International Energy Agency

"This is a golden time window to acquire more strategic oil at lower costs," notes one Hong-Kong based analyst, as Bloomberg confirms what we have noted here and here, that China is emerging as the winner from OPEC’s battle with rival oil producers as the world’s biggest energy consumer stockpiles crude.

The oil industry is no longer what it once was, it’s not even a normal industry anymore. Oil companies sell assets and borrow heavily, then buy back their own stock and pay out big dividends. What kind of business model is that? Well, not the kind that can survive a 40% cut in revenue for long. Cheap oil a boon for the economy? You might want to give that some thought.

The precipitous decline in the price of oil is perhaps one of the most bearish macro developments this year. We believe we are entering a “new oil normal,” where oil prices stay lower for longer. While we highlighted the risk of a near-term decline in the oil price in our July newsletter, we failed to adjust our portfolio sufficiently to reflect such a scenario. This month we identify the major implications of our revised energy thesis.  The reason oil prices started sliding in June can be explained by record growth in US production, sputtering demand from Europe and China, and an unwind of the Middle East geopolitical risk premium. The world oil market, which consumes 92 million barrels a day, currently has one million barrels more than it needs.... Large energy companies are sitting on a great deal of cash which cushions the blow from a weak pricing environment in the short-term. It is still important to keep in mind, however, that most big oil projects have been planned around the notion that oil would stay above $100, which no longer seems likely.

Russia finds itself in familiar territory after a controversial half-year, highlighted by the bloody and still unresolved situation in Ukraine. Nonetheless, the prospect of further sanctions looms low and Russia’s stores of oil and gas remain high. Shortsighted? Maybe, but Russia has proven before – the 2008 financial crisis for example– that it can ride its resource rents through a prolonged economic slump. Higher oil price volatility and sanctions separate the current downturn from that of 2008, but Russia’s economic fundamentals remain the same – bolstered by low government debt and a large amount of foreign reserves.

It was heinous. It was underhanded. It was beyond the bounds of international morality. It was an attack on the American way of life. It was what you might expect from unscrupulous Arabs. It was “the oil weapon” -- and back in 1973, it was directed at the United States. Skip ahead four decades and it’s smart, it’s effective, and it’s the American way. The Obama administration has appropriated it as a major tool of foreign policy, a new way to go to war with nations it considers hostile without relying on planes, missiles, and troops.  It is, of course, that very same oil weapon.

Amid the recent weakness in stocks and strength in the USDollar, we are constantly reassured by talking heads that major stock market declines only happen during recessions. While that may be technically correct, perhaps it is worth pondering: "Did a recession cause the correction, or did the correction cause the recession?"

Next time you get into your car and drive to the supermarket, think about how much energy you consume on an annual basis. It is widely assumed that Westerners are some of the world’s worst energy pigs. While Americans make up just 5 percent of the global population, they use 20 percent of its energy, eat 15 percent of its meat, and produce 40 percent of the earth’s garbage. Europeans and people in the Middle East, it turns out, aren't winning any awards for energy conservation, either. Oilprice.com set out to discover which countries use the most energy and why. While some of the guilty parties are obvious, others may surprise you.

America is betting the kitchen sink on natural gas. No matter which estimate you look at -- the U.S. Energy Information Administration, the International Energy Agency, or Wall Street banks -- two things are clear: the United States is slated to consume enormous amounts of natural gas and the dominant fuel of electricity generation for the last 50 years, coal, is diminishing. For everyone’s sake, let’s hope the gamble pays off. Because if natural gas fails to live up to the high expectations, there will be less coal to back it up.

• Russia faces new U.S., EU sanctions over Ukraine crisis (Reuters)
• Glasgow pulls no punches in welcome to 'Save the Union Express' (Guardian)
• Pound Seen Tumbling Up to 10% on Scottish Yes Vote (BBG)
• Moscow stifles dissent as soldiers return in coffins (Reuters)
• Ukraine's leader sees no military solution of crisis, eyes reforms (Reuters)
• Venezuela Threatens Harvard Professor for Default Comment (BBG)
• Australia Raises Terror Alert to Highest Level in a Decade (BBG)
• Activist Investors Build Up Their War Chests (WSJ)

Ways for retail investors, and institutions small and large, to monetize a fundamental or economic outlook that the muppet masters will never tell you!

What this chart shows is that when it comes to core manufacturing and service trade, that which excludes petroleum, the US trade deficit hit some $49 billion dollars in the month of May, the highest trade deficit ever recorded! In other words, far from doubling US exports, Obama is on pace to make the export segment of the US economy the weakest it has ever been, leading to millions of export-producing jobs gone for ever (but fear not, they will be promptly replaced by part-time jobs). It also means that the collapse in Q1 GDP, much of which was driven by tumbling net exports, will continue as America appear largely unable to pull itself out of its international trade funk, much less doubling its exports.

• At least 74 dead in crashes similar to those GM linked to faulty switches (Reuters)
• Obama Calls for $1 Billion Europe Security Fund; Will Increase U.S. Military Presence in Eastern Europe (WSJ)
• Euro Inflation Slowing More Than Forecast Pressures ECB (BBG)
• China accelerates as euro zone stumbles (Reuters)
• Russia says Ukraine situation worsening, submits U.N. resolution (Reuters)
• Secondary Sales Squeeze Investors (WSJ)
• Barclays Said to Start Cutting Jobs in Investment Banking Unit (Bloomberg)
• Backlash Grows on Release of Sgt. Bowe Bergdahl in Taliban Prisoner Swap (WSJ)
• For fallen soldiers' families, Bergdahl release stirs resentment (Reuters)
• PIMCO's Gross stares at record outflow (Reuters)

The two big stories of our day are: (1) Our economic problems: The inability of economies to grow as rapidly as they would like, add as many jobs as they would like, and raise the standards of living of citizens as much as they would like. Associated with this slow economic growth is a continued need for ultra-low interest rates to keep economies of the developed world from slipping back into recession; and (2) Our oil related-problems: One part of the story relates to too little, so-called “peak oil,” and the need for substitutes for oil. Another part of the story relates to too much carbon released by burning fossil fuels, including oil, leading to climate change. While the press treats these issues as separate stories, they are in fact very closely connected, related to the fact that we are reaching limits in many different directions simultaneously.

The potential for a golden age of gas comes along with a big “if” regarding environmental and social impact. The International Energy Agency (IEA) - the "global energy authority" - believes that this age of gas can be golden, and that unconventional gas can be produced in an environmentally acceptable way.

One of the more interesting aspects of the Arab Spring is that it largely spared the Gulf monarchies. To be sure, the monarchies in Bahrain and Jordan had to contend with a degree of unrest. Still, the core of the Arab Spring protests occurred in the Arab Republics, some of which fell from power. By comparison, the monarchies in the region - many of which are located in the Persian Gulf - were spared the worst of the unrest. Although this possibility cannot be discounted, the Persian Gulf and other Arab monarchies face a much graver threat to their stability, and that threat originates in Asia. Specifically, the economic slowdowns in Asia in general, and China and India in particular, could very well ignite a second Arab Spring, and this one would not spare the monarchies.