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Goodbye OPEC?

by coldwarrior ( 106 Comments › )
Filed under Economy, Energy, Islamists, Middle East, Open thread at August 6th, 2015 - 4:06 am

It appears that the oil ticks have over-played their hand. Showing the lesson once again, never play poker with cowboys.

 

Please read the entire article, there are many salient points in it that are worth your time.

(FYI: there will be a debate thread for later)

 

Saudi Arabia may go broke before the US oil industry buckles

It is too late for OPEC to stop the shale revolution. The cartel faces the prospect of surging US output whenever oil prices rise

If the oil futures market is correct, Saudi Arabia will start running into trouble within two years. It will be in existential crisis by the end of the decade.

The contract price of US crude oil for delivery in December 2020 is currently $62.05, implying a drastic change in the economic landscape for the Middle East and the petro-rentier states.

The Saudis took a huge gamble last November when they stopped supporting prices and opted instead to flood the market and drive out rivals, boosting their own output to 10.6m barrels a day (b/d) into the teeth of the downturn.

Bank of America says OPEC is now “effectively dissolved”. The cartel might as well shut down its offices in Vienna to save money.

If the aim was to choke the US shale industry, the Saudis have misjudged badly, just as they misjudged the growing shale threat at every stage for eight years. “It is becoming apparent that non-OPEC producers are not as responsive to low oil prices as had been thought, at least in the short-run,” said the Saudi central bank in its latest stability report.

“The main impact has been to cut back on developmental drilling of new oil wells, rather than slowing the flow of oil from existing wells. This requires more patience,” it said.

One Saudi expert was blunter. “The policy hasn’t worked and it will never work,” he said.

By causing the oil price to crash, the Saudis and their Gulf allies have certainly killed off prospects for a raft of high-cost ventures in the Russian Arctic, the Gulf of Mexico, the deep waters of the mid-Atlantic, and the Canadian tar sands.

Consultants Wood Mackenzie say the major oil and gas companies have shelved 46 large projects, deferring $200bn of investments.

The problem for the Saudis is that US shale frackers are not high-cost. They are mostly mid-cost, and as I reported from the CERAWeek energy forum in Houston, experts at IHS think shale companies may be able to shave those costs by 45pc this year – and not only by switching tactically to high-yielding wells.

Advanced pad drilling techniques allow frackers to launch five or ten wells in different directions from the same site. Smart drill-bits with computer chips can seek out cracks in the rock. New dissolvable plugs promise to save $300,000 a well. “We’ve driven down drilling costs by 50pc, and we can see another 30pc ahead,” said John Hess, head of the Hess Corporation.

It was the same story from Scott Sheffield, head of Pioneer Natural Resources. “We have just drilled an 18,000 ft well in 16 days in the Permian Basin. Last year it took 30 days,” he said.

The North American rig-count has dropped to 664 from 1,608 in October but output still rose to a 43-year high of 9.6m b/d June. It has only just begun to roll over. “The freight train of North American tight oil has kept on coming,” said Rex Tillerson, head of Exxon Mobil.

He said the resilience of the sister industry of shale gas should be a cautionary warning to those reading too much into the rig-count. Gas prices have collapsed from $8 to $2.78 since 2009, and the number of gas rigs has dropped 1,200 to 209. Yet output has risen by 30pc over that period.

Until now, shale drillers have been cushioned by hedging contracts. The stress test will come over coming months as these expire. But even if scores of over-leveraged wild-catters go bankrupt as funding dries up, it will not do OPEC any good.

The wells will still be there. The technology and infrastructure will still be there. Stronger companies will mop up on the cheap, taking over the operations. Once oil climbs back to $60 or even $55 – since the threshold keeps falling – they will crank up production almost instantly.

OPEC now faces a permanent headwind. Each rise in price will be capped by a surge in US output. The only constraint is the scale of US reserves that can be extracted at mid-cost, and these may be bigger than originally supposed, not to mention the parallel possibilities in Argentina and Australia, or the possibility for “clean fracking” in China as plasma pulse technology cuts water needs.

Mr Sheffield said the Permian Basin in Texas could alone produce 5-6m b/d in the long-term, more than Saudi Arabia’s giant Ghawar field, the biggest in the world.

Saudi Arabia is effectively beached. It relies on oil for 90pc of its budget revenues. There is no other industry to speak of, a full fifty years after the oil bonanza began.

Citizens pay no tax on income, interest, or stock dividends. Subsidized petrol costs twelve cents a litre at the pump. Electricity is given away for 1.3 cents a kilowatt-hour. Spending on patronage exploded after the Arab Spring as the kingdom sought to smother dissent.

The International Monetary Fund estimates that the budget deficit will reach 20pc of GDP this year, or roughly $140bn. The ‘fiscal break-even price’ is $106.

Far from retrenching, King Salman is spraying money around, giving away $32bn in a coronation bonus for all workers and pensioners.

He has launched a costly war against the Houthis in Yemen and is engaged in a massive military build-up – entirely reliant on imported weapons – that will propel Saudi Arabia to fifth place in the world defence ranking.

The Saudi royal family is leading the Sunni cause against a resurgent Iran, battling for dominance in a bitter struggle between Sunni and Shia across the Middle East. “Right now, the Saudis have only one thing on their mind and that is the Iranians. They have a very serious problem. Iranian proxies are running Yemen, Syria, Iraq, and Lebanon,” said Jim Woolsey, the former head of the US Central Intelligence Agency.

Money began to leak out of Saudi Arabia after the Arab Spring, with net capital outflows reaching 8pc of GDP annually even before the oil price crash. The country has since been burning through its foreign reserves at a vertiginous pace.

The reserves peaked at $737bn in August of 2014. They dropped to $672 in May. At current prices they are falling by at least $12bn a month.

Khalid Alsweilem, a former official at the Saudi central bank and now at Harvard University, said the fiscal deficit must be covered almost dollar for dollar by drawing down reserves.

The Saudi buffer is not particularly large given the country’s fixed exchange system. Kuwait, Qatar, and Abu Dhabi all have three times greater reserves per capita. “We are much more vulnerable. That is why we are the fourth rated sovereign in the Gulf at AA-. We cannot afford to lose our cushion over the next two years,” he said.

Standard & Poor’s lowered its outlook to “negative” in February. “We view Saudi Arabia’s economy as undiversified and vulnerable to a steep and sustained decline in oil prices,” it said.

Mr Alsweilem wrote in a Harvard report that Saudi Arabia would have an extra trillion of assets by now if it had adopted the Norwegian model of a sovereign wealth fund to recyle the money instead of treating it as a piggy bank for the finance ministry. The report has caused storm in Riyadh.

“We were lucky before because the oil price recovered in time. But we can’t count on that again,” he said.

OPEC have left matters too late, though perhaps there is little they could have done to combat the advances of American technology.

In hindsight, it was a strategic error to hold prices so high, for so long, allowing shale frackers – and the solar industry – to come of age. The genie cannot be put back in the bottle.

The Saudis are now trapped. Even if they could do a deal with Russia and orchestrate a cut in output to boost prices – far from clear – they might merely gain a few more years of high income at the cost of bringing forward more shale production later on.

Yet on the current course their reserves may be down to $200bn by the end of 2018. The markets will react long before this, seeing the writing on the wall. Capital flight will accelerate.

The government can slash investment spending for a while – as it did in the mid-1980s – but in the end it must face draconian austerity. It cannot afford to prop up Egypt and maintain an exorbitant political patronage machine across the Sunni world.

Social spending is the glue that holds together a medieval Wahhabi regime at a time of fermenting unrest among the Shia minority of the Eastern Province, pin-prick terrorist attacks from ISIS, and blowback from the invasion of Yemen.

Diplomatic spending is what underpins the Saudi sphere of influence caught in a Middle East version of Europe’s Thirty Year War, and still reeling from the after-shocks of a crushed democratic revolt.

We may yet find that the US oil industry has greater staying power than the rickety political edifice behind OPEC.

A Good Start, Make Him Veto It!

by coldwarrior ( 184 Comments › )
Filed under Economy, Energy, Open thread, Politics at February 24th, 2015 - 7:00 am

Get the Democrats ON RECORD!

Congressional Republican leaders are expected to send President Obama legislation authorizing construction of the Keystone XL pipeline on Tuesday, The Hill reports.

While the bill passed Congress more than a week ago, Republican leaders delayed sending it to the White House in order to prevent Obama from carrying out his veto threat while Congress was out of town.

Senate Majority Leader Mitch McConnell, House Speaker John Boehner and many other Republicans have urged Obama to reconsider his promise to veto the bill, pointing to estimates that it could create as many as 40,000 jobs.

Some members of Obama’s own party have indicated that they too think his veto threats are a mistake. Defying the president, 28 Democrat House members on Jan. 9 voted in favor of passage of legislation authorizing the Keystone pipeline which passed by a 266 to 153 vote.

One day before that vote, three top leaders of the moderate Blue Dog Coalition of House Democrats sent a letter to President Obama urging him not to veto the pipeline legislation.

“The Blue Dog Coalition stands ready to work with you and Congressional leaders to provide stringent oversight of construction and operation of the Keystone XL Pipeline, but we cannot miss this opportunity to create good paying jobs and put America on the path to be less reliant on oil from our foes,” wrote Democrat Reps. Kurt Schrader of Oregon, Jim Cooper of Tennessee and Jim Costa of California.

Support from Democrats was not strictly limited to the center of the party, as progressives such as Assistant Leader James E. Clyburn of South Carolina and Sheila Jackson Lee of Texas joined Republicans in voting for Keystone.

The legislation passed the Senate by a vote of 62-36 on Jan. 29, with nine Democrats crossing party lines to support the project.

In arguing for delay, the administration has said that congressional action would undercut the ongoing process underway for the transnational pipeline which is being overseen by the State Department.

Saturday Lecture Series: Vector Autoregression and Oil

by coldwarrior ( 38 Comments › )
Filed under Academia, Economy, Energy, Open thread, saturday lecture series at February 14th, 2015 - 7:00 am

Good Morning, All! Welcome to the Blogmocracy’s Applied and Experimental Econometric Modeling Lab and wood-fired pizza joint. Today we will discuss Vector Autoregression and it’s uses.

Vector Autoregression (VAR) is a very powerful prediction system used in the Voodou of Econometrics. You will need to have your entrails and chicken parts in good working working order and a proper Hounfour at the ready to attempt the VAR.

 

First you need an Autoregression model. In AR the output variable depends on its own previous values. It is a time series model that can attempts to predict the variable (prices) by their value before when a ‘shock’ occurred. So, if Demand changed and changed the price, demand is the shock that changes the price. Any change in that varible of ‘demand’ can then be predicted for the future in levels of shock by price of the good.

The notation AR(p) refers to the autoregressive model of order p. The AR(p) model is written

 X_t = c + \sum_{i=1}^p \varphi_i X_{t-i}+ \varepsilon_t .\,

where \varphi_1, \ldots, \varphi_p are parameters, c is a constant, and the random variable \varepsilon_t is white noise.

At this point it is appropriate to throw the chicken bones on the floor and divine what you will happen to your neighbor next time he parks in your spot…that spot that you shoveled all of the global warming from…

VARs allow multiple evolving variables such as demand, supply, and any other thing that can and has happened that effected what you are studying. how does supply and demand effect the price of oil? A look into the past allows predictability into the future.

A VAR model describes the evolution of a set of k variables (called endogenous variables) over the same sample period (t = 1, …, T) as a linear function of only their past values. The variables are collected in a k × 1 vector yt, which has as the i th element, yi,t, the time t observation of the i th variable. For example, if the i th variable is GDP, then yi,t is the value of GDP at time t.

A p-th order VAR, denoted VAR(p), is

y_t = c + A_1 y_{t-1} + A_2 y_{t-2} + \cdots + A_p y_{t-p} + e_t, \,

where the l-periods back observation yt−l is called the l-th lag of y, c is a k × 1 vector of constants (intercepts), Ai is a time-invariant k × k matrix and et is a k × 1 vector of error terms satisfying

  1. \mathrm{E}(e_t) = 0\, — every error term has mean zero;
  2. \mathrm{E}(e_t e_t') = \Omega\, — the contemporaneous covariance matrix of error terms is Ω (a k × k positive-semidefinite matrix);
  3. \mathrm{E}(e_t e_{t-k}') = 0\, for any non-zero k — there is no correlation across time; in particular, no serial correlation in individual error terms.[1]

A pth-order VAR is also called a VAR with p lags. The process of choosing the maximum lag p in the VAR model requires special attention because inference is dependent on correctness of the selected lag order.[2][3]

You may now go to your Vodouisant and light the candle and pray to Simbi to intervene for you to Bondye, then pull out your CJ Voodoo doll and bind his fingers so he can’t get to his Cheetos.  See, Voodou and Econometrics are easy and fun!

So, we can attempt to predict the future by what has happened in the past by showing the relationship that variables have had on the thing that we want to study.

 

Goldman: Here’s Why Oil Crashed—and Why Lower Prices Are Here to Stay

Oil prices have gotten crushed for the last six months. The extent to which that was caused by an excess of supply or by a slowdown in demand has big implications for where prices will head next. People wishing for a big rebound may not want to read farther.

Goldman Sachs released an intriguing analysis on Wednesday that shows what many already suspected: The big culprit in the oil crash has been an abundance of oil flooding the market. A massive supply shock in the second half of last year accounted for most of the decline. In December and January, slowing demand contributed to the continued sell-off. Goldman was able to quantify these effects.

The Culprit Is in Blue

Goldman’s model is simple on its face, looking at just two variables over time: the price of oil and the value of U.S. stocks (as measured by the S&P 500). The idea is that the stock market is a pretty good indicator of economic demand. So when stocks move in tandem with oil prices, demand is in the driver’s seat. When the price of oil moves in the opposite direction of stocks, the shock is coming from supply.

It’s a bit more complicated than that—for the statistically inclined, Goldman uses a “vector autoregression with sign restrictions”—but you get the idea. In the following chart, they split apart the effects of demand shocks (left) from supply shocks (right).

Demand & Supply

The chart on the left shows what you might expect: strong demand leading up to a precipitous decline during the recession beginning in late 2008. The supply chart on the right shows a shock of undersupply in late 2007, leading to years of relatively steady supply expectations. Oversupply shocks picked up, beginning in 2012, as U.S. shale-oil production exceeded expectations, culminating in a piercing shock of oversupply last year that sent markets reeling.

The big take-away: “[T]he decline in oil has been driven by an oversupplied global oil market,” wrote Goldman economist Sven Jari Stehn. As a result, “the new equilibrium price of oil will likely be much lower than over the past decade.”

 

If your predictions are then confounded, you may send Uncle Gunnysack out to take care of that uncooperative neighbor. Have a great Saturday!

 

Mars Presents: From The New American: Obama Hides Executive Abuses by Calling Decrees “Memoranda”

by Mars ( 170 Comments › )
Filed under Barack Obama, Blogmocracy, Communism, Corruption, Cult of Obama, Debt, Democratic Party, Energy, Fascism, government, Guest Post, Immigration, Liberal Fascism, Marxism, Politics, Progressives, Regulation at January 7th, 2015 - 8:00 am

While everyone is watching and tracking his executive orders Obama is throwing out decrees left and right through Presidential Memorandas.

Despite promising repeatedly on the campaign trail to rein in George W. Bush’s executive-branch usurpations of power, Obama has been spewing a particular type of unconstitutional decree at a rate unprecedented in U.S. history. While the Obama administration has indeed unleashed a full-throated attack on the Constitution using “executive orders,” even more of his decrees have come in the form of so-called “presidential memoranda” — an almost identical type of executive action that he has used more than any previous U.S. president, according to a review published this week by USA Today.

Since taking office, Obama has issues 198 decrees via memoranda — that is 33 percent more than Bush, the runner up for the record, issued in eight years — along with 195 executive orders. Among other policy areas, Obama’s memoranda edicts have been used to set policy on gun control, immigration, labor, and much more. Just this week, Obama issued another memoranda decree purporting to declare Bristol Bay in Alaska off limits to oil and gas exploration — locking up vast quantities of American wealth and resources using his now-infamous and brazenly unconstitutional “pen and phone.”

“Like executive orders, presidential memoranda don’t require action by Congress,” reported USA Today as part of its investigation into Obama’s decrees. “They have the same force of law as executive orders and often have consequences just as far-reaching. And some of the most significant actions of the Obama presidency have come not by executive order but by presidential memoranda.” However, despite the newspaper’s obvious confusion on constitutional matters — only Congress can make law, not the White House — the review raises a number of important issues.

For instance, as the paper implies, Obama has been using deception to conceal his radical — imperial or dictatorial, according to many lawmakers — machinations purporting to change policy and law by fiat. “The truth is, even with all the actions I’ve taken this year, I’m issuing executive orders at the lowest rate in more than 100 years,” Obama claimed in a speech last July, without mentioning that he has issued more “memoranda” than any American president in history. “So it’s not clear how it is that Republicans didn’t seem to mind when President Bush took more executive actions than I did.”

Other leading Democrats have made similarly deceptive arguments to dupe “stupid” voters, as ObamaCare’s Gruber put it. Aside from the fact that previous abuses by Republicans do not legitimize or excuse current abuses, the oft-heard claim that Obama has issued fewer “executive order” decrees than other presidents is more a matter of semantics than substance. “There’s been a lot of discussion about executive orders in his presidency, and of course by sheer numbers he’s had fewer than other presidents,” Andrew Rudalevige, a presidency scholar at Bowdoin College, told USA Today.

“So the White House and its defenders can say, ‘He can’t be abusing his executive authority; he’s hardly using any orders,” Rudalevige continued. “But if you look at these other vehicles, he has been aggressive in his use of executive power.” Indeed, as The New American has documented extensively, Obama has been purporting to rule by executive fiat on everything from gun rights and the “climate” to immigration, education, national security, foreign relations, and health.

However, according to constitutional experts and even the president himself (before he took office), none of the “law”-making by presidential decree is actually legitimate. According to the U.S. Constitution, which created the federal government and granted it a few limited powers, only Congress has the power to make laws — assuming they are constitutional. The president’s job, by contrast, involves merely enforcing the laws passed by Congress and signed by the president, not making them up while hiding behind patently bogus claims of imagined “executive authority.”

Obama, of course, understands that well — or at least he claimed to less than seven years ago. “I taught constitutional law for ten years,” then-Senator Obama told gullible voters in 2008 amid his first run for the presidency. “I take the Constitution very seriously. The biggest problems that were facing right now have to do with George Bush trying to bring more and more power into the executive branch and not go through Congress at all, and that’s what I intend to reverse when I’m President of the United States of America.”

Except rather than reversing the illegitimate usurpation of unconstitutional power, Obama expanded it by leaps and bounds — to the point where his administration openly creates pseudo-“law” and pseudo-“treaties,” and then mocks Congress about it. Among the “memoranda” used by Obama thus far was the purported creation of the MyRA “savings” scheme, a widely ridiculed and criticized unconstitutional plot that analysts said would be used to extract more wealth from Americans under the guise of “helping” them. Even Congress does not have the authority to create such a program — much less the administration.

Obama, though, regularly brags about his lawless pseudo-lawmaking. “One of the things that I’ll be emphasizing in this meeting is the fact that we are not just going to be waiting for a legislation [sic] in order to make sure that we’re providing Americans the kind of help that they need,” Obama announced at the beginning of the year, right before his first cabinet meeting. “I’ve got a pen and I’ve got a phone — and I can use that pen to sign executive orders and take executive actions and administrative actions that move the ball forward.”

Shortly after that, in his State of the Union speech to Congress, he brazenly told the American people’s elected representatives that he would ignore them if they did not promptly submit to his demands. “America does not stand still — and neither will I,” Obama threatened before lawmakers stood up and applauded the outlandish behavior. “So wherever and whenever I can take steps without legislation to expand opportunity for more American families, that’s what I’m going to do.” Many lawmakers were furious, blasting Obama as a “socialistic dictator,” calling for his impeachment, and more, and the public was horrified, but the rule-by-decree continued.

Indeed, unlike his false campaign promises, Obama did indeed make good on his threats to continue ignoring Congress and the Constitution to rule by unconstitutional decree. Behaving more like a Third World dictatorship than a U.S. presidential administration, the White House even trotted out senior officials to tell the press that even the American people’s elected representatives would be unable to stop the usurpations and abuses. In addition to the “executive orders” and “presidential memoranda,” which the administration itself considers to be essentially the same, Obama has also unleashed dozens of so-called “presidential policy directives.”

Of course, there can be some legitimate functions for executive orders — outlining the manner in which the administration plans to faithfully execute the constitutional laws passed by Congress, for example. However, purporting to make and change law — or even contradict existing federal law, such as Obama’s radical amnesty-by-decree scheme supposedly preventing the enforcement of immigration law — are certainly not among those legitimate functions.

The solution to the imperial decrees and pretended acts of legislation from the White House is simple: Congress must refuse to fund it. However, despite being elected on a wave of popular outrage against the Obama administration’s usurpations of power, lawmakers on both sides of the aisle recently voted to fund virtually all of the White House’s illegal decrees through next September. The only way to put a stop to the scheming will be for an educated American electorate to hold their elected representatives accountable to the oath they swore, with a hand on the Bible, to uphold the U.S. Constitution.

Alex Newman is a correspondent for The New American, covering economics, education, politics, and more. Follow him on Twitter @ALEXNEWMAN_JOU. He can be reached at

http://www.thenewamerican.com/usnews/constitution/item/19739-obama-hides-executive-abuses-by-calling-decrees-memoranda

OPEC, The Fed, Frac!, Debt, and Depression

by coldwarrior ( 146 Comments › )
Filed under Economy, Energy, Open thread at December 11th, 2014 - 6:00 am

Yes it is a pretty thick article and will require some effort to get through. But is is worth the read.

 

Here is more from AEP on cheap oil and islam.  There is a very good video on how oil is priced at the link below.

Bank of America sees $50 oil as Opec dies

“Our biggest worry is the end of the liquidity cycle. The Fed is done. The reach for yield that we have seen since 2009 is going into reverse”, said Bank of America.

 The Opec oil cartel no longer exists in any meaningful sense and crude prices will slump to $50 a barrel over the coming months as market forces shake out the weakest producers, Bank of America has warned.

Revolutionary changes sweeping the world’s energy industry will drive down the price of liquefied natural gas (LNG), creating a “multi-year” glut and a much cheaper source of gas for Europe.

Francisco Blanch, the bank’s commodity chief, said Opec is “effectively dissolved” after it failed to stabilize prices at its last meeting. “The consequences are profound and long-lasting,“ he said.

The free market will now set the global cost of oil, leading to a new era of wild price swings and disorderly trading that benefits only the Mid-East petro-states with deepest pockets such as Saudi Arabia. If so, the weaker peripheral members such as Venezuela and Nigeria are being thrown to the wolves.

The bank said in its year-end report that at least 15pc of US shale producers are losing money at current prices, and more than half will be under water if US crude falls below $55. The high-cost producers in the Permian basin will be the first to “feel the pain” and may soon have to cut back on production.

The claims pit Bank of America against its arch-rival Citigroup, which insists that the US shale industry is far more resilent than widely supposed, with marginal costs for existing rigs nearer $40, and much of its output hedged on the futures markets.

Bank of America said the current slump will choke off shale projects in Argentina and Mexico, and will force retrenchment in Canadian oil sands and some of Russia’s remote fields. The major oil companies will have to cut back on projects with a break-even cost below $80 for Brent crude.

It will take six months or so to whittle away the 1m barrels a day of excess oil on the market – with US crude falling to $50 – given that supply and demand are both “inelastic” in the short-run. That will create the beginnings of the next shortage. “We expect a pretty sharp rebound to the high $80s or even $90 in the second half of next year,” said Sabine Schels, the bank’s energy expert.

Mrs Schels said the global market for (LNG) will “change drastically” in 2015, going into a “bear market” lasting years as a surge of supply from Australia compounds the global effects of the US gas saga.

If the forecast is correct, the LNG flood could have powerful political effects, giving Europe a source of mass supply that can undercut pipeline gas from Russia. The EU already has enough LNG terminals to cover most of its gas needs. It has not been able to use this asset as a geostrategic bargaining chip with the Kremlin because LGN itself has been in scarce supply, mostly diverted to Japan and Korea. Much of Europe may not need Russian gas at all within a couple of years.

Bank of America said the oil price crash is worth $1 trillion of stimulus for the global economy, equal to a $730bn “tax cut” in 2015. Yet the effects are complex, with winners and losers. The benefits diminish the further it falls. Academic studies suggest that oil crashes can ultimately turn negative if they trigger systemic financial crises in commodity states.

Barnaby Martin, the bank’s European credit chief, said world asset markets may face a stress test as the US Federal Reserve starts to tighten afters year of largesse. “Our biggest worry is the end of the liquidity cycle. The Fed is done and it is preparing to raise rates. The reach for yield that we have seen since 2009 is going into reverse”, he said.

Mr Martin flagged warnings by William Dudley, the head of the New York Fed, that the US authorities had tightened too gently in 2004 and might do better to adopt the strategy of 1994 when they raised rates fast and hard, sending tremors through global bond markets.

Bank of America said quantitative easing in Europe and Japan will cover just 35pc of the global stimulus lost as the Fed pulls back, creating a treacherous hiatus for markets. It warned that the full effect of Fed tapering had yet to be felt. From now on the markets cannot expect to be rescued every time there is a squall. “The threshold for the Fed to return to QE will be high. This is why we believe we are entering a phase in which bad news will be bad news and volatility will likely rise,” it said.

What is clear is that the world has become addicted to central bank stimulus. Bank of America said 56pc of global GDP is currently supported by zero interest rates, and so are 83pc of the free-floating equities on global bourses. Half of all government bonds in the world yield less that 1pc. Roughly 1.4bn people are experiencing negative rates in one form or another.

These are astonishing figures, evidence of a 1930s-style depression, albeit one that is still contained. Nobody knows what will happen as the Fed tries to break out of the stimulus trap, including Fed officials themselves.

I do have to disagree with AEP on the future ‘wild price swings’ I am sure that American energy corporations can do a rather good job judging demand and adjust as needed.

 

We will see if this is a slow down on demand of oil globally, an overproduction globally, or a mix of the two. I’m going to bet its a bit of both and the world won’t collapse in a gloom and doom scenario as the free market is allowed to work again without the interference of the oil tick cartel. The only change I might make is to randomly make 10-20% of oil speculators actually take delivery of the amount of oil that they are betting on.  😆

 

More from Bloomberg. PLEASE read the article here and watch the video.

Petro-War!

by coldwarrior ( 90 Comments › )
Filed under Economy, Energy, Islam, Open thread at December 2nd, 2014 - 6:00 am

Cheap oil can be both a blessing and a curse as AEP explains in this analysis:

Saudi Arabia and the core Opec states are taking an immense political gamble by letting crude oil prices crash to $66 a barrel, if their aim is to shake out the weakest shale producers in the US. A deep slump in prices might equally heighten geostrategic turmoil across the broader Middle East and boomerang against the Gulf’s petro-sheikhdoms before it inflicts a knock-out blow on US rivals.

Caliphate leader Abu Bakr al-Baghdadi has already opened a “second front” in North Africa, targeting Algeria and Libya – two states that live off energy exports – as well as Egypt and the Sahel as far as northern Nigeria. “The resilience of US shale may prove greater than the resilience of Opec,” said Alistair Newton, head of political risk at Nomura.

Chris Skrebowski, former editor of Petroleum Review, said the Saudis want to cut the annual growth rate of US shale output from 1m barrels per day (bpd) to 500,000 bpd to bring the market closer to balance. “They want to unnerve the shale oil model and undermine financial confidence, but they won’t stop the growth altogether,” he said.

There is no question that the US has entirely changed the global energy landscape and poses an existential threat to Opec. America has cut its net oil imports by 8.7m bpd since 2006, equal to the combined oil exports of Saudi Arabia and Nigeria.

The country had a trade deficit of $354bn in oil and gas as recently as 2011. Citigroup said this will return to balance by 2018, one of the most extraordinary turnarounds in modern economic history.

“When it comes to crude and other hydrocarbons, the US is bursting at the seams,” said Edward Morse, Citigroup’s commodities chief. “This situation is unlikely to stop, even if prevailing prices for oil fall significantly. The US should become a net exporter of crude oil and petroleum products combined by 2019, if not 2018.”

Opec has misjudged the threat. As late as last year, it was dismissing US shale as a flash in the pan. Abdalla El-Badri, the group’s secretary-general, still insists that half of all US shale output is vulnerable below $85.

This is bravado. US producers have locked in higher prices through derivatives contracts. Noble Energy and Devon Energy have both hedged over three-quarters of their output for 2015.

Pioneer Natural Resources said it has options through 2016 covering two- thirds of its likely production. “We can produce down to $50 a barrel,” said Harold Hamm, from Continental Resources. The International Energy Agency said most of North Dakota’s vast Bakken field “remains profitable at or below $42 per barrel. The break-even price in McKenzie County, the most productive county in the state, is only $28 per barrel.”

Efficiency is improving and drillers are switching to lower-cost spots, confronting Opec with a moving target. “The (price) floor is falling and may not be nearly as firm as the Saudi view assumes,” said Citigroup.

Mr Morse says the “full cycle” cost for shale production is $70 to $80, but this includes the original land grab and infrastructure. “The remaining capex required to bring on an additional well is far lower, and could be as low as the high-$30s range,” he said.

Critics of US shale may have misunderstood its economics. There is a fast decline in output from new wells but this is offset by a “long-tail phase” for a growing number of legacy wells. The Bakken field has already reached 1.1m bpd, and this is expected to double again over the next five years.

Other oil projects around the world may be more vulnerable to a price squeeze, including the North Sea, the ultra-deepwater ventures in the Atlantic off Brazil and Angola, Canadian oil sands, or Russia’s contentious plans for the Arctic in the “High North”. But the damage will be gradual.

In the meantime, oil below $70 is already playing havoc with budgets across the global petro-nexus. The fiscal break-even cost is $161 for Venezuela, $160 for Yemen, $132 for Algeria, $131 for Iran, $126 for Nigeria, and $125 for Bahrain, $111 for Iraq, and $105 for Russia, and even $98 for Saudi Arabia itself, according to Citigroup.

Opec may not be worried about countries such as Nigeria, but even there a full-blown economic and political crisis could turn the north into a Jihadi stronghold under Boko Haram.

The growing Jihadi movements in the Maghreb – combining with events in Syria and Iraq – clearly pose a first-order security threat to the Saudi regime itself.

The Libyan city of Derna is already in the hands of the Salafist group Ansar al-Shariah and has pledged allegiance to Islamic State. Terrorist movements in the Egyptian Sinai have also rallied to the black and white flag of IS, prompting Egypt’s leader Abdel al-Sisi to call last week for a “general mobilisation” of all leading Arab and Western powers to defeat the spreading movement.

The new worry is Algeria as the Bouteflika regime goes into its final agonies. “They have an entrenched terrorist problem as we saw in the seizure of the Amenas gas refinery last year. These people are aligning themselves with Islamic State as part of the franchise,” said Mr Newton.

Algeria exports 1.5m bpd of petroleum products. Its gas exports matter more but the price of liquefied natural gas shipped to Europe is indirectly linked to oil over time.

It is an open question what will happen to Algeria, Iraq, and Libya if oil prices hover at half the budget break-even costs for a year or two, given the extreme fragility of the region and political risk of cutting subsidies.

The Sunni Salafist tornado sweeping across the Middle East – so strangely like the lightning expansion of Islam in the mid-7th century – is moving to its own inner rhythms. It is not a simple function of economic welfare, let alone oil prices.

Yet Saudi Arabia’s ruling dynasty tests fate if it is betting that the Middle East’s fraying political order can withstand a regional economic shock for another two years.

Much more analysis here

Marcellus Shale – SW liquids rich $24.23
Marcellus Shale – Super Rich $25.63
Utica – Wet gas $32.39
Mississippian Horizontal – East $42.15
Utica – Liquids Rich $44.04
Eagle Ford – Liquids Rich $46.05
Niobrara – Wattenberg $46.10
Wolfcamp – N. Midland (Horizontal) $53.92
Eagle Ford – Oil Window $55.29
Wolfcamp – S. Midland (Horizontal) $61.57
Mississippian Horizontal – West $64.05
Wolfberry $64.63
Bakken Shale $64.74
Wolfcamp – N. Delaware (Horizontal) $68.54
Uinta – Green River $68.77
Uinta – Wasatch (H) $72.15
Granite Wash – Liquids Rich $73.10
Horizontal
Uinta – Wasatch (V) $74.95
Barnett Shale – Southern Liquids $84.45

Do the Republicans Now Own the Coal Vote?

by Iron Fist ( 83 Comments › )
Filed under Economy, Energy at November 9th, 2014 - 7:02 am

Politico seems to think so:

The Republicans’ romp this week may have permanently turned coal country from blue to red.

Coal-heavy districts in West Virginia, Kentucky and Illinois that had been steadily moving away from Democrats in recent elections appear to have completed that shift Tuesday, when they overwhelmingly backed Republicans who vowed to oppose what they call President Barack Obama’s “war on coal.”

“This has been a growing trend in coal politics and will outlast President Obama’s tenure,” Wheeler said.

Gee, you tell people that you intend to put them out of business (and, thus, out of a job), and they’ll vote against you for it? Who could have seen that coming? In reality, it doesn’t make much sense for anyone in the entire energy sector, with the exception of “green” energy that relies on government subsidies to stay afloat, to vote for the Democrats. It isn’t just coal. The Democrats hate fracing. They hate offshore drilling, too. And they really hate nuclear and hydroelectric energy. Basically, if you are in the energy sector, the Democrats want you out of business.

Think about that for a minute. Damned near everything that we think of as “Modern Civilization” requires energy to function. It always kills me to see the hippies protesting power plants while yakking on their cell phones and surfing the web on their iPads. The anti-energy people are some of the lest self-conscious people out there. You can think of them as a human sponge (the sea creature). They sit there and take all the energy in that anyone else does, but they do it simply by virtue of being. They don’t have any real awareness of where it comes from or what is necessary to produce it (you get the same kind of thing with people that think meat comes from a grocery store).

All of this is good news for the GOP, not just for this election, but for the coming elections:

In West Virginia, once a long-time Democratic stronghold, Republicans will take control of both houses of the state legislature for the first time since 1931. Republicans picked up seven seats in the state Senate to bring the balance to 17-17, and then Democrat Daniel Hall switched parties Wednesday to give the majority to the GOP.

Voters there also elected Rep. Shelley Moore Capito as their first GOP senator in 56 years, and Republicans won three congressional contests, even kicking out 38-year incumbent Rep. Nick Rahall.

[snip]

The “policies and priorities espoused by the national Democratic Party, as reflected in their platform, don’t resonate with the priorities, beliefs and feelings of the people” of West Virginia, said Evan Jenkins, the Republican who will take Rahall’s place in Congress.

“Southern West Virginia in particular has been devastated economically over this last six years in the war on coal,” he said. “It’s very difficult for West Virginia Democrats to explain to the voters why their party maintains such an anti-coal agenda.”

Now, keep in mind that this is just West Virginia. This won’t have the same impact that, say, California waking up from her slumber and recognizing what the Democrats hath wrought would have. But it is a start, and it may be the leading edge of a permanent shift (as much as anything in politics can be termed “permanent”).

While West Virginia has been trending toward the Republican Party for years, in Kentucky, where Sen. Mitch McConnell beat Grimes by 15 percentage points, Obama’s policies on coal appeared to have helped the GOP, he said.

McConnell won by the largest margins in the state’s coal-producing counties, often topping the 70 percent mark. “I’m not sure some of those counties he’s won ever,” said Bissett. The senator won 47 counties where more than 60 percent of voters are registered Democrats.

As the next Senate majority leader, McConnell says Republicans “will use the power of the purse to try to push back against this overactive bureaucracy,” pointing to the “war on coal” as a prime example.

While the new GOP majority in Congress means fossil fuels will see more support in Washington, the loss of so many Democrats from coal-heavy House districts may make it harder for Republicans to reach across the aisle on measures to benefit the industry.

With the defeats Rahall, Bill Enyart (D-Ill.) and John Barrow (D-Ga.), “it is going to be much harder crafting bipartisan legislation on energy and environmental issues in the House,” Wheeler said.

Enyart, a co-chairman of the congressional coal caucus, represented a southern Illinois district heavily reliant on coal, and Barrow and Rahall held the center on the House Energy and Commerce Committee as “go-to Democrats for sponsorship of Republican-led and industry-favored legislation and letters,” Wheeler said. “Their defeat means it will be harder to attract Democrats to such efforts.”

This is why I say it may be the leading indicator of a permanent shift. The opposition to energy badly hurt the Democrats this time around, but rather than learning from that experience and shifting their policies accordingly, it looks like instead they are going to double-down on it. If you look at a map of the United States showing the counties that voted Republican versus Democrat, you see a set of large urban areas that are extremely heavily Democrat surrounded by a sea of, well, the rest of the country, that is Republican. These large urban areas are tremendous consumers of energy, but the popular will there is decidedly against the energy sector, with the exception of “green” power. These people have no idea what it takes to keep a power grid running. Electricity is magic pixie dust that comes out of a socket on the wall. That is why you see the perennial push for “electric” cars as “green” alternatives. They never consider that you have to burn coal (or natural gas, nuclear fuel, or whatever) to produce the electricity to charge the car.

The Energy Sector is a huge sector of the economy, and it is not at all a stretch to say that it is the sector that makes most (if not all) of the other sectors of the economy possible. If you work in that sector directly, it really is foolish to vote for the Democrats. They ultimately want to put you out of a job, unless you are a windmill operator or the like. But for the rest of us, energy is a vital commodity as well. When the Democrats try to put coal out of business, they are making almost everything else more expensive. The power that you use to power the computer that you are using may very well have been produced by coal, but even if it wasn’t, the loss of the supply of coal energy will cause the price of all other supplies of energy to rise, as the Law of Supply and Demand dictates. The Democrats feel that they are above even natural laws, but when they step off the side of a building, they are going to fall just like the rest of us. With their war on energy, the Left may be taking that first fatal step right now.

FRAC Goes the Oil Market

by coldwarrior ( 80 Comments › )
Filed under Economy, Energy, Open thread at October 15th, 2014 - 8:00 am

I started my day like every day…Kettlebell and Nordictrack and CNBC at 0530. The heads are finally getting at what the Frac boom mans to the oil market. Combine the frac with very low economic growth expectations and you get several things:

A Nervous Saudi (PLEASE read the entire article at this link):

A Saudi billionaire investor has sounded the alarm over the potential impact of falling oil prices on the Gulf kingdom’s economy.

In an open letter to Saudi ministers posted via Twitter, Prince Alwaleed bin Talal al-Saud expressed his “astonishment” at comments made by Ali al-Naimi, the oil minister, who reportedly played down the impact of oil prices falling below $100 a barrel. Prices have since fallen below $88 a barrel, or a quarter since June.

Prince Alwaleed, noting the kingdom’s 2014 budget was 90 per cent dependent on oil revenues, said belittling the impact of lower prices was a “catastrophe that cannot go unmentioned”…

The prince expressed similar concerns last year over the rise of shale oil, which, with weakening Asian demand, has contributed to the rapid slide in oil prices – despite geopolitical uncertainties in Iraq, a major producer.

His public broadside against the veteran oil minister came as analysts said the Gulf members of Opec, the oil producers’ cartel, led by Saudi Arabia, seem prepared to drive down oil prices to retain market share and fend off the threat of rising US production, despite the risks to their hydrocarbon-dependent economies…

Gulf oil producers, most of which have large cash reserves, seem to be betting that the short-term pain of declining oil revenues from lower prices will close off competing supplies and revive the lowest global oil demand since 2009.

Oil prices are reaching levels that, if sustained, threaten the ability of some Gulf states to meet domestic spending commitments, forcing a drawdown on reserves or debt issuance.

Saudi Arabia needed an oil price of $89 a barrel in 2013 to balance the budget, up from a “fiscal break-even” of $78 a barrel in 2012, according to the International Monetary Fund.

Chart

But Riyadh’s regional political rivals, such as Iran and Iraq, as well as other Opec members such as Venezuela, have much higher fiscal break-evens.

That bolded paragraph is the new reality, the ME is being driven from relevance.

 

And you get market fallout:

Crude oil futures settled down 4.6 percent at $81.84 a barrel, the biggest percentage drop since November 2012 and the lowest settlement since June 28, 2012.

Brent crude for November slid earlier and lurched lower toward the end of the day, dropping by more than $4 a barrel to dip below $85 a barrel for the first time since 2010. It was the biggest one-day drop in prices since 2011. The benchmark settled at $85.04, $3.85 lower on the day.

Oil dived more than $4 a barrel on Tuesday, its biggest drop in more than two years as mounting evidence of slackening demand and unrelenting U.S. shale output left traders struggling to peg a floor for crude’s four-month rout.

The abrupt acceleration of an over 26 percent slide in prices since June was triggered by three news items that epitomized the market’s turn: a downgrade in global oil consumption forecasts; projections for another big boost in shale oil; and reluctance by OPEC members to cut output.

Read MoreCheap oil is here to stay, at least for a few months

Oil is struggling to find a floor after Saudi Arabia made clear that it was focused on maintaining market share, not supporting prices with unilateral production cuts.

Other members appear to be taking a similar tack. A source familiar with oil policy in Iran, normally one of the first in OPEC to call for production cuts, followed Kuwait in saying there was no need to rein in supplies.

Read MoreOil slide wipes out stock market gains

“I think it’s just continued the rationalization that all signs continue to suggest that OPEC is not going to do much,” said Dominick Chirichella, senior partner at the Energy Management Institute, New York.

Getty Images

The slide began early in the day after the International Energy Agency, the West’s energy watchdog, cut its estimates for global oil demand growth by 250,000 barrels per day for this year and by 90,000 bpd for 2015. It said demand for OPEC oil would be 200,000 bpd lower for both years.

Read MoreOil demand to ‘rise tentatively’ in 2015: IEA

The diminishing outlook for consumption is colliding with an unrelenting rise in U.S. shale oil, leading to a glut of crude that has knocked Brent lower since June.

Losses deepened in mid-afternoon after the U.S. Energy Information Administration projected that fast growing shale basins would increase output by some 106,000 bpd in November from a month earlier.

 

The down side? This can be deflationary and the Fed does not have much room to move on interest rates. This could cause QE again here as Europe heads for another recession. Low $ oil shuts off the Shale wells in America at,I think $80 a barrel. Weak expected demand and the march toward American Energy independence is going to be an interesting ride.

Supply, Demand, Dollar Values and FRAC!

by coldwarrior ( 72 Comments › )
Filed under Economy, Energy, Open thread at October 9th, 2014 - 8:00 am

An interesting article:

 

HERE

The Shale Revolution Is Changing How We Think About Oil And The Dollar

 

goldman sachs commodoties and dollarGoldman Sachs

Historically, there’s been a pretty consistent correlation between oil prices and the US dollar.

When the dollar strengthened, oil prices would fall — and vice versa.

For the longest time, this relationship has been explained by the huge flow of US oil imports.

However, a new report by Goldman Sachs’s Jeffrey Currie says that rationale has broken down in the wake of the American shale revolution.

“In 2008 … the US was importing on a net basis nearly 12 million [barrels per day] of oil and products,” Currie writes. “Owing to shale technology, today that number is now less than 5 million b/d. And subtracting out Canada and Mexico, the number drops to 2.4 million b/d. In other words, net imports are over 60% lower than in 2008.”

This has “significantly reduced the correlation between commodities and the US dollar,” he writes.

Back in the day…

In the past, Currie writes, investors believed that the “primary mechanism for the correlation” between oil prices and the dollar was the large US petroleum current account deficit.

“From the early 2000’s to the global financial crisis, increasing oil imports saw a widening US current account deficit, which put depreciation pressure on the dollar (appreciation pressure on oil producers currencies), which in turn put further widening pressure on the current account deficit (for any given volume of imports), causing additional dollar weakness,” Currie writes.

By 2008, oil reached $147 per barrel and the US dollar was at its weakest point versus the Euro at 1.6. At the time, the US was importing on a net basis approximately 12 million barrels per day of oil and products.

And then there was the shale revolution…

santorum north dakota shaleREUTERS/Harrison McClaryA piece of North Dakota shale.

Today, the number of imports has dropped to around 5 million. If you take out Canada and Mexico, that number falls further to 2.4 million — a stark difference from 2008’s 12 million.

Overall, oil imports are down more than 60% since 2008.

Imports have dropped because the US is now using hydraulic fracturing to extract oil from its massive shale basins, creating more supply.

And it’s during this same 2008 – 2014 time period that there’s been a huge reduction in correlation between oil prices and the US dollar, according to Currie.

“Along with the post-crisis financial market normalization, [the drop in oil imports] has dramatically reduced the correlation between oil and the USD, to around 0% (i.e. uncorrelated) today from historical highs near 60% in 2008/2009,” Currie writes.

Thus, according to this analysis, although oil prices have recently dropped as the dollar has surged, one trend doesn’t explain the other.

 

Dhimmi Carter Birthday Wishes

by Macker ( 139 Comments › )
Filed under Anti-semitism, Democratic Party, Energy, Hamas, History, Inflation, Iran, Koran, Misery Index at October 2nd, 2014 - 6:00 pm

Happy Belated 90th Birthday to the WORST US President…of the 20th Century! Yes, James Earl Carter, Jr. is still kickin’…and it’s time for those of us on the Right Side to leave any type of Birthday Greeting to a forerunner of who we have now.
Think of all the things he’s responsible for: The Misery Index, stagflation, high unemployment, military emasculation, the Iranian Hostage Crisis…and that’s just for starters.
Have at it!