EIA Inventory Report and Oil Market Analysis 3 9 2016 (Video)

By EconMatters

Gasoline demand is driving the oil complex higher, relatively strong gasoline numbers on the refinery input side and the gasoline demand side of the equation. Brent should test $44 a barrel pretty soon, unless something dramatically happens that is unforeseen as of today.

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“Dust Off The Tail-Risk Hedges” MKM Warns US Equities Are Entering A “High Volatility Regime”

"Dust off the systematic hedging strategies, and get re-acquainted with the concept of tail-risk," is the ominous conclusion from MKM Partners' Jim Strugger's latest report. Despite every effort from central banks to maintain a low-volatility environment, the magnitude of the August 2015 'shock' not just for U.S. equities but across asset classes, was great enough for Strugger to conclude that a transition into a high-volatility regime had begun. Given the length of the economic cycle, bull market, and the rise in financial stress globally, Strugger warns a transition to a high-vol regime leaves ultimate damage in the &P 500 averaging 53%.

There have been seven distinct volatility regimes since the inception of the Chicago Board Options Exchange (CBOE) VXO implied volatility index in the mid-1980s, Strugger points out. The average duration of a volatility regime has lasted five years, with the most recent regime from late 2012 to August of 2015 lasting just 2.75 years.

 

Low volatility regimes have been positive for stocks. Periods such as 1991-1997, 2003-2007, 2013-current were historically a time of positive equity market gains, with low implied correlation, flat skew and stable upward-sloping term structure. On average, SPX monthly returns were positive 67% of the time, while spot VIX average 14, which appears a key resistance point today.

Since inception of VIX there have been five prior 40-magnitude VIX shocks, all during periods of structurally elevated volatility.. August was the trigger…

Crucially, U.S. Equities Are Not In a Vacuum…

A major gap has opened up between global financial stress and VIX which is unusual as they have historically tracked each other extremely closesly…

It’s a Global High-Vol Regime

GFSI measures risk via 41 sub-components across a range of asset classes and geographies. It inflected in earlier in 2015 actually preceding the shift in U.S. equity implied volatility…

 

In a worst case scenario, Strugger adds:

Implications are significant since the last two bear markets saw equities cascade lower for 1.5-2 years with ultimate damage in SPX averaging 53%

High volatility market environment calls for a different approach to tail risk

Contrast this with high volatility regimes. Strugger notes that since 1990 the two bear markets and every major equity market drawdown have occurred within high-volatility regimes, of which we have now entered. This points to what is currently a higher-risk environment with deeper equity market pullbacks. Is this a bear market? This “remains inconclusive from a volatility perspective,” Strugger says

“Even if a late-1990s type scenario unfolds and the bull market that began in March 2009 continues for another couple or few years, pullbacks relative to the 2012-2015 period will be sharper and equities will remain vulnerable to higher-magnitude shocks,” he wrote.

He notes fat tail risk and kurtosis can sometimes have an ugly correlation factor and advises institutional investors to “dust off the systematic hedging strategies, get re-acquainted with the concept of tail-risk” and consider volatility strategies that extract profits from elevated implied vol levels. This could include covered call and even put writing under certain circumstances.

“Our starting point for systematic hedging is to own 3-month index puts or put spreads partially financed by the sale of 1-2 month covered calls on individual stocks in the portfolio,” he advises, a strategy that resembles the CBOE S&P 500 95-110 Collar Index (CLL). Strugger also likes covering tail risk through VIX and volatility-linked ETPs (VXTH) in this environment.

Source: MKM Partners

Full report below:

Volatility Regime In Pictures – MKM


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“Are You Not Entertained” By This Close: Dow Back At 17K After Last Minute VIX Slam

Seriously!!!! That Close!!!

 

Your day in the "market"…

 

The "stable" oil market…

 

Following yesterday's noisy drop, today was the echo with a noisy choppy low volume rally as Oil sparked the momentum in the pre-open, but stocks decoupled lower from both JPY and Oil (smashed lower on weak wholesale trade data and a realization that US crude production rose)…

 

Trannies outperformed as The Dow couldn't get too far away from unch… and then everyone panicced to buy at the close..

 

On the week, The Dow clung to unchanged thanks to the panic close, but Trannies lag…

 

No bounce at all in financials – even as Treasury yields rose – but energy obviously bounced (even though energy credit risk rose 6bps to 1262bps)

 

Today saw two legs down – the first from a delayed reaction to the fact that crude production rose in the US and the second as Carson Block commented on the "dead cat bounce" – all that mattered today was defending the short-squeeeze trendline at 1980… What a total f##king joke that close was…

 

And the ramp was all about getting The Dow above 17000!!!

 

But VIX remains totally decoupled once again from global financial stress…

 

Treasury yields rose all day pushing all but 30Y higher for the week…with Fischer's inflation sightings the catalyst

 

Notably the USD Index tumbled as US Inventories data hit – pointing clearly at recessionary pressures building. But JPY plunged…

 

Crude was the day's big winner for absolutely no good reason, PMs were modestly lower and copper gained back half of yesterday'slosses…

 

Gold was triple-slammed overnight… but bounced back…

 

Charts: Bloomberg


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What Matters Most?

Via ConvergEx's Nick Colas,

Today we engage in a simple thought experiment: what 3 pieces of information would you need to confidently call the 2016 end-of-year level on the S&P 500?

 

A brief survey of senior Convergex traders yielded this list: year-end worldwide central bank rates, Chinese GDP growth in 2016, actual 2016 US corporate earnings, the winner of the U.S. presidential race, and the pace of increases in the Fed Funds rate for the year. 

 

When we posed the questions to analyst friends, they added: 2016 U.S. wage growth, 2017 consensus corporate earnings (in December 2016) and any information about a significant geopolitical event.  Everyone agreed oil prices were on the list.

 

All this pushes two other questions to the fore.  First, what’s on your list, and why?  And second, what’s not on any of these lists?  Because maybe that’s what will actually move markets…

The 1920s were a period of immense technological innovation, but that didn’t stop many prominent thinkers of the age from believing that the living could speak to the dead.  Sir Arthur Conan Doyle, creator of the deeply rational Sherlock Holmes, wrote more than a dozen books on the topic.  French Nobel Prize winning physiologist (awarded 1913) Charles Richet was the original “Ghostbuster”, coining the term “ectoplasm” decades before Bill Murray ever got slimed.   Even Thomas Edison thought about building a telephone to reach into the next world.

As a result of this air of respectability, tens of thousands of mystics plied their trade in Europe and the U.S., including one Mary Carter of Cincinnati Ohio.  She had an especially powerful shtick in her repertoire.  During a séance an assistant would place a small clean chalkboard in a box on the table where participants sat.  They would ask their questions of people in the afterlife, and when the box was opened the slate would reveal the answer.  A neat bit of magic, if nothing else.

In the mid-1940s, her son Albert Carter borrowed the idea to create a toy that is still popular today: the “Magic 8 ball”.  Essentially, it was two dice with words (‘Yes’, ‘don’t count on it’, ‘it is certain’, etc.) printed on them, suspended in can of oil with a clear top.  Ask a question, shake the container, and wait for one of the die to float to the surface with your answer.  After he passed on, his partners licensed the idea to Brunswick Billiards as a give-away item to promote the brand.  The container became the now well-known black sphere resembling an 8-ball.

Predicting capital markets action can, at times, feel much like using a Magic 8 ball.  You ask a question, wait, and the market returns with an answer. Sometimes you like the answer, and sometimes you don’t.

But what if that plastic black ball became a crystal one instead?  Those are far older, by the way.  They date back to the first century A.D. – although they came into widespread use during the Victorian age just as the precursor to the Magic 8 ball was a bit of 1920s occult stagecraft.  Something about periods of rapid technological advancement seems to give mankind false notions of grandeur, it appears.

Here is a quick thought experiment I gave to a handful of colleagues and friends this afternoon:

  • I possess a crystal ball that can accurately foresee any future event or financial market asset price except the price of the S&P 500.
  • If your task were to predict where the S&P 500 will close this year, what three things would you want to know from the ball?
  • Since everyone would want to know the price of oil, I offered that up as a freebie. In this game, the price of crude oil will run between $30 and $40/barrel through the end of 2016.

I first asked the senior traders on the Convergex equity desk.  Their replies:

  • The contours of central bank monetary policy between now and year end (timing and magnitude of rate moves).
  • Chinese GDP growth rates.
  • Actual year-end 2016 earnings per share for the S&P 500.
  • If Donald Trump wins the general election.

Then I posed the same question to some analysts. Their answers obviously overlapped with the traders’, but they added:

  • What will be the consensus 2017 earnings estimate for the S&P 500 at the end of this year?
  • Where will junk corporate bond spreads be at the end of the year?
  • What is the Q4 2016 GDP growth rate for the U.S.?
  • What will U.S. wage growth be at the end of 2016?
  • Will there be any major shocks in global geopolitics this year?

 

For what it’s worth, here are my three and a bit of the reasoning behind them.

#1: Is the VIX over 30 for more than 5 consecutive days in 2016?

 

Reasoning: The first quarter of 2016 has seen an unvirtuous circle of negativity on basically everything that matters to equity investors – worries over the global banking system, worldwide deflation, the efficacy of central bank policy, etc.  And yet the CBOE VIX Index never closed above 30.  If things stay quiet – or there’s just a small bout of volatility at some point – equities will likely end the year up or down small (5-10%) from here.

 

Now, if there is any event – geopolitical or otherwise – that pulls the VIX over 30 and holds it there for a week, all bets are off.  The most important lesson of 2016 thus far is that markets now openly question the ability of central banks to create specific economic outcomes.  Negative rates, QE, jawboning, every implement that fills the tool box in a central banker’s work vehicle is being questioned.  And that’s not good for markets. We’re walking a tightrope here, and any large external shock will raise far more questions than answers in the minds of investors.

 

#2: What is the Labor Force Participation Rate in December 2016?

 

Reasoning: This ratio of people in the workforce to total adult population has been declining since 1999, although it stabilized from 2005 to 2008. The drop since, to its current 62.9% from a peak of 67.3%, is a combination of demographic and other factors.  Received wisdom has it that this number will continue to decline for the foreseeable future.

 

The funny thing is that LFPR is at one year highs, right now.  So what will the Federal Reserve make of this number if it continues to rise through the year?  Likely, it will interpret that as an indication that wages are rising fast enough to pull marginally attached workers back into the labor market.  And that will inform their commentary on the trajectory of Fed Funds in 2017 more than just the ‘Jobs Added’ data or the unemployment rate.

 

#3: Where are used car prices at year end?

 

Reasoning: Yes, seriously, this is a thing.  Demand for cars and light trucks have been the single brightest star in the U.S. economy since the Financial Crisis. Buying a light vehicle is the second most expensive purchase most households ever make, so good demand here means the rest of the economy is likely OK.  And the February 2016 selling rate was one of the best of the last decade.  Used car prices are proxies for trade-in values (the higher the better) as well as an indicator of income/spending levels for the 50-70% of American consumers who don’t buy new cars and trucks.

 

We use the Manheim Used Vehicle Value Index as our guide (see here http://ift.tt/1Dcp2hk).  It has been rock solid since 2011, although it’s begun to look a little shakier (down 1.4% in the most recent reading).  There is a huge amount of chatter about the subprime component of new car sales, and I’ve seen enough cycles to know that fear plus negative catalyst equals reality. Yes, the U.S. auto industry is no longer as important to the overall economy as it once was.  But how many cars GM can sell is still a better indicator of the economy than, say, how many Uber rides take place.

As a closing thought (or two):  First, what would your three questions be?  And second, what question is no one asking that will prove to be decisive?

Time to ask the Magic 8 ball.


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This Is Jeff Gundlach’s Favorite (& Scariest) Chart

According to DoubleLine’s Jeff Gundlach, this is his favorite chart – backing his persepctive that equity markets have “2% upside and 20% downside) from here.

In his words: “These lines will converge…”

Chart: Bloomberg

It should be pretty clear what drove the divergence, and unless (and maybe if) The Fed unleashes another round of money-printing (or worse), one can’t help but agree with Gundlach’s ominous call.


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Dear Ms. Merkel, Be Careful What You Wish For

Submitted by Raul Ilargi Meijer via The Automatic Earth blog,

“Those are my principles, and if you don’t like them… well, I have others.”

 

– Groucho Marx

What is perhaps most remarkable about the deal the EU is trying to seal with Turkey to push back ALL refugees who come to Greece is that the driving force behind it turns out to be Angela Merkel. Reports say that she and temp EU chairman Dutch PM Mark Rutte ‘pushed back’ the entire EU delegation that had been working on the case, including Juncker and Tusk, and came with proposals that go much further than even Brussels had in mind.

Why? Angela has elections this weekend she’s afraid to lose.

It’s also remarkable that the deal with the devil they came up with is fraught with so many legal uncertainties -it not outright impossibilities- that it’s highly unlikely the deal will ever be closed, let alone implemented. One thing they will have achieved is that refugees will arrive in much larger numbers over the next ten days, before a sequel meeting will be held, afraid as they will be to be pushed back after that date.

They may not have to be so scared of that, because anything remotely like what was agreed on will face so many legal challenges it may be DOA. Moreover, in the one-for-one format that is on the table, Europe would be forced to accept as many refugees from Turkey as it pushes back to that country. Have Merkel and Rutte realized this? Or do they think they can refuse that later, or slow it down?

Under the deal, Turkey seems to have little incentive to prevent refugees from sailing to Greece. Because for every one who sails and returns, Turkey can send one to Europe. What if that comes to a million, or two, three? The numbers of refugees in Turkey will remain the same, while the number in Europe will keep growing ad infinitum.

*  *  *

Sweet Jesus, Angela, we understand you have problems with the refugee situation, and that you have elections coming up this weekend, but what made you think the answer can be found in playing fast and loose with the law? And what, for that matter, do you expect to gain from negotiating a Faustian deal with the devil? Surely you know that makes you lose your soul?

You said yesterday that history won’t look kindly on the EU if it fails on refugees, but how do you think history will look on you for trying to sign a deal that violates various international laws, including the Geneva Conventions? You have this aura of being kinder than most of Europe to the refugees, but then you go and sell them out to a guy who aids ISIS, massacres Kurds, shuts down all the media he doesn’t like and makes a killing smuggling refugees to Greece?

Or are we getting this backwards, and are you shrewdly aware that the elections come before the next meeting with Turkey, and are you already planning to ditch the entire deal once the elections are done, or have your legal team assured you that there’s no way it will pass the court challenges it will inevitably provoke?

It would be smart if that’s the case, but it’s also quite dark: we are still talking about human beings here, of which hundreds of thousands have already died in the countries the living are fleeing, or during their flight (and we don’t mean by plane), and tens of thousands -and counting, fast- are already stuck in Greece, with one country after the other closing their borders after the -potential- deal became public knowledge.

So now Greece has to accommodate ever more refugees because all borders close, something Greece cannot afford since the bailout talks left it incapable of even looking after its own people, while over the next ten days it can expect a surge of ‘new’ refugees to arrive from Turkey, afraid they’ll be stuck there after a deal is done. Greece will become a “holding pen”, and the refugees will be the livestock. A warehouse of souls, a concentration camp.

The circumstances under which these human beings have been forced to flee their homes, to travel thousands of miles, and now to try and stay alive in Greece, are already way below morally acceptable. Just look at Idomeni! You should do all you can to improve their conditions, not to risk making them worse. Where and how you do that is another matter, but the principle should stand.

You should be in Greece right now, Angela, asking Tsipras how you can help him with this unfolding mayhem, how much money he needs and what other resources you can offer. Instead, Athens today hosts the Troika and Victoria “F**k the EU” Nuland. That is so completely insane it can’t escape the protagonists themselves either.

*  *  *

Refugees from war -torn countries are per definition not ‘illegal’. What is illegal, on the other hand, is to refuse them asylum. So all the talk about ‘illegal migrants’ emanating from shills like Donald Tusk is at best highly questionable. The freshly introduced term ‘irregular migrants’ is beyond the moral pale.

As is the emphasis on using the term ‘migrant’ versus ‘refugee’ that both European politicians and the international press are increasingly exhibiting, because it is nothing but a cheap attempt to influence public opinion while at the same time throwing desperate people’s legal status into doubt.

What their status is must be decided by appropriate legal entities, not by reporters or politicians seeking to use the confusion of the terms for their own personal benefit. And numbers show time and again that most of the people (93% in February GRAPH) arriving in Greece come from Syria, Iraq and Afghanistan, all war-torn, and must therefore be defined as ‘refugees’ under international law. It is really that simple. Anything else is hot air. Trying to redefine the terminology on the fly is immoral.

In that same terminology vein, the idea that Turkey is a ‘safe third country’, as the EU so desperately wants to claim, is downright crazy. That is not for the EU to decide, if only because it has -again, immoral- skin in the game.

All this terminology manipulation, ironically, plays into the hands of the very right wing movements that Angela Merkel fears losing this weekend’s elections to. They create a false picture and atmosphere incumbent ‘leaders’ try to use to hold on to power, but it will end up making them lose that power.

*  *  *

The funniest, though also potentially most disruptive, consequence of the proposed deal may well be that the visa requirements for the 75 million Turks to travel to Europe are to be abandoned in June, just 3 months away, giving them full Schengen privileges. Funny, because that raises the option of millions of Turkish people fleeing the Erdogan regime travelling to Europe as refugees, and doing it in a way that no-one can call illegal.

There may be as many as 20 million Kurds living in Turkey, and Erdogan has for all intents and purposes declared war on all of them. How about if half of them decide to start a new life in Europe? Can’t very well send them back to ‘safe third country’ Turkey.

Be careful what you wish for, Angela.

via GIPHY


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Kiwi Plunges As New Zealand Announces “Surprise” Rate Cut

They don’t call it a “currency war” for nothing. 

Moments ago, the RBNZ cut rates by 25 bps to 2.25% in the latest shot across the bow in what is now a years-long race to the bottom.

Here are the bullets: 

  • NEW ZEALAND CUTS KEY INTEREST RATE TO 2.25% FROM 2.50%
  • RBNZ SAYS FURTHER EXCHANGE RATE DEPRECIATION IS APPROPRIATE
  • RBNZ SEES INFLATION REACHING 2% IN 1Q 2018 VS 4Q 2017
  • RBNZ SEES 4Q 2016 ANNUAL INFLATION AT 1.1% VS 1.6%

Cue the kiwi plunge:

RBNZ governor Graeme Wheeler apparently made up his mind last week:

  • WHEELER: DECIDED TO CUT RATES LAST FRIDAY

But someone forgot to tell the PhD’s because 15 out of 17 economists surveyed by Bloomberg expected New Zealand to stand pat.

We don’t blame them. After all, who could have foreseen competitive easing in this environment?


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The “Smart Money” Is Quietly Getting Out Of Dodge: Sells For A Sixth Straight Week As Buybacks Soar

One week ago, when looking at the latest BofA client flow trend monitor, we noticed something strange: despite the S&P’s surge higher due to either a record short squeeze or because it is merely another bear market rally, the smart money was selling.

In fact, as BofA’s Jill Hall calculated, the three groups that make up the so-called “smart money” basket, hedge funds, BofA’s institutional clients as well its private clients, had been selling aggressively every week for the prior five. As she explained on March 1, “last week, during which the S&P 500 climbed 1.6%, BofAML clients were net sellers of US stocks for the fifth consecutive week, in the amount of $1.5bn. This was the biggest weekly outflow since mid-December.” Someone clearly was very grateful for the selling opportunity that this squeeze was providing.

Well, we can now add one more week to the total: in BofA’s latest note, “last week, during which the S&P 500 rallied 2.7%, BofAML clients were net sellers of US stocks for the sixth week.

She explains that “similar to the prior week, hedge funds, institutional clients, and private clients were all net sellers, though sales last week were led by private clients (vs. hedge funds the week prior). Our hedge fund clients remain the biggest net sellers of US stocks year-to-date.” 

The full breakdown below:

Clients were net sellers of stocks in five of the ten sectors last week and net buyers of the remaining five, as well as ETFs. Tech and the commodity-oriented sectors of Industrials and Materials saw the largest net sales, while Financials and Utilities saw the largest net buying… All three client groups sold stocks last week, led by private clients.”

 


 

So, like last week, we again know who is selling but what about the other side: was it just shorts covering who are providing the bid? The answer is no: “buybacks by corporate clients accelerated last week to their highest level since August, and are tracking above levels we saw this time last year, though below levels we observed in 2014 (see chart below). Clients sold both large and small caps last week, but continued to buy mid-caps—which have seen the most persistent buying by our clients over the last several years despite being crowded and expensive.

 

In retrospect, this makes a lot of sense: with the debt market for all but the moost pristine issuers jammed up, corporations who have relied on debt-funded buybacks to push their price higher have had to step on the accelerator in their buyback activity, to give the impression that the market is back to stable, which in turn could thaw the frozen debt market, allowing them to issue even more debt, whose proceeds they would then use to buy back even more stock. Indeed, the lower the market dropped, the greater the buyback activity had to be to offset the natural selling by the smart money.

This is what we said one week ago:

In other words, buybacks are on pace to surpass buyback records, and since the debt issuance pipeline has to be unclogged or else risk the failure of hundreds of billions in bond bond refinancings in the coming months not to mention the collapse of the bond-buyback pathway, companies have scrambled to put a “risk on” mood on the market by repurchasing their stock, so that these same companies can issue more debt, so that they can buyback even more debt in the future.

Since then absolutely nothing has changed, and here we are now: 6 weeks of consecutive derisking and selling by hedge funds, institutions and private clients soaked up by what is now a record short squeeze, as well as a near record buyback spree to mask the fact that the “smart money” is bailing.

We leave it up to readers to decide just how healthy is this “rally” if the smart money has been selling for nearly 2 months, and where the two primary buying groups are corporations themselves, and shorts squeezed into covering positions.

 


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Washington Post Ran 16 Negative Stories On Bernie Sanders In 16 Hours

Submitted by Adam Johnson via CommonDreams.org,

In what has to be some kind of record, the Washington Post ran 16 negative stories on Bernie Sanders in 16 hours, between roughly 10:20 PM EST Sunday, March 6, to 3:54 PM EST Monday, March 7—a window that includes the crucial Democratic debate in Flint, Michigan, and the next morning’s spin:

All of these posts paint his candidacy in a negative light, mainly by advancing the narrative that he’s a clueless white man incapable of winning over people of color or speaking to women. Even the one article about Sanders beating Trump implies this is somehow a surprise—despite the fact that Sanders consistently out-polls Hillary Clinton against the New York businessman.

There were two posts in this time frame that one could consider neutral: These Academics Say Bernie Sanders’ College Plan Will Be a Boon for African-American Students, Will It?” and “Democratic Debate: Clinton, Sanders Spar Over Fracking, Gun Control, Trade and Jobs.” None could be read as positive.

While the headlines don’t necessarily reflect all the nuances of the text, as I’ve noted before, only 40 percent of the public reads past the headlines, so how a story is labeled is just as important, if not more so, than the substance of the story itself.

The Washington Post was sold in 2013 to libertarian Amazon CEO Jeff Bezos, who is worth approximately $49.8 billion.

Despite being ideologically opposed to the Democratic Party (at least in principle), Bezos has enjoyed friendly ties with both the Obama administration and the CIA. As Michael Oman-Reagan notes, Amazon was awarded a $16.5 million contract with the State Department the last year Clinton ran it. Amazon also has over $600 million in contracts with the Central Intelligence Agency, an organization Sanders said he wanted to abolish in 1974, and still says he “had a lot of problems with.” FAIR has previously criticized the Washington Post for failing to disclose, when reporting on tech giant Uber, that Bezos also owns more than $1 billion in Uber stock.

The Washington Post’s editorial stance has been staunchly anti-Sanders, though the paper contends that its editorial board is entirely independent of both Bezos and the paper’s news reporting.

 


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The Curious Case Of The 550 Million Missing Barrels Of Crude Oil

Even as US crude oil inventories just hit a fresh record high for another week, both in Cushing and across all other regions, a more curious accumulation of excess oil inventory has emerged: according to the IEA, global oil production exceeded consumption by just over 1 billion barrels in 2014 and 2015.

 

As Reuters reports, crude oil production exceeded consumption by an average of 0.9 million barrels per day in 2014 and 2.0 million bpd in 2015. Of this 1 billion barrels which the IEA believes was produced but not consumer, some 420 million are said to be stored on land in OECD member countries and another 75 million can be found stored at sea or in transit by tanker somewhere from the oil fields to the refineries. This means that as of this moment, about 550 million “missing barrels” are unaccounted for “apparently produced but not consumed and not visible in the inventory statistics.”

As John Kemp writes, like most “plugs”, the missing barrels are recorded in the “miscellaneous to balance” line of the IEA’s monthly Oil Market Report as the difference between production, consumption and reported stock changes. The miscellaneous item reflects errors in data from OECD countries, errors in the agency’s estimates for supply and demand in non-OECD countries, and stockpile changes outside the OECD that go unrecorded.

The current IEA data reveals that there is a miscellaneous to balance item of 0.5 million barrels per day in 2014 and 1.0 million barrels per day in 2015.

This is not new: missing barrels have been a feature of IEA statistics since the 1970s, and as Reuters adds over time, errors have occurred in both directions, and have ranged up to 1 million or even 2 million barrels per day.

 

And as Reuters adds, while most of the time, the oil market ignores the miscellaneous to balance item, but it tends to become controversial when it becomes very large, either positive or negative. Such as now. Furthermore, the situation is additionally compounded by the massive documented inventory glut not only in the US but around the globe, and certainly in China which, as reported yesterday, reported a record amount of oil in January even as demand is said to have been declining.

This is what happened the last time there was an implied glut on par with the current one:

The last time the miscellaneous to balance item was this large and positive (implying an oversupplied market) was in 1997/98 when the issue triggered fierce criticism of the IEA’s statistics.

 

Critics accused the IEA of over-estimating supply, under-estimating demand, contributing to perception of a glut, depressing prices, and causing unnecessary hardship to the oil industry. Senator Pete Domenici, chairman of the U.S. Senate Budget Committee, asked the General Accounting Office to investigate the IEA’s statistics and the question of missing barrels. In a report published in May 1999, GAO concluded “missing barrels are not a new condition, and the amount and direction of missing barrels have fluctuated over time”.

 

“At any point in time, the historical oil supply and demand as well as the stock data reported by IEA could be overstated or understated by an unknown magnitude.”

That it true, although the error item it may also indicate just how much over (or under) supply there is. The GAO concluded then that it was not possible to “quantify how much of the missing barrels are due to statistical limitations and how much are the result of physical oil storage in unreported stocks”.

Some other comparisons:

In 1997/98, the market was oversupplied by 2.1 million barrels per day compared with total demand of around 74 million barrels per day, according to the IEA.

 

In 2015, the oil market was also oversupplied by 2.0 million barrels per day but consumption was running at more than 94 million barrels per day, around 25 percent higher.

To be sure, episodes of massive imbalance usually even out, and following the 1997/98 episode, the missing barrels that accumulated in unreported non-OECD storage were drawn down in 1999, according to the IEA (“Oil Market Report”, IEA, Dec 1999). In December 1999, the IEA wrote: “The weight of (the) evidence is that the missing barrels did exist and that they have now returned to the market.

What helped the 1998 glut was that by the end of 1999, the oil market was seeing excess demand and prices were rising. But the rapid recovery depended on very strong economic growth in North America and Asia (after the East Asian financial crisis in 1997/98). 

Another critical factor was the substantial production cuts by OPEC in conjunction with production restraint from non-OPEC countries. And it was both heralded and caused by a shift in the forward price curve from contango to a state of backwardation.

As Reuters concludes, the events of 1999 illustrate the factors needed to clear an inherited glut of oil (strong demand, production restraint and a shift in the shape of the forward price curve).

There are two major problems: this time around demand is declining – especially in trade-dependent distillate demand – while debt across the entire world is at record highs, and makes a fiscal stimulus improbable. Worse, following the November 2014 OPEC fiasco, the cartel effectively no longer exists. Furthermore, major oil exporting countries have not so far agreed to cut production, unlike 1998/99, and in fact Saudi Arabia has openly rejected the idea.  And finally, futures prices remain resolutely in contango, which is both a symptom of excess stockpiles and creates a financial incentive to continue holding them. As Reuters observes, there is no sign of the market moving into backwardation yet, which would indicate the supply-demand balance was shifting and would also create a financial incentive to release oil from storage.

Kemp’s conclusion:

Several key OPEC and non-OPEC producers have announced a provisional production freeze which could speed up the rebalancing, assuming it is implemented.

 

But it might not be enough to eliminate the glut quickly; outright production cuts may be needed to accelerate the process, depending on what happens to demand and production from other countries.

This is also why Goldman yesterday released its latest bearish report on oil, in which it said the “commodity rally is not sustainable” and worse, “the force of their reversal has created a new trend in market positioning that could run further. However, the longer they run, the more destabilizing they become to the nascent rebalancing they are trying to price.”

In other words, the sharp, brief rebound in prices, means that a long-term sustainable rebound in prices becomes that much less probable.

The bottom line is that the IEA’s calculations are likely correct, and end markets are merely misreporting due to commercial interests: “In 1997/98 episode, the IEA concluded most of the missing barrels went into non-OECD storage and uncounted OECD inventories . In the current episode, it is also very likely some of the 550 million barrels unaccounted for in 2014/15 have gone into unreported storage outside the OECD.”

Places like China. China’s government is known to have been filling its Strategic Petroleum Reserve. More barrels are likely to have gone into commercial storage in China and in other countries outside the OECD. 

The question then is how much longer can all this excess production be stored quietly away from the public’s eye.  We already know that Cushing is denying some storage requests, and that as a result the US is storing oil in cargo trains, and exporting it to Europe, in effect making the entire world a series of communication oil vessels. Still, absent some dramatic supply cut in the near term, or just as dramatic rebound in demand, what happens when not just Cushing but the entire world’s inventory capacity is used up?

That is the true fundamental bearish case, one which every daily short squeeze in oil makes increasingly more probable.


via Zero Hedge http://ift.tt/1UT2Sf3 Tyler Durden