Crude

Would You Support a War Against Iran If You Knew the True Facts?

A riddle, wrapped in a mystery, inside an enema.

There is a very clear relationship between economic growth and sufficient quantities of high quality energy. A crude measure of energy quality is its price. The lower the price for a unit of energy, the higher its quality (or net energy), but this is a very crude measure that can and often is heavily distorted by subsidies, market pressures, and other factors. As we squint at the world price for oil and note that Brent today is trading at $120 per barrel, it is clear that this high price is signaling that energy is now more expensive than it used to be. By adopting the belief that Peak Oil has been debunked, one runs the risk of missing the larger story that our current economic model is unsustainable. And that stocks and bonds and other traditional investments that derive a large portion of their current value from expectations of future growth simply may not perform anything like they have in the past. And worse, that recent and continuing efforts to revive the old economy by printing money risk the destruction of the money system itself. Given this all-too-human tendency to attempt to preserve the status quo, in this case by printing money, I must reiterate my advice to be sure that gold forms a significant portion of your core portfolio. 

The softer PMI reports have weighed on risk markets, which as a result saw equities trade lower throughout the session. In addition to that, market participants continued to fret over the latest Greek debt swap proposals, which according to the Greek CAC bill will give bond holders at least 10 days to decide on new bond terms following the public invitation, and the majority required to change bond terms is set at 2/3 of represented bond holders. Looking elsewhere, EUR/USD spot is flat, while GBP/USD is trading sharply lower after the latest BoE minutes revealed that BoE's Posen and Miles voted for GBP 75bln increase in APF. Going forward, the second half of the session sees the release of the latest Housing data from the US, as well as the USD 35bln 5y note auction by the US Treasury.

Crude oil spiked to nine-month high primarily on investors fear of potential conflict over the escalating tensions between the US, Europe, Israel, and Iran.  Right now, it seems Iran could be the one blinks first (war or peace).

January's hopium catchphrase of the month was that Europe's recession would be "technical" which is simply a euphemism for our Fed's beloved word - "transitory." Based on the just released Euroarea PMI, we can scratch this Euro-accented "transitory" addition to the lexicon, because contrary to expectations that the Euroarea composite PMI would show expansion at 50.5, instead it came out at 49.7 - the manufacturing PMI was 49.0 on Exp of 49.4, while the Services PMI was 49.4, on hopes of expansion at 50.6, which as Reuters notes suggests that firms are still cutting prices to drum up business and reducing workforces to cut costs. This was accompanied by a overnight contraction in China, where the flash manufacturing PMI rose modestly from 48.8, but was again in contraction at 49.7. We would not be surprised if this is merely the sacrifice the weakest lamb in the pack in an attempt to get crude prices lower. So far this has failed to dent WTI much if at all following rapidly escalating Iran tensions. What is curious is that Germany and France continue to do far better than the rest of the Eurozone - just as America has decoupled from Europe, so apparently have Germany and France. This too is surely "sustainable."

Just when we thought that when it comes to nonsensical announcements Europe is second to none, here comes the White House and takes the cake:

• WHITE HOUSE SAYS RISE IN GASOLINE PRICES CAUSED BY VARIETY OF GLOBAL FACTORS, INCLUDING UNREST IN SOME PARTS OF WORLD, FAST GROWTH IN OTHERS - RTRS

Uhm, would the "unrestful" parts of the world be those that have an above average US drone presence. At least we know that said price surges have nothing to do with the following chart:

Heading into the North American open, equities are trading lower with the benchmark EU volatility index up 1.6%, with financials underperforming on concerns that the latest Greek bailout deal will need to be revised yet again. Officials said that the deal will require Greece’s private creditors to take a deeper write-down on the face value of their EUR 200bln in holdings than first agreed. The haircut on the face value of privately held Greek debt will now be over 53%. As a result of the measures adopted, the creditors now assume that Greece’s gross debt will fall to just over 120% of GDP by 2020, from around 164% currently, according to the officials. However as noted by analysts at the Troika in their latest debt sustainability report - “…there are notable risks. Given the high prospective level and share of senior debt, the prospects for Greece to be able to return to the market in the years following the end of the new program are uncertain and require more analysis”. Still, Bunds are down and a touch steeper in 2/10s under moderately light volume, while bond yield spreads around Europe are tighter.

JPM brings some less than good news for the administration, which unless planning to propose another $500 billion or so gas price offsetting fiscal stimulus (which would bring total US debt to $17 trillion by the end of 2012) may find itself with the bulk of its electorate unable to drive to the voting booths come November. In a just revised crude forecast, JPM commodity analyst Larry Eagles, has hiked both his Crude and Brent expectations across the board, and now sees WTI going from $105 currently to a $120 by the end of the year, $4 higher than his prior forecast. Alas, since in another report from this morning titled "Return of Asset Reflation" JPM finally figures out what we have been saying for months, namely that the stealthy global central bank liquidity tsunami is finally spilling out of equity markets and into everything else, inflation is about to become a substantially topic in pre-election propaganda. As a reminder, when gold was at $1900 last summer, central banks had pumped about $2 trillion less into the markets. We expect the market to grasp this discrepancy shortly.

Between the Chinese 'surprise' RRR and the Iran export halt to UK and France (and escalating tensions), Oil prices are off to the races this evening. WTI front-month futures have just broken $105 (now up more than 10% in the last two weeks), the highest levels in over nine months and just 8% shy of the 5/2/11 post-recession peak just under $115. Brent (priced in EUR) remains off last week's intraday highs (as EUR strengthens) but still above the pre-recession peak but in USD it traded just shy of $121 - well above last week's peak. Of course, this will be heralded as a sign of demand pressure from a 'growing' global economy rather than the margin-compressing, implicit-taxation, consumer-spending-crushing supply constraint for Europe and the US that it will become in the not too distant future. As we post, The Guardian is noting that US officials are commenting that "Sanctions are all we've got to throw at the problem. If they fail then it's hard to see how we don't move to the 'in extremis' option." The impact of any escalation from here is gravely concerning with PIMCO's $140 minimum and SocGen's $150-and-beyond Brent prices rapidly coming into focus - and for those pinning their hopes on the Saudis coming to the rescue (and fill the Iranian output gap), perhaps the news that our Middle-East 'allies' cut both production and exports in December will stymie any euphoria.

Now that the bipolar market has once again resynced general risk appetite with the EURUSD (high Euro -> high ES and vice versa), everything in the macro front aside from European developments, is noise (and the occasional reminder by data adjusting authorities in the US that the country can in fact decouple with the entity responsible for half the world's trade. This will hardly come as a surprise to anyone. In fact, the conventional wisdom as shown by Goldman's latest client poll has European sovereign crisis worries far in the lead of all macro risks. Behind it are Iran and nuclear tensions, China hard-landing, the US recovery/presidential election and the Japanese trade deficit/record debt/JGB issues. Which for all intents and purposes means that the next big "surprise" to the market will be none of the above. What are some of the factor not listed as big macro risks? According to David Kostin 'Risks that clients did not mention include late March US Supreme Court review of health care reform (implications for 12% of S&P 500); mid-year deadline to implement Dodd-Frank financial reform (14% of market); and the French Presidential election on April 22nd where polls show incumbent Nicolas Sarkozy trails opposition candidate Francois Hollande." Oddly enough, one very crucial item missing is once again surging inflation courtesy of trillions in stealthy central banks reliquification, sending crude to the highest since May 2011, and the most expensive gas price in January on record.

The geopolitical game theory escalates once again, as Iran, which four days ago halted exports to peripheral European countries took it up a notch, and has as of this morning halted sales to British and French companies. Reuters reports: "Iran has stopped selling crude to British and French companies, the oil ministry said on Sunday, in a retaliatory measure against fresh EU sanctions on the Islamic state's lifeblood, oil. "Exporting crude to British and French companies has been stopped ... we will sell our oil to new customers," spokesman Alireza Nikzad was quoted as saying by the ministry of petroleum website." Here is the actual statement from MOP.ir. As a reminder, on January 27 we said how Iran was about to "Turn Embargo Tables: To Pass Law Halting All Crude Exports To Europe." And so it has - now, the relentless media campaign about China isolating Iran in response to American demands has to be respun: recall that in early February Reuters told us that "China will halve its crude oil imports from Iran in March compared to average monthly purchases a year ago, as a dispute over payments and prices stretches into a third month, oil industry sources involved in the deals said on Monday." Apparently that may not have been the case, as there is no way Iran would have escalated as far as it has unless it had replacement buyers of one third of its crude. Incidentally, this is just as we predicted in "A Very Different Take On The "Iran Barters Gold For Food" Story." The end result of this senseless gambit by the west: Europe has less oil, the Saudi fable that it has endless excess suplies is about the be seriously tested, China has just expanded a key crude supply route, and Russia is grinning through it all as Brent prices are about to spike. Iran didn't invent chess for nothing.

QE 3?  Been there, done that

In a 60-36 vote, Senate just passed the payroll tax extension, previously voted through by Congress. From Reuters: "The U.S. Senate on Friday passed legislation extending a tax cut for 160 million workers and long-term jobless benefits through December, clearing the way for President Barack Obama to sign the measure into law. The Senate approval by a simple majority vote followed the House of Representatives' approval earlier on Friday. The legislation, which also extends current payment rates to doctors through the Medicare health care program for older Americans, will add $100 billion to the U.S. deficit and is aimed at further stimulating the economy." As a reminder, all this means is that a repeat of the debt ceiling fiasco is now virtually assured before the presidential election as discussed here, which explains the GOP's willingness to pass this through as fast as possible with no offsetting spending cuts. As for the benefits of $1000/taxpaying household, the recent rise in gasoline prices has already offset those. One can only hope that crude prices are as susceptible to successful central planning intervention as all other assets, or else many more extensions will be needed before the year is over.

Market participants continued to react positively to yesterday’s reports that Euro-zone central banks, via the ECB, are to exchange the Greek bonds they hold for new bonds, without CAC’s, to help the Greek debt deal. As a result, stock futures traded higher throughout the session, led by the financials sector, while the health-care sector which is characterised by defensive-investment properties underperformed. Looking elsewhere, EUR/GBP traded briefly below the 0.8300 level, while GBP/USD continued to consolidate above the 1.5800 level following the release of better than expected retail sales. Hopes that a Greek deal is in the pipeline also lifted EUR/USD, which trades in close proximity to an intraday option expiry at 1.3110.