A quick post to update readers on an interesting debacle that occurred in the world of oil stock data analysis this week.
Philip Verleger, veteran independent oil analyst, launched a scathing attack on the quality of the EIA’s data on Monday, claiming the agency had been overestimating US output by some 1.6m barrels a day.
The accusations in his note were brutal to say the least:
“The explanation for the mistake indicates a gross dereliction of responsibility on the EIA’s part. Rarely if ever has a US agency charged with collecting data made a miscue of this magnitude. The EIA administrator should be dismissed immediately for gross incompetence.”
So this could be the beginning of the end.
Or, alternatively, the bond price rout is a perfectly predictable response to…:
There were those who said it would never happen. Then there were those who said it wouldn’t matter even if it did happen. And there were those who recognised Saudi Arabia was probably panicking about the prospect of a destabilising cash burn situation as soon as the term Saudi America became a thing.
But, as the FT reports on Friday, Saudi cash burn is now not only a big thing, it’s an accelerating big thing: Read more
At first glance, America’s latest growth figures don’t look so good. We generally refrain from commenting on quarterly GDP data because, among other reasons, the numbers are naturally noisy and they’re often revised by large amounts. (Or as the Fed says, “transitory factors,” although probably not the weather.) Those caveats out of the way, there are a few interesting points in this report that are worth noting.
Let’s start with a theoretical exercise. Imagine it were one year ago today, and someone told you that, between then and the end of this past March, the price of oil would fall by about half and that the real, trade-weighted dollar would appreciate by more than 10 per cent. A reasonable person would expect two things: big cutbacks in domestic oil investment that wouldn’t initially have been offset by higher investment elsewhere, and a hit to net exports.
None of this would have told you anything about would happen to total spending, but it would have provided guidance on how the composition of spending would change. Read more
You’ve got to hand it to Alan Rusbridger: he’s a great contrarian indicator. The editor of The Guardian launched his valedictory campaign to demand divestment from fossil fuels with a wrap-around promotion and the paper’s full moral force. Read more
The FT’s Martin Wolf led a stellar panel on the global economy and the outlook for commodities featuring China expert Michael Pettis, BP’s group chief economist, Spencer Dale (formerly chief economist at the Bank of England), and Goldman’s chairman of global natural resources Brett Olsher.
As one might expect there was a difference of opinion on the panel about China’s future growth path. Goldman’s Olsher said he was confident that China would be able to maintain 6.5 per cent to 7 per cent growth in the near term, whereas Pettis suggested that even 3-4 per cent should be considered a successful adjustment. Read more
An inundated inbox means we’re slightly late to this, but it’s worth flagging up two days on regardless.
It’s the EIA’s take on the US crude system’s “l’embarass de richesses” problem.
Inventory levels at Cushing may be at a record high, they note, but not as a percentage of total working storage capacity.
The great thing about the Cushing storage system is that it’s a private market. That means whenever storage gets tight the incentive to build new capacity increases for commercial operators. Read more
Fresh out of Riyadh…
Saudi Oil Minister Ali Al-Nuaimi Sunday proposed establishment of an association dedicated for petroleum media, which comprised of Gulf and Arab journalists covering energy affairs. Saudi Arabia is ready to support the establishment of this association with the objective of boosting transparency among GCC countries and prepare oil strategies of the Arab Gulf countries… Read more
Back in 2009, Olivier Jakob of Petromatrix was one of the first analysts to spot the weird effects that commodity ETFs were having on commodity future markets.
It started with the USO, the oil ETP, and then went on to the UNG, a natural gas ETP
At the time, what was going on was a bit of a mystery. Why should these ETFs be bloating up even as professional investors were staying clear of the underlying assets backing the ETFs? Read more
The oil world’s been full of speculation about the shift of strategy last year by Saudi Arabia which saw it keep the pumps running even as the price fell, turning an initial drop into a plunge.
There may be a simpler explanation for Saudi’s willingness to see prices slide than an attack on US shale or a “political plot” against regional rival Iran, though: a change in the Saudi view on peak oil.
The Saudis have two choices with their oil: sell it now, or sell it later. Read more
Nigeria’s oil minister Diezani Alison-Madueke told the Financial Times (and FT Alphaville with them) on Monday she was happy with Opec’s decision to keep production unchanged at last year’s November meeting, a move which had shocked the oil market at the time and prompted an extended rout in the price of oil.
To the oil minister’s mind the decision was a “text-book” manoeuvre, designed to help the cartel stand its ground, defend market share in the face of growing international competition and drive inefficient producers out of the market. This to a large part had been achieved, in her opinion.
“I think it’s quite shrewd really,” she said. “If you cede market share continuously you drive yourself into oblivion.” Read more
At what point does running out of space to keep all the stuff you want to hold on to stop being prudent risk management and become a compulsive hoarding disorder instead?
It’s a question worth asking in the context of oil surpluses because, according to Citi’s commodity research team, US capacity to store excess crude oil may be about to run out of space. Read more
The shift to an oil-driven economy with a high wage capacity has been a comfortable journey. The journey forward, where the oil service industry must downscale and other trade-exposed industries must grow, will be more challenging.
That’s the short answer, from a recent speech by Øystein Olsen, the governor of Norway’s central bank. Oil has been a windfall that pushed Norwegian living standards far above that of its neighbors. If the windfall has ended, living standards will probably converge through a combination of currency depreciation and wage cuts. So far, that hasn’t happened. Read more
Canada is a large, diversified economy in which commodity extraction plays a (relatively) small role. Yet historically its currency, which was once known as the Canadian peso thanks to its 30 per cent devaluation against the US dollar in the 1990s, seems to have been driven by changes in the oil price.
Here’s a chart comparing two-month changes in the amount of US dollars you can buy with a single Canadian dollar against changes in the price of West Texas Intermediate: Read more
So, this weekend, the Bank for International Settlements released a preview of an upcoming report in which they make a connection between financialisation and the oil market.
Tracy’s written it up here.
But, before you get too excited, two things must be pointed out.
The first, of course, is that a BIS admission about financialisation effects on the oil market is pretty unexpected.
You see, as far as we’ve tracked or heard from BIS economists on this matter, they’ve resisted arguments and models pointing to financialisation effects, embracing instead explanations that link price effects to fundamentals.
Which brings us to the second thing. Yes, the BIS is shifting its view on the financialisation argument, but the paper also shows it doing so in a really convoluted and unconvincing way. Definitely the opposite of Occam’s Razor. Read more
FT Alphaville has written before about how the pronounced collapse in the price of oil appears very reminiscent of the disintegration in the value of a certain subprime financial asset; both have been swift, disorderly and self-reinforcing.
A new report from The Bank for International Settlements emphasises the latter dynamic by drawing a connection between the vast sums of money energy companies have borrowed from investors in recent years as well as the retreat of traditional dealers from certain commodities-related transactions. The new dynamic has imparted a swift and sudden forcefulness to the recent price action in the crude price that goes beyond the effects of a simple change in production and consumption of oil. Read more
Back in May 2008, nobody — especially regulators — had a clue about what was causing crude oil prices to spike to $100-per-barrel-levels, and mostly everyone was inclined to either blame “China” or “speculators” or some combination of the two.
But Michael Masters, a portfolio manager at Masters Capital Management, had a simple proposition. In the Senate committee hearings organised to figure out exactly what was going on, Masters testified that it was his belief that a new class of investor — one he dubbed the passive “index speculator” — had bulldozed his way into the market and distorted the usual price discovery process. Read more
In this guest post, Alex Bellefleur, global macro strategist at Pavilion Global Markets, writes that the Bank of Canada was prudent to loosen monetary policy in response to the decline in oil prices.
Last week the Bank of Canada (BOC) surprised markets by cutting interest rates 25 basis points, leaving them at 0.75%. While some argue this move was unnecessary, we are of the view that the cut is needed as a pre-emptive manoeuvre to counter private sector deleveraging. Read more
Just a few developments to update oil watchers on. Plus one conspiracy theory.
First, John Kemp of Reuters observes on Thursday that gasoline demand is now at multi-year seasonal highs:
Central banks are just full of surprises these days, from Mumbai to Zurich to Copenhagen. Today, Ottawa:
The Bank of Canada today announced that it is lowering its target for the overnight rate by one-quarter of one percentage point to 3/4 per cent. The Bank Rate is correspondingly 1 per cent and the deposit rate is 1/2 per cent. This decision is in response to the recent sharp drop in oil prices, which will be negative for growth and underlying inflation in Canada…The negative impact of lower oil prices will gradually be mitigated by a stronger U.S. economy, a weaker Canadian dollar, and the Bank’s monetary policy response… Read more
As already mentioned, this may not be your usual oil-price decline. But it’s also not crude’s first appearance in the 50 per cent club:
Now, in absolute terms the falls aren’t comparable ($100 to $50 versus $30 to $15) but there are similarities. Read more
Yup. Analysts and economists still can’t decide whether the fall in oil prices is net positive or net negative for the global economy.
Unfortunately for the net positive camp, it looks increasingly like global demand and growth figures are beginning to side with the negativity team.
Indeed, the longer the oil price stays low, the more it looks like global stimulus hopes were overdone due to poor understanding of financial feedback loops in the commodity space.
So what’s behind the anomaly? How did a whole school of economists get this potentially so wrong? Read more
There’s plenty of discussion about why the oil price collapsed (read Izzy’s take on the changed structure of the market, for one), but consider a broader question: if markets can be so wrong about the price of one of the most widely used and heavily traded commodities, what else are they missing?
We ask because a halving in the price of other markets may not be cheered in the same way as cheap oil. We also wonder what it says about how orderly (or otherwise) big market declines will be, when they eventually roll around. After all, major currency pairs don’t move by a fifth in one morning…
To that end, here’s a reminder of what a 50 per cent decline looks like for a selection of markets, and the last time that level was hit. Read more
A quick post to collate a few side theories on the reasons, justifications and consequences of the SNB move.
Simon Derrick at BNY Mellon is first to point out that the euro floor/chf celing was leaving an open door to safe haven flows from Russia by way of an open bid for euros. As he notes:
Compounding this was Switzerland’s role as a safe haven as the Russian crisis intensified. It was, therefore, not entirely surprising when the SNB decided a few weeks ago to impose an interest rate of -0.25% on sight deposit account balances at the bank and expand the target range for three-month LIBOR to -0.75%/+0.25%.
Lower oil prices are likely, on the whole, to be bad for Canada.
–Timothy Lane, Deputy Governor of the Bank of Canada, January 13, 2015
Unlike most rich countries, Canada is a net oil exporter. According to the US Energy Information Administration, Canada’s net exports of petroleum have more than doubled since 2005 to about 1.7 million barrels per day:
The parallels between the oil markets and bitcoin continue to astound.
Over in the bitcoin universe, for example, questions over the legitimacy of the $1,200 level achieved in November 2013 have begun to circle. The running theory is that the ridiculously high price was only achieved because Mt.Gox — Bitcoin’s premier exchange until it collapsed in February 2014 — was in league with manipulative HFT traders who, with the help of a proprietary algorithm nicknamed the “Willy Bot,” pumped the price as far as it could go, and then cashed out.
Over in the oil world, meanwhile, a similar dialogue is coming forth with regards to the record prices achieved in 2008. Read more
Some thoughts, musings, and simply fun items we’ve recently come across:
1) As of the start of this week, global non-energy equities have held up fine: Read more
The drop in oil prices – with WTI now drifting down towards $46 a barrel – has been nothing short of stunning.
On that note, here’s an interesting thought from Chris Flanagan, head of US mortgages and other structured finance research at Bank of America Merrill Lynch. When this securitisation veteran sees the fall in oil prices he thinks of one thing – the ABX index. Read more
$80 oil, $70 oil, $60 oil, $50 oil and counting… If you suspect the structure of the oil market has fundamentally changed, you may be on to something.
There was a time when all you needed to balance oversupply in the oil market was the ability, and the will, to store oil when no-one else wanted to.
That ability, undoubtedly, was linked to capital access. For a bank, it meant being able to pass the cost of storing surplus stock over to commodity-oriented passive investors and institutions happy to fund the exposure. For a trading intermediary, that generally meant having good relations with a bank which could provide the capital and financing to store oil, something the bank would do (for a fee) because of its ability to access institutional capital markets and its reluctance to physically store oil itself. Read more
Good news for those looking out for crude bottoms!
JBC Energy reports on Friday that the economics that make storing surplus oil in floating tankers profitable are finally in play. Contango, in other words, has returned sufficiently enough to the market to incentivize those intermediaries who have the physical means to store oil, to purchase it for storage purposes and delayed sales, thus helping to balance the surplus in the market. Read more