Crude Oil

If at first you don't succeed, try, try, keep trying again and again. That appears to be the mantra of Goldman's credit strategists.

Last night's surprisingly large inventory build reported by API (+2.9mm vs expectations of -2.5mm) sent hopeful crude prices reeling (not helped by comments from Iran and Saudi this morning). Following last week's huge 5.9mm draw, DOE reports a 2.63mm build (confirming API's data). Cushing (which API reported as a 923k build) also saw DOE report a 0.9mm barrel build (pushing closer to its limits). As we have detailed previously, December typically sees major drawdowns in inventory as energy firms attempt to minimize tax burdens into year-end. December 2015 has seen a notably lower drawdown.

• Oil rebound fizzles, sending global shares lower (Reuters)
• Saudi Arabia Won’t Change Oil Production (WSJ)
• China suspends forex business for some foreign banks (Reuters)
• Republicans come up short in search for diverse voters in 2016 election (Reuters)
• Oil Prices Become a Problem for U.S. Steelmakers (BBG)
• Oil-Producing States Battered as Tax-Gushing Wells Are Shut Down (BBG)

With just two days left in 2015, the main driver of overnight global stocks and US equity futures remains the most familiar one of all of 2015 - crude oil, which, after its latest torrid bounce yesterday has resumed the familiar "yoyo" mode, and again stumbled dropping below $37 on yesterday's surprising API 2.9 million crude inventory build, as well several more long-term "forecasts" by OPEC members, with Kuwait now budgeting for $30 oil, while Venezuela's Maduro said the oil price fell to $28/bbl and is "headed downward." As a result U.S. futures declined and European stocks fell, extending their worst December drop since 2002 in thin volume on the last full trading day of the year.

"At current prices we estimate that valuations for the oil and gas group reflect an implied Brent crude oil price in the range of $65-70/bbl while natural gas leveraged companies reflect a Henry Hub natural gas price in the range of $3.00/Mcf."

It appears $38 is the new strange attractor for WTI Crude oil as it coincides with the last two weeks' "opposites" inventory data releases. Brent and WTI continue to hug each other for the 3rd day in a row. We await tonight's API inventory data (expected to see a 2.5mm draw) for the next move in crude (and therefore US equities).

Santa Claus is cutting it close: after stocks closed down yesterday, and just fractionally red for the year, the jolly old gift-giver (who now has activist investors breathing down his neck) has just three trading days to push if not stocks then the market into the green for the year. And so far, so good, with US equity futures rising by 8 points or 0.4%, on the back of some modest renewed Dollar strength but mostly on oil, which after yesterday's big slide, has managed to stem the decline and is up fractionally, just under $37, along with other commodities if not copper, which falls for second day.

Most people assume that prices move as a result of changes in the money supply. Instead, let’s look at the effect of changes in interest.

Congress ended the U.S. crude oil export ban last week. There is apparently no longer a strategic reason to conserve oil because shale production has made American great again. At least, that’s narrative that reality-averse politicians and their bases prefer. Congress’ decision to lift the 40-year U.S. ban on crude oil exports reflects the same misinformed and distorted thinking that declares that the world’s highest cost producer - tight oil - can somehow also be the world’s swing producer.

Imagine if Casinos told you in advance what the next card from the deck in a game of Blackjack was going to be?

After a Q1 collapse, the Dallas Fed Manufacturing Outlook managed a bounce for a few months (though never got back above zero). It appears, Dallas Fed's aptly-named 'Dick' Fischer was entirely wrong when he progonosticated that "on net, low oil prices are good for Texas." December's Dallas Fed print crashed to -20.1 (from -4.9) massively missing expectations of -7.0 and back at the lows not seen since June 2009.

The sustainable floor price for oil is a Brent price in the range of $30-35/bbl. Oil prices could temporarily fall below that level; however, companies would begin to shut-in production as variable production costs would exceed cash flow for some projects

The last trading week of 2015 begins on a historic precipice for stocks: as reported over the weekend, the U.S. stock market has not been lower for any year ending in a “5? since 1875. That streak is now in jeopardy, because following Thursday's shortened holiday session which ended with an abrupt selloff, the overnight session has seen continued weakness across global assets in everything from Chinese stocks which tumbled the most since November 27, to commodities (WTI  is down 2.5%) to European stocks (Stoxx 600 -0.4%), to US equity futures down 0.4% on what appears to be an overdue dose of Santa Rally buyers' remorse.

Q. Could oil prices collapse to $20?
A. The short answer is ‘yes.’ We believe that crude oil prices could fall further unless global oil production is reduced.  We believe that the weakness in crude oil prices reflects a combination of fundamental factors and financial flows. Fundamentally there is simply too much oil... the current supply-demand balance is not sustainable; something has to give.

Recently, former CIA deputy director Michael Morell told Charlie Rose on PBS that the reason the US had never actually gone after the lifeblood of the ISIS regime, its oil supply chain, infrastructure and products, was because "we didn’t want to do environmental damage, and we didn’t want to destroy that infrastructure." Luckily as the clip below shows, the Russian military has no such qualms.