Oil Tumbles To 11 Year Lows After Another Bank Joins "$20 Crude" Bandwagon
Another algo-induced stop-run has tried and failed to maintain its gains this morning as Morgan Stanley becomes the latest (after Goldman) to join the "oil in the $20s is possible" bandwagon. Despite hopeful bullishness from Andy Hall who sees production destruction leading (an industry that couldn’t function at $50 certainly can't function with prices below $40) inevityably leading to higher prices, Morgan Stanley warns, "in an oversupplied market, there is no intrinsic value for crude oil. The only guide posts are that the ceiling is set by producer hedging while the floor is set by investor and consumer appetite to buy. As a result, non-fundamental factors, such as the USD, are arguably more important price drivers."
The "Ma" bounce has failed...
Just as we predicted a year ago...
...because while equities are pricing in an unsustainable 23x in foward energy P/E, another market, that of interest rate forwards, is implying oil plunging down to $35!
As a reminder, oil is among other things, a function of rate differentials or said simpler, USD strength, strength which appears is not going anywhere. And as the following calculation from Cornerstone implies, should the EURUSD tumble to parity which is what Draghi's desire seems to be, it would suggest a 22% plunge in oil from here, implying a $35.5 price of oil one year from now.
Morgan Stanley has now come to the realization that Material USD Appreciation Could Bring New Lows for Oil
Oil in the $20s is possible, but not for the reasons often cited. Several analysts and press reports have cited $20 oil scenarios for well over a year on the premise that storage would reach “tank tops” in the US or globally and force oil prices to “shut-in economics.” In reality, such scenarios are unlikely and often ignore how physical oil trading functions.
Moreover, there are few scenarios where reaching cash costs would force producers to shut in, especially over any shorter time horizon. Lastly, these forecasts also fail to appreciate that marginal changes in fundamentals are not driving marginal changes in oil prices.
It’s not about deteriorating fundamentals: The USD and non-fundamental factors continue to drive oil prices. Oversupply drove oil to ranges that should slow investment, but it does not set the price level. Oversupply may have pushed oil prices under $60, but the difference between $35 oil and $55 oil is primarily the USD, in our view.
In an oversupplied market, there is no intrinsic value for crude oil. The only guide posts are that the ceiling is set by producer hedging while the floor is set by investor and consumer appetite to buy. As a result, non-fundamental factors, such as the USD, were arguably more important price drivers in 2015. In fact, when we assess the >30% decline in oil since early Nov, much of it is attributable to the appreciation in the trade-weighted USD (not the DXY). With the oil market likely to remain oversupplied throughout 2016, we see no reason for this trading paradigm to change.
Given the continued USD appreciation, $20-25 oil price scenarios are possible simply due to currency. For much of the year, the rolling 20 and 30-week beta to the trade-weighted USD has ranged from 2-3, with recent figures even exceeding 3. On a shorter duration, the rolling 20-day and 30-day beta for the weighted USD basket of currencies has generally ranged from 2-4 with periods exceeding 4. In other words, for every 1% move in the trade-weighted USD, we tend to see a 2-4% move in Brent. Therefore, a 3.2% increase in the USD, as implied by a 15% yuan devaluation, could push down oil 6-15% ($2-5/bbl), which could put oil in the high $20s. If other currencies move as well, the move in the USD and oil could be even greater. Hence, we remain bearish, even after the notable downward move already.
Finally we leave it to perennial crude bull Andy Hall (whose fund lost 35% in 2015) to explain where it all went wrong:
We continue to believe that the shorter term headwinds are ultimately trumped by the longer term outlook for prices which remains firmly to the upside: an industry that couldn’t function at $50 certainly can't function with prices below $40.
And here is his full confessional to investors...
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price manipulation in the war against Russia and other energy-dependent economies. there will be consequences.
https://www.youtube.com/watch?v=dxytyRy-O1k
The cycle repeatedAs explosions broke in the sky
All that I needed
Was the one thing I couldn't find And you were there at the turn
Waiting to let me know We're building it up
To break it back down
We're building it up
To burn it down
We can't wait
To burn it to the ground
Kids these days and the music they listen to...
LOL this band is like 16 years old and the guys are above 40.
I'm gonna make it rain, so ring the bellI know it all too well
Switchblade on the edge of your wrist
Can I get a witness? (witness)
'Cause agony brings no reward
For one more hit and one last score
Don't be a casualty, cut the cord cut the cord
(Freedom, la la la la)
(Freedom) https://www.youtube.com/watch?v=9itwt_opsvQ
Andy Hall's reasoning is absolutely spot on.
But the market is irrational and it will stay irrational no matter how much Andy reasons with it.
It looks like the crude pendulum is not going to swing back until it has utterly exhausted every last drop of the surplus.
When the crude oil market eventually tightens thanks to the capex hiatus, it will take the entire global economy with it.
NASDAQ just went negative. Half-life of morning futures pump-fests these days: about half an hour.
Noticed that myself. Damage control team needs a new wardrobe. lol
There we go - falling fast on the other side of the peek oil. The Saud gang is selling short fast and trying to run trough the door for their lives.
LinkinPark has been around since 1999. Does that make you feel old?
Remember, many of those countries have debt that is dominated in USD/FRN.
They now have LESS income, hence they will NOT service that debt.
If american bankers/financiers really want to shoot themselves in the head, I say LET THEM!
Spot on LoP. I stated similarly below.
The oil industry gorged far too long on excessive prices. Paying $100,000 a year to sit in pickups. Paying Australian cooks $160,000. Lots of fat being cut out now. And I doubt that any pencil pusher in an Ivory Tower has clue one where real costs of production can go with the squeeze on prices.
Operating fixed costs are being re-negotiated, ie, would you like to open up that contract we signed 3 years ago or would you like to have us open it up under Chapter 11.
And Financial fixed costs come under- do you think you can find a buyer for our shit right now or would you like to spend your weekends maintaining and protecting your newly seized assets.
Take away ALL the subsidies and tax breaks in energy and food (including SNAP) and let's see what the real cost or price is!!!!!!
jump you motherfuckers!!!!!
How much of the price action over the last year is manipulation versus demand destruction?
The most recent BP Stats study (2015 with 2014 data) has a very high level global demand and production chart that shows really significant demand growth in China over the past years, where aggregates like Europe are actually demanding LESS oil than they did in 89.
I think the rampant investment in gross amounts of overcapacity in China is evident to all - and global supply raced to keep up (e.g. US Fracking) - and now that deflation is being exported from China and impacting oil demand in China as well as her trading partners.
The supply build that gets discussed a lot is a supply-demand imbalance. And all the big boys (Russia, SA, and soon Iran) are dumping as much oil on the market as they can for revenues. Even if supply does taper off, if demand continues to fall faster than supply, it is going to get worse regardless.
This is what I was thinking was driving prices.
Do appreciate your comments and insignt.
Regards,
Cooter
I don't get it. The global economy runs on energy and the cheaper the better for the vast majority of us peons. So oil in the 20s should mean PARTY LIKE THERE'S NO TOMORROW
At least until it runs out and by then flux capacitors should be perfected
Let's get this fucker started...Green in the AM...we should be able to bring this bitch down to -230 before noon. Ooops...did I say that out loud....?
Spikey charts really turn me on. Especially this opening bell plunge :)
Aside from playing...I have a serious question. Of course there is a point where you would want to get "IN" on oil. We all know that oil will not sit at $30 a barrel or less for a long time (5 years)...It is NOT going to happen. So, that being said, and me not being a trader, I do think it may be wise at some point to allocate some paper funds to play the upside of oil. What is the BEST way to do that? Do you buy oil companies? Exxon, Chevron, etc? What is the best play...that is simple when I feel it has bottomed? Thanks.
The best way to do that is to short a 3X Levered short oil ETF on as much margin as they'll give you.
(Please don't do this.)
Listen to Greg Morse before you buy any "stocks." He has some interviews on youtube. You never really own stocks, because you're not allowed to. You only own the beneficial rights. The DTCC/DTC own all the stocks.
https://www.youtube.com/watch?v=aaDxSI_j2Hc
or
https://www.youtube.com/watch?v=TwdUFLBWURc
yes, it really is a fucking club.
roll the motherfucker guillotines! NOTHING changes otherwise!
I'm starting to acquire some small paper oil (USO) as I'm starting to think the bottom is in if banks are starting to beat their drums as hard as they beat their prostitutes.
Good luck with that.
I don't see Putin or the Saudis blinking in the current Mexican standoff.
Both have doubled down.
...and you think the snap back to reality will be slow and painless?
You have to do what you have to do. There will be blood. The Saudis are backed into a corner. Russia is backed in to a corner. When you can no longer undersell your competitor, you set his gas station on fire.
Russia has more resilience than Saudi Arabia- Obvious yes, but more important strategically. Russia is essentialy at war with the House of Saud. If Russia can knock out the petrodollar, that will actually have a negative effect on the Royal House of Saud. The only reason the petrodollar is still alive is because it benefits the Saudis. Otherwise, it would have been shitcanned by 2012. Of course, this means that Russia is essentially at war with the US, since if Russia can knock out the petrodollar, the whole dollar dominance paradigm collapses.
The petrodollar can be weakened by economic measures, such as trading Russian oil in Rubles. However, a political shift, such as the literal destuction of the house of Saud in a revolution/coup will literaly destroy the petrodollar. No Shia- dominated ex-Saudi government will use it.
So, expect that Russia and Iran will use every means to destabilize Saudi Arabia, and cause th House of Saud to fall. They will fund saudi domestic terrorists. They will attempt to bankrupt the Saudis by supporting Saudi opposition in Syria and Yemen. (Yemen is more dangerous because Yemeni hillbillies could actually invade Saudi territory. Can you say "Squeal like a pig!" ?)
Meanwhile, they will do whatever they must to keep oil prices low, while striving to undermine the petrodollar on the economic front. The Saudis are running huge deficits fighting a two-front war. hey are cutting back on social services- the only sop that keeps their enslaved population from getting restless. Everyone has the side benefit of watching US shale production grind to a shuddering halt. The creeping junk bond yield contagion that will slowly infect the bond market systemically is also a good thing short-term, but dangerous long term, since the US, while cravenly stupid and incompetent, can still rampage like a rabid Godzilla when pissed off.
This will not be pretty. I wonder if the only agents-provocateurs at the oregon standoff are the Feds????
While I enjoyed the comment about the Yemeni hillbillies, I have to wonder if this comment should be reversed:
The only reason the petrodollar is still alive is because it benefits the Saudis.
Deep assumptions here that USD / Oil remains tightly connected. I'm not so convinced. Up until around 2010, yes, USD/Oil was tight. But the petrodollar has been adding other currencies at an accelerated rate, and now will formally include the Yuan (which has been an informal petrotrade for years). Note that from 2010-2014, Oil-USD became disconnected. Dollar strength grew 15% during this time, but crude oil prices actually went UP (around $95). Crude prices didn't start falling until Saudi started over-supplying, right around August 2014. For this reason, I think Saudi over-supply accounts for at least 50% of the current price fall. USD/EUR still plays a major role, but far less than pre-2010.
The bottom will be in during the spring and summer. It's winter heating season in the northern hemisphere, meaning oil consumption is up a bit. Consumption will be down in the spring, and after that it will hit bottom. Or rather, the tanks and storage will hit "full"
How long until the S&P500 tumbles to 11 year low? (watching rally at the open and close to negative now only 22 mins later)
Yeah, that was weird. Up .60% now slightly down... Not gonna say that I don't like it.
was watching last night and out the blue it would go straight up 0.5% and then fade and then again a little higher. They ran it into the open and then just after the bell and then it faded back again. They're having trouble keeping the moves higher "stick"...wonder why hehe.
".....warns, "in an oversupplied market, there is no intrinsic value for crude oil."
Keep that thought in mind.
Back to fundamentals.
So if you have a tank full of oil and no buyers of it at a price you want to sell it at, you won't mind if I take it then?
What rubbish. It isn't sea water, if it is used it can make stuff that sells, or transport stuff that sells, or convey people who buy stuff.
Element
You have an ocean tanker full of oil-costing $10,000 per day sitting in a bay somewhere in the world. Every available ocean tanker is full. You are up to your credit limit and your bank says they are not prepared to fund $300,000 per month for your tanker anymore.
What is your oil worth?
I'm sorry, who says they're not prepared to fund $300,000 per month?
Bullshit. Stop thinking in terms of bullshit FIAT and start thinking in terms of CONSUMABLE CALORIES and reduced hydrocarbons.
The energy to recover that oil has already been spent, period. Now, someone can actually do and build real stuff with all that oil, period. The oil has great intrinsic value. What you are refering to is the RENT being charged by useless fucking paper-pushers becuase they control the fucking printer/computer. That will not last motherfucker!
ALL FIAT will die, regardless. Fuck the useless fucking bankers/financiers.
Well that's pretty easy, "I rupture the hull and drive it ashore if I don't get $2,000,000 in my private bank acct, by 4 PM."
I bet that's worth 2 million poo-tickets to someone.
I agree. What this bozo is really referring to is the US dollar:
"in an oversupplied market, there is no intrinsic value."
So, they're manipulating the price of oil to try to save themselves at the banks and the Fed. They overplayed their hand, trying to do a world wide asset-grab by bankrupting everyone. If everyone defaults, the dollar is obsolete, it's too bad for the bankers and everything goes back to normal.
If there was TRUE PRICE DISCOVERY, yes.
Unfortunately, there isn't.
Jump you fuckers!!!
True price discovery would put all petroleum products well and truly out of the reach of 99.9% of humanity, with or without credit cards, until it has found something better to use those stupendously concentrated joules on than driving the SUV to Wal-Mart (with most of those joules wasted as thermal losses and conversion inefficiencies). You know all of this, yet still prefer to mindlessly shill against the credit provisioners, who are the only reason we have ever heard of gasoline.
Careful what you wish for... no, actually we're going to get it regardless. The fuel rationing has already begun.
Jibberish. Of course there's intrinsic value.
Commodity-centric export-driven economies are getting paid in fewer dollars (income streams) with which to service their fixed $9T in USD denominated debt.
This won't end well.
...for "THEM"
for the creators and holders of USD, the world will be available for purchase at rock bottom prices.
No it will be terrible for the USD eventually, as it will destabilize the entire financial system. Recall the Asian Currency crisis. As I wrote in another comment on another article:
I think Jim Willie of the Golden Jackass will be proven to have nailed it: the dollar is going to rise into irrelevance due to its strong demand to service the $9T in emerging market USD-denominated debt, resulting in wide-spread USD debt defaults, which by definition will be a large USD-denominated deflation (already beginning) to the point that a Big Print will be required (large devaluation) thereafter.
Edit: keep in mind that commodity centric emerging market exporters are now getting fewer dollars for their commodities. In other words, they have smaller income streams with which to service a fixed amount of USD-denominated debt.
With market in cantango USO is in a world of hurt.
We need more battery powered cars to really hammer this bitch lower.
And if they spontaneously catch fire, it could lower the demand for heating oil, and promote the Keynesian broken window mantra.
Mainstream media and Keynesian hucksters: "Hey folks! Cheap gas! Run out and shop!" Consumers: "Don't need any gas. I don't have a job to drive to anymore."
Who flies gold? I thought you were only supposed to ship it on boats? http://www.dailymail.co.uk/travel/travel_news/article-3393856/More-77-00...
Anyone with insights into the Platinum market ?
Current spot ( 10:22 AM EST) is down -$29 and 3.31 % loss. WTF ???