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...
(7 votes)
»
- Login or register to post comments
- Printer-friendly version
- Send to friend
- advertisements -
Some how related. I know that Pt is used in gas emissions, but diesel is another ball game.
My best guess is that industrial demand has cratered and punters are getting out ASAP.
http://jalopnik.com/volkswagens-fix-for-u-s-diesels-is-a-new-catalytic-c...
Isn't Pt still used in catalytic converters?
I have a feeling it is related to the SA Rand taking a 10% nose-dive yesterday as this may force some South African firms to liquidate positions, including platinum and platinum producers.
I believe palladium is mainly used in catalytic converters these days.
Pt a huge buy at this juncture. Less than Au and 3x more scarce. Use the phony paper price to load phy. Pd has more downside IMWO.
Looks like wave 5 down may complete soon. Short here at your own risk.
I literally was flipping channels and just heard some suite and tie talking about the great tax cut the oil savings is and how starting in 2016 consumers will be spending it. He seemed desperate more than confidant
$20.00 sounds good to me!
The oil industry will have to do what I had to do when gas was $4.00...Deal with it!
Mr McCormick. ..good thoughts. I have a couple questions, yes from a newbe. Btw, for all you newbe haters, the more you educate us, the more we'll be prepared. Therefore, the less unprepared assholes to riot and cause mayhem.
I thought Saud was was cash strapped. Therefore they will sell anything they can, for any amount they can get. Oil seems to be the only thing they have. Why would they stir up trouble knowing it will further deplete their money, or are they taking it from all sides and just being reactionary? Are they fighting because the opponents are trying to rid themselves of the petrodollar, and by extension U.S. hegemony?
Why hasn't Russia tightened supply to countries backing saud?
All good questions, Jack Buster. There is no consensus answer, just a lot of speculation. I'm still convinced that Saudi is over supplying to hurt shale/sand/polar/deep-water/LNG/electro-vehicles, and will continue over supplying until a significant number of alternative plays are shuttered. When that happens, look for supply to decrease, and oil to spike well over trend, perhaps into the $100-150 range, for a good long period. Huge profits for Saudi, until they stablize supply again. That's the only way I can figure the Saudi's will recoup all their ongoing losses during their over-supply period.
De-Dollarization: Russia's Oil Benchmark Futures to Be Priced in Rubles
9 January 2016, (Sputnik)
http://sputniknews.com/business/20160109/1032879749/dedollarization-russ...
Step-by-step Russia, China and other emerging economies are taking measures to reduce their dependence on the US dollar, F. William Engdahl notes, referring to Russia's crude oil benchmark initiative; the move could deal a dramatic blow to the "petrodollar's" dominance.
Iran, India to settle outstanding crude oil dues in rupees
5 January 2016, by Amitav Ranjan (Indian Express)
http://indianexpress.com/article/business/business-others/iran-india-to-...
The payment agreement needs amendment as tax exemption is contingent on the pact notified by the Centre in January 2012 which allows only 45% of oil payments in rupees. Ditching the dollar, Iran and India have agreed to settle all outstanding crude oil dues in rupees in preparation to future trade in their national currencies. The dollar dues — $6.5 billion equaling 55% of oil payment — would be deposited in National Iranian Oil Co account with Indian banks.
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 crown of Saud has a poliferation problem.. been curning out lergitimate and illigitmate chilrend on an unpresidented rate. Has bee good for yatch makers and the luxury market in general, but times are a changeing with the number one oil field haveing problems.. and then to get suckered into a war. This is like 'testosteronne' thinking and is trouble that I doubt they can handle. ISIS is a product of their 'failed ways' and they have expanded this way to a prportion that will end up on their front door (and back door at the same time).
If the price of oil breaks below $28 it will be time for the FED to act and fill the Strategic Reserve wells. Nothing like making Saudi Arabia go totally broke and refinancing the dollar with a consumable. This would totally peg the dollar to oil for quite some time, saving the dollar when oil rebounds. If nothing is done the the dollar will turn to debt dust. This oil glut is not a forever event as the amount being pumped will crash one of the competitor providers, the Saudis.
As for global warming.. I have to say that since the test in the first Gulf war, Oil that is uncontrollably burned could be the main culpirt
Morgan Stanley's summary of the above...
http://video.cnbc.com/gallery/?video=3000479360