Month: May 2018

Authored by Tsvetana Paraskova via OilPrice.com,

The geopolitical risk premium has taken center stage as one of the key drivers of oil prices in recent months, often trumping fundamentals to send prices soaring on concerns about where the next sudden oil supply disruption would come from.

In recent weeks, a perfect storm of nearly erased global oil glut and simmering—and at times flaring—tensions in the Middle East and the worst production loss without an armed conflict (Venezuela) have supported oil prices and boosted them to levels last seen in November 2014.

In the coming weeks and months, geopolitical risks could further boost oil prices in a market that hasn’t been this tight in years. The main risks to oil supply could come from the Middle East, North Africa, and Venezuela.

S&P Global Platts has summed up the key flashpoints around the world that could lead to oil supply disruptions, potentially further boosting oil prices.

Iran

OPEC’s third-largest producer Iran—which pumps 3.8 million bpd as per OPEC’s secondary sources—could be the most immediate threat to supply.

U.S. President Donald Trump has until May 12 to decide whether to waive the sanctions against Tehran as part of the nuclear deal that global powers signed with Iran. Analysts think that the possibility of President Trump not waiving the sanctions is high, but they diverge wildly as to how a no-waiver would impact Iran’s oil exports and global oil prices. Estimates vary from a zero to one million bpd loss of supply out of Iran, and a premium to oil prices of between $2 and $10. Iran’s top oil customers are China, India, and South Korea. 

Yemen

The Iran-Saudi proxy war in Yemen risks escalating. The Iran-aligned Yemeni rebels—who have been fighting a Saudi-led Arab coalition in Yemen since 2015—have been targetingSaudi Aramco oil facilities and the Saudi capital Riyadh with missiles and have been trying to attack Saudi oil tankers in the sea. Yemen lies along one of the main global oil chokepoints in the Red Sea. Millions of barrels of crude oil pass Yemeni shores from the Suez Canal en route to Europe every day.

The Red Sea

The conflict in Yemen is also a risk to tanker route disruptions in the Red Sea. While Yemen is not a major oil producer, further escalation of the war could spill over to the oil chokepoints around the Middle East that could disrupt oil tanker routes and flows.

The Bab el-Mandeb Strait is one of the key chokepoints around the Arabian Peninsula. Located between Yemen, Djibouti, and Eritrea, Bab el-Mandeb connects the Red Sea with the Gulf of Aden and the Arabian Sea. According to EIA estimates, a total of 4.8 million bpd of crude oil and refined petroleum products flowed through this waterway in 2016 toward Europe, the United States, and Asia. 

The Strait of Hormuz

The Strait of Hormuz is the world’s most important chokepoint, with an oil flow of 18.5 million bpd in 2016, the EIA estimates. The Strait of Hormuz connects the Persian Gulf with the Gulf of Oman and the Arabian Sea and is the key route through which Persian Gulf exporters—Saudi Arabia, Iran, Iraq, Kuwait, Qatar, the UAE, and Bahrain—ship their oil. Only Saudi Arabia and the UAE have pipelines that can ship crude oil outside of the Persian Gulf and have additional pipeline capacity to bypass the Strait of Hormuz, which is a route of more than 30 percent of daily global seaborne-traded crude oil and petroleum products and more than 30 percent of the liquefied natural gas (LNG) flows. Iran has threatened in the past to block the Strait of Hormuz, and although analysts think that it would struggle to do so due to the U.S. naval presence in the area, a further flare-up in the Tehran-U.S. relations could be a risk to the oil flows in this vital global chokepoint.

Syria

The complex proxy conflict in Syria is also a risk to heightened tension in the Middle East, although Syria is not a big oil producer. Further escalation of the conflict, or heightened U.S. vs. Russia/Iran tension, is a risk to which the oil market could react.

Iraq

Iraq—OPEC’s second-largest producer behind Saudi Arabia—is holding parliamentary elections on May 12 amid still unresolved issues with the Kurdish region that have hit Iraq’s oil exports from the north to Turkey’s Mediterranean coast. According to Platts, the election is a short-term risk as it could delay assigning oil contracts as Iraq is pushing for recovery of its oil, refining, and civil infrastructure sectors after it declared victory over ISIS at the end of last year.

Unsurprisingly, the Middle East is home to most of the oil supply risks. But there are other geopolitical risk factors to oil prices, both close to the Middle East and far off in Latin America.

Libya

The North African oil producer has managed to lift its production to around 1 million bpd, but risks still persist with rival factions fighting for control and suddenly disrupting oil facilities’ operations and oil export terminals.

Venezuela  

 Venezuela’s oil production is crumbling, and the only way ahead is further down, all analysts say. The only question is how low the production could drop. According to OPEC’s secondary sources, Venezuela’s oil production averaged 2.154 million bpd in 2016, and 1.916 million bpd in 2017. In March 2018, its production plunged to 1.488 million bpd. Oil production is set to further collapse amid lack of maintenance, staff exodus, and the economy in total disarray. Venezuela holds a presidential election on May 20, which the U.S. and several Latin American nations say they will not recognize. New sanctions on Venezuela could follow, including a possible ban on U.S. light oil exports that Venezuela uses to blend its heavy oil to move it through pipelines.

To be sure, none of the above geopolitical risks could materialize, but even if just one or two were to occur and actually disrupt oil supply, oil prices could surge in this tight market.

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President Trump answered some shouted questions from reporters as he headed for the helicopter this morning.

While his main focus was on how great the jobs number was and the “Witch Hunt” that is Mueller’s investigation (and the Democrat-led investigations)…

Trump said “if it was fair, he would override the advice of his lawyers not to speak to Mueller.”

“I would love to talk to Mueller or the investigations, because there was no collusion with Russia, but there are 13 democrats, 13 angry democrats, and I wouldn’t be treated fairly.”

We suspect the main headlines will be about his comments on Rudy Giuliani, after Giuliani appeared for a series of bombshell interviews on Fox News and declared that Cohen was repaid by the president for his $130,000 payment to porn star Stormy Daniels to keep quiet about an alleged affair with Trump.

“…we love Rudy, he’s a special guy but he doesn’t understand all the facts… he’s only been here a few days… he understands this is a witch hunt… he’ll get his facts straight.“

President Trump on Rudy Giuliani: “He started yesterday. He’ll get his facts straight. He’s a great guy.” pic.twitter.com/mTjYdcMCCX

— NBC News (@NBCNews) May 4, 2018

Which clearly implies the White House is shifting the narrative once again.

Of course, judging by President Trump’s historical playbook of praising before firing his staff, his “special guy… great guy” comments could be ominous for Giuliani.

Additionally, Mediate is reporting that MSNBC’s Donny Deutsch dropped a bombshell on Morning Joe Friday, stating that said President Donald Trump’s personal lawyer Michael Cohen told him Rudy Giuliani “doesn’t know what he’s talking about.”

Giuliani’s comments were an effort to defend Cohen against charges his payment to Daniels violated campaign finance laws, though it’s not clear he cleaned anything up for the president’s fixer.

“The Giuliani thing is interesting,” Deutsch said. “We forget how during the campaign, Giuliani was unhinged. I mean if you showed clips of him during the campaign, there was a reason he didn’t get hired for all the jobs that he wanted to.”

“I spoke with Michael Cohen yesterday, and his remark about Giuliani, was that he doesn’t know what he’s talking about,” Deutsch said. “He also said look, there are two people that know exactly what happened. And that’s myself and the president. And you’ll be hearing my side of the story.”

“And he was obviously very frustrated with what had come out yesterday,” Deutsch added.

Finally, we note that Trump said that they have a date and location ready for the Summit with North Korean leader Kim (but would not reveal it).

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After years of monthly payroll reports padded with excessive minimum wage waiter, bartender, educator or retail worker jobs, the just released April jobs report, disappointing as it may have been on the top-line, showed surprising strength in most components even if some negative surprises were also present.

Of note: the biggest jobs growth in April was in the higher paying job categories, such as professional services and manufacturing. The notable sector trends are as follows, via Southbay Research:

• Continued strength in Goods Production: Oil services (+7K), Construction (+17K) & Manufacturing (+24K).
• Trade & Transportation Slowed: Wholesale (-10K), Retail (+2K), and Transportation (+0K).

And while the retail sluggishness was expected, the weakness in Wholesale and Transportation was not, especially since it was contradicted by micro level data sourced directly from major trucking employers, all of whom have been complaining they can’t find enough people to hire, which suggests there may be an upward revision next month.

Some other highlights:

• Professional Services were especially strong, with a balanced mix of White collar demand (Technical services +26K) and Admin & Suppport (+28K). The offset: Temp workers came in soft at just +10.3K.
• Manufacturing also very strong at +24K: machinery added +8K jobs and fabricated metal products was up +4,000.
• Education weak with just +1.1K: Unexplained significant weakness in this sector.
• Healthcare was steady: +29.3K: Employment rose in ambulatory health care services (+17,000) and hospitals (+8,000).
•  
• Leisure & Hospitality mild: +18K
• Mining +8K solid, most of the gain came from support activities for mining (+7,000).

Visually:

Looking over the past year, the following charts from Bloomberg show the industries with the highest and lowest rates of employment growth for the prior year. The latest month’s figures are highlighted. Wage data are shown when available.

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Just a week after ‘the purge’ began, Deutsche Bank is closing its office in Houston as part of a strategy to pare its U.S. operations, according to an internal memo seen by Bloomberg.

As part of Deutsche’s drastic restructuring, we noted previously, the purge began last week when Deutsche fired 300 U.S.-based investment bankers on Wednesday with another 100 pink slips expected over the next 24 hours.

In total, the biggest German bank plans to cut more than 1,000 jobs, or over 10%, of total US jobs in its initial restructuring phase. According to Bloomberg, the US hosts about 10,300 Deutsche Bank employees, or about a tenth of the firm’s global workforce.

In his earnings call comments, CEO Sewing stopped short of disclosing how many of the bank’s 97,103 jobs would be let go…

… while CFO James von Moltke also gave few clues as to how much of its massive 1.4 trillion euro ($1.7 trillion) balance sheet would be shed in the process. Von Moltke estimated restructuring costs for 2018 would rise to 800 million euros, up from an earlier estimate of 500 million euros, according to Bloomberg.

“These cutbacks will be painful, but they are unfortunately unavoidable if we want to be sustainably profitable in the best interests of our bank, our clients and our investors,” Sewing said.

And now, as Bloomberg reports, the bank will now shutter its Houston office, which has over 50 staff…

“We will continue to serve our Oil and Gas clients through our debt and corporate banking treasury products,” Mark Fedorcik, co-head of the U.S. investment bank, said in the memo to staff.

“We remain committed to the U.S. Power and Utilities sector which will be re-aligned under the Industrials coverage vertical in New York.”

A spokeswoman for the company confirmed the contents of the memo.

Bloomberg notes that it wasn’t immediately clear how many jobs would be cut, and how many would be relocated to other offices.

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Authored by Charles Hugh Smith via OfTwoMinds blog,

Corporate buybacks provide the key analogy for the economy as a whole.

Central banks have been running a grand experiment for 9 years, and now we’re about to find out if it succeeds or fails. For 9 unprecedented years, central banks have pushed the pedal of monetary stimulus to the metal: near-zero interest rates, monumental purchases of bonds, mortgage-backed securities, stocks and corporate bonds, injecting trillions of dollars, yuan, yen and euros into the global financial system, all in the name of promoting a “synchronized global recovery” that in many nations remains the weakest post-World War II recovery on record.

The two goals of this unprecedented stimulus were 1) bringing consumption forward and 2) generating a “wealth effect” as the owners of assets rising in value would translate their perception of feeling wealthier into more borrowing and consumption that would then feed a self-sustaining virtuous cycle of expansion.

The Federal Reserve has finally begun reducing its stimulus programs of near-zero interest rates and bond purchases, the idea being that the “recovery” is now robust enough to continue without the extraordinary monetary stimulus of the past 9 years since the Global Financial Meltdown of 2008-09.

Will the “synchronized global recovery” continue as interest rates rise and central bank assets purchases decline? Policy makers and economists evince confidence as they collectively hold their breath–is the recovery now self-sustaining?

2018 is the first test year. Global assets–stocks, bonds and real estate–remain at levels that are grossly overvalued by traditional measures, and most economies are still expanding modestly. But since the other major central banks have only recently begun to “taper” / reduce their securities purchases, the real test has yet to begin.

The pulses of asset valuations and productive expansion are weakening. Asset valuations are either no longer expanding or are actively falling; markets everywhere feel heavy, as if all they need is one good shove to slip into major declines.

The vaunted “wealth effect” was extremely asymmetric: only those in the top 5% who owned enough assets to experience a meaningful increase in wealth–those who bought assets years before the current bubble expanded, and the relative few households who own roughly 70% of all financial assets–and the few workers and entrepreneurs who benefited from an increasingly “winner take most” expansion.

As a result, the enormous increases in assets had little real effect on the bottom 80% who own few assets, and only modest effects on the “middle class” between the bottom 80% and the top 5%.

Meanwhile, bringing consumption forward has drained the pool of future consumption and creditworthy borrowers. Future consumption now rests on the shaky foundation of marginally qualified buyers and the relatively few young people forming new households who also have high incomes and good credit.

The reality nobody dares acknowledge is that a “recovery” based not on improving productivity and innovation but on cheap credit and an artificially stimulated “wealth effect” was inherently weak, for the stimulus effectively hollowed out the productive economy in favor of the financialized, speculative economy and created perverse incentives to over-borrow and over-spend, stripping future demand to create the illusion of growth in a stagnating economy of rising wealth and power inequality.

A funny thing happens when you borrow from the future to spend more today–the future arrives, and we find the pool has been drained to serve the absurd policy goal of “no recession now, or ever again.”

Corporate buybacks provide the key analogy for the economy as a whole: as sales, productivity and profits all stagnate, corporations borrow against future earnings to buy shares back from investors to push share prices higher, creating an illusion of “wealth.” But it’s all illusion; once the billions in buybacks cease, gravity takes hold and the phantom “wealth” dissipates.

Apple is simply the latest corporation to announce slowing sales growth and to compensate for this stagnation with a massive $100 billion buyback to prop up shares at their current valuation.

Perhaps these realities are seeping into the margins of the complacent herd. It certainly feels like the “smart money” is selling (distributing) to the complacent herd, which is one lightning strike and thunder clap away from a panicked rush to sell and book 9 years of gains before the synchronized global asset bubbles all pop.

Markets have ignored the tapering of central bank support (asset purchases), but the question remains: is this complacency temporary?

Productivity is the only sustainable source of widespread prosperity, and it’s stagnating:

*  *  *

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Two days ago we reported that less than two weeks after getting stopped out on his WTI short, days after he was also stopped out on his Nasdaq short, “world-renowned commodity guru” Dennis Gartman decided he had had enough of boring, boneheaded assets, and decided to short the 10Y treasury.

NEW RECOMMENDATION: The bond market has rallied ever-so-slightly in the course of the past several days, taking it from being aggressively over-sold back to neutrality and in protracted bear markets neutrality is about all that one can ask.

We need to remember that the bond market is now two years into a bear market and that the supposed line-in-the-sand at 3% will prove ephemeral as the ten year trades to 4% and perhaps 5% over the course of the next two or three years.

We are sellers of the ten year here, willingly risking the yield to drop to 2.92 from 2.98 presently, and when the yield moves upward through 3.02 again we shall add to short positions.

As we write, the ten-year note future is trading 119 11/3nds.

What happened next was predictable: the 10Y proceeded to spike higher…

… and then it went higher, and higher, and higher, until this morning’s disappointing NFP print, which prompted some to – incorrectly – concluded that the Fed may be getting cold feet about hiking more. Whatever the reason, however, moments after the NFP was announced the 10Y yield plunged, sliding from above 2.93% to below 2.91% in the span of milliseconds.

More importantly, recall from Gartman:

We are sellers of the ten year here, willingly risking the yield to drop to 2.92 from 2.98 presently, and when the yield moves upward through 3.02 again we shall add to short positions.

Well, he risked… and lost.

And just like that, Gartman was just stopped out for the 3rd time in 2 weeks. And now, 10Y yields can go ahead and soar.

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Following this morning’s disappointing payrolls data – if you ignore the ridiculous 3.9% unemployment rate that The Fed focuses on – the dollar index is spiking back above pre-FOMC levels.

However, it is the massive VIX flash-crash to a 10 handle is the most notable…

 

Stocks are sinking post-payrolls…

Not a fat finger!

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