OPEC

In reviewing the financials of one of the largest shale producers in the United States, Whiting Petroleum, we can’t help but notice the parallels to the .COM era of 1999 which, to some extent, has already returned to the technology and biotech sectors of today.

Less than four months into his reign, Bloomberg reports that Saudi Arabia’s King Salman is consolidating power with a major reshuffle of succession lines and government officials. "The new king has proved consistent in his determination to elevate members of his close family to key positions," noted one analyst. As the world’s top oil exporter plays a more prominent role in the region’s power struggles, it apears Salman wants family close. Oil policy is unlikely to change, notes Bloomberg's Julian Lee, as this brings younger men into top government positions, paving way for transfer of power to new generation of princes.

There is mounting evidence that oil prices are poised to rebound from a historic bust. But what if the bust is not over yet? Despite the signs of a rebound, ExxonMobil’s CEO Rex Tillerson has a much more bearish take on oil prices. Speaking at the IHS CeraWeek conference in Houston, Tillerson predicted that oil prices would remain subdued for the next several years.

Saudi Arabia is not trying to crush U.S. shale plays. Its oil-price war is with the investment banks and the stupid money they directed to fund the plays. It is also with the zero-interest rate economic conditions that made this possible. Saudi Arabia intends to keep oil prices low for as long as possible.

Nothing is ever permanent with the QE’s because they were doomed from the start. The “dollar” system can never be refined and remade to its prior station because it was irrevocably broken on August 9, 2007. All that QE’s have done is to create reverberation within the downward channel which may, in the end, only exacerbate the degree of imbalance that weighs on the inevitable shift.

Everyone this week focused on the slight production declines that this was a sign to go long oil, but what seemed to go under the radar was another build in both Cushing and the Gulf Coast storage hubs.

In order to maintain a grip on market share by pushing U.S. shale producers out of the market, Saudi Arabia (and OPEC) is willing to use up its spare capacity. That could lead to a price spike.

 Oil prices should become 'lower for longer", but the wild card would be the OPEC meeting this June... 

As hopeful US investors buy everything oil-related on the back of a lower than expected crude build this week (after the biggest build in 30 years the week before), The Kingdom has stepped up overnight and ruined the dream of supply-restrained price recovery as it announced a surge in production output in March to yet another record high. The nation boosted crude output by 658,800 barrels a day in March to an average of 10.294 million a day, which as Bloomberg notes, is about half the daily production from the Bakken formation. WTI Crude prices have slipped by around 2% from yesterday's NYMEX Close ramp highs as it appears Saudi Arabia is not willing to just let this effort to squeeze Shale stall.

A “soft landing” is unlikely. 

Just as the S&P appeared set to blast off to a forward GAAP PE > 21.0x, here comes Greece and drags it back down to a far more somber 20.0x. The catalyst this time is an FT article according to which officials of now openly insolvent Greece have made an informal approach to the International Monetary Fund to delay repayments of loans to the international lender, but were told that no rescheduling was possible.  The result if a drop in not only US equity futures which are down 8 points at last check, but also yields across the board with the German 10Y Bund now just single basis points above 0.00% (the German 9Y is now < 0), on its way to -0.20% at which point it will lead to a very awkward "crossing the streams" moment for the ECB.

Back in November we chronicled the (quiet) death of the Petrodollar, the system that has buttressed USD hegemony for decades by ensuring that oil producers recycled their dollar proceeds into still more USD assets creating a very convenient (if your printing press mints dollars) self-fulfilling prophecy that has effectively underwritten the dollar’s reserve status in the post WWII era. Now, with oil prices still in the doldrums, oil producers are selling off their USD assets in a frenzy threatening the viability of petrocurrency mercantilism and effectively extracting billions in liquidity from the system just as the Fed prepares to hike rates.

• China growth slowest in six years, more stimulus expected soon (Reuters)
• EU charges Google over shopping searches, to probe Android (Reuters)
• A Chinese Paradox: Slow Growth Is Good, Stock Bubbles Welcome (BBG)
• Draghi Seen Dispelling Duration Doubts About QE Program (BBG)
• IEA Sees OPEC Supply Jumping Most in Four Years on Saudi Surge (BBG)
• SEC Reaches Settlement with Former Freddie Mac  (WSJ)
• Kerry says confident Obama can get final deal on Iran (Reuters)
• Regulators Call for Short-Term Loan Changes to Handle ‘Too-Big-to-Fail’ (WSJ)
• Florida Doctor Linked to Sen. Robert Menendez Indicted for Medicare Fraud (WSJ)

If yesterday stocks surged on the worst 4-month stretch of missing retail sales since Lehman, one which BofA with all seriousness spun by saying "it seems not unreasonable to suspect that the March 2015 reading on retail sales gets revised up next month", then the reason why futures are now solidly in the green across the board even as German Bunds have just 14 bps to go until they hit negative yields and before the ECB is fresh out of luck on future debt monetization, is that overnight China reported its worst GDP since 2009 together with economic data misses across the board confirming China's economy continues its hard landing approach despite a stock market that has doubled in the past year.

In recent weeks the sell side analysts who cover energy have become so complacent that they merely plug in the current strip prices into their earnings models for E&P companies. Not one, except Mike Rothman at Cornerstone Analytics, is questioning the “why?” or “how?” of what is occurring. The 200 or so players who effectively control the oil futures market have changed behavior and expectations as the oil price curve has collapsed. Prices from late 2016 into 2018 are essentially flat in the low to mid 60s, believe it or not, which would essentially bankrupt most of OPEC, US conventional oil, part of US shale and deep offshore drilling. So ask where is the oil going to come from? Yet the madness continues until investors realize E&P companies need a higher price to justify investments in the space.