Now that the impact of the first (of many) SPR release moves courtesy of an Obama administration desperately in need of political brownie points has been beyond wiped out, it is time for the IEA to leak rumors of another emergency meeting, and for our brilliant and fearless leaders to announce they are about to sell another 30 million barrels. After all there is just under 700 million barrels in the SPR now (pro forma for the first release).
About a year ago, Goldman Sachs experienced an unprecedented P&L wipe out after in Q2 it bet on a decline in volatility, only to be caught offguard by the first Greek bailout which in turn cost the firm's prop desk hundreds of millions in losses. Now, about a year later, it is again the same sellside hubris and pretty much the same players that make a repeat appearance, after Bloomberg just disclosed that a very wrong way bet on 5 and 30 year TIPS breakevens has cost the interest-rates trading group "at least tens of millions of dollars." And while Jim Caron's traditionally wrong rates call has up to now only cost his clients money, this time it is his own trading desk that may be left collecting the shrapnel. But topping off the irony is that it is once again an ex-Goldmanite who is responsible for the actual trade. Per Bloomberg, "The interest-rate group is run by Glenn Hadden, who Morgan Stanley hired from New York-based Goldman Sachs in January." News of the loss made their way through the trading community earlier and was manifested in the weakness of the "hedge fund" banks: the Goldmans, the JPMs and, of course, the Morgan Stanleys of the world. As a result, MS is now forced to unwind the trade at a major loss (at least for the current quarter, we have to ask John Paulson if the trade is profitable on a cost basis), which will likely have substantial repercussions for the short and long breakeven curve for days, if not weeks.
Remember how 4 very long days ago, the 60 million barrel SPR release was vaunted as being the reason for the second consumer renaissance after it was largely expected it would lead to sub $90 crude, and low $3/gallon gas, and result in every Joe Sixpack going out and buying 3 houses at least? Well, so much for that: the IEA's action has now been fully priced in and WTI is back to precisely where it was before the IEA announcement on Thursday. Which means that what some said was a shadow QE (and don't get us started on all the mainstream media "journalists", among which Bloomberg and CNN, who continue to confuse QE Lite with something they call QE 2.5) had a half life of just over 3 days. Expect future intervention half lives to continue declining, as the criminal banking cartel's ammunition is now down to just one thing, the only thing, printing.
The magical RISK (commodities, rates, carry FX)-ES spread trade which we pointed out yesterday as soon as it blew out, providing a 7.5 ES equivalent pick up, suggesting a compression trade at this divergence level usually leads to a happy ending, has just closed (although in a classic reminder why trading just one leg of the spread can lead to hazardous conclusions - remember: this is a pair trade). Oddly, today RISK has notably outperformed the ES for three main reasons: the outperformance of crude, the plunge in the JPY, and the big move in the butterfly as a result of two consecutive abysmal bond trades. On an intraday indexed basis, the spread is actually favoring going long ES here while shorting the entire risk basket. The bad thing for the IEA and the administration is that today's move in crude higher is more than offsetting the jump in stocks (which intuitively should now be moving in opposite directions as Brian Sack has gotten his marching orders to kill oil and send stocks back to 1350).
I don’t know if anyone else has noticed, but this country has been thoroughly gutted over the past few decades. Our industrial base has been dismantled and shipped overseas to the benefit of foreign nations and corporate feudalists. Our grain reserves, once ample, have been depleted to an all time low. Our currency has been systematically debased. And now, our oil reserves, without rational cause, are being sold off only to feed the catastrophe our government is supposedly out to stop. Are the American people being prepped like a glazed ham for the fires of the globalist oven? Is this really all due to coincidence and stupidity as skeptics claim, or is there something else at work here? I find it hard to believe that the IEA and our government are not aware that their proposed strategies conflict with their own source data, or that they are completely oblivious to the destruction they are about to reap upon our economy. The latest IEA decision is just one more piece of evidence of an agenda of deliberate financial destabilization trending towards a disaster that serves the interests of a select few, to the detriment of all the rest.
Last week, many, Zero Hedge among them, blasted the decision by the IEA to released 60 million barrels of crude in what was perceived as a last ditch effort to lower the price of gas in exchange for brownie points, while ignoring the fact that the crude would have to repurchased at some point in the future almost certainly at a higher price, and that it puts OPEC in a position of potential retaliation that could have far more adverse price repercussions than the IEA's opening salvo. Then again perhaps the move was not as misguided as the skeptics believe. Below we present the view from Emad Mostaque of Religare Capital Markets who provides a different spin on things: "Market consensus following the IEA release of strategic reserves last week has been quite negative on fears of OPEC/Saudi retaliation, erosion of the all-important buffer and accusations of political pandering. We are more positive and see this as positive for market transparency and function. GCC and IEA objectives are aligned: Neither the GCC or IEA want oil prices over $100 or market distortions. The remainder of OPEC has no room to retaliate and we are likely to see more cooperation to reduce volatility. IEA targeting shortages, GCC price: This is essentially an oil swap agreement addressing the lack of light, sweet Libyan crude in the European market and the ridiculous Brent-WTI spread. The GCC will continue to pump heavier crude at market value and will defend prices in the $85-100 range. As a result, we do not believe reserves will fall to dangerous levels. Fundamentals and Libya: While we have been negative on the short-term oil price since the start of May and have been looking at the lower end of our $90-100 range for the summer, we are still constructive long-term and believe consensus estimates are reasonable. We also see a potential resolution in Libya as increasingly likely, with no increase in MENA violence."
Since the SPR is sold essentially at the bottom of the market, it mostly likely will cost a lot more to replenish. The most ironic thing is that while trying to intervene the oil market, the U.S. government,and taxpayers could end up losing money both ways--on the sale and on the buy-back.
Last week's dramatic decision by the US administration to strongarm the IEA into releasing strategic petroleum reserves (of which the US would account for 30 million barrels, or half of the total), is nothing but yet another example of the hobbled and incredibly short-sighted thinking that permeates every corner of the Obama administration. Because as the WSJ reports, "the move by the U.S. and its allies to release strategic reserves of oil could provide a much-needed shot in the arm for the U.S. economy, but risks inflicting lasting damage on the already tense relationship between oil producers and consumers." The move comes on the heels of the dramatic collapse in OPEC talks in Vienna two weeks ago when Saudi Arabia was effectively kicked out of the cartel, further confirmed by reports that the IEA consulted with Saudi (and China and India) in advance of its decision (more later). Additionally, "OPEC and the European Union are due to hold an energy summit in Vienna Monday that will be the first official meeting of producers and consumers since the IEA's move, and will provide a platform for OPEC members to express their disquiet over the stocks' release. However, OPEC's biggest player, Saudi Arabia, won't be present." Make that former player, in an organization now headed by the previously #2 producer, Iran (which just happens is not all that pro-US). The biggest threat, however, is that in direct retaliation against the IEA's cartel-like decision, which comes at the expense of the remaining OPEC countries, is that as Zero Hedge suspected, the next step will be a more than proportionate cut in crude production by OPEC: "Some analysts speculated that OPEC could respond to the IEA release by cutting output to offset the increased supply." What happens next is complete Nash equilibrium collapse, with a high possibility of a 1973-type OPEC oil embargo announcement in the immediate future.
Perhaps even more than exposing the instability of the worldwide economic ponzi system, so far 2011 has been most remarkable for fully demonstrating the fragility of the global energy complex, which in the aftermath of the Fukushima nuclear crisis (and the moratorium on nuclear energy in Germany now, and soon other places), and the MENA revolutions, have raised the question of what happens in a world in which crude is getting ever scarcer, while the one main legacy energy alternative, fission-based nuclear power, just took a giant step back. The topic of limitations in conventional and possibilites in alternative energy has gripped the general public's mind to such an extent that Popular Science magazine has dedicated its entire July edition to answering that very critical question. As PopSci says: "Oil’s amazing efficiency is one reason it remains in such high demand, especially for transportation, and it’s also why finding an alternative will be so difficult. But find one we must. We have already burned our way through most of the world’s easy oil. Now we’re drilling for the hard stuff: unconventional resources such as shale and heavy oil that will be more difficult and expensive to discover, extract, and refine. The environmental costs are also on the rise." So what is the existing line up of future alternatives to the current crude oil-dominated energy paradigm. Below we present the complete list.
Is it a coincidence that the government announced the release of crude from the SPR just days after it was disclosed that Dodd-Frank will make trading in OTC spot products illegal? Perhaps. On the other hand if there is indeed a concerted and very politicized effort by the government to encroach and "centrally plan" yet more industries, the implications for precious metals trading could be substantial. FMX Connect summarizes these as follows: "Our two cents are as follows. It does not pay to fight the government right now. Even though Bernanke can’t print more oil it is clear that we are entering into a new phase of a centrally planned economy. To us this smacks of price controls. When you combine it with the Dodd-Frank bill prohibition of OTC gold trading, you might see that we are setting up for something worse. Tin Foil Hat Alert: All gold will trade through exchanges and while we don’t think ownership will be prohibited it may be taxed to death."
Following its admission yesterday that it is now buying oil by telling clients to sell Brent to $105-107 a monther after advising anyone who cares Brent was on its way to $130, today we learn that Goldman is actively dumping its prop, pardon, there we go again, flow, FLOW, inventory of oil equities to idiots, pardon, clients. As to how dropping crude prices and thus collapsing profit margins is beneficial for energy producers, that is one we will long be scratching our heads over.
I'm confused. Some questions.
Following the earlier general announcement that the SPR would sell 30 MM barrels of oil a lot of questions were left unanswered, such as what kind of crude will be sold, where will it be sold from, and at what price. The wait for answers is now over: The DOE has just released all the missing data. Per Reuters: "Under the terms of the U.S. sale that were issued by the department, the government does not plan to stagger the sale of the oil and will offer all 30 million barrels in one bid sale. The department will offer "sweet" crude oil from three of the reserve's storage sites: Bryan Mound and Big Hill in Texas and West Hackberry in Louisiana. The oil will have a base price of $112.78 a barrel, a spokeswoman for the SPR said." Which does not however mean that this is the price at which the oil will be sold: "Traders can bid above or below the "Base Reference Price" of $112.78, which is derived from the last five days of trading of Light Louisiana Sweet crude oil, as assessed by energy pricing agency Argus. Companies will submit their bids for the oil through a special department website. Delivery of the oil to the winning companies would take place over the month of August. Winning companies would pay for their oil during the month after the crude is delivered." Which simply means that China will convert quite a bit of America's trade deficit from dollars into oil.
Russ Certo's Macro Thoughts On Today's Global Coordinated Crude "Rate Cut" And Other "Market Schizophrenia"Submitted by Tyler Durden on 06/23/2011 15:44 -0500
Good afternoon. Quick synopsis of macro-thoughts. I’m not used to writing market comments or market updates anymore given the all things government and policy impacts on markets. It seems too often that it was as simple as the Treasury is selling the Fed is buying. And that was it. Simple. Whatever the reasons, there are implications of today’s bizarre events. There are lots of views which can be observed by schizophrenic price action in markets today. Let me share mine.
Uber-Flip flopper extraordinaire Goldman Sachs just cut its Brent target price a month after hiking its price target to $130, a month after cutting it to $105 (and just as we predicted two hours before the Goldman announcement). The latest number from David Greely: $105-$107/bbl. To wit: "The International Energy Agency announced today that its member countries have agreed to release 60 million barrels of oil from their emergency stocks over a period of 30 days. The IEA has coordinated this release, only the third in its history, in response to the ongoing loss of Libyan light sweet crude oil production and the impact that the resulting higher crude oil prices are having on the world economy. We estimate that a 60 million barrel release by the end of July has the potential to reduce our 3-month Brent crude oil price target by $10-12/bbl, to $105-107/bbl. 125/bbl." Full bizarro day report below, although all that matters is that Goldman is buying Brent again, after the "GS vs Client" scorecard now reads 3:0.