Category Archives: Oil

Libya

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The US sales from the strategic reserve have been about 1 million bpd and are due to end soon. Saudis have upped output by about 1 million per day as well. My concern is how the US output will be ‘replaced’ next month as it looks like Libya won’t be back online as before any time soon. So unless demand falls it will be up to the Saudis. If they don’t have the capacity they could lose control of prices to the upside.

From CNBC:

Libyan oil production was just shy of 1.6 million barrels per day in February, before the uprising swept across the country, leading to six months of civil war. Production in May was down to 60,000 barrels per day, according to the International Energy Agency (IEA).

“The medium-term outlook is that they probably have the potential to produce more than the 1.6 million, so it’s a very bullish scenario for anyone who is ready to invest in Libya,” Johannes Benigni, managing director of JBC Energy, told CNBC Wednesday morning. “The reality factor is, everyone knows that Libya was easier to run in a dictatorship than in a democratic or semi-democratic environment, and those guys first have to prove that they are able to bring back stability.”

The TNC, headed by Mustafa Jalil, appears to be relatively cohesive at the moment, but the rebels are composed of a complex mix of political, tribal and social alliances that analysts worry may not hold once their common enemy is beaten.

Benigni said that he expected that Libya could pump 400,000 barrels per day by the end of the year, but that in the best case scenario it would be 12-18 months before it returned to pre-war levels.

Goldman Sachs had forecast average output of 250,000 barrels per day in 2012, with a potential to increase to 585,000 barrels per day by the end of the year if rebels were to take control of infrastructure in the west of the country. The rebellion, which began in the east of the country, rapidly seized parts of the Libyan oil industry. Goldman’s predictions were based around output from those eastern facilities.

In a report issued on Tuesday, however, the bank said that the seizure of western oil assets increases the likelihood that output could ramp up more swiftly.

Analysts have been struggling to obtain reliable information on the state of much of the Libyan oil infrastructure. A report from Exclusive Analysis, the risk forecasting firm, said that exports would be likely to resume from the east within three months and from the west within six to nine months.

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Consumer credit up, Friday update

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It doesn’t look to me like anything particularly bad has actually yet happened to the US economy.

The federal deficit is chugging along at maybe 9% of US GDP, supporting income and adding to savings by exactly that much, so a collapse in aggregate demand, while not impossible, is highly unlikely.

After recent downward revisions, that sent shock waves through the markets, so far this year GDP has grown by .4% in Q1 and 1.2% in Q2, with Q3 now revised down to maybe 2.0%. Looks to me like it’s been increasing, albeit very slowly. And today’s employment report shows much the same- modest improvement in an economy that’s growing enough to add a few jobs, but not enough to keep up with productivity growth and labor force growth, as labor participation rates fell to a new low for the cycle.

And, as previously discussed, looks to me like H1 demonstrated that corps can make decent returns with very little GDP growth, so even modestly better Q3 GDP can mean modestly better corp profits. Not to mention the high unemployment and decent productivity gains keeping unit labor costs low.

Lower crude oil and gasoline profits will hurt some corps, but should help others more than that, as consumers have more to spend on other things, and the corps with lower profits won’t cut their actual spending and so won’t reduce aggregate demand.

This is the reverse of what happened in the recent run up of gasoline prices.

Japan should be doing better as well as they recover from the shock of the earthquake.

Yes, there are risks, like the looming US govt spending cuts to be debated in November, but that’s too far in advance for today’s markets to discount.

A China hard landing will bring commodity prices down further, hurting some stocks but, again, helping consumers.

A euro zone meltdown would be an extreme negative, but, once again, the ECB has offered to write the check which, operationally, they can do without limit as needed. So markets will likely assume they will write the check and act accordingly.

A strong dollar is more a risk to valuations than to employment and output, and falling import prices are very dollar friendly, as is continuing a fiscal balance that constrains aggregate demand to the extent evidenced by the unemployment and labor force participation rates. And Japan’s dollar buying is a sign of the times. With US demand weakening, foreign nations are swayed by politically influential exporters who do not want to let their currency appreciate and risk losing market share.

The Fed’s reaction function includes unemployment and prices, but not corporate earnings per se. It’s failing on it’s unemployment mandate, and now with commodity prices coming down it’s undoubtedly reconcerned about failing on it’s price stability mandate as well, particularly with a Fed chairman who sees the risks as asymmetrical. That is, he believes they can deal with inflation, but that deflation is more problematic.

So with equity prices a function of earnings and not a function of GDP per se, as well as function of interest rates, current PE’s look a lot more attractive than they did before the sell off, and nothing bad has happened to Q3 earnings forecasts, where real GDP remains forecast higher than Q2.

So from here, seems to me both bonds and stocks could do ok, as a consequence of weak but positive GDP that’s enough to support corporate earnings growth, but not nearly enough to threaten Fed hikes.

Consumer borrowing up in June by most in 4 years

By Martin Crutsinger

May 25 (Bloomberg) — Americans borrowed more money in June than during any other month in nearly four years, relying on credit cards and loans to help get through a difficult economic stretch.

The Federal Reserve said Friday that consumers increased their borrowing by $15.5 billion in June. That’s the largest one-month gain since August 2007. And it is three times the amount that consumers borrowed in May.

The category that measures credit card use increased by $5.2 billion — the most for a single month since March 2008 and only the third gain since the financial crisis. A category that includes auto loans rose by $10.3 billion, the most since February.

Total consumer borrowing rose to a seasonally adjusted annual level of $2.45 trillion. That was 2.1 percent higher than the nearly four-year low of $2.39 trillion hit in September.

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Saudi crude pricing

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Setting price and letting quantity adjust:

Daily Oil Note: OSPs a Critical Piece in the Supply Puzzle


A key source of market uncertainty is how much oil Saudi Arabia will produce and export over the next few months. We see reports that Saudi Aramco recently offered additional cargoes to term buyers, but reportedly many declined because pricing was unattractive versus alternatives. Tanker bookings also do not point to a substantial ramp up in Middle East liftings in coming weeks. In fact, they are running well behind the pace in June.

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DJ OPEC Secretary General: Sees No Good Reason For IEA Oil

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Looks like some OPEC infighting.

The only way OPEC could block Saudi attempts to lower price would be production cuts beyond the Saudi’s ability to increase supply.

In the past, OPEC has never actually been able to do that, as apart from the Saudis the rest pretty much always pump flat out even after they agree to cut.

I suspect the Saudis and Obama also know Lybia will be back online soon with another 1 million barrels a day make it that much more problematic for the rest of OPEC to cut sufficiently to get the price up.

And the US and the Saudis probably also know world demand is falling short of forecasts, or they probably wouldn’t have undertaken the price cutting actions.

*DJ OPEC Secretary General: Sees No Good Reason For IEA Oil Release
*DJ OPEC Secy Genl: Wants Immediate Cessation Of Stocks Release
*DJ OPEC President Ready To Call Emergency Meeting If Needed
*DJ OPEC President: Hopes Oil Market Won’t Warrant Emergency Meeting

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Crude prices

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Looks like the Saudis left the OPEC meeting saying they wanted crude 80-90 and didn’t need OPEC to do it.

The Saudis realize that to stay in power they need Obama’s support.

This latest move is an understanding with Obama to give him all the credit and keep the fact that the Saudis are price setters out of the headlines.

And there is probably an understanding that the Saudis will keep the price low enough so the US can later refill the reserve at the lower prices.

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Saudis to pump 10 million bpd

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The Saudis don’t sell in the spot markets, they only post prices to refiners and then take orders at those prices.

That is, they post price and let quantity vary.

So the only way they could definitively get to 10 million bpd would be to change policy and sell in the spot market, which would let loose a downward price spiral until some other producer decided to cut production to stop the fall.

As always, it’s their political decision, and no telling what they might actually do.

Saudi Shows Who’s Boss, to Pump 10 Million Barrels Per Day

June 10 (Reuters) — Saudi Arabia will raise output to 10 million barrels day in July, Saudi newspaper al-Hayat reported on Friday, as Riyadh goes it alone in unilaterally pumping more outside OPEC policy.

Citing OPEC and industry officials, the newspaper said output would rise from 8.8 million bpd in May. There was no immediate independent verification of the story.

The report suggests Riyadh is asserting its authority over fellow members of the Organization of the Petroleum Exporting Countries after it failed to convince the 12-member cartel to lift output at an acrimonious meeting in Vienna on Wednesday.

“The Saudi intention is to show that they cannot be pushed around,” said Middle East energy analyst Sam Ciszuk at IHS. “Either OPEC follows the Saudi lead or they will have problems.”

A proposal by Saudi and its Gulf Arab allies the UAE and Kuwait to lift OPEC production was blocked by seven producers including Iran, Venezuela and Algeria.

The two sides blamed each other for the breakdown in talks. Saudi Oil Minister Ali ali-Naimi called those opposed to the deal obstinate. Iran’s OPEC governor Mohammad Ali Khatibi responded by saying Riyadh had been overly-influenced by U.S.-led consumer country demands for cheaper fuel.

“The hawks in OPEC called their bluff and now it is up to Riyadh to show that they were not bluffing — that they will go ahead unilaterally if pushed,” said Cizsuk.

Saudi Arabia has not pumped 10 million bpd for at least a decade, according to Reuters data, production having peaked at 9.7 million bpd in July 2008 after prices hit a record $147 a barrel. It is the only oil producer inside or outside OPEC with any significant spare capacity.

Asked in Vienna on Thursday whether Saudi would reach 10 million bpd Naimi said: “Just send the customers, don’t worry about the volumes.”

Gulf delegates said Riyadh was planning to pump an average 9.5-9.7 million bpd in June.

Saudi is already offering more crude to refiners in Asia, which, led by China, is driving a global rise in oil consumption.

Forecasts from OPEC headquarters show demand will increase about 1.7 million bpd in the second half of the year from recent cartel output of about 29 million bpd.

Brent crude rose to a 5-week high of $120 a barrel after the OPEC talks broke down. Prices eased after Friday’s Saudi news, last dipping 63 cents to trade near $118.94 a barrel.

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QE2: Captain, your ship is sinking

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So imagine the corn crop report comes out and it surprises on the upside at up 30%
What happens? The price of corn probably starts to fall. Commercial buyers back off, farmers rush to hedge, and, overall, players of all ilks try to reduce positions, get short, etc.

A few weeks later it’s further confirmed that the farmers are producing a massive bumper crop.

What happens? The same adjustments continue.

But what if that crop report was wrong? What if, in actual fact, there had been a crop failure? And market participants never do get that information?

What happens? Prices go down for a while as described above, but at some point they reverse, as sellers dry up, and as consumption overtakes actual supply price work their way higher, and then accelerate higher, even if no one ever actually figures out there was a crop failure.

QE is, in fact, a ‘crop failure’ for the dollar. The Fed’s shifting of securities out of the economy and replacing them with clearing balances removes interest income. And the lower rates from Fed policy also reduces interest paid to the economy by the US Treasury, which is a net payer of interest.

But the global markets mistakenly believed QE was producing a bumper crop for the dollar. They all believed, and some to the of panic, that the Fed was ‘printing money’ and flooding the world with dollars.

So what happened? The tripped overthemselves to rid them selves of dollars in every possible manner. Buying gold, silver, and the other commodities, buying stocks, selling dollars for most every other currency, selling tsy securities, etc. etc. etc. in what was, in most ways, all the same trade.

This went on for months, continually reinforced by the pervasive rhetoric that QE was ‘money printing’, and that the Fed was playing with fire and risking hyperinflation, with the US on the verge of suddenly/instantly becoming the next Greece and getting its funding cut off.

Not to mention Congress with it’s deficit reduction phobia.

So what’s happening now? While everyone still believes QE is a bumper crop phenomena, QE (and 0 rate policy in general) is none the less an ongoing crop failure, continuously removing $US net financial assets from the economy.

And so now that the speculators and portfolio shifters have run up prices of all they tripped over each other to buy, the anticipated growth in spending power-underlying aggregate demand growth needed to support those prices- isn’t there. And, to throw more water on the fire, the higher prices triggered supply side repsonse that have increased net supply along with a bit of ‘demand destruction’ as well.

Last week I suggested that higher crude prices were the last thing holding down the dollar, and that as crude started to fall I suggested its was all starting to reverse.

It’s now looking like it’s underway in earnest.

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Saudi oil production, Donald Trump, and President Obama

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The Saudis operate by posting prices for their refiners and then filling all orders at their posted prices.

It looks like the spike in demand for Saudi crude due to Libya has pretty much passed, and Libya is not back to full production.

So look for Saudi production to fall further when Libya comes back on line.

Prices, however, will remain at whatever level the Saudis decide to post, much like Donald Trump has been proclaiming. And with Trump having the President’s ear, there’s at least an outside chance the President figures it out and lets the Saudis know he’s on to them and works out a price cut?

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from Press Conference

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I thought he did a AAA job within his paradigm.

The answers on the dollar were spot on- ultimately the dollar is worth what it can buy, so ‘low inflation’ is a strong dollar policy in the long term. It’s pretty much the purchasing power parity argument. Additionally, he said a strong economy helps the dollar, citing the capital inflow channel, probably a reference to China and other emerging market nations. And I might have added the fiscal tightening channel, as strong economies tend to cause federal deficits to fall via automatic fiscal stabilizers.

Interestingly, he did not mention specifically how higher oil prices, set by a foreign monopolist, continue to work against the dollar.

Nor how highly deflationary policies in other currencies tend to strengthen those currencies relative to the dollar.

And there was no mention of how portfolio shifting alters the dollar, which may be the largest driver currently.

Let me suggest, however, it would have been more nearly correct for him to have said the policy of low inflation and strong growth also happens to support the dollar, rather than imply a strong dollar was the policy variable.

He remains out of paradigm on the QE issue, still not realizing it’s entirely about price and not quantity, but that was to be expected.

The more dovish tone from the FOMC indicates some fundamental insecurity about the economy. Yes, they remain moderately optimistic, but probably continue to worry disproportionately about the downside risks. They see downside risks to demand everywhere from the euro zone and the UK, to Japan and China, and, though recognizing nothing of consequence has happened yet, they hear the fiscal sabre rattling from both the left and the right. And they see it’s unlikely for the housing channel to provide much support in the near future as it’s done in previous cycle.

Also, second chance to buy my 100oz gold bar at the current spot price of gold!
When I offered it for sale when gold was $1,200, no one wanted it so I still have it.

:)


Karim writes:

1) Extended period means a ‘couple of meetings’.
2) Q1 GDP weakness transitory (i.e., they didn’t alter the outlook for rest of f/cast period) due to
   a. timing of defense outlays
   b. timing of export shipments
   c. weather
3) No fiscal measures that have been announced so far have altered their near-term outlook
4) Impact of Japan supply disruptions ‘moderate and temporary’
5) Strong and stable dollar in U.S. best interest

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Obama and McConnell

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Stupid headline and stupid response.

Unemployment is a macro problem, and cutting spending does’t create jobs.

It’s the continuing saga of the blind leading the blind.

Looking for $31 billion in federal spending cuts this week.
And that’s just a down payment.

Obama: Shift From Foreign Oil Will Help Create More Jobs

April 2 (AP) — President Barack Obama says shifting the U.S. away from imported oil and toward cleaner forms of energy will add momentum to a trend that has led to 1.8 million new jobs in the past 13 months.

Obama used his weekly radio and Internet address Saturday to promote his ideas for bringing down gasoline prices by decreasing U.S. dependence on foreign oil. A blueprint he outlined in a recent speech calls for increasing domestic oil exploration and production, making cars and trucks more energy efficient and building vehicles that run on alternative fuels or electricity.

Noting that the U.S. doesn’t have enough oil reserves to meet its needs, he set a goal of reducing imports by one-third by 2025.

“By doing so, we’re going to make our economy less vulnerable to wild swings in oil prices,” Obama said. “We’re going to use cleaner sources of energy that don’t imperil our climate. And we’re going to spark new products and businesses all over the country by tapping America’s greatest renewable resource: our ingenuity.”

The address was Obama’s third in recent days on the issue. On Wednesday, he travels to the Philadelphia area to visit an arm of the Spanish company Gamesa, maker of giant turbines that generate electricity from wind.

Oil prices have climbed because of increasing demand in China and instability in some oil-producing countries in the Middle East. That, in turn, has pushed U.S. gasoline prices to new highs. The national average for a gallon of gas hit $3.619 on Friday, the highest price ever for this time of year, according to AAA and other sources. Prices have climbed 23.2 cents in the past month and more than 81 cents in the past year.

Senate Republican leader Mitch McConnell agreed with Obama on encouraging more domestic energy production. But he accused the administration of stifling that industry’s growth by canceling drilling leases, halting drilling off the Gulf Coast after last summer’s oil spill and increasing permit fees.

“As a result, thousands of U.S. workers have lost their jobs, as companies have been forced to move their operations overseas. That must end,” the Kentucky Republican said. “We must do more to find energy here at home, and the jobs that go with it.”

Obama said that sparking new products and businesses during a transition away from imported oil will help create jobs. The government reported Friday that 230,000 private sector jobs were created in March, bringing the total number created in the past 13 months to 1.8 million. The national unemployment rate also dipped to a two-year low of 8.8 percent last month.

“That’s a good sign,” Obama said. He recorded the address at a UPS shipping facility in suburban Maryland, where he examined all-electric and hybrid vehicles used by AT&T, Verizon, PepsiCo and other companies.

“But we have to keep up the momentum, and transitioning to a clean energy economy will help us do that,” Obama said.

House Speaker John Boehner, R-Ohio, focused his party’s weekly message on steps he said the government must take to encourage small businesses to create jobs. Among those steps are continuing to cut spending, blocking tax increases, reducing the bureaucracy and eliminating regulations. Boehner once owned a small plastics and packaging business in Ohio.

Boehner said Congress also needs to pass a bill funding the government through Sept. 30, when the budget year ends, and avoid a shutdown. The government’s authority to spend money expires next Friday.

“Washington’s inability to get spending under control is creating uncertainty for our job creators,” Boehner said. “It’s discouraging investment in small businesses and eroding confidence in our economy. To put it simply, the spending binge in Washington is holding our country back and keeping our economy from creating jobs.”

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