Menu Icon

Will Oil Kill The Zombies?

Dec 122014
 
 December 12, 2014  Posted by at 5:48 am Finance Tagged with: , , , , , , ,  5 Responses »


Ben Shahn Quick lunch stand in Plain City, Ohio Aug 1938

Oil producer Russia hikes rates to 10.5% as the ruble continues to plunge, while fellow producer Norway does the opposite, and cuts its rates, but also sees its currency plummet. As Greek stocks lose another 7.35% after Tuesday’s 13% loss on rumors about what the left leaning Syriza party will or will not do if it wins upcoming elections, and virtually anonymous Dubai drops 7.42%. We all know the story of the chain and its weakest link, and beware, these really still ARE global markets.

Meanwhile someone somewhere saved WTO oil from falling through the big, BIG, $60 limit for most of the day Thursday, and then it went south anyway. And that brings to mind the warnings about what would, make that will, happen to high yield energy junk bonds. Of which there’s a lot out there, but not much is being added anymore, that market has been largely shut to companies, especially in the shale patch. So how are they going to finance their fracking wagers? Hard to see.

And something tells me this Bloomberg piece is still lowballing the debt issue, though I commend them for making the link between shale and Fed ‘stimulus’ policies, something all too rare in what passes for press in the US these days.

Fed Bubble Bursts in $550 Billion of Energy Debt

The danger of stimulus-induced bubbles is starting to play out in the market for energy-company debt. Since early 2010, energy producers have raised $550 billion of new bonds and loans as the Federal Reserve held borrowing costs near zero, according to Deutsche Bank. With oil prices plunging, investors are questioning the ability of some issuers to meet their debt obligations. Research firm CreditSights predicts the default rate for energy junk bonds will double to 8% next year. “Anything that becomes a mania – it ends badly,” said Tim Gramatovich, chief investment officer of Peritus Asset Management. “And this is a mania.”

I think it’s obvious that the default rate could be much higher than 8%.

The Fed’s decision to keep benchmark interest rates at record lows for six years has encouraged investors to funnel cash into speculative-grade securities to generate returns, raising concern that risks were being overlooked. A report from Moody’s this week found that investor protections in corporate debt are at an all-time low, while average yields on junk bonds were recently lower than what investment-grade companies were paying before the credit crisis. Borrowing costs for energy companies have skyrocketed in the past six months as West Texas Intermediate crude, the U.S. benchmark, has dropped 44% to $60.46 a barrel since reaching this year’s peak of $107.26 in June.

Yields on junk-rated energy bonds climbed to a more-than-five-year high of 9.5% this week from 5.7% in June, according to Bank of America Merrill Lynch index data. At least three energy-related borrowers, including C&J Energy Services, postponed financings this month as sentiment soured. “It’s been super cheap” for energy companies to obtain financing over the past five years, said Brian Gibbons, a senior analyst for oil and gas at CreditSights in New York. Now, companies with ratings of B or below are “virtually shut out of the market” and will have to “rely on a combination of asset sales” and their credit lines, he said.

When you’re as addicted to debt as the shale industry has been – and still would be if they could still get their fix -, then seeing prices for your products drop over 40% and the yields on your bonds just about double (just for starters), then you have not a problem, but a disaster. And one that’s going to reverberate through all asset markets. It’s already by no means just oil that’s plunging, – industrial – commodities (iron ore, nickel, copper etc.) as a whole are way down from just a few months ago. I read a nice expression somewhere: “the economy is topped with a copper roof”, which supposedly means to say that where copper goes, the economy will follow.

But this is by no means all of the news, it’s not even the worst. To get back to oil, there are some very revealing numbers in the following from CNBC, which call out to us that we haven’t seen nothing yet.

Oil Pressure Could Sock It To Stocks

With crude sliding through the key $60 level, oil pressure could stay on stocks Friday. West Texas Intermediate futures for January closed at $59.95 per barrel, the first sub-$60 settle since July 2009. The $60 level, however, opens the door to the much bigger, $50-per-barrel level. Besides oil, traders will be watching the producer price index Friday morning, and it’s expected to be off 0.1% with the fall in energy. Consumer sentiment is also expected at 10 a.m. EST.

Consumers stepped up and spent in November, as evidenced in the 0.7% gain in that month’s retail sales Thursday. That better mood should show up in consumer sentiment. Stocks on Thursday gave up sizeable gains after oil reversed course and fell through $60.

“Oil has pretty much spooked people,” said Daniel Greenhaus, chief global strategist at BTIG. “There just isn’t a bid. With everything in energy and the oil price collapsing as it is, who is going to step in and be a buyer now? The answer is nobody.” Oil continued to slide in after-hours trading. “The selling appears to have accelerated a little bit after the close with really no bullish news in sight,” said Andrew Lipow, president of Lipow Associates. WTI futures temporarily fell below $59 in late trading.

“The big level is going to be $50 now in terms of psychological support. Much as $100 is on the upside,” said John Kilduff of Again Capital. Oil stands a good chance of getting there too. Tom Kloza, founder and analyst at Oil Price Information Service, said the market could bottom for the winter in about 30 days, but then it will be up to whatever OPEC does.

That was just the intro. Now, wait for it, check this out:

“It’s (oil) actually much weaker than the futures markets indicate. This is true for crude oil, and it’s true for gasoline. There’s a little bit of a desperation in the crude market,” said Kloza.”The Canadian crude, if you go into the oil sands, is in the $30s, and you talk about Western Canadian Select heavy crude upgrade that comes out of Canada, it’s at $41/$42 a barrel.”

“Bakken is probably about $54.” Kloza said there’s some talk that Venezuelan heavy crude is seeing prices $20 to $22 less than Brent, the international benchmark. Brent futures were at $63.20 per barrel late Thursday.

“In the actual physical market, it’s fallen by even more than the futures market. That’s a telling sign, and it’s telling me that this isn’t over yet. This isn’t the bottoming process. The physical market turns before the futures,” he said.

I see very little reason to doubt that what’s happening is that the media are way behind the curve in their reporting of what’s really going on. WTI and Brent are standards, and standards are one thing, but what oil actually sells for is quite another matter. Many companies – and many oil-producing countries too – must sell at whatever price they can get just to survive. And there is no stronger force in the world to drive prices down.

That is today’s reality. And while there are many different estimates around about breakeven prices for US shale plays, if we go with the ones from WoodMacKenzie, we get at least some idea of how bad the industry is hurting with prices below $60 (click to enlarge):

If prices fall any further (and what’s going to stop them?), it would seem that most of the entire shale edifice must of necessity crumble to the ground. And that will cause an absolute earthquake in the financial world, because someone supplied the loans the whole thing leans on. An enormous amount of investors have been chasing high yield, including many institutional investors, and they’re about to get burned something bad.

What it amounts to is that the falling oil price will chase a lot of zombie money out of the markets, the stuff created through a combination of QE-related ultra low interest rates and money printing, plus the demise of accounting standards that allowed companies to abandon mark-to-market practices. This has led to the record stock market valuation that we see today, and that could vanish in the wink of an eye once even just one asset, one commodity, starts being marked to market in defiance of the distortion official policies have imposed upon the global marketplace.

We might well be looking at the development of a story much bigger than just oil. I said earlier this week that it would be hard to find a way to bail out the US oil industry, but that’s merely one aspect here. Because if oil keeps going the way it has lately, the Fed may instead have to think about bailing out the big Wall Street banks once again.

Debt Rattle December 6 2014

Dec 062014
 
 December 6, 2014  Posted by at 12:01 pm Finance Tagged with: , , , , , , , ,  1 Response »


Louise Rosskam General store in Lincoln, Vermont Jul 1940

• The ‘You Want Fries With That?’ Jobs Report (CNBC)
• Full-Time Jobs Down 150K, Participation Rate Stays At 35-Year Lows (Zero Hedge)
• US Factory Orders Tumble, Miss By Most Since January (Zero Hedge)
• The New Economics Of Oil (Economist)
• More than $150 Billion of Oil Projects Face the Axe in 2015 (Reuters)
• Energy Bond Crash Contagion Suggests Oil Will Stay Lower For Longer (Zero Hedge)
• Natural Gas: The Fracking Fallacy (Nature)
• Draghi’s Authority Drains Away As Half ECB Board Joins Mutiny (AEP)
• EU Sanctions Relief For Russia’s Top Banks, Oil Companies (RT)
• Crashing Yen Leads To Record Number Of Japanese Bankruptcies (Zero Hedge)
• A Comprehensive Breakdown of America’s Economic House of Cards (Beversdorf)
• S&P Wakes Up, Cuts Italy to One Notch Above Junk (WolfStreet)
• Russia’s Gazprom Receives Prepayment From Ukraine For Gas Supplies (Reuters)
• Reckless Congress ‘Declares War’ on Russia (Ron Paul)
• Chief Constable Warns Against ‘Drift Towards (Thought) Police State’ (Guardian)
• The Tragedy of America’s First Black President (Spiegel)
• Adapting To A Warmer Climate To Cost Three Times As Much As Thought (Guardian)
• One Man’s 40-Year Fight Against Africa’s Ivory Poachers (John Vidal)

“Friday’s turbocharged jobs headline came thanks to seasonal adjustments and other wizardry at the Bureau of Labor Statistics ..”

• The ‘You Want Fries With That?’ Jobs Report (CNBC)

Consider it a brutal lesson in government math. Friday’s turbocharged jobs headline came thanks to seasonal adjustments and other wizardry at the Bureau of Labor Statistics, which reported that U.S. job growth hit 321,000 even as the unemployment rate held steady at 5.8%. Those numbers, courtesy of establishment survey estimates, sound nice on the surface, and they certainly present reasons if not for unbridled optimism then at least confidence that the job market continues to mend and is on a pretty steady trajectory higher. However, the household survey, which is an actual head count, presents details that show there’s still plenty of work to do. A few figures to consider: That big headline number translated into just 4,000 more working Americans. There were, at the same time, another 115,000 on the unemployment line. That disparity can be explained through an expanding labor force, which grew 119,000, though the participation rate among that group remained at 62.8%, which is just off the year’s worst level and around a 36-year low.

But wait, there’s more: The jobs that were created skewed heavily toward lower quality. Full-time jobs declined by 150,000, while part-time positions increased by 77,000. Analysts, though, mostly gushed over the report. Fixed income strategist David Harris at Schroders said it was “unquestionably strong and significantly exceeded expectations.” Economist Lindsey Piegza at Sterne Agee called it “impressive,” while Paul Ashworth at Capital Economics termed the headline gain “massive” with “labor market conditions improving at breakneck speed.” As for the unseemly nature of the internals, Michelle Meyer of BofAML said the “gift” of a report should override those concerns. “Household jobs were only up 4,000, which on the surface is a disappointment. However, this follows an outsized gain of 683,000 in October and 232,000 in September, leaving the three-month moving average still up a healthy 306,000,” Meyer said in a report for clients. “The monthly survey of household jobs tends to be quite noisy, suggesting caution when reacting to a given month of data.”

But there were several other points not to like in the report. Families, for instance, also were under pressure: There were 110,000 fewer married men at work, while married women saw their ranks shrink by 59,000. And there was an exceedingly huge disparity between expectations and results: ADP’s report Wednesday showed just 208,000 new private sector positions, compared with the 314,000 in the BLS report. That’s a miss of 51%, the worst showing for ADP’s count since April 2011 even though the firm has touted its partnership since then with Moody’s Analytics as a way to make its count more accurate. Some Wall Street analysts had been scaling back their calls, and Goldman Sachs, which has had a good history of picking the number, was expecting gains of 220,000. Even the most buoyant economist on the street, Joe LaVorgna at Deutsche Bank, was looking for 250,000. [..]

Finally, there was a rather startling numerical coincidence: That same 321,000 figure was repeated later in the report—as the total number of bar and restaurant jobs created over the past 12 months. Taken in total, a peek beneath the hood of these numbers suggests a job market that still has a ways to go.

Read more …

“.. the Household Survey was nowhere close to confirming the Establishment Survey data, suggesting jobs rose only by 4K from 147,283K to 147,287K, and furthermore, the breakdown was skewed fully in favor of Part-Time jobs, which rose by 77K while Full-Time jobs declined by 150K.”

• Full-Time Jobs Down 150K, Participation Rate Stays At 35-Year Lows (Zero Hedge)

While the seasonally-adjusted headline Establishment Survey payroll print reported by the BLS moments ago may be indicative of an economy which the Fed will soon have to temper in an attempt to cool down, a closer read of the November payrolls report shows several other things that were not quite as rosy. First, the Household Survey was nowhere close to confirming the Establishment Survey data, suggesting jobs rose only by 4K from 147,283K to 147,287K, and furthermore, the breakdown was skewed fully in favor of Part-Time jobs, which rose by 77K while Full-Time jobs declined by 150K.

And then for those keeping tabs on the composition of the labor force, the same adverse trends indicated over the past 4 years have continued, with the participation rate remaining flat at 62.8%, essentially the lowest print since 1978, driven by a 69K worker increase in people not in the labor force.

Read more …

” .. the only other time we had 3 straight months of factory orders declines was in the recession and the 2012 decline was saved by QE3.”

• US Factory Orders Tumble, Miss By Most Since January (Zero Hedge)

But, but, but payrolls data was awesome!! US Factory Orders tumbled -0.7% in October (missing 0.0% expectations) for the 3rd month in a row (for the first time since June 2012). Rather notably, the only other time we had 3 straight months of factory orders declines was in the recession and the 2012 decline was saved by QE3. The data was ugly across the board: Non-durable orders -1.5%, non-defense, ex-air tumbled -1.6%, and inventories-to-shipments levels are at the year’s highs. More problematically for GDP enthusiasts, October inventories of manufactured nondurable goods decreased -0.5% to $249.0 billion driven by petroleum and coal products (but wait, lower oil prices are unequivocally good right?)

Read more …

The Economist has no idea what is going on. Not the first time. All they see is a rising global GDP because of lower oil prices.

• The New Economics Of Oil (Economist)

The official charter of OPEC states that the group’s goal is “the stabilisation of prices in international oil markets”. It has not been doing a very good job. In June the price of a barrel of oil, then almost $115, began to slide; it now stands close to $70. This near-40% plunge is thanks partly to the sluggish world economy, which is consuming less oil than markets had anticipated, and partly to OPEC itself, which has produced more than markets expected. But the main culprits are the oilmen of North Dakota and Texas. Over the past four years, as the price hovered around $110 a barrel, they have set about extracting oil from shale formations previously considered unviable. Their manic drilling – they have completed perhaps 20,000 new wells since 2010, more than ten times Saudi Arabia’s tally – has boosted America’s oil production by a third, to nearly 9m barrels a day (b/d). That is just 1m b/d short of Saudi Arabia’s output. The contest between the shalemen and the sheikhs has tipped the world from a shortage of oil to a surplus.

Cheaper oil should act like a shot of adrenalin to global growth. A $40 price cut shifts some $1.3 trillion from producers to consumers. The typical American motorist, who spent $3,000 in 2013 at the pumps, might be $800 a year better off—equivalent to a 2% pay rise. Big importing countries such as the euro area, India, Japan and Turkey are enjoying especially big windfalls. Since this money is likely to be spent rather than stashed in a sovereign-wealth fund, global GDP should rise. The falling oil price will reduce already-low inflation still further, and so may encourage central bankers towards looser monetary policy. The Federal Reserve will put off raising interest rates for longer; the European Central Bank will act more boldly to ward off deflation by buying sovereign bonds.

There will, of course, be losers. Oil-producing countries whose budgets depend on high prices are in particular trouble. The rouble tumbled this week as Russia’s prospects darkened further. Nigeria has been forced to raise interest rates and devalue the naira. Venezuela looks ever closer to defaulting on its debt. The spectre of defaults and the speed and scale of the price plunge have unnerved financial markets. But the overall economic effect of cheaper oil is clearly positive. Just how positive will depend on how long the price stays low. That is the subject of a continuing tussle between OPEC and the shale-drillers. Several members of the cartel want it to cut its output, in the hope of pushing the price back up again. But Saudi Arabia, in particular, seems mindful of the experience of the 1970s, when a big leap in the price prompted huge investments in new fields, leading to a decade-long glut. Instead, the Saudis seem to be pushing a different tactic: let the price fall and put high-cost producers out of business. That should soon crimp supply, causing prices to rise.

Read more …

But this the reality: loss of investment, defaults and job losses.

• More than $150 Billion of Oil Projects Face the Axe in 2015 (Reuters)

Global oil and gas exploration projects worth more than $150 billion are likely to be put on hold next year as plunging oil prices render them uneconomic, data shows, potentially curbing supplies by the end of the decade. As big oil fields that were discovered decades ago begin to deplete, oil companies are trying to access more complex and hard to reach fields located in some cases deep under sea level. But at the same time, the cost of production has risen sharply given the rising cost of raw materials and the need for expensive new technology to reach the oil. Now the outlook for onshore and offshore developments – from the Barents Sea to the Gulf or Mexico – looks as uncertain as the price of oil, which has plunged by 40% in the last five months to around $70 a barrel.

Next year companies will make final investment decisions (FIDs) on a total of 800 oil and gas projects worth $500 billion and totalling nearly 60 billion barrels of oil equivalent, according to data from Norwegian consultancy Rystad Energy. But with analysts forecasting oil to average $82.50 a barrel next year, around one third of the spending, or a fifth of the volume, is unlikely to be approved, head of analysis at Rystad Energy Per Magnus Nysveen said. “At $70 a barrel, half of the overall volumes are at risk,” he said. Around one third of the projects scheduled for FID in 2015 are so-called unconventional, where oil and gas are extracted using horizontal drilling, in what is known as fracking, or mining. Of those 20 billion barrels, around half are located in Canada’s oil sands and Venezuela’s tar sands, according to Nysveen.

Read more …

“.. credit markets – the most sensitive to cashflows at this stage – are signalling either prices have considerably further to fall or will remain at these thinly-profitable-if-at-all prices for considerably longer ..”

• Energy Bond Crash Contagion Suggests Oil Will Stay Lower For Longer (Zero Hedge)

When we first explained to the public that the excessive leverage and currently squeezed cashflow of many US oil producers could “trigger a broader high-yield market default cycle,” the world’s smartest TV-anchors shrugged off lower oil prices as ‘unequivocally good’ for all. Now, as a 40% collapse in new well permits and liquidations occurring at the well-head, the world outside of credit markets is starting to comprehend the seriousness of the crash of a sector that was responsible for 93% of jobs created in this ‘recovery’. The credit risk of HY energy corporates has more than doubled to a record 815bps (over risk-free-rates) crushing any hopes of cheap funding/rolling debt loads. Suddenly expectations of 1/3rd of energy firms restructuring is not so crazy… The chart below suggests another problem for hopers… credit markets – the most sensitive to cashflows at this stage – are signalling either prices have considerably further to fall or will remain at these thinly-profitable-if-at-all prices for considerably longer…

Read more …

.. “we’re setting ourselves up for a major fiasco“ ..

• Natural Gas: The Fracking Fallacy (Nature)

When US President Barack Obama talks about the future, he foresees a thriving US economy fuelled to a large degree by vast amounts of natural gas pouring from domestic wells. “We have a supply of natural gas that can last America nearly 100 years,” he declared in his 2012 State of the Union address. Obama’s statement reflects an optimism that has permeated the United States. It is all thanks to fracking — or hydraulic fracturing — which has made it possible to coax natural gas at a relatively low price out of the fine-grained rock known as shale. Around the country, terms such as ‘shale revolution’ and ‘energy abundance’ echo through corporate boardrooms.

Companies are betting big on forecasts of cheap, plentiful natural gas. Over the next 20 years, US industry and electricity producers are expected to invest hundreds of billions of dollars in new plants that rely on natural gas. And billions more dollars are pouring into the construction of export facilities that will enable the United States to ship liquefied natural gas to Europe, Asia and South America. All of those investments are based on the expectation that US gas production will climb for decades, in line with the official forecasts by the US Energy Information Administration (EIA). As agency director Adam Sieminski put it last year: “For natural gas, the EIA has no doubt at all that production can continue to grow all the way out to 2040.”

But a careful examination of the assumptions behind such bullish forecasts suggests that they may be overly optimistic, in part because the government’s predictions rely on coarse-grained studies of major shale formations, or plays. Now, researchers are analysing those formations in much greater detail and are issuing more-conservative forecasts. They calculate that such formations have relatively small ‘sweet spots’ where it will be profitable to extract gas. The results are “bad news”, says Tad Patzek, head of the University of Texas at Austin’s department of petroleum and geosystems engineering, and a member of the team that is conducting the in-depth analyses. With companies trying to extract shale gas as fast as possible and export significant quantities, he argues, “we’re setting ourselves up for a major fiasco”.

Read more …

“.. a full six months after Mr Draghi first talked loosely of a €1 trillion blitz to head off deflation risks [..] the ECB balance sheet has shrunk by over €100bn.”

• Draghi’s Authority Drains Away As Half ECB Board Joins Mutiny (AEP)

The European Central Bank is facing a full-blown leadership crisis. Mario Draghi’s authority is ebbing, with powerful implications for financial markets and the long-term fate of monetary union. Both Die Zeit and Die Welt report that three members of the ECB’s six-strong executive board refused to sign off on Mr Draghi’s latest statement, an unprecedented mutiny in the sanctum sanctorum of the ECB’s policy making machinery. The dissenters are reportedly Germany’s Sabine Lautenschläger, Luxembourg’s Yves Mersch, and more surprisingly France’s Benoît Cœuré, an indication that Paris is still hoping to avoid a breakdown in relations with Berlin over the management of EMU. The reality is that a full six months after Mr Draghi first talked loosely of a €1 trillion blitz to head off deflation risks, almost nothing has actually happened. The ECB balance sheet has shrunk by over €100bn. Talk has achieved a weaker euro but that is not monetary stimulus. It does not offset the withdrawal of $85bn of net bond purchases by the US Federal Reserve for the global economy as a whole.

It is a zero-sum development. The clash comes at a delicate moment amid Italian press reports that Mr Draghi may soon go home, drafted to take over the Italian presidency as the 89-year old Giorgio Napolitano prepares to step down. Such an outcome is unlikely. Yet there is no doubt that Mr Draghi has pressing family reasons to return to Rome, and he barely disguises his irritation with Frankfurt any longer. This incendiary column in the ARD Tagesschau gives a flavour of what is being said in Germany. Fairly or not, Mr Draghi is accused of losing his temper, refusing to listen to objections, cutting off Bundesbank chief Jens Weidmann, and retreating to a “narrow kitchen cabinet”. The latest dispute was over a change in the wording of the ECB statement on its balance sheet. While it appears semantic and trivial – whether the €1 trillion boost is “expected” or “intended” – the underlying clash is serious. The hawks will not be bounced into full-fledged quantitative easing before they are ready. They are patently playing for time, still hoping that the Rubicon may never be crossed.

Mrs Lautenschläger raised eyebrows last weekend by violating the pre-meeting ‘Purdah’, warning that the bar on QE is still very high. She decried “activism” for the sake of it and warned that QE would do more harm than good at this point. Purchases of government bonds amount to fiscal transfer. They create a “serious incentive problem”, she said. She is of course backed by the Bundesbank’s Jens Weidmann, who said this morning that monetary policy is too loose for German needs – even as the Bundesbank halves its economic growth forecast for Germany to 1pc next year, and even as the share of goods in Germany’s price basket in deflation reaches 31.2pc. Mr Weidmann says the crash in oil prices is a “mini-stimulus”, seeming to imply that it therefore reduces any need for QE. The Germans suspect that Mr Draghi is trying rush through sovereign QE so that there will be a lender of last resort in place for Club Med bonds next year as banks sell their holdings, following the repayment of ECB loans (LTROs).

Italian lenders have doubled their portfolio of Italian state bonds (BTPs) to roughly €400bn since Mr Draghi launched his first €1 trillion carry trade three years ago. Mediobanca expects this to fall by €100bn in 2015. Who is going to buy this flood of supply on the market, and at what price? Mr Draghi made clear that the ECB can override Germany on bond purchases if need be. “We don’t need to have unanimity,” he said, though he could hardly have answered otherwise when questioned explicitly on the point. One can imagine the scandal if he had suggested instead that Germany has a veto.

Read more …

Seen any coverage of this in the western press?

• EU Sanctions Relief For Russia’s Top Banks, Oil Companies (RT)

The European Union has amended sanctions against Russia’s biggest lenders like Sberbank and VTB on long-term financing, and eased some sanctions on the oil industry. The EU says Russia’s biggest lenders – Sberbank, VTB, Gazprombank, Vnesheconombank and Rosselkhozbank – will now be allowed access to long –term financing should the solvency of their European subsidiaries be at risk. The announcement released Friday refers to “loans that have a specific and documented objective to provide emergency funding to meet solvency and liquidity criteria for legal persons established in the Union, whose proprietary rights are owned for more than 50% by any entity referred to in Annex III [Russian banks – Ed.].” The EU has also specified the terms and conditions on which it can lift the ban on providing equipment for oil exploration.

Its supply is still banned to Russia itself, or the exclusive economic zone and offshore territories. However, EU said it may “grant an authorization where the sale, supply, transfer or export of the items is necessary for the urgent prevention or mitigation of an event likely to have a serious and significant impact on human health and safety or the environment.” This basically clarifies the position of the latest set of EU sanctions. The notion of “Arctic oil exploration” means the embargo is applied to oil exploration on the offshore Arctic. “Deep water exploration” means any operation extracting oil carried out deeper than 150 meters below the surface.

The sanctions target the finance, energy and defense sectors. In July 2014 the EU issued a “sectoral list” which includes Sberbank, VTB, Gazprombank, Russian Agricultural Bank (Rosselkhozbank) and Vnesheconombank. The lenders were cut off from long-term (over 30 days) international financing. The EU has banned three Russian energy companies Rosneft, Gazpromneft and Transneft from raising long-term debt on European capital markets. It has also halted services Russia needs to explore oil and gas in the Arctic, deep sea and shale extraction projects. On Friday Russia’s gas major Gazprom said it had inked a €390 million loan agreement with UniCredit bank. The EU however refused to comment on the news, with the EU foreign affairs department saying that the implementation of adopted restrictive measures is the responsibility of each EU country’s national authorities.

Read more …

Well done Shinzo!

• Crashing Yen Leads To Record Number Of Japanese Bankruptcies (Zero Hedge)

Last week, Zero Hedge first showed a chart so simple, even a Krugman could get it: at this point (and really ever since USDJPY 110 and higher), any incremental Yen devaluation is destructive for the Japanese economy, leading to an unprecedented surge in corporate bankruptcies and, ultimately, economic depression.

The obvious logic here led even the Keynesian studs at Goldman to declare that “Further yen depreciation could be a net burden.” Unfortunately for Abe and Kuroda, halting the Yen devaluation here would be suicide, as Japan now needs its currency to devalue every single day to mask the fact of the underlying economic devastation, or else the Japanese people may (and should) vote Abe out, which would lead to a prompt end to Abenomics, an epic collapse in the Nikkei, and put thousands of weak-Yen chasing Mrs. Watanabes in margin call purgatory. Sadly, that will not happen. We say “sadly” because an end end to Abenomics, which is really Krugmanomics now, is the only thing that could save Japan now. And just to prove that, here is Japan Times confirming what we said, with a report that “Corporate bankruptcies linked to the yen’s slide hit a new record in November, highlighting the strains on small and midsize companies as Prime Minister Shinzo Abe campaigns for re-election on his deflation-busting economic strategy.”

42 of the companies that failed in November cited the weakened currency as a contributing cause, bringing total bankruptcies associated with the yen so far this year to 301, almost triple that of the same period in 2013, according to a survey by Teikoku Databank Ltd. It said surging costs of imported food, metals and construction materials are squeezing small companies. The yen broke through 120 per dollar on Thursday in New York for the first time since 2007, as Abe’s handpicked Bank of Japan governor pumps a record amount of funds into the economy to stoke inflation. [..] “The business conditions for small and medium-size companies are severe,” said Norio Miyagawa, an economist at Mizuho Securities Co. “The more the yen weakens, the more the drawbacks will become evident, unless the benefits big companies are seeing spill over to consumption through an increase in wages.”

Read more …

“There is simply no way to escape the need for ever more debt once you get locked into this economic catch 22.”

• A Comprehensive Breakdown of America’s Economic House of Cards (Beversdorf)

If we face the worse case projection, let’s call it 200% debt to GDP by 2039, 10 yr Treasuries cannot be more than around 2% yield in order to remain within the historical debt service to GDP range. This is where things really break down. Because if we cannot entice lenders today at 2.5% or 3% interest with 70% debt to GDP there is simply no way lenders will be attracted at 2% with debt to GDP at 200%. So let’s think about what this means. Now the CBO budget projections predict deficits will increase forever after 2018. And we will see why this is true shortly. This will require massive amounts of debt over the next 25 years.

And if we don’t have willing lenders we’re back to monetizing most of that debt as we’ve done for the past several years. This means massive amounts of money printing. And so we put ourselves into a downward spiral of devaluation, which means inflation. Inflation perpetuates larger deficits as spending increases and even more money printing and so the downward spiral worsens. This will be made much worse by the winding down currently taking place of the petrodollar as demand for dollars will see significant declines. Alternatively to monetizing debt, we can raise interest rates to attract lenders to the market. Let’s say we get to the 20 year average of 7.5%. That means 7.5% of 200% of GDP, so 15% of GDP. Well, we’ve already stated that total tax revenues equate to about 17% of GDP.

This means total debt service will eat up virtually every bit of tax revenue, again leading to massive deficits so even more debt will be required to cover all other expenditures. That leads to more borrowing and worsening balance sheet metrics requiring even higher interest rates. And so we can see very quickly this alternative also leads to a downward spiral. Further, we see that under both scenarios of monetizing debt or incentivizing lenders, a debt driven economy will result in endlessly rising deficits requiring ever more debt. There is simply no way to escape the need for ever more debt once you get locked into this economic catch 22.

Read more …

And bond yields keep falling … A topsy turvy world, until it turns back around and right side up with a vengeance.

• S&P Wakes Up, Cuts Italy to One Notch Above Junk (WolfStreet)

Italy has one of the most troubled economies in the EU. Businesses and individuals are buckling under confiscatory taxes that everyone is feverishly trying to dodge. Banks are stuffed with non-performing loans that have jumped 20% from a year ago. The economy is crumbling under an immense burden of government debt that, unlike Japan, Italy cannot slough off the easy way by devaluing its own currency and stirring up a big bout of inflation – because it doesn’t have its own currency. Devaluation and inflation used to be Italy’s favorite methods of dealing with its economic problems. It went like this: Politicians made promises that they knew couldn’t be kept but that bought a lot of votes. When everything ground down as industries were getting hammered by competition from across the border, the government stirred up inflation, and then over some weekend, the lira would be devalued.

It was bitter medicine. It was painful. It didn’t even cure anything. It impoverished the people. But it temporarily made Italy competitive with its neighbors once again. Most recently, Italy devalued in 1990 and then again 1992 against the European Exchange Rate Mechanism, a predecessor to the euro. Having to take this bitter medicine time and again had made Italians the most eager to adopt the euro. The idea of a currency that would be out of reach of politicians and that would function as a reliable store of value, run by the Germans as if it were the mark, and in turn, keep politicians honest – all that seemed like paradise. But it just hasn’t kept Italian politicians honest. Only this time, their favorite tools are gone. The economy is now a mess.

Economic “growth” has been negative or zero for the last 13 quarters. And the country’s debt, no matter of how hard the government tries to fudge the numbers, just keeps ballooning. So, on Friday, ratings agency Standard & Poor’s woke up and cut Italy’s sovereign credit rating to BBB–, just one notch above junk, which is the dreaded BB. It cited the economy’s perennial shrinkage and lousy competitiveness. The deteriorating economic fundamentals and a political unwillingness to address the deficit were making the mountain of public debt increasingly unsustainable. The ECB has been busy doing “whatever it takes” to keep the cost of funding this wobbly construct as low as possible. It lowered its own benchmark interest rate to near zero. It instituted negative deposit rates, it’s contemplating a big round of QE, all to keep Italy (and some of its cohorts) afloat a little while longer.

Read more …

Wonder where they got the money.

• Russia’s Gazprom Receives Prepayment From Ukraine For Gas Supplies (Reuters)

Russian natural gas producer Gazprom said on Saturday it had received a prepayment of $378.22 million from Ukraine for natural gas supplies, paving the way for the first shipments to Kiev since Moscow cut supplies in June. Ukraine’s state energy firm, Naftogaz, said on Friday it had transferred the sum to Gazprom for December. A Gazprom spokesman confirmed the money had been received. In line with a deal signed by Naftogaz and Gazprom in October, flows to Ukraine from Russia, which were severed in a dispute over prices and debts, will resume within 48 hours from when the Russian firm receives the transfer. Naftogaz did not say how much gas it planned to buy, but earlier the energy ministry said this could be about 1 billion cubic metres. Russian news agencies also put the amount at 1 billion cubic metres on Saturday.

Read more …

Ron Paul has had it right all the way since this nonsense started. But the Putin bashing in the western media keeps running at a fever pitch.

• Reckless Congress ‘Declares War’ on Russia (Ron Paul)

Today the US House passed what I consider to be one of the worst pieces of legislation ever. H. Res. 758 was billed as a resolution “strongly condemning the actions of the Russian Federation, under President Vladimir Putin, which has carried out a policy of aggression against neighboring countries aimed at political and economic domination.” In fact, the bill was 16 pages of war propaganda that should have made even neocons blush, if they were capable of such a thing. These are the kinds of resolutions I have always watched closely in Congress, as what are billed as “harmless” statements of opinion often lead to sanctions and war. I remember in 1998 arguing strongly against the Iraq Liberation Act because, as I said at the time, I knew it would lead to war. I did not oppose the Act because I was an admirer of Saddam Hussein – just as now I am not an admirer of Putin or any foreign political leader – but rather because I knew then that another war against Iraq would not solve the problems and would probably make things worse.

We all know what happened next. That is why I can hardly believe they are getting away with it again, and this time with even higher stakes: provoking a war with Russia that could result in total destruction! If anyone thinks I am exaggerating about how bad this resolution really is, let me just offer a few examples from the legislation itself: The resolution (paragraph 3) accuses Russia of an invasion of Ukraine and condemns Russia’s violation of Ukrainian sovereignty. The statement is offered without any proof of such a thing. Surely with our sophisticated satellites that can read a license plate from space we should have video and pictures of this Russian invasion. None have been offered. As to Russia’s violation of Ukrainian sovereignty, why isn’t it a violation of Ukraine’s sovereignty for the US to participate in the overthrow of that country’s elected government as it did in February?

We have all heard the tapes of State Department officials plotting with the US Ambassador in Ukraine to overthrow the government. We heard US Assistant Secretary of State Victoria Nuland bragging that the US spent $5 billion on regime change in Ukraine. Why is that OK? The resolution (paragraph 11) accuses the people in east Ukraine of holding “fraudulent and illegal elections” in November. Why is it that every time elections do not produce the results desired by the US government they are called “illegal” and “fraudulent”? Aren’t the people of eastern Ukraine allowed self-determination? Isn’t that a basic human right? The resolution (paragraph 13) demands a withdrawal of Russia forces from Ukraine even though the US government has provided no evidence the Russian army was ever in Ukraine. This paragraph also urges the government in Kiev to resume military operations against the eastern regions seeking independence.

Read more …

Wise man. So no-one will listen.

• Chief Constable Warns Against ‘Drift Towards (Thought) Police State’ (Guardian)

The battle against extremism could lead to a “drift towards a police state” in which officers are turned into “thought police”, one of Britain’s most senior chief constables has warned. Sir Peter Fahy, chief constable of Greater Manchester, said police were being left to decide what is acceptable free speech as the efforts against radicalisation and a severe threat of terrorist attack intensify. It is politicians, academics and others in civil society who have to define what counts as extremist ideas, he says. Fahy serves as chief constable of Greater Manchester police and also has national counter-terrorism roles. He is vice-chair of the police’s terrorism committee and national lead on Prevent, the counter radicalisation strategy. He stressed he supported new counter-terrorism measures unveiled by the government last week, including bans on alleged extremist speakers from colleges.

Fahy said government, academics and civil society needed to decide where the line fell between free speech and extremism. Otherwise, he warned, it would be decided by the security establishment, so-called “securocrats”, including the security services, government and senior police chiefs like Fahy. Speaking to the Guardian, Fahy said: “If these issues [defining extremism] are left to securocrats then there is a danger of a drift to a police state”. He added: “I am a securocrat, it’s people like me, in the security services, people with a narrow responsibility for counter-terrorism. It is better for that to be defined by wider society and not securocrats.” Fahy said officers were also having to decide issues such as when do anti-gay or anti-women’s rights sentiments cross the line, as well as when radical Islam veers into extremism: “There is a danger of us being turned into a thought police,” he said. “This securocrat says we do not want to be in the space of policing thought or police defining what is extremism.”

Read more …

Der Spiegel has a go at this. Interesting in that it is a view from abroad, but not all that good.

• The Tragedy of America’s First Black President (Spiegel)

At the beginning of his term, Barack Obama likely never imagined that a new wave of violence would take place during his presidency. But it is not an accident. After all, he himself raised hopes that progress would be made. Yet after six years in office, little has changed for blacks in the US. Obama held the speech that raised the hopes of black Americans on March 18, 2008 as a candidate in Philadelphia. It was a reaction to comments made by his Chicago pastor and friend Jeremiah Wright, who had accused the US government of crimes against blacks. “God damn America … for killing innocent people,” he intoned from the pulpit in a sermon that threatened to derail Obama’s candidacy. “The profound mistake of Reverend Wright’s sermons is not that he spoke about racism in our society,” Obama said in his speech. “It’s that he spoke as if our society was static; as if no progress has been made; as if this country … is still irrevocably bound to a tragic past.”

Obama was referring to a time when blacks were forced to serve whites as slaves; a time when they weren’t even second-class citizens, instead being treated as commodities to be raised and sold at market. But he also was referring to the decades leading up to the 1960s when blacks were not allowed to use the same park benches as whites and were forced to sit at the back of the bus. In that speech, Obama promised to create “a more perfect union,” in reference to the preamble of the US Constitution. He sought to finally fulfill the promise made 50 years earlier by fellow Democrat Lyndon B. Johnson. In remarks at the signing of the Civil Rights Bill on July 2, 1964, Johnson said he hoped to “eliminate the last vestiges of injustice in our beloved country” and to “close the springs of racial poison.” Many observers believe that Obama’s speech was a decisive factor in his becoming the first black president in American history half a year later. It is still widely considered to be one of his best.

But the final push to realize Johnson’s dream has still not taken place. The situation today gives the impression that African-Americans are adequately represented “without giving them the possibility to really take advantage” of that representation, says Kareem Crayton, a law professor at the University of North Carolina. Eduardo Bonilla-Silva, sociology professor at Duke University, agrees. “Having a black president doesn’t mean much in our day-to-day lives.” [..] “It’s the age of Obama, and yet civil rights have gone backwards. What went wrong? asked the New Republic on its cover in August. The issue, which appeared after Michael Brown’s death in Ferguson, spoke of a “new racism.” Indeed, the kinds of deadly events that took place in Ferguson and Cleveland have now convinced many blacks that it wasn’t Obama who was right back in the spring of 2008. Rather, it was his angry pastor, Jeremiah Wright.

Read more …

Attempts to put numbers on this don’t strike me as useful, they’ll just change all the time anyway. It seems far more important to make clear that this is not about money.

• Adapting To A Warmer Climate To Cost Three Times As Much As Thought (Guardian)

Adapting to a warmer world will cost hundreds of billions of dollars and up to three times as much as previous estimates, even if global climate talks manage to keep temperature rises below dangerous levels, warns a report by the UN. The first United Nations Environment Programme (Unep) ‘Adaptation Gap Report’ shows a significant funding gap after 2020 unless more funds from rich countries are pumped in to helping developing nations adapt to the droughts, flooding and heatwaves expected to accompany climate change. “The report provides a powerful reminder that the potential cost of inaction carries a real price tag. Debating the economics of our response to climate change must become more honest,” said Achim Steiner, Unep’s executive director, as ministers from nearly 200 countries prepare to join the high level segment of UN climate talks in Lima, Peru, next week.

“We owe it to ourselves but also to the next generation, as it is they who will have to foot the bill.” Without further action on cutting greenhouse gas emissions, the report warns, the cost of adaptation will soar even further as wider and more expensive action is needed to protect communities from the extreme weather brought about by climate change. Delegates from the Alliance of Small Islands States at the UN climate conference in Lima, which opened on Monday, are already feeling those impacts. They have appealed for adaptation funds for “loss and damage” as their homelands’ very existence is threatened by rising sea levels. “We’re keen to see the implementation of the Green Climate Fund – we’re still waiting,” Netatua Pelesikoti, director of the climate change office at the Secretariat of the Pacific Environment Programme, referring to a fund set up to hope poorer countries cope with global warming.

“The trickle down to each government in the Pacific is very slow but we can’t abandon the process at this stage,” said the Tongan delegate. Rich countries have pledged $9.7bn to the Green Climate Fund but the figure is well short of the minimum target of $100bn each year by 2020. The Adaptation Gap Report said adaptation costs could climb to $150bn by 2025/2030 and $250-500bn per year by 2050, even based on the assumption that emissions are cut to keep temperature rises below rises of 2C above pre-industrial levels, as governments have previously agreed. However, if emissions continue rising at their current rate – which would lead to temperature rises well above 2C – adaptation costs could hit double the worst-case figures, the report warned.

Read more …

We need a lot more people like this man, or we will see the twilight of Africa’s wildlife in our lifetimes.

• One Man’s 40-Year Fight Against Africa’s Ivory Poachers (John Vidal)

Most tourists who walk into Hong Kong’s many licensed ivory stores and carving factories, browse the displays of statues, pendants and jewellery and accept the official assurances that it all comes from sustainable sources. But not the reserved middle-aged man who last month went into a Kowloon shop. What started with a few polite questions about the provenance of the objects on show turned swiftly to confrontation. Within minutes he was furious and the owner had threatened to call the police. Having spent nearly 40 years trying to protect elephants and other African wildlife from poachers, Richard Bonham says he was shocked to see, for the first time, the Hong Kong stores where most of the world’s ivory ends up. The statistics, he says, show that Africa’s elephant population has crashed from 1.3 million in 1979 to around 400,000 today.

In the last three years alone, around 100,000 elephants have been killed by poachers and more are now being shot than are being born. Rhinos are on the edge too. For a Hong Kong shopkeeper, each trinket is something to profit from. But for Bonham, they tell a story of cruelty, desperation and exploitation. “I wanted to see for myself. Yes, I was angry. There’s no other word for it. I saw the shops with huge stocks that, despite the import ban, are not dwindling. Yet the [Hong Kong] government has chosen not to recognise or address the lack of legitimacy of their trade. “The experience of seeing the end destination of ivory was important to me. It completed the circle from seeing elephant herds, stampeding in terror at the scent of man, from seeing the blood-soaked soil around lifeless carcasses to whimsical trinkets in glass display cases.”

In London last week to receive the Prince William lifetime achievement award conservation, he produced a Hong Kong government document that showed how the former British colony holds over 100 tonnes of ivory stocks despite a 25-year-old import ban that was meant to eliminate all stocks 10 years ago. It is proof, he says, that the Hong Kong government knows that its traders have been topping up their stocks with “black”, or illegal ivory from poached elephants, yet do nothing. Back in Africa, he said, the trade ends in carnage and impoverished environments. “I have watched elephants in the Selous game reserve in Tanzania drop from over 100,000 animals to probably less than 10,000 today and that number is still falling. During a one-hour drift down the Rufiji river three years ago I was seeing up to six different elephant herds coming down to drink.

Now I see none – they’ve gone, back to dust and into the African soil, with their ivory shipped off to distant lands. There is a silence on that river that will take decades to return – if at all.” But despite the statistics, he says he is upbeat for conservation, at least in the Amboseli national park in Kenya, where he lives among the Maasai. “It’s not all bad news, it’s not too late. We have got poaching there more or less under control. We are seeing elephants on the increase and lions, that 15 years ago where on the verge of local extinction, have increased by 300%. But probably more importantly we are seeing local communities setting aside land for conservancies and wildlife.

Read more …

Jobs, Shale, Debt and Minsky

Dec 052014
 
 December 5, 2014  Posted by at 8:29 pm Finance Tagged with: , , , , ,  5 Responses »


Arthur Rothstein President Roosevelt tours drought area, near Bismarck, North Dakota Aug 1936

OK, I don’t see a whole lot of comprehension out there, so let’s try and link the obvious: employment to shale to plummeting oil prices to the debt the shale industry was built on (and which is vanishing). I know, people look at the US jobs report today, and at the stock exchanges (Europe up some 2% across the board), and think salvation has landed on their doorstep, but the true story really is very different.

The EU markets are up because of US job numbers + the expectation that Draghi will launch a broad QE in January. But US jobs are far less sunny than meets the eye at first glance, and the Bundesbank will not all of a sudden do a 180º on ECB stimulus options. Ergo: a lot of European investors are set to lose a lot of money.

Anyone notice how quiet Angela Merkel has become about the QE debate? That’s because she doesn’t want to be caught stuck in a losing corner. Even if the Bundesbank would give in to Draghi, and chances are close to zero, there would be multiple court cases in Deutschland against that decision, and chances are slim the spend spend side would win them all. That’s the sort of quicksand an incumbent leader like Merkel wants to avoid at all cost.

But let’s leave Europe to cook itself, and its own goose too. What’s happening stateside is more important today. First, Marc Chandler has a good way of putting what I have said for as long as oil prices started testing ever deeper seas: the danger to the industry is not even so much falling prices, it’s financing both existing and future endeavors. Shale is a leveraged Ponzi, that’s its most urgent problem. Even if shale could break even at low prices, financiers and investors would still leave the building.

Both shale oil and gas have two big problems: 1) projects are based on highly optimistic returns, and 2) they are financed with very large and leveraged debt loads. With WTI prices now at $66 a barrel, and the first Bakken prices below $50 a barrel having been signaled, the entire industry starts resembling a house of cards, a game of dominoes and/or a pyramid shell (pick your favorite) more by the day. Chandler:

This Is Oil’s ‘Minsky Moment’

[..] Marc Chandler says the energy sector has just suffered its own Minsky moment. And while he doesn’t expect it to take down the stock market, the slide in oil could have a serious impact on the high-yield bond market. Minsky moment is a term coined by Pimco economist Paul McCulley in 1998, and it refers to a point when a period of rapid growth and risk-taking leads to a sudden turn lower and a crisis. Chandler, global head of markets strategy at Brown Brothers Harriman, says that is precisely what is happening in crude oil.

“Many people a couple years ago, a year ago, were saying that oil prices could only go up – ‘we’re in peak oil’ – meaning that we’re running out of the stuff. So a lot of things were leveraged based on oil prices that can only go up. Sort of like house prices—’they can only go up.’ So what happened is, because people held this as a deep conviction, they leveraged up,” Chandler said.” [..] “The big risk now to our shale is not going to be that the price of oil drops so far that it’s not going to be profitable,” he said. “The weakness, the Achilles’ heel, is that they don’t get the cheap funding anymore.”

Even Nature magazine this week gave it a shot, and tried to lend scientific credibility to a certain view of shale. Here’s the editorial:

The Uncertain Dash For Gas

[..] The International Energy Agency projected in November that global production of shale gas would more than triple between 2012 and 2040, as countries such as China ramp up fracking of their own shale formations.

[..] Academic journals are filled with earnest projections about future energy dynamics, which usually turn out to be wildly inaccurate. Even worse, governments and companies wager billions of dollars on dubious bets. This matters because investment begets further investment. As the pipework and pumps go in, momentum builds. This is what economists call technology lock-in.

[..] Nature has obtained detailed US Energy Information Administration (EIA) forecasts of production from the nation’s biggest shale-gas production sites. These forecasts matter because they feed into decisions on US energy policy made at the highest levels. Crucially, they are much higher than the best independent academic estimates. The conclusion is that the US government and much of the energy industry may be vastly overestimating how much natural gas the United States will produce in the coming decades.

[..] The EIA projects that production will rise by more than 50% over the next quarter of a century, and perhaps beyond, with shale formations supplying much of that increase. But such optimism contrasts with forecasts developed by a team of specialists at the University of Texas, which is analysing the geological conditions using data at much higher resolution than the EIA’s.

The Texas team projects that gas production from four of the most productive formations will peak in the coming years and then quickly decline. If that pattern holds for other formations that the team has not yet analysed, it could mean much less natural gas in the United States future.

And then an article:

Natural Gas: The Fracking Fallacy

When US President Barack Obama talks about the future, he foresees a thriving US economy fuelled to a large degree by vast amounts of natural gas pouring from domestic wells. “We have a supply of natural gas that can last America nearly 100 years,” he declared in his 2012 State of the Union address. [..]

Over the next 20 years, US industry and electricity producers are expected to invest hundreds of billions of dollars in new plants that rely on natural gas. And billions more dollars are pouring into the construction of export facilities that will enable the United States to ship liquefied natural gas to Europe, Asia and South America.

All of those investments are based on the expectation that US gas production will climb for decades, in line with the official forecasts by the US Energy Information Administration (EIA). As agency director Adam Sieminski put it last year: “For natural gas, the EIA has no doubt at all that production can continue to grow all the way out to 2040.”

But a careful examination of the assumptions behind such bullish forecasts suggests that they may be overly optimistic, in part because the government’s predictions rely on coarse-grained studies of major shale formations, or plays. Now, researchers are analysing those formations in much greater detail and are issuing more-conservative forecasts. They calculate that such formations have relatively small ‘sweet spots’ where it will be profitable to extract gas.

The results are “bad news”, says Tad Patzek, head of the University of Texas at Austin’s department of petroleum and geosystems engineering, and a member of the team that is conducting the in-depth analyses. With companies trying to extract shale gas as fast as possible and export significant quantities, he argues, “we’re setting ourselves up for a major fiasco”.

The scientific ring to it is commendable, but this misses quite a few things. They cite David Hughes, but leave out the work of Rune Likvern, without whom in my opinion no true – scientific or not – view of the shale industry is complete. But okay, they tried, in their own way, and their conclusions may be a bit softened, but they’re still miles apart from those of either the industry’s PR, or the EIA.

And then we move to the next link: that between shale and jobs. Because that’s where falling oil prices start to go from joy for the whole family to something entirely different.

What happens if the US shale industry crumbles under the weight of its own leverage? Most people will probably think: we’ll just start buying from that oversupplied world market again. But it’s not that easy, that leaves out one big issue. American jobs.

And we can take it straight from there to today’s hosannah heysannah BLS report. Which, however, has issues that don’t show up at the surface. Tyler Durden:

Full-Time Jobs Down 150K, Participation Rate Remains At 35 Year Lows

While the seasonally-adjusted headline Establishment Survey payroll print reported by the BLS moments ago may be indicative of an economy which the Fed will soon have to temper in an attempt to cool down, a closer read of the November payrolls report shows several other things that were not quite as rosy. First, the Household Survey was nowhere close to confirming the Establishment Survey data, suggesting jobs rose only by 4K from 147,283K to 147,287K, and furthermore, the breakdown was skewed fully in favor of Part-Time jobs, which rose by 77K while Full-Time jobs declined by 150K.

And then for those keeping tabs on the composition of the labor force, the same adverse trends indicated over the past 4 years have continued, with the participation rate remaining flat at 62.8%, essentially the lowest print since 1978, driven by a 69K worker increase in people not in the labor force.

So according to the BLS Household Survey, the US lost 150,000 jobs, while the Establishment Survey, prepared by the same BLS, shows a gain of 321,000 jobs. Yay! pARty! But we’ve been familiar with all the questions surrounding the jobs reports for a long time, so that’s not all that interesting anymore.

Still, when you see that again most of the jobs that were allegedly created are low paid service jobs, and that wages are not going anywhere, you have to wonder what is really happening. Well, this. The vast majority of new US jobs since 2008/9 have come from energy- and related industries, which makes them a dangerously endangered species now oil prices or down 40% and falling.

Tyler Durden ran the following on Wednesday, and I think this is very relevant today:

Jobs: Shale States vs Non-Shale States

Consider: lower oil prices unequivocally “make everyone better off”, Right? Wrong. First: new oil well permits collapse 40% in November; why is this an issue? Because since December 2007, or roughly the start of the global depression, shale oil states have added 1.36 million jobs while non-shale states have lost 424,000 jobs.

The ripple effects are everywhere. If you think about the role of oil in your life, it is not only the primary source of many of our fuels, but is also critical to our lubricants, chemicals, synthetic fibers, pharmaceuticals, plastics, and many other items we come into contact with every day. The industry supports almost 1.3 million jobs in manufacturing alone and is responsible for almost $1.2 trillion in annual gross domestic product. If you think about the law, accounting, and engineering firms that serve the industry, the pipe, drilling equipment, and other manufactured goods that it requires, and the large payrolls and their effects on consumer spending, you will begin to get a picture of the enormity of the industry.

Simply put, this means 9.3 million, or 93% of the 10 million jobs created since the recession/depression trough, are energy related.

The links above, jobs to shale to oil prices, are intended to give people an idea of what’s in store if oil prices stay where they are or fall more. It’s 4 to 12 for US shale, and its saving grace is nowhere to be seen. And if 93% of all new American jobs since the recession, even if they are burgerflipping ones, come from the oil and gas industry, what’s going to become of either of the BLS reports?

I’ve been saying for weeks that lower oil prices would not be a boon but a scourge for the US economy, for several different reasons, and this is a big one. The losses to investors, the restructurings and bankruptcies, and perhaps even the bailouts, are a very much interconnected and crosslinked other. There’s no resilience – left – in a system like this, it bets all on red, and that makes it terribly brittle.

Here Is Oil’s Next Leg Down

Dec 042014
 
 December 4, 2014  Posted by at 2:28 pm Finance Tagged with: , , , , , , , ,  3 Responses »


DPC Pittsburgh by Night 1907

News reports about developments in the oil markets are coming fast and furious, and none of them indicate any stabilization, let alone rise, in oil prices. Quite the contrary. There are very large amounts of extra barrels flowing into the market, which is just, as one analyst puts it “even more oil flooding the market that nobody needs.” Saudi Arabia looks set to battle for sheer market share, even if it sends strangely contradictory messages.

While the US shale industry aggressively tries to convey an attitude based on confidence and breakeven prices that suddenly are claimed to be much lower than what seemed common knowledge until recently. Bloomberg says today that most shale is profitable even at $25 a barrel, and we might want some independent confirmation and/or analysis of that. Just hearing the industry claim it seems a bit flimsy; they have plenty reasons to paint the picture as rosy as they can get away with.

Last night, the Wall Street Journal reported on a Saudi price cut for the US, and a simultaneous price hike for Asia.

Saudi Price Cut Upends Oil Market

Oil prices tumbled to their lowest point in more than two years after Saudi Arabia unexpectedly cut prices for crude sold to the U.S., likely paving the way for further declines and adding to pressure on American energy producers. The decision by the world’s largest oil exporter sent the Dow industrials into negative territory for the day amid concerns about the pace of global growth. The move heightened worries over the resilience of the U.S. oil industry, which has expanded rapidly in recent years.

But that growth, driven largely by new production technology used to extract oil from shale-rock formations, has never been tested by a prolonged slump in prices. While lower crude prices generally help consumers by reducing the amount they pay for gasoline, analysts said falling energy prices will squeeze profit margins at many U.S. energy companies, particularly smaller firms or those with large debt loads. Meanwhile, Saudi Arabia raised the prices for its oil in other locations, including Asia, where the country had cut its prices for four consecutive months.

Which led Barron’s to speculate on energy ETFs.

Saudi Oil Price Cut Dings Energy ETFs

Saudi Arabia’s unexpected price cut to oil it ships to the U.S. is roiling the market for crude and squeezing a host of exchange-traded funds that hold energy stocks. The United States Oil Fund (USO) sinks 2.2% to $$29.12 in early trading, while iPath S&P GSCI Crude Oil Total Return Index ETN (OIL) falls 2.3%. West Texas Intermediate crude futures dropped to the lowest level in three years, recently down 2.1% to $76.77 a barrel.

Oil futures prices have tumbled by about one-quarter in recent months in a world awash with oil after production increases in the U.S. and, more recently, Libya. For weeks, speculation has swirled that the Saudis might be keen to hold prices low in order to keep a tight grip on market share and choke off competitors. Monday’s move by Saudi Arabia to cut prices for crude exports to U.S. customers, while at the same time a raising the prices it charges to countries in Asia, provides more evidence that the Saudis are bent on quashing competition.

But then just now Reuters says ‘recalled’ an email that detailed the cuts:

Saudi Aramco Recalls Email Showing Steep Oil Price Cuts

Saudi Aramco said it was recalling an email it sent on Thursday which had announced a sharp drop in January official selling oil prices for Asia and the United States. Official Selling Prices (OSPs) for oil from Saudi Arabia, OPEC’s largest producer and exporter, have been eagerly watched by the market in recent months for indications of the kingdom’s oil policies.

Some analysts have said sharp drops in OSPs over the past months are an indication the kingdom is fighting for market share with other producers, but others have said the OSPs only reflect the market and are a backward-looking rather than a forward-looking indicator.

“(The) Saudis making it clear they don’t want to lose market share,” Richard Mallinson, analyst at consultancy Energy Aspects told Reuters Global Oil Forum before Aramco recalled prices. It was not clear whether Aramco was recalling all prices or only some prices, or what changes if any had been made. It was also unclear whether and when a new email might follow.

The email, which was later recalled, showed Aramco had cut its January price for its Arab Light grade for Asian customers by $1.90 a barrel from December to a discount of $2 a barrel to the Oman/Dubai average. The Arab Light OSP to the United States was set at a premium of $0.90 a barrel to the Argus Sour Crude Index for January, down 70 cents from the previous month. The email also said Arab Light OSPs to Northwest Europe were raised by 20 cents for January from the previous month to a discount of $3.15 a barrel to the Brent Weighted Average.

That $24 a barrel breakeven price for shale contrasts somewhat with what Abhishek Deshpande, lead oil analyst at Natixis, says about Saudi oil: “..because of how Saudi Arabia uses its oil well to support its entire economy, the country’s budget calls for $90 a barrel to break even, despite that the cost of production is closer to $30.”

Collapse Of Oil Prices Leads World Economy Into Trouble

OPEC, the largest crude-oil cartel in the world, wanted others to feel its pain as oil prices collapsed. “OPEC wanted … to cut off production … and they wanted other non-OPEC [countries], especially in the US and Canada, to feel the pinch they are feeling,” says Abhishek Deshpande, lead oil analyst at Natixis. But in its rush to influence others, OPEC ended up hurting everyone in the process – including itself. Low oil prices, pushed down further by OPEC’s meeting last week,have impacted world economies, energy stocks, and several currencies. From the fate of the Russian rouble to Venezuelan deficits to American mutual funds full of Exxon or Chevron stock, OPEC’s decision was the shot heard round the world for troubled commodities.

So how low could oil go? Standard Chartered analysts expect a “chaotic” quarter ahead, saying OPEC’s decision to keep the production target unchanged is “extremely negative for oil prices for 2015”. The bank slashed its 2015 average price forecast for Brent crude oil by $16 a barrel to $85. Other forecasts are lower. Citi Research estimated an average 2015 price of $72 for WTI and $80 for ICE Brent. Natixis’s Deshpande said their average 2015 Brent forecast is around $74, with WTI around $69. These prices have real-world effects on world economies. Everyone in the sector is smarting. Deshpande said because of how Saudi Arabia uses its oil well to support its entire economy, the country’s budget calls for $90 a barrel to break even, despite that the cost of production is closer to $30.

Other OPEC members have even higher budgetary breakevens. Saudi Arabia is sitting on a “war chest” of money it stockpiled when prices were high, Deshpande said. Citi analysts said Saudi Arabia has about $800bn in cash reserves. Venezuela, on the other hand, is a prime example of a country squandering its riches. Citi said for every $10 drop in oil prices Venezuela loses about $7.5bn in revenues. “Already weak fiscally, this should call for reducing energy subsidies. But domestic politics including the 2015 election makes this nearly impossible,” they said. OPEC countries as a whole could lose $200bn in revenue if Brent prices stay at $80, which is about $600 per capita annually, Citi said.

And that in turn makes you wonder how the Saudis feel about Bakken shale oil being sold at $49.69 a barrel.

Sub-$50 Oil Surfaces in North Dakota As Regional Discounts Swell

Oil market analysts are debating if oil will fall to $50. In North Dakota, prices are already there. Crude sold at the wellhead in the Bakken shale region in North Dakota fell to $49.69 a barrel on Nov. 28, according to the marketing arm of Plains All American Pipeline LP. That’s down 47% from this year’s peak in June, and 29% less than the $70.15 paid for Brent, the global benchmark. The cheaper price for North Dakota crude underscores how geographic and logistical hurdles can amplify the stress that plunging futures prices have put on drillers in new shale plays that have helped push U.S. oil production to the highest level in 31 years. Other booming areas such as the Niobrara in Colorado and the Permian in Texas have also seen large discounts to Brent and U.S. benchmark West Texas Intermediate.

“You have gathering fees, trucking, terminaling, pipeline and rail fees,” Andy Lipow, president of Lipow Oil Associates LLC in Houston, said Dec. 2. “If you’re selling at the wellhead, you’re getting a very low number relative to WTI.” Discounted prices at the wellhead have been exacerbated by a 39% drop in Brent futures since June 19 to $69.92 a barrel yesterday. Prices have fallen as global demand growth fails to keep pace with surging oil production from the U.S. and Canada. Much of that new output is coming from areas that are facing steep discounts. Bakken crude was posted at $50.44 a barrel Dec. 2. Crude from Colorado’s Niobrara shale was priced at $54.55, according to Plains. Eagle Ford crude cost $63.25, and oil from the Oklahoma panhandle was $58.25.

American consumers probably still feel good about developments like ever lower prices at the pump, but they should be careful what they wish for.

First U.S. Gas Station Drops Below $2 a Gallon

$2 gasoline is back in the U.S. An Oncue Express station in Oklahoma City was selling the motor fuel for $1.99 a gallon today, becoming the first one to drop below $2 in the U.S. since July 30, 2010, Patrick DeHaan, a senior petroleum analyst at GasBuddy Organization Inc., said by e-mail from Chicago. “We knew when we saw crude oil prices drop last week that we’d break the $2 threshold pretty soon, but we didn’t know if it would happen in South Carolina, Texas, Missouri or Oklahoma,” said DeHaan, senior petroleum analyst for GasBuddy. “Today’s national average, $2.74, now makes the current price we pay a whopping 51 cents per gallon less than what we paid a year ago.”

Gasoline is sliding after OPEC decided last week not to cut production amid a global glut of oil that has already dragged international oil prices down by 37% in the past five months. Pump prices have fallen by almost a dollar since reaching this year’s high on April 26. 15% of the nation’s gas stations are selling fuel below $2.50 a gallon, “and it may not be long before others join OnCue Express in that exclusive club that’s below $2,” said Gregg Laskoski, another senior petroleum analyst with GasBuddy. Retail gasoline averaged $2.746 a gallon in the U.S. yesterday, data compiled by AAA show. Stations will cut prices by another 15 to 20 cents a gallon as they catch up to the plunge in oil, AAA’s Michael Green said.

And here’s the reason to be careful with those wishes: job losses.

Norway Seeks to Temper Its Oil Addiction After OPEC Price Shock

After the biggest slump in oil prices since the start of the global financial crisis, the prime minister of Norway says western Europe’s largest crude producer must become less reliant on its fossil fuels. “We need new industries, a new tax system and a better climate for investment in Norway,” Prime Minister Erna Solberg said yesterday in an interview in Oslo. The comments follow threats from SAFE, one of Norway’s three main oil unions, which warned this week it will respond with industrial action unless the government acts to stem job losses. Solberg said that far from triggering government support, plunging oil prices should be used by the industry as an opportunity to improve competitiveness.

A 39% slump in oil prices since June is killing jobs in Norway, which relies on fossil fuels to generate more than one-fifth of its gross domestic product. In the past few months, Norway has lost about 7,000 oil jobs and SAFE said this week it was up to the government to reverse that trend. Solberg says protecting oil jobs will ultimately make it harder for the economy to wean itself off its commodities reliance. “We need to lower our cost of production in the development of new fields,” she said. “Oil production is not going to rise, it will slowly fall in Norway.”

And may I volunteer as an aside that Norway’s intentions to become less reliant on oil are perhaps a little past their best before date? They have this large sovereign oil fund, but never thought of using it to diversify their economy?

Perhaps the numero uno reason that oil prices will keep sinking is production becoming available in the Middle East. And in North Africa, where Libya recently reportedly brought an extra 800,000 barrels/day to the fray. Now it’s Iraq’s turn. Bloomberg put 300,000 barrels in its headline, only to say this in the article: “As much as 300,000 barrels a day of Kirkuk blend will be shipped through the Turkish pipeline under the terms of the deal, according to the KRG. Another 250,000 barrels daily of oil produced in the Kurdish region will be exported through the same route”. I corrected the headline.

There Are 550,000 Iraqi Barrels Signaling Oil Glut Will Deepen

Not only is OPEC refraining from cutting oil output to stem the five-month plunge in prices, it’s adding to the supply glut. Just five days after OPEC decided to maintain production levels, Iraq, the group’s second-biggest member, inked an export deal with the Kurds that may add about 300,000 barrels a day to world supplies. In a global market that neighboring Kuwait estimates is facing a daily oversupply of 1.8 million barrels, the accord stands to deepen crude’s 38% plunge since late June. Or as Carsten Fritsch, analyst at Commerzbank, put it: There’ll be “even more oil flooding the market that nobody needs.”

Benchmark Brent crude slumped immediately after the deal was signed Dec. 2 in Baghdad, dropping 2.8% to $70.54 a barrel. Prices, which slipped 0.9% yesterday to reach the lowest since 2010, were at $70.38 at 1:30 p.m. Singapore time today. Futures are down about 10% since OPEC’s Nov. 27 decision. The agreement seeks to end months of feuding between the Kurds and officials in Iraq over the right to crude proceeds, a dispute that has hindered their joint effort to push back Islamic State militants. The deal allows for as much as 550,000 barrels a day of crude to be shipped by pipeline from northern Iraq to the Mediterranean port of Ceyhan in Turkey, according to the regional government. The Kurds were already exporting about 220,000 barrels daily, according to data compiled by Bloomberg.

The Kurdish Regional Government expanded its control of Iraq’s oil resources in June when it deployed forces to defend Kirkuk, the largest field in the north of the country, from Islamic militants. The Kurds have been shipping crude through Turkey in defiance of the central government, which took legal action to block the sales, leaving some tankers loaded with Kurdish oil stranded at sea. As much as 300,000 barrels a day of Kirkuk blend will be shipped through the Turkish pipeline under the terms of the deal, according to the KRG. Another 250,000 barrels daily of oil produced in the Kurdish region will be exported through the same route, according to the government in Baghdad.

What it will all lead to, and increasingly so as prices fail to recover and instead keep falling, is the disappearance and withdrawal of financing in the oil industry, especially the insanely overleveraged shale patches. The financiers will need a little more time to consolidate, minimize and liquidate their losses, but they will get up and leave. So all the talk of growing the industry sounds just a tad south of fully credible. This is an industry that lost over $100 billion a year for at least three years running, i.e. didn’t produce sufficient revenue even at $100 a barrel, and at $60 they would be fine, without much of their previous external financing?

Energy Junk-Debt Deals Postponed as Falling Oil Saps Demand

Two energy-related companies are postponing financings after a plunge in oil prices made their high-yield, high-risk debt more difficult to sell. New Atlas, a newly formed unit of oil and gas producer Atlas Energy Group, put on hold a $155 million loan it was seeking to refinance debt, according to five people with knowledge of the deal, who asked not be identified because the decision is private. EnTrans International, a manufacturer of equipment used in fracking, delayed selling a $250 million bond, according to three other people with knowledge of that transaction. Investors in bonds of junk-rated energy companies are facing losses of more than $11 billion as oil prices dropped to a five-year-low of $63.72 a barrel this week. This is deepening concern that the riskiest oil explorers won’t be able to meet their obligations, and sending their borrowing costs to the highest since 2010.

More than half of Cleveland, Tennessee-based EnTrans’s revenue comes from equipment sales to the hydraulic fracturing and the energy industry, Moody’s Investors Service said in a Nov. 17 report. The notes, which were being arranged by Credit Suisse, would have been used to refinance debt. Gary Riley, chief executive officer at EnTrans International, said yesterday in an e-mail commenting on the deal status that “the decision to defer or go forward has not been made.” Riley didn’t respond to questions seeking comment today. Deutsche Bank and Citigroup were managing New Atlas’s financing and had scheduled a meeting with lenders for this morning, according to data compiled by Bloomberg.

Perhaps those sub-$50 Bakken prices tell us pretty much where global prices are ahead. And then we’ll take it from there. With 1.8 million barrels “that nobody needs” added to the shale industries growth intentions, where can prices go but down, unless someone starts a big war somewhere? Yesterday’s news that US new oil and gas well permits were off 40% last month may signal where the future of shale is really located.

But oil is a field that knows a lot of inertia, long term contracts, future contracts, so changes come with a time lag. It’s also a field increasingly inhabited by desperate producers and government leaders, who wake up screaming in the middle of the night from dreaming about their heads impaled on stakes along desert roads.

Debt Rattle December 2 2014

Dec 022014
 
 December 2, 2014  Posted by at 12:13 pm Finance Tagged with: , , , , , , ,  3 Responses »


‘Daly’ Store, Manning, South Carolina July 1941

• Canadian Natural Resources Chairman Sees Oil Touching $30 A Barrel (NatPost)
• Banks’ $650 Billion Bet On Oil Backfires As Brent Prices Slump (Telegraph)
• Billionaire Shale Pioneer Sees Drilling Slowdown on Oil Price Drop (Bloomberg)
• US Shale Crude Exports To Asia Grind To Halt On Flood Of Mideast Oil (Reuters)
• October Oil Shale Permits Drop 15%: Is The Slowdown Here? (Reuters)
• As Crude Tumbles, Oil Drillers Seek To Temporarily Idle More Rigs (Reuters)
• For Oil Companies, It’s Survival Of The Fittest (MarketWatch)
• Beware the Vulnerable Oil Debt That Lurks in Your Junk-Bond ETFs (Bloomberg)
• Oil Investors May Be Running Off a Cliff They Can’t See (BW)
• Bank Of England Investigating Risk To Banks Of ‘Carbon Bubble’ (Guardian)
• Fed’s Dudley Says Oil Price Decline Will Strengthen US Recovery (Bloomberg)
• Why The Commodities Selloff May Continue In 2015 (CNBC)
• Europe Debates Third Bailout Package for Greece (Spiegel)
• European Banks Seen Afflicted by $82 Billion Capital Gap (Bloomberg)
• Leak at Federal Reserve Revealed Confidential Bond-Buying Details (ProPublica)
• The Return Of Currency Wars Will Strengthen The US Dollar Even More (Roubini)
• Japanese Workers See Wages Drop for 16th Month (Bloomberg)
• Putin: EU Stance Forces Russia To Withdraw From South Stream Project (RT)
• Russia Intervenes As Crumbling Ruble Echoes 1998 Debt Crisis (Guardian)
• Russia Says NATO Destabilizes North Europe, Aid Draws Ire (Bloomberg)
• North Korea Refuses To Deny Sony Pictures Cyber-Attack (BBC)
• Kim Dotcom Avoids Jail After Bail Hearing (NZ Herald)

The threat here is not about the oil, it’s about the financing. Junk bonds, loans, oil stocks etc. The whole industry is leveraged up to its neck. It’s an extremely brittle system that can’t take shocks.

• Canadian Natural Resources Chairman Sees Oil Touching $30 A Barrel (NatPost)

Canada’s oil industry faces a year of “tough slugging,” including the deferment of many projects, as oil prices collapse to as little as US$30 a barrel then likely stabilize around US$70 to US$75 a barrel, oil entrepreneur Murray Edwards predicted Friday. Because of its high costs, the Canadian sector will be impacted more than many oil-producing jurisdictions around the world by OPEC’s decision Thursday to not cut oil production, said Mr. Edwards, the chairman of Canadian Natural Resources and one of Canada’s single biggest oil investors. Prices could spike down to $30, $40. It got down to $35 in 2008, for a very short period of time “On a given day you can have market fluctuations where prices fluctuate far more than the underlying economic value of the unit,” Mr. Edwards told reporters on the sidelines of a business forum here.

“Prices could spike down to $30, $40. It got down to $35 in 2008, for a very short period of time,” he said. “I don’t believe that if it spikes down that low, that it will stay that low for long, because you will see increased demand and supply respond. “The better question is where does it stabilize, and that $70-$75 area is probably not a bad place to stabilize for a period of time until you get more balance in term of growth in demand and some supply response.” Mr. Edwards said industry projects that are already under way, particularly oil sands projects with a long-term horizon and capital already invested, will likely continue. But others will be shelved until there is more clarity around future oil prices. There will also be a slowdown in conventional oil projects, particularly those that tend to produce a lot at the front end, he predicted.

Weak oil prices will force the industry to refocus and look at new way of doing things to cut costs, he said. Canadian Natural Resources, one of Canada’s top oil and gas producers, will adjust its capital spending next year to reflect weaker oil prices, he said. The company recently approved an $8.5-billion capital budget for 2015, including $2-billion in flexible capital, based on oil averaging around US$81 for West Texas Intermediate. Overtime, markets will find a new balance as low oil prices stimulate demand. “Right now we have more supply than we have demand for a period of time,” he said. “The market is now going to find a price which best reflects what it costs to produce a barrel of oil … nothing solves low prices like low prices.”

Read more …

” .. a collapse in the oil price is far more dangerous for the banks than it would have been only a few years ago.”

• Banks’ $650 Billion Bet On Oil Backfires As Brent Prices Slump (Telegraph)

British banks face losses of more than £2bn as risky loans to the oil and gas industry go sour amid the plummeting price of crude. Banks have piled into the sector over the last three years, with oil and gas accounting for £11 of every £100 of high-yield debt on the back of America’s booming shale industry. However, oil’s precipitous decline since June has left many of the lenders looking at heavy losses. Brent Crude prices fell to a low of $67.53 yesterday, the lowest level for almost five years. The price rebounded by around 2pc as of Monday afternoon but remains almost 40pc down since June. Last week, Opec leaders decided against restricting output in an attempt to squeeze North America’s shale producers – many of whom have borrowed heavily to invest. Although much of the banks’ exposure will have been hedged off, Barclays, RBS, HSBC and Standard Chartered could face a combined $3.4bn (£2bn) of impairment charges related to oil and gas exposures in the fourth quarter of the year, according to Chirantan Barua, an analyst at Bernstein.

“Nearly $650bn of high yield debt has been issued in the sector since 2011,” Mr Barua said. “While the broader high yield market is down [around] 20pc year-to-date, oil and gas has been flat with issuance running straight up to the OPEC event. [This] can’t be a good thing for a sudden stress in the market if oil prices stay at this level.” When you see $650bn of high yield issuance in a sector that has been levering up across the supply chain, any shocks in the underlying business will have risk ripples across the financial system.” While Barclays, HSBC and RBS could be sitting on losses of $1bn each, and Standard Chartered faces $400m of impairments, banks in North America could face much bigger impairment charges. US and Canadian banks that have lent heavily to the sector on the back of the US shale boom, and high-yield debt to less stable oil companies has increased substantially. This means a collapse in the oil price is far more dangerous for the banks than it would have been only a few years ago.

Read more …

“They’ll pull back and won’t drill it until the price recovers. That’s the way it ought to be.”

• Billionaire Shale Pioneer Sees Drilling Slowdown on Oil Price Drop (Bloomberg)

Billionaire wildcatter Harold Hamm, a founding father of the U.S. shale boom whose personal fortune has fallen by more than half in the past three months, said U.S. drilling will slow as producers cut back amid falling oil prices. Declining activity from Texas to North Dakota won’t be as harmful to the industry as some have feared, the chairman and chief executive officer of Continental Resources Inc. said. OPEC’s refusal to curb output last week bodes well for U.S. producers that can outlast countries in the cartel, which depend on higher oil prices. “Will this industry slow down? Certainly,” Hamm said yesterday in a telephone interview. “Nobody’s going to go out there and drill areas, exploration areas and other areas, at a loss. They’ll pull back and won’t drill it until the price recovers. That’s the way it ought to be.”

Investors have been spooked as oil has declined to a five-year low. The downturn comes after prices above $100 a barrel sparked a boom in output from U.S. shale formations that helped create a glut of supply. Hamm’s wealth, which is largely tied to the fate of Oklahoma City-based Continental, has fallen by more than $12 billion in three months, according to the Bloomberg Billionaires Index. Hamm, who helped discover the potential of North Dakota’s Bakken formation, predicted a swift recovery in oil prices, which have declined more than 36 percent since June as Saudi Arabia and its allies in the Organization of Petroleum Exporting Countries refused to cut production last week to help re-balance the market. The company said last month it’s sold nearly all its hedges through 2016, in a bet on a recovery in prices. West Texas Intermediate, the U.S. benchmark, fell below $65 a barrel yesterday before settling up 4.3 percent to $69.

Read more …

Well, we all like a little competition, don’t we?

• US Shale Crude Exports To Asia Grind To Halt On Flood Of Mideast Oil (Reuters)

An aggressive strategy by Mideast Gulf producers to exploit the lowest oil prices in five years to defend market share is showing signs of bearing fruit as U.S. crude exports to Asia grind to halt. Asian refineries have suspended imports of condensate, a light crude oil produced from the U.S. shale boom, just four months after they began in favor of cheaper Middle East grades, according to trade and industry sources. The suspension illustrates how competition between suppliers has heated up following a more than 40% decline in oil prices since June.

Last week Ali al-Naimi, the oil minister of OPEC kingpin Saudi Arabia, warned his fellow OPEC members they must combat the U.S. shale boom. He argued against cutting OPEC production so as to keep prices depressed and undermine the profitability of North American producers. “There’s so much oversupply that Middle East crudes are now trading at discounts and it is not economical to bring over crudes from the U.S. anymore,” said Tushar Tarun Bansal of consultancy FGE in Singapore. U.S. oil became uncompetitive against similar grades from Qatar, Saudi Arabia and the United Arab Emirates after Gulf producers began dropping prices in August to maintain their market share in an oil market glut.

Read more …

We’ll see a lot more restructuring and defaults, a lot less financing, and a lot less exploration and drilling.

• October Oil Shale Permits Drop 15%: Is The Slowdown Here? (Reuters)

U.S. oil producers have been racing full-speed ahead to drill new shale wells in recent years, even in the face of lower oil prices. But new data suggests that the much-anticipated slowdown in shale country may have finally arrived. Permits for new wells dropped 15% across 12 major shale formations last month, according to exclusive information provided to Reuters by DrillingInfo, an industry data firm, offering the first sign of a slowdown in a drilling frenzy that has seen permits double since last November. OPEC last week agreed to maintain its production quota of 30 million-barrels-per-day, despite a 30% drop in oil prices since June, triggering an additional 10% decline. That move, many analysts believe, was squarely aimed at U.S. oil producers driving the country’s energy resurgence: can they continue drilling at the current pace if prices don’t rise? “Currently, the market is focused on U.S. shale as the place where spending and production must be curtailed,” Roger Read, a Wells Fargo analyst, said in a note Friday.

“There is little doubt, in our view, that lower oil and gas prices will result in lower spending and lower shale production in 2015 to 2017.” A cutback of U.S. production could play into the hands of Saudi Arabia, which has suggested over the past few months that it is comfortable with much lower oil prices. Most analysts predict U.S. oil producers can maintain their healthy production rates in the first half of 2015 – thanks in part to investments made months ago. Some oil service companies have suggested that a slowdown might be held off, as they continue to buy key drilling components. But, the data suggests that production is likely to eventually succumb to lower prices. “The first domino is the price, which causes other dominos to fall,” said Karr Ingham, an economist who compiles the Texas PetroIndex, an annual analysis of the state’s energy economy. One of the first tiles to drop: the number of permits issued, Ingham said.

Read more …

“The day rate for a top specification drillship, which can work in water up to 12,000 feet (3,658 meters) deep, was recently quoted at as low as $400,000, down from $600,000 last year.” [..] “The global fleet of jackup rigs is forecast to grow 9% in 2015 and another 7% in 2016 .. ” Overinvestment is what you get when credit is too cheap. It turns the whole world into a casino, and everyone into a gambler. And then they all lose.

• As Crude Tumbles, Oil Drillers Seek To Temporarily Idle More Rigs (Reuters)

Offshore drillers globally are increasingly considering “warm stacking” their rigs to take them temporarily off the market, as they gear up for a slowdown in the hunt for oil with crude prices sliding to five-year lows. Rigs in warm stack maintain basic operations and most of the crew, and can be put to use once the owner gets a contract. Drillers put rigs in warm stacks to lower operational costs and also to keep them sufficiently ready for quick deployment, meaning they are hopeful a downturn won’t be a prolonged one. Rigs can also be “cold stacked”, or shut down, which typically happens when an owner does not expect to find work for an extended period of time.

“Six months ago, no one talked about stacking rigs,” said Thomas Tan, chief executive officer at Kim Heng Offshore & Marine Holdings, a Singapore-based oilfield service firm, “In the last few weeks, things have become scarier and the talk of stacking started.” Tan said his firm has received enquiries to stack dozens of rigs over the past few weeks. Kim Heng currently services four rigs in warm stack around Singapore. The company serves about 60 rigs a year in different stage of operations, including providing repair, maintenance and logistics services. “A lot of people are looking at warm stack, as they hope that the market will turn around quickly,” Tan said. “Cold stack is on their mind… but they haven’t given up hope yet.” [..]

The day rate for a top specification drillship, which can work in water up to 12,000 feet (3,658 meters) deep, was recently quoted at as low as $400,000, down from $600,000 last year. Even rates for jack-up rigs, generally working in water depth below 400 feet, have started to weaken in recent months after holding up relatively well earlier in the year. Rig orders soared in recent years when oil prices topped $100 per barrel, making it more profitable to explore in hard-to-reach underwater areas. The global fleet of jackup rigs is forecast to grow 9% in 2015 and another 7% in 2016, Oslo-based investment bank Pareto Securities estimated.

Read more …

Darwin looms over fossils. Sort of fitting.

• For Oil Companies, It’s Survival Of The Fittest (MarketWatch)

It looks like it may be a long winter on the oil patch. Companies are dusting off contingency plans that may have seemed far-fetched when oil was trading above $100 a barrel in the summer. Oil-well and land portfolios are coming under renewed scrutiny as they decide where to wait it out and where to continue production. Survival of the fittest is the term being used by investors and analysts as they try to figure out what’s next after the Organization of the Petroleum Exporting Countries last week decided to keep its production levels unchanged, sending crude futures down 10% on Friday. Prices recovered some of those losses on Monday, with New York-traded oil closing at $69 a barrel after testing lows below $65 a barrel earlier in the session. “We are on the edge of what people are comfortable with,” said Meredith Annex, an analyst with research firm Bloomberg New Energy Finance. U.S. drilling is likely to continue if prices hold around $70 to $75 a barrel, she said.

Below $65, however, companies will cut production and move away from the newer, less developed shale plays in the U.S., and even from the fringes of the more established shale areas like the Permian basin in Texas and North Dakota’s Bakken basin, she said. The U.S. would then import more crude until prices come back up again. Analysts at Tudor Pickering Holt told investors to find shelter in “liquid names with high quality assets and healthy balance sheets that can weather the 2015 storm.” Tudor and others are expecting oil prices to stabilize around $70 a barrel in the coming weeks or months. Last week’s steep decline was probably exaggerated by thin U.S. trading around Thursday’s Thanksgiving holiday, they said. [..]

Energy is a cyclical business, and adjusting production to lower prices and lower demand is not uncommon — companies did exactly that in 2008 and 2009, when oil prices collapsed during the recession. This year, however, companies were convinced in the spring and summer that prices would remain around $90 a barrel, said Reid Morrison, energy consultant with PwC. U.S. companies are likely poring over their portfolios now to figure out which wells they can afford to shut down, to ditch, or even to sell. Idling a well, from a purely technical viewpoint, is relatively easy. But it gets complicated when companies have to factor in the financing structure and tens of thousands of land leases, each carrying different obligations and time frames, said Morrison. “Every exploration and production company is doing a detailed review of their leases and rationalizing their portfolio as we speak,” Morrison said. In some cases, selling the land lease might be the answer, he said.

Read more …

Check your pension plans!

• Beware the Vulnerable Oil Debt That Lurks in Your Junk-Bond ETFs (Bloomberg)

It pays to look a little closer at your investments in exchange-traded high-yield funds right now to find out just how exposed you are to plunging oil prices. Take State Street’s $9.8 billion junk-bond ETF that trades under the ticker JNK. It’s lost almost twice as much as a broad index of high-yield debt since the end of August, partly because its bigger allocation to energy companies has been a drag as oil prices plummet to the lowest since 2009. Individuals and institutions alike have gravitated toward ETFs as a quick way to enter infrequently-traded bond markets. Those who piled into speculative-grade bonds may not have realized their fortunes are, more than ever, tied to the outlook for oil given energy companies account for a record proportion of the market. “As oil prices have fallen further, reality has struck,” UBS analysts Matthew Mish and Stephen Caprio wrote in a Nov. 26 report. “For high yield, we expect that spreads and flows will be quite sensitive to oil prices at these levels. Further price declines would significantly raise expected default rates.”

Oil has collapsed into a bear market as the U.S. pumps crude at the fastest rate in three decades at the same time that global growth is slowing. OPEC resisted calls from members including Venezuela and Iran to reduce its production target when it met last week in Vienna, prompting West Texas Intermediate crude to fall below $65 dollars a barrel from more than $80 at the end of October and a high of $107 in mid-June. While some still like riskier U.S. bonds — such as Morgan Stanley (MS) analysts who today recommended buying the securities — the debt has suffered losses in the past five months as concern mounts that dropping energy costs will leave speculative shale drillers unable to meet their obligations.

Read more …

The stranded assets issue due to climate agreements is starting to make people nervous. Investors are preparing to get out. Lower prices might (should) be just what they need to make the decision.

• Oil Investors May Be Running Off a Cliff They Can’t See (BW)

A major threat to fossil fuel companies has suddenly moved from the fringe to center stage with a dramatic announcement by Germany’s biggest power company and an intriguing letter from the Bank of England. A growing minority of investors and regulators are probing the possibility that untapped deposits of oil, gas and coal – valued at trillions of dollars globally – could become stranded assets as governments adopt stricter climate change policies. The concept gaining traction from Wall Street to the City of London is simple. Limits on emissions of carbon dioxide will be necessary to hold temperature increases to 2 degrees Celsius, the maximum climate scientists say is advisable. Without technologies to capture the waste gases from combusting fossil fuels, a majority of known oil, gas and coal deposits would have to stay underground. Once that point is reached, they become stranded.

With representatives from more than 190 countries gathered to discuss climate rules in Lima, the argument that burning all the world’s known oil, gas and coal reserves would overwhelm the atmosphere is moving beyond the realm of environmental activists. Storebrand), a Scandinavian financial services company managing $74 billion of assets, announced last year that it would divest from 19 fossil fuels companies. That list has since expanded to 35, including 15 coal producers, 10 oil-sand miners and 10 utilities that predominantly use coal. “It was a financial and climate-related decision, and there was very much a consideration of stranded assets,” Christine Torklep Meisingset, Storebrand’s head of sustainable investments, said by phone from Oslo. “Companies that specialize in carbon-intense projects are very vulnerable to climate policy and shifting regulations.”

Read more …

“In May, Carbon Tracker reported that over $1 trillion is currently being gambled on high-cost oil projects that will never see a return if the world’s governments fulfil their climate change pledges.”

• Bank Of England Investigating Risk To Banks Of ‘Carbon Bubble’ (Guardian)

The Bank of England is to conduct an enquiry into the risk of fossil fuel companies causing a major economic crash if future climate change rules render their coal, oil and gas assets worthless. The concept of a “carbon bubble” has gained rapid recognition since 2013, and is being taken increasingly seriously by some major financial companies including Citi bank, HSBC and Moody’s, but the Bank’s enquiry is the most significant endorsement yet from a regulator. The concern is that if the world’s government’s meet their agreed target of limiting global warming to 2C by cutting carbon emissions, then about two-thirds of proven coal, oil and gas reserves cannot be burned. With fossil fuel companies being among the largest in the world, sharp losses in their value could prompt a new economic crisis. Mark Carney, the bank’s governor, revealed the enquiry in a letter to the House of Commons environment audit committee (EAC), which is conducting its own enquiry. He said there had been an initial discussion within the bank on “stranded” fossil fuel assets.

“In light of these discussions, we will be deepening and widening our enquiry into the topic,” he said, involving the financial policy committee which is tasked with identifying systemic economic risks. Carney had raised the issue at a World Bank seminar in October. News of the Bank’s enquiry comes on the day that global negotiations on climate change action open in Lima, Peru, and as one of Europe’s major energy companies E.ON announced it was to hive off its fossil fuel business to focus on renewables and networks. The UN’s Intergovernmental Panel on Climate Change recently warned that the limit of carbon emissions consistent with 2C of warming was approaching and that renewable energy must be at least tripled. “Policy makers and now central banks are waking up to the fact that much of the world’s oil, coal and gas reserves will have to remain in the ground unless carbon capture and storage technologies can be developed more rapidly,” said Joan Walley MP, who chairs the EAC.

“It’s time investors recognised this as well and factored political action on climate change into their decisions on fossil fuel investments,” she told the Financial Times. Anthony Hobley, chief executive of thinktank Carbon Tracker which has been prominent in analysing the carbon bubble, said the bank’s latest move could lead to important changes. “Fossil fuel companies should be disclosing how many carbon emissions are locked up in their reserves,” he said. “At the moment there is no consistency in reporting so it’s difficult for investors to make informed decisions.” Both ExxonMobil and Shell said earlier in 2014 that they did not believe their fossil fuel reserves would become stranded. In May, Carbon Tracker reported that over $1tn is currently being gambled on high-cost oil projects that will never see a return if the world’s governments fulfil their climate change pledges.

Read more …

“The sharp drop in oil prices will help boost consumer spending ..” I don’t understand that: we’re talking about money that would otherwise also have been spent, only on gas. There is no additional money, so where’s the boost?

• Fed’s Dudley Says Oil Price Decline Will Strengthen US Recovery (Bloomberg)

The sharp drop in oil prices will help boost consumer spending and underpin an economy that still requires patience before interest rates are increased, Federal Reserve Bank of New York President William C. Dudley said. “It is still premature to begin to raise interest rates,” Dudley said in the prepared text of a speech today at Bernard M. Baruch College in New York. “When interest rates are at the zero lower bound, the risks of tightening a bit too early are likely to be considerably greater than the risks of tightening a bit too late.” Dudley expressed confidence that, although the U.S. economic recovery has shown signs in recent years of accelerating, only to slow again, “the likelihood of another disappointment has lessened.”

Investors’ expectations for a Fed rate increase in mid-2015 are reasonable, he said, and the pace at which the central bank tightens will depend partly on financial-market conditions and the economy’s performance. Crude oil suffered its biggest drop in three years after OPEC signaled last week it will not reduce production. Lower energy costs “will lead to a significant rise in real income growth for households and should be a strong spur to consumer spending,” Dudley said. The drop will especially help lower-income households, who are more likely to spend and not save the extra real income, he said. Lower energy prices have already helped speed U.S. growth. Manufacturing in the U.S. expanded in November at a faster pace than projected, according to the Institute for Supply Management’s factory index.

[..] He also tried to disabuse investors of the notion that the Fed would, in times of sharp equity declines, ease monetary conditions, an idea known as the “Fed put.” “The expectation of such a put is dangerous because if investors believe it exists they will view the equity market as less risky,” Dudley said. That could cause investors to push equity markets higher, contributing to a bubble, he said. “Let me be clear, there is no Fed equity market put,” he said.

Read more …

It’s simply a balloon deflating.

• Why The Commodities Selloff May Continue In 2015 (CNBC)

Several of the world’s key commodities – including oil, gas, gold and corn – have been suffering the worst months of trading since the commodities crash of 2008. Back then, the main reason for downturn in prices was obvious: the credit crisis and subsequent panic about global economic growth. Yet today, while global growth is more sluggish than hoped in certain parts of the world – particularly in China – the overall economic picture seems much brighter than in 2008. In 2014, the focus seems to have switched to supply, as OPEC pledges to keep supply constant despite plunging oil prices. As well as being interpreted as throwing down the supply gauntlet to the shale-rich U.S., the OPEC move has been criticised for apparently penalizing several of its members.

Ultimately, it looks like investment decisions in the developed world may be causing the commodities glut. “Increasingly the supply side counts more, as investment cycles are creating persistent gluts in some areas (e.g. oil, natural gas, iron ore, grains) and lagging investment is starting to result in tightening elsewhere (industrial metals in general, copper in particular),” commodities analysts at Citi wrote in a research note. Despite the focus on emerging markets, the Citi analysts argue that continuing weakness in 2015 will have a “Made in America” quality, and called an end to “the era of $100 a barrel oil.” With grains, better weather conditions than for years meant better-than-expected crops, which “should leave inventories chock-a-block for a good year or two,” according to Citi.

The classic, straightforward analysis of commodity supply-demand dynamics would argue that, with cheaper commodities and cheaper prices, demand from consumers who feel like they’re getting a bargain will subsequently grow, sending prices up again. Unfortunately for miners and other commodities-linked companies, who have seen share price falls already this week, this may not be the case in 2015. “This fall in prices seems demand rather than supply led and so any benefit (to consumers) will be negated by the declining world growth outlook,” Rabobank strategists argue.

Read more …

Anyone still keeping count?

• Europe Debates Third Bailout Package for Greece (Spiegel)

It’s no accident that “pathos” is a Greek word. Greek Prime Minister Antonis Samaras, at least, is a politician who is fond of sprinkling his speeches with the kind of emotional appeal that Aristotle long ago identified as an effective stylistic device. “The era of bailout packages is ending,” Samaras promised in September during an appearance in Thessaloniki. “Greece is now welcoming the new Greece.” Samaras knew the line would guarantee him applause from his audience, but the promise also came a bit prematurely. Following the announcement, Greece got a small taste of what it might mean were Greece were released from the oversight of the troika, comprised of the European Commission, the ECB and the IMF. The more often Samaras spoke of a “clean solution,” the more yields rose on long-term Greek government bonds. At the beginning of September, the rates had been 5.8%, but they soon climbed to almost 9%. It was the financial markets’ way of hinting that it is still too early to grant Greece full fiscal independence.

One high-ranking EU official compared the situation to a patient who has survived intensive care but wants to leave the hospital early. A relapse is certain and the subsequent care will be much more involved than if the patient had stayed in the hospital long enough for full recovery. Greece’s second bailout package officially ends in a month’s time, but it is already certain that the country will require additional funding from its EU partners. Last Wednesday in Paris, there was a minor uproar when troika officials made it known that they felt Greece hadn’t fulfilled conditions for the payout of the final tranche from the second bailout package. Athens’ international creditors determined the country will fall around €2 billion ($2.5 billion) short of reaching its commitment of not exceeding a budget deficit of 3% of gross domestic product. The Greeks, for their part, accused the troika of being overly critical, arguing that in the past, the situation had developed more positively than predicted by pessimists.

Read more …

More creative accounting. And another completely useless stress test. A new capitalization standard that goes into effect in 2015 was not applied to banks in 2014. Idiots.

• European Banks Seen Afflicted by $82 Billion Capital Gap (Bloomberg)

Europe’s latest bank stress test was flawed, and dozens of the region’s lenders, including Deutsche Bank and BNP Paribas, aren’t sufficiently capitalized to improve the economy’s anemic growth or withstand a repeat of the 2008 financial crisis. Those are the conclusions of analysts at Keefe, Bruyette & Woods and the Danish Institute for International Studies who looked at what would have happened if the ECB had applied a leverage minimum that will be introduced next year. A third study by the Centre for European Policy Studies showed Deutsche Bank and BNP Paribas above the cutoff, while 28 other banks that passed the stress test failed. The new standard requires banks around the world to have capital equal to 3% of total assets, complementing a system that weights them for risk.

If the ECB had used that yardstick and demanded the highest quality capital, 12 big European banks that passed the stress test would need to raise an additional €66 billion ($82 billion), according to Jakob Vestergaard, a senior researcher at the Danish institute. “Relying on risk-based measures only isn’t enough because it’s always what we thought wasn’t risky that ends up blowing up during a crisis,” said Vestergaard, who examined data collected by the ECB at the request of Bloomberg News and has published papers on leverage. “The ECB wanted to appear tough, but it still couldn’t show big German, French banks as undercapitalized for political reasons.”

The ECB didn’t subject bank leverage ratios to the stress test’s adverse economic scenario because European lenders only have to report those numbers on an informational basis starting next year, a spokeswoman for the central bank in Frankfurt said. The new international standard approved by the Basel Committee on Banking Supervision won’t be fully binding until 2018. When it released test results on Oct. 26, the ECB provided leverage data that showed 14 lenders, including Deutsche Bank, were below the 3% minimum. Three more fell short after the central bank’s asset-quality review determined how many loans should be considered nonperforming. Combining the results of the independent studies, almost three times as many banks would fail the stress test if the leverage standard were used.

Read more …

And why does it take 2 years to get this out into the open?

• Leak at Federal Reserve Revealed Confidential Bond-Buying Details (ProPublica)

The Federal Reserve sprung a previously unreported leak in October 2012, when potentially market-moving information about highly confidential monetary deliberations made its way into a financial analyst’s private newsletter. The leak occurred the day before the scheduled public release of meeting minutes that shed new light on the Fed’s decision to embark on a third round of bond buying to boost the economy, ProPublica has learned. The newsletter revealed what the minutes would say the next day as well as fresh details about the Fed’s internal plans and deliberations – information that could have provided traders with an edge. Leaks from inside the Fed are considered a serious matter. In the past, they have prompted Congressional concern and triggered the involvement of federal law enforcement. In this instance, then Fed Chairman Ben Bernanke instructed the central bank’s general counsel to look into the matter.

The Federal Reserve has faced criticism in recent years for its information security practices, with some in Congress questioning whether it operates under sufficient oversight. The October 2012 leak involved deliberations of the Federal Open Markets Committee, which holds eight regularly scheduled meetings per year to set policies that control inflation and keep the economy growing. Since the 2008 economic crisis, it has involved itself more deeply in financial markets. Minutes of the committee’s meetings are released promptly at 2 p.m. three weeks after it meets. Fed watchers eagerly await the event and parse every word for clues on how financial markets will move. The Fed tightly guards nonpublic information about deliberations by the committee and the select staffers who are privy to them, about five dozen people in all. Doing so is critical to “reinforce the public’s confidence in the transparency and integrity of the monetary process,” the Fed’s policy on external communications says. [..]

The newsletter containing the leaked material came from an economic policy intelligence firm called Medley Global Advisors whose clients include hedge funds, institutional investors and asset managers. On Oct. 3, 2012, Regina Schleiger, an analyst with the firm, sent clients a “special report” titled “Fed: December Bound.” The report focused on the Sept. 12-13 open market committee meeting, where the panel had approved what’s called “QE3,” a new program of large-scale purchases of mortgage-backed and Treasury securities. Typically, the Fed chairman holds a news conference following the meetings to help explain the committee’s actions. But when Bernanke did this on Sept. 13, he did not reveal the depth of disagreement within the committee about how effective the bond-buying program would be and whether it was worth the cost. Schleiger wrote, however, that the minutes due out the next day would reveal “intense debate between Federal Open Market Committee participants.”

Read more …

Roubini’s not much of an analyst anymore, it’s all Keynes ‘austerity killed the cat’ all the way, a one dimensional focus on growth that is so abundant today. To claim, for example, that Japan’s sales tax hike in April ‘killed the recovery’ is an opinionated opinion, at best. Japan’s problems are far too deep to be either solved or aggravated by a 3% extra sales tax. But it’s the sort of opinion that gets Nouriel re-invited to Basel and all those places where the rich meet.

• The Return Of Currency Wars Will Strengthen The US Dollar Even More (Roubini)

The recent decision by the Bank of Japan to increase the scope of its quantitative easing is a signal that another round of currency wars may be under way. The BOJ’s effort to weaken the yen is a beggar-thy-neighbor approach that is inducing policy reactions throughout Asia and around the world. Central banks in China, South Korea, Taiwan, Singapore and Thailand, fearful of losing competitiveness relative to Japan, are easing their own monetary policies or will soon ease more. The European Central Bank and the central banks of Switzerland, Sweden, Norway and a few Central European countries are likely to embrace quantitative easing or use other unconventional policies to prevent their currencies from appreciating. All of this will lead to a strengthening of the U.S. dollar, as growth in the United States is picking up and the Federal Reserve has signaled that it will begin raising interest rates next year.

But if global growth remains weak and the dollar becomes too strong, even the Fed may decide to raise interest rates later and more slowly to avoid excessive dollar appreciation. You can lead a horse to liquidity, but you can’t make it drink. The cause of the latest currency turmoil is clear: In an environment of private and public deleveraging from high debts, monetary policy has become the only available tool to boost demand and growth. Fiscal austerity has exacerbated the impact of deleveraging by exerting a direct and indirect drag on growth. Lower public spending reduces aggregate demand, while declining transfers and higher taxes reduce disposable income and, thus, private consumption. In the eurozone, a sudden stop of capital flows to the periphery and the fiscal restraints imposed, with Germany’s backing, by the European Union, the IMF and the ECB have been a massive impediment to growth.

In Japan, an excessively front-loaded consumption-tax increase killed the recovery achieved this year. In the U.S., a budget sequester and other tax-and-spending policies led to a sharp fiscal drag in 2012-2014. And in the United Kingdom, self-imposed fiscal consolidation weakened growth until this year. Globally, the asymmetric adjustment of creditor and debtor economies has exacerbated this recessionary and deflationary spiral. Countries that were overspending, under-saving and running current-account deficits have been forced by markets to spend less and save more. Not surprisingly, their trade deficits have been shrinking. But most countries that were over-saving and under-spending have not saved less and spent more; their current-account surpluses have been growing, aggravating the weakness of global demand and, thus, undermining growth.

Read more …

Wages have been falling for much longer.

• Japanese Workers See Wages Drop for 16th Month (Bloomberg)

Japanese wages adjusted for inflation dropped for a sixteenth straight month as Prime Minister Shinzo Abe faces an election focused on his efforts to spur economic growth. Earning declined 2.8% in October from a year earlier, the labor ministry said today, following data last week showing households cut spending for a seventh month. Abe’s call for companies to use their cash holdings on salaries and investment has been partially met, with capital spending among manufacturers rising while wages change little. He faces voters on Dec. 14 with an economy that fell into recession following a sales-tax increase and opposition parties highlighting the difficulties of low-income earners.

“With the effect of the sales tax hike, I don’t see real wages rising in the financial year through April,” said Toru Suehiro, an economist at Mizuho Securities. “People will be asking themselves whether they feel better off, and there probably aren’t that many who think the economy has got better.” Before adjusting for inflation, average monthly pay in October rose 0.5% from a year earlier to 267,935 yen ($2,260). Large Japanese companies will raise winter bonuses by 5.8% this year, according to the preliminary results of a survey by the Keidanren business lobby group. Abe said yesterday that Keidanren has promised to lift pay next year.

Read more …

The EU shoots itself in the foot. And Russia gets angrier. Gazprom spent billions preparing the South Stream line. Dmitry Orlov said from now on to expect things from Russia that no-one expects.

• Putin: EU Stance Forces Russia To Withdraw From South Stream Project (RT)

Russia is forced to withdraw from the South Stream project due to the EU’s unwillingness to support the pipeline, and gas flows will be redirected to other customers, Vladimir Putin said after talks with his Turkish counterpart, Recep Tayyip Erdogan. “We believe that the stance of the European Commission was counterproductive. In fact, the European Commission not only provided no help in implementation of [the South Stream pipeline], but, as we see, obstacles were created to its implementation. Well, if Europe doesn’t want it implemented, it won’t be implemented,” the Russian president said. According to Putin, the Russian gas “will be retargeted to other regions of the world, which will be achieved, among other things, through the promotion and accelerated implementation of projects involving liquefied natural gas.”

“We’ll be promoting other markets and Europe won’t receive those volumes, at least not from Russia. We believe that it doesn’t meet the economic interests of Europe and it harms our cooperation. But such is the choice of our European friends,” he said. The South Stream project is at the stage when “the construction of the pipeline system in the Black Sea must begin,” but Russia still hasn’t received an approval for the project from Bulgaria, the Russian president said. Investing hundreds of millions of dollars into the pipeline, which would have to stop when it reaches Bulgarian waters, is “just absurd, I hope everybody understands that,” he said. Putin believes that Bulgaria “isn’t acting like an independent state” by delaying the South Stream project, which would be profitable for the country.

He advised the Bulgarian leadership “to demand loss of profit damages from the European Commission” as the country could have been receiving around €400 million annually through gas transit. Putin said that Russia is ready to build a new pipeline to meet Turkey’s growing gas demand, which may include a special hub on the Turkish-Greek border for customers in southern Europe. For now, the supply of Russian gas to Turkey will be raised by 3 billion cubic meters via the already operating Blue Stream pipeline, he said. Last year, 13.7 bcm of gas were supplied to Turkeyvia Blue Stream, according to Reuters. Moscow will also reduce the gas price for Turkish customers by 6% from January 1, 2015, Putin said. “We are ready to further reduce gas prices along with the implementation of our joint large-scale projects,” he added.

Read more …

And announced a 0.8% growth shrinkage for 2015.

• Russia Intervenes As Crumbling Ruble Echoes 1998 Debt Crisis (Guardian)

Russia’s central bank was forced to step in to defend the ruble on the foreign exchanges on Monday after fears over the economy’s vulnerability to a weak oil price sent the currency to a record low against the dollar. Moscow was forced to abandon its hands-off policy towards the ruble amid heavy selling, unmatched since the Russian debt default of 1998. The Russian central bank intervened when the ruble was down 6.5% on the day against the US dollar, and by the close of trading the currency had recouped more than half its earlier losses. A bounce in the oil price from a fresh five-year low and a sense that the sell-off since last week’s meeting of the Opec cartel has been overdone helped sentiment towards the Russian currency, which has been badly buffeted by a plunge of almost 40% in the cost of crude since the summer.

Data from the US suggesting that drilling activity in the shale oil sector is being affected by lower oil prices also helped the ruble by pushing down the value of the dollar. Oil is denominated in dollars, so when the US currency falls oil becomes cheaper and more attractive for holders of other currencies. With Moscow fearful that the drop in the value of the ruble makes Russia vulnerable to capital flight, Ksenia Yudaeva, the Russian central bank’s deputy chairwoman, told newswires that households should not panic. She said the rise in interest rates to 9.5% should encourage them not to convert savings into euros or dollars. “It’s necessary to explain to people that the yield they get on their deposits at the moment will guarantee a high degree of safety for their savings with regards to inflation. They should think twice before rushing out, losing the yield on their deposits, taking on currency risks and losing money on their currency conversions.”

Read more …

NATO is putting ever more attack weapons in countries it had been agreed would be neutral terrain.

• Russia Says NATO Destabilizes North Europe, Aid Draws Ire (Bloomberg)

Russia accused NATO of trying to destabilize northern Europe as the alliance’s chief said the latest aid convoy for Ukraine was another sign of Russian disrespect for its neighbor’s border. NATO military drills and its transfer of warplanes capable of carrying nuclear weapons to the Baltic states are a “reality which is extremely negative,” Interfax reported Russian Deputy Foreign Minister Aleksey Meshkov as saying today. “They are trying to shake up the most stable region in the world, the north of Europe,” Meshkov said. “In this regard, Russia’s leadership is and will be taking all steps to ensure the security of Russia and its citizens.” Ukraine and its allies blame Russia for stoking the conflict in the east of Ukraine, which has killed more than 4,300 people and left at least 10,000 wounded. The government in Moscow denies involvement. After delivering more than 1,200 metric tons of cargo to the Donetsk and Luhansk regions without consulting the government in Kiev yesterday, Russia may soon dispatch a ninth aid convoy, Tass reported, citing the Emergencies Ministry.

Read more …

Stranger than fiction. Then again, if a country seen as hostile to the US produces a movie in which the plot evolves around a plan to kill the American President, how amused would Washington be?

• North Korea Refuses To Deny Sony Pictures Cyber-Attack (BBC)

North Korea has refused to deny involvement in a cyber-attack on Sony Pictures that came ahead of the release of a film about leader Kim Jong-un. Sony is investigating after its computers were attacked and unreleased films made available on the internet. When asked if it was involved in the attack a spokesman for the North Korean government replied: “Wait and see.” In June, North Korea complained to the United Nations and the US over the comedy film The Interview. In the movie, Seth Rogen and James Franco play two reporters who are granted an audience with Kim Jong-un. The CIA then enlists the pair to assassinate him. North Korea described the film as an act of war and an “undisguised sponsoring of terrorism”, and called on the US and the UN to block it. California-based Sony Pictures’ computer system went down last week and hackers then published a number of as-yet un-released films on online download sites.

Among the titles is a remake of the classic film Annie, which is not due for release until 19 December. The Interview does not appear to have been leaked. When asked about the cyber-attack, a spokesman for North Korea’s UN mission said: “The hostile forces are relating everything to the DPRK (North Korea). I kindly advise you to just wait and see.” On Monday Sony Pictures said it had restored a number of important services that had to be shut down after the attack. It said it was working closely with law enforcement officials to investigate the matter but made no mention of North Korea. The FBI has confirmed that it is investigating. It has also warned other US businesses that unknown hackers have launched a cyberattack with destructive malware.

Read more …

It’s good to see the NZ justice system has a degree of independence. But this isn’t over. They’ll keep on trying.

• Kim Dotcom Avoids Jail After Bail Hearing (NZ Herald)

Kim Dotcom has had bail conditions tightened, although the judge who did so said there was no evidence he had breached any of the court-ordered conditions. Dotcom now has to report twice a week, rather than once, and is banned from travelling on private aircraft or sea-going vessels. Dotcom lambasted the United States and the Crown lawyers acting for it outside court, saying both seized the opportunity to have his bail revoked after he split from his former gold-plated legal team. “The court has found I have no breached any of my bail conditions. I have been probably the most compliant, exemplary candidate of bail in NZ and I am surprised, even though I am going home right now, that my bail conditions have been tightened given my excellent bail compliance.

“I think this is another case of harassment and bullying by the United States government in concert with the New Zealand government. I think this whole application was only made because my lawyers decided to resign because of a lack of funds on my part because Hollywood has seized the new family assets that have been made after the raid. “The Crown and US government have used this opportunity at a weak moment to make up the bogus case for me having breached my bail conditions.” He accused the FBI of being deceitful bringing allegations he had tried to sell a Rolls Royce or been in contact with banned co-accused. He said the evidence showed – as he claimed was true in other branches of the case – that the US would not act with openness and honesty.

“I’m now going home to play with my kids.” Judge Nevin Dawson dismissed the arguments put by the US, saying there was “no proof” he had been in contact with former Megaupload staff who are free in Europe but also facing criminal copyright charges. He said he was not compelled by accusations Dotcom acted with a “lack of candour” by using a driver licence under the name Kim Schmitz in 2009 when stopped for dangerous driving. He said “it appears to be a legitimate use of the name Kim Schmitz”. Other claims also failed to find traction with Judge Dawson, who said he was tightening conditions to take account of the wealth Dotcom had accrued since his arrest and the approaching extradition trial, set for June.

Read more …

Cheap Oil A Boon For The Economy? Think Again

Nov 292014
 
 November 29, 2014  Posted by at 7:21 pm Finance Tagged with: , , , , , , , ,  16 Responses »


‘Daly’ Somewhere in the South, possibly Miami 1941

I thought it might be a nice idea to question a certain someone’s theories using their own words, while at the same time showing everybody what the dangers are from falling oil prices. There are many ‘experts and ‘analysts’ out there claiming that economies will experience a stimulus from the low prices, something I’ve already talked about over the past few days in The Price Of Oil Exposes The True State Of The Economy and OPEC Presents: QE4 and Deflation. And I’ve also already said that I don’t think that is true, and I don’t see this ending well.

Today, our old friend Ambrose Evans-Pritchard starts out euphoric, only to cast doubt on his self-chosen headline. He’d have done better to focus on that doubt, in my opinion. And I have his own words from earlier in the year to support that opinion. Ambrose is bad at opinions, but great at collecting data; his personal views are his achilles heel as a journalist. That’s maybe why he fell into the propaganda trap of picking this headline; after all, if you write for the Daily Telegraph you’re supposed to write positive things about the economy.

Oil Drop Is Big Boon For Global Stock Markets, If It Lasts

Tumbling oil prices are a bonanza for global stock markets, provided the chief cause is a surge in crude supply rather than a collapse in economic demand

Roughly one third of the current oil slump is a shortfall in expected demand, caused by China’s industrial slowdown and Europe’s austerity trap. The other two thirds are the result of a sudden supply glut, which Saudi Arabia and the Gulf states have so far chosen not to offset by cutting output. This episode looks relatively benign. Nick Kounis from ABN Amro says it will add $550 billion of stimulus to world markets. “That is fantastic news for the global economy,” he said. But it comes at a time when stocks are already high if measured by indicators of underlying value. The Schiller 10-year price earnings ratio is at nose-bleed levels above 27.

Tobin’s Q, a gauge based on replacement costs, is stretched to near historic highs. Andrew Lapthorne from SocGen says the MSCI world index of stocks has risen 38% over the last three years but reported profits have risen just 3%. “Valuations, as measured by median price to cash flow ratios, are near historical highs. As US QE has come to an end, depriving the world of $1 trillion printed dollars a year, there are plenty of reasons to be nervous,” he said.

Ambrose’s gauge of share values is dead on, and far more important than he seems to realize. He knows full well there are tons of reasons to doubt his own headline. But he still leaves out many of those reasons in that article today. So let’s move back in time to look at what he wrote this summer, before the drop in oil prices.

Here are a few lines from Ambrose on July 9 2014:

Fossil Industry Is The Subprime Danger Of This Cycle

The epicentre of irrational behaviour across global markets has moved to the fossil fuel complex of oil, gas and coal. This is where investors have been throwing the most good money after bad. [..] oil and gas investment in the US has soared to $200 billion a year. It has reached 20% of total US private fixed investment, the same share as home building.

This has never happened before in US history, even during the Second World War when oil production was a strategic imperative. The International Energy Agency (IEA) says global investment in fossil fuel supply doubled in real terms to $900 billion from 2000 to 2008 as the boom gathered pace. It has since stabilised at a very high plateau, near $950 billion last year. The cumulative blitz on exploration and production over the past six years has been $5.4 trillion [..]

… upstream costs in the oil industry have risen 300% since 2000 but output is up just 14% [..] The damage has been masked so far as big oil companies draw down on their cheap legacy reserves.

… companies are committing $1.1 trillion over the next decade to projects that require prices above $95 to break even. The Canadian tar sands mostly break even at $80-$100. Some of the Arctic and deepwater projects need $120. Several need $150. Petrobras, Statoil, Total, BP, BG, Exxon, Shell, Chevron and Repsol are together gambling $340 billion in these hostile seas.

… the biggest European oil groups (BP, Shell, Total, Statoil and Eni) spent $161 billion on operations and dividends last year, but generated $121 billion in cash flow. They face a $40 billion deficit even though Brent crude prices were buoyant near $100 ..

… the sheer scale of “stranded assets” and potential write-offs in the fossil industry raises eyebrows. IHS Global Insight said the average return on oil and gas exploration in North America has fallen to 8.6%, lower than in 2001 when oil was trading at $27 a barrel.

What happens if oil falls back towards $80 as Libya ends force majeure at its oil hubs and Iran rejoins the world economy?

A large chunk of US investment is going into shale gas ventures that are either underwater or barely breaking even, victims of their own success in creating a supply glut. One chief executive acidly told the TPH Global Shale conference that the only time his shale company ever had cash-flow above zero was the day he sold it – to a gullible foreigner.

… the low-hanging fruit has been picked and the costs are ratcheting up. Three Forks McKenzie in Montana has a break-even price of $91. [..]

“Under a global climate deal consistent with a two degrees centigrade world, we estimate that the fossil fuel industry would stand to lose $28 trillion of gross revenues over the next two decades , compared with business as usual,” said Mr Lewis. The oil industry alone would face stranded assets of $19 trillion, concentrated on deepwater fields, tar sands and shale.

By their actions, the oil companies implicitly dismiss the solemn climate pledges of world leaders as posturing, though shareholders are starting to ask why management is sinking so much their money into projects with such political risk.

Those numbers alone, combined with the knowledge that prices are off close to 40% by now, should be enough to give anyone the jitters, about the oil industry, and therefore about the global economy. Any industry that’s so deeply in debt cannot afford a 40% dip in revenue, not even for a short while. Dominoes must start tumbling in short order.

And of course saying ‘any industry so deeply in debt’ is already a bit misleading, because there is no industry like oil in the world (except maybe steel, and look how that’s doing), and it’s highly doubtful there’s another one with such debt levels. Oil stocks are down somewhat, but it’s hard to see how they could not fall a lot further. And as for the huge amounts invested in energy junk bonds, one can but shudder.

On August 11 2014, Ambrose had some more:

Oil And Gas Company Debt Soars To Danger Levels To Cover Cash Shortfall

The world’s leading oil and gas companies are taking on debt and selling assets on an unprecedented scale to cover a shortfall in cash, calling into question the long-term viability of large parts of the industry. The US Energy Information Administration (EIA) said a review of 127 companies across the globe found that they had increased net debt by $106 billion in the year to March, in order to cover the surging costs of machinery and exploration, while still paying generous dividends at the same time.

They also sold off a net $73 billion of assets. [..] The EIA said revenues from oil and gas sales have reached a plateau since 2011, stagnating at $568 billion over the last year as oil hovers near $100 a barrel. Yet costs have continued to rise relentlessly.

… the shortfall between cash earnings from operations and expenditure – mostly CAPEX and dividends – has widened from $18 billion in 2010 to $110 billion during the past three years. Companies appear to have been borrowing heavily both to keep dividends steady and to buy back their own shares, spending an average of $39 billion on repurchases since 2011.

… “continued declines in cash flow, particularly in the face of rising debt levels, could challenge future exploration and development”. [..] upstream costs of exploring and drilling have been surging, causing companies to raise long-term debt by 9% in 2012, and 11% last year. Upstream costs rose by 12% a year from 2000 to 2012 due to rising rig rates, deeper water depths, and the costs of seismic technology. This was disguised as China burst onto the world scene and powered crude prices to record highs.

Global output of conventional oil peaked in 2005 despite huge investment. [..] the productivity of new capital spending has fallen by a factor of five since 2000. “The vast majority of public oil and gas companies require oil prices of over $100 to achieve positive free cash flow under current capex and dividend programmes. Nearly half of the industry needs more than $120,” ..

Analysts are split over the giant Petrobras project off the coast of Brazil, described by Citigroup as the “single-most important source of new low-cost world oil supply.” The ultra-deepwater fields lie below layers of salt, making seismic imaging very hard. They will operate at extreme pressure at up to three thousand meters, 50% deeper than BP’s disaster in the Gulf of Mexico.

Petrobras is committed to spending $102 billion on development by 2018. It already has $112 billion of debt. The company said its break-even cost on pre-salt drilling so far is $41 to $57 a barrel. Critics say some of the fields may in reality prove to be nearer $130. Petrobras’s share price has fallen by two-thirds since 2010.

… global investment in fossil fuel supply rose from $400 billion to $900 billion during the boom from 2000 and 2008, doubling in real terms. It has since levelled off, reaching $950 billion last year. [..] Not a single large oil project has come on stream at a break-even cost below $80 a barrel for almost three years.

… companies are committing $1.1 trillion over the next decade to projects requiring prices above $95 to make money. Some of the Arctic and deepwater projects have a break-even cost near $120 . The IEA says companies have booked assets that can never be burned if there is a deal limit to C02 levels to 450 (PPM), a serious political risk for the industry. Estimates vary but Mr Lewis said this could reach $19 trillion for the oil nexus, and $28 trillion for all forms of fossil fuel.

For now the major oil companies are mostly pressing ahead with their plans. ExxonMobil began drilling in Russia’s Arctic ‘High North’ last week with its partner Rosneft, even though Rosneft is on the US sanctions list. “Exxon must be doing a lot of soul-searching as they get drawn deeper into this,” said one oil veteran with intimate experience of Russia. “We don’t think they ever make any money in the Arctic. It is just too expensive and too difficult.”

Plummeting oil prices not only mirror the state of the – real – economy, they will also drag the state of that economy down further. Much further. If only for no other reason than that today’s oil industry swims in debt, not reserves. Investment policies, both within the industry and on the outside where people buy oil company stocks and – junk – bonds, have been based on lies, false presumptions, hubris and oil prices over $100.

The oil industry is no longer what it once was, it’s not even a normal industry anymore. Oil companies sell assets and borrow heavily, then buy back their own stock and pay out big dividends. What kind of business model is that? Well, not the kind that can survive a 40% cut in revenue for long. The industry’s debt levels were, in Ambrose’s words, at a ‘danger level’ when oil was still at $110.

Is Big Oil still a going concern? You tell me. I don’t want to tell the whole story bite-sized on a platter, there’s more value in providing the numbers, this time from Ambrose but there are many other sources, and have you make up your own mind, do the math etc.

Ambrose’s exact numbers can and will be contested three ways to Sunday, but his numbers are not that far off, and if anything, he may still be sugarcoating. WTI closed at $66.15 on Friday, Brent is at $70.15. Given the above data, where would you think the industry is headed? What will happen to the trillions in debt the industry was already drowning in when oil was still above $100?

And how will this be a boon to the economy even if, as Ambrose puts it, the ”oil drop lasts”? Do you have any idea how much your pension fund is invested in oil? Your money market fund? Your government? I would almost say you don’t want to know.

There can be very little doubt that oil prices will at some point rise again from whatever bottom they will reach. Even if nobody knows what that bottom will be. At the same time, there can also be very little doubt that when that happens, the energy industry’s ‘financial landscape’ will look very different from today. And so will the – real – economy.

Cheap oil a boon for the economy? You might want to give that some thought.

Debt Rattle November 28 2014

Nov 282014
 
 November 28, 2014  Posted by at 12:06 pm Finance Tagged with: , , , , , , , , ,  1 Response »


Andreas Feininger Production B-17 heavy bomber at Boeing plant, Seattle Dec 1942

• US Equity Markets In ‘Dotcom Style’ Bubble (Telegraph)
• China Has ‘Wasted’ $6.8 Trillion In Investment, Warn Beijing Researchers (FT)
• Oil Seen in New Era as OPEC Won’t Yield to US Shale (Bloomberg)
• Russian Oil Oligarch: ‘$60 And Below Is Possible’ (Reuters)
• Russian Oil Giant Battles Debt After $55 Billion Deal (Bloomberg)
• US Shale Boom Is Same As Dotcom Bubble, Says Russian Oil Executive (Telegraph)
• OPEC Policy Ensures US Shale Crash, Russian Tycoon Says (Bloomberg)
• Will OPEC Bankrupt US Shale Producers? (CNBC)
• Tar Sands Producers With World’s Cheapest Oil Face Cascading Woes (Bloomberg)
• Abe Tested by Weak Retail Sales as Japan Election Looms (Bloomberg)
• Good or Bad? Oil Slide Poses Conundrum as Japan Seeks Inflation (Bloomberg)
• Kuroda Bond Splurge Crowds Out Individual Buyers (Bloomberg)
• Eurozone November Inflation Dips To 0.3% (CNBC)
• Germany Warns Wrecking Russian Economy Would Be Perilous (Bloomberg)
• Junk Bond Carnage, One Company at a Time (WolfStreet)
• Swiss Vote Provokes ‘6,000-Year Gold Bubble’ Attack (AEP)
• Italian Unemployment Rises to Record (Bloomberg)
• France Paying For Past Mistakes: Economy Minister (CNBC)
• Venezuela Burns Through Third of New Chinese Money in a Week (Bloomberg)
• Reports of Thailand’s Revival Are Greatly Exaggerated (Bloomberg)
• America’s Youngest Outcasts (Homeless Children America.org (pdf))

Don’t worry. Won’t be long now.

• US Equity Markets In ‘Dotcom Style’ Bubble (Telegraph)

Asset values around the world are over-heating, the UK’s top professional investors’ body has warned, raising fears over a dotcom-style bubble in US stocks. Investors are concerned that prices for US stocks are dependent on central bank funding, according to a survey of professional money managers completed by the CFA Society of the UK. “US equities are looking particularly expensive since the correction in October as they have powered ahead,” said Simon Evan-Cook, senior investment manager at Premier Asset Management, which manages £3.2bn in funds. “However, valuation always gets in the way of these things, people who said tech was going to change the world back in1999 were right, they just paid too much money for it at the time and we get the impression that could be happening with US equities at the moment,” he added. The survey offers a rare insight into the thinking of the investment community, which manages billions of pounds on behalf of pension funds and households.

It revealed that 42pc of the 554 professional investors now believe that developed market equities are overvalued. The number of money managers that felt there were further gains to be made in equity markets, was just 23pc. The Dow industrials and S&P 500 finished at record levels on Wednesday night before closing for the holiday season on Thursday and Friday. The S&P 500 index gained 0.3pc, to 2,072.83, marking its 47th closing high in 2014. “Government bonds are also horrifically expensive,” said John Ventre, head of Multi-Asset, Old Mutual Global Investors which manages £17.4bn in funds. Mr Ventre added that US equity markets are also looking expensive as earnings growth is relaint on share buybacks and currently unsustainable. “Respondents continue to believe that most asset classes are overvalued. This probably reflects the concern that market values are dependent on the easy monetary conditions being employed by central banks in the face of weak global growth,” said Will Goodhart, CFA Society chief executive.

Read more …

Before you know it, we’re talking real money.

• China Has ‘Wasted’ $6.8 Trillion In Investment, Warn Beijing Researchers (FT)

“Ghost cities” lined with empty apartment blocks, abandoned highways and mothballed steel mills sprawl across China’s landscape – the outcome of government stimulus measures and hyperactive construction that have generated $6.8 trillion in wasted investment since 2009, according to a report by government researchers. In 2009 and 2013 alone, “ineffective investment” came to nearly half the total invested in the Chinese economy in those years, according to research by Xu Ce of the National Development and Reform Commission, the state planning agency, and Wang Yuan from the Academy of Macroeconomic Research, a former arm of the NDRC. China is this year on track to grow at its slowest annual pace since 1990, and the report highlights growing concern in the Chinese leadership about the potential economic and social consequences if wasteful investment leaves projects abandoned and bad loans overloading the financial system.

The bulk of wasted investment went directly into industries such as steel and automobile production that received the most support from the government following the 2008 global crisis, according to the report. Mr Xu and Ms Wang said ultra-loose monetary policy, little or no oversight over government investment plans and distorted incentive structures for officials were largely to blame for the waste. “Investment efficiency has fallen dramatically [in recent years],” they say in the report. “It has become far more obvious in the wake of the global financial crisis and has caused a lot of over-investment and waste.” Beijing has in recent years sought to move from its investment-heavy, credit-dependent growth model to one that relies more on consumption and services. But slipping growth rates this year have seen it fall back on loose credit and government-mandated infrastructure investment to prop up the economy and ensure steadily rising employment.

Read more …

What a curious headline. OPEC couldn’t have taken any different decision. But that’s because of the global financial situation, not shale.

• Oil Seen in New Era as OPEC Won’t Yield to US Shale (Bloomberg)

OPEC’s decision to cede no ground to rival producers underscored the price war in the crude market and the challenge to U.S. shale drillers. The 12-nation OPEC kept its output target unchanged even after the steepest slump in oil prices since the global recession, prompting speculation it has abandoned its role as a swing producer. Yesterday’s decision in Vienna propelled futures to the lowest since 2010, a level that means some shale projects may lose money. “We are entering a new era for oil prices, where the market itself will manage supply, no longer Saudi Arabia and OPEC,” said Mike Wittner, head of oil research at SocGen in New York. “It’s huge. This is a signal that they’re throwing in the towel. The markets have changed for many years to come.”

The fracking boom has driven U.S. output to the highest in three decades, contributing to a global surplus that Venezuela yesterday estimated at 2 million barrels a day, more than the production of five OPEC members. Demand for the group’s crude will fall every year until 2017 as U.S. supply expands, eroding its share of the global market to the lowest in more than a quarter century, according to the group’s own estimates. Benchmark Brent crude fell the most in more than three years after OPEC’s decision, sliding 6.7% to close at $72.58 a barrel. Futures for January settlement extended losses to $71.12 a barrel in London today, the lowest since July 2010. Prices peaked this year at $115.71 in June.

“We will produce 30 million barrels a day for the next 6 months, and we will watch to see how the market behaves,” OPEC Secretary-General Abdalla El-Badri told reporters in Vienna after the meeting. “We are not sending any signals to anybody, we just try to have a fair price.” OPEC pumped 30.97 million barrels a day in October, according to data compiled by Bloomberg. The group has exceeded its current output ceiling in all but four of the 34 months since it was implemented, the data show. OPEC’s own analysts estimate production was 30.25 million last month, according to a report Nov. 12. Members will abide by the 30 million barrel-a-day target, El-Badri said yesterday. “OPEC has chosen to abdicate its role as a swing producer, leaving it to the market to decide what the oil price should be,” Harry Tchilinguirian at BNP Paribas in London, said yesterday. “It wouldn’t be surprising if Brent starts testing $70.”

Read more …

That would do in his own company.

• Russian Oil Oligarch: ‘$60 And Below Is Possible’ (Reuters)

Russia’s most powerful oil official Igor Sechin said in an interview with an Austrian newspaper that oil prices could fall below $60 by mid-way through next year. Sechin, chief executive of Rosneft, Russia’s largest oil producer, also said U.S. oil production would fall after 2025 and that an oil market council should be created to monitor prices, the same day the OPEC cartel met in Vienna and left its output targets unchanged. “We expect that a fall in the price to $60 and below is possible, but only during the first half, or rather by the end of the first half (of next year),” Sechin told the Die Presse newspaper.

On Thursday, OPEC decided against production cuts to halt a slide in global oil prices, sending benchmark Brent crude plunging to a fresh four-year low below $73 a barrel. Russia is not a member of OPEC. Sechin, who met representatives from world oil powers in Vienna earlier in the week, said he believed Russia had the potential to cut between 200,000 and 300,000 barrels a day of production if prices remained low. On U.S. oil production, Sechin said: “After 2025, the production volumes will decrease, namely because of the resource base, to the extent that we know it today.” Earlier on Thursday, Rosneft said in a statement that OPEC’s decision to leave its output unchanged would not affect the work of the company.

Read more …

Simialr stories can be told for most of the world’s major oil companies.

• Russian Oil Giant Battles Debt After $55 Billion Deal (Bloomberg)

Igor Sechin spent $55 billion in 2013 to buy competitor TNK-BP and create a Russian oil colossus, pumping about 5% of the world’s crude. Almost two years later and investors have written off the deal. Battered by sanctions and oil’s accelerating price crash, Rosneft has lost 38% of its market value this year in dollar terms and today the whole company, TNK-BP and all, is worth $50 billion. And buying TNK-BP has left Sechin, Rosneft’s chief executive officer and a long-time ally of Russian President Vladimir Putin, with a lot of debt to repay. State-controlled Rosneft owes about $60 billion to banks and bondholders, making it more indebted relative to earnings than any large oil producer apart from Brazil’s Petroleo Brasileiro SA.

“Their aggressive expansion and debt accumulation made them more vulnerable to the falling oil price and the effect of sanctions,” Oleg Popov, who helps oversee $1 billion at Allianz Investments in Moscow, said by phone. Sechin, who had pledged the combined company would be worth $120 billion, has bigger ambitions than simply creating Russia’s largest oil producer. Putin’s point man for energy has sought to build a global oil major, swapping drilling rights at home for exploration blocks from Norway to the Gulf of Mexico. He bought production projects in Venezuela and half an oil refinery in Germany. As the company’s balance sheet gets more stretched, he will find it harder to achieve those aims, providing an example of how the Ukraine crisis has harmed some of Russia’s largest companies and limited their ambitions to expand globally.

Read more …

“OPEC secretary general Abdulla Salem El-Badri denied the meeting was divided and that the decision will trigger a price war that could put shale oil drillers in the US out of business. “We’re not sending any signal,” he said.”

• US Shale Boom Is Same As Dotcom Bubble, Says Russian Oil Executive (Telegraph)

The rise of US shale is similar to the dotcom boom of the late Nineties and will cause many companies to fail, one of Russia’s top oil executives has warned. Leonid Fedun, vice-president of Lukoil, Russia’s second-largest oil producer, believes that with the price of Brent crude and WTI at multi-year lows, fracking companies will struggle to make fracking profitable. These fears were given extra weight on Thursday after Opec’s members agreed to leave oil production quotas unchanged, sending oil prices plummeting. Some believe Opec, which controls the majority of the world’s oil output, is threatened by the emergence of US shale and is trying to force many American drilling companies out of business. “In 2016, when Opec completes this objective of cleaning up the American marginal market, the oil price will start growing again,” Mr Fedun told Bloomberg. He said the current oil market was similar to the rise of the technology sector more than a decade ago that saw companies’ stock prices surge before collapsing several years later.

“The shale boom is on a par with the dotcom boom. The strong players will remain, the weak ones will vanish,” added Mr Fedun, who is worth around $4bn. The price of a barrel of Brent crude oil dropped 6.7pc to $72.58 on Thursday, while WTI fell 6.3pc to $69.05. The sharp falls came after Opec’s members agreed to keep oil production levels at 30m barrels per day (bpd), following three days of talks in Vienna. The meeting ended in anger, with Venezuela’s representative, Rafael Ramirez, storming out of the secretariat after his proposal to make cuts of up to 1.5m bpd was rejected. OPEC secretary general Abdulla Salem El-Badri denied the meeting was divided and that the decision will trigger a price war that could put shale oil drillers in the US out of business. “We’re not sending any signal,” he said.

Read more …

“The major strike is against the American market ..”

• OPEC Policy Ensures US Shale Crash, Russian Tycoon Says (Bloomberg)

OPEC policy on crude production will ensure a crash in the U.S. shale industry, a Russian oil tycoon said. The Organization of Petroleum Exporting Countries kept output targets unchanged at a meeting in Vienna today even after this year’s slump in the oil price caused by surging supply from U.S shale fields. American producers risk becoming victims of their own success. At today’s prices of just over $70 a barrel, drilling is close to becoming unprofitable for some explorers, Leonid Fedun, vice president and board member at Lukoil, said in an interview in London. “In 2016, when OPEC completes this objective of cleaning up the American marginal market, the oil price will start growing again,” said Fedun, who’s made a fortune of more than $4 billion in the oil business, according to data compiled by Bloomberg. “The shale boom is on a par with the dot-com boom. The strong players will remain, the weak ones will vanish.”

At the moment, some U.S. producers are surviving because they managed to hedge the prices they get for their oil at about $90 a barrel, Fedun said. When those arrangements expire, life will become much more difficult, he said. While some OPEC countries including Venezuela pushed for a reduction in output quotas at today’s meeting, Saudi Arabia, the group’s dominant member, argued for the status quo. In Russia, where Lukoil is the second-largest producer behind state-run Rosneft, the industry is much less exposed to oil’s slump, Fedun said. Companies are protected by lower costs and the slide in the ruble that lessens the impact of falling prices in local currency terms, he said. Even so, output in Russia, the biggest producer after Saudi Arabia in 2013, is likely to fall slightly next year as lower prices force producers to rein in investment, Fedun said. “The major strike is against the American market,” Fedun said.

Read more …

Yes. Quite a few.

• Will OPEC Bankrupt US Shale Producers? (CNBC)

OPEC’s contentious decision to keep its production target, leaving the market with a supply glut, could trigger a wave of debt defaults by U.S. shale oil producers, warn analysts. The 12-member oil cartel on Thursday said it would stick to its output target of 30 million barrels a day, triggering a sharp decline in oil prices, with U.S. crude futures tumbling nearly $6 to $67.75 on Friday – the lowest since May 2010. Neil Beveridge, senior oil analyst at Sanford C. Bernstein, told CNBC the plunge in oil prices raises the risk of bankruptcy for U.S. shale players. “While production growth is very strong [in North America], remember if you look at the debt situation for a lot of these companies, there is a lot of distressed debt,” said Beveridge. “$68 a barrel is not economical for a lot of these shale oil wells. CDS [credit default swap] spreads and yields on some of the debt are rising very quickly, because at these kinds of oil prices you are going to see producers go bankrupt,” he added.

Since 2011, U.S. energy firms have ploughed some $1.5 trillion into ramping up their operations, taking on a large share of debt to do so, according to Alliance Bernstein. Debt issued by energy companies now accounts for more than 15% of U.S. junk bond market, compared with less than 5% a decade ago. Small companies that have levered up to fund exploration and production will see their margins squeezed with bankruptcy “a distinct possibility,” Ivan Rudolph-Shabinsky, portfolio manager of credit at AllianceBernstein, wrote in a blog post this week. “Companies involved in exploration and production—known as ‘upstream operations’—are vulnerable simply because they’ve earmarked too much capital for production. While fracking has helped increase capacity, the cost of developing production capabilities isn’t likely to be fully recovered,” Rudolph-Shabinsky said.

Read more …

Carnage in the tar.

• Tar Sands Producers With World’s Cheapest Oil Face Cascading Woes (Bloomberg)

Canada’s biggest energy producers now face the same prospects of shrinking budgets and declining profit as their smaller rivals as prices drop for what’s already the world’s cheapest oil. Producers including Suncor and Canadian Natural, which each fell the most in at least three years yesterday, operate in one of the most expensive places on earth to produce oil. If crude prices continue sinking following OPEC’s decision not to cut global oil supplies, Canada’s producers big and small will have to tighten their belts to prepare for declining profits. “This is a pretty big shock,” said Justin Bouchard, an analyst at Desjardins Securities in Calgary. “There’s no question there’s going to be a slowdown. Even the big guys will have to look at their capital spending plans.”

Western Canada Select, the Canadian benchmark, has lost more than a third of its value since June, in step with declines for West Texas Intermediate and the international gauge Brent. WCS traded yesterday at $55.94 a barrel, the lowest in the world. Investors reacted by sending the 69-company S&P/TSX Composite Index Energy Sector Index down 5.1%, the most since August 2011. WTI sank as much as 8.1% and Brent fell as much as 8.4% after the announcement from OPEC. Large Canadian energy producers will probably trim capital spending with WTI below $70 a barrel, which reduces cash flow about 30%, Matthew Kolodzie, a Toronto-based credit analyst at RBC Dominion Securities, said in a note yesterday. If oil falls to $60 a barrel and natural gas prices decline as well, Canadian Natural will probably have to lower spending plans by C$2 billion ($1.8 billion), Kolodzie said.
Read more …

You can’t force people to spend, not as a government, not as a central bank. There’s no such thing as omnipotence, and this is where that shows.

• Abe Tested by Weak Retail Sales as Japan Election Looms (Bloomberg)

Japan’s inflation slowed for a third month and retail sales fell more than forecast, showing the economy continues to struggle from a sales-tax increase as Prime Minister Shinzo Abe heads into an election next month. The Bank of Japan’s key price gauge increased 2.9% in October from a year earlier, equivalent to a 0.9% gain when the effects of April’s tax bump are excluded. Retail sales dropped 1.4% from September, more than a 0.5% decline forecast in a Bloomberg News survey. An unexpected increase in production points to resilience among manufacturing exporters that contrasts with the pinch on Japanese households from the weakening yen amid unprecedented monetary easing.

Abe has ordered preparations for a stimulus package as he seeks a fresh mandate for Abenomics in an election Dec. 14. “There is still no clear sign that domestic consumption is recovering after the sales-tax hike,” said Minoru Nogimori, an economist at Nomura Holdings Inc. “Fiscal stimulus would be a plus but probably won’t be large enough to provide sufficient support, given Japan’s fiscal situation.” With today’s data reinforcing forecasts for the BOJ to expand its already unprecedented monetary stimulus, two-year note yields slumped below zero% for the first time and the yen dropped – sending Japanese equities higher.

Read more …

True for many nations.

• Good or Bad? Oil Slide Poses Conundrum as Japan Seeks Inflation (Bloomberg)

When a country imports almost all its energy, a slide in oil prices to a four-year low should be helpful – cutting costs for companies and households. For Japan, it may not be so simple. The reliance of the world’s third-largest economy on fossil-fuel imports has deepened since Japan shuttered its nuclear-power industry following the March 2011 Fukushima meltdowns. With the price of Dubai crude oil – a benchmark for Middle East supply to Asia – down more than a third from a June peak, that ought to mean more disposable cash for households who have been hit by an April sales-tax increase. Economy Minister Akira Amari reinforced this good-news interpretation today, telling reporters in Tokyo that cheap oil helps to offset the impact of a tumbling yen – which drives up the cost of imported goods.

Where sliding energy costs are a challenge is the campaign by policy makers to embed inflationary expectations across the economy. After 15 years of entrenched deflation, central bank Governor Haruhiko Kuroda is trying to get sustained 2% gains in consumer prices. Until wage rises are so big that they make companies push up prices, much of the onus is on import costs, so a slump in oil undercuts Kuroda’s efforts. “The declining oil prices are positive to consumers and companies, but they give Kuroda a headache as he commits on prices rather than economic growth,” Hiroaki Muto, an economist at Sumitomo Mitsui Asset Management in Tokyo. “The answer could be further monetary easing.”

Read more …

Japan can’t afford to lose its domestic investor base due to Kuroda’s bond buying, it’s the only thing that kept the mad government debt situation controllable.

• Kuroda Bond Splurge Crowds Out Individual Buyers (Bloomberg)

The Bank of Japan’s record bond buying is crowding out individual buyers, narrowing the investor base for the world’s second-largest bond market. The government last month canceled sales of sovereign notes maturing in 2016 through financial companies to households because buyers would have to pay more in broker fees than they would get in interest, according to the Ministry of Finance. The BOJ’s 80 trillion yen ($677 billion) a year in debt purchases drove two-year yields below zero today for the first time on record in secondary market trading. The coupon on the latest two-year securities was 0.038%, less than half the rate in June last year, and compared with about 0.02% interest on bank deposits. “The BOJ’s massive JGB buying is hampering efforts to increase sales to individual investors,” said Toru Suehiro, a market economist in Tokyo at Mizuho Securities, one of the 23 primary dealers obliged to bid at government bond auctions.

“Diversifying the investor base is important for the stabilization of the market over the longer term but the excessive decline in yields poses a dilemma in that sense.” BOJ Governor Haruhiko Kuroda has been driving down sovereign yields to encourage investment in riskier corporate notes and stocks. The Ministry of Finance, by contrast, needs to spur demand from a broad range of buyers as 109.72 trillion yen of debt come due this fiscal year, bigger than Indonesia’s economic output. Historical volatility on JGBs surged to the highest since August 2013 this week, adding to concerns over the impact of any exit from monetary easing. The government started sales of JGBs to households in 2003 and began offering some notes at financial companies after the privatization of Japan Post in 2007. In an attempt to get a greater number of individuals to finance the world’s largest debt burden, the ministry in January also switched to monthly sales of 10-year, floating rate bonds and fixed rate, 5-year notes, from every three months previously.

Read more …

With one lower oil prices, deflation can no longer be denied. Or conquered with stimulus.

• Eurozone November Inflation Dips To 0.3% (CNBC)

Eurozone inflation fell again in November amid expectations that the European Central Bank could try to bolster the region’s economy by announcing further stimulus measures. Consumer prices rose 0.3% in November from the same period a year earlier, according to a flash estimate from Eurostat, the EU statistics office. This is down from 0.4% in October and in line with market expectations. The single currency fluctuated in morning trade on Friday amid a slew of economic news. After the inflation number the euro rose to around 1.2446 against the greenback after trading at 1.2435 beforehand. The inflation data come at a key time for the ECB, just days ahead of its next policy meeting on Thursday. The bloc has been staring down the barrel of negative growth and weak demand, with tensions in Ukraine pressuring Germany in particular. Market-watchers have been busy this week placing bets on whether Mario Draghi, president of the ECB, will announce more stimulus, even as soon as next week.

Read more …

Opinions in Germany no longer rhyme. At some point Merkel will have to lower her tone.

• Germany Warns Wrecking Russian Economy Would Be Perilous (Bloomberg)

Germany wants to avoid wrecking Russia’s economy with sanctions imposed in the conflict over Ukraine, Foreign Minister Frank-Walter Steinmeier said. The economic measures are taking a toll on Russia, so the European Union doesn’t need to intensify them, Steinmeier said in a speech today in Berlin. Instead, Germany must take the lead in negotiations aimed at defusing the eight-month conflict on Europe’s eastern periphery, he said. “An economically isolated Russia, one that may face collapse, would not help improve security in Europe or in Ukraine, but would pose a danger to itself and others,” Steinmeier said. “One of the problems is that many people aren’t having a dialogue. That’s not true of the Germans.” Steinmeier echoed Chancellor Angela Merkel’s warning that the standoff with Russia over the conflict in Ukraine will be lasting.

Even as fighting flares between pro-Russian separatists and Ukrainian forces in the former Soviet republic’s east, with Europe accusing Russia of stoking the conflict, Steinmeier said the door to talks should remain open. The clash over Ukraine “won’t be over tomorrow or the day after tomorrow,” Steinmeier said. “I plead as a necessary reaction not to hold senseless talks, but at the same time, not to foreclose simply on all the channels” with Russia. Germany can’t declare Russia, its “rather large neighbor,” a friend or enemy, Steinmeier said. Officials in the 28-member EU who argue for ratcheting up sanctions because they’re working suffer from a “dangerous misunderstanding.” “Can that really be our aim and purpose, to wrestle Russia economically to the ground with those instruments that we have and can sharpen?” Steinmeier said. “My single answer is: No, that’s not true and can’t be the purpose of sanctions.”

Read more …

Taking America apart, one step at a time.

• Junk Bond Carnage, One Company at a Time (WolfStreet)

Storied weapons maker Colt Defense LLC is in a pickle. But it’s not the only junk-rated company in a pickle. The money is drying up. Selling even more new debt to service and pay off old debt is suddenly harder and more expensive to pull off, and holders of the old debt – your conservative-sounding bond fund, for example – are starting to grapple with the sordid meaning of “junk”: Colt announced on Wednesday that it might not be able to make its bond payment in May. [..] This scenario is starting to play out company by company, hitting the most fragile ones first, as investors are becoming at least somewhat reluctant to throw good money after bad. That reluctance has to be overcome with additional compensation in form of yield, thus a greater expense for the companies when they can least afford it.

The junk-debt-funded oil and gas shale revolution is particularly on the hot seat. Its ever-faster moving fracking treadmill of steep decline rates and costly drilling is now smacking into the plunging price of oil. Hoping that the price of oil and gas would only go up, energy companies have drilled $1.5 trillion into the ground since 2000, and they’re now shouldering a huge pile of debt – much of it junk rated. This year, energy companies have issued 15.2% of all new junk bonds. Yet, oil and gas production is only a small part of the US economy. In 2013, their junk bond issuance made up 10.3% of all junk bonds. Back in 2004, it made up 4.3%. That’s how the fracking party has been funded.

The more the price of crude drops, the deeper these companies sink into the morass. At some point, defaults will begin to cascade through the system. The total return on the Merrill Lynch High Yield Energy Index for the last three month was a loss of 5.8%, the worst performance since the fourth quarter of crisis year 2008. More broadly, the average yield of CCC or lower rated bonds, the riskiest junk out there, shot up from 8% in early July to over 10% on Tuesday, according to the BofA Merrill Lynch US High Yield Index. And the High Yield Total Return Index for these types of bonds lost 5.3% over the same period. Meanwhile the BofA Merrill Lynch US High Yield BB Index, which groups together less risky junk bonds, has barely budged with yield at a historically low 4.8%. It’s still fully suspended in the middle of a magnificent bubble.

Read more …

Citigroup’s Willem Buiter is the butt of goldbugs anger today.

• Swiss Vote Provokes ‘6,000-Year Gold Bubble’ Attack (AEP)

5 million Swiss voters will decide on Sunday whether to force the Swiss National Bank to repatriate all its gold from vaults in Britain and Canada, boost its holdings of bullion to 20pc of foreign reserves and then keep the metal forever. The “Save Our Swiss Gold” referendum is a valiant attempt by Switzerland’s army of gold bugs – and the populist Swiss People’s party (SVP) – to lead the world back to the halcyon days of the international Gold Standard. It is a primordial scream against a quantitative easing and money creation a l’outrance by the leading central banks. Yet there is a snag. The Swiss National Bank (SNB) is the biggest printer of them all in relative terms, far outstripping the Bank of Japan, let alone the US Federal Reserve or the Bank of England – mere amateurs at this game. The SNB has boosted its balance sheet to a colossal 83pc of GDP in a maniacal – but fully justified – effort to stop the Swiss franc appreciating beyond 1.20 to the euro, and to head off deflation.

It vowed to print whatever is necessary to buy foreign bonds and defend the exchange rate. It has been true to its word since 2011. At one stage it was mopping up half of the entire sovereign bond issuance of the eurozone each month, a scale of action that the European Central Bank’s Mario Draghi can only dream of. During the eurozone debt crisis, Standard & Poor’s even accused the SNB of becoming a conduit for capital flight, via Switzerland, to German, Dutch and French bonds, and therefore indirectly exacerbating Euroland’s North-South rift. You have to smile when you hear Swiss gold enthusiasts complaining that these foreign bonds – bought with electronic fiat francs created out of thin air – are now losing value as the euro slides against the dollar. But then we all suffer from congnitive dissonance. The result of this buying blitz is that the SNB now has a balance sheet of 522bn francs (£345bn). Only 7.5pc of this is in gold, some 1,040 metric tonnes. It will have to buy 1,733 tonnes to reach the 20pc target mandate by 2019 if the vote passes.

Gold bulls are snorting. The world’s annual mine output is roughly 2,500 tonnes. We can all do the arithmetic. The SNB might persuade a friendly central bank to sell a few crates, but last year the central banks were net buyers. Led by Russia and other BRICS states, they bought 367 tonnes. Citigroup’s Willem Buiter has poked fun at the Swiss plan, and at metal fetishism in general, in a lascerating report entitled Gold: a six thousand year-old bubble revisited. “Making it illegal to ever sell any of the gold the central bank has now or acquires in the future would make the gold useless as an international reserve. The gold stock can never be used for foreign exchange market interventions and it cannot be used as collateral. The gold becomes useless as a store of value of any kind. Its value is therefore zero.” Mr Buiter says gold is a “fiat commodity” of almost no intrinsic value, coveted only as an asset “to the extent that enough people believe it has value as an asset”.

Read more …

Go. Leave.

• Italian Unemployment Rises to Record (Bloomberg)

Italy’s unemployment rate unexpectedly rose above 13% in October, setting a new record as businesses refrain from hiring amid the country’s longest recession since World War II. The unemployment rate rose to 13.2% from a revised 12.9% the previous month, the Rome-based national statistics office Istat said in a preliminary report today. That’s the highest since the quarterly series began in 1977. The median estimate of seven economists surveyed by Bloomberg called for an unemployment rate of 12.6% in October. Youth unemployment rate for those aged 15 to 24 rose to 43.3% last month from 42.7% in September, today’s report showed.

Italian Prime Minister Matteo Renzi has been battling labor unions and politicians from the opposition and within his own party to push through reforms to make the labor market more flexbile and eliminate the gap between overprotected workers with open-ended contracts and younger people with no job security. The proposed reforms are still being discussed by parliament. After the final approval, the government will have another six months to detail the measures and pass them via decrees, meaning the changes won’t be in place until next year at the earliest.

Read more …

“The biggest danger we see right now is a period of window dressing where lip service is paid to grand projects and reforms ..”

• France Paying For Past Mistakes: Economy Minister (CNBC)

French Economy Minister Emmanuel Macron has placed the blame for the sustained weakness in his country’s economy with previous administrations, saying the country was paying for past mistakes. “I do think that this feeling (of frustration) is clearly due to our past and we are paying for past mistakes. But first, during the last two years we have started to reform and now we have decided to accelerate these reforms and I do think that we have to deliver more, more rapidly and explain more – that’s the key point,” he told CNBC on Thursday. “That’s what we want to do and that’s what we are doing but it’s unfair that the current frustration is due to the current situation, it’s due to the past,” he said. France’s socialist government has come under fire for failing to reignite the country’s weak economic activity. More people are now unemployed in the country than ever before and the government has clashed with trade unions in its efforts to reform the labor market.

Macron said the country shouldn’t have to “pay twice”, adding: “we cannot pay for the past.” His comments come after a high-profile report in which proposals were put forward to rescue Germany and France’s economies, the largest and second-largest economies in the euro zone respectively. The economists who authored the report – Henrik Enderlein and Jean Pisani-Ferry, both professors at Germany’s Hertie School of Governance – proposed a package of reforms and initiatives designed to revive growth. They also warned in their report that both countries had no time to lose in implementing reforms. “France and Germany need to act now. And they need to act together. The biggest danger we see right now is a period of window dressing where lip service is paid to grand projects and reforms, but no real steps are taken”, ” the authors said in the 50-page report, noting both countries face elections in 2017.”

Read more …

I smell default.

• Venezuela Burns Through Third of New Chinese Money in a Week (Bloomberg)

Venezuela’s international reserves declined $1.3 billion in the week after President Nicolas Maduro transfered $4 billion of Chinese loans to the central bank. The country’s reserves dropped to $22.2 billion today, according to central bank data. A collapse in global oil prices pushed Venezuela’s foreign currency holdings to an 11-year low earlier this month. Maduro on Nov. 18 ordered the Chinese loan proceeds to be moved from an off-budget fund, so that they would show up in reserves and help boost investor confidence in an economy beset by the world’s highest inflation and widest budget deficit. The following day, Venezuelan bonds rose the most in six years in intraday trading. “If the plan was to calm the bondholders, then burning through a third of that money in five working days doesn’t do it in any way,” Henkel Garcia, director of Caracas-based consultancy Econometrica, said in a telephone interview.

Read more …

It’s about to get worse, not better. The weakest go first.

• Reports of Thailand’s Revival Are Greatly Exaggerated (Bloomberg)

Thailand may still be the best place in the world to get a nose job, even after its military coup last spring. But tentative signs of an economic rebound hardly resolve the deep structural problems that continue to afflict its politics, economy and society.
The Thai stock market is booming, and growth has ticked upward slightly after shrinking almost 2% in the first quarter. The country has retained its position as the world’s No. 1 destination for medical tourism, including cosmetic surgeries. At best, however, May’s coup has only stemmed the bleeding caused by months of political turmoil. The World Bank thinks the country will remain the slowest-growing economy in Southeast Asia through 2016. High household debt levels – more than 80% of gross domestic product – will continue to depress spending. While coup leaders have put some money in citizens’ pockets with millions in payments to rice and rubber farmers, household consumption is projected to grow only 1.5% next year.

The central bank’s easy-money policy has led mostly to a run-up in stock prices. Previous military-led governments in the 1980s were able to jump-start growth through heavy state-directed investment. But today’s ruling generals face a more complex challenge. It’s too late for Thailand to regain low-end manufacturing jobs, which have shifted to cheaper neighbors. To move up the value chain, the country needs to invest in education, research and development, and infrastructure – something juntas have proved no better than civilian governments at doing. Plans to spend $60 billion on transportation infrastructure during the next 10 years will help but not immediately and not enough.

Read more …

“The impact of homelessness on the children, especially young children, is devastating and may lead to changes in brain architecture that can interfere with learning, emotional selfregulation, cognitive skills, and social relationships.”

• America’s Youngest Outcasts (Homeless Children America.org (pdf))

America’s Youngest Outcasts reports on child homelessness in the United States based on the most recent federal data that comprehensively counts homeless children, using more than 30 variables from over a dozen established data sets. A staggering 2.5 million children are now homeless each year in America. This historic high represents one in every 30 children in the United States. Child homelessness increased in 31 states and the District of Columbia from 2012 to 2013. Children are homeless in every city, county, and state—every part of our country. Based on a calculation using the most recent U.S. Department of Education’s count of homeless children in U.S. public schools and on 2013 U.S. Census data:

• 2,483,539 children experienced homelessness in the U.S. in 2013.
• This represents one in every 30 children in the U.S.

From 2012 to 2013, the number of children experiencing homelessness annually in the U.S.:

• Increased by 8% nationally.
• Increased in 31 states and the District of Columbia.
• Increased by 10% or more in 13 states and the District of Columbia.

Major causes of homelessness for children in the U.S. include: (1) the nation’s high poverty rate; (2) lack of affordable housing across the nation; (3) continuing impacts of the Great Recession; (4) racial disparities; (5) the challenges of single parenting; and (6) the ways in which traumatic experiences, especially domestic violence, precede and prolong homelessness for families. The impact of homelessness on the children, especially young children, is devastating and may lead to changes in brain architecture that can interfere with learning, emotional selfregulation, cognitive skills, and social relationships. The unrelenting stress experienced by the parents, most of whom are women parenting alone, may contribute to residential instability, unemployment, ineffective parenting, and poor health.

Read more …

The Price Of Oil Exposes The True State Of The Economy

Nov 272014
 
 November 27, 2014  Posted by at 6:34 pm Finance Tagged with: , , , , , ,  22 Responses »


Jack Delano Cafe at truck drivers’ service station on U.S. 1, Washington DC Jun 1940

We should be glad the price of oil has fallen the way it has (losing another 6% today as I write this). Not because it makes the gas in our cars a bit cheaper, that’s nothing compared to the other service the price slump provides. That is, it allows us to see how the economy is really doing, without the multilayered veil of propaganda, spin, fixed data and bailouts and handouts for the banking system.

It shows us the huge extent to which consumer spending is falling, how much poorer people have become as stock markets set records. It also shows us how desperate producing nations have become, who have seen a third of their often principal source of revenue fall away in a few months’ time. Nigeria was first in line to devalue its currency, others will follow suit.

OPEC today decided not to cut production, but whatever decision they would have come to, nothing would have made one iota of difference. The fact that prices only started falling again after the decision was made public shows you how senseless financial markets have become, dumbed down by easy money for which no working neurons are required.

OPEC has become a theater piece, and the real world out there is getting colder. Oil producing nations can’t afford to cut their output in some vague attempt, with very uncertain outcome, to raise prices. The only way to make up for their losses is to increase production when and where they can. And some can’t even do that.

Saudi Arabia increased production in 1986 to bring down prices. All it has to do today to achieve the same thing is to not cut production. But the Saudi’s have lost a lot of clout, along with OPEC, it’s not 1986 anymore. That is due to an extent to American shale oil, but the global financial crisis is a much more important factor.

We are only now truly even just beginning to see how hard that crisis has already hit the Chinese export miracle, and its demand for resources, a major reason behind the oil crash. The US this year imported less oil from OPEC members than it has in 30 years, while Americans drive far less miles per capita and shale has its debt-financed temporary jump. Now, all oil producers, not just shale drillers, turn into Red Queens, trying ever harder just to make up for losses.

The American shale industry, meanwhile, is a driverless truck, with brakes missing and fueled by on cheap speculative capital. The main question underlying US shale is no longer about what’s feasible to drill today, it’s about what can still be financed tomorrow. And the press are really only now waking up to the Ponzi character of the industry.

In a pretty solid piece last week, the Financial Times’ John Dizard concluded with:

Even long-time energy industry people cannot remember an overinvestment cycle lasting as long as the one in unconventional US resources. It is not just the hydrocarbon engineers who have created this bubble; there are the financial engineers who came up with new ways to pay for it.

While Reuters on November 10 (h/t Yves at NC) talked about giant equity fund KKR’s shale troubles:

KKR, which led the acquisition of oil and gas producer Samson for $7.2 billion in 2011 and has already sold almost half its acreage to cope with lower energy prices, plans to sell its North Dakota Bakken oil deposit worth less than $500 million as part of an ongoing downsizing plan.

Samson’s bonds are trading around 70 cents on the dollar, indicating that KKR and its partners’ equity in the company would probably be wiped out were the whole company to be sold now. Samson’s financial woes underscore how private equity’s love affair with North America’s shale revolution comes with risks. The stakes are especially high for KKR, which saw a $45 billion bet on natural gas prices go sour when Texas power utility Energy Future Holdings filed for bankruptcy this year.

And today, Tracy Alloway at FT mentions major banks and their energy-related losses:

Banks including Barclays and Wells Fargo are facing potentially heavy losses on an $850 million loan made to two oil and gas companies, in a sign of how the dramatic slide in the price of oil is beginning to reverberate through the wider economy. [..] if Barclays and Wells attempted to syndicate the $850m loan now, it could go for as little as 60 cents on the dollar.

That’s just one loan. At 60 cents on the dollar, a $340 million loss. Who knows how many similar, and bigger, loans are out there? Put together, these stories slowly seeping out of the juncture of energy and finance gives the good and willing listener an inkling of an idea of the losses being incurred throughout the global economy, and by the large financiers. There’s a bloodbath brewing in the shadows. Countries can see their revenues cut by a third and move on, perhaps with new leaders, but many companies can’t lose that much income and keep on going, certainly not when they’re heavily leveraged.

The Saudi’s refuse to cut output and say: let America cut. But American oil producers can’t cut even if they would want to, it would blow their debt laden enterprises out of the water, and out of existence. Besides, that energy independence thing plays a big role of course. But with prices continuing to fall, much of that industry will go belly up because credit gets withdrawn.

The amount of money lost in the ‘overinvestment cycle’ will be stupendous, and you don’t need to ask who’s going to end up paying. Pointing to past oil bubbles risks missing the point that the kind of leverage and cheap credit heaped upon shale oil and gas, as Dizard also says, is unprecedented. As Wolf Richter wrote earlier this year, the industry has bled over $100 billion in losses for three years running.

Not because they weren’t selling, but because the costs were – and are – so formidable. There’s more debt going into the ground then there’s oil coming out. Shale was a losing proposition even at $100. But that remained hidden behind the wagers backed by 0.5% loans that fed the land speculation it was based on from the start. WTI fell below $70 today. You can let your 3-year old do the math from there.

I wonder how many people will scratch their heads as they’re filling up their tanks this week and wonder how much of a mixed blessing that cheap gas is. They should. They should ask themselves how and why and how much the plummeting gas price is a reflection of the real state of the global economy, and what that says about their futures. Happy Turkey.

Debt Rattle November 27 2014

Nov 272014
 
 November 27, 2014  Posted by at 12:02 pm Finance Tagged with: , , , , , , , ,  2 Responses »


DPC Wall Street and Trinity Church, New York 1903

• Oil Price Fall Starts To Weigh On Banks (FT)
• Oil Sinks Further As OPEC Meeting Begins (MarketWatch)
• World On Brink Of Oil Price War As OPEC Set To Keep Pumping (Telegraph)
• Oil Bust of 1986 Reminds US Drillers of Price War Risks (Bloomberg)
• Drill On: U.S. Mantra as OPEC Power Wanes in the Face of Shale (Bloomberg)
• Oil Slump Reverberates After Nigeria Currency Devaluation (Reuters)
• Seadrill Plunges on Dividend Suspension as Oil Rig Market Sours (Bloomberg)
• Tightening By Superpower Fed Trumps Mini-Stimulus In Europe And Asia (AEP)
• China’s Industrial Profits Drop Most in Two Years Amid Slowdown (Bloomberg)
• Spanish Consumer Prices Decline More Than Forecast (Bloomberg)
• Juncker Investment Plan Questioned on Capital, Leverage (Bloomberg)
• Greece Paralyzed By Major Strike, Flights Stopped (Reuters)
• After Zero Rates, Sweden Ponders Next Steps To Avoid Deflation (Reuters)
• Europe’s Economy Faces Three Major Risks: Draghi (CNBC)
• Goldman Sachs, HSBC Sued By Jeweller For Fixing Platinum Prices (Independent)
• Attack Dogs Deployed To Save South Africa’s Rhinos (Bloomberg)

A loss of $340 million on just one loan.

• Oil Price Fall Starts To Weigh On Banks (FT)

Banks including Barclays and Wells Fargo are facing potentially heavy losses on an $850 million loan made to two oil and gas companies, in a sign of how the dramatic slide in the price of oil is beginning to reverberate through the wider economy. Details of the loan emerged as delegates of Opec, the oil producers’ cartel, gathered in Vienna to address the growing glut in the supply of oil. Several Opec members have been calling for a production cut to shore up prices, but Saudi Arabia, Opec’s leader and largest producer, signalled that it would not push for a big change in the group’s output targets. Repercussions from the decline in the price of crude, which has dropped 30% since June, are spreading beyond the energy sector, hitting currencies, national budgets and energy company shares.

The price slide is having a serious impact on oil producers that rely on revenues from crude exports to balance their budgets. The Russian rouble has lost 27% of its value since mid-June, when crude began to fall, while the Norwegian krone is down 12% and on Wednesday the Nigerian naira touched a record low. Companies are also being hit, with BP’s shares down 17% since mid-June and Chevron’s down 11%. Shares in SeaDrill, one of the world’s biggest drilling rig owners, fell as much as 18% on Wednesday as it suspended dividend payments. The company has suffered from an oversupply of rigs as the majors respond to crude’s slide by cancelling projects. Now banks are also being affected, with Barclays and Wells said to face potential losses on an energy-related loan.

Earlier this year, the two banks led an $850 million “bridge loan” to help fund the merger of Sabine Oil & Gas and Forest Oil, U.S.-based oil companies. Investors, however, balked at buying the loan when it was first offered in June and slumping oil prices combined with volatile credit markets in the months since have scuppered further attempts to sell, or syndicate, the loan, according to market participants. With underwriting banks unable to offload the loan to investors they are now facing losses on the deal as the value of the two oil companies’ debt erodes. Sabine’s bonds were trading above their face value at around $105.25 in June, but have since fallen to $94.25 – firmly in “distressed” territory. Their yield – which moves inversely to price – has jumped from around 7.05% to 13.4%. Rival bankers estimate that if Barclays and Wells attempted to syndicate the $850m loan now, it could go for as little as 60 cents on the dollar.

Read more …

Isn’t it fun?

• Oil Sinks Further As OPEC Meeting Looms (MarketWatch)

Oil prices extended their losses and sunk to fresh four-year lows on Thursday as expectations of a cut in OPEC oil production faded following the Saudi Arabian oil minister’s comments Wednesday. On the New York Mercantile Exchange, light, sweet crude futures for delivery in January traded at $72.22 a barrel, down $1.47, or 2% in the Globex electronic session. January Brent crude on London’s ICE Futures exchange fell $1.92, or 2.5%, to $75.83 a barrel. The Organization of the Petroleum Exporting Countries meets in Vienna within a few hours to decide whether its members will cut production to remove some of the glut in supply in global markets and boost oil prices. The 12-member oil cartel typically steps in to adjust output when prices move sharply due to excess or insufficient supply. It currently has an oil production ceiling of 30 million barrels a day and has been producing in excess of this level in recent months.

Crude-oil prices have plummeted this year, losing almost 30% of their value since June, mainly due to rising U.S. oil production driven by the shale boom and slowing demand growth in Asia and Europe. Analysts say that OPEC will need to cut oil production much lower than its current ceiling for prices to make a significant recovery. Today’s OPEC meeting and any decision on production cuts is likely to set the tone for oil prices for the next few months and well into 2015. Forget about an OPEC cut: Three delegates told Reuters that OPEC was unlikely to take any action after Russia said it wouldn’t cut in tandem. On Wednesday, Saudi Oil Minister Ali al-Naimi said he expects the market “to stabilize itself eventually,” hinting he wouldn’t push for a cut in OPEC’s production targets. “This is a very clear indication that the Saudis and OPEC will do nothing at the meeting … It is not 100% rock solid or set in stone, but it is a very clear signal,” Michael Wittner, head of oil market research at Societe Generale said. His bearish price forecasts are for $70 Brent and $65 WTI for the next two years.

Read more …

“Saudi oil minister Ali Al-Naimi said: “The market will stabilise itself eventually”. Question is where and when.

• World On Brink Of Oil Price War As OPEC Set To Keep Pumping (Telegraph)

Oil slumped on Wednesday as expectations that Opec will cut production faded following dovish remarks by cartel kingpin Saudi Arabia, which could signal the beginning of a price war. Speaking on the sidelines ahead of Thursday’s critical meeting of the Organisation of Petroleum Exporting Countries (Opec) in Vienna, Saudi oil minister Ali Al-Naimi said: “The market will stabilise itself eventually”. His remarks were interpreted by the market as a signal that the cartel would keep its production ceiling at 30m barrels per day (bpd), which sent the price of crude lower. Brent crude – a global benchmark comprised of a blend of high-quality oil from 15 North Sea fields – fell 1.3pc to $77.30 per barrel after Mr Naimi’s comments, before recovering to trade flat at $78.29 by late afternoon. Brent crude has fallen 30pc since June. Crude traded in the US fell to as low as $74 per barrel as traders bet that Opec will allow the price to fall further amid growing signs of a global price war amid producers.

“There remains little prospect of any production cut being agreed at [Thursday’s] Opec meeting,” said brokers at Commerzbank. “Opec will merely agree to comply better with the current production target of 30m bpd. Iranian officials, traditionally seen as hawks within the cartel of mainly Middle East producers, also appeared to soften their position following an afternoon of closed door meetings with counterparts from Saudi Arabia and Kuwait. Bijan Zanganeh, Iran’s oil minister, told reporters after leaving the talks that Iran was now “close” to the Saudi position, heading into Thursday’s final discussion at the Opec secretariat. Rafael Ramirez, Venezuela’s Opec representative, had tried to galvanise support for production cuts to restore oil prices to around $100 per barrel, after talks with senior Russian oil officials on Tuesday delivered no immediate sign of a consensus. Although Russia is not a member of Opec’s 12 nations, the country is a major oil producer and has expressed concerns over falling prices.

Major Opec nations, Russia and US shale oil drillers now appear on the brink of a price war as these three giant producing blocs fight for a greater share of global demand. Although Opec states enjoy the lowest average production costs – in some cases around $2 per barrel – they have increasingly lost ground in North America, which remains the world’s largest consumer of oil. Some Opec members now want producers outside the cartel, including Russia and the US, to shoulder some of the responsibility for balancing the market by essentially cutting their output. UAE energy minister Suhail Al-Mazrouei said on Wednesday that Opec alone was not responsible for the stability of the oil market. “This is not a crisis that requires us to panic,” he said.

Read more …

“In 1986, the Saudis opened the spigot and sparked a four-month, 67% plunge that left oil just above $10 a barrel.” This time around, the Saudis will achieve that by simply not closing the spigot.

• Oil Bust of 1986 Reminds US Drillers of Price War Risks (Bloomberg)

The last time that U.S. oil drillers got caught up in a price war orchestrated by Saudi Arabia, it ended badly for the Americans. In 1986, the Saudis opened the spigot and sparked a four-month, 67% plunge that left oil just above $10 a barrel. The U.S. industry collapsed, triggering almost a quarter-century of production declines, and the Saudis regained their leading role in the world’s oil market. So while no one expects the Saudis to ramp up output now like they did then and U.S. shale oil companies are pledging to keep drilling regardless, the memory of that bust looms large for American industry executives on the eve of OPEC’s meeting tomorrow.

As the Saudis gather with officials from the 11 other OPEC nations in Vienna, analysts are split on whether the group will cut output to lift prices or leave production unchanged to fight for market share with shale drillers. “1986 was the big price collapse and the industry did not see it coming,” said Michael Lynch, president of Strategic Energy and Economic Research in Winchester, Massachusetts, who has covered the oil sector for 37 years. “It put a lot of them out of business. You just don’t forget it. It’s part of the cultural memory.” The Organization of Petroleum Exporting Countries, responsible for about 40% of the world’s output, pumped 31 million barrels a day in October, exceeding its official target of 30 million. Oil has tumbled more than 30% from a 2014 peak in June.

Read more …

The more they drill, the lower prices will go. They’ll lose financing.

• Drill On: U.S. Mantra as OPEC Power Wanes in the Face of Shale (Bloomberg)

No matter what OPEC countries decide tomorrow about cutting oil output, U.S. producers already know what they’re going to do: drill on. As Saudi Arabia and its 11 fellow members of the Organization of Petroleum Exporting Countries meet for what’s viewed as the cartel’s most important conclave since 2008’s worldwide financial crisis, the U.S. has the most to gain and the least to lose. For the oil industry, a significant production cut by OPEC would lift prices and profits across the board and help finance further U.S. energy innovation. And while a weaker response – or no move – would put more pressure on energy companies, the industry is increasingly insulated by burgeoning North American output. “The U.S. oil industry is going to continue on its growth track whether OPEC comes out with a cutback or not,” Daniel Yergin, vice chairman of consultant IHS. “As oil prices go down, the U.S. industry is going up the learning curve and is better capable of coping with lower prices than it would have been two or three years ago.”

The swagger of U.S. producers in the face of plunging oil prices shows the confidence they’ve gained from upending OPEC’s six decades of market dominance with technology that wrings oil from dense rock for prices as low as $40 a barrel. The shale boom has placed the U.S. oil industry in its strongest position since OPEC began flexing its pricing power in the early 1970s. Investors are taking note, pouring money back into shale producers in the past 10 days after shares fell an average 20% since July. Beyond the ability of producers to remain profitable at lower prices, the broader U.S. economy is even less susceptible to whatever course OPEC might take. A shift away from industries like steelmaking and into services such as health care has helped make the economy less reliant than ever on oil and natural gas, according to government data compiled since 1950.

Since the 1973 Arab oil embargo, the first major shock brought about by OPEC coordination, the amount of oil and gas consumed in the U.S. to generate $1 of gross domestic product has fallen 64%. The U.S. in August imported an average of about 4.8 million barrels a day of crude and petroleum products, a 24% decline from 1986, the year when Saudi Arabia’s market machinations sent prices below $10 a barrel in a crushing blow to U.S. producers. As the services economy has grown, oil demand has fallen, with the U.S. burning 13% less oil in 2013 than 2005. Improvements in fuel consumption mean cars and trucks can travel further on each gallon of gasoline. The nation is 26%age points more efficient in terms of the the energy required to generate economic growth than the global average, according to the U.S. Energy Information Administration.

Read more …

” IMF data shows Nigeria, Russia and Saudi Arabia all need prices above $90 to balance their budgets.”

• Oil Slump Reverberates After Nigeria Currency Devaluation (Reuters)

The impact of sub-$80 oil prices rippled across energy-exporting emerging markets on Wednesday, with investors betting other countries will have to follow Nigeria in devaluing their currencies. Brent crude remained firmly below $80 per barrel and around a third lower from June levels after Saudi Arabia signaled it was unlikely to push for a major change in output when producers’ club OPEC meets on Thursday. Nigeria’s naira hit a record low near 178 per dollar – lower than its new target band of 160-176 per dollar – a day after the central bank devalued the currency by 8% and hiked rates by 100 basis points to conserve its reserves. Central bank governor Godwin Emefiele forecast a sustained drop in oil, saying the $73 per barrel assumed in Nigeria’s 2015 budget may be too optimistic.

“Oil remains on the back foot … it is a relevant dynamic for the rouble and for various parts of the Middle East and Africa,” said Manik Narain, emerging markets strategist at UBS in London. “We will see more pressure on local currencies there and Nigeria is an early example.” The risk that falling revenues will affect spending plans in oil-exporting countries, with unpredictable political and economic consequences, is a prime concern of investors. IMF data shows Nigeria, Russia and Saudi Arabia all need prices above $90 to balance their budgets. Sub-Saharan Africa’s other big oil producer, Angola, saw its kwanza currency trade near a record low hit on Tuesday.

Read more …

These guys are getting scared.

• Seadrill Plunges on Dividend Suspension as Oil Rig Market Sours (Bloomberg)

Seadrill fell the most in six years after the offshore driller controlled by billionaire John Fredriksen suspended dividends as the slump in oil prices weakens demand for rigs. Seadrill, which hadn’t frozen or cut dividends in six years, dropped as much as 19% in Oslo trading, the most since November 2008. The stock was down 17% to 118.3 kroner at 3:58 p.m., the lowest since July 2010. “The decision to suspend the dividend has been a difficult decision for the board,” Fredriksen, chairman of Bermuda-based Seadrill, said in a statement. “However, taking into consideration the significant deterioration in the broader offshore drilling and financing markets over the past quarter, the board believes this is the right course of action.”

The plunge in crude prices since June is blowing through the oil-services industry as clients peg back spending on finding and developing fields. Transocean, one of Seadrill’s largest competitors, earlier this month wrote down the value of its fleet by $2.76 billion. Halliburton, the second-biggest oil-service company, is buying the third-largest, Baker Hughes. Seadrill, which paid owners $1 a share for the first two quarters this year, said in August that level was sustainable until at least the end of 2015. Today’s surprise decision will strengthen the company’s capital position by about $2 billion a year, the company said. “Suspending dividends entirely is the most reasonable thing to do, since the market is looking so bleak,” said Robert Andre Jensen from SpareBank 1 Markets AS. “Fredriksen’s companies are known for paying dividends, but you have to focus on your chances to survive the downturn.”

Read more …

“The liquidity cycle is inflecting downwards. The odds of turbulence are rising ..”

• Tightening By Superpower Fed Trumps Mini-Stimulus In Europe And Asia (AEP)

The apparent tsunami of stimulus from central banks in Asia and Europe is a mirage. The world’s monetary authorities are on balance tightening. There may or may not be good reasons to buy equities at the current giddy heights, but reliance on the totemic powers and friendly intention of central banks should not be one of them. The US Federal Reserve matters most in a financial world that still moves to the rhythm of the 10-year US Treasury bond, and still runs on a de facto dollar standard. More than 40 currencies have dollar pegs or “dirty floats”, including China, joined to America’s hip whether they like it or not. Some $11 trillion of cross-border loans and bonds issued outside the US are denominated in dollars. The US capital markets are still a colossal $59 trillion, more than the total for Europe and Japan combined.

The Institute of International Finance says the impact of Fed action on capital flows to emerging markets is “twice as large” as moves by the European Central Bank. The Fed can hardly put off rate rises for much longer as the US economy grows at a 3.9pc clip and the jobless rate drops to a six-year low of 5.8pc. The “quit rate” tracked by labour economists as a barometer of the jobs market is suddenly surging, a clear sign that slack is vanishing and wage pressures will soon rise. The world is already turning on its axis even before the Fed pulls the trigger, as if the QE era were a memory. The dollar largesse that flooded the commodity nexus and drove the credit booms of Asia, Latin America and Africa is draining away. “The liquidity cycle is inflecting downwards. The odds of turbulence are rising,” said CrossBorder Capital, which monitors global flows.

Fresh money creation in Japan, China and the eurozone would not offset a liquidity squeeze by the Fed in a symmetric fashion even if it were happening, but it is not in fact happening on anything like an equivalent scale, and may not do so for a long time. The “happy handover” scenario is wishful thinking. China is tightening at a slower pace, but it is still tightening. The surprise rates cuts last week are less than meets the eye. The People’s Bank of China (PBOC) regulates the level of credit in the economy through curbs on quantity, not by adjusting the cost of credit. These controls are still in place. It is too early to conclude that President Xi Xinping has capitulated and ordered the PBOC to reflate, pushing the day of reckoning into the future once again. The balance of evidence is that Beijing is still attempting – with great difficulty – to deflate China’s $26 trillion credit boom before it turns into a national tragedy.

Read more …

” .. investment in fixed assets such as machinery expanded the least since 2001 ..”

• China’s Industrial Profits Drop Most in Two Years Amid Slowdown (Bloomberg)

Industrial profits in China fell the most in two years, underscoring the need for looser monetary conditions as the world’s second-largest economy slows. Total profits of China’s industrial enterprises fell 2.1% from a year earlier in October, the National Bureau of Statistics said today in Beijing. That compares with September’s 0.4% increase and is the biggest drop since August 2012, based on previously reported data.

The People’s Bank of China, which last week cut benchmark interest rates, refrained from selling repurchase agreements in open-market operations today for the first time since July, loosening monetary policy further. Mired by a property slump, overcapacity and factory-gate deflation, China is headed for its slowest full-year economic expansion since 1990. Data released Nov. 13 showed the economy’s slowdown deepened in October. Factory production rose 7.7% from a year earlier, the second weakest pace since 2009, while investment in fixed assets such as machinery expanded the least since 2001 from January through October. Retail sales gains also missed economists’ forecasts last month.

Read more …

And it’s supposed to be doing so well?!

• Spanish Consumer Prices Decline More Than Forecast (Bloomberg)

Spanish consumer prices fell more than economists forecast in November, which may raise concerns that deflation is taking hold in the euro region’s fourth-largest economy. Prices dropped 0.5% from a year earlier, the Madrid-based National Statistics Institute said today. The decline, based on a European Union measure, was bigger than the 0.3% forecast by economists in a Bloomberg News survey. Economic growth was unchanged at 0.5% in the third quarter, INE said in a separate release, confirming its Oct. 30 estimate. Euro-area data tomorrow is forecast to show inflation in the 18-nation currency region slowed to 0.3% in November to match the least since 2009.

European Central Bank policy makers are watching for signs that additional stimulus may be needed and have expert committees examining further measures to help boost near-stagnant growth to add to long-term loans and asset-purchase programs. “The data show risks of deflation remain high for some countries,” said Diego Trivino, chief economist at Intermoney Valores in Madrid. “Price drops in Spain are forced and structural as it’s the only way it can regain competitiveness in an environment of near-zero inflation in the euro region.” Spanish bond yields fell to a record low this week along with those of most members of the 18 nation euro region after ECB President Mario Draghi stoked speculation of a new stimulus program extending to sovereign bonds.

Read more …

Juncker is a windbag, and plans like this are what comes out of such bags.

• Juncker Investment Plan Questioned on Capital, Leverage (Bloomberg)

German Chancellor Angela Merkel said she supports the European Commission’s 315 billion-euro ($394 billion) investment plan “in principle” as businesses around Europe sounded a note of caution. “We stress that investments are important, but that it has to be clear above all where the projects of the future lie,” Merkel, who announced Germany’s own 10 billion-euro investment program earlier this month, told the Bundestag in Berlin yesterday. The investment plan unveiled by commission President Jean-Claude Juncker will use 5 billion euros in cash from the European Investment Bank and 16 billion euros in European Union guarantees. The start-up money, projected to have an impact of 15 times its size, will serve as capital for a new EIB unit that can share risk with private investors.

The fund doesn’t have sufficient capital, Spanish Economy Minister Luis de Guindos said in Madrid yesterday. He described the commission’s leverage projection as “a bit high.” It’s right to focus on measures “to raise growth prospects across Europe and the emphasis on increasing private-sector investment,” British Chancellor of the Exchequer George Osborne said in a statement. The program, called the European Fund for Strategic Investments, is set to be operational by mid-2015. It doesn’t require EU member nations to commit any new money or alter existing budget agreements. The Brussels-based commission will dedicate 8 billion euros of existing funds to backstop its guarantee.

“Using a small amount of public funds to leverage private-sector provision can be a successful way to ensure that we choose projects that drive productivity and growth,” said Markus Beyrer, director general at BusinessEurope, a lobby representing employers from 35 nations. “We hope the leverage ratios set out in the investment plan can be achievable, but we must ensure that projects taken forward are genuinely ones that would not have taken place without the new fund.” By taking on some of the risk of new projects through a first-loss liability, the investment fund aims to attract cash-rich banks and companies to support investments in energy, broadband and transport infrastructure and back risk finance for small and medium-sized companies.

Read more …

Go. Leave.

• Greece Paralyzed By Major Strike, Flights Stopped (Reuters)

Greek labour unions staged a 24-hour strike on Thursday that cancelled hundreds of flights, shut public offices and severely disrupted local transport, in the first major industrial action to cripple the austerity-weary country in months. Private sector union GSEE and its public sector counterpart ADEDY called the walkout to protest against planned layoffs and pension reform demanded by European Union and International Monetary Fund lenders who have bailed out Greece twice. All Greek domestic and international flights were cancelled after air traffic controllers joined the strike. Trains and ferries also halted services. Hospitals worked on emergency staff while tax and other local public offices remained shut. “GSEE is resisting the dogmatic obsession of the government and the troika with austerity policies and tax hikes,” the union said in a statement this week.

It accused the government of trying to take the labour market back to “medieval times” and of implementing policies that are causing a “humanitarian crisis”. Thousands of Greeks were preparing to march to parliament later on Thursday as part of rallies to mark the strike. The two unions last held a general strike in April. Major protests have declined sharply since then as frustration and anger give way to a mood of despondency and resignation over a jobless rate exceeding 25% and a sharp fall in incomes. Turnout at Thursday’s rallies could provide a key measure of the opposition facing Prime Minister Antonis Samaras’s conservative-led government, which is under pressure from EU/IMF lenders to impose more cutbacks to balance next year’s budget.

Read more …

Yep. Krugman was here.

• After Zero Rates, Sweden Ponders Next Steps To Avoid Deflation (Reuters)

What should a central bank do next when it already has zero interest rates and arguably still faces the threat of Japanese-style deflation? If it’s the Swedish Riksbank, it should keep cutting, and do so soon, says Lars Svensson. Svensson no longer has a say; he quit as a deputy Riksbank governor last year after failing to persuade fellow board members to cut rates aggressively. Last month, they heeded his advice, lowering the repo rate to 0% and pushing back the official forecast for when the Riksbank will start tightening monetary policy again to mid-2016. After years of tense, polarized meetings that eventually led to Svensson’s resignation, a united Riksbank now sees zero rates as enough to push inflation up toward its 2% target. Svensson disagrees, saying Sweden should go into negative rates – effectively charging banks to deposit funds at the central bank – to avoid the deflation which has trapped Japan in low economic growth punctuated by periodic recessions for more than a decade.

“From this point it is unlikely that the current policy at zero is enough,” he told Reuters. “They should lower to -0.25 or even -0.50. The next meeting would be the natural time.” The Riksbank’s next policy meeting is on Dec. 15, with its decision announced the following morning. Rate-setters have not ruled out negative rates, but Riksbank Governor Stefan Ingves has rejected the comparison with Japan, pointing to expected Swedish growth this year of around 1.9%, with the economy moving up a gear again in 2015. Nevertheless, Swedish consumer prices have been flat or falling for most of the last two years on an annual basis. Underlying inflation, the Riksbank’s preferred measure which excludes interest rate effects, was 0.6% in October.

Read more …

Draghi himself is a big risk.

• Europe’s Economy Faces Three Major Risks: Draghi (CNBC)

Europe’s recovery faces three risks – unemployment and a lack of productivity and structural reforms, according to the European Central Bank’s President, Mario Draghi. In a speech to be delivered to the Finnish Parliament later Thursday, Draghi concedes that the euro area economic outlook “is surrounded by a number of downside risks.” According to a transcript released ahead of the speech to Finnish lawmakers, Draghi will say that the euro zone’s “recovery will likely be dampened by high unemployment, sizeable unutilized capacity, and the necessary balance sheet adjustments….Inflation in the euro zone remains very low (and) meanwhile, we are facing continuously sluggish money and credit dynamics.”

“We have seen a weakening in the euro area’s growth momentum over the summer Also, most recent forecasts by private and public sector institutions have been revised downwards. Our expectation for a moderate recovery in the next years still remains in place, reflecting our monetary policy measures, the ongoing improvements in financial conditions, and the progress made vis-à-vis structural reforms and fiscal consolidation,” he said. His comments come amid speculation as to whether the ECB will implement a U.S.-style quantitative easing program to stimulate the euro zone economy in the face of slowing growth, disinflation and low consumer confidence – at a 9-month low in November.

Read more …

Why isn’t Washington suing them?

• Goldman Sachs, HSBC Sued By Jeweller For Fixing Platinum Prices (Independent)

Goldman Sachs and HSBC are among a group of banks being sued in the US for allegedly fixing platinum and palladium prices. Modern Settings — a jeweller that buys precious metals and derivatives set on their prices — claims the banks “were privy to and shared confidential, non-public information about client purchase and sale orders that allowed them to glean information about the direction” of prices. “This unlawful behaviour allowed defendants to reap substantial profits, while non-insiders, which include plaintiffs, were injured,” lawyers acting for the company added. Separately, HSBC is facing a probe into allegations that an employee leaked confidential client information to a major hedge fund, according to reports. The leak is alleged to have taken place in March 2010, when HSBC was advising Prudential on its failed bid for AIA. A senior HSBC trader is said to have alerted a trader at hedge fund Moore Capital Management about a transaction taking place.

Read more …

It’s going to take a lot more than dogs.

• Attack Dogs Deployed To Save South Africa’s Rhinos (Bloomberg)

Strapped into a black nylon harness, Venom abseils from a helicopter 100 feet to a bush clearing below. The two-year-old Belgian Shepherd’s master Marius slides down in tandem and unclips his ward. Then the dog races across the grass and tears down a man wearing a felt-stuffed bite suit. Venom is part of an army of dogs being trained as South African defense company Paramount Group’s contribution to fighting the poachers in South Africa, home to most of the world’s rhinos. Prized for their horns, which are used in Asian traditional medicine, a record 1,020 rhinos have been slaughtered in the country this year, triple the number three years ago.

The Malinois, as the breed is also known, “can work in extreme conditions,” Henry Holsthyzen, who runs Paramount’s K9 Solutions dog academy, said at a presentation of the year-old school yesterday. “It’s been proven useful in Iraq and Afghanistan. It’s high energy, highly intelligent and very fast. It’s an awesome package.” Rhino horns are made of the same material as human hair or finger nails, yet is more valuable than gold by weight. Prices for a kilogram range from $65,000 to as much as $95,000 in China and Vietnam, where consumers buy them in a powdered form to ingest as a supposed cure for cancer and to try improve their libido. South Africa is trying a number of measures to end the poaching, including setting up a protection zone within the Israel-sized Kruger National Park, moving rhinos to private ranches and deploying soldiers to fight poachers.

Read more …

Debt Rattle November 26 2014

Nov 262014
 
 November 26, 2014  Posted by at 11:11 am Finance Tagged with: , , , , , , , , , , ,  8 Responses »


Arthur Rothstein Oregon or Bust, family fleeing South Dakota drought Jul 1936

• Banking’s Toxic Culture ‘Will Take A Generation To Clean Up’ (Guardian)
• Consumer Confidence in US Unexpectedly Dropped in November (Bloomberg)
• Case Shiller Reports “Broad-Based Slowdown For Home Prices” (Zero Hedge)
• BEA Revises 3rd Quarter 2014 US GDP Growth Upwards to 3.89% (CMI)
• Refinancing Boom Exposing Risks in US Property Bonds (Bloomberg)
• Abe Sales Tax Backfiring With More Debt Not Less (Bloomberg)
• Japan Is Running Out of Options (Bloomberg)
• Eurozone ‘Major Risk To World Growth’: OECD (CNBC)
• Do German Bonds Face Japanification? (CNBC)
• UK Housing Market Cools Rapidly (Guardian)
• Commodity Exporters Like Cheaper Currencies (A. Gary Shilling)
• On This Day, 138 Years Ago, The Idea Of QE Was Born (Art Cashin)
• A Bearish Hedge Fund Bets Against the Bulls and Still Profits (NY Times)
• Saudi Arabia Says No One Should Cut Output, Oil Will Stabilize
• Pre-OPEC Producer Meeting Fails to Deliver Oil Output Cut (Bloomberg)
• The Unbearable Over-Determination Of Oil (Ben Hunt)
• Who Will Wind Up Holding the Bag in the Shale Gas Bubble? (Naked Capitalism)
• US Oil Producers Can’t Kick Drilling Habit (FT)
• The Environmental Downside of the Shale Boom (NY Times)
• Obama Climate Envoy: Fossil Fuels Will Have To Stay In The Ground (Guardian)
• Cracks Form in Berlin Over Russia Stance (Spiegel)
• Europe Looks ‘Aged And Weary’: Pope Francis (CNBC)

Why should it? Just regulate the heebees out of them or close them down.

• Banking’s Toxic Culture ‘Will Take A Generation To Clean Up’ (Guardian)

Overhauling the broken culture of high street banking will take a generation to achieve, according to a report that found UK banks have received 20m customer complaints since the financial crisis. The report, by the thinktank New City Agenda, calculated that in the last 15 years the retail operations of banks had incurred £38.5m in fines and redress for mistreatment of customers. Andre Spicer, a professor at Cass Business School and the report’s lead author, said: “Most people we spoke to told us that real change will take at least five years. “There was some uncertainty as to how these changes were being translated into good practice at the customer coalface. Many culture change initiatives are fragile, and their success is not ensured. It’s clear to us that much work still needs to be done.”

The report concluded that it will take a generation to end a sales culture exposed by the 2008 crisis. It said UK banks did not address cultural change until the eruption of the Libor scandal in 2012, having failed to act after the emergence of mis-selling debacles such as the payment protection insurance scandal. “A toxic culture, decades in the making, will take a generation to clean up,” said the founders of New City Agenda, who are Labour peer Lord McFall, Conservative MP David Davis, and Liberal Democrat peer Lord Sharkey. They added: “Some frontline staff told us they still feel under significant pressure to sell. Complaints continue to rise and trust remains extremely low. Most of the people we talked to believed that real change, and as a consequence the better treatment of customers, will take some time to achieve.”

Read more …

Will they ever stop using the word ‘unexpectedly’? It’s certainly a favorite over at Bloomberg, and not just there.

• Consumer Confidence in US Unexpectedly Dropped in November (Bloomberg)

Consumer confidence unexpectedly declined in November to a five-month low as Americans became less upbeat about the economy and labor market. The Conference Board’s index fell to 88.7 this month from an October reading of 94.1 that was the strongest since October 2007, the New York-based private research group said today. The figure last month was weaker than the most pessimistic estimate in a Bloomberg survey of economists. The decline this month interrupts a steady pickup in sentiment since the middle of the year and shows attitudes about the economy would benefit from bigger wage gains. While confidence slipped, buying plans picked up, indicating spending will be sustained on the heels of stronger job growth and lower fuel costs.

The drop this month “doesn’t change our view that the trend in consumer confidence is moving upwards,” said David Kelly, chief global strategist at JPMorgan Funds in New York. “Gasoline prices are down, the unemployment rate is down, home prices are gradually rising, and stock prices are certainly rising.” The median forecast of 75 economists in the Bloomberg survey called for a reading of 96, with estimates ranging from 93.5 to 99 after a previously reported October index of 94.5. The Conference Board’s measure averaged 96.8 during the last expansion and 53.7 during the recession that ended in June 2009.

Read more …

I’m wondering how this squares with that GDP revision.

• Case Shiller Reports “Broad-Based Slowdown For Home Prices” (Zero Hedge)

While the just revised Q3 GDP surprised everyone to the upside, the Case Shiller index for September which was also reported moments ago, showed yet another month of what it called a “Broad-based Slowdown for Home Prices.” The bad news: the 20-City Composite gained 4.9% year-over-year, compared to 5.6% in August. However, this was modestly above the 4.6% expected. However, what was more troubling is that on a sequential basis, the Top 20 Composite MSA posted a modest -0.03% decline, the first sequential drop since February. And from the report itself: “The National Index reported a month-over-month decrease for the first time since November 2013. The Northeast region reported its first negative monthly returns since December 2013 and its worst annual returns since December 2012 due to weaknesses in Washington D.C. and Boston.”

Read more …

Some useful details.

• BEA Revises 3rd Quarter 2014 US GDP Growth Upwards to 3.89% (CMI)

In their second estimate of the US GDP for the third quarter of 2014, the Bureau of Economic Analysis (BEA) reported that the economy was growing at a +3.89% annualized rate, up +0.35% from their first estimate for the 3rd quarter but still down some -0.70% from the 4.59% annualized growth rate registered during the second quarter. The modest improvement in the headline number masks substantial changes in the reported sources of the annualized growth. The previously reported significant inventory draw-down almost vanished completely (dropping to a mere -0.12% impact on the headline number). Improving fixed investments added +0.23% to the headline, with nearly all of that improvement from spending for commercial equipment. Consumer spending for goods was also reported to be growing 0.27% in this report, while consumer spending for services was essentially unchanged (+0.02%).

Offsetting those upside revisions was a significant erosion in the previously reported export growth, which subtracted -0.38% from the headline. The contribution from imports in the headline number also weakened, taking the annualized growth down another -0.17%. Governmental spending was also revised down slightly, knocking another -0.07% from the headline. Nearly all of that downward revision to governmental spending was from reduced state and local investment in infrastructure. Despite the increased consumer spending, households actually took a disposable income hit in this revision – losing $146 in annualized per capita disposable income (now reported to be $37,525 per annum). This is down $344 per year from the 4th quarter of 2012. The spending growth reported above came exclusively from reduced household savings, which dropped a full 0.5% in this report.

As mentioned last month, softening energy prices play a major role in this report, since during the 3rd quarter dollar-based energy prices were plunging (and have continued their dive since). US “at the pump” gasoline prices fell from $3.68 per gallon to $3.32 during the quarter, a 9.8% quarter-to-quarter decline and a -33.8% annualized rate – pushing most consumer oriented inflation indexes into negative territory. During the third quarter (i.e., from July through September) the seasonally adjusted CPI-U index published by the Bureau of Labor Statistics (BLS) was actually mildly dis-inflationary at a -0.10% (annualized) rate, and the price index reported by the Billion Prices Project (BPP — which arguably reflected the real experiences of American households) was slightly more dis-inflationary at -0.18% (annualized).

Yet for this report the BEA effectively assumed a positive annualized quarterly inflation of 1.40%. Over reported inflation will result in a more pessimistic growth data, and if the BEA’s numbers were corrected for inflation using the appropriate BLS CPI-U and PPI indexes the economy would be reported to be growing at a spectacular 5.42% annualized rate. If we were to use just the BPP data to adjust for inflation, the quarter’s growth rate would have been an astounding 5.52% annualized rate.

Read more …

The smell of volatility on the morning.

• Refinancing Boom Exposing Risks in US Property Bonds (Bloomberg)

A $40 million penalty wasn’t enough to keep the owner of San Francisco’s Parkmerced apartment complex from the chance to lock in record-low interest rates and take advantage of the property’s $1.5 billion value. While a landlord willing to pay almost 63 times the average fee to refinance early is a bullish sign for commercial real estate, it’s less so for bond investors facing $295 billion of mortgages that come due during the next three years. That’s because the securities are increasingly tied to the market’s weakest properties, many of them financed during the peak of the real-estate boom in 2007, as the strongest are paid off. More property owners are jumping on a drop in financing costs and loosening terms to pay off their mortgages. That helped shrink the amount of debt maturing before the end of 2017 from $332 billion at the start of 2014, according to Bank of America data.

“If you’re a well-capitalized entity, you’re going to do it,” Richard Hill, a debt analyst at Morgan Stanley, said. That could leave commercial-mortgage bond investors “holding the bag on a bunch of lower-quality loans.” Properties such as skyscrapers, shopping malls, hotels and apartment complexes are attracting investors from sovereign wealth funds to insurance companies as they seek higher-yielding assets amid six years of Federal Reserve policies to hold short-term interest rates near zero. Wall Street banks are on pace to issue $100 billion of securities backed by commercial real estate this year after issuance doubled to $80 billion in 2013, according to data compiled by Bloomberg. Sales, which peaked at $232 billion in 2007, are poised to climb to $140 billion in 2015, Credit Suisse Group AG analysts led by Roger Lehman forecast in a Nov. 21 report.

Sales of the securities also are being fueled by rules that will require banks to retain some portion of loans that are sold to investors as securities, according to Morgan Stanley’s Hill. That may increase financing costs when they take effect in 2016. Ray Potter, founder of R3 Funding, a New York-based firm that arranges financing for landlords and investors, said he’s advising clients not to wait to refinance as economists forecast the Fed will raise rates next year for the first time since 2006. There has been a surge in borrowers looking to refinance in the past couple of months, Potter said. “If you like that coupon, lock it in for 10 years,” he said. While the interest rate could dip even lower, it’s not worth the risk because “when it moves higher it moves fast,” he said.

Read more …

“Japan remains doomed by its demographics and, of course, by its horrible debt.”

• Abe Sales Tax Backfiring With More Debt Not Less (Bloomberg)

What started as a plan to reduce Japan’s debt is turning into a reason to issue more bonds. Prime Minister Shinzo Abe’s administration implemented a higher sales tax in April to boost revenue as government liabilities ballooned to 1 quadrillion yen ($8.5 trillion), more than double the nation’s yearly economic output. Consumption plunged and the economy fell into a recession, prompting companies including Mirae Asset Global Investments Co. and High Frequency Economics to predict even more sovereign debt sales to revive growth. “The government’s policies have failed,” Will Tseng, a money manager in Taipei at Mirae Asset, which manages about $62 billion, said in an e-mail Nov. 20. “They’re still issuing more debt and printing more money to try to help the economy. They’re in a really bad cycle.” He said he’s staying away from Japanese bonds.

The cost of protecting Japan’s debt from default surged for eight straight days and the yen tumbled to a seven-year low as Abe called a snap election and delayed plans to further increase the sales tax by 18 months. Bank of Japan Governor Haruhiko Kuroda on Oct. 31 boosted the amount of government bonds he plans to buy to as much as 12 trillion yen a month, a record. Japan will go back to its routine of borrowing more to fund plans to spur growth, said Carl Weinberg, the chief economist at High Frequency Economics in Valhalla, New York. What it needs to do is allow immigration to keep the population from shrinking, he said Nov. 18 on the “Bloomberg Surveillance” radio program. “The population and the economy are contracting, and the debt is growing, and that’s an unsustainable trend,” Weinberg said. “Japan remains doomed by its demographics and, of course, by its horrible debt.”

Read more …

” .. Kuroda now has a budding mutiny on his hands. Many of his staffers think the central bank has already gone too far to weaken the yen and buy virtually every bond in sight.”

• Japan Is Running Out of Options (Bloomberg)

The New York Times recently lit up the Japanese Twittersphere with a cartoon that was a little too accurate for comfort. In it, a stretcher marked “economy” is loaded into an ambulance with “Abenomics” painted on the side; the vehicle lacks tires and sits atop cinder blocks. Prime Minister Shinzo Abe looks on nervously, holding an IV bag. The image aptly sums up Japan’s failure to gain traction in its push to end deflation. The Bank of Japan’s unprecedented stimulus and Abe’s pro-growth reforms have yet to spur a recovery in inflation and gross domestic product growth, and the country is yet again in recession. Worse, BOJ Governor Haruhiko Kuroda is rapidly running out of weapons in his battle to eradicate Japan’s “deflationary mindset.”

Minutes from the central bank’s Oct. 31 board meeting, at which officials surprised the world by expanding an already massive quantitative-easing program, show that Kuroda now has a budding mutiny on his hands. Many of his staffers think the central bank has already gone too far to weaken the yen and buy virtually every bond in sight. That’s a problem for Kuroda and Abe in two ways.

First, board members warned that the costs of further monetary stimulus outweigh the benefits. We already knew that Kuroda had only won approval for his shock-and-awe announcement by a paper-thin 5-4 margin, and that Takahide Kiuchi dissented when the BOJ boosted bond sales to about $700 billion annually. But the minutes suggest Kuroda came as close to any modern BOJ leader ever has to defeat on a policy move. Cautionary voices like Kiuchi’s worry that the BOJ could be “perceived as effectively financing fiscal deficits.” I’d say it’s too late for that. Of course the BOJ is acting as the Ministry of Finance’s ATM, just as Abe intended when he hired Kuroda. Still, the fact is that Kuroda’s odds of getting away with yet another Friday surprise are nil at best.

Second, maintaining stability in the bond market just got harder. The only way Kuroda can stop 10-year yields – currently 0.44% – from spiking as he tries to generate 2% inflation is by making ever bigger bond purchases. But fellow BOJ board members will be giving Kuroda less latitude to cap market rates. Japan is lucky in one way: Given that more than 90% of public debt is held domestically, Tokyo can the avoid wrath of the “bond vigilantes.” Kuroda further neutralized these activist traders by saying there’s “no limit” to what he can do to make Abenomics work. The fact that so many of his colleagues are skeptical of the policy, however, undermines Kuroda’s credibility. If markets begin to doubt his staying power, yields are sure to rise.

Read more …

The entire world is a risk to world growth.

• Eurozone ‘Major Risk To World Growth’: OECD (CNBC)

The eurozone poses a serious danger for global growth, with the world’s economy already “in low gear”, the Organisation for Economic Co-operation and Development (OECD) said on Tuesday. “The euro area is grinding to a standstill and poses a major risk to world growth, as unemployment remains high and inflation persistently far from target,” the OECD said in the 96th edition of its Economic Outlook. The euro zone’s fledgling recovery—which started at the end of 2013—has been a cause for concern over recent months, with gross domestic product (GDP) rising only 0.2% quarter-on-quarter between July and September. Policymakers are also battling with very low inflation and high unemployment—around one-quarter of Spaniards and Greek remain without jobs.

The OECD sees euro zone economic growth at 0.8% this year. This is better than the economic contraction the currency union suffered in 2012 and 2013, but below average growth of 1.1% between 2002 and 2011. By comparison, the OECD expects the world’s economy to expand by 3.3% this year. As with the euro zone, this is an improvement on 2012 and 2013, but below the 2002-2011 average of 3.8%.”A moderate improvement in global growth is expected over the next two years, but with marked divergence across the major economies and large risks and vulnerabilities,” the OECD said.

A euro zone analyst at the Economist Intelligence Unit said the risks to the world economy posed by the euro zone were even larger than the OECD forecast.”The euro zone’s fundamental institutional deficiencies are now exacting a damaging price, by hampering the formulation and implementation of policy responses to the ongoing slump,” said Aengus Collins in a research note emailed after the OECD report.”In addition, the OECD overlooks political risk, which is rising sharply in line with voter disaffection.” Major countries expected to post solid growth include the U.S., which the OECD predicts will expand by 2.2% this year and 3.1% next. China, meanwhile, is seen growing by an impressive 7.3% in 2014, before slowing to 7.1% in 2015.

Read more …

More interestingly, where will that leave Spanish and Italian bonds?

• Do German Bonds Face Japanification? (CNBC)

The euro zone’s long disinflation has spurred fears it will tumble all the way to Japan-style deflation, with some concerned yields on the continent’s safe-haven bond, the German bund, could remain depressed for the long haul. “While we are still not convinced that the euro zone is the new Japan, despite the many similarities in their economic predicaments, we are increasingly of the view that the 10-year Bund yield will remain exceptionally low for at least the next couple of years,” John Higgins, chief markets economist at Capital Economics, said in a note Wednesday. The 10-year bund is yielding around 0.75%, around all-time lows, compared with the 10-year Japanese government bond (JGB) at around 0.45% after a decades-long downtrend.

Japan’s central bank cut its benchmark interest rate to 0.5% in 1995, a move that pushed the 10-year JGB yield below 1% after three years, Higgins noted. “Investors did not know in 1998 that Japan’s key policy rate would remain near zero for the next 16 years (and counting). But the prospect of it remaining there for the foreseeable future was enough to keep the 10-year yield quite firmly anchored,” he said. “We see no reason why a similar outcome couldn’t happen in Germany,” as the bund yield fell below 1% after the ECB cut its main rate to 0.5% in mid-2013.

Read more …

” .. new mortgage approvals hit a 17-month low of 37,076 in October. That total was down nearly a quarter from January’s 76-month high of 48,649. It was also down 16% year on year ..”

• UK Housing Market Cools Rapidly (Guardian)

Britain’s housing market is cooling rapidly as a result of tougher Bank of England mortgage market requirements, high prices and the uncertainty caused by the coming general election. The prospect of higher interest rates at some point in 2015 is also dampening demand. Figures from the British Bankers’ Association showed a sharp slowdown in mortgage approvals, while Nationwide building society has reported a drop in lending volumes. The BBA said that new mortgage approvals hit a 17-month low of 37,076 in October. That total was down nearly a quarter from January’s 76-month high of 48,649. It was also down 16% year on year. However, a house price crash is unlikely, according to new forecasts. Halifax’s forecasts for 2015 point to a further rise in values of 3% to 5% next year, despite uncertainty about the general election. Earlier this month Halifax reported that house prices fell during October and recorded their smallest quarterly increase in nearly two years.

The October survey by the Royal Institution of Chartered Surveyors found that buyer inquires shrank for the fourth month running. Half-year results from Nationwide building society added to the gathering evidence of a weakening market, with net lending down by £2bn to £3.6bn in the six months to 30 September – although lending to landlords rose slightly. The society, which reported a doubling in pre-tax profits and higher savings inflows, said part of the reason net lending was down was tougher competition from other major mortgage providers, such as Halifax and Santander. “The BBA data add to now pretty widespread and compelling evidence that the housing market has come well off the boil,” said Howard Archer, an economist at IHS Insight. “The fact that mortgage approvals are substantially below their January peak levels – and falling – after lenders have got to grips with the new mortgage regulations points to an underlying moderation in housing market activity.”

Read more …

“The Canadian, Australian and New Zealand dollars as well as the Brazilian real, Russian ruble and other emerging economies are all playing this game. Those countries want weaker currencies to offset declining commodity exports ..”

• Commodity Exporters Like Cheaper Currencies (A. Gary Shilling)

The U.S. dollar is strengthening for reasons that go beyond deliberate devaluations of the euro and yen. Major commodity exporters are also purposely pushing down their currencies as commodity prices drop. The Canadian, Australian and New Zealand dollars as well as the Brazilian real, Russian ruble and other emerging economies are all playing this game. Those countries want weaker currencies to offset declining commodity exports. In the past year, the head of the Reserve Bank of Australia has expressed sympathy for a weaker Aussie in view of soft mineral exports and a moderately growing economy.

Recently, the head of the Reserve Bank of New Zealand said that, even with the drop in the New Zealand dollar, the kiwi is at “unjustifiable” levels and isn’t reflecting the weakness in the global commodity market. Earlier, the kiwi was propelled by strong meat and dairy exports to China and robust prices for milk, which have plunged. New Zealand’s economic growth is in jeopardy. The Bank of Canada recently left its benchmark interest rate unchanged at 1% and expects inflation to be near its 2% target. But a decline in energy and other commodity prices has hurt the Canadian economy, which is growing at the same slow 2% rate as the U.S. The commodity bubble in the early 2000s prompted producers of industrial commodities, such as copper, zinc, iron ore and coal, to increase production. New output resulted just in time for the price collapse in the 2007 to 2009 recession.

The subsequent rebound didn’t hold and commodity prices have been falling since early 2011, no doubt due to excess supply of industrial commodities and slower growth in China, the world’s biggest commodity user. The price decreases are also due to sluggish expansions in developed countries and, in the case of agricultural products, good weather and more acreage being planted. So far this year, grain prices are falling, as are industrial commodity prices. Crude oil prices rose until mid-June, but have since dropped 25% and now are the lowest in six years. Spurred by fracking, U.S. oil output is exploding as economic softness in Europe and China and increased conservation have curtailed consumption. Copper, which is used in everything from plumbing fixtures to computers, is dropping in price as supply leaps and demand lags.

Read more …

“Several months earlier, the stock market had begun to plunge violently. Soon there were layoffs and business closings and the economy was having a tough time getting back in gear.”

• On This Day, 138 Years Ago, The Idea Of QE Was Born (Art Cashin)

On this day in 1876, a group of influential, yet irate, Americans met in Indianapolis. Their primary purpose was to send a message to Washington on how to get the economy moving again. America at the time was going through a difficult and unusual period. Several months earlier, the stock market had begun to plunge violently. Soon there were layoffs and business closings and the economy was having a tough time getting back in gear. And for months now, strange things were happening, the money supply seemed not to be growing, real estate values were stagnant to slipping, and commodity prices were heading lower. (How unusual.)

So this group decided that what was needed was re-inflation (put more money in everyone’s hands, you see). The method they proposed was to issue more and more money. Cynics called them “The Greenback Party”. And on this day, the Greenbacks challenged Washington by running an independent for President of the United States. His name was Peter Cooper. He lost but several associate whackos were elected to Congress. To celebrate stop by the “Printing Press Lounge”. (It’s down the block from the Fed.) Tell the bartender to open the tap and just keep pouring it out till you say stop. Reassure the guy next to you (while you can still talk) that now we have more enlightened people in Washington. Try not to spill your drink if he falls off the stool laughing. There wasn’t much raucous laughter on Wall Street Monday, but the bulls were beaming with smiles as they managed to continue their string of bull runs.

Read more …

” .. the stimulus policies of the Federal Reserve and other central banks have the power to drive stocks higher. But they will ultimately be self-defeating ..”

• A Bearish Hedge Fund Bets Against the Bulls and Still Profits (NY Times)

The stock market has been rising for years, hitting new highs almost every week. So how is it that one of Wall Street’s most bearish investors can claim to have profited strongly over this period? Universa Investments, a hedge fund founded by Mark Spitznagel, is one of the few firms that is set up with the aim of making money in an economic and financial collapse. In the market turmoil of 2008, Mr. Spitznagel earned large returns. Large pessimistic bets usually lose a lot of money when stocks are rising, as they have ever since 2009. But Universa is saying that its investment strategy has been able to produce consistent gains since then, including a 30% return last year, according to firm materials that were reviewed by The New York Times.

In comparison, the benchmark Standard & Poor’s 500-stock index in 2013 had a return of 32% with dividends reinvested. Insurance policies that pay out after disasters do not produce big returns when the catastrophe fails to occur. But since 2008, some investors have been looking for ways to ride the market higher while having bets in place that will notch up huge gains if the system teeters on the brink once again. At Universa, Mr. Spitznagel’s strategy stems from his skepticism toward government efforts to revive the economy. He acknowledges that the stimulus policies of the Federal Reserve and other central banks have the power to drive stocks higher. But they will ultimately be self-defeating, he contends.

This theory holds that another crash will occur when the Fed stops being able to stoke the economy. Universa’s strategy seeks to profit when confidence in the central banks is strong — and when it evaporates. “The Fed has created a trap in this yield-chasing environment,” Mr. Spitznagel said in an interview, during which he gave an overview of Universa’s approach. “It allows you to be long, but it gets you in position to be short when it’s all over,” he said.

Read more …

Beggar thy neighbor, oil edition.

• Saudi Arabia Says No One Should Cut Output, Oil Will Stabilize

Saudi Arabia’s oil minister said tumbling crude prices will stabilize and there’s no need for producing nations to cut output. “No one should cut and market will stabilize itself,” Ali Al-Naimi told reporters a day before OPEC meets in Vienna. “Why Saudi Arabia should cut?The U.S. is a big producer too now. Should they cut?” Oil ministers from the 12 nations in the Organization of Petroleum Exporting Countries meet tomorrow in Vienna to discuss their combined production at a time when prices have fallen 30 percent since June. Crude fell in part on speculation that Saudi Arabia and other OPEC states wouldn’t take the necessary measures to curb a surplus. Venezuela’s Foreign Minister Rafael Ramirez met with officials from Saudi Arabia, Mexico and Russia yesterday. While they agreed to monitor prices, they made no joint commitment to lower their supplies.

Read more …

It’s not going to happen. They are in too much distress.

• Pre-OPEC Producer Meeting Fails to Deliver Oil Output Cut (Bloomberg)

Nations supplying a third of the world’s oil failed to pledge output cuts after meeting in Vienna today. Russia can withstand prices even lower than they are now, the country’s biggest producer said. Officials from Venezuela, Saudi Arabia, Mexico and Russia said only that they would monitor prices. Crude futures sank to a four-year low in New York. OPEC meets in two days, with analysts split evenly over whether the group will lower output in response to the crash in prices. Crude fell into a bear market this year amid the highest U.S. production in 31 years and speculation that Saudi Arabia and other members of OPEC won’t do enough to curb a surplus. Prices are below what nine of group’s 12 members need to balance their national budgets, data compiled by Bloomberg show.

“All these countries are significantly affected by lower prices and want to see cuts, but it is a big step between having these talks and taking actual coordinated action to achieve this,” Richard Mallinson, geopolitical analyst at Energy Aspects, said by phone today. “The key is going to be what happens amongst OPEC members.” Brent, the global benchmark, fell as much as 2.1% in London, having gained 1% before the four-way meeting concluded. It settled at $78.33 a barrel. West Texas Intermediate sank 2.2% to $74.09, the lowest since Sept. 21, 2010. The discussions didn’t result in any joint commitment to reduce supplies, Rafael Ramirez, Venezuela’s Foreign Minister and representative to OPEC, told reporters after the meeting. All parties said they were worried about the oil price, he said.

“There is an overproduction of oil,” Igor Sechin, Chief Executive of OAO Rosneft, Russia’s largest oil company, said after the meeting. “Supply is exceeding demand, but not critically” and Russia wouldn’t need to cut production immediately even if oil fell below $60 a barrel, he said. Russia, Saudi Arabia, Mexico and Venezuela between them produced 27.8 million barrels a day of oil last year, according to data from BP Plc. Total global output was 86.8 million barrels daily, the oil company’s figures show. OPEC, which meets to discuss output in Vienna on Nov. 27, pumped 30.97 million barrels a day last month, according to data compiled by Bloomberg.

Read more …

Too many opinions, too many variables.

• The Unbearable Over-Determination Of Oil (Ben Hunt)

You know you’re in trouble when the Fed’s Narrative dominance of all things market-related shows up in the New York Times crossword puzzle, the Saturday uber-hard edition no less. It’s kinda funny, but then again it’s more sad than funny. Not a sign of a market top necessarily, but definitely a sign of a top in the overwhelming belief that central banks and their monetary policies determine market outcomes, what I call the Narrative of Central Bank Omnipotence. There is a real world connected to markets, of course, a world of actual companies selling actual goods and services to actual people. And these real world attributes of good old fashioned economic supply and demand – the fundamentals, let’s call them – matter a great deal. Always have, always will. I don’t think they matter nearly as much during periods of global deleveraging and profound political fragmentation – an observation that holds true whether you’re talking about the 2010’s, the 1930’s, the 1870’s, or the 1470’s – but they do matter.

Unfortunately it’s not as simple as looking at some market outcome – the price of oil declining from $100/bbl to $70/bbl, say – and dividing up the outcome into some percentage of monetary policy-driven causes and some percentage of fundamental-driven causes. These market outcomes are always over-determined, which is a $10 word that means if you added up all of the likely causes and their likely percentage contribution to the outcome you would get a number way above 100%. Are recent oil price declines driven by the rising dollar (a monetary policy-driven cause) or by over-supply and global growth concerns (two fundamental-driven causes)? Answer: yes. I can make a case that either one of these “explanations” on its own can account for the entire $30 move. Put them together and I’ve “explained” the $30 move twice over. That’s not very satisfying or useful, of course, because it doesn’t help me anticipate what’s next.

Should I be basing my risk assessment of global oil prices on an evaluation of monetary policy divergence and what this means for the US dollar? Or should I be basing my assessment on an evaluation of global supply and demand fundamentals? If both, how do I weight these competing explanations so that I don’t end up overweighting both, which (not to get too technical with this stuff) will have the effect of sharply increasing the volatility of my forward projections, even if I’m exactly right in the ratio of the relative contribution of the potential explanatory factors. Here’s the short answer. I can’t.

Read more …

Note: this is shale gas, not oil. That’s another bubble, and just as big.

• Who Will Wind Up Holding the Bag in the Shale Gas Bubble? (Naked Capitalism)

We’ve been writing off and on about how the sudden fall in gas prices has been expected to put a lot of shale gas development on hold. In fact, quite a few analysts believe that one of the big Saudi aims in refusing to support oil prices was to dent the prospects for competitive energy sources, not just renewables like wind and hydro power, but shale gas. Even though OilPrice reported that US rig count had indeed fallen as oil prices plunged, John Dizard at the Financial Times (hat tip Scott) gives a more intriguing piece of the puzzle: the degree to which production is still chugging along despite it being uneconomical. The oil majors have been criticized for levering up to continue developing when it is cash-flow negative; they are presumably betting that prices will be much higher in short order. But the same thing is happening further down the food chain, among players that don’t begin to have the deep pockets of the industry behemoths: many of them are still in “drill baby, drill” mode. Per Dizard:

Even long-time energy industry people cannot remember an overinvestment cycle lasting as long as the one in unconventional US resources. It is not just the hydrocarbon engineers who have created this bubble; there are the financial engineers who came up with new ways to pay for it.

And while the financial engineers will as always do just fine, lenders are another matter:

By now, though, there is an astonishing amount of debt that continues to build up on the smaller E&P companies’ balance sheets. According to Gavekal, the research group, even before the oil price plunge, aggregate debt-to-equity ratios in the smaller publicly traded energy companies are now at 93%, up from around 70% in 2012 and 2013, and around 50% between 2005 and 2011. This in a highly cyclical industry that used to go through periodic banker-driven shakeouts and even bankruptcies.

Read more …

John Dizard from last Friday: the debt boom can’t stop without wreaking havoc across the industry.

• US Oil Producers Can’t Kick Drilling Habit (FT)

You would think, what with the recent oil price crash, the people who finance US oil and gas producers would have learnt their lesson. But not yet. For the past several years, and despite the once again widening gap between capital spending and cash flow, Wall Streeters have stepped in like an overindulgent parent to pay for the producers’ drilling habit. “Isn’t he cute!” they exclaim, as an exploration and production boy crashes another budget. “So talented! Did you see how many frac stages he can do now, and how tight his well spacing is?” Of course the exploration and production companies and their lenders have been to expensive accounting therapy sessions, where the concerned Wall Street family, accompanied by the sullen E&P operators, are told that they have to make a really sincere effort to match finding, drilling and completion expenditures to internally generated cash flow.

Everyone promises the accountant that that irresponsible land purchase or midstream commitment was the last mistake. From now on, cash flow break-even. Right. By now, though, there is an astonishing amount of debt that continues to build up on the smaller E&P companies’ balance sheets. According to Gavekal, the research group, even before the oil price plunge, aggregate debt-to-equity ratios in the smaller publicly traded energy companies are now at 93%, up from around 70% in 2012 and 2013, and around 50% between 2005 and 2011. This in a highly cyclical industry that used to go through periodic banker-driven shakeouts and even bankruptcies.

Particularly in the gas and natural gas liquids drilling directed sector, every operator (and their financier) is waiting for every other operator to stop or slow their drilling programmes, so there can be some recovery in the supply-demand balance. I have been hearing a lot of buzz about cutbacks in drilling budgets for 2015, but we will not really know until the companies begin to report in January and February. Then we will find out if they really are cutting back, using their profits on in-the-money hedge programmes to keep their debt under control, and taking impairment charges on properties that did not really pay off.

Read more …

Nasty report.

• The Environmental Downside of the Shale Boom (NY Times)

Since 2006, when advances in hydraulic fracturing — fracking — and horizontal drilling began unlocking a trove of sweet crude oil in the Bakken shale formation, North Dakota has shed its identity as an agricultural state in decline to become an oil powerhouse second only to Texas. A small state that believes in small government, it took on the oversight of a multibillion-dollar industry with a slender regulatory system built on neighborly trust, verbal warnings and second chances. In recent years, as the boom really exploded, the number of reported spills, leaks, fires and blowouts has soared, with an increase in spillage that outpaces the increase in oil production, an investigation by The New York Times found. Yet, even as the state has hired more oil field inspectors and imposed new regulations, forgiveness remains embedded in the Industrial Commission’s approach to an industry that has given North Dakota the fastest-growing economy and lowest jobless rate in the country. [..]

Continental Resources hardly seems likely to walk away from its 1.2 million leased acres in the Bakken. It has reaped substantial profit from the boom, with $2.8 billion in net income from 2006 through 2013. But the company, which has a former North Dakota governor on its board, has been treated with leniency by the Industrial Commission. From 2006 through August, it reported more spills and environmental incidents (937) and a greater volume of spillage (1.6 million gallons) than any other operator. It spilled more per barrel of oil produced than any of the state’s other major producers. Since 2006, however, the company has paid the Industrial Commission $20,000 out of $222,000 in assessed fines.

Continental said in a written response to questions that it was misleading to compare its spill record with that of other operators because “we are not aware other operators report spills as transparently and proactively as we do.” It said that it had recovered the majority of what it spilled, and that penalty reductions came from providing the Industrial Commission “with precisely the information it needs to enforce its regulations fairly.” What Continental paid Mr. Rohr, the injured driller, is guarded by a confidentiality agreement negotiated after a jury was impaneled for a trial this September. His wife, Winnie, said she wished the trial had gone forward “so the truth could come out, but we just didn’t have enough power to fight them.”

Read more …

You wish.

• Obama Climate Envoy: Fossil Fuels Will Have To Stay In The Ground (Guardian)

The world’s fossil fuels will “obviously” have to stay in the ground in order to solve global warming, Barack Obama’s climate change envoy said on Monday. In the clearest sign to date the administration sees no long-range future for fossil fuel, the state department climate change envoy, Todd Stern, said the world would have no choice but to forgo developing reserves of oil, coal and gas. The assertion, a week ahead of United Nations climate negotiations in Lima, will be seen as a further indication of Obama’s commitment to climate action, following an historic US-Chinese deal to curb emissions earlier this month. A global deal to fight climate change would necessarily require countries to abandon known reserves of oil, coal and gas, Stern told a forum at the Center for American Progress in Washington.

“It is going to have to be a solution that leaves a lot of fossil fuel assets in the ground,” he said. “We are not going to get rid of fossil fuel overnight but we are not going to solve climate change on the basis of all the fossil fuels that are in the ground are going to have to come out. That’s pretty obvious.” Last week’s historic climate deal between the US and China, and a successful outcome to climate negotiations in Paris next year, would make it increasingly clear to world and business leaders that there would eventually be an expiry date on oil and coal. “Companies and investors all over are going to be starting at some point to be factoring in what the future is longer range for fossil fuel,” Stern said.

Read more …

Merkel has problems keeping her stance.

• Cracks Form in Berlin Over Russia Stance (Spiegel)

Within the European Union, the interests of the 28 member states are diverging in what are becoming increasingly clear ways. Taking a tough stance against Russia is generally less important to southern Europeans than it is to eastern Europeans. In the past, the German government had sought to serve as a bridge between the two camps. But in Berlin itself these days, significant differences in the assessment of the situation are starting to emerge within the coalition government pairing Merkel’s conservative Christian Democrats and the center-left Social Democrats (SPD). It’s one that pits Christian Democrat leaders like Merkel and Horst Seehofer, who heads the CDU’s Bavarian sister party, the Christian Social Union (CSU), against Foreign Minister Frank-Walter Steinmeier of the SPD and Social Democratic Party boss Sigmar Gabriel, who is the economics minister.

“The greatest danger is that we allow division to be sown between us,” the chancellor said last Monday in Sydney. And it’s certainly true to say that this threat is greater at present than at any other time since the crisis began. Is that what the Russian president has been waiting for? Last week, German Foreign Minister Steinmeier traveled to Moscow to visit with his Russian counterpart Sergey Lavrov. With Steinmeier standing at his side, the Russian foreign minister praised close relations between Germany and Russia. “It’s good my dear Frank-Walter that, despite the numerous rumors of recent days, you hold on to our personal contact.” Steinmeier reciprocated by not publically criticizing contentious issues like Russian weapons deliveries to Ukrainian separatists. Afterwards, Vladimir Putin received him, a rare honor. It was a prime example of just how the Russian strategy works.

Read more …

Don’t want to be a prick, and I like the man, but so does he a bit.

• Europe Looks ‘Aged And Weary’: Pope Francis (CNBC)

Pope Francis has warned European politicians and policymakers that Europe is becoming less of a protagonist in the world as it looks “aged and weary.” Addressing the European Parliament in Strasbourg on Tuesday, Pope Francis, the spiritual leader of one billion Catholics worldwide, suggested that Europe risks becoming irrelevant. “Europe gives the impression of being aged and weary,feeling less and less a protagonist in a world which frequently looks on itwith aloofness, distrust and even, at times, suspicion…As a grandmother, no longer fertile and lively,” he said. “The great ideas that once inspired Europe…seem to have been replaced by the bureaucratic technicalities of Europe’s institutions.” Speaking at the plenary session of the parliament, he told lawmakers that they had the task of protecting and nurturing Europe’s identity “so that its citizens can experience renewed confidence in the institutions of the (European) Union and its project of peace and friendship that underlies it.”

Pope Francis’ visit to the European Parliament is the first by a pontiff since Pope John Paul II’s visit in 1988. He is also visiting the Council of Europe – the region’s human rights body – later on Tuesday. “I encourage you to work so that Europe rediscovers the best of its health,” he added. The pope also spoke about the importance of education and work. On the question of migration, a hot topic in Europe, Pope Francis said there needed to be a “united response.” “We cannot allow the Mediterranean to become a large graveyard,” he said, referring to the number of migrants who die during their attempts to cross the sea and reach Europe. “Rather than adopting policies that focus on self-interest which increase and feed conflicts, we need to act on the causes (for migration) and not only on the effects,” he added.

Read more …

 Older Entries  Newer Entries