling activity indicated a sharper slowdown was underway. The index for utilization of equipment by oilfield services firms dropped sharply in the fourth quarter, down from 43 points in the third quarter to just 1.6 in the fourth – falling to the point where there was almost no growth at all quarter-on-quarter.

Meanwhile, employment has also taken a hit. The employment index fell from 31.7 to 17.5, suggesting a “moderating in both employment and work hours growth in the fourth quarter,” the Dallas Fed wrote. Labor conditions in oilfield services were particularly hit hard.

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

Global Economic Slump Imminent As Korean Exports ‘Canary’ Crashes

In the latest sign that the slowdown in China and the global trade war is weighing on global commerce, South Korea’s exports fell  in December. The 1.2% YoY decline was dramatically below the +2.5% YoY expected and missed even the most pessimistic forecast (which was still a rise).

Korean exports were hit by falling memory-chip and oil prices and cooling demand from China and imports also disappointed, rising 0.9% YoY.

“The (annual) decline came about a month earlier than I thought, but I expect Korean exports to be weak throughout the first half of this year, posting low single-digit growth at best,” said Lee Seung-hoon, an economist at Meritz Securities.

South Korea is the first major exporter to report trade data each month, so provides an early reading of global trade; and as the world’s leading exporter of computer chips, ships, cars and petroleum products, December’s data is a major red flag for the global economy.

As the chart below shows, Global equity market earnings growth (and contraction) is extremely tightly correlated to Korean export growth (or contraction)…

So maybe global stocks are on to something with their recent collapse as they increasingly price in an earnings recession.

Why Oil Prices Rose And Crashed In 2018

Why Oil Prices Rose And Crashed In 2018

Bubble

Last week the price of West Texas Intermediate (WTI) crude oil, the primary U.S. benchmark, fell to a 17-month low. The price, $45.88/bbl, marks a stunning fall from a price that closed at $76.40/bbl on October 3rd.

So, what has caused this roller coaster ride, and where are prices headed as we head into 2019?

Let’s first review how to we got to sub-$50 oil as we near the end of 2018. That’s important, because I think it strongly influences what is likely to happen in 2019.

Why Oil Prices Rose in 2018

In my 2018 predictions, which I will grade in a couple of weeks, I projected that oil prices would reach $70/bbl in 2018. The price of WTI, the U.S. benchmark, rose to that level in May and remained there for most of the summer.

There were several reasons I expected oil prices to rise. The threat of sanctions on Iran, global demand that continues to rise (despite increasing predictions of the demise of demand growth), and the deteriorating situation in Venezuela were just three of the reasons I predicted higher oil prices.

But if you had asked me in mid-summer what I expected for the rest of 2018, I would not have anticipated an oil price collapse. I largely attribute this decline to an unexpected variable in the oil markets that I call “The Trump Effect”.

The Trump Effect

President Trump has done some good things for the oil industry, but he has a blind spot when it comes to oil prices. He has been vocal about the need to keep oil prices low, even as the U.S. becomes an increasingly important global oil producer.

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

WTI Extends Losses After Production Rebounds To Record

WTI has slid lower overnight following API’s surprise large crude build (and no equity pump) and was unable to hold gains after a bigger than expected gasoline build (and tiny crude draw) along with a production rebound to record highs.

If U.S. crude output rises, it’s likely to see more inventory builds, according to Stewart Glickman, an energy equity analyst at CFRA Research. “The Permian has surprised to the upside over the last couple of months,” he says.

API

  • Crude +6.92mm
  • Cushing +1.76mm
  • Gasoline +3.67mm
  • Distillates -598k

DOE

  • Crude _46k (+3.4mm exp)
  • Cushing +799k
  • Gasoline +3.003mm (+1.0mm exp)
  • Distillates +2k

Tiny crude draw (4th week in a row) but another Cushing build along with a rise in gasoline stocks took the edge off for the bulls.

US Crude production had stalled from its never ending surge higher in recent weeks as the rig count stabailized but rebounded to record highs last week…

 

WTI hovered around $44.50 into the DOE print and was very modestly lower after….

Falling Oil Prices May Spark New Debt Crisis

Falling Oil Prices May Spark New Debt Crisis

benj

U.S. oil prices at below $50 and now even below $45 a barrel could cause concerns about the debt levels of some energy companies, Nasdaq energy analyst Tamar Essner told CNBC on Wednesday.

“Credit markets have held up a lot better than the energy equity markets right now, so that tells you that credit investors out there believe in the oil story much more so than energy equity investors do right now,” Essner said.

Consumers in the U.S. like the low gasoline prices that come with lower oil prices, but a slide in the price of oil has a broader impact on the economy, Essner said.

Some of the newer U.S. shale producers are probably deep into cash-flow negative at the current oil prices of $43 a barrel WTI Crude, although the energy industry as a whole is “in a lot stronger position” today than it was in the price crash of 2014, according to the energy analyst.

“A lot of the debt has been put in a much more consolidated position. We’ve just had a round of credit redetermination in the fall when prices were higher, so that should buy us some time in the market as well,” Essner said, referring to the banks’ twice-yearly borrowing base redetermination of energy companies.

Over the past few weeks, when oil prices were falling due to fears that the OPEC+ production cuts won’t be enough to rebalance the oil market, some companies announced their 2019 capital budget plans.

Many of those companies said they would be cutting spending and the number of rigs, Essner said, noting that lower spending levels will ultimately result in a lower pace of oil production growth, but it will take time.

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

Shale Growth Could Slow On Oil Price Meltdown

Shale Growth Could Slow On Oil Price Meltdown

Oil

Can the U.S. shale boom continue if WTI stays mired below $50 per barrel?

Much has been made about the dramatic cost reductions that shale drillers have implemented over the past few years, with impressive breakeven prices that should ensure the drilling frenzy continues no matter where oil prices go. On earnings calls with investors and analysts, shale executives repeatedly trumpeted extremely low breakeven prices.

However, those figures are at times cherry-picked or otherwise misleading. They fail to include the cost of land acquisition and other costs, or they simply reflect cost structures in only the very best acreage.

The sudden meltdown in prices – oil fell nearly 8 percent on Tuesday – could put renewed scrutiny on the point at which many shale wells breakeven.

The problem for a lot of companies is that they are not necessarily earning the full WTI price. Oil in West Texas in the Permian Basin continues to trade at a steep discount relative to WTI, even as the differential has narrowed in recent months. With WTI at roughly $47 or $48 per barrel, oil based in Midland is trading below $40 per barrel, the lowest point in more than two years, according to Bloomberg.

Bloomberg NEF data provides more clues into the complex “breakeven” debate. Wells located in the Spraberry (within the Permian basin) can breakeven when prices trade between $32 and $47 per barrel. Digging deeper, Bloomberg NEF notes that some of the best wells can break even in the low $30s, but the worst quartile of wells breakeven at an average of $65.54 per barrel.

In other words, a large portion of wells in the Permian – which, to be clear, is often held up as the best shale basin in the world – is currently unprofitable, given WTI priced in the high-$40s per barrel.

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

What’s Behind The Crash In Crude?

What’s Behind The Crash In Crude?

Basra oil terminal

Oil prices crashed to new one-year lows on Tuesday, dragged down by a deepening sense of global economic gloom as well as fears of oversupply in the oil market itself.

The reasons for the sudden meltdown were multiple. Rising crude oil inventories and expected increases in shale production weighed on oil prices, but the price crash was accentuated by the broader selloff in financials.

Genscape said that inventories are rising, which has raised fears of tepid demand amid soaring supply growth. “The Cushing number came in higher than anticipated … it’s definitely pointing to the concern that there’s more supply and demand is weakening,” said Phil Flynn, analyst at Price Futures Group in Chicago, according to Reuters. “The market is still very nervous about that.”

Crude prices fell 4 percent on Monday and about 7 percent on Tuesday. WTI dropped below $47 per barrel and Brent fell to the $56 handle.

The EIA said in its latest Drilling Productivity Report that it expects U.S. shale production to top 8.1 million barrels per day (mb/d) in January, rising by a massive 134,000 bpd month-on-month. The Permian alone will see production rise by 73,000 bpd next month. By way of context, the gains in the Permian are bigger than even some of the large monthly declines that we have seen in Venezuela, for instance.

Still, with WTI dropping below $50 per barrel, shale drillers will start to face increasing financial strain. That could force a slowdown in the shale patch. “We’re probably going to see a supply slowdown in the U.S.,” Michael Loewen, a commodities strategist at Scotiabank, told Bloomberg. “I do think that producers will react.”

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

Shale Under Pressure As Oil Falls Below $50

Shale Under Pressure As Oil Falls Below $50

fracking operation

The OPEC+ cuts still are not doing very much to boost oil prices, dashing hopes for many U.S. shale producers. With companies in the process of formulating their budgets for 2019, the prospect of $50 oil sticking around raises questions about the heady production figures expected from the shale patch.

The IEA expects U.S. oil production to grow by 1.3 million barrels per day (mb/d) in 2019. But oil prices could significantly impact those projections. “Total U.S. shale oil growth is highly sensitive to WTI prices in the $40-60 range,” Morgan Stanley wrote in a December 13 note. The investment bank said that shale producers are growing more sensitive to prices below $60 but less sensitive to price spikes above $60. “If WTI remains around current levels (~$50/bbl), US growth should start to slow.”

The investment bank said that larger companies, such as ConocoPhillips or Occidental Petroleum, are less sensitive to price swings than smaller E&Ps. On the other hand, some companies could begin to slow production if prices linger at low levels. Morgan Stanley pointed to Apache Corp., Murphy Oil, Newfield Exploration, Oasis Petroleum, Whiting Petroleum and Chesapeake Energy. “With low oil prices, we see these companies slowing production growth in 2019 to spend within cash flow (or minimize outspend), [free cash flow] levels fall or turn negative, and leverage metrics move higher.”

Other analysts also see price sensitivity from the shale sector. “We expect 5-10% capex growth on average at $59 WTI, which should yield production growth of nearly 1.3mn b/d,” Bank of America Merrill Lynch wrote in a note. “However producers may budget for lower oil prices given the recent decline in prices and increase in uncertainty.”

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

The Impact of OPEC on Climate Change

It is accepted that the Organization of the Petroleum Exporting Countries (OPEC) is a cartel that restrains oil production and keeps prices higher than they would otherwise be. Indeed, this is the premise behind the “OPEC Accountability Act of 2018” in the US Senate. This bill would address high and rising oil prices by trying to break OPEC. US pressure on OPEC — particularly on friendly governments such as Saudi Arabia that are seen as leaders in the organization — to “open the spigots” is not new. Nor is the control of oil exports by producing countries for political purposes. However, the environmental impact of high oil prices is only lightly considered.

There is little debate that motor vehicle industry changes to increase fuel efficiency were a historic and significant environmental advance. When OPEC action has led to increased prices, the quantity of oil in demand has fallen. This was starkly demonstrated when the Organization of Arab Petroleum Exporting Countries (OAPEC) — founded in 1968 — flexed its price-making muscles in the 1970s. Production cuts and an embargo against sale of oil to several countries raised the spot price of West Texas Intermediate (WTI) crude from $3.56 per barrel in mid-1973 to $4.31 later in the year to $10.11 in January. By the time President Jimmy Carter famously suggested we all turn down our thermostats, the price of WTI crude had reached $14.85 per barrel. The price finally peaked in mid-1980 at $39.50 — a 1000 percent increase in seven years. The price of gasoline more than tripled. In response, we got the Department of Energy, the Chevy Citation, and more fuel-efficient Japanese and German automobile imports.

More recently, the total vehicle miles traveled in the US fell in 2007 amid high oil prices and the Great Recession, and did not increase again until gas prices fell over the second half of 2014 ― from $3.69 per gallon to $2.12.

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

Slipping Rig Count Can’t Keep Oil Prices From Falling

Slipping Rig Count Can’t Keep Oil Prices From Falling

BHGE rig

Baker Hughes reported a 4-rig decrease for oil and gas in the United States this week—a loss in rigs for the third week in a row. The four-rig decline was all on the oil-rig side, with gas rigs holding steady.

The total number of active oil and gas drilling rigs now stands at 1,071 according to the report, with the number of active oil rigs decreasing by 4 to reach 873 and the number of gas rigs holding steady at 198.

The oil and gas rig count is now 141 up from this time last year, 126 of which is in oil rigs.

Crude oil prices fell sharply near the close of the week on Friday despite production losses in OPEC’s Libya and an agreement within OPEC+ to cut 1.2 million bpd from the expanded cartel’s October production.

The WTI benchmark was trading down 2.26% (-$1.19) at $51.39—a loss of more than $2 per barrel week over week—at 11:39am EST. Brent crude was trading down 1.84% (-$1.13) at $60.32—also down more than $2 per barrel from last week

Canada’s oil and gas rigs for the week decreased by 12 rigs this week after losing 17 rigs last week, bringing its total oil and gas rig count to 174, which is 64 fewer rigs than this time last year, with a 7-rig decrease for oil rigs, and a 5-rig decrease for gas rigs.

The EIA’s estimates for US production for the week ending December 7 continues to weigh on prices, averaging 11.6 million bpd­—a drop off from the previous 11.7 million bpd for the previous four weeks.

By 1:07pm EDT, WTI had decreased by 2.68% (-$1.41) at $51.17 on the day. Brent crude was trading down 2.03% (-$1.25) at $60.20 per barrel.

A VERY RARE SETUP: Who Will Win The Tug Of War In The Oil Market?

A VERY RARE SETUP: Who Will Win The Tug Of War In The Oil Market?

There has been a tug of war in the oil price over the past two weeks.  Due to a very rare setup in the market, the oil price has traded in a very narrow range as traders fight it out to see who will win control… the BULLS or the BEARS.  My bet is on the bet is on the bears.  Amazingly, the oil price is literally stuck right between two critical technical levels.

Ever since the oil price peaked at $77 at the beginning of October, it has fallen $25 and is now trading in a tight volatile range between $50-$53.  As we can see in the chart below, the oil price dropped to $50 at the end of November and now has been trading up and down with no clear direction:

Oil Price Daily Chart (Each candlestick = 1 day of trading)

Even though the oil price touched $54 for a few days, it has mostly been trading in a tight $3 range.  In looking at this daily chart, we have no idea why the oil price is behaving in such a way.  However, if we look at the longer-term monthly chart, we can see the apparent reason why.  The oil price has been pushed between the 50 Month Moving Average (BLUE) and the 300 Month Moving Average (ORANGE):

Oil Price Monthly Chart (Each candlestick = 1 month of trading)

If you look at the magnified view, you will see that the oil price that closed today at $52.58 remains between these two moving averages.  The large red candlestick shows the decline in the oil price in November as each candlestick represents one month of trading.

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

Gold & Silver Prices Rise As The Markets & Oil Decline

Gold & Silver Prices Rise As The Markets & Oil Decline

Over the past week, the gold and silver prices have held up rather well compared to the overall markets.  While precious metals investors still fear that a huge sell-off in the gold and silver prices will take place during the next market crash, it seems that the metals continue to be very resilient during large market corrections.

Now, I am not saying that the metals prices cannot fall any lower, but a lot of the leverage in the gold and silver market has already been removed and is now at a near all-time low.  So, even though we could see weaker precious metals prices, the overwhelming leverage and bubble asset prices are in the stock and real estate markets.

Furthermore, one of the reasons precious metals investors still fear that a major selloff is imminent is that they are using the 2007-2008 economic market meltdown as a guideline.  However, when gold and silver prices were plummeting from their highs in 2008, along with the rest of the market, speculators held huge long positions while the commercials controlled an enormous number of short contracts.

If we look at the following Gold Hedgers Chart, we can clearly see that the market setup today is the exact opposite of what it was in 2008:

When gold was trading near $1,000 in early 2008, the commercial banks held a record high of 252,000 net short contracts compared to the present gold price of $1,222 (time of chart), with the commercials only holding 16,000 net short contracts.  The commercial short positions are shown by the blue line.  Thus, the higher the commercial short positions, the lower the line goes and the lower the number, the higher the line moves.  Currently, the gold price and commercial net short positions are both at the near lows.  Also, the speculator net long positions are close to their lows as well

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

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