It is increasingly certain that the future will not be like the past. Previous downturns have been equally devastating but the primary causes eventually reversed themselves; low commodity prices recovered and damaging government policies were rescinded. This recovery will be different for a variety of reasons which will combine to cap growth, opportunity and profits, even if oil and gas prices spike. The following major changes appear permanent...
Sunday, April 17th was the designated moment. The world’s leading oil producers were expected to bring fresh discipline to the chaotic petroleum market and spark a return to high prices. But what happens if confidence in the eventual resurgence of demand begins to wither? Then the incentives to cooperate begin to evaporate, too, and it’s every producer for itself in a mad scramble to protect market share. This new reality -- a world in which “peak oil demand,” rather than “peak oil,” will shape the consciousness of major players -- is what the Doha catastrophe foreshadowed.
The famous Hollywood adage - 'nobody knows anything' - seems to perfectly apply to the current turbulence in the oil market. So in an effort to clarify where the global oil economy is heading to, let’s engage in a Battle of the Oil Analysts. Relying on these Oil Analysts (OA) does not necessarily mean you will be handed straightforward answers, but perhaps with some luck you will see a ray of light.
Will Algos Push Oil Back To $60? Morgan Stanley Begs You To "Forgive The Macros, They Know Not What They Do"Submitted by Tyler Durden on 04/26/2016 11:58 -0400
“Close your eyes and buy” seems to be the mantra for now. While fundamentals don’t justify a cyclical recovery in oil yet, the market continues to move higher. The primary driving force has been macro funds, index money and CTAs. Technicals and momentum have only added to it, and there is a sense from some of investors that they need to buy for fear of missing out. Similar to 2015, we see a confirmation bias where any bullish data point is embraced outages, weekly US production, etc) and bearish data points are dismissed or spun as a buying opportunity.
Futures are currently unchanged, but the E-mini was down as much as 12 points less than two hours earlier after the European open when this time it was up to the PBOC to intervene in global markets by pushing the Yuan higher (selling USDCNY via intermediary banks) sending global stocks sharply higher off session lows and leaving the S&P futures virtually unchanged. As Bloomberg reported, there has been increasing USD/CNY selling in afternoon session as Dollar Index edged lower. This is the PBOC entering the building and levitating stocks.
Take away Saudi Arabia’s oil and all that’s left are a couple of Islamic shrines and a lot of sand and hot air.
Irrational market exuberance hits its zenith after Doha talks fail as oil prices rise, instead of fall, because of minor Kuwait oil strike, then stay up after the strike fails within a day, then rise more when Saudis promise to retaliate with more production and stay up when Russians promise to retailiate with still more production.
"In the post-Doha world, when we're still in what is essentially a free market for oil, the Russians will pump as much oil out as the market will absorb and the Saudis have said much the same thing."
There is going to have to be "a recalibration of our relationship with America," former Saudi Intelligence Chief Prince Turki Al-Faisal told CNN's Christiane Amanpour. "How far we can go with our dependence on America, how much can we rely on steadfastness from American leadership, what is it that makes for our joint benefits to come together," Turki said in a significant departure from usual Saudi rhetoric. "These are things that we have to recalibrate."
One day after stocks were this close from hitting new all time highs on what have been either ok earnings, if looking at non-GAAP data, or atrocious earnings, based on GAAP, and where any oil headline is now immediately translated as bullish by the oil algos, so far futures are relatively flat, while European stocks were at their moments ago in anticipation of the latest ECB announcement due out in just one hour. However, unlike last month's "quad-bazooka", this time the market expects far less from Draghi. “Having pulled put the monetary bazooka in March, the market is sensibly expecting no further policy measures from the ECB,”
A market entirely supported by rumors and hearsay can rally quickly, but also lose all gains at the drop of a hat. What the Doha debacle represents is a signal that the establishment is incrementally abandoning support for market systems. This is translating to a loss of faith in central banks and major financial institutions. On top of this, look at the incredible amount of misinformation and misdirection that went into Doha, now completely exposed. The truth is crystal; the MSM lied and obfuscated helping the establishment to drive up oil prices and stocks, all for a mere six to eight weeks of market security. As soon as these lies were revealed, volatility began to return. If the oil market bubble can implode (as it already has) in such a way due to the striking of fundamentals, then stocks can also be destabilized as well.
Saudi officials indicated they would sell its dollar-denominated assets if the law passed to avoid having those assets frozen by American courts. But does Saudi Arabia even have $750 billion of assets to sell? For the answer we go to Stone McCarthy who note that while they can't answer that question definitively - recall that the exact amount of Saudi Treasury holdings remains a mystery as it is not broken out separately - here's what they do know from the Treasury International Capital (TIC) data.
Following API's 3.1mm reported build overnight, expectations were for a 3mm build and DOE reported a 2.08mm build. Cushing saw a 235k draw from API and was expected to drop 1mm barrels but DOE reported just 248k drop in inventories as Gasoline inventories drewdown just 110k barrels (drastically less than the 1mm exp) and Distillates saw a large 3.55mm draw - the most in 3 months. Production appears more of a focus for now and fell once again last week to 8.953mm barrels (down 4.41% YoY) - lowest since Oct 2014. Crude prices had slipped overnight as Kuwait's strike ended and Russia threatened to increase supply but the production slowdown and lower than expected inventory data sent WTI back above $42.
The biggest catalyst for overnight markets, first reported on this site, was the announcement by Kuwait that its oil workers had ended their strike which disrupted oil production in the 4th largest OPEC producer for 3 days cutting it by as much as 1.7 mmb/d, and had served to offset the negative news from the Doha debacle. Kuwait Petroleum also added that it would boost output to 3m b/d within 3 days, which in turn has pressured the price of oil overnight, and the May WTI contract was back to just over $40 at last check, sliding 2%. Not helping things was a very dejected Venezuela oil minister Eulogio Del Pino who said at a conference in Moscow that he sees oil prices returning to lows in 3-4 weeks if oil producers can't make a deal. For now the algos - and central banks - disagree.
The catalyst that moved oil prices higher over the past two days, and which had overriden the "bad news" from the Doha talks failure, was the Kuwait oil workers strike announced over the weekend and which resulted in up to 1.6mmb/d in production being taken offline. As of moments ago, however, according to Kuwait's Aljarida press website, the strike is now over.