For the past few months, the one silver lining to the energy complex - with crude oil plummeting to levels not seen since 2009 - was nat gas, which soared to the mid-$4s in early November on expectations of a brutal polar vortex for the second year in a row sending heating demand surging. Well, so far the "harsh" weather, which was blamed for the epic collapse in the US economy in Q1 has not materialized, and all those buyers of natgas contracts have been scrambling to sell all of their exposure afraid they may suffer the same fate as their crude trading brethren. End result: as of moments ago, nat gas finally slide under $3, the first time it has done so since 2012!
We live in a new world, and the Saudis are either the only or the first ones to understand that. Because they are so early to notice, and adapt, I would expect them to come out relatively well. But I would fear for many of the others. And that includes a real fear of pretty extreme reactions, and violence, in quite a few oil-producing nations that have kept a lid on their potential domestic unrest to date. It would also include a lot of ugliness in the US shale patch, with a great loss of jobs (something it will have in common with North Sea oil, among others), but perhaps even more with profound mayhem for many investors in US energy. And then we’re right back to your pension plans.
The oil price drop that has dominated the headlines in recent weeks has been framed almost exclusively in terms of oil market economics, with most media outlets blaming Saudi Arabia, through its OPEC Trojan horse, for driving down the price, thus causing serious damage to the world's major oil exporters – most notably Russia. While the market explanation is partially true, it is simplistic, and fails to address key geopolitical pressure points in the Middle East.
The ability of oil exporters to trigger a short-term collapse in price does not automatically translate into an ability to control the financial conflagration such a crash ignites.
- Russia says NATO turning Ukraine into 'frontline of confrontation' (Reuters)
- Oil Drillers Under Pressure to Scrap Rigs to Cope With Downturn (BBG)
- Demonstrators Defy NYC Mayor's Call to Suspend Police Protests (BBG)
- U.S. to send more private contractors to Iraq (Reuters)
- ISIS Shoots Down Jet From U.S.-Led Coalition, Syrian Monitors Say (NYT)
- Russians Race to Secure Mortgages Before Costs Spiral (BBG)
- Abe Brings in Former Soldier Nakatani as Defense Minister (BBG)
- At Coke, Newest Flavor Is Austerity (WSJ)
- Fear and retribution in Xi's corruption purge (Reuters)
- UBS Raises Flag on China’s $1 Trillion Overseas Debt Pile (BBG)
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.
For all those who think the upcoming carnage to the shale industry will be "contained" we refer to the following research report from the Manhattan Institute for Policy Research. For the impatient ones, here is the punchline: "The $300–$400 billion overall annual economic gain from the oil & gas boom has been greater than the average annual GDP growth of $200–$300 billion in recent years—in other words, the economy would have continued in recession if it were not for the unplanned expansion of the oil & gas sector."
No respite for the American oil patch and its investors.
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.
- Christmas rally enters sixth day in Europe (Reuters)
- Downing North Korea's Internet not much of a scalp (Reuters)
- North Korean Internet Access Restored After Hours-Long Outage (BBG)
- At U.N. council, U.S. calls life in North Korea 'living nightmare' (Reuters)
- Ukraine Cuts Gold Reserve to Nine-Year Low as Russia Buys (BBG)
- De Blasio Seeks to Heal Rifts With Police After Officers Slain (BBG)
- Oil steady around $60 on hopes of strong U.S. data (Reuters) - so it fell below $60 because...
- Australian Dollar Hits Four and a Half Year Low on Chine Growth Worries (Reuters)
"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?
Natural Gas prices are down over 11.5% in the last 2 days, falling to their lowest price since January 2013, as a familiar tale of excess production in the face of ebbing demand looms large. As WSJ reports, BNP Paribas' Teri Viswanath notes "the delayed return of cold weather has simply curbed all buying interest," and this was exaggerated by technical selling as the market broke previous support around 3.50. Ironically, given its detrimental impact on GDP, Macquarie points out, "it is increasingly apparent to us that weather will need to bail the market out again this winter - otherwise prices could see material downside during the spring and summer months."
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.
Every year, David Collum writes a detailed "Year in Review" synopsis full of keen perspective and plenty of wit. This year's is no exception. "I have not seen a year in which so many risks - some truly existential - piled up so quickly. Each risk has its own, often unknown, probability of morphing into a destructive force. It feels like we’re in the final throes of a geopolitical Game of Tetris as financial and political authorities race to place the pieces correctly. But the acceleration is palpable. The proximate trigger for pain and ultimately a collapse can be small, as anyone who’s ever stepped barefoot on a Lego knows..."