As the following snapshot from January 2009 shows, the 12 month, $25 contango back then was without precedent, and as a result there was an epic scramble by hedge funds, banks and various other speculators to store about 100 million barrels on tankers with the intention to sell later. Since the contango was so wide one could easily lease any number of VLCCs and still be profitable on the trade. In fact, a big reason for the renormalization of the crude curve back then was because so many funds jumped on this arb. Fast forward to today, because the "risk-free" contango trade is back.
A form of society could undoubtedly exist powered by nuclear, wind and shale gas. But it would be a society supported by the state with far larger numbers working in the energy industries than now, producing lower surpluses, the energy production part perhaps running at a perennial loss. Those losses have to be covered by either higher price or via the taxation system. Either way, the brave new world that awaits us will be characterized as the time of less that will be in stark contrast to the time of plenty many of us enjoyed during the 20th Century.
In the last couple of months, the sharp reversion in oil prices has certainly caught the world’s attention. While the majority of economists and analysts continue to expect incorrectly that falling oil prices are a positive input to economic growth, the reality is that it is not. The negative impact to economic growth from the decline in oil prices are quite considerable when you consider that almost 40% of all the jobs created since 2009 have been in energy related industries. While the economists and analysts are hopeful for a sharp recovery in oil prices, the current decline in oil prices is nothing more than a return to historical normalcy.
ConvergEx's Nick Colas quarterly review of “Off the grid” economic indicators tells a story somewhat less sanguine than the typical government data. Confidence is returning, yes. But consider just how low it got: the top 3 Google autofills for “I want to sell my …” featured “kidney” for the first 3 quarters of this year. It was replaced in the current quarter with “Laptop”. Progress, of a sort...
As the year winds down, a Gordian knot tying Russia, oil prices and China together is receiving a great deal of attention. Let's see if we can unravel some of the confusing twists and turns.
We turn first to China's offer of assistance to Russia. The idea that Russia could activate its CNY150 bln (~$24 bln) currency swap line with China is capturing the imagination of many.
With the wind down of the record 2014 trading slump now in its final days (although judging by volumes throughout the year one may have a difficult time noticing just when the holidays began and ended), the already entertaining zero-liquidity market moves are sure to provide further amusement today in the context of the US economic data bonanza on deck, which includes Durable Goods, GDP, Personal Income and Spending, Richmond Fed, UMich, and New Home Sales. Beat or miss, all of the above are guaranteed to send the S&P to higher recorder highs because in the multiple-expansion euphoria blow-off top phase nobody cares about such trivia as fundamentals or the economy, especially when Japan and Germany are about to monetize all of their gross issuance. Just remember to occasionally keep an eye on the preferred rigging correlation pairs: the USDJPY and the VIX, whose every illiquid jerk will be followed by Citadel & NYFed's algos tic for tic.
"People should not be worried," explained Kazakhstan President Nursultan Nazarbayev in a TV address over the weekend, "we have a plan in place if oil prices are $40 per barrel." Kazakhstan, the second largest ex-Soviet oil producer after Russia, explains "there are reserves which could support people, preventing living conditions from worsening." However, if A. Gary Schilling's reality check of $20 oil being possible comes to fruition, as he explains, what matters are marginal costs - the expense of retrieving oil once the holes have been drilled and pipelines laid. That number is more like $10 to $20 a barrel in the Persian Gulf... We wonder who has a plan for that?
Having exuberantly reached its highest level since September 2013 last month (despite the total collapse in mortgage applications), it appears the ugly reality of the housing market has peeked its head out once again. As prices rose, existing home sales plunged 6.1% - the most since July 2010 (against an expected 1.1% drop) to 4.93mm SAAR (the lowest in 6 months). As usual there is an excuse for this carnage... NAR's Larry Yun blames the stock market (and rising home values). Quite a conundrum for the Fed...
It all looked so rosy just a few short hours ago. WTI crude has slipped from over $58.50 (once again testing that upper band of resistance) to back below $56 and down almost 2% from Friday's close (not stabilizing). While the S&P and Dow (futures) remain green, the Nasdaq has tumbled into the red on the heels of Gilead's weakness (the 6th largest name in the Nasdaq 100).
- Police officers' slaying raises pressure on New York mayor (Reuters)
- People Call for Cooling of Racial Tensions After Murder of NYPD Officers (BBG)
- The $6.3 Trillion Frenzy That Vanquished Treasury Bears (BBG)
- China Investigates Possible Stock-Price Manipulation (WSJ)
- Citigroup Was Wary of Metals-Backed Loans (WSJ)
- UPS Turns Parking Lots Into Sorting Centers to Add Speed (BBG)
- U.S. Move to Normalize Cuba Ties Boosts Firms’ Asset Claims (WSJ)
- Meredith Whitney’s Fund Said to Drop 11% as Office Put on Market (BBG)
- Railcar Bottleneck Looms for Oil (WSJ)
There are two key events driving overnight risk prices: first, there is the Bloomberg story that "China Offers Russia Help With Currency Swap Suggestion", which was previously covered extensively here a week ago, but now that the algos have official confirmaiton they have sent the Ruble shorts into a panic short squeeze, with the USDRUB tumbling another 5% as of latest. The other key development pushing oil prices modestly higher again, is yesterday's speech by Saudi oil minister Ali al-Naimi who "expressed confidence prices will pick up", however not due to a drop in supply - because he made it very clear OPEC will never cut output and instead will wait for the high cost producers to exit the game - but amid improved economic growth.
Fast forward to today when we are about to learn that Newton's third law of Keynesian economics states that every boom, has an equal and opposite bust. Which brings us to Texas, the one state that more than any other, has benefited over the past 5 years from the Shale miracle. And now with crude sinking by the day, it is time to unwind all those gains, and give back all those jobs. Did we mention: highly compensated, very well-paying jobs, not the restaurant, clerical, waiter, retail, part-time minimum-wage jobs the "recovery" has been flooded with. Here is JPM's Michael Feroli explaining why Houston suddenly has a very big problem.
Banks are selling a record amount of U.S. structured notes tied to the stocks of fast-growing, volatile technology companies such as Facebook and Twitter. As Bloomberg Briefs reports, sales of securities linked to Facebook soared to $457.6 million this year, more than double the $204.2 million issued during the same period of 2013. Bloomberg notes that investors are flocking to products tied to social media companies, where more volatile share prices help banks improve structured-note terms that have been hurt by low interest rates... and issuers are "trying to put shiny objects in front of the client," as the BTFD mentality gets increased leverage (and downside risk). Investors have purchased $1.88 billion of structured notes linked to the 10 most popular technology stocks so far this year - 31% more than the same period in 2013 - and $32.7bn equity- and commodity-linked notes this year alone (up ~10% YoY). As we warned last week, counterparty risks are rising.