In a repeat of Thursday's action, Chinese stocks which had opened about 1% lower, remained underwater for most of the session before attempting a feeble bounce which took the Shanghai Composite fractionally into the green, before the now traditional last hour action which this time failed to maintain the upward momentum and the last day of the month saw a surge in volume which dragged the market to its lows before closing roughly where it opened, -1.13% lower. This caps the worst month for Chinese stocks since since August 2009, as the government struggles to rekindle investor interest amid a $3.5 trillion rout, one which has sent the Shanghai market lower by 15% - the biggest loss among 93 global benchmark gauges tracked by Bloomberg.
Global oil prices have returned to a state of flux. This is hardly news to any who follow the oil markets closely and yet prices continue to drive international headlines. While oil prices are notoriously difficult to predict, it has failed to deter the speculators. There are those warning that the latest dip is a precursor for $40 a barrel, a catastrophe for oil markets in some minds. On the other end of the spectrum are the optimists betting on a return to $100 by 2020. The World Bank has taken a typically middle-of-the-road approach, with forecasts of $57 a barrel in 2015. That said, given Iran’s potential revitalization, Russia’s murky outlook, and U.S. shale supply limits uncertain, prices will be responsive to supply and demand trends; at least in the short to medium term.
The U.S. E&P industry is really good at spending other people’s money to increase production. It doesn’t matter if there is a market for the oil and gas. As long as the capital keeps flowing, they will do what they do best. Don’t be distracted by the noisy chatter about savings through efficiency or re-fracking. Just look at the income statements and balance sheets from first quarter and it’s pretty clear that most companies are hemorrhaging cash at these prices. The U.S. rig count increased by 19 this week as oil prices dropped below $48 per barrel – the latest sign that the E&P industry is out of touch with reality.
Hedge Funds' net long position in WTI Crude collapsed 27% (the biggest single 'dump' in over 3 years) ahead of the big plunge last week (and is now down almost 60% in the last month - the most since 2010). Part of a broader deflationary collapse in commodities, as Bloomberg reports, long positions dropped to a two-year low while short holdings climbed 25%, erasing more than $100 billion in market value from the 61 companies in the Bloomberg E&P stock index. With crude supplies still almost 100 million barrels above the five-year average, "there's a lot more room for prices to slide," warned one trader, "it's going to take a long time for this to work itself out."
Who is the culprit for the recent record oil stock glut across the OECD nations? We present the answer on the following several charts showing oil exports from both OPEC and non-OPEC oil producing countries. Note that Iran has gone exactly nowhere - it is "others" who are to blame for the most recent downturn in oil prices.
"I don’t know if you’ll get the same slack in October as in April, absent a turnaround in the market price for oil. It’s going to be that ‘come-to-Jesus’ point in time where it’s about how much longer can they let it play. If the banks get too aggressive, they’re going to hurt the value for themselves and their ability to exit. So they’re playing a balancing act."
A slow week devoid of virtually any macro news - last night the biggest weekly geopolitical event concluded as expected, when Greece voted to pass the bailout bill which "the government does not believe in" just so the ECB's ELA support for Greek depositors can continue - is slowly coming to a close, as is the busiest week of the second quarter earnings season which so far has been largely disappointing despite aggressive consensus estimate cuts, especially for some of the marquee names, and unlike Q1 when a quarterly drop in EPS was avoided in the last minute, this time we won't be so lucky, and the only question is on what side of -3.5% Y/Y change in EPS will the quarter end.
The forward curve currently points towards a recovery in prices that is far worse than in 1986. As there was no sharp downturn in the ~15 years before that, the current downturn could be the worst of the last 45+ years. If this were to be the case, there would be nothing in our experience that would be a guide to the next phases of this cycle, especially over the relatively near term. In fact, there may be nothing in analysable history.
Andy Brown, a top Shell official, said the Anglo-Dutch oil giant forecasts no quick rebound in the average global price of oil, but only a gradual recovery lasting five years. He attributed this sluggishness to a slowdown in China’s economy, leading a drop in demand for fuel, and the continuing oversupply of oil. “It will take several years [for oil prices to recover fully], but we do believe fundamentals will return,” Brown said. “Until such time, we, like other companies, will have to make sure we stay robust.”
The dollar made new multi-year highs against the dollar-bloc and is bid against most major and em currncies. Why?
The coming few months will prove challenging for the sector, and some small and medium U.S. producers may start missing their debt repayments or even file for bankruptcy. Quicksilver Resources and American Eagle Energy are two of the six U.S. based companies that have filed for bankruptcy in 2015 so far. Sabine Oil and Gas Corp. is the latest, and the biggest, U.S. producer to file for bankruptcy so far. Even mergers and acquisitions have slowed down considerably for the U.S. oil and gas industry in 2015. If the present trend persists, companies will have no choice but to cut their workforces even further to remain competitive and reduce their rising overheads. If oil prices remain in the range of $50 per barrel for longer than expected, even big operators such as Exxon Mobil, Chevron and ConocoPhillips (who have so far not made any major layoffs) could start downsizing their workforce.
However, after seeing that QE has not caused inflation or triggered a dollar collapse in the last five years, it is not clear why people would wake up one morning and decide to panic.
While slightly later than expected, a comprehensive deal on Iran’s nuclear weapons program has now been reached. As Reuters reports, the agreement will be greeted with alarm in several quarters, both in Washington and Tehran and internationally too, and could yet unravel. Internationally, the deal will accelerate unease in some Arab states, including Saudi Arabia, but it is Israeli Prime Minister Benjamin Netanyahu who remains the fiercest public critic and has issued a warning that the accord will "inevitably lead to a nuclear war." The deal profoundly changes the balance of power in the region, but averts the conflict that was likely otherwise, but as ECStrat notes, Iran offers exceptional investment opportunities, but the near term impact will be to continue oil’s decline back to its lows, potentially taking energy stocks with it.
While not predicting that Tehran and six world powers will strike a deal by the new July 10 deadline, a senior Iranian oil official says his country hopes to nearly double its crude exports immediately if and when sanctions are lifted and hopes that OPEC will accommodate this growth by capping production by the cartel’s other members. “We are like a pilot on the runway ready to take off,” Mansour Moazami, Iran’s deputy oil minister for planning and supervision, told The Wall Street Journal inTehran on July 5. “This is how the whole country is right now.”
If it was Greece's intention to crush the Chinese stock market instead of Europe's, well - it succeeded. Because despite the PBOC and politburo throwing everything but QE at the stock market, China stocks closed down sharply on Thursday after another wild trading day as investors shrugged off regulators' intensified efforts to put a floor under the sliding market, by cutting trading fees and easing margin rules, which has now crashed 25% in about two weeks wiping out $2.5 trillion of the peak $10 trillion in Chinese stock market cap as of June 14. This ultimately resulted with the Shanghai Composite closing under 4000 for the first time since April.