Category Archives: OPEC

Oil Rally Not Sustainable Says Russian Central Bank

Summary

  • The Russian central bank sees several catalysts that could stop the oil rally in its tracks.
  • Bearish rig count report from Baker Hughes could signal a reverse in direction.
  • Supply will continue to increase rather than slow down in 2016 – even if there is a decline in shale production.
  • Battle for market share is one of the major catalysts not being considered.

I believe it’s very clear this oil rally is running on fumes and was never the result of an improvement in fundamentals. That means to me this rally is going to quickly run out of steam if it isn’t able to run up quicker on existing momentum. I don’t see that happening, and it could pull back dramatically, catching a lot of investors by surprise. The Russian central bank agrees, saying it doesn’t believe the price of oil is sustainable under existing market conditions.

Cited by CNBC, the Russian central bank said, “the current oil market still features a continued oversupply, on the backdrop of a slowdown in the Chinese economy, more supplies originating from Iran and tighter competition for market share.”

In other words, most things in the market that should be improving to support the price of oil aren’t. That can only mean one thing: a violent pullback that could easily push the price of oil back down to the $30 to $32 range. If the price starts to fall quickly, we could see panic selling driving the price down even further.

I think most investors understand this is not a legitimate rally when looking at the lack of change in fundamentals. I’ll be glad when the production freeze hoax is seen for what it is: a manipulation of the price of oil by staggered press releases meant to pull investors along for the ride. The purpose is to buy some time to give the market more time to rebalance. Once this is seen for what it really is, oil will plummet. It could happen at any time in my opinion.

 

Rig count increases for first time in three months

For the first time in three months, the U.S. rig count was up, increasing by one to 387. By itself this isn’t that important, but when combined with the probability that more shale supply may be coming to the market in 2016, it definitely could be an early sign of the process beginning.

EOG Resources (NYSE:EOG) has stated it plans on starting up to 270 wells in 2016. We don’t know yet how much additional supply it represents, but it’s going to offset some of the decline from other companies that can’t continue to produce at these price levels. There are other low-cost shale producers that may be doing the same, although I think the price of oil will have to climb further to make it profitable for them, probably around $45 per barrel.

It’s impossible to know at this time if the increase in the price of oil was a catalyst, or we’ve seen the bottom of the drop in rig counts. The next round of earnings reports will give a glimpse into that.

Fundamentals remain weak

Most of the recent strength of the price of oil has been the continual reporting on the proposed production freeze from OPEC and Russia. This is light of the fact there really won’t be a freeze, even if a piece of paper is signed saying there is.

We know Iran isn’t going to agree to a freeze, and with Russia producing at post-Soviet highs and Iraq producing at record levels, what would a freeze mean anyway? It would simply lock in output levels the countries were going to operate at with or without an agreement.

The idea is the freeze is having an effect on the market and this will lead to a production cut. That simply isn’t going to happen. There is zero chance of that being the outcome of a freeze, if that ever comes about.

And a freeze without Iran isn’t a freeze. To even call it that defies reality. How can there be a freeze when the one country that would make a difference isn’t part of it? If Iran doesn’t freeze production, it means more supply will be added to the market until it reaches pre-sanction levels. At that time, all Iran has promised is it may consider the idea.

 

What does that have to do with fundamentals? Absolutely nothing. That’s the point.

Analysis and decisions need to be based on supply and demand. Right now that doesn’t look good. The other major catalyst pushing up oil prices has been the belief that U.S. shale production will decline significantly in 2016, which would help support oil. The truth is we have no idea to what level production will drop. It seems every time a report comes out it’s revised in a way that points to shale production remaining more resilient than believed.

I have no doubt there will be some production loss in the U.S., but to what degree there will be a decline, when considering new supply from low-cost shale companies, has yet to be determined. I believe it’s not going to be near to what was originally estimated, and that will be another element weakening support over the next year.

Competing for market share

One part of the oil market that has been largely ignored has been the competition for market share itself. When U.S. shale supply flooded the market, the response from Saudi Arabia was to not cede market share in any way. That is the primary reason for the plunge in oil prices.

There has been no declaration by the Saudis that they are going to change their strategy in relationship to market share and have said numerous times they are going to let the market sort it out, as far as finding a balance between supply and demand. So the idea they are now heading in a different direction is a fiction created by those trying to find anything to push up the price of oil.

It is apparent some of the reason for increased U.S. imports comes from Saudi Arabia in particular lowering its prices to nudge out domestic supply. It’s also why the idea of inventory being reduced in conjunction with lower U.S. production can’t be counted on. It looks like imports will continue to climb while shale production declines.

More competition means lower prices, although in this case, Saudi Arabia is selling its oil at different price points to different markets. It’s the average that matters there, and we simply don’t have the data available to know what that is.

 

In the midst of all of this, Russia is battling the Saudis for share in China, while the two also battle it out in parts of Europe, with Saudi Arabia looking to take share away from Russia. Some of Europe has opened up to competitors because it doesn’t want to rely too much on Russia as its major energy source.

For this and other competitive reasons, I could never trust a production freeze agreement if it ever came to fruition. They haven’t been adhered to in the past, and they won’t be if it happens again. Saudi Arabia has stated several times that it feels the same way.

Conclusion

To me the Russian central bank is spot on in saying the chance of a sustainable oil rally is slim. It also accurately pointed out the reasons for that: it’s about the lack of the fundamentals changing.

With U.S. inventory increasing, rig counts probably at or near a bottom, no end in sight to oversupply continuing, and competition for a low-demand market heating up, there is nothing I see that can justify an ongoing upward price move. I don’t even see it being able to hold.

A weaker U.S. dollar has legitimately helped some, but it can’t support the price of oil on its own. When all the other factors come together in the minds of investors, and the price of oil starts to reverse direction, there is a very strong chance a lot of bullish investors are going to get crushed hard. It is probably time to take some profits and run for the exit if you’re in the oil market for the short term.

by Gary Bourgeault


Irrational Oil Optimists About To Experience Some Panic Selling Pain

Summary

  • Short-term positions in oil getting more risky.
  • U.S. production will outperform estimates as shale producers add supply to the market.
  • Inventory will come under more strain as key U.S. storage facilities approach full capacity.
  • Dollar weakness isn’t enough to maintain oil price momentum.

The longer the price of oil has upward momentum, and the higher it goes, the more risky it becomes for investors because there is nothing outside of a weakening U.S. dollar to justify any kind of move we’ve seen the price of oil make recently.

The falling dollar isn’t enough to keep the oil price from falling to where it belongs, and that means when the selloff begins, it’s likely to gravitate into full-panic mode, with sellers running for the exits before they get burned.

This is especially risky for those looking to make a quick windfall from the upward movement of oil. I’m not concerned about those taking long-term positions in quality energy companies with significant oil exposure, since they’ve probably enjoyed some great entry points. There is, of course, dividend risk, along with the strong probability of further share erosion before there is a real recovery that has legs to stand on because it’s based on fundamentals.

For that reason, investors should seriously consider taking profits off the table and wait for better conditions to re-enter.

Oil has become a fear play. Not the fear of losing money, but the fear of not getting in on the fast-moving action associated with the quick-rising price of oil. Whenever there is a fear play, it is ruled by emotion, and no amount of data will convince investors to abandon their giddy profits until they lose much, if not all, of what they gained. Don’t be one of them.

 

Having been a financial adviser in the past, I know what a lot of people are thinking at this time in response to what I just said. I’ve heard it many times before. It usually goes something like this: “What if the price of oil continues to rise and I lose a lot of money because of leaving the market too soon?” That’s a question arising from a fear mentality. The better question is this: “What if the oil price plunges and panic selling sets in?”

Oil is quickly becoming a casino play on the upside, and the longer investors stay in, the higher the probability they’ll lose the gains they’ve enjoyed. Worse, too much optimism could result in losses if preventative action isn’t taken quickly enough.

What needs to be considered is why one should stay in this market. What is so convincing it warrants this type of increasing risk, which offers much less in the way of reward than even a week ago? What fundamentals are in place that suggest a sustainable upward movement in the price of oil? The answer to those questions will determine how oil investors fare in the near future.

U.S. shale production

The more I think on the estimates associated with U.S. shale production in 2016, measured against the statements made by stronger producers that they’re going to boost supply from premium wells this year, the more I’m convinced it isn’t going to fall as much as expected. New supply will offset a lot of the less productive and higher cost wells being shuttered. I do believe there will be some loss of production from that, but not as much as is being suggested.

There are various predictions on how much production is going to be lost, but the general consensus is from 300,000 bpd to 600,000 bpd. It could come in on the lower side of that estimate, but I don’t think it’ll be close to the upper end of the estimate.

What is unknown because we don’t have an historical guideline to go by is, the amount of oil these premium wells will add to supply. We also don’t know if the stated goals will be followed up on. I think they will, but we won’t know for certain until the next couple of earnings reports give a clearer picture.

 

When combined with the added supply coming from Iran, and the ongoing high levels of production from Saudi Arabia, Russia and Iraq, I don’t see how the current support for the price of oil can continue on for any length of time.

There is no way of knowing exactly when the price of oil will once again collapse, but the longer it stays high without a change in the fundamentals, the higher the risk becomes, and the more chance it could swing the other way on momentum, even if it isn’t warranted. It could easily test the $30 mark again under those conditions.

Inventory challenges

What many investors don’t understand about storage and inventory is it definitely matters where the challenges are located. That’s why Cushing being over 90 percent capacity and Gulf storage only a little under 90 percent capacity means more than if other facilities were under similar pressure. Together, they account for over 60 percent of U.S. storage.

With the imbalance of supply and demand driving storage capacity levels, the idea of oil staying above $40 per barrel for any period of time is highly unlikely. A lower U.S. dollar and the highly irrelevant proposed production freeze talks can’t balance it off.

Once the market digests this, which could happen at any time, we’ll quickly enter bear mode again. The problem is the price of oil is straining against its upper limits, and if momentum starts to deflate, the race to sell positions will become a sprint and not a marathon.

Uncertainty about shale is the wild card

As already mentioned, U.S. shale production continues to be the major catalyst to watch. The problem is we have no way of knowing what has already been unfolding in the first quarter. If investors start to abandon their positions, and we find shale supply is stronger than projected, it’ll put further downward pressure on oil after it has already corrected.

What I mean by that is we should experience some fleeing from oil before the next earnings reports from shale producers are released. If the industry continues to surprise on the upside of supply, it’ll cause the price of oil to further deteriorate, making the outlook over the next couple of months potentially ominous.

 

This isn’t just something that has a small chance of happening; it’s something that has a very strong probability of happening. Agencies like IEA have already upwardly revised their outlook for shale supply in 2016, and if that’s how it plays out, the entire expected performance for the year will have to be adjusted.

Conclusion

Taking into account the more important variables surrounding what will move the price of oil, shale production remains the most important information to follow. Not much else will matter if supply continues to exceed expectations. It will obliterate all the models and force analysts to admit this has little to do with prior supply cycles and everything to do with a complete market disruption. Many are still in denial of this. They’ll learn the reality soon enough.

That doesn’t mean there won’t eventually be a time when demand finally catches up with supply, but within the parameters of this weak global economy and oil supply that continues to grow, it’s going to take a lot longer to realize than many thought.

For several months, it has been understood that the market underestimated the expertise and efficiency of U.S. shale producers, and to this day they continue to do so. We will find out if that remains in play in the first half of 2016, and by then, whether it’ll extend further into 2017.

As for how it will impact the price of oil now, if we start to have some panic selling before the earnings reports, and the earnings reports of the important shale producers exceed expectations on the supply side, with it being reflected in an increase in the overall output estimates for the year, it will put more downward pressure on oil.

The other scenario is oil lingers around $40 per barrel until the earnings reports come out. There will still be a decline in the price of oil, the level of which would depend on how much more supply shale producers brought to the market in the first quarter than expected.

My thought is we’re going to experience a drop in the price of oil before earnings reports, which then could trigger a secondary exodus from investors in it for short-term gains.

 

For those having already generated some decent returns, it may be time to take it off the table. I don’t see how the shrinking reward can justify the growing risk.

by Gary Bourgeault

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The Mosul Dam – OPEC’s Unavoidable Supply Cut

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Summary

The Mosul Dam in Iraq could collapse at any time, causing massive flooding across the country.

Iraq produces over four million barrels of oil per day, a number which will drop immediately when this event occurs.

The destruction of oil production in Iraq will immediately decrease world supply, lifting oil prices.

The Oil Situation: Since 2014, the oil market has been in a tailspin due to a multitude of global factors. As of March 2016, prices seem to have stabilized, although the persistence of crude oversupply continues to hang over the market. For months, declining US production and a potential output freeze by OPEC have been putting a potential floor in place. However, I believe an event is on the horizon which will change the equilibrium of oil prices immediately… the collapse of the Mosul Dam.

The Mosul Dam: The Mosul Dam is the largest dam in Iraq. It is located on the Tigris River in the western governance of Ninawa, upstream of the city of Mosul. Constructed in 1981, the dam has had a history of structural issues, requiring perpetual maintenance in order to maintain its integrity. Since 1984, this consisted of 300 man crews, working 24 hours a day across three shifts, filling holes in the bedrock through a process called grouting. For 30 years, this process worked, although it was always considered to be a ticking time bomb, dubbed “the most dangerous dam in the world” by the US Army Corps of Engineers.

In August 2014, the Islamic State of Iraq and the Levant took control of the dam, halting the maintenance process until it was retaken by Iraqi, Kurdish and US Forces two weeks later. Unfortunately, the damage was already done… since then, the maintenance crews have been limited to 30 personnel or less, and the equipment is inadequate to continue patching holes. Per the dam’s former chief engineer, Nasrat Adamo, “The machines for grouting have been looted. There is no cement supply. They can do nothing. It is going from bad to worse, and it is urgent. All we can do is hold our hearts.” As winter snows melt, the water levels will rise to unsustainable levels, and while it has two pressure release gates to avoid this scenario, one has been non-functioning for years, and using the second one alone risks the stability of the structure.

The Iraqis have been working on a solution with an Italian firm, the Trevi Group, known for fixing 150 dams worldwide. This case is special, however, as it will require a cut off wall 800 feet below the dam, the construction of which may affect the dam’s integrity. Additionally, the continued presence of ISIS poses a risk to any contractors in the area, which will require a security force of 450 personnel. Until Mosul (still held by ISIS) is retaken by Coalition forces, full repairs cannot commence. While the Iraqi forces believe this can happen in months, the US Defense Intelligence Agency head, Lt Gen. Vincent Stewart, is not optimistic that it will occur this year.

My personal opinion, knowing the effectiveness of Iraqi Forces (who dropped their guns and fled during the initial ISIL invasion), is that the Mosul Dam will fail. Without significant US assistance, the retaking of Mosul will not occur fast enough to begin construction, and as long as it is in ISIS’ hands, safe repairs cannot commence. Although the US has not said the event is guaranteed, warnings are coming at an increasing pace, and the State Department has warned US citizens to prepare for evacuation in the event of failure.

The Event: When the Mosul Dam collapses (and without reconstruction measures being implemented quickly, this is considered a ‘when’, not an ‘if’), a wave 45-65 feet high is expected to flood the country, drowning Mosul in four hours and reaching Baghdad within two to four days.

Estimates range from 500,000 to 1,500,000 lives lost. In addition to flooding, there will be secondary and tertiary effects… as demonstrated in America during Hurricane Katrina, panic and lawlessness can be equally as dangerous as the flooding itself, but even worse, diseases such as malaria and West Nile fever will follow. A catastrophic event of this magnitude will immediately push the entire country into chaos, and Iraq does not have the capability to respond without global support. The closest comparison to make is Haiti, which with billions in global assistance has not returned to normalcy in five years. Overall, I anticipate this catastrophe will take years to overcome… in the meantime, it will have a significant effect on the world’s supply of oil today.

The Effects: As of winter 2015, Iraq was producing 4.3M barrels per day, with the southern fields producing 3.3M barrels and the remaining 1M coming from the north. The graphic below (left) is from 2014, but gives a picture of the oil field placements. To the right is a topographical map, which gives us an idea of how the floodwaters will progress. Based on the elevation of where the flood would initiate, everything between Mosul and Baghdad will be completely covered, and while the wave will dissipate over time, the fields between Baghdad and Basra will see enough water (and everything that comes with it, to include bodies, disease and unexploded ordinance) to temporarily disable operations. Additionally, the pipeline between Kirkuk and Ramadi will be underwater, and there is a potential for damage to the Iraq Strategic Pipeline, which runs parallel to the direction of the water’s progression.

The world’s oversupply of oil is estimated around one million barrels per day. Assume that the above happens, and in a best-case scenario, only northern production is affected. What would occur immediately is the elimination of one quarter of Iraq’s oil output, rapidly pushing supply and demand into equilibrium. In a worst-case scenario, where all of Iraq’s oil is temporarily eliminated, it will move the supply deficit to three million barrels per day, leading to large ramifications on the world’s crude oil surplus within weeks.

While the true answer lies somewhere between these possibilities, what is undeniable is that a catastrophe of this magnitude will immediately move the price of crude oil up, and depending on the timeline to return to today’s production levels, that move could be enormous. In late 2015, the world produced 97M barrels per day, causing the price to collapse to $26.00 per barrel. In 2014, while producing 93M barrels per day, the price averaged near $110.00 prior to its fall. Although the above is simple extrapolation, demand continues to grow, so I think we can all agree that the price shift north will be significant.

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Conclusion: The subject of this article is admittedly morbid. The true fallout of this event is the loss of hundreds of thousands of Iraqi lives, and damage that would take years to erase. However, as informed investors, it would be irresponsible to not consider global events, and this has the potential to re-balance the oil market in a matter of days. When this occurs, over four million barrels per day can disappear from production, immediately shifting the direction of oil prices. Based on the above information, I believe a production cut decision by OPEC is irrelevant, as natural forces are preparing to address the oil oversupply on their own.

by Middle East Medium in Seeking Alpha

The Oil Short Squeeze Explained: Why Banks Are Aggressively Propping Up Energy Stocks

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Last week, during the peak of the commodity short squeeze, we pointed out how this default cycle is shaping up to be vastly different from previous one: recovery rates for both secured and unsecured debts are at record low levels. More importantly, we noted how this notable variance is impacting lender behavior, explaining that banks – aware that the next leg lower in commodities is imminent – are not only forcing the squeeze in the most trashed stocks (by pulling borrow) but are doing everything in their power to “assist” energy companies to sell equity, and use the proceeds to take out as much of the banks’ balance sheet exposure as possible, so that when the default tsunami finally arrives, banks will be as far away as possible from the carnage. All of this was predicated on prior lender conversations with the Dallas Fed and the OCC, discussions which the Dallas Fed vocally denied accusing us of lying, yet which the WSJ confirmed, confirming the Dallas Fed was openly lying.

This was the punchline:

[Record low] recovery rate explain what we discussed earlier, namely the desire of banks to force an equity short squeeze in energy stocks, so these distressed names are able to issue equity with which to repay secured loans to banks who are scrambling to get out of the capital structure of distressed E&P names. Or as MatlinPatterson’s Michael Lipsky put it: “we always assume that secured lenders would roll into the bankruptcy become the DIP (debtor in possession) lenders, emerge from bankruptcy as the new secured debt of the company. But they don’t want to be there, so you are buying the debt behind them and you could find yourself in a situation where you could lose 100% of your money.

And so, one by one the pieces of the puzzle fall into place: banks, well aware that they are facing paltry recoveries in bankruptcy on their secured exposure (and unsecured creditors looking at 10 cents on the dollar), have engineered an oil short squeeze via oil ETFs…

… to push oil prices higher, to unleash the current record equity follow-on offering spree

… to take advantage of panicked investors some of whom are desperate to cover their shorts, and others who are just as desperate to buy the new equity issued. Those proceeds, however, will not go to organic growth or even to shore liquidity but straight to the bank to refi loan facilities and let banks, currently on the hook, leave silently by the back door. Meanwhile, the new investors have no security claims and zero liens, are at the very bottom of the capital structure, and  face near certain wipe outs.

In short, once the current short squeeze is over, expect everyone to start paying far more attention to recovery rates and the true value of “fundamentals.”

Going back to what Lipsky said, “the banks do not want to be there.” So where do they want to be? As far away as possible from the shale carnage when it does hit.

Today, courtesy of The New York Shock Exchange, we present just the case study demonstrating how this takes place in the real world. Here the story of troubled energy company “Lower oil prices for longer” Weatherford, its secured lender JPM, the incestuous relationship between the two, and how the latter can’t wait to get as far from the former as possible, in…

Why Would JP Morgan Raise Equity For An Insolvent Company?

I am on record saying that Weatherford International is so highly-leveraged that it needs equity to stay afloat. With debt/EBITDA at 8x and $1 billion in principal payments coming due over the next year, the oilfield services giant is in dire straits. Weatherford has been in talks with JP Morgan Chase to re-negotiate its revolving credit facility — the only thing keeping the company afloat. However, in a move that shocked the financial markets, JP Morgan led an equity offering that raised $565 million for Weatherford. Based on liquidation value Weatherford is insolvent. The question remains, why would JP Morgan risk its reputation by selling shares in an insolvent company?

According to the prospectus, at Q4 2015 Weatherford had cash of $467 million debt of $7.5 billion. It debt was broken down as follows: [i] revolving credit facility ($967 million), [ii] other short-term loans ($214 million), [iii] current portion of long-term debt of $401 million and [iv] long-term debt of $5.9 billion. JP Morgan is head of a banking syndicate that has the revolving credit facility.

Even in an optimistic scenario I estimate Weatherford’s liquidation value is about $6.7 billion less than its stated book value. The lion’s share of the mark-downs are related to inventory ($1.1B), PP&E ($1.9B), intangibles and non-current assets ($3.5B). The write-offs would reduce Weatherford’s stated book value of $4.4 billion to – $2.2 billion. After the equity offering the liquidation value would rise to -$1.6 billion.

JP Morgan and Morgan Stanley also happen to be lead underwriters on the equity offering. The proceeds from the offering are expected to be used to repay the revolving credit facility.

In effect, JP Morgan is raising equity in a company with questionable prospects and using the funds to repay debt the company owes JP Morgan. The arrangement allows JP Morgan to get its money out prior to lenders subordinated to it get their $401 million payment. That’s smart in a way. What’s the point of having a priority position if you can’t use that leverage to get cashed out first before the ship sinks? The rub is that [i] it might represent a conflict of interest and [ii] would JP Morgan think it would be a good idea to hawk shares in an insolvent company if said insolvent company didn’t owe JP Morgan money?

The answer? JP Morgan doesn’t care how it looks; JP Morgan wants out and is happy to do it while algos and momentum chasing day traders are bidding up the stock because this time oil has finally bottomed… we promise.

So here’s the good news: as a result of this coordinated lender collusion to prop up the energy sector long enough for the affected companies to sell equity and repay secured debt, the squeeze may last a while; as for the bad news: the only reason the squeeze is taking place is because banks are looking to get as far from the shale patch and the companies on it, as possible.

We leave it up to readers to decide which “news” is more relevant to their investing strategy.

by ZeroHedge

The Big Banks Secret Oil Play: Why Oil Prices Are So Low

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We grow up being taught a very specific set of principles.

One plus one equals two. I before E, except after C.

As we grow older, the principles become more complex.

Take economics for example.

The law of supply states that the quantity of a good supplied rises as the market price rises, and falls as the price falls. Conversely, the law of demand states that the quantity of a good demanded falls as the price rises, and vice versa.

These basic laws of supply and demand are the fundamental building blocks of how we arrive at a given price for a given product.

At least, that’s how it’s supposed to work.

But what if I told you that the principles you grew up learning is wrong?

With today’s “creative” financial instruments, much of what you learned no longer applies in the real world.

Especially when it comes to oil.

The Law of Oil

Long time readers of this Letter will have read many of my blogs regarding commodities manipulation.

With oil, price manipulation couldn’t be more obvious.

For example, from my Letter, “Covert Connection Between Saudi Arabia and Japan“:

“…While agencies have found innovative ways to explain declining oil demand, the world has never consumed more oil.

In 2010, the world consumed a record 87.4 million barrels per day. This year (2014), the world is expected to consume a new record of 92.7 million barrels per day.

Global oil demand is still expected to climb to new highs.

If the price of oil is a true reflection of supply and demand, as the headlines tell us, it should reflect the discrepancy between supply and demand.

Since we know that demand is actually growing, that can’t be the reason for oil’s dramatic drop.

So does that mean it’s a supply issue? Did the world all of a sudden gain 40% more oil? Obviously not.

So no, the reason behind oil’s fall is not the causality of supply and demand.

The reason is manipulation. The question is why.

I go on to talk about the geopolitical reasons of why the price of oil is manipulated.

Here’s one example:

“On September 11, Saudi Arabia finally inked a deal with the U.S. to drop bombs on Syria.

But why?

Saudi Arabia possesses 18 per cent of the world’s proven petroleum reserves and ranks as the largest exporter of petroleum.

Syria is home to a pipeline route that can bring gas from the great Qatar natural gas fields into Europe, making billions of dollars for Saudi Arabia as the gas moves through while removing Russia’s energy stronghold on Europe.

Could the U.S. have persuaded Saudi Arabia, during their September 11 meeting, to lower the price of oil in order to hurt Russia, while stimulating the American economy?

… On October 1, 2014, shortly after the U.S. dropped bombs on Syria on September 26 as part of the September 11 agreement, Saudi Arabia announced it would be slashing prices to Asian nations in order to “compete” for crude market share. It also slashed prices to Europe and the United States.”

Following Saudi Arabia’s announcement, oil prices have plunged to a level not seen in more than five years.

Is it a “coincidence” that shortly after the Saudi Arabia-U.S. meeting on the coincidental date of 9-11, the two nations inked a deal to drop billions of dollars worth of bombs on Syria? Then just a few days later, Saudi Arabia announces a massive price cut to its oil.

Coincidence?

There are many other factors – and conspiracies – in oil price manipulation, such as geopolitical attacks on Russia and Iran, whose economies rely heavily on oil. Saudi Arabia is also flooding the market with oil – and I would suggest that it’s because they are rushing to trade their oil for weapons to lead an attack or beef up their defense against the next major power in the Middle East, Iran.

However, all of the reasons, strategies or theories of oil price manipulation could only make sense if they were allowed by these two major players: the regulators and the Big Banks.

How Oil is Priced

On any given day, if you were to look at the spot price of oil, you’d likely be looking at a quote from the NYMEX in New York or the ICE Futures in London. Together, these two institutions trade most of the oil that creates the global benchmark for oil prices via oil futures contracts on West Texas Intermediate (WTI) and North Sea Brent (Brent).

What you may not see, however, is who is trading this oil, and how it is being traded.

Up until 2006, the price of oil traded within reason. But all of a sudden, we saw these major price movements. Why?

Because the regulators allowed it to happen.

Here’s a review from a 2006 US Senate Permanent Subcommittee on Investigations report:

“Until recently, U.S. energy futures were traded exclusively on regulated exchanges within the United States, like the NYMEX, which are subject to extensive oversight by the CFTC, including ongoing monitoring to detect and prevent price manipulation or fraud.

In recent years, however, there has been a tremendous growth in the trading of contracts that look and are structured just like futures contracts, but which are traded on unregulated OTC electronic markets. Because of their similarity to futures contracts they are often called ”futures look-a likes.”

The only practical difference between futures look-alike contracts and futures contracts is that the look-a likes are traded in unregulated markets whereas futures are traded on regulated exchanges.

The trading of energy commodities by large firms on OTC electronic exchanges was exempted from CFTC oversight by a provision inserted at the behest of Enron and other large energy traders into the Commodity Futures Modernization Act of 2000 in the waning hours of the 106th Congress.

The impact on market oversight has been substantial.

NYMEX traders, for example, are required to keep records of all trades and report large trades to the CFTC. These Large Trader Reports (LTR), together with daily trading data providing price and volume information, are the CFTC’s primary tools to gauge the extent of speculation in the markets and to detect, prevent, and prosecute price manipulation.

…In contrast to trades conducted on the NYMEX, traders on unregulated OTC electronic exchanges are not required to keep records or file Large Trader Reports with the CFTC, and these trades are exempt from routine CFTC oversight.

In contrast to trades conducted on regulated futures exchanges, there is no limit on the number of contracts a speculator may hold on an unregulated OTC electronic exchange, no monitoring of trading by the exchange itself, and no reporting of the amount of outstanding contracts (”open interest”) at the end of each day.

The CFTC’s ability to monitor the U.S. energy commodity markets was further eroded when, in January of this year (2006), the CFTC permitted the Intercontinental Exchange (ICE), the leading operator of electronic energy exchanges, to use its trading terminals in the United States for the trading of U.S. crude oil futures on the ICE futures exchange in London-called ”ICE Futures.”

Previously, the ICE Futures exchange in London had traded only in European energy commodities-Brent crude oil and United Kingdom natural gas. As a United Kingdom futures market, the ICE Futures exchange is regulated solely by the United Kingdom Financial Services rooority. In 1999, the London exchange obtained the CFTC’s permission to install computer terminals in the United States to permit traders here to trade European energy commodities through that exchange.

Then, in January of this year, ICE Futures in London began trading a futures contract for West Texas Intermediate (WTI) crude oil, a type of crude oil that is produced and delivered in the United States. ICE Futures also notified the CFTC that it would be permitting traders in the United States to use ICE terminals in the United States to trade its new WTI contract on the ICE Futures London exchange.

Beginning in April, ICE Futures similarly allowed traders in the United States to trade U.S. gasoline and heating oil futures on the ICE Futures exchange in London. Despite the use by U.S. traders of trading terminals within the United States to trade U.S. oil, gasoline, and heating oil futures contracts, the CFTC has not asserted any jurisdiction over the trading of these contracts.

Persons within the United States seeking to trade key U.S. energy commodities-U.S. crude oil, gasoline, and heating oil futures-now can avoid all U.S. market oversight or reporting requirements by routing their trades through the ICE Futures exchange in London instead of the NYMEX in New York.

As an increasing number of U.S. energy trades occurs on unregulated, OTC electronic exchanges or through foreign exchanges, the CFTC’s large trading reporting system becomes less and less accurate, the trading data becomes less and less useful, and its market oversight program becomes less comprehensive.

The absence of large trader information from the electronic exchanges makes it more difficult for the CFTC to monitor speculative activity and to detect and prevent price manipulation. The absence of this information not only obscures the CFTC’s view of that portion of the energy commodity markets, but it also degrades the quality of information that is reported.

A trader may take a position on an unregulated electronic exchange or on a foreign exchange that is either in addition to or opposite from the positions the trader has taken on the NYMEX, and thereby avoid and distort the large trader reporting system.

Not only can the CFTC be misled by these trading practices, but these trading practices could render the CFTC weekly publication of energy market trading data, intended to be used by the public, as incomplete and misleading.”

Simply put, any one can now speculate and avoid being tagged with illegal price. The more speculative trading that occurs, the less “real” price discovery via true supply and demand become.

With that in mind, you can now see how the big banks have gained control and cornered the oil market.

Continued from the Report:

“…Over the past few years, large financial institutions, hedge funds, pension funds, and other investment funds have been pouring billions of dollars into the energy commodities markets…to try to take advantage of price changes or to hedge against them.

Because much of this additional investment has come from financial institutions and investment funds that do not use the commodity as part of their business, it is defined as ”speculation” by the Commodity Futures Trading Commission (CFTC).

…Reports indicate that, in the past couple of years, some speculators have made tens and perhaps hundreds of millions of dollars in profits trading in energy commodities.

This speculative trading has occurred both on the regulated New York Mercantile Exchange (NYMEX) and on the over-the-counter (OTC) markets.

The large purchases of crude oil futures contracts by speculators have, in effect, created an additional demand for oil, driving up the price of oil to be delivered in the future in the same manner that additional demand for the immediate delivery of a physical barrel of oil drives up the price on the spot market.

As far as the market is concerned, the demand for a barrel of oil that results from the purchase of a futures contract by a speculator is just as real as the demand for a barrel that results from the purchase of a futures contract by a refiner or other user of petroleum.

Although it is difficult to quantify the effect of speculation on prices, there is substantial evidence that the large amount of speculation in the current market has significantly increased prices.

Several analysts have estimated that speculative purchases of oil futures have added as much as $20-$25 per barrel to the current price of crude oil, thereby pushing up the price of oil from $50 to approximately $70 per barrel.”

The biggest banks in the world, such as Goldman Sachs, Morgan Stanley, Citigroup, JP Morgan, are now also the biggest energy traders; together, they not only participate in oil trades, but also fund numerous hedge funds that trade in oil.

Knowing how easy it is to force the price of oil upwards, the same strategies can be done in reverse to force the price of oil down.

All it takes is for some media-conjured “report” to tell us that Saudi Arabia is flooding the market with oil, OPEC is lowering prices, or that China is slowing, for oil to collapse.

Traders would then go short oil, kicking algo-traders into high gear, and immediately sending oil down further. The fact that oil consumption is actually growing really doesn’t matter anymore.

In reality, oil price isn’t dictated by supply and demand – or OPEC, or Russia, or China – it is dictated by the Western financial institutions that trade it.

The Reason is Manipulation, the Question is Why?

Via my past Letter, “Secrets of Bank Involvement in Oil Revealed“:

“For years, I have been talking about how the banks have taken control of our civilization.

…With oil prices are falling, economies around the world are beginning to feel the pain causing a huge wave of panic throughout the financial industry. That’s because the last time oil dropped like this – more than US$40 in less than six months – was during the financial crisis of 2008.

…Let’s look at the energy market to gain a better perspective.

The energy sector represents around 17-18 percent of the high-yield bond market valued at around $2 trillion.

Over the last few years, energy producers have raised more than a whopping half a trillion dollars in new bonds and loans with next to zero borrowing costs – courtesy of the Fed.

This low-borrowing cost environment, along with deregulation, has been the goose that laid the golden egg for every single energy producer. Because of this easy money, however, energy producers have become more leveraged than ever; leveraging themselves at much higher oil prices.

But with oil suddenly dropping so sharply, many of these energy producers are now at serious risk of going under.

In a recent report by Goldman Sachs, nearly $1 trillion of investments in future oil projects are at risk.

…It’s no wonder the costs of borrowing for energy producers have skyrocketed over the last six months.

…many of the companies are already on the brink of default, and unable to make even the interest payments on their loans.

…If oil continues in this low price environment, many producers will have a hard time meeting their debt obligations – meaning many of them could default on their loans. This alone will cause a wave of financial and corporate destruction. Not to mention the loss of hundreds of thousands of jobs across North America.”

You may be thinking, “if oil’s fall is causing a wave of financial disaster, why would the banks push the price of oil down? Wouldn’t they also suffer from the loss?”

Great question. But the banks never lose. Continued from my letter:

“If you control the world’s reserve currency, but slowly losing that status as a result of devaluation and competition from other nations (see When Nations Unite Against the West: The BRICS Development Bank), what would you do to protect yourself?

You buy assets. Because real hard assets protect you from monetary inflation.

With the banks now holding record amounts of highly leveraged paper from the Fed, why would they not use that paper to buy hard assets?

Bankers may be greedy, but they’re not stupid.

The price of hard physical assets is the true representation of inflation.

Therefore, if you control these hard assets in large quantities, you could also control their price.

This, in turn, means you can maintain control of your currency against monetary inflation.

And that is exactly what the banks have done.

The True World Power

Last month, the U.S. Senate’s Permanent Subcommittee on Investigations published a 403-page report on how Wall Street’s biggest banks, such as Goldman Sachs, Morgan Stanley, and JP Morgan, have gained ownership of a massive amount of commodities, food, and energy resources.

The report stated that “the current level of bank involvement with critical raw materials, power generation, and the food supply appears to be unprecedented in U.S. history.”

For example:

“…Until recently, Morgan Stanley controlled over 55 million barrels of oil storage capacity, 100 oil tankers, and 6,000 miles of pipeline. JPMorgan built a copper inventory that peaked at $2.7 billion, and, at one point, included at least 213,000 metric tons of copper, comprising nearly 60% of the available physical copper on the world’s premier copper trading exchange, the LME.

In 2012, Goldman owned 1.5 million metric tons of aluminum worth $3 billion, about 25% of the entire U.S. annual consumption. Goldman also owned warehouses which, in 2014, controlled 85% of the LME aluminum storage business in the United States.” – Wall Street Bank Involvement with Physical Commodities, United States Senate Permanent Subcommittee on Investigations

From pipelines to power plants, from agriculture to jet fuel, these too-big-to-fail banks have amassed – and may have manipulated the prices – of some of the world’s most important resources.

The above examples clearly show just how much influence the Big Banks have over our commodities through a “wide range of risky physical commodity activities which included, at times, producing, transporting, storing, processing, supplying, or trading energy, industrial metals, or agricultural commodities.”

With practically an unlimited supply of cheap capital from the Federal Reserve, the Big Banks have turned into much more than lenders and facilitators. They have become direct commerce competitors with an unfair monetary advantage: free money from the Fed.

Of course, that’s not their only advantage.

According to the report, the Big Banks are engaging in risky activities (such as ownership in power plants and coal mining), mixing banking and commerce, affecting prices, and gaining significant trading advantages.

Just think about how easily it would be for JP Morgan to manipulate the price of copper when they – at one point – controlled 60% of the available physical copper on the world’s premier copper trading exchange, the LME.

How easy would it be for Goldman to control the price of aluminum when they owned warehouses – at one point – that controlled 85% of the LME aluminum storage business in the United States?

And if they could so easily control such vast quantities of hard assets, how easy would it be for them to profit from going either short or long on these commodities?

Always a Winner

But if, for some reason, the bankers’ bets didn’t work out, they still wouldn’t lose.

That’s because these banks are holders of trillions of dollars in FDIC insured deposits.

In other words, if any of the banks’ pipelines rupture, power plants explode, oil tankers spill, or coal mines collapse, taxpayers may once again be on the hook for yet another too-big-to-fail bailout.

If you think that there’s no way that the government or the Fed would allow this to happen again after 2008, think again.

Via the Guardian:

“In a small provision in the budget bill, Congress agreed to allow banks to house their trading of swaps and derivatives alongside customer deposits, which are insured by the federal government against losses.

The budget move repeals a portion of the Dodd-Frank financial reform act and, some say, lays the groundwork for future bailouts of banks who make irresponsibly risky trades.”

Recall from my past letters where I said that the Fed wants to engulf you in their dollars. If yet another bailout is required, then the Fed would once again be the lender of last resort, and Americans will pile on the debt it owes to the Fed.

It’s no wonder that in the report, it actually notes that the Fed was the facilitator of this sprawl by the banks:

“Without the complementary orders and letters issued by the Federal Reserve, many of those physical commodity activities would not otherwise have been permissible ‘financial’ activities under federal banking law. By issuing those complementary orders, the Federal Reserve directly facilitated the expansion of financial holding companies into new physical commodity activities.”

The Big Banks have risked tons of cash lending and facilitating in oil business. But in reality they haven’t risked anything. They get free money from the Fed, and since they aren’t supposed to be directly involved in natural resources, they obtain control in other ways.

Remember, the big banks – and ultimately the Fed who controls them – are the ones who truly control the world. Their monetary actions are the cause of many of the world’s issues and have been used for many years to maintain control of other nations and the world’s resources.

But they can’t simply go into a country, put troops on the ground and take over. No, that would be inhumane.

So what do they do?

Via my past Letter, The Real Reason for War in Syria:

“Currency manipulation allows developed countries to print and lend to other developing countries at will.

A rich nation might go into a developing nation and lend them millions of dollars to build bridges, schools, housing, and expand their military efforts. The rich nation convinces the developing nation that by borrowing money, their nation will grow and prosper.

However, these deals are often negotiated at a very specific and hefty cost; the lending nation might demand resources or military and political access. Of course, developing nations often take the loans, but never really have the chance to pay it back.

When the developing nations realize they can’t pay back the loans, they’re at the mercy of the lending nations.

The trick here is that the lending nations can print as much money as they want, and in turn, control the resources of developing nations. In other words, the loans come at a hefty cost to the borrower, but at no cost to the lender.”

This brings us back to oil.

We know that oil’s crash has put a heavy burden on many debt facilities that are associated with oil. We also know that the big banks are all heavily leveraged within the sector.

If that is the case, why are the big banks so calm?

The answer is simple.

Asset-Backed Lending

Most of the loans associated with oil are done through asset-backed loans, or reserve-based financing.

It means that the loans are backed by the underlying asset itself: the oil reserves.

So if the loans go south, guess who ends up with the oil?

According to Reuters, JP Morgan is the number one U.S. bank by assets. And despite its energy exposure assumed at only 1.6 percent of total loans, the bank could own reserves of up to $750 million!

Via Reuters:

“If oil reaches $30 a barrel – and here we are – and stayed there for, call it, 18 months, you could expect to see (JPMorgan’s) reserve builds of up to $750 million.”

No wonder the banks aren’t worried about a oil financial contagion – especially not Jamie Dimon, JP Morgan’s Chairman, CEO and President:

“…Remember, these are asset-backed loans, so a bankruptcy doesn’t necessarily mean your loan is bad.” – Jamie Dimon

As oil collapses and defaults arise, the banks have not only traded dollars for assets on the cheap, but gained massive oil reserves for pennies on the dollar to back the underlying contracts of the oil that they so heavily trade.

The argument to this would be that many emerging markets have laws in place that prevent their national resources from being turned over to foreign entities in the case of corporate defaults.

Which, of course, the U.S. and its banks have already prepared for.

Via my Letter, How to Seize Assets Without War:

“…If the Fed raises interest rates, many emerging market economies will suffer the consequence of debt defaults. Which, historically means that asset fire sales – often commodity-based assets such as oil and gas – are next.

Historically, if you wanted to seize the assets of another country, you would have to go to war and fight for territory. But today, there are other less bloody ways to do that.

Take, for example, Petrobras – a semi-public Brazilian multinational energy corporation.

…Brazil is in one of the worst debt positions in the world with much of its debt denominated in US dollars.

Earlier this year (2015), Petrobras announced that it is attempting to sell $58 billion of assets – an unprecedented number in the oil industry.

Guess who will likely be leading the sale of Petrobras assets? Yup, American banks.

Via Reuters:

“…JPMorgan would be tasked with wooing the largest number of bidders possible for the assets and then structure the sales.”

As history has shown, emerging market fire sales due to debt defaults are often won by the US or its allies. Thus far, it appears the Petrobras fire sale may be headed that way.

Via WSJ:

‘Brazilian state-run oil company Petróleo Brasileiro SA said Tuesday (September 22, 2015) it is closing a deal to sell natural-gas distribution assets to a local subsidiary of Japan’s Mitsui & Co.’

The combination of monetary policy and commodities manipulation allows Western banks and allies to accumulate hard assets at the expense of emerging markets. And this has been exactly the plan since day one.

As the Fed hints of raising rates, financial risks among emerging markets will continue to build. This will trigger a reappraisal of sovereign and corporate risks leading to big swings in capital flows.”

Not only are many of the big banks’ practices protected by government and Fed policies, but they’re also protected by the underlying asset itself. If things go south, the bank could end up owning a lot of oil reserves.

No wonder they’re not worried.

And since the banks ultimately control the price of oil anyway, it could easily bring the price back up when they’re ready.

Controlling the price of oil gives U.S. and its banks many advantages.

For example, the U.S. could tell the Iranians, the Saudis, or other OPEC nations, whose economies heavily rely on oil, “Hey, if you want higher oil prices, we can make that happen. But first, you have to do this…”

You see how much control the U.S., and its big banks, actually have?

At least, for now anyway.

Don’t think for one second that nations around the world don’t understand this.

Just ask Venezuela, and many of the other countries that have succumbed to the power of the U.S. Many of these countries are now turning to China because they feel they have been screwed.

The World Shift

The diversification away from the U.S. dollar is the first step in the uprising against the U.S. by other nations.

As the power of the U.S. dollar diminishes, through international currency swaps and loans, other trading platforms that control the price of commodities (such as the new Shanghai Oil Exchange) will become more prominent in global trade; thus, bringing some price equilibrium back to the market.

And this is happening much faster than you expect.

Via Xinhuanet:

Chinese President Xi Jinping returned home Sunday after wrapping up a historic trip to Saudi Arabia, Egypt, and Iran with a broad consensus and 52 cooperation agreements set to deepen Beijing’s constructive engagement with the struggling yet promising region.

During Xi’s trip, China upgraded its relationship with both Saudi Arabia and Iran to a comprehensive strategic partnership and vowed to work together with Egypt to add more values to their comprehensive strategic partnership.

Regional organizations, including the Organization of Islamic Cooperation (OIC), the Cooperation Council for the Arab States of the Gulf (GCC) and the Arab League (AL), also applauded Xi’s visit and voiced their readiness to cement mutual trust and broaden win-win cooperation with China.

AL Secretary General Nabil al-Arabi said China has always stood with the developing world, adding that the Arab world is willing to work closely with China in political, economic as well as other sectors for mutual benefit.

The Belt and Road Initiative, an ambitious vision Xi put forward in 2013 to boost inter-connectivity and common development along the ancient land and maritime Silk Roads, has gained more support and popularity during Xi’s trip.

…Xi and leaders of the three nations agreed to align their countries’ development blueprints and pursue mutually beneficial cooperation under the framework of the Belt and Road Initiative, which comprises the Silk Road Economic Belt and the 21st Century Maritime Silk Road.

The initiative, reiterated the Chinese president, is by no means China’s solo, but a symphony of all countries along the routes, including half of the OIC members.

During Xi’s stay in Saudi Arabia, China, and the GCC resumed their free trade talks and “substantively concluded in principle the negotiations on trade in goods.” A comprehensive deal will be made within this year.”

In other words, the big power players in the Middle East – who produce the majority of the world’s oil – are now moving closer to cooperation with China, and away from the U.S.

As this progresses, it means the role of the U.S. dollar, and its value in world trade, will diminish.

And the big banks, which hold trillions of dollars in U.S. assets, aren’t concerned.

They’d much rather own the underlying assets.

Seek the truth,

by Ivan Lo for The Equedia Letter

Crude Oil Market Structure Looks Weak, But It Is Only One Part Of A Complicated Puzzle

Summary

  • Term structure – contango says too much oil around.
  • Brent-WTI says Iran will flood the market.
  • Crack spreads could crack the recent lows for crude.
  • OPEC meeting is the next big event – signals are that these guys cannot agree on anything.
  • Crude oil and a turbulent world.
 

The price of crude oil has not looked this bad since March, when it made lows of $42.03, or on August 24, when it fell to $37.75. On Friday, November 20, active month January NYMEX crude oil settled at $41.90 per barrel. The expiring December contract traded down to lows of $38.99 on the session. There are very few positive things to say about the future prospects for the price of crude oil at this time. The fundamental structural state of the oil market is bearish for price.

Term Structure – contango says too much oil around

Two weeks ago, the IEA told us that the world is awash in crude oil. The international agency told us that worldwide inventories have swelled to 3 billion barrels.

When crude oil was trading over $100 per barrel on the active month NYMEX futures contract during the summer of 2014, the market was in backwardation. Deferred futures prices were lower than nearby prices. This condition tells us that a market is tight, or there is a supply deficit. As the price of oil began to fall, term structure moved from backwardation to contango. This told us that the market moved from deficit to a condition of oversupply. This past week, the contango on the nearby versus one-year oil spread once again validated the glut condition in crude oil.

(click to enlarge)The December 2015 versus December 2016 NYMEX crude oil spread closed last week at over $8.00 per barrel. The contango has increased to 20.46%, the highest level yet for this spread. The January 2016 versus January 2017 NYMEX spread also made a new high and traded above the $7 level.

Brent crude oil futures have rolled from December to January. The January 2016 versus January 2017 Brent crude oil spread was trading around the $7.62 or 17% level last Friday. Market structure is telling us that huge inventories of crude oil will weigh on the price in the weeks ahead. At their current levels, a new low below the current support at $37.75 seems likely. Meanwhile, a location/quality spread in crude oil is also telling us that prospects for the oil price are currently bleak.

Brent-WTI says Iran will flood the market

The benchmark for pricing North American crude is the NYMEX West Texas Intermediate (WTI) price. When it comes to European, African and Middle Eastern crudes, Brent is the benchmark pricing mechanism. For many years, Brent crude traded at a small discount to WTI. That is because WTI is sweeter crude; it has lower sulfur content. This makes WTI more efficient when it comes to processing the oil into the most ubiquitously consumed oil product, gasoline.

That changed in 2010. The Arab Spring caused uncertainty in the Middle East to rise. As the majority of the world’s oil reserves are located in this region, the price of Brent crude rose relative to the price of WTI. Brent crude included a political premium. Additionally, increasing production from the United States, due to the extraction of oil from shale, exacerbated the price differential between the two crudes. In 2011, the price of Brent traded at over a $25 premium to the price of WTI. Recently, the spread between these two crudes has been converging. While the spread on January futures was trading at a premium of $2.40 for the Brent futures as of last Friday, it had moved much lower during the week.

The premium of Brent over WTI has evaporated over the course of 2015. The reason is two-fold. First, the number of operating oil rigs in the United States has fallen dramatically over the past year, indicating that production of the energy commodity will fall. Last Friday, Baker Hughes reported that the total number of oil rigs in operation as of November 20 stands at 564 down from 1,574 at this time last year. While lower U.S. production is one reason for a decline in the spread, increased production of Iranian crude oil has had a more powerful effect on the spread.

The nuclear nonproliferation agreement with Iran means that sanctions will ease and Iran will pump and export more crude oil in the weeks and months ahead. Iran has stated that their production will initially rise by 500,000 barrels per day and it will eventually rise to over one million. These two factors have caused the Brent-WTI spread to converge. The price trend in this spread is a negative for the price of crude at this time.

Crack spreads could crack the recent lows for crude

Recently, we have seen divergence emerging in crude oil processing spreads. Gasoline cracks have been outperforming crude oil, while heating oil crack spreads continue to trade at the weakest level in years.

Last Friday, the NYMEX gasoline crack spread closed at just over $14 per barrel.

The monthly chart of the gasoline crack highlights the recent strong action in this spread. Gasoline is a seasonal product; it tends to trade at the lows during this time of year. In 2014, the high in the gasoline crack at this time of year was $12.36. Therefore, compared to last year, gasoline prices are strong relative to the price of raw crude oil. This could be due to the current low level of gasoline futures – the December NYMEX gasoline futures contract closed last Friday at $1.2866 and the January futures closed at $1.2670 per gallon. The current low level of gasoline prices has increased demand from drivers as refineries work to process heating oil as the winter is only a few weeks ahead. In September U.S. drivers set a record for miles traveled by automobile.

The heating oil processing spread is a very different story. While the gasoline crack is relatively strong, the heating oil crack is very weak.

(click to enlarge)Last Friday, the January heating oil processing spread closed at around the $17.50 per barrel level. Last year at this time, the low in this spread was $22.73. In 2013, the low was $24.53 and in 2012, the low was $37.75 per barrel. The current level of the heating oil crack spread is seasonally the lowest since November 2010 when it traded down to $12.35 per barrel. In November 2010, crude oil was trading above $84 per barrel.

One of the many reasons that the crude oil price is weak these days is that demand for seasonal products, heating oil and diesel fuel, is low and inventories of distillates are high. As you can see, there are very few bullish signs in the fundamental structure for the crude oil market these days. In two weeks, the oil cartel will sit down to decide what to do now that the commodity they seek to “control” is awash in a sea of bearishness.

OPEC meeting is the next big event – Signals are that these guys cannot agree on anything

When OPEC met in November 2014, the price of crude was around the $75 per barrel level. When they met late last spring, the price had recovered to around $60. In both cases, the cartel left production levels unchanged. The stated production ceiling for the members of OPEC is 30 million barrels per day. The member nations are currently producing over 31.5 million barrels per day and increasing Iranian production means that OPEC output will likely rise. As the price of oil falls, the members need to sell more to try to recoup revenue. For the weaker members, the oil revenue is an imperative. Even the stronger members are under pressure. Saudi Arabia recently began selling bonds; they are borrowing money from the markets to replace lost income due to the lower crude oil price.

Meanwhile, OPEC’s current strategy is to continue to produce to flush high cost producers out of the market and build market share for the cartel members. However, OPEC did not count on a global economic slowdown, particularly in China. At the December 4 meeting of oil ministers in Vienna, it is likely that demand for crude oil will be an important consideration.

Dominant members of the cartel remain at odds. Saudi Arabia and Iran are on opposite sides and are involved in a proxy war in Yemen. The weaker members of OPEC want the stronger members to shoulder the burden of production cuts, and that is not likely to happen any time soon. In a hint of the discord between the member nations, on November 17, OPEC’s board of governors was unable to agree on the cartel’s long-term strategy plan and they tabled the issue until 2016. The issues revolve around ceiling output, setting production quotas and methods of maximizing member profits.

This tells us that unless the cartel is planning a giant spoof on the market, there is probably going to be no change in production policy. The current level of cheating or daily sales above the production ceiling may even increase. At this point, I doubt whether OPEC members could agree on whether it is sunny or cloudy outside given vast political, economic and cultural divergences among member nations. This means that selling will continue and even increase over the months ahead.

Crude oil and a turbulent world

All of the news, fundamentals and technicals for crude oil point to new lows and a challenge of the December 2008 lows of $32.48 per barrel. Last week, Goldman Sachs came out with a prediction that oil could fall to $20 per barrel. This is not such a bold call given the current state of the oil market, the strength of the dollar and the overall bear market for raw material prices. Last week, copper put in another multi-year low, iron ore fell to new lows and the Baltic Shipping Index fell to the lowest level since 1985.

However, all of the bad news for crude oil is currently in the price. We have seen this before. In March when crude oil traded to lows, there were calls for crude oil to fall – Dennis Gartman, the respected commodity analyst, went on CNBC and said that crude oil could fall to $10 per barrel as the energy commodity could go the way of “whale oil.” In late August, when oil fell to recent lows at $37.75, there were multiple calls for oil to fall to the low $30s and $20s. In both cases, powerful recovery rallies followed these bearish market calls. Following the March 2015 lows, oil rallied for over two months and gained 48.9%. In August of this year, a seven-week rally took oil 35% higher. The bearish prediction by Goldman Sachs last week could just turn out to be a contrarian’s dream.

There are a number of issues, big issues, going on in the world that can turn crude oil on a dime. First, Brent has fallen relative to WTI and the political premium for oil has evaporated. In 1990, when Saddam Hussein invaded Kuwait, the price of crude oil doubled in a matter of minutes. While the Middle East has always been a turbulent and dangerous part of the world, I would argue that today, it is far more turbulent and far more violent. The odds of attacks against oil fields and refineries in the Middle East have increased exponentially particularly given the recent ISIS attacks in France and around the world. At the same time, all of the bearish fundamental news about crude oil has decreased the political premium, and it is politics and war that could turn out to outweigh all of the current fundamentals.

Moreover, a surprise from outside of the Middle East could foster an increase in the price of oil. The world is now almost counting on Chinese economic weakness. Last week, Jamie Dimon, the Chairman of JPMorgan Chase, said that he is bullish on Chinese growth. If China does begin to show signs of growth, this could turn out to be supportive of crude oil and commodities in general, which remain mired in a bear market. Right now, the price of crude oil looks awful and fundamentals support a new low. However, all of that bearish data is in the price, and any surprise, in a world that always seems be full of surprises, could ignite the price once again. We saw this in March and again in August. As oil makes new lows, keep in mind that crude oil is a complicated puzzle. It is the unknown that will likely dictate the next big price move in oil. I am watching crude oil now and wondering whether Goldman Sachs called the turn in the market with their bearish forecast.

As a bonus, I have prepared a video on my website Commodix that provides a more in-depth and detailed analysis of the current state of the oil market to illustrate the real value implications and opportunities.

By Andrew Hecht in Seeking Alpha

Oil Theft Soars as Downturn Casts U.S. Roughnecks Out of Work

The moon was a waning crescent sliver Sept. 9 when a man emerged from an oil tanker, sidled up to a well outside Cotulla, Texas, and siphoned off almost 200 barrels. Then, he drove two hours to a town where he sold his load on the black market for $10 a barrel, about a quarter of what West Texas Intermediate currently fetches.

“This is like a drug organization,” said Mike Peters, global security manager of San Antonio-based Lewis Energy Group, who recounted the heist at a Texas legislative hearing. “You’ve got your mules that go out to steal the oil in trucks, you’ve got the next level of organization that’s actually taking the oil in, and you’ve got a gathering site — it’s always a criminal organization that’s involved with this.”

From raw crude sucked from wells to expensive machinery that disappears out the back door, drillers from Texas to Colorado are struggling to stop theft that has only worsened amid the industry’s biggest slowdown in a generation. Losses reached almost $1 billion in 2013 and likely have grown since, according to estimates from the Energy Security Council, an industry trade group in Houston. The situation has been fostered by idled trucks, abandoned drilling sites and tens of thousands of lost jobs.

“You’ve got unemployed oilfield workers that unfortunately are resorting to stealing,” said John Chamberlain, executive director of the Energy Security Council.

In Texas, unemployment insurance claims from energy workers more than doubled over the past year to about 110,000, according to the Workforce Commission. In North Dakota, average weekly wages in the Bakken oil patch decreased nearly 10 percent in the first quarter of 2015, compared with the previous quarter, according to the Federal Reserve Bank of Minneapolis.

With dismissals hitting every corner of the industry, security guards hired during boom times are receiving pink slips. That’s leaving sites unprotected.

“There are a lot less eyes out there for security,” said John Esquivel, an analyst at security consulting firm Butchko Inc. in Tomball, Texas, and a former chief executive of the U.S. Border Patrol in Laredo. “The drilling activity may be quieter, but I don’t think criminal activity is.”

Special Charges

States are trying to get a handle on the theft, which can include anything from drill bits that can fetch thousands on the resale market, to copper wiring that can be melted down, to the crude itself. Texas lawmakers met earlier this month in Austin to craft a bill that would increase penalties related to the crime. A similar measure passed both houses of the legislature this year, but Republican Governor Greg Abbott vetoed it, saying it was “overly broad.” Lawmakers, at the urging of industry, are hoping to revive it next legislative session.

In Oklahoma, law-enforcement officers recently teamed with the Federal Bureau of Investigation to intensify their effort. In North Dakota, the FBI earlier this year opened an office in the heart of oil country to combat crimes including theft, drug trafficking and prostitution.

The lull in drilling has given oil companies more time to scrutinize their operations — and their losses.

During booms “they are moving at such a rapid pace there’s not a lot of auditing and inventorying going on,” said Gary Painter, sheriff in Midland County, Texas, in the oil-rich Permian Basin. “Whenever it slows down, they start looking for stuff and find out it never got delivered or it got delivered and it’s gone.”

Oil theft is as old as Spindletop, the East Texas oilfield that spewed black gold in 1901 and began the modern oil era. In the early 1900s, Texas Rangers were often deployed to carry out “town taming” in oil fields rife with roughnecks, prostitutes, gamblers and thieves. In 1932, 18 men were indicted for their role in a Mexia ring that included prominent politicians and executives and resulted in the theft of 1 million barrels.

The allure of ill-gotten oil money remains strong.

In April, the Weld County Sheriff’s office in Colorado recovered almost $300,000 worth of stolen drill bits. In January, a Texas man pleaded guilty to stealing three truckloads of oil worth nearly $60,000 after an investigation by the FBI and local law-enforcement officers. Robert Butler, a sergeant at the Texas Attorney General’s Office whose primary job is to investigate oil theft, said in the legislative hearing that he is investigating a case of 470,000 barrels stolen and sold over the past three years worth about $40 million.

In Texas, oilfield theft has become entangled with Mexican drug trafficking, as the state’s newest and biggest production area, the Eagle Ford Shale region, lies along traditional smuggling routes. That’s thrust oil workers in the middle of cartel activity, and made it even more difficult to track stolen goods across the U.S.-Mexico border, said Esquivel, the retired Border Patrol agent.

Trickling Away

Oil thieves are a slippery bunch. Criminals sand off serial numbers of stolen goods to evade detection or melt them for scrap. Tracking raw crude is even trickier, since tracing it to its originating well is almost impossible once it’s mixed with other oil. Many companies fail to report the crime, making it difficult for investigators to trace the origins of stolen goods.

Many of the crimes are inside jobs, with thieves doubling as gate guards, tank drivers or well servicers. Last year, a federal grand jury indicted three Texas men in connection with the theft of $1.5 million worth of oil from their employers, including Houston’s Anadarko Petroleum Corp.

“Your average person wouldn’t know the value of a drill bit or a piece of tubing or a gas meter,” said Chamberlain. “It’d be like breaking into a jewelry store; unless you know what’s valuable, you wouldn’t know what to steal.”

by Lauren Etter in Bloomberg Business

The Biggest Threat To Oil Prices: 2-Mile Long Stretch Of Iraq Oil Tankers Headed For The U.S.

https://s17-us2.ixquick.com/cgi-bin/serveimage?url=http%3A%2F%2Fens-newswire.com%2Fwp-content%2Fuploads%2F2013%2F07%2F20130705_shipssingapore.jpg&sp=88dd9c2a647d73922d4d13126517cc68

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

Crude prices are already falling:


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

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


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

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

Worst still, they are slashing prices…

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

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

“It’s being priced much more aggressively,” said Dominic Haywood, an oil analyst at Energy Aspects Ltd. in London. “It’s being discounted so U.S. Gulf Coast refiners are more incentivized to take it.”

So when does The Obama Administration ban crude imports?

And now, we get more news from Iraq:

  • *IRAQ CUTS DECEMBER CRUDE OIL OSPS TO EUROPE: TRADERS

So taking on the Russians?

*  *  *

Finally, as we noted previously, it appears Iraq (and Russia) are more than happy to compete on price.. and have been successful – for now – at gaining significant market share…

Even as both Iran and Saudi Arabia are losing Asian market share to Russia and Iraq, Tehran is closely allied with Baghdad and Moscow while Riyadh is not. That certainly seems to suggest that in the long run, the Saudis are going to end up with the short end of the stick.

Once again, it’s the intersection of geopolitics and energy, and you’re reminded that at the end of the day, that’s what it usually comes down to.

Source: Zero Hedge


WTI Tumbles To $43 Handle After API Confirms Huge Inventory Build

API reported a huge 6.3 million barrel inventory build (notably larger than expected) extending the series of build to seven weeks. Even more worrying was the massive 2.5 million barrel build at Cushing, even as gasoline inventories fell 3.2mm. WTI immediately dropped 35c, breaking back to a $43 handle after-hours.

A huge build…


But for Cushing it was massive…

The reaction was quick and on heavy volume…

Source: Zero Hedge


Four US Firms With $4.8 Billion In Debt Warned This Week They May Default Any Minute

The last 3 days have seen the biggest surge in US energy credit risk since December 2014, blasting back above 1000bps. This should not be a total surprise since underlying oil prices continue to languish in “not cash-flow positive” territory for many shale producers, but, as Bloomberg reports, the industry is bracing for a wave of failures as investors that were stung by bets on an improving market earlier this year try to stay away from the sector. “It’s been eerily silent,” in energy credit markets, warns one bond manager, “no one is putting up new capital here.”

The market is starting to reprice dramatically for a surge in defaults...

Eleven months of depressed oil prices are threatening to topple more companies in the energy industry. As Bloomberg details,

Four firms owing a combined $4.8 billion warned this week that they may be at the brink, with Penn Virginia Corp., Paragon Offshore Plc, Magnum Hunter Resources Corp. and Emerald Oil Inc. saying their auditors have expressed doubts that they can continue as going concerns. Falling oil prices are squeezing access to credit, they said. And everyone from Morgan Stanley to Goldman Sachs Group Inc. is predicting that energy prices won’t rebound anytime soon.

The industry is bracing for a wave of failures as investors that were stung by bets on an improving market earlier this year try to stay away from the sector. Barclays Plc analysts say that will cause the default rate among speculative-grade companies to double in the next year. Marathon Asset Management is predicting default rates among high-yield energy companies will balloon to as high as 25 percent cumulatively in the next two to three years if oil remains below $60 a barrel.


“No one is putting up new capital here,”
said Bruce Richards, co-founder of Marathon, which manages $12.5 billion of assets. “It’s been eerily silent in the whole high-yield energy sector, including oil, gas, services and coal.”

That’s partly because investors who plowed about $14 billion into high-yield energy bonds sold in the past six months are sitting on about $2 billion of losses, according to data compiled by Bloomberg.

And the energy sector accounts for more than a quarter of high-yield bonds that are trading at distressed levels, according to data compiled by Bloomberg.

Barclays said in a Nov. 6 research note that the market is anticipating “a near-term wave of defaults” among energy companies. Those can’t be avoided unless commodity prices make “a very large” and “unexpected” resurgence.

“Everybody’s liquidity is worse than it was at this time last year,” said Jason Mudrick, founder of Mudrick Capital Management. “It’s a much more dire situation than it was 12 months ago.”

Source: Zero Hedge


Something Very Strange Is Taking Place Off The Coast Of Galveston, TX

Having exposed the world yesterday to the 2-mile long line of tankers-full’o’crude heading from Iraq to the US, several weeks after reporting that China has run out of oil storage space we can now confirm that the global crude “in transit” glut is becoming gargantuan and is starting to have adverse consequences on the price of oil.

While the crude oil tanker backlog in Houston reaches an almost unprecedented 39 (with combined capacity of 28.4 million barrels), as The FT reports that from China to the Gulf of Mexico, the growing flotilla of stationary supertankers is evidence that the oil price crash may still have further to run, as more than 100m barrels of crude oil and heavy fuels are being held on ships at sea (as the year-long supply glut fills up available storage on land). The storage problems are so severe in fact, that traders asking ships to go slow, and that is where we see something very strange occurring off the coast near Galveston, TX.


FT reports that “
the amount of oil at sea is at least double the levels of earlier this year and is equivalent to more than a day of global oil supply. The numbers of vessels has been compiled by the Financial Times from satellite tracking data and industry sources.”

The storage glut is unprecedented:
 
 
Off Indonesia, Malaysia and Singapore, Asia’s main oil hub, around 35m barrels of crude and shipping fuel are being stored on 14 VLCCs.
 
“A lot of the storage off Singapore is fuel oil as the contango is stronger,” said Petromatrix analyst Olivier Jakob. Fuel oil is mainly used in shipping and power generation.
 
Off China, which is on course to overtake the US as the world’s largest crude importer, five heavily laden VLCCs — each capable of carrying more than 2m barrels of oil — are parked near the ports of Qingdao, Dalian and Tianjin.
 
In Europe, a number of smaller tankers are facing short-term delays at Rotterdam and in the North Sea, where output is near a two-year high. In the Mediterranean a VLCC has been parked off Malta since September.
 
On the US Gulf Coast, tankers carrying around 20m barrels of oil are waiting to unload, Reuters reported. Crude inventories on the US Gulf Coast are at record levels.
 
A further 8m barrels of oil are being held off the UAE, while Iran — awaiting the end of sanctions to ramp up exports — has almost 40m barrels of fuel on its fleet of supertankers near the Strait of Hormuz. Much of this is believed to be condensate, a type of ultralight oil.
And unlike the last oil price collapse during the financial crisis only half of the oil held on the water has been put there specifically by traders looking to cash in by storing the fuel until prices recover. Instead, sky-high supertanker rates have prevented them from putting more oil into so-called floating storage, shutting off one of the safety valves that could prevent oil prices from falling further.
 
 
A widening oil market structure known as contango — where future prices are higher than spot prices — could make floating storage possible.
 
 
 
The difference between Brent for delivery in six months’ time and now rose to $4.50 last week, up from $1.50 in May. Traders estimate it may need to reach $6 to make sea storage viable.
JBC Energy, a consultancy, said in many regions onshore oil storage is approaching capacity, arguing oil prices may have to fall to allow more to be stored profitably at sea.
 
 
“Onshore storage is not quite full but it is at historically high levels globally,” said David Wech, managing director of JBC Energy.
 
“As we move closer to capacity that is creating more infrastructure hiccups and delays in the oil market, leading to more oil being backed out on to the water.”
 
Patrick Rodgers, the chief executive of Euronav, one of the world’s biggest listed tanker companies, said oil glut was so severe traders were asking ships to go slow to help them manage storage levels.
 
“We are being kept at relatively low speeds. The owners of the oil are not in a hurry to get their cargoes. They are managing their storage capacity by keeping ships at a certain speed.”
As a result of all this, something very unusual going on off the coast of Galveston, where more than 39 crude tankers w/ combined cargo capacity of 28.4 million bbls wait near Galveston (Galveston is area where tankers can anchor before taking cargoes to refineries at Houston and other nearby plants), vessel tracking data compiled by Bloomberg show, which compares w/ 30 vessels, 21 million bbls of capacity in May. Vessels wait avg of 5 days, compared w/ 3 days May.

As AP puts it,a traffic jam of oil tankers is the latest sign of an unyielding global supply glut.”

More than 50 commercial vessels were anchored outside ports in the Houston area at the end of last week, of which 41 were tankers, according to Houston Pilots, an organization that assists in navigation of larger vessels. Normally, there are 30 to 40 vessels, of which two-thirds are tankers, according to the group.
 
Although the channel has been shut intermittently in recent weeks because of fog or flooding, oil traders pointed to everything from capacity constraints to a lack of buyers.
 
“It appears that the glut of supply in the global market is only getting worse,” said Matt Smith, director of commodity research at ClipperData. Several traders said some ships might have arrived without a buyer, which can be hard to find as ample supply and end-of-year taxes push refiners to draw down inventories.
And here, courtesy of MarineTraffic is the interactive snapshot (readers can recreate it here):

All of which explains why this is happening:


Crude Jumps After API Reports Modest Inventory Draw (First In 8 Weeks) Despite Another Big Build At Cushing

11/17/2015: After seven straight weeks of significant inventory builds, API reported a modest 482k draw. That was all the algos needed and WTI immediately ramped back above $41.00. However, what they likely missed was the 2nd weekly (huge) build in Cushing (1.5mm barrels) as we warned earlier on land storage starting to really fill…

Cushing saw another big build…

And crude reacted…

As we noted earlier,

In short: “The US is the last place with significant onshore crude storage space left.”

Which leads directly to Citi’s conclusion: “‘Sell the rally’ near-term as fundamentals remain very sloppy and inventory constraints are becoming increasingly more binding.”

Source: Zero Hedge

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