Baltic Dry Index. 982 -37 Brent Crude 68.22
LIR Gold Target in 2019: $30,000. Revised due to QE programs.
“But it (the boom) could not last forever
even if inflation and credit expansion were to go on endlessly. It would then
encounter the barriers which prevent the boundless expansion of circulation
credit. It would lead to the crack-up boom and the breakdown of the whole
monetary system.”
Ludwig Von Mises
This week looks like it’s all going to be about oil. Early on it
increasingly looks like we are in for a blood bath. According to latest
figures, in our world awash with up to 2 million barrels a day of excess
production, US frackers are increasing drilling and production again. With
Europe, Japan and Russia in recession, and the commodity economies headed
there, we are on the cusp of freefall in the price of oil.
Below, the oil story at the start of the week. Only buy minimal amounts
of petrol for the car until prices crash. So far very little of the oil wreck
is getting passed on to consumers.
Oil Declines From 5-Year Low on Signs U.S. Taking Fight to OPEC
Dec 8, 2014 5:08 AM GMT
West Texas Intermediate and
Brent extended declines from the lowest close in more than five years amid
speculation that U.S. oil producers will fight OPEC for market share. Futures dropped as much as 1.8 percent in New York and 1.9 percent in London. Explorers in the U.S. increased the number of operating rigs last week, defying predictions of a drilling slowdown, according to data from Baker Hughes Inc. Brent’s 14-day relative strength index has been below 30 since Nov. 27, a reading that signals crude is oversold.
Oil is trading in a bear market amid signs that U.S. output is expanding even after the Organization of Petroleum Exporting Countries opted not to reduce its production target. The 12-member group is responsible for about 40 percent of the world’s supply. Falling prices will put “short-term pressure” on Iran’s budget, President Hassan Rouhani said in parliament yesterday, the Iranian Students’ News Agency reported.
“This is primarily a supply-side issue,” Ric Spooner, a chief strategist at CMC Markets in Sydney, said by phone today. “Current supplies are too large for any foreseeable improvement in demand. The price needs to fall to a level that starts to really give the market some comfort that that new projects are going to be put on the backburner and delayed.”
WTI for January delivery dropped as much as $1.21 to $64.63 a barrel in electronic trading on the New York Mercantile Exchange and was at $65.09 at 12:36 p.m. Singapore time. It slid 97 cents to $65.84 on Dec. 5, the lowest close since July 2009. The volume of all futures traded was about 19 percent above the 100-day average. Prices have decreased 34 percent this year.
----The number of U.S. rigs in operation rose to 1,575 through Dec. 5, the first gain in three weeks, according to Baker Hughes, a Houston-based field services company. The nation’s oil boom has been driven by a combination of horizontal drilling and hydraulic fracturing, which has unlocked supplies from shale formations including the Eagle Ford in Texas and the Bakken in North Dakota.
U.S. oil production climbed to 9.08 million barrels a day through Nov. 28, Energy Information Administration data showed. That’s the fastest rate in weekly records that started in January 1983.
More
China Trade Surplus Climbs to Record as Imports Drop on Oil
Dec 8, 2014 5:33 AM GMT
China’s trade surplus climbed to
a record in November after an unexpected decline in imports on lower crude oil and other commodity
prices. Overseas shipments rose 4.7 percent from a year earlier, missing the 8 percent median estimate in a Bloomberg News survey. Imports fell 6.7 percent, compared with projections of a 3.8 percent increase, leaving a trade surplus of $54.47 billion, the customs administration said today.
The slide in oil prices to five-year lows offers China a double benefit as its leadership confronts the weakest expansion in a generation. The decline could boost economic growth and help keep inflation slow enough to give scope for further easing after last month’s interest-rate cut.
----China imported $16.42 billion worth of crude oil in November, down from $18.43 billion a year earlier.
Falling oil prices will prompt importers to “wait until the oil gets even cheaper and delay purchase,” and that also exacerbates the imports (CNFRIMPY) data, said Larry Hu, head of China economics at Macquarie Securities Ltd. in Hong Kong.
More
Here Come The Defaults: Oil & Gas Bloodbath Extends to Junk Bonds And Leveraged Loans
by Wolf Richter • December 7, 2014
The price of oil has plunged
nearly 40% since June to $65.63, and junk bonds in the US energy sector are
getting hammered, after a phenomenal boom that peaked this year. Energy
companies sold $50 billion in junk bonds through October, 14% of all junk bonds
issued! But junk-rated energy companies trying to raise new money to service
old debt or to fund costly fracking or off-shore drilling operations are suddenly
hitting resistance.
And the erstwhile booming
leveraged loans, the ugly sisters of junk bonds, are causing the Fed to have
conniptions. Even Fed Chair Yellen singled them out because they involve banks
and represent risks to the financial system. Regulators are investigating them
and are trying to curtail them through “macroprudential” means, such as
cracking down on banks, rather than through monetary means, such as raising
rates. And what the Fed has been worrying about is already happening in the
energy sector: leveraged loans are getting mauled. And it’s just the beginning.
----Oil and gas stocks are bleeding: the Energy Select Sector ETF (XLE) is down 21% from June; S&P International Energy Sector ETF (IPW) down 29% from early July; and the Oil & Gas Equipment & Services ETF (XES) down 42% from early July.
Smaller drillers are in trouble. All of them had horrific single-day plunges, some over 30%, on “Black Friday” after OPEC’s Thanksgiving decision to keep production quotas at 30 million barrels per day. By now, “Black Friday” has acquired an entirely different meaning in the oil patch than its classic meaning in retail. Traders who tried to catch these stocks have gotten their fingers sliced off since then:
- Goodrich Petroleum -88% since June.
- Energy XXI -86% since June
- Sanchez Energy -78% since June.
- Oasis Petroleum -75% since July.
- Triangle Petroleum -71% since June.
- Stone Energy -70% since April.
- Clayton Williams Energy -62% since May.
- Callon Petroleum -61% since June.
- EP Energy -60% since June.
Turns out, the Fed, so ingeniously prolific in buying financial assets to inflate their prices, can’t buy oil.
Companies in the sector are now facing a harsh reality: crashing revenues and earnings. Some of them are going to have liquidity problems. Unless a miracle happens that will goose the price of oil pronto, there will be defaults, and they will reverberate beyond the oil patch. And the consequences are felt far beyond the American oil patch [read… Saudi Arabia Declares Oil War on US Fracking, hits Railroads, Tank-Car Makers, Canada, Russia; Sinks Venezuela ].
But even the 43 largest, most diversified players in the energy sector that are part of the S&P 500 are grappling with the new reality: analysts chopped earnings estimates by 20.5% since September 30, according to FactSet. If this is final decline for the quarter – though the chopping is likely to continue – it will be the worst decline in EPS estimates since the first quarter of crisis-year 2009.
As of Friday, analysts expected the energy sector to report a 13.7% drop in revenues. At the beginning of the quarter, they’d expected a decline of only 1.7%, though oil prices had been plunging for three months. And they now expect a 14.6% swoon in earnings, as opposed to the 6.6% gain they still saw at the beginning of the quarter. This chart by FactSet shows the ugly reversal of their EPS expectations (ugly red bar on the far right) – and just how far they lagged behind when the quarter began:
All of the energy companies in the S&P 500 got their EPS estimates decimated, even the biggest ones: Exxon Mobil by 20%, Chevron by 25%, Hess by 47%, Murphy Oil by 50%, and Marathon Oil by 63%.
More
Japan’s Recession Deepens as Election Looms for Abe: Economy
Dec 8, 2014 2:45 AM GMT
Japan’s recession was
deeper than initially estimated as company investment unexpectedly shrank, a
blow to Prime Minister Shinzo Abe as he campaigns for re-election on his
economic credentials. The economy contracted an annualized 1.9 percent in the July to September period from the previous quarter, weaker than the 1.6 percent drop reported in preliminary data. The result was also below every forecast in a Bloomberg News survey that showed a median 0.5 percent decrease.
The surprise decline in business investment sapped the strength of the world’s third-biggest economy, compounding damage from a slump in consumer spending after a sales-tax rise in April. With the main opposition party caught unprepared, Abe is on-track to win the Dec. 14 election, even as a decline in the yen cuts into people’s spending power.
More
There can be few fields of human endeavour in which history counts for so little as in the world of finance. Past experience, to the extent that it is part of memory at all, is dismissed as the primitive refuge of those who do not have the insight to appreciate the incredible wonders of the present.
J. K. Galbraith
At the Comex silver
depositories Friday final figures were: Registered 64.48 Moz, Eligible 113.25
Moz, Total 177.73 Moz.
Crooks and Scoundrels Corner
The bent, the seriously bent, and the totally
doubled over.
"When it becomes serious, you have to lie"
Jean-Claude Juncker. Failed Luxembourg Prime Minister and ex-president of the Euro
Group of Finance Ministers. Confessed liar. EC President.
European Banks Threatened by Slowing Growth, Moody’s Says
Dec 8, 2014 12:05 AM GMT
European
banks will be weakened further by poor economic conditions and high
litigation costs in 2015, according to Moody’s Investors Service. Banks’ profits in the region, with the exception of the U.K. and Scandinavia, may be exposed to “economic tailwinds,” hurting loan demand and the value of transactions, Moody’s said in a statement today. The region’s banking industry may need to cut costs further and make more adjustments, it said.
“Weak macroeconomic conditions weigh on Europe’s banking sector, and low overall bottom lines implies that the European banking industry remains structurally vulnerable,” Carola Schuler, Moody’s managing director of Europe, the Middle East and Africa banking, said in the statement.
The European Central Bank last week reduced its euro-area growth and inflation forecasts for 2014 to 2016, while Germany’s Bundesbank also cut its economic outlook. It comes as litigation expenses continue to weigh on European banks from investigations into the manipulation of benchmark interest rates to currency markets.
Germany's Bundesbank halves growth forecast as eurozone sours
The German economy has lost "considerable momentum", and can only be expected to deliver growth of 1pc next year, the country's central bank says
The Bundesbank has dramatically
downgraded its growth forecasts for the German economy to 1pc in 2015, half the
pace it had forecast in June.
The organisation also slashed its
growth outlook for this year to 1.4pc, compared with its previous estimate of a
1.9pc expansion. GDP growth is expected to pick up slightly in 2016, rising to
1.6pc.
The central bank cited a loss of
“considerable momentum in the second and third quarters of 2014” as responsible
for the drop to a flatter growth path in 2014.
Jens Weidmann, the Bundesbank’s
president, said that “there is reason to hope that the current sluggish phase
will prove to be short-lived”.
The Bundesbank’s updated biannual
forecasts were published as separate data showed that Germany factory orders
had risen by 2.5pc in the month of October, growth five times stronger than
expected by analysts.
The jump in order books was
described as a “surge” by Barclays analysts, who said that “the strong showing
of core orders from other euro area members over the past few months is
particularly encouraging”.
Germany's manufacturing sector
has suffered over the year as a result of ongoing geopolitical tensions over
Russia and Ukraine. Tit-for-tat sanctions exchanged over the issue have not
helped Germany or Russia.
The Bundesbank also lowered its
projections for inflation, to 1.1pc next year, and 1.8pc in 2016. Inflation in
the euro area as a whole fell to 0.3pc in the year to November, well below the
European Central Bank’s target of close to 2pc.
Noting a recent fall in the value
of oil prices, Mr Weidmann said: “If crude oil prices remain at this subdued
level for an extended period of time, economic growth in 2015 and 2016 could
turn out to be between 0.1 and 0.2 percentage point higher in each case”.
A second estimate of eurozone
growth released after the Bundesbank forecasts confirmed that GDP rose by just
0.2pc in the third quarter.
Jonathan Loynes, chief European
economist at Capital Economics, said that the latest breakdown of GDP
"offers little encouragement that the region's recovery is about to pick
up any meaningful speed".
Meanwhile, S&P lowered the
the rating it holds on Italian government debt to one notch above
"junk", from BBB to BBB-.
MoreSpain's state-owned bank presented accounts plagued with errors
Report into Bankia released as part of a court investigation into its flotation and state bailout, which saw hundreds of thousands of small investors lose money
Spanish state-owned lender Bankia
presented a series of error-strewn accounts for 2011, the year it listed shares,
according to a report released as part of a long-running court investigation
into its flotation and state bailout.
Hundreds of thousands of small
investors lost money after Bankia needed a massive rescue in 2012, less than a
year after the lender's mid-2011 stock market listing. Some have alleged they
were cheated when they bought the shares.
"[The accounts] do not
comply with Bank of Spain norms ... due to the presence of accounting
errors," the report said.
Spain's High Court opened a probe
into the listing two years ago after a small political party brought a claim,
though it is still not clear if or when there will be a trial.
Rodrigo Rato, a former
International Monetary Fund chief who was chairman at the time of the
flotation, has been questioned in court over the case along with some other
former managers, and they have been accused of fraud.
More
ECB Measures Seen as Not Sufficient Without Bond Buying
Dec 8, 2014 12:01 AM GMT
Mario Draghi is about to get an idea of how far reality falls short of his intentions.
A round of long-term loans by the European Central Bank to lenders this week won’t even cover the repayments they owe from a previous program, according to a Bloomberg News survey of analysts. The operation could show that stimulus measures the ECB president says are “intended” to add as much as 1 trillion euros ($1.23 trillion) to the financial system won’t suffice without large-scale buying of assets such as government bonds.
Draghi has promised the ECB will act should current stimulus prove insufficient when it is reassessed early next year, and the central bank is said to be preparing a QE package to be discussed at the next monetary policy meeting on Jan. 22. The debate is dividing officials though, meaning each fresh piece of evidence could prove critical in swaying opinion.
A take-up of 180 billion euros in the four-year loans “is basically the upper ceiling,” said Thomas Harjes, senior European economist at Barclays Plc in Frankfurt. “Even with 180 billion euros, the ECB balance sheet under existing measures falls significantly short of what is ‘intended’.”
More
"The most puzzling development in politics during the last decade is the apparent determination of Western European leaders to re-create the Soviet Union in Western Europe."
Mikhail Gorbachev
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