Arthur Berman: Why The Price Of Oil Must Rise

Submitted by Adam Taggart via PeakProsperity.com,

Geologist Arthur Berman explains why today’s low oil prices are not here to stay, something investors and consumers alike should be very aware of. The crazy-low prices we’re currently experiencing are due to an oversupply created by geopolitics and (historic) easy credit, not by sustainable economics.

And when the worm turns, we are more likely than not to experience a sudden supply shortfall, jolting prices viciously higher. This will be a situation not soon resolved, as the lag time for new production to come on-line will be much longer than the world wants:

The same things that always drive prices in the end it’s always about fundamentals. The markets are peculiar and they change every day. But the fundamentals of supply and demand at some point markets come back to those and have to adjust accordingly. Not on a daily basis, maybe not even on a monthly basis. But eventually they get it right. So this oil price collapse is really straight forward as far as I can tell, and it has to do with cheap stupid money because of artificially low interest rates that resulted in over-investment in oil — as well as lots of other commodities that are not in my area of specialty, but that’s what I see. And over-investment led to over-production and eventually over-production swamped the market with too much supply and the price has to go down until we work our way through the excess supply.

Continue reading “Arthur Berman: Why The Price Of Oil Must Rise”

WHERE’S OUR F#%KING SAVINGS

Every day I look at the gas price sign at the Exxon as I get on the Northeast Extension of the Turnpike. It just sits there at $2.64 per gallon. It has been in that general vicinity for weeks. Then I think to myself WTF. I know oil prices have been plunging for the last two months. Where’s my fucking savings!!!

I’m tired of the bullshit about refinery maintenance, summer driving, and all the other made up excuses for why gas prices aren’t falling. Oil prices today are under $41 per barrel. They have fallen 33% since June 24. National gas prices are actually higher today than they were in early August. Gas prices have only fallen a minuscule 5% since June 24. 

When oil prices rise, gas prices shoot up instantaneously. I want my fucking savings and I want it now!!!

Who do I see about this?


When Will Oil Prices Turn Around?

Look for some good news about oil prices this week…maybe.

EIA releases its Short-Term Energy Outlook (STEO) on Tuesday (August 11) and IEA publishes its August Oil Market Report (OMR) on Wednesday (August 12). I hope to see a small increase in world demand and relatively flat supply.  That will bring the market somewhat closer to balance and prices may increase or, at least, stop falling.

Meanwhile, the view among most analysts is grim. On Monday, The Wall Street Journal’s Money & Investing headline read “No Relief in Sight for Crude: Oil’s Malaise could last for years.”  In late September, Bloomberg wrote, “Oil Warning: The Crash Could Be the Worst in More Than 45 Years.” As recently as mid-June, analysts were confident that oil prices were rebounding toward “normal” because both Brent and WTI had risen from low $40- to low-$60 levels.

When many were celebrating a return to higher prices, I warned that prices would fall. Now, when most are proclaiming lower oil prices ahead, I am looking for a bottom to the price slump.

Don’t get me wrong: this is not going to be anything dramatic but, if I’m right, it will add another month of data that suggests flattening production and increasing demand.

I have not changed my view that we have crossed a boundary and things are fundamentally different than before. My colleague Rune Likvern published a post today that details the key reasons why this substantive market shift has occurred.

As I wrote in late June, the world is a fundamentally different place post-the 2008 Financial Collapse and some markets, including oil, no longer respond as they did before. This is a function of even more massive debt than prior to the Collapse and monetary policies that have sustained artificially low interest rates for 6 years. Cheap money has fostered the expansion of oil and other commodity supplies beyond the weakened global economy’s capacity to absorb them. Also, the anticipated de-leveraging of debt has not occurred.

Continue reading “When Will Oil Prices Turn Around?”

WHERE’S OUR GAS SAVINGS?

I understand the concept of lag effect, but this seems a little extreme. Does it seem that when the price of oil goes up, gas prices go up immediately? And when oil prices fall, gas prices don’t fall as rapidly? Your feeling is confirmed by the facts. We’ve had quite a roller coaster ride of oil and gas prices this year.

The first chart shows gas prices bottoming around April 1 at $2.38 per gallon. Oil prices were at $48 per barrel. Oil reached $61 per barrel on June 24. That was a 27% increase in less than three months. Gasoline prices rose to $2.80 by June 24. That 17% rise tracked the oil price rise almost to the penny when you take the gasoline taxes out of the equation. The oil companies did not eat any of the price increase in oil. They passed it along to you immediately.

It’s been a different story on the way down. Oil has fallen from $61 per barrel on June 24 to $44.50 today. That happens to be a 27% decrease in about six weeks. Meanwhile, the price of gasoline has only drifted down to $2.63, a miniscule 6% drop. Why hasn’t it dropped 18%? It went up 18% when oil rose by 27%. It seems the oil companies aren’t quite as flexible when prices are dropping. They have executive bonuses to pay themselves. They are so busy firing thousands of employees, they haven’t had time to reduce prices at the pump. The screwing will continue until morale improves.

For Oil Price, Bad Is The New Good

Lately, oil prices have gone up when they should have gone down. In the last week, OPEC decided not to cut production and the two major energy agencies reported that the world over-supply problem is getting worse.  Brent futures increased from $62 to $65. Bad is the new good.

The expected bad news on Friday, June 5 that OPEC would not cut production was skillfully cloaked in positive statements about growing demand. On Monday, June 8, Brent opened at $62.69 and rose to $65.70 over the next two days.

On Tuesday, June 10,  the EIA published its monthly Short-Term Energy Outlook (STEO) that showed that the production surplus responsible for low oil prices had increased in May to almost 3 million barrels per day (bpd).

http://www.artberman.com/wp-content/uploads/World-Liquids-Production-Surplus-or-Deficit-Brent-Crude-Oil-Price_June-2015-.jpg
Figure 1. World liquids production surplus or deficit and Brent crude oil price. Source: EIA and Labyrinth Consulting Services, Inc.
(Click image to enlarge)

Continue reading “For Oil Price, Bad Is The New Good”

Oil Price Recovery Or “Dead Cat” Bounce

 


Since the beginning of the year oil prices (using West Texas Intermediate Crude as a proxy) have bounced from their lows following the collapse last year. Many are speculating that the “damage has been done” and now prices should begin to recover, hopefully, to much higher levels in the near future.

My view is somewhat different as the recent recovery in prices has all the earmarks of a technical “dead cat” bounce rather than a fundamentally driven recovery story. Let’s start with the chart below which is a MONTHLY chart of oil prices as compared to a 4-year moving average.

Oil-Prices-Technical-4yrAvg-052814

The break below the long-term bullish trend suggests that a tremendous amount of technical damage has been done over the last nine months which is unlikely to be resolved in the short-term.

From an investor psychology view, many individuals were trapped by the collapse in oil prices. After buying into energy stocks near the peaks, many are now hoping for an opportunity to exit positions on the bounce. The dashed blue line shows the current downward trend of the 4-year moving average that will likely act as a confining resistance level for quite some time. Rallies in oil prices toward these levels will be met by investors looking to sell out of losing positions.

Furthermore, the number of net reportable crude contracts has surged from deeply depressed levels which has created a “short squeeze” in the underlying commodity prices. However, the last time that net reportable contracts were at the current levels, oil prices were over $100/bbl rather than $60. This data also suggests the recent bounce in oil prices is likely temporary as well.

Oil-Prices-NetContracts-052814

The current level of speculation in oil prices suggests that another leg down will likely come during the summer months particularly as supplies continue to build as global demand continues to slide.

Continue reading “Oil Price Recovery Or “Dead Cat” Bounce”

Hope Fades: U.S. Storage Withdrawals About Price, Not Supply & Rig Count Drop Stalls

Guest Post by Art Berman

Storage withdrawals and falling rig count have been the main sources of hope that U.S. tight oil production will fall and that oil prices will rebound. That hope is fading as it is now clear that recent withdrawals from U.S. crude oil storage are because of price, not falling supply, and that the drop in rig count has stalled.

Figure 1 below shows the relationship between U.S. crude oil storage inventory and WTI price. The thinking around recent withdrawals from storage is that this reflects depleting supply. The data, however, reflects that traders were storing crude oil during the price collapse in order to realize higher prices later. With rising prices over the last month, traders are selling their stored volumes. The recent inventory build correlates almost perfectly with the fall in oil prices and the withdrawals from storage over that last 3 weeks correlate with the 35% increase in oil prices since late March.

http://www.artberman.com/wp-content/uploads/US-Crude-Oil-Inventory-WTI-23-May-2015.jpg
Figure 1. Monthly change in U.S. crude oil inventory and WTI oil price (3-month moving average of inventory volumes). Source: EIA and Labyrinth Consulting Services, Inc.
(click to enlarge image)

Previous builds and withdrawals from inventory also correlate with price but generally price followed changes in inventory. In the recent case, price lead inventory changes.

Continue reading “Hope Fades: U.S. Storage Withdrawals About Price, Not Supply & Rig Count Drop Stalls”

Oil Prices Will Fall: A Lesson in Gravity

Guest Post by Art Berman

The oil price collapse is not over yet.  It is more likely that Brent price could fall back into the mid-$50 range than that it will continue to rise toward $70 per barrel.

That is because oil prices have risen based on sentiment alone. The fundamentals of supply and demand indicate a dismal reality: oil prices will fall and may fall hard in the near term.

Our present situation is like that of the cartoon character Wile E. Coyote.  He routinely ran off of a cliff and as long as he didn’t look down, everything was fine.  But as soon as he looked down and saw that there was no ground beneath him, he fell.  Hope and momentum cannot overcome gravity.

WILE E COYOTE SERIES 17 MAY 2015
Figure 1. Wile E. Coyote cartoons.  Sources:  The Braiser, Dubsisms and Forbes.

Neither can ignoring the data.

When I look down from $60 WTI and almost $68 Brent, I see no support except sentiment. Like Wile E. Coyote, we need a gravity lesson about oil prices.  What goes up for no reason, will come down sooner than later and it may fall hard.

Let’s examine the facts.

Continue reading “Oil Prices Will Fall: A Lesson in Gravity”

PIN MEET HOUSING BUBBLE 2.0

Housing bubble 2.0 just met Pin 2.0

The 30 Year U.S. Treasury bond yield hit 2.35% yesterday. That is the lowest rate in U.S. history for the 30 Year Treasury. During the deepest darkest depths of the recession in March 2009, after the stock market had fallen over 50%, the yield was 3.5%. One year ago it was yielding 4.0%. Long term interest rates are not controlled by Yellen. They reflect the economic prospects of the country. When they are rising it means the economy is doing well. When they are plummeting to all time lows, the economy is either in recession or headed into recession. Take your pick. No amount of government data manipulation, feel good propaganda spewed by the captured mainstream media, or Ivy League educated Wall Street economist doublespeak, can change the fact this economy is in the dumper and headed much lower. The Greater Depression is resuming its downward march toward inevitable war.

ust30low

  • KBH SEES 1Q BOTTOM LINE ABOUT BREAK-EVEN (against expectations of a 17c rise!)
  • KB HOME CFO SAYS FIRST-QUARTER MARGINS EXPECTED TO BE DOWN
  • KB HOME PULLED OUT OF `COUPLE’ HOUSTON LAND DEALS, CEO SAYS
  • LENNAR CFO SAYS MARGINS ARE POISED TO NARROW ON LESS PRICING POWER
  • LENNAR GROSS MARGIN DECLINED & SALES INCENTIVES GREW
  • LENNAR CEO SAYS “ACROSS THE BOARD, WE’RE SEEING INTENSIFIED COMPETITION AS BUILDERS GO OUT AND CHASE VOLUME”

KB Home had revenues of $2.4 billion in 2014. They are one of the largest home builders in the country. It’s stock has dropped 30% in the last few days. It’s down 40% from its February 2014 high. It’s down 85% from its 2005 high. It had $9 billion of revenues and delivered 60,000 homes in 2005. Then Pin 1.0 popped the first bubble. Revenues collapsed to $1.3 billion and they lost hundreds of millions from 2007 through 2012.

Lennar had revenues of $7.0 billion in 2014. They are the largest home builder in the country. It’s stock has dropped 9% this week. It had been trading at a seven year high, but is still trading 33% below its 2005 bubble high. It had $14 billion of revenues and delivered 42,000 homes in 2005. Then Pin 1.0 popped their bubble. Revenues imploded to $3 billion and they also lost hundreds of millions from 2007 through 2012.

Their admissions earlier this week are proof Bubble 2.0 has met Pin 2.0. KB Home’s 85% increase in revenue and Lennar’s 130% increase in revenue since 2011 have been nothing but a Federal Reserve/Wall Street/U.S. Treasury engineered scheme to repair the balance sheets of the insolvent Too Big To Trust Wall Street banks. The financial industry oligarchs and their servile lackey puppet politicians decided an easy money, Wall Street created scheme to boost home prices would benefit the .1% and restore some of their fraudulently acquired wealth. It isn’t a coincidence home prices rose in parallel with the Fed’s QE programs. And it isn’t a coincidence the bubble is rapidly deflating now that QE3 is over.

The fraudulent nature of the supposed housing recovery can be deciphered by analyzing a few pertinent data points. 30 year mortgage rates were in the 5% to 6% range during the first bubble. Mortgage rates have been consistently below 4% for the last three years. In a healthy market driven economy, these low rates should have brought in first time home buyers and led to a sustainable long-term recovery.

Instead, the number of homes bought by first time buyers has languished at record low levels. The majority of homes sold in 2011 and 2012 were distressed foreclosures and short sales, and the vast majority of sales in the last two years have been to Federal Reserve financed Wall Street investors, Chinese billionaires and fast buck flippers. New home sales of just above 400,000 five years into an economic recovery are at previous recession lows, despite record low mortgage rates. They languish 65% below 2005 levels, when KB Home and Lennar were minting money. Existing home sales of 5 million are back at 1999 levels and 30% below the 2005 highs. This pitiful result is after $3.5 trillion of QE, extremely low mortgage rates, and tremendous hype from the NAR and the corporate MSM (It’s always the best time to buy).

The falsity of the housing recovery storyline can be seen in the fact that mortgage applications linger at 1995 levels, even though mortgage rates are 400 basis points lower than they were in 1995. A critical thinking individual might ask how home prices could rise by 20% since 2012 even though mortgage purchase applications are 20% lower than they were in 2012 and 65% below 2005 levels. The answer is they couldn’t have risen by 20% without massive monetary manipulation and insider deals between Wall Street banks, Wall Street hedge funds, FNMA, Freddie Mac, The Fed, and the U.S. Treasury.

gt10mbap

You see, average Americans buy houses not as an investment, but as a place to live. They save enough for a down payment by spending less than they earn, and then make monthly payments for 30 years from their rising household income. Of course, that was the old days. Real median household income is exactly where it was in 1995. It is currently below the level of 1989. Average Americans have made no headway in 20 years. The median price of a home in 1995, according to the Census Bureau, was $128,000. The median price of a home today is $281,000. When prices go up 120% and your real income remains stagnant, even record low mortgage rates is just pushing on a string. With real wages continuing to fall, young people saddled with a trillion dollars of student loan debt, the full impact of the Obamacare neutron bomb (kills small business, doctors and jobs, but not insurance conglomerates or government bureaucracy) just detonating, and an economy clearly going into the tank, there is absolutely no possibility of a real housing recovery in the foreseeable future.

nnnnffffff

The Too Big To Trust banks have consistently accounted for 35% to 55% of all mortgage originations in the U.S. over the last four years. Wells Fargo is the undisputed leader. All of these banks have reported dreadful financial results this week, with plunging revenues and profits, even with accounting shenanigans like relieving loan loss reserves and marking their balance sheets to fantasy rather than true market values. In the midst of a supposed housing recovery, with mortgage rates at historic lows, the largest mortgage originator in the world, saw their mortgage originations FALL by 12% over last year. They are down 65% from two years ago. JP Morgan and Citigroup also saw their mortgage businesses contracting. These banks have been firing thousands of people in their mortgage divisions. This is surely a sign of a healthy growing housing market. Right?

Essentially, the entire housing recovery storyline has revolved around the Federal Reserve providing free money to Wall Street banks, who then withheld foreclosures from the market, sold them in bulk at inflated prices to Wall Street hedge funds like Blackstone, who then created a nationwide rental business, driving prices higher. FNMA and Freddie Mac did their part by selling their bulk foreclosures to the same connected hedge funds. The average person had no opportunity to bid on foreclosed homes and reap the benefits of lower prices. Blackstone has since created a new derivative, by packaging their rental income streams into an “investment” to sell to muppets. Their rental properties are concentrated in the previous bubble markets of Arizona, California, Florida, and Nevada. What a beautiful business concept. Free money from their Federal Reserve sugar daddy, kicking people out of their homes and then renting their houses back to them, driving prices higher by restricting supply and stopping new household formations, double dipping by creating a new exotic subprime investment opportunity, and then exiting stage left before it all blows sky high again.

Continue reading “PIN MEET HOUSING BUBBLE 2.0”

CANADIAN HOUSING MARKET ABOUT TO GO KABOOM, EH

Guest Post by Dr. Housing Bubble

 

The Canadian housing bubble makes California real estate look sensible: Crash in energy prices will put pressure on home values up north as Canadians go into maximum leverage.

 

As the year comes to a close, it is useful to put things into perspective. Sure, California has a love affair with real estate and we go through our traditional booms and busts. $700,000 crap shacks now litter the landscape but there are fewer and fewer lemmings taking the plunge. In Canada there was no correction. In fact, households continue to go into deep debt to purchase real estate. The argument goes that mortgage standards are much tighter in Canada so therefore, they are much more enlightened when it comes to financing homes. People forget that the bulk of the 7,000,000 foreclosures in the US came in the form of standard loans. Garbage loans imploded in more dramatic fashion but people lost their homes because the economy shifted. At that point, it merely meant covering the monthly nut. We were housing dependent and that market contracted aggressively. Canada is housing and oil dependent. And oil just got a big kick to the shins.

In Canadian debt we trust

There was an inflexion point for US markets when household debt surpassed household income. People kept saying it was a liquidity crisis initially but it was truly a solvency crisis. People took on too much debt and were walking on a financial tightrope. In the US, this peaked above 120 percent. Canada is well on its way above 160 percent:

Canada-US-debt
Basically Canadians are deeper in debt relative to their income. And a large part of this debt is housing related. A large part of the economy is also tied to oil and as you may know, oil just took a massive cut:

oil

It was interesting to hear that we would never see oil drop below $100 a barrel. Oil is now trading at $52.84 a barrel. Similar arguments were made about US housing never having one negative year-over-year price drop until we did.

Large part of Canada’s oil is costly to extract

A large portion of Canada’s oil is costly to extract. With oil sands for example oil would need to be at $80 a barrel to make a profit:

Oil sands

Continue reading “CANADIAN HOUSING MARKET ABOUT TO GO KABOOM, EH”

SHOULD YOU BELIEVE WHAT THEY TELL YOU OR WHAT YOU SEE?

Sometimes I wish I could just passively accept what my government monarchs and their mainstream media mouthpieces feed me on a daily basis. Why do I have to question everything I’m told? Life would be much simpler and I could concentrate on more important things like the size of Kim Kardashian’s ass, why the Honey Boo Boo show was canceled, the Victoria Secret Fashion Show, whether I’ll get a better deal on Chinese slave labor produced crap on Black Thanksgiving, Black Friday, or Cyber Monday, fantasy football league standings, the latest NFL player to knockout their woman and get reinstated, Obama’s latest racial healing plan, which Clinton or Bush will be our next figurehead president, or the latest fake rape story from Rolling Stone. The willfully ignorant masses, dumbed down by government education, lured into obesity by corporate toxic packaged sludge disguised as food products, manipulated, controlled and molded by an unseen governing class of rich men, and kept docile through never ending corporate media propaganda, are nothing but pawns to the arrogant sociopathic pricks pulling the wires in this corporate fascist empire of debt.

I’m sure my blood pressure would be lower and my mood better if I just accepted everything I was told by my wise, sagacious, Ivy League educated, obscenely wealthy rulers as the unequivocal truth. Why should I doubt these noble, well intentioned, champions of the common folk? They’ve never misled us before. They would never attempt to use two highly publicized deaths as a lever to keep black people and white people fighting each other and not realizing all races are now living in a militarized police surveillance state supported by the one Party. They would never use their complete control over the financial, political, judicial, and media organisms to convince the masses that voting for one of their hand selected red or blue options will ever actually change anything. They would never engineer the overthrow of a democratically elected government, cover up the shooting down of an airliner, and attempt to blame their crimes on the leader of a nuclear power in their efforts to retain a teetering global empire. They would never overthrow or wage economic warfare on countries that don’t toe the line regarding the continued dominance of the petrodollar in global commerce.

Sadly, I’m cursed with a mind that questions everything and trusts no one in authority or associated with the status quo. It’s the reason I don’t read newspapers or watch mainstream media television entertainment propaganda, disguised as news. It’s the reason I will never vote in a national election again. The lesser of two evils is still evil. I’m skeptical of every piece of data fed to the sheep by the government apparatchiks working for the state. The faux journalists being paid millions by one of the six corporations controlling the media and dependent upon the government, Wall Street bankers, and mega-corporations for their advertising revenues regurgitate whatever they are told by those pulling the purse strings. The mainstream media are nothing but propaganda peddlers for the Deep State and truth telling is prohibited in their world of deception, debt, and denial. Their job is to sustain, enhance, and further enrich the status quo by engineering consent through what they report and what they do not report. The true ruling powers who operate in the shadows behind the scenes are men of power, wealth, status and education who truly believe they are better equipped to consciously manage and manipulate the public mind to achieve their ends. They are disciples of the Edward Bernays School of deception, manipulation and propaganda.

“If we understand the mechanism and motives of the group mind, is it not possible to control and regiment the masses according to our will without their knowing about it? The recent practice of propaganda has proved that it is possible, at least up to a certain point and within certain limits.” Edward Bernays

The Nazis were pikers compared to the technologically savvy Madison Avenue maggots and Silicon Valley snakes who mold the opinions, tastes, and beliefs of the iGadget addicted, vapid, unintelligent, unquestioning, zombie-like masses who beseech to be led, told what to do and what to believe. A vast swath of the population don’t read books or even know how to read above a grade school level. They couldn’t write a coherent paragraph if their life depended upon it. But they can twitter, text, Instagram, and facebook at the speed of light. Try walking down any street in an American city without some iGadget distracted oblivious moron bumping into you. The addicting nature of today’s technology is being used by the ruling elite to monitor, control, and make you respond the way they choose.

Facebook, corporate media organizations, quasi-government organizations, and the NSA are creating a corporate totalitarian state where the slaves willingly sacrifice their privacy, liberty and freedom for mindless entertainment and distractions. The 21st Century totalitarian state captures your political beliefs, daily activities, habits, interests, spending behaviors, organizational associations, love life, pictures, psychological makeup, and fears from your own postings on the internet. With the right algorithms they can uncannily predict how you will react to different situations and messaging. They can also uncover threats to the status quo. Under the guise of keeping you safe from terrorists they are actually ferreting out subversives and radicals who refuse to conform to their idea of a good citizen slave. We will all be subject to our own Room 101.

Dan Kaplan in his recent article about Facebook as a tool for totalitarianism lays out the extreme threat to our future:

Today’s totalitarian demands a more subtle way to influence cultural and political sentiment. But if you got your hands on an algorithmically filtered newsfeed? One that could control the stories people see every day and influence their emotions across geographic, political and economic lines? You’d be in business.

But then there was the mood-influence study that scandalized us for a couple of weeks this year. Facebook changed the tone of content showing up in people’s feeds to test the impact it could have on their moods. The results, not too surprisingly, suggested that Facebook has the power to manipulate sentiment at scale.

Given how easy it is to scare people about the scary-seeming-but-actually-low-risk Ebola, and how dumb we all get when we are afraid, it is not crazy to think that under the wrong circumstances — like one or two more mass-scale terrorist attacks on major cities — modern democracy gives way to something akin to 1984.

If Big Brother were to seize the reins of power, sure, he’d use the cable news the way it’s being used today. But Facebook’s data maw, targeting power and sentiment-manipulation capabilities would be far more insidious. Whether this is what we become or not comes down to the future we choose to build.

The saddest part of this episode of mass delusion, mass confusion, and mass media collusion is that even though we are moving towards Orwell’s totalitarian vision of society, thus far, technology, triviality and an unending array of distractions have lured the masses into passive preoccupation with egotistical pleasures. We’ve been persuaded to love our servitude while drowning in a sea of irrelevance, diversions, and trifles. We continue to amuse ourselves to death while forging our own chains of debt and yielding to the direction of an all-powerful welfare warfare surveillance state that promises to protect us from phantom threats while actually abolishing our rights, freedoms, and liberties. No coercion necessary. We have been trained to love our servitude.

“A really efficient totalitarian state would be one in which the all-powerful executive of political bosses and their army of managers control a population of slaves who do not have to be coerced, because they love their servitude.” Aldous Huxley – Brave New World

Arrogance, Desperation, Lies & Truth

 “Facts do not cease to exist because they are ignored.” – Aldous Huxley

The level of data massaging by the government and their co-conspirators on Wall Street and in the corporate media is a futile attempt at a happy ending that will never come to fruition. The intensity and relentlessness with which the state and its quasi-state minions attempt to paint a false picture of economic recovery is equal parts arrogance and desperation. The arrogance is a function of successfully pulling off the greatest heist in world history from 2003 through 2008 with no adverse consequences, no criminal charges, no penalties for their crimes, and more power and wealth than they had prior to 2003. The only way to stop sociopaths is to throw them in jail or kill them. In our dystopian paradise of greed, they were rewarded with trillions in rescue packages by their cohorts in crime at the Federal Reserve and in Congress. They’ve paid themselves billions in bonuses for gorging at the Federal Reserve trough of QE and ZIRP. The desperation is borne from the fact that after $7.5 trillion of debt added by the Federal government and $3.5 trillion of debt created by the Federal Reserve since 2009, the Greater Depression for average Americans deepens by the day.

The men pulling the strings behind the scenes are drunk with power and their hubris allows them to believe their own infallibility and blinds them to the dire consequences for our country when their debt Ponzi scheme fails. But, as we grow ever closer to the day of reckoning, they will use every means at their disposal to paint a positive picture, regardless of the facts and reality for the average person. The examples of twisting, distorting and outright lying about the economic reality of our times are endless. These are some of the major false storylines peddled by our benevolent corporate fascist leaders:

The BLS reported 321,000 jobs added in November and the unemployment rate at 5.8%. Jobs are plentiful, based upon these statistics.

A skeptical critical thinking individual might ask a few questions or point out a few inconvenient facts the government purveyors of propaganda might not want us to ponder:

  • The non-manipulated, non-seasonally adjusted number of jobs in November FELL by 270,000. The BLS added 600,000 jobs as an adjustment to achieve the headline grabbing result.
  • If the jobs market is so good, why is the labor participation rate at a 30 year low of 62.8%?
  • Since 2007 the number of working age Americans has risen by 17 million, while the number of employed has risen by less than 1 million, but the unemployment rate is about the same.
  • Why would almost 14 million working age Americans leave the labor force since 2007 if the economy is booming and jobs plentiful, with 1.2 million leaving in the last 12 months?
  • Why would payroll tax receipts be flat with last year if millions of new jobs have been created?
  • If the country has really added 8 million jobs since 2010, how could real median household income FALL by 2.3%?

According to the government reported figures, the economy hasn’t been this strong since 2007. GDP has supposedly grown at greater than 4% over the last two quarters.

Anyone who is sentient knows consumer spending accounts for 68% of GDP. Capital investments that lead to long term prosperity continue to decline as a percentage of GDP from 20% in 2000 to 16% today. We’ve chosen consumption and financialization over savings and investment. This fact leads to some observations:

  • If GDP has actually grown by 20% since 2008 how does this correlate with a 6.9% decline in real median household income?
  • GDP has been goosed by a $69 billion increase in government spending, with the majority going to the military industrial complex. ISIS has been a godsend for our GDP and arms dealer profits.
  • GDP was increased retroactively by $500 billion last year based on a new way the government accounts for intangibles.
  • The surge in consumer expenditures over the last two quarters has been in the purchase of services. The higher costs for Obamacare are a boon for GDP. Are they a boon for your bank account?
  • The trade deficit has fallen as exports of petroleum products have temporarily provided a boost to GDP. The collapse in oil prices will reverse that trend rapidly.

According to the quasi-governmental mouthpieces at the Conference Board, consumer confidence is near a 5 year high, reflecting what should be robust spending.

So we are told by the representatives of corporatism that we are confident about the economy and the future. How does that measure up to the facts on the ground:

  • Black Friday weekend sales collapsed by 11% versus the previous year. As the pundits tried to blame it on on-line sales (10% of total retail sales), Cyber Monday also proved to be a dud.
  • If the average person is confident about the future and happy with their economic circumstances, why did they just vote to throw out the bums in November?
  • If consumers are confident, why have real retail sales, excluding subprime debt goosed auto sales, been flat for the last three months and up only 1% in the last year?
  • If consumers are so confident, why are credit card balances still $138 billion BELOW where they were in 2008? If all these new jobs are being created why is credit card debt lower than it was in mid-2010? Maybe consumers are so desperate they are using credit cards to pay utility and tax bills and not using them for frivolous Chinese crap at big box retailers.
  • The increased spending at grocery stores and restaurants is driven by food inflation, not foot traffic. Discretionary spending at furniture, electronics, and sporting goods stores is flat.
  • Department store sales continue to fall. Sears and JC Penney teeter on the verge of bankruptcy. Delia’s is liquidating and Radio Shack isn’t far behind. The major chains have completely stopped building new stores. The great bricks and mortar unwind relentlessly plods forward. In addition, online growth is stalling as states implement sales taxes.

According to the government, the deficit was ONLY $483 billion in 2014.

This is a real doozy. Obama has been touting how he has cut the deficit through his wise management of the budget. This is where government accounting is used by apparatchiks to mislead the public and obscure the truth. A few pertinent facts are always left out by the politicians touting deficit reduction:

  • Because of the budget impasse in 2013, the Federal government stopped updating the national debt on a daily basis, but we know from when they started counting again, the debt went up by $2.3 billion per day. Therefore, the national debt on October 1, 2013 was approximately $17.038 trillion. On October 1, 2014 the national debt was $17.875. Therefore, the national debt went up by $837 billion in 2014. Just a smidge higher than the reported deficit of $483 billion.
  • Interest is not paid on reported deficits. It’s paid on the national debt, so the massaged, manipulated and made over deficit is meaningless. The national debt was always slightly higher than reported deficits, but in the last few years the deviation has grown to a Grand Canyon size.
  • The deficit number has been artificially lowered by nothing other than accounting entry hocus pocus. The Federal Reserve increasing its balance sheet to $4 trillion out of thin air creates approximately $80 billion of phantom interest profits that are paid to the Treasury. Why don’t they increase their balance sheet to $40 trillion and eliminate deficits all together?
  • The biggest accounting scam is Fannie and Freddie. Just as the Wall Street banks have created fake profits through accounting entries regarding future losses, Fannie and Freddie have gone the extra mile in helping fake deficit reduction. These bloated insolvent government run pigs required a $187 billion taxpayer bailout in 2009. Amazingly, when you allow criminals to value their assets at whatever they choose, phantom profits flow like honey.
  • These two horribly run institutions of fraud “generated profits” of $129 billion in 2014 which were “paid back” to the Treasury. That is four times more than Apple or Exxon’s profits during a non-existent housing recovery. Why are their stocks trading at just over $2 per share if they are generating vastly more profits than they were in 2007 when their stocks were north of $70 per share? It’s because the profits are fake. Everyone knows it, but the Federal Deficit is reported $129 billion lower because these insolvent entities pretended to pay the taxpayer back. Accounting entries do not reduce deficits. Spending less than you generate in revenues reduces deficits.

According to the government, we’ve experienced a strong housing recovery since 2010.

The supposed housing recovery storyline continues to be beaten like a dead horse by the Wall Street media (CNBC) and the shills at the NAR. Anyone with a functioning brain (eliminates CNBC bimbos, hacks, and Ivy League economists) can see there has been no real housing recovery:

  • The 24% rise in home prices (Case Shiller Index) since the 2012 low has been nothing more than a Wall Street hedge fund/Federal Reserve scheme to elevate prices and make Wall Street bank balance sheets less insolvent. Wall Street banks withholding foreclosures from the market while Wall Street hedge funds (Blackstone) use free money from the Fed to buy up housing and rent it out to former homeowners has enriched the .1% while destroying the dream of home ownership for millions.
  • The percent of first time home buyers remains near record lows, while speculators, flippers, hedge fund managers, and rich Chinese businessmen make up a record number of purchasers. The fact this is a fake housing recovery is proven by mortgage applications to purchase a home sitting at 1995 levels and 30% below 2009 recession lows. Maybe the fact real median household income is also at 1995 levels, real wages keep declining, and labor force participation is at 1978 levels has something to do with real people not being able to purchase a home.

  • Even with the artificial hedge fund demand, existing home sales are lower than 2013 and languishing at 1999 levels. They are still 25% below 2005 levels, despite the lowest mortgage rates in history. New home sales are a disaster, with no appreciable increase in two years. Apartment construction has far outpaced single family housing construction. After a five year housing recovery, new home sales languish at levels seen at the bottom of our last six recessions. New home sales are 65% below the 2005 peak and at levels seen in the early 1960’s when there were 130 million less people living in the country.

According to the corporate media, the auto market is hitting on all cylinders with annual sales of 16.4 million, the highest since 2006.

Pretending to sell automobiles to people without the means to pay you for the automobile is always a good business idea. Of course, when you have Ally Financial and the rest of the Wall Street banking cabal doling out 7 year 0% loans and subprime auto loans like candy, it’s easy to move inventory. The temporary boost to GDP by issuing more bad debt always works out in the long run. Right?

  • If the auto business is booming why have GM profits fallen from $9.2 billion in 2011 to $5.4 billion in 2013, and on course to fall to $4 billion in 2014? Record levels of channel stuffing produces sales gains, but no profits. Why is their stock 25% below its 52 week high and lower than it was in 2010 when it was IPO’d after being rescued by Obama?
  • If the auto business is booming why are Ford’s profits falling by 35% versus last year and lower than they were in 2010? Why is their stock price 16% below its 52 week high and still 20% below its 2010 price?
  • Auto loan debt is at an all-time high of $950 billion, up 33% since 2010 when the Fed, Wall Street, and the political class in the fetid D.C. swamp decided they needed new debt bubbles in auto loans and student loans to jump start our moribund economy.
  • There are 65 million auto loans outstanding, and the average debt now stands at $17,352. Over 30% of auto “sales” are actually leases. The rest are financed over an average of 65 months. Virtually all new car sales are nothing more than 3 to 7 year rentals. It’s amazing what easy money from the Fed can produce.
  • Over 31% of all new auto loans this year were to subprime borrowers. They now account for 36.5% of all outstanding auto loans. You become a subprime borrower by defaulting on previous debt obligations. In a shocking development, auto loan delinquencies surged by 13% in the last quarter, with subprime loan delinquencies skyrocketing by 18%. When has issuing billions of debt to subprime borrowers ever caused problems before?
  • Only a University of Phoenix African Studies major is more of a subprime risk than the millions of ecstatic Escalade drivers cruising around our urban ghetto paradises. The average student loan debt is now $33,000. Until the Obama administration went Keynesian, student loan debt was primarily in the private sector. When Obama entered the White House total student loan debt was $620 billion and delinquencies totaled $50 billion. There are now $1.3 trillion of student loans outstanding, with the Federal government accounting for $830 billion and guaranteeing a large portion of the rest. Delinquencies have skyrocketed to $125 billion, as another taxpayer bailout beckons.

According to the corporate mainstream media pundits, the plunge in oil prices from $100 per barrel to $61 per barrel is unequivocally good for the economy. The shale oil boom has worked its magic and happy times are here again.

Sometimes you have to wonder whether the highly educated spokesmodels on the corporate mainstream media are really as vacuous and clueless as they appear or whether they are just paid to look pretty and mouth the corporate line. They seem incapable of comprehending the unintended consequences of various events. The collapse in oil prices is one of those events.

  • There is no doubt that lower oil prices will lower the price of gas for the average American. Estimates say they will save $368 per year, which can be spent elsewhere. The highly paid shill economists who declare this will boost spending seem to be math challenged. Retail sales figures include gas stations. What isn’t spent there will be spent in another category, most likely healthcare or groceries as prices in both areas continue to escalate. It’s a zero sum game. No new spending will occur.
  • The worldwide supply of oil has only increased marginally over the last few years. The U.S. shale boom has been offset by declines elsewhere (Libya, Iran, Mexico). The reason for the collapse is the same reason for the 2009 collapse – worldwide demand is contracting. Europe is in a depression. Japan is in a depression. Russia’s economy is contracting. China is decelerating rapidly. The U.S. demand is flat. The implications of another global recession after five years of central banks printing trillions of fiat currency are alarming to say the least.
  • The cost to extract shale oil and transport it to a refinery capable of processing it is high. Honest analysts will tell you that a price of $70 to $80 is required to breakeven. Most companies don’t build breakeven into their plans. Bakken shale oil sells at a discount of about $14 per barrel due to the difficulty of extraction, transport, and processing. It is now selling for $47 per barrel. The number of permits for new rigs fell by 40% in November when oil was still selling for $75 per barrel. Do you think permits for new wells will fall at a price of $61 per barrel? Capital spending by the energy industry accounted for 33% of all capital spending in the last few years. I’m sure some other industry will pick up the slack. Right?
  • It seems the shale oil boom has resulted in a few jobs being created since the 2010 recession trough. In fact the states where fracking is prevalent have accounted for all the job growth in the nation. I wonder if a shale oil bust will have any employment implications. There are 9.3 million jobs related to the energy industry across the country. The plunge in oil prices created by Saudi Arabia in the 1980s created a depression in Texas which contributed to the S&L crisis. This plunge will reveal who has been swimming naked in the high yield bond market and derivatives market.

These are just a few examples among a multitude of lies. Others include: stocks aren’t overvalued, gold isn’t money, inflation is good for you, and ISIS terrorists are an imminent threat to your way of life. Every feel good story fed to the masses by the oligarchs running this shitshow we call America is no different than the propaganda doled out by other infamous totalitarian regimes throughout history. We believe things because we’ve been conditioned to believe them. The crony capitalist oligarchs are intelligent enough to invent theories to explain how the world should work, but not intelligent enough to interpret their models correctly. When they act on their theories (Keynesianism), their actions appear to be those of a lunatic. Despite all evidence refuting their theories, their arrogance and hubris lead them to destruction. The collective insanity of this world is almost too much for a rational thinking person to grasp. The extremely wealthy men operating in the shadows will use every means at their disposal to retain power, enhance their wealth, and crush dissent.

“Being a card carrying member of the privileged class means never having to say I’m sorry, much less ‘not guilty.’  Power is doing what you want when you want, and consequences are for everyone else. Or perhaps these titans of modern industry and the halls of power are at heart just good natured bumblers, who in a genuine belief destroy lives and crash economies, while pursuing insane ideological assumption put forward by vested interests, all the while stuffing their pockets, and crushing all dissent with the political skills of a Machiavelli and the ruthlessness of Al Capone.” – Jesse

The two party system is nothing but a ruse designed to keep the people believing they have a say in how things are run in this country. Both parties support the military industrial complex. Both parties support the militarization of police forces around the country. Both parties support the mass surveillance of its citizens. Both parties do the bidding of their rich corporate and special interest benefactors. Both parties favor deficit spending for eternity. Both parties believe the government should expand its role in our everyday lives. Both parties do the bidding for and protect the Wall Street interests who really run this country. No more proof is needed than what has occurred over the last five years, as criminal Wall Street bankers were rewarded for their malfeasance with trillions of dollars from taxpayers and their puppets at the Federal Reserve. While we were allowing ourselves to be distracted, amused, entertained, and indebted, the oligarchs were busy conducting a silent coup.

“Let’s be clear about this, the oligarchs are flush with victory, and feel that they are firmly in control, able to subvert and direct any popular movement to the support of their own fascist ends and unslakable will to power.

This is the contempt in which they hold the majority of American people and the political process: the common people are easily led fools, and everyone else who is smart enough to know better has their price. And they would beggar every middle class voter in the US before they will voluntarily give up one dime of their ill-gotten gains.

But my model says that the oligarchs will continue to press their advantages, being flushed with victory, until they provoke a strong reaction that frightens everyone, like a wake-up call, and the tide then turns to genuine reform.” – Simon Johnson

The oligarchs have had a good run. The system cannot be reformed from within. The corruption runs too deep. The system is broken and can’t be fixed. There is no doubt in my mind that a collapse approaches which will make 2008/2009 look like a walk in the park. The anger, blame and retribution will sweep away the existing social order and replace it with something new. It will be up to the people to decide what happens next. We were warned two centuries ago by a wise man. Hopefully, we’ll get a 2nd chance.

“However political parties may now and then answer popular ends, they are likely in the course of time and things, to become potent engines, by which cunning, ambitious, and unprincipled men will be enabled to subvert the power of the people and to usurp for themselves the reins of government, destroying afterwards the very engines which have lifted them to unjust dominion.” George Washington

 

The Price Of Oil Exposes The True State Of The Economy

Submitted by Raul Ilargi Meijer via The Automatice Earth blog,


Jack Delano Cafe at truck drivers’ service station on U.S. 1, Washington DC Jun 1940
We should be glad the price of oil has fallen the way it has (losing another 6% today as we write this). Not because it makes the gas in our cars a bit cheaper, that’s nothing compared to the other service the price slump provides. That is, it allows us to see how the economy is really doing, without the multilayered veil of propaganda, spin, fixed data and bailouts and handouts for the banking system.

It shows us the huge extent to which consumer spending is falling, how much poorer people have become as stock markets set records. It also shows us how desperate producing nations have become, who have seen a third of their often principal source of revenue fall away in a few months’ time. Nigeria was first in line to devalue its currency, others will follow suit.

OPEC today decided not to cut production, but whatever decision they would have come to, nothing would have made one iota of difference. The fact that prices only started falling again after the decision was made public shows you how senseless financial markets have become, dumbed down by easy money for which no working neurons are required.

OPEC has become a theater piece, and the real world out there is getting colder. Oil producing nations can’t afford to cut their output in some vague attempt, with very uncertain outcome, to raise prices. The only way to make up for their losses is to increase production when and where they can. And some can’t even do that.

Saudi Arabia increased production in 1986 to bring down prices. All it has to do today to achieve the same thing is to not cut production. But the Saudi’s have lost a lot of clout, along with OPEC, it’s not 1986 anymore. That is due to an extent to American shale oil, but the global financial crisis is a much more important factor.

We are only now truly even just beginning to see how hard that crisis has already hit the Chinese export miracle, and its demand for resources, a major reason behind the oil crash. The US this year imported less oil from OPEC members than it has in 30 years, while Americans drive far less miles per capita and shale has its debt-financed temporary jump. Now, all oil producers, not just shale drillers, turn into Red Queens, trying ever harder just to make up for losses.

The American shale industry, meanwhile, is a driverless truck, with brakes missing and fueled by on cheap speculative capital. The main question underlying US shale is no longer about what’s feasible to drill today, it’s about what can still be financed tomorrow. And the press are really only now waking up to the Ponzi character of the industry.

In a pretty solid piece last week, the Financial Times’ John Dizard concluded with:

Even long-time energy industry people cannot remember an overinvestment cycle lasting as long as the one in unconventional US resources. It is not just the hydrocarbon engineers who have created this bubble; there are the financial engineers who came up with new ways to pay for it.

While Reuters on November 10 (h/t Yves at NC) talked about giant equity fund KKR’s shale troubles:

KKR, which led the acquisition of oil and gas producer Samson for $7.2 billion in 2011 and has already sold almost half its acreage to cope with lower energy prices, plans to sell its North Dakota Bakken oil deposit worth less than $500 million as part of an ongoing downsizing plan.

 

Samson’s bonds are trading around 70 cents on the dollar, indicating that KKR and its partners’ equity in the company would probably be wiped out were the whole company to be sold now. Samson’s financial woes underscore how private equity’s love affair with North America’s shale revolution comes with risks. The stakes are especially high for KKR, which saw a $45 billion bet on natural gas prices go sour when Texas power utility Energy Future Holdings filed for bankruptcy this year.

And today, Tracy Alloway at FT mentions major banks and their energy-related losses:

Banks including Barclays and Wells Fargo are facing potentially heavy losses on an $850 million loan made to two oil and gas companies, in a sign of how the dramatic slide in the price of oil is beginning to reverberate through the wider economy. [..] if Barclays and Wells attempted to syndicate the $850m loan now, it could go for as little as 60 cents on the dollar.

That’s just one loan. At 60 cents on the dollar, a $340 million loss. Who knows how many similar, and bigger, loans are out there? Put together, these stories slowly seeping out of the juncture of energy and finance gives the good and willing listener an inkling of an idea of the losses being incurred throughout the global economy, and by the large financiers. There’s a bloodbath brewing in the shadows. Countries can see their revenues cut by a third and move on, perhaps with new leaders, but many companies can’t lose that much income and keep on going, certainly not when they’re heavily leveraged.

The Saudi’s refuse to cut output and say: let America cut. But American oil producers can’t cut even if they would want to, it would blow their debt laden enterprises out of the water, and out of existence. Besides, that energy independence thing plays a big role of course. But with prices continuing to fall, much of that industry will go belly up because credit gets withdrawn.

The amount of money lost in the ‘overinvestment cycle’ will be stupendous, and you don’t need to ask who’s going to end up paying. Pointing to past oil bubbles risks missing the point that the kind of leverage and cheap credit heaped upon shale oil and gas, as Dizard also says, is unprecedented. As Wolf Richter wrote earlier this year, the industry has bled over $100 billion in losses for three years running.

Not because they weren’t selling, but because the costs were – and are – so formidable. There’s more debt going into the ground then there’s oil coming out. Shale was a losing proposition even at $100. But that remained hidden behind the wagers backed by 0.5% loans that fed the land speculation it was based on from the start. WTI fell below $70 today. You can let your 3-year old do the math from there.

I wonder how many people will scratch their heads as they’re filling up their tanks this week and wonder how much of a mixed blessing that cheap gas is. They should. They should ask themselves how and why and how much the plummeting gas price is a reflection of the real state of the global economy, and what that says about their futures.

The 2014 Oil Price Crash Explained

Submitted by Euan Mearns via Energy Matters blog,

  • In February 2009 Phil Hart published on The Oil Drum a simple supply demand model that explained then the action in the oil price. In this post I update Phil’s model to July 2014 using monthly oil supply (crude+condensate) and price data from the Energy Information Agency (EIA).
  • This model explains how a drop in demand for oil of only 1 million barrels per day can account for the fall in price from $110 to below $80 per barrel.
  • The future price will be determined by demand, production capacity and OPEC production constraint. A further fall in demand of the order 1 Mbpd may see the price fall below $60. Conversely, at current demand, an OPEC production cut of the order 1 Mbpd may send the oil price back up towards $100. It seems that volatility has returned to the oil market.

Figure 1 An adaptation of Phil Hart’s oil supply demand model. The blue supply line is constrained by data (see Figure 4). The red demand lines are conceptual. Prior to 2004, oil supply was fairly elastic to changes in price, i.e. a small rise in price led to a large rise in production. This is explained by OPEC opening and closing the taps. Post 2004, oil supply became inelastic to price, i.e. a large change in price led to marginal increase in supply. This is explained by the world pumping flat out. Demand tends to be fairly inelastic and inversely correlated with price in that high price suppresses demand a little. Supply and price at any point in time is defined by the intersection of the supply and demand curves. 72 Mbpd and $40 / bbl in 2004 became 76 Mbpd and $120 / bbl in 2008 as demand for oil soared against inelastic supply.

 

Figure 2

Followers of the oil market will be familiar with the recent evolution of oil supply and price shown in Figure 2.

Figure 3

What is less widely appreciated is that a cross plot of the data shown in Figure 2 results in the well-ordered relationship shown in Figure 3. Oil supply and price are clearly following some well established rules. This relationship led to Phil Hart developing his model shown as Figure 1.

Figure 4

Separating the data into two time periods brings more clarity to the process at work. The data define a fairly well-ordered time series beginning at January 1994 at the bottom left rising slowly to January 2004 and then steeply to the Olympic Peak of July 2008. The financial crash then caused the oil price to give up all of its gains returning to 2004 levels by December 2008.

Figure 5

The second time period from January 2009 to the present shows some different forces at work. Starting in 2009 some new production capacity was built. This was not in OPEC and is concentrated in N America where the light tight oil (LTO) boom took off supplemented by steady expansion of tar sands production. Prior to 2009, the production peaks were of the order 74 Mbpd. Post 2009 peaks of the order 77 Mbpd were achieved. About 3 Mbpd new capacity has been added. In May 2011 there is a significant and curious excursion to lower production not accompanied by a fall in price. This coincides with Libya coming off line for the first time and the loss of 1.6 Mbpd production. It seems possible that this coincided with weak demand and the fortuitous loss of production cancelling weak demand leaving price unchanged.

The EIA are always running a few months behind with their statistics these days, not ideal in a rapidly changing world. Thus we do not yet have the data to see the recent crash in the oil price. But we know the price has fallen below $80 and production is unlikely to be significantly changed. So, how do we explain production of roughly 77 Mbpd and a price below $80?

Figure 6

Figure 6 updates Phil Hart’s model (Figure 1) to take account of the oil supply and price movements of the last 5 years. Capacity expansion is achieved by adding 3 Mbpd to the former, well-defined supply-price curve (blue arrow). There is no a-priori reason that this curve should hold in the new supply-price regime, but for the time being that is all I have to work with. The red lines, as described in the caption to Figure 1, conceptually represent inelastic demand where high price marginally suppresses demand for oil. The recent past has seen oil priced at $110 with supply running at about 77 Mbpd as defined by the right hand red coloured demand curve. Reducing demand by about 1 Mbpd brings the price below $80 / bbl (red arrow).

The Recent Past and the Future

Old hands will know that it is virtually impossible to forecast the oil price. The anomalous recent price stability of $110±10 I believe reflects great skill on the part of Saudi Arabia balancing the market at a price high enough to keep Saudi Arabia solvent and low enough to keep the world economy afloat. The reason Saudi Arabia has not cut production now, when faced with weak global demand for oil, probably comes down to their desire to maintain market share which means hobbling the N American LTO bonanza. Alternatively, they could be conspiring with the USA to wreck the Russian economy? But Saudi Arabia is not the only member of OPEC and the economies of many of the member countries will be suffering badly at these prices and that ultimately leads to elevated risk of civil unrest. It is not possible to predict the actions of the main players but it is easier to predict what the outcome may be of certain actions.

  1. If demand for oil weakens by about a further 1 Mbpd this may send the price down below $60 / bbl.
  2. If OPEC cuts supply by about 1 Mbpd at constant demand this may send the price back up towards $100 / bbl.
  3. Prolonged low price may see LTO production fall in N America and other non-OPEC projects shelved resulting in attrition of non-OPEC capacity. This may take one to two years to work through but with constant demand, this will inevitably send prices higher again.
  4. Prolonged low price may see many specialist LTO producers default on loans, risking a new credit crunch and reduced LTO production. This would likely lead to a major consolidation of operators in the LTO patch where the larger companies (the IOCs) pick up the best assets at knock down prices. That is the way it has always been.
  5. Black Swans and elephants in the room – with conflict escalation in Ukraine and / or Syria-Iraq and a new credit crunch, all bets will be off.

*  *  *

And lastly, thanks to The Automatic Earth’s Raul Ilargi Meijer, here is an additional comment that warrants attention this week…

via Euan’s friend and collaborator Roger Andrews (check the grey dots!):

Hi Euan:

I put this XY plot of the data together from the data links you supplied. It shows the same trends as your Figures except that I’ve plotted all the points on one graph and segregated them into five periods, with trend lines and arrows showing the overall “direction of travel” for each (arrows in both directions for October 2004-May 2009, which as you noted goes zooming up and then comes right back down again).

I’ve also projected production data for the missing months since May 2014 (shouldn’t be too far off) so that we can at least get an idea of how the latest trend might compare with the old ones.

 

We seem to be in uncharted territory.

ADMIN WAS WRONG

I believe I made a statement in a post or comment a few months ago that we would never see gasoline below $3.00 per gallon ever again. Well, last week I saw gasoline advertised for $2.95 per gallon. Peak cheap oil must be a false storyline. Facts must no longer matter.

Read it here first.

 

I WAS WRONG

 

Make sure you take a screen shot. It might never happen again. I mean it might be the last time you ever see me admit that I was wrong, with the likes of SSS, Llpoh, and Stuck ready to pounce on any sign of weakness.

I failed to anticipate a drastic global economic slowdown and the lengths to which Obama and Saudi Arabia would go to try and destroy the Russian and Iranian economies. The energy independence crowd is crowing that the shale oil miracle has achieved nirvana for the American people. There is one law that works the majority of the time – supply and demand.

The reason prices have crashed is because worldwide consumption has stopped growing due to recession in Europe, stagnation in the U.S., and a slowdown in China. There has been no dramatic increase in supply. Adjusted for population growth, the number of miles being driven by vehicles in the U.S. are are at the same level they were in 1995, and down 9% from the 2005 peak. This is not due to engine efficiency. Gas guzzling pickups, SUVs and sports cars still acount for 75% of vehicle sales. The vehicle miles have declined because commerce has been reduced, requiring less trucking, and people without jobs don’t have to drive to work.

Normally, OPEC would cut production to maintain prices above $90 per barrel when demand softened. This time, backroom deals with the U.S. and EU, have kept Saudi Arabia pumping oil at high levels. The plan is to make Putin and Iran pay for their unwillingness to cooperate and bow down to the American Empire. The unintended consequences of this act of economic warfare could be considerable. In the short-term OPEC collusion with the American Empire can cause economic pain to Russia and Iran. One problem. The Russian and Iranian people are used to hardship. They’ll deal with it.

In the long-run Saudi Arabia and 90% of the oil producing countries need oil prices in excess of $90 per barrel or their people will get restless. And we all know what happens when Muslims get restless.

Obama’s master plan to crush Putin will fail. But he may succeed in derailing his shale oil boom. These wells already deplete at a rate of 90% after two years. In order for companies to invest the millions required to begin a new well, they need an oil price in excess of $80 to consider starting the well. This morning, oil dropped below $80. No investment in new wells = rapid decline in shale oil output. The miracle dies.

I may have been wrong about gasoline dropping below $3.00 per gallon, and I’m certainly enjoying the $15 per week in savings, but it won’t last long. Supply and demand will reassert itself in the near future.

$106 OIL SHOULD DO WONDERS FOR SECOND QUARTER GDP

The politicians, Wall Street shysters, and the corporate MSM sure are running out of feel good propaganda to keep the sheep docile. How high do food and energy prices need to go before even the sheep get the picture?

 

WINNING!!!!

 

Iraq Update: Kurds Take Kirkuk, Al Qaeda Surges Toward Baghdad

Tyler Durden's picture

Now that 25 year old math PhD HFT programmers have finally figured out what this thing called Iraq is, and why headlines around it should factor into algo trading signals – especially those of crude oil – here, for their benefit is a summary of the latest events in Iraq, and also for everyone else confused why crude is back to levels not seen since last summer.

In broader terms (via RanSquawk):

  • The situation in Northern Iraq continues to deteriorate as the extremist ISIS/ISIL group took control of Mosul and then moved into Tirkit, which was later recaptured, in the north of Iraq which is near the Ceyhan-Kirkuk pipeline, which carries 1.6mln bbls per day. ISIS/ISIL forces then seized the Baiji refinery, the main refinery in Iraq, from Iraqi forces. (BBG/RTRS)
  • Iraqi forces and militants have now clashed in Ramadi, 100km from Baghdad, as ISIL extremist forces push towards the Iraqi capital. (BBG)
  • However Iraqi Oil Minister Luaibi said US planes may bomb North Iraq and denied ISIL took Baiji refinery in the North. The oil Minister also said Iraq average crude exports 2.6mln bbl/d, Iraq crude production 3.166mln bbl/d, Kirkuk production 167,000 bbl/d and Iraq has stored oil products and won’t increase imports. (BBG/RTRS)
  • Washington has vowed to boost aid to Iraq and is mulling done strikes amid fears that Iraqi forces are crumbling in the face of militant attacks. (RTRS)

And in detail:

As the WSJ reports, after hard core Al Qaeda spin off ISIS (no relation to Sterling Archer) took over Saddam’s home town of Tikrit yesterday, Iraq edged closer to all-out sectarian conflict on Thursday as Kurdish forces took control of a provincial capital in the oil-rich north and Sunni militants vowed to march on two cities revered by Shiite Muslims.  Kurdish militia known as peshmerga said they had taken up positions in key government installations in Kirkuk, as forces of the Shiite-dominated government of Prime Minister Nouri al-Maliki abandoned their posts and fled in fear of advancing Sunni militants, an official in the office of the provincial governor said.

Reuters adds that “The whole of Kirkuk has fallen into the hands of peshmerga,” citing Jabbar Yawar. “No Iraqi army remains in Kirkuk now.”

This in turn has put the output of the key Kirkuk-Ceyhan pipeline, with a 1.6MM bbls/day capacity, at risk.

The militia were operating out of the headquarters of the Iraqi army’s 2nd Division. The official said western parts of Kirkuk province were still under the control of fighters from the Islamic State of Iraq and al-Sham, or ISIS, an al Qaeda offshoot.

Abu Mohammed al-Adnani, a spokesman for the Islamic State of Iraq and al-Sham, said the al Qaeda-inspired group would advance on Karbala and Najaf, as well as the capital Baghdad, the Associated Press reported, citing an audio statement.

However, as we showed yesterday, the final ISIS target is none other than the city of Baghdad, and the overthrow of the Iraq government entirely.

In Tikrit, militants have set up military councils to run the towns they captured, residents said.

“They came in hundreds to my town and said they are not here for blood or revenge but they seek reforms and to impose justice. They picked a retired general to run the town,” said a tribal figure from the town of Alam, north of Tikrit.

“’Our final destination will be Baghdad, the decisive battle will be there,’ that’s what their leader of the militants group kept repeating,” the tribal figure said.

The powerful Shiite leader, Moqtada al-Sadr, urged his followers on Wednesday to form military units to defend the two cities, which along with Mecca and Medina in Saudi Arabia are considered sacred by Shiites.

Before he suspended its operations in 2008, Mr. Sadr’s Mahdi Army, once estimated to have nearly 60,000 members, played a major role in the country’s Sunni-Shiite sectarian conflict.

His call for military mobilization came after Mr. Maliki said the government would arm citizens who volunteer to fight militants, after the fall of Mosul on Tuesday.

Security was stepped up in Baghdad to prevent the Sunni militants from reaching the capital, which is itself divided into Sunni and Shi’ite neighborhoods and saw ferocious sectarian street fighting in 2006-2007 under U.S. occupation.

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The Kurdish capture of Kirkuk instantly overturns the fragile balance of power that has held Iraq together as a state since Saddam’s fall.

Iraq’s Kurds have done well since 2003, running their own affairs while being given a fixed percentage of the country’s overall oil revenue. But with full control of Kirkuk – and the vast oil deposits beneath it – they could earn more on their own, eliminating the incentive to remain part of a failing Iraq.

Maliki’s army already lost control of much of the Euphrates valley west of the capital to ISIL last year, and with the evaporation of the army in the Tigris valley to the north this week, the government could be left in control only of Baghdad and areas south.

The surge also potentially leaves the long desert frontier between Iraq and Syria effectively in ISIL hands, advancing its stated goal of erasing the border altogether and creating a single state ruled according to mediaeval Islamic principles.

Maliki described the fall of Mosul as a “conspiracy” and said the security forces who had abandoned their posts would be punished. He also said Iraqis were volunteering in several provinces to join army brigades to fight ISIL.

In a statement on its Twitter account, ISIL said it had taken Mosul as part of a plan “to conquer the entire state and cleanse it from the apostates”, referring to the province of Nineveh of which the city is the capital.

Militants were reported to have executed soldiers and policemen after their seizure of some towns.

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And while all of the above explains oil’s spike today, now that the world has yet another geopolitical hotzone to follow, following the China-Japan naval conflict, the China-Vietnam escalation, the Thailand martial law, the Ukraine civil war and now the Iraq collapse, expect the USDJPY rigging crew to ignite enough momentum to send the S&P 500 to fresh all time highs.