As RBC pointed out earlier today, there were two key drivers (in addition to month end “black box” rebalancing) behind today’s volumeless equity rally: the jump in the dollar,  which rose on the previously discussed Fed-ECB policy divergence as well as upward revisions to Q4 GDP, and which has put the BBG dolar index on track for its first weekly advance in three …

… and today’s jump in crude, which rose by nearly $1, and managed to reclaim $50/barrel for the first time in two weeks, after Kuwait’s oil minister said OPEC is in talks to extend production cuts, saying nothing that the market did not already know.

And since the reflation trade appeared to return, the biggest beneficiaries were those sectors that recently had seen some greater weakness, namely small caps and trannies, while gains in the Dow, S&P and Nasdaq were roughly in line.

And with the reflation trade back on, banks were predictably higher across the board.

After a quiet overnight session, the S&P surged higher out of the gates, and after a close call with going unchanged around lunchtime, found a second wind later in the afternoon…

…. courtesy of several USDJPY momentum ingition events…

… which helped slam gold to the lowest level in a week.

… even as VIX went was rangebound and ultimately went nowhere.

A return of the reflation trade also meant that Treasuries fell, with the 30Y rising back above 3.00%.

Then again that is the narrative: all of the above could simply be one big fund rebalancing positions ahead of week, and month end. Which is why, as Charlie McElligott warned earlier, to see if the reflation trade has indeed returned, tune back in tomorrow.

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Authored by Nick Cunningham via OilPrice.com,

Thousands of drilled shale wells are sitting idle, unfracked and uncompleted.

The backlog of drilled but uncompleted wells (DUCs) grew dramatically beginning in 2014, as low oil prices forced drillers to hold off on completion in hopes of higher prices at a later date. After all, why bring production online in a low price environment when the same oil could earn more in the future if prices rebound. That calculation is particularly important given that a shale well typically sees an initial burst of production in its first few months of operation followed by a precipitous decline in output.

The surge in DUCs created an enormous backlog of wells awaiting completion. This “fracklog” loomed over the oil market, threatening to derail any sign of an oil price recovery. As soon as oil prices rebounded to some higher point, the shale industry would bring thousands of already-drilled wells online, and that sudden rush of new supply would push prices back down.

But that was a necessary process in order to shrink the huge inventory of DUCs – and that’s exactly what started to play out last year. As oil prices moved up from $27 per barrel in February 2016 to around $50 per barrel by early summer, the industry began completing a lot of wells. The DUC inventory fell from over 5,600 to just over 5,000 between January and August, a decline of 10 percent, according to the EIA’s Drilling Productivity Report.

 

By late November, when OPEC announced an ambitious plan to take 1.2 million barrels per day off of the market, combined with nearly 600,000 bpd of non-OPEC cuts, oil prices shot up. One would have thought that the DUC inventory would see another round of completions, reducing the backlog even further.

But that didn’t happen. The DUC list has grown since then, increasing to 5,443 as of February 2017, an increase of roughly 8 percent since October. Why did this happen even though WTI and Brent moved up well into the $50s per barrel? The rig count has increased sharply since the OPEC deal was announced, but why are companies adding rigs back into operation if they are not completing the new wells that they are drilling? For example, in the Permian Basin, the industry drilled 395 new wells, but they only completed 300 of them.

 

Reuters interviewed industry experts and lawyers and found that a lot of companies are drilling new wells because the terms of their leases require drilling by a certain date or else the companies forfeit their rights to the acreage. Standard leases typically have three-year terms, Reuters says, with an option for a two-year extension. They can drill the wells, but keep them uncompleted and still comply with the terms of the lease, allowing the companies to hold onto the acreage and then come back at a later date to complete the well.

Holding onto land is particularly important these days because land prices in West Texas have skyrocketed, with acreage costing five times as much as it once did a few years ago. Nobody wants to forfeit any prospects amid such a land rush.

Another element contributing to the DUC buildup is that market for fracking crews is tightening, according to Reuters. After a well is drilled, producers contract with fracking crews to complete the well.

“There were a number of completions that were originally scheduled in first quarter and you’ve seen those slide to Q2 and that’s really being driven by…access to service crews and things like that,” Tom Stoelk, the CFO and interim CEO of Northern Oil & Gas Inc, told Reuters. So the uptick in the backlog could just be temporary.

But with drilling activity picking up, oilfield services companies are seeing such an uptick in demand that they are charging more. The rising cost of frac sand, well completions, drilling rigs and even labor are leading to cost inflation across the industry, cancelling out some of the “savings” achieved since the market downturn began in 2014. As such, some companies might be waiting for higher prices.

Once the DUCs are completed, new production will come online. And just as before, that backlog still weighs on the market. Wood Mackenzie estimates that if the Permian Basin’s DUC list was completed, it would add 300,000 bpd in new supply.

That supply sitting on the sidelines will put downward pressure on any new oil price rally.

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March Comex Silver “Deliveries”

Posted with permission and written by Craig Hemke (CLICK HERE FOR ORIGINAL)

 

 

 

It seems that every few months, the charade of “physical delivery” on Comex becomes so outrageous that we feel compelled to write about it. Well, here we are again today.

 

Before we get to the CME-reported numbers, let’s start with the usual background…

 

What you need to know is that most of this is just a massive scam. Rarely is any actual, physical metal exchanged. Instead, the bi-monthly Comex delivery process is primarily a shuffle of paper warehouse receipts and warrants. Additionally, the parties to these exchanges of paper are usuallly The Banks themselves, acting in one seemingly endless circle jerk where one month Scotia “delivers” to HSBC and, the next month, HSBC turns around and “delivers” metals back to Scotia. It’s been this way for years and it continues to this day.

And the volume of “deliveries” rarely changes, as well. For March, the initial amount of contracts still open and “standing” when the contract went off the board on February 27 was 7,299. Even at the conclusion of First Notice Day on the 28th, there were still 4,271 contracts still open. The delivery month is now complete and a total of 3,855 “deliveries” have been made. How does this compare to previous delivery months? It’s about average. See below:

 

Delivery Month	Total “Deliveries”
Dec 2014	2,975
Mar 2015	2,583
May 2015	2,840
July 2015	3,637
Sept 2015	1,555
Dec 2015	3,939
Mar 2016	1,356
May 2016	2,716
July 2016	2,474
Sept 2016	3,215
Dec 2016	3,980
Two-year average:	2,843

 

So, as you can see, the total amount of “deliveries” for March were not extraordinary by any means, though when compared to the previous two Marches, the 3,855 for March 2017 is above average. Regardless, let’s dispel with the idea that suddenly there is some surge of physical demand for silver on the Comex for as you can see above, March 2017 was really no different from any other month in the past two years.

 

However, I do want to make note of two items and they both have to deal with The Major Power in Comex silver…JP Morgan. Not only does JP Morgan control about half of the total vaulted silver on the Comex, they only do so after nearly experiencing an extinction-level event back in 2011 when they were caught massively short paper silver with no physical silver with which to cover it. This led to the final short squeeze of April 2011 and all of the events that followed. In response and to prevent this from happening again, JPM was rushed through the approval process for their own Comex silver vault. See here:
http://ift.tt/2nAy9rE

 

In the years since, JP Morgan has amassed a stockpile of what is alleged to be physical silver in their Comex Vault. As of Monday, their total stockpile of registered and eligible silver stood at just over 94,000,000 ounces versus a total Comex vaulting structure of 191,488,871 ounces. That’s just a shade over 49% and JPM now has enough silver to “physically settle” a short position of nearly 19,000 Comex contracts should they ever find themselves squeezed again.

 

How did JPM acquire all of this “physical silver”? Primarily through the Comex “delivery” process. Below are the year-end summaries for just 2015 and 2016 (click to enlarge). Note that the “house” or proprietary account of JPM is the primary stopper of “deliveries” nearly every month, to the tune of a NET 10,199 contracts. At 5,000 ounces per contract, that’s just shy of 51,000,000 ounces of their current 94,000,000 ounce warchest.

 

 

 

And this continued during the just-completed March “delivery” month. As you can see below, of the stated 3,855 “deliveries”, the proprietary account of JPM stopped a total of 2,689 for nearly 70%. That’s another 13.5MM ounces added to the stockpile for use in the event of another paper metal short squeeze.

 

 

Lastly, just one other item of note. Since there is a stated position limit of just 1,500 contracts for each front/delivery month, you might be asking yourself how JPM gets away with stopping far more than that number. If you go back and look at the 2015 and 2016 tables above, note that they seem to adhere to these limits each month. So why and how did they manage to stop 2,689 in March? That’s a good question so I took the time yesterday to submit a formal complaint to the CFTC:

 

 

Given my past experience in dealing with the CFTC, in no way do I expect any aggressive action from this neutered and fully-controlled agency. Instead, I just thought it would be fun to see if I heard anything back from them at all. Will I even get a response? I can tell you that, so far, I haven’t even received one of those “thank you for writing us, we’ll look into it” emails so it’s not looking good. However, if I do eventually hear from them, I’ll be sure to write follow-up to this post.

 

 

Thanks for reading and thanks for taking the time to understand some of the forces aligned against you in the Bullion Bank Paper Derivative Pricing Scheme.

 

 

 

Questions or comments about this article? Leave your thoughts HERE.

 

 

 

 

 

March Comex Silver “Deliveries”

Posted with permission and written by Craig Hemke (CLICK HERE FOR ORIGINAL)

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According to RBC’s cross-asset strategist, Charlie McElligott, two things are behind today’s (painfully volumeless) market rally: i) a return of “policy divergence”, following yesterday’s hawkish announcements by the Fed (“up to 4 hikes”) offset by dovish hints by the ECB, which in turn is powering the dollar higher, and ii) OPEC “deal extension speculation” pushing oil prices higher. The result: the general reflation trade is back on.

Here are the full details from McElligott who writes that “Risk Is Rallying On The Return of “Policy Divergence” and Higher Crude”

“Major key” alert (H/T DJ Khaled) as a return of ‘policy DIVERGENCE’ powers ‘higher Dollar’ and OPEC deal extension talk powers ‘higher crude’—in turn driving risk-assets to best levels of the week. 

• As anticipated in the 3/16 ““RBC Big Picture: FED CREATES MORE ROPE TO HANG THEMSELVES WITH,” the Fed’s doves are rolling-out ‘hawkish,’ with 4 hikes in ’17 a real option. 
• Juxtapose this with ECB ‘source’ story yesterday (‘taken aback’ by mkt hawkishness and thus looking to reiterate ‘easy’ policy), while today we saw a massive messaging campaign from Nowotny, Praet and Knot all ‘walking-back’ hike expectations with dovish language.
• Add-in the weak German March Inflation print (1.5% vs est 1.9% and Feb’s 2.2%) and we see Bunds rallying today.
• This “hawkish Fed, dovish ECB” dynamic is a complete “round-trip” back to where we were just prior to the Fed—a return to “policy DIVERGENCE” and away from the two-week old “policy CONVERGENCE” narrative which has been driving the USD-unwind / weakness. 
• As a reminder, “ Fed / R.O.W. policy divergence” has been “THE” driver of higher USD regime over the past 2.5 years, over which the DXY has appreciated 25%.
• With this ‘hawkish Fed / dovish ECB’ scenario, the USD is experiencing ‘signs of life.’  In turn, this could in fact reinvigorate ‘US domestic reflation’ trades which had been on life-support or unwound outright over the prior weeks / months.
• Equities thematic ‘reflation’ plays have too been reawakened this week within the broad market rally—but note that it is possible this is simply representative of significant mean reversion’ strategy deployment into month- and quarter- end rebalancing flows (as opposed to ‘sticky’ money rotating back ‘into’ trade). 
• The first week of April will then be critical to monitor for follow-through in said ‘cyclical beta’ / ‘inflation’ / ‘value’ / ‘small cap’ thematic equities trades, or whether we see a return to the ‘havens’ trade that dictated performance YTD (‘secular growers’ like mega-cap tech and classic ‘defensive’ sectors).
• “Paging Dr. Obvious,” but even more important with ‘reflation’ theme will be crude oil’s direction.  As I’ve said for eons-now, we are beginning to see the ‘roll-off’ of the ‘energy base effect’ (as evidenced by the aforementioned German inflation data, where the ‘energy’ component declined from 7.2% in Feb to 5.1% in March YoY). 
• As has been the case for two years, higher inflation expectations (via higher crude) are MISSION-CRITICAL for higher risk assets (S&P, HY and EM).  Today’s Kuwait / OPEC ‘support extending cuts’ headlines are a positive start, as we need higher crude to keep inflation walking higher (note: breakevens and 5y5y infl remain ‘stuck’).
• In conjunction with US GDP and Personal Consumption both revised higher this morning, we are seeing all three ‘macro factor’ boxes being positively ‘checked’ for the SPX—higher ‘global growth,’ ‘inflation expectations’ and ‘global real rates’ all at once.
• As such, the Quant Insight short-term (83d) model is almost back at a ‘predictive’ macro regime (62% R^2) after collapsing earlier this month (down to 9%)—meaning, the SPX price movements are now largely ‘explainable’ again.  It seems clear to me that the macro regime breakdown was heavily correlated to the crowded positioning and ensuing price ‘shakeouts’ in crude- and USD- longs.
• Now, the SPX ‘volatility signal’ window is about to close when R^2 passes back above 65% imminently (likely tomorrow).  S&P eminis traded -3.0% ‘peak to trough’ from the generation of the signal noted on the 13th, to the highs made the 17th, to the lows made Monday of this week, which speaks to 1) ‘buy the dip’ in Spooz / ‘sell the rip’ in Vol “alpha generating muscle-memory” still firmly intact with traders, but also 2) the forever-shrinking ‘half-lives’ of macro drawdowns, as so much tactical money is ‘loaded’ for such opportunities.
• The largest threat then for risky-assets it seems is a swing back to ‘tighter financial conditions’ concerns via higher USD and US rates, on account of any “policy error / policy divergence” scenario accelerating.  In meantime, higher nominal rates and higher Dollar due to ongoing better data / revisions continue to be palatable.

How are traders reacting  to today’s news? With a return of the original reflation trade.

THIS WEEK’S FLOWS SHOW BUYING YTD LOSERS, SELLING YTD LEADERS:

‘REFLATION’ SNAPS BACK:

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Authored by Kyle Plantz via InsideSources.com,

U.S. Sen. Claire McCaskill, D-Mo., opened an investigation Tuesday into the role drug companies may have played in the nation’s opioid epidemic. She requested internal documents from five leading drugmakers on how they market opioid painkillers and if they knew anything about the dangers of the drugs. Yet, the top opioid prescription manufacturer, which is located in McCaskill’s home state in St. Louis, Missouri, is missing from the initial list of companies she’s investigating.

McCaskill requested internal sales and marketing materials, addiction studies, and contributions made to third-party advocacy groups that may have worked to block efforts to increase regulation of opioids. She sent the letter to Purdue Pharma, Janssen/Johnson & Johnson, Insys, Mylan, and Depomed.

However, according to data from IMS Health, an information services company for the healthcare industry, there are other companies who had a higher annual opioid prescription total in 2016 than some of the companies on McCaskill’s list, and the Missouri-based Mallinckrodt, the company with the highest annual total, was not mentioned in her announcement.

“It’s time to look at the manufacturers and find out what they knew about addiction … (and) what marketing practices did they use to push these drugs,” McCaskill told reporters in a conference call on Tuesday.

 

“We want to get to the bottom of why all of a sudden opioids have been handed out like candy in this country.”

In 2016, there were more than 236 million opioid prescriptions filled by 183 drug companies, according to IMS. Here’s the percentage of the total market share by prescription for the five companies mentioned by McCaskill:

• Mylan: 6.7 million scripts or 2.84 percent of the total annual opioid prescriptions for 2016
• Purdue: 4.8 million scripts or 2 percent
• Depomed: 878,000 scripts or 0.37 percent
• Janssen: 74,000 scripts or 0.03 percent
• Insys: 33,000 scripts or 0.01 percent

The top manufacturer for opioid prescriptions last year was Mallinckrodt, which had more than 43.8 million prescriptions, accounting for approximately 18.6 percent of the total market share. However, the company didn’t receive a letter from McCaskill.

The Missouri-based drug company’s political action committee also donated $2,500 to McCaskill’s campaign coffers in September 2015, according to a filing with the Federal Election Commission. No data was available for previous years. McCaskill will face reelection in 2018.

“This epidemic is the direct result of a calculated sales and marketing strategy major opioid manufacturers have allegedly pursued over the past 20 years to expand their market share and increase dependency on powerful — and often deadly — painkillers,” McCaskill wrote in the letter to the companies.

 

“To achieve this goal, manufactures have reportedly sought, among other techniques, to downplay the risk of addiction to their products and encourage physicians to prescribe opioids for all cases of pain and in high doses,” she added.

Mallinckrodt has previously been in the spotlight after agreeing in January to pay $100 million to settle allegations that a subsidiary broke U.S. antitrust law by significantly increasing the price of a multiple sclerosis drug.

Some of the other companies on her list have also received negative attention for misrepresenting or deceptively marketing painkillers. In 2007, Purdue Pharma paid $635 million in fines to settle criminal and civil charges due to the company’s misrepresentation of the addictive qualities of its OxyContin painkiller medication. Three executives of the company pleaded guilty to criminal misbranding.

McCaskill said her probe would focus on the five companies, but she suggested her investigation could expand to include other companies. It’s not immediately clear if the drug company Mallinckrodt from her own state would be on a future list.

Last year, a joint investigation by the Associated Press and the Center for Public Integrity found how drugmakers used lobbying and their deep war chests to undermine legislation aimed at curbing opioid prescribing practices.

The sale of opioid prescriptions has quadrupled since 1999, according to the Centers for Disease Control. Opioid overdose deaths hit a record high in 2015, claiming the lives of more than 33,000 Americans.

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