Tag: news

The attacks on Egypt’s Coptic Christian minority continued Friday as gunmen opened fire on a convoy of vehicles carrying worshippers to a desert monastery, leaving 23 dead and another 25 injured, the New York Times reports.

Here’s NYT:

"A Christian official in Minya Province, south of Cairo, said the attackers opened fire on a pickup truck carrying workmen and a bus carrying worshippers as they traveled in convoy to St. Samuel’s monastery. Many of the worshippers were children.

 

 

'We are having a very hard time reaching the monastery because it is in the desert. It’s very confusing. But we know that children were killed,' said the official, Ibram Samir."

Minya is about 140 miles south of Cairo, NBC News reports. No group has claimed responsibility for the attack as of yet.

Coptic Christians, who account for about 10% of Egypt’s population of 80 million, have become the victims of an intensifying campaign of bombings and shootings masterminded by ISIS, which is trying to expand its footprint in Egypt.

In April, at least 37 people were killed and more than 100 injured in two separate bombings at Christian Coptic churches packed with worshippers in northern Egypt one week before Coptic Easter.

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For years the BEA traditionally used healthcare (i.e. Obamacare) as the “plug” variable to boost GDP at time when it, well, needed boosting.

However, now that Trump is in control, and Obamacare is on its way out one way or another, this will no longer work especially since healthcare spending is likely to significantly moderate in coming years as the GDP boosting mandatory tax that is Obamacare is repealed in some fashion over the coming quarters. And yet, in today’s GDP report personal spending was reported to nearly double, with Personal Consumption Expenditures jumping from only $9.7 BN annualized as per the first estimate, to $18.6 BN in the just released second revision, a nearly 100% increase.

What drove this? The answer was interesting as a new “plug” category appears to have emerged: non profit organizations. As the chart below shows, while healthcare was revised sharply lower in the second revision, this was more than offset by a $11.9 billion annualized increase in expenditures of “nonprofit institutions serving households.“

But what are “Non-profit institutions serving households”? Here is the answer:

Non-profit institutions serving households, abbreviated as NPISH, make up an institutional sector in the context of national accounts consisting of non-profit institutions which are not mainly financed and controlled by government and which provide goods or services to households for free or at prices that are not economically significant. Examples include churches and religious societies, sports and other clubs, trade unions and political parties.

 

NPISH are private, non-market producers which are separate legal entities. Their main resources, apart from those derived from occasional sales, are derived from voluntary contributions in cash or in kind from households in their capacity as consumers, from payments made by general governments, and from property income.

And another interesting fact: In the national income and product accounts, the services provided by NPISHs – their gross output – is measured as their current operating expenses because these services are not generally sold in markets with observable prices.

In other words, Q1 GDP was boosted by i) nonprofit organizations which ii) could have simply padded their operating expenses (without actually providing any tangible benefits), giving the BEA the impression that the economy was doing better than expected just one months ago, when instead various political, religious and other entities were simply receiving favors from their donors. In this context, one wonders how much of a contribution to Q1 GDP the Clinton Family Foundation was…

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Bitcoin has rebounded to $2600 this morning (after touching $2200 late yesterday, and $2760 highs yesterday) as Korean prices and US prices are converging (Korbit still trading at around $3200)

Bitcoin is trading around $2600 on US exchanges…

 

And $3200 on Korea's Korbit…

 

As Alhambra Investments' Jeffrey Snider details, Bitcoins are a remarkable bit of innovative technology. When they were first introduced quietly at the end of October 2008, nobody noticed it or the fitting timing. The design paper for the cryptocurrency was published anonymously at the very same moment the dominant global currency, the eurodollar, was undergoing its severe reckoning. The latter is in many ways like the former, since the eurodollar is not a thing just like Bitcoins. In many respects, it, too, is a cryptocurrency and as such confounds a great deal of “expert” analysis.

The price of a Bitcoin, meaning its exchange rate, has exploded more recently, though not for the first time. If we reckon it as a currency, then the other side implication of this price action is that the dollar has fallen in value relative to it. That it has survived and in some places thrived after eight and a half years is meaningful, but what we don’t know is whether it is that because of the potential for Bitcoins or because of the constant malfunction of the “dollar.”

There is more than a fair hint of Gresham’s Law at work. For those unfamiliar, Gresham’s Law is a stated maxim on currency, thought up in 1858 by Scottish banker Henry Dunning Macleod and named for 16th century English financier Sir Thomas Gresham. Ironically, I suppose, Macleod’s thoughts on 19th economics mirror what would become of this idea.

I can hardly express the disappointment I felt at reading them…for the purpose of describing the actual principles and mechanisms of commerce they were absolutely worthless. They were merely a chaos of confusion and contradictions…In fact, they were in no sense a science, but the butchery of a science. I saw that the greatest opportunity that had come to any man since Galileo had come to me, and I then determined to devote myself to the construction of a real science of Economics on the model of the already established physical sciences.

The “them” Macleod referred to were Adam Smith, David Ricardo, and John Stuart Mill, among others. Intending to establish economics as actual science, his concern was as the whole of it was about exchange, where value was specific to only supply and demand. Therefore, in the case of multiple currencies artificiality would lead to drastic inequalities as a matter of self-evident principle. Or, as Gresham’s Law is commonly stated, bad money drives out good money.

Throughout human history there was rarely a single form of currency. In most cases, any economic system would often run with several concurrently. The early Colonial United States was practically fixed to Spanish gold doubloons, often short were English guineas or French Louis d’Ors. It was messy but in so many ways very elegant; a system of checks and balances beyond the reach of governments.

Are we seeing something similar here? Is the Bitcoin so undervalued, the “dollar” so overvalued, that the former are being hoarded while the latter discounted toward oblivion? Not quite, but, again, there is the suggestion.

The issue is purely acceptance, meaning that those exchanging Bitcoins north of $2,000 per are betting on wider recognition and therefore the cryptocurrency increasingly supplanting other forms, including maybe the eurodollar itself. This is not specific to Bitcoin, as the blockchain technology behind it is what really drives the relentless interest. To put it simply and bluntly, the world’s leaders have all failed in monetary terms, so should anyone be surprised that alternative means are occasionally, if not consistently, sought?

Here is where it gets sticky, though, as there are tremendous barriers to that possibility. The biggest is, of course, the US government who after appropriating a coinage monopoly is not going to so easily relinquish it (though I should point out this is also true of replacing the eurodollar). Several years ago, they made that amply clear when the IRS ruled Bitcoins within its taxing authority, and not as money. I wrote at the time:

In other words, you cannot avoid taxation by paying employees in Bitcoins instead of dollars. Further, the IRS is subjecting merchandise trade to its $600 filing limitation – if you paid two Bitcoins to Overstock.com for a new flatscreen you are supposed to issue Overstock a 1099 (this is not a joke)…

When you paid two Bitcoins for that flatscreen from Overstock, you are supposed to calculate the value of the Bitcoins at which they were attained and compare that to the fair value of the flatscreen. If the latter is greater than the former, the IRS has ruled it a taxable gain. And that subjects you to a further taxation test about whether that gain is “capital” or “ordinary.”

This is no trivial matter, for what ultimately will guide any currency to full establishment is its acceptability to the public. The modern person is a creature of convenience, a fact established by almost every facet of modern life. The chartalists were right on that count, as what matters for currency is no longer value but expediency, a factor over which the government unfortunately holds enormous sway in this regard. We may lament this state of affairs, the loss of money as property, but it does us no good to ignore it or wish it wasn’t so.

And so the balance under Gresham’s Law, as it were, is one of possible inconvenience under Bitcoin versus the inertia of the eurodollar though it doesn’t work. If the latter rises past some critical threshold, then we would expect this element or corollary of Gresham’s Law to increase exponentially (a run on “dollars” converted into Bitcoins?). Though I am as pessimistic about the state of the eurodollar system as anyone, if not more so, I’m not sure it will get that far as anything more than a true “tail event.” In other words, the entire system would have to break down catastrophically and with no alternate form of viable money on the horizon. The first part could happen, but I just don’t see the second part.

For Bitcoins, however, if there is a path to full currency status it is likely in future generations of the technology that address version 1.0’s weaknesses, including anticipating how the government will surely intervene to block it. Until you can whip out your phone and pay in Bitcoins without issuing a 1099 and calculating the capital gains tax on the transaction (or maybe there will be an app that will do both?) the potential is limited to largely the specific forms of commerce currently open to them (more so black market or darknet).

I doubt that is what the current “price” of $2,800 is anticipating, so it is a fair question to ask whether recent price action invokes the word bubble. I can’t answer it mostly because my interests are almost all on the other side, meaning that I can’t help but be encouraged that entrenched dissatisfaction over the state of global money is driving it. That said, I continue to believe we are a couple blockchain generations away from true viability, though if nothing changes we could get there sooner than you might think.

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After a very disappointing first Q1 GDP print of only 0.7%, on Friday the BEA reported that its second estimate of first quarter growth showed a sizable rebound, with annualized GDP growing at 1.2%, above the 0.9% estimate. The growth rate, however, was still well below the 2.1% print from Q4 2016.

The increase in real GDP was accounted for by increases in business investment, housing investment, consumer spending on services, and exports. These increases were partly offset by decreases in inventory investment, and government spending. Imports, which are a subtraction from GDP, increased. The upward revision to the second estimate of GDP growth reflected upward revisions in business investment, consumer spending in services, and state and local government spending. These upward revisions were partly offset by a downward revision to inventory investment.

Of note, personal consumption contributed 0.44% to the bottom GDP line, up nearly double from the 0.23% reported one month ago. In a longer-term context, however, it was still a disappointing number.

Similarly, fixed investment rose to 1.85% in the second revision, up from 1.62% reported in the first revision.

Yet while the headline data showed a modest improvement, one which will likely subtract from “pent up” Q2 GDP growth, a more troubling observation was revealed in the corporate profits estimation, which decreased 1.9% at a quarterly rate in the first quarter of 2017 after increasing 0.5 percent in the fourth quarter of 2016.

• Profits of domestic nonfinancial corporations decreased 1.4 percent after decreasing 4.9 percent.
• Profits of domestic financial corporations decreased 5.5 percent after increasing 5.4 percent.
• Profits from the rest of the world increased 1.4 percent after increasing 11.0 percent.
• Y/y corp. profits grew 3.7% in 1Q after rising 9.3% prior quarter
  • Financial industry profits declined 5.5% in 1Q after rising 5.4% prior quarter
  • Federal Reserve bank profits up 2.7% in 1Q after falling 1.8% prior quarter
  • Nonfinancial sector profits fell 1.6% in 1Q after falling 4.9% prior quarter

A big part of the reason why this number differs so notably from the alleged surge in profitability, is that it avoid non-GAAP adjustments and various other gimmicks used by management teams to boost their stock prices and increase stock-linked compensation.

And now we await for the sellside to start cutting their Q2 GDP estimates as a result of this “bringing forward” of growth back to the first quarter.

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Headline durable goods orders tumbled 0.7% MoM (the worst of the year), but beat expectations of a 1.5% drop. However, Core Durable Goods New Orders fell 0.4% (dramatically worse than the +0.4% expectation) for the worst performance since June 2016.

• Non-Defense ex-Aircraft new orders were unchanged in April (huge miss) – weakest in 2017
• Shipments Ex-Aircraft fell 0.1% in April (huge miss) – weakest in 2017

Worst still, Headline New Orders are unchanged year-over-year…

Q2 GDP is starting to get in trouble with Durable Goods piling on after inventories weakness yesterday.

We have one question – when does this revert?

Durable Goods Orders are unchanged since May 2013.. The Dow is up 5000 points since then.

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Authored by Michael Snyder via The Economic Collapse blog,

Should everyone in America receive a “basic income” directly from the federal government?  Considering the fact that we are already 20 trillion dollars in debt, such a concept may sound quite foolish to many of you, but this is an idea that is really starting to gain traction in leftist circles.  In fact, Facebook CEO Mark Zuckerberg suggested that this was something that we should “explore” during the commencement speech that he just delivered at Harvard.  For quite a while it has been obvious that Zuckerberg is very strongly considering a run for the presidency in 2020, but up until just recently we haven’t had many clues about where he would stand on particular issues.  If he is serious about proposing a universal basic income for all Americans, that would make Zuckerberg very appealing to the far left voters that flocked to the Bernie Sanders campaign.

Yesterday, I discussed the fact that the number of Americans that are receiving money from the government each month has reached an all-time high, but Zuckerberg would take things much farther.  According to Zuckerberg, society would be far better off if everyone got an income from the government…

“Every generation expands its definition of equality. Now it’s time for our generation to define a new social contract,” Zuckerberg said during his speech. “We should have a society that measures progress not by economic metrics like GDP but by how many of us have a role we find meaningful. We should explore ideas like universal basic income to make sure everyone has a cushion to try new ideas.”

 

Zuckerberg said that, because he knew he had a safety net if projects like Facebook had failed, he was confident enough to continue on without fear of failing. Others, he said, such as children who need to support households instead of poking away on computers learning how to code, don’t have the foundation Zuckerberg had. Universal basic income would provide that sort of cushion, Zuckerberg argued.

Such a proposal is going to look really good to a lot of people at first glance.

But who is going to pay for this?

Of course the truth is that the money for the people that are not working would come from taxing the people that are working.

I don’t think that Zuckerberg has really thought this through.  Are young people going to have an incentive to work if they can just stay home and watch movies and play video games all day while collecting their “universal basic incomes” from the government?

And why would anyone want to bust their rear ends working for a living when their incomes are just going to be taxed extremely heavily to pay for all the people that aren’t working?

We are already 20 trillion dollars in debt, but politicians on the left just want to keep giving even more free stuff to people.  During his presidential campaign, Bernie Sanders suggested that everyone in America “deserves a minimum standard of living” and that every citizen is “entitled” to universal health care, free college education and basic housing…

So long as you have Republicans in control of the House and the Senate, and so long as you have a Congress dominated by big money, I can guarantee you that the discussion about universal basic income is going to go nowhere in a hurry. But, if we can develop a strong grassroots movement which says that every man, woman and child in this country is entitled to a minimum standard of living?—?is entitled to health care, is entitled to education, is entitled to housing?—?then we can succeed. We are living in the richest country in the history of the world, yet we have the highest rate of childhood poverty of almost any major country and millions of people are struggling to put food on the table. It is my absolute conviction that everyone in this country deserves a minimum standard of living and we’ve got to go forward in the fight to make that happen.

In previous generations, very few people would have ever taken someone like Bernie Sanders seriously.

But in our day and time socialism is really starting to catch on.  In fact, one survey found “that four out of every ten adults say they prefer socialism to capitalism”…

The American Culture and Faith Institute recently conducted a survey of adults 18 and older. It shows not only how deeply divided Americans are on some issues but also how their view of the nation stands in many cases in stark contrast to our nation’s founding principles. Most Americans (58 percent) see themselves as politically moderate, while a quarter identify as conservative, and 17 percent as liberal. Those who were both socially and fiscally conservative, the group tracked by the ACFI in greatest detail, were 6 percent of the population.

 

But those differences don’t reveal the greatest divide and danger to America’s future. “The most alarming result, according to [George] Barna, was that four out of every ten adults say they prefer socialism to capitalism,” the ACFI noted in its commentary on the poll. “That is a large minority,” Barna said, “and it includes a majority of the liberals — who will be pushing for a completely different economic model to dominate our nation. That is the stuff of civil wars. It ought to set off alarm bells among more traditionally-oriented leaders across the nation.’” That 40 percent of Americans now prefer socialism to capitalism could spell major change to the policies advanced by legislators and political leaders and to the interpretations of judges ruling on the application of new and pre-existing laws.

And as I noted yesterday, Millennials are particularly attracted to socialism.  This could have dramatic implications for our society as older generations of Americans slowly die off.

Unfortunately, there is just one huge problem with socialism.

It doesn’t work.

If you want to see the end result of socialism, just move to Venezuela or North Korea for a while.

In socialist nations, there is very little incentive to work hard.  Instead, people tend to become very lazy and expect the government to provide everything that they need.

When people work hard and are productive, the overall wealth of a society goes up.  And when people sit around and wait for someone else to provide for them, the overall wealth of a society goes down.

Would Mark Zuckerberg have worked so hard to develop Facebook if he knew that the government would just come in and take most of the money away so that others could have a “universal basic income”?

Yes, we want to do all that we can to reduce poverty and to build a strong, vibrant middle class.

But socialism is not the answer and it never will be.

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• Trump’s first G7 expected to be ‘challenging’ (Reuters); Trump Saves Worst for Last on Foreign Trip (BBG)
• Trump Blasts German Carmakers’ U.S. Sales and Threatens Barriers (BBG)
• Trump directly scolds NATO allies, says they owe ‘massive’ sums (Reuters)
• Trump Likely to Maintain Obama’s Russia Sanctions (WSJ)
• Juncker says Trump was not aggressive on German trade surplus (Reuters)
• Republican wins Montana special election despite assault charge (Reuters)
• China Considers Changing Yuan Fixing Formula to Curb Swings (BBG)
• China Exerts More Control Over Its Currency With Tweak to Yuan Fix (WSJ)
• China’s teapot refiners set to slow crude imports as tanks overflow (Reuters)
• China’s reforms not enough to arrest mounting debt: Moody’s (Reuters)
• China central bank denies reports it told banks to deposit dollars (Reuters)
• Chinese foreign minister urges Seoul to resume talks with North Korea (Reuters)
• Amazon’s Brush With $1,000 Signals the Death of the Stock Split (WSJ)
• Waiting for ‘The Big One’ to Shake San Francisco (BBG)
• Philippine president urges IS-linked rebels to halt siege, start talks (Reuters)
• Why All CEOs Need to Be Tech CEOs (WSJ)
• Tesla’s Model X Is Missing the American SUV Craze (BBG)
• Major UK parties restart election push, under shadow of security threat (Reuters)
• Indonesia makes arrests as Islamic State claims Jakarta attacks (Reuters)

 

Overnight Media Digest

WSJ

– China vowed to further build up military capabilities after a U.S. Navy destroyer sailed near a Chinese-built artificial island in the South China Sea, the first such patrol under U.S. President Donald Trump. on.wsj.com/2s1rdF3

– Moody’s Investors Service is facing a backlash in China against its decision to cut the country’s credit rating, a move that has come just as foreign ratings firms are set to receive greater access than ever to China’s economy. on.wsj.com/2rWiBQT

– United Parcel Service Inc is teaming up with Chinese express delivery firm SF Holdings, in a bid to tap surging demand for deliveries from China to the U.S. on.wsj.com/2qlywqN

– General Motors was accused in a lawsuit by owners of diesel-powered trucks of using illegal emissions software that allowed the vehicles to bypass government emissions tests and pollute far beyond legal limits on the road. on.wsj.com/2qpNtr3

– Wells Fargo & Co is sweetening its signing bonuses for veteran brokers, a move to capitalize on Morgan Stanley’s and Bank of America’s retreat from the industry’s costly recruiting practice known as “prisoner exchange.” on.wsj.com/2rnhWe4

– The Organization of the Petroleum Exporting Countries on Thursday renewed an agreement with 10 other crude-oil producers to withhold output through March 2018, striking a deal of last resort among countries reeling economically and politically from low prices. on.wsj.com/2qTNve0

 

FT

– PepsiCo it selling all of its long-held 4.5 percent stake in British soft drinks company Britvic, its UK bottler. It said the disposal would not affect its “longstanding and valued bottling relationship with Britvic.”

– Jeremy Corbyn in a campaign relaunch on Friday will link terrorist attacks on British soil to wars fought by the UK overseas. Corbyn will address the terrorist threat during a speech in central London. He will call for an end to the “war on terror”, saying it is not working, and demand a “smarter way” to tackle terrorism.

– OPEC agreed to extend its production cuts into next year and the agreement will see the 1.8 million barrel a day cuts, first agreed in November, extended to the end of the first quarter of 2018.

– Exane BNP Paribas analysts said BT’s chairman-elect Jan du Plessis should cut dividend payout by 30 percent. BT this month scrapped its 10 percent dividend growth target in favour of a “progressive” policy, but still faces an 800-million-pound cash shortfall over the next three years to deliver just 2 percent growth, Exane said.

 

NYT

– The Trump administration is considering moving responsibility for overseeing more than $1 trillion in student debt from the Education Department to the Treasury Department, a switch that would radically change the system that helps 43 million students finance higher education. nyti.ms/2qpAh5a

– A Seattle law firm that specializes in suing automakers has filed a class-action lawsuit against General Motors Co , accusing the company of programming some of its heavy-duty pickup trucks to cheat on diesel emissions tests. nyti.ms/2qpz4es

– Companies are sticking by Fox News’s Sean Hannity as he promotes his conspiracy theory surrounding the murder of a DNC staff member, claiming he is not violating their core values. nyti.ms/2qpLL8X

– Saudi Arabia’s largest sovereign wealth fund will make a $20 billion investment in a new Blackstone Group LP infrastructure project, which could then double in size. nyti.ms/2qpA8io

– The Organization of the Petroleum Exporting Countries (OPEC) extended oil production cuts through March 2018, after a meeting in Vienna on Thursday. The move follows a decision this month by Saudi Arabia and Russia to do so. nyti.ms/2qpKqPp

 

Britain

The Times

The Manchester bomber is believed to have planned the attack for at least a year and bought nails and screws for the atrocity in two trips to DIY stores in the city. bit.ly/2rmDgAz

The Guardian

A group of “diehard” shareholders determined to see former Royal Bank of Scotland Chief Executive Fred Goodwin in court are refusing to accept a settlement in their 700 million pounds ($904.89 million)legal claim against the bank. bit.ly/2rmoytc

The TUC has urged the next government to take action to boost pay as it warned that borrowing to top up wages was poised to breach the record levels hit just before the financial crisis of a decade ago. bit.ly/2rmKNiT

The Telegraph

The chairman of Lloyds Banking Group has dismissed a warning made by his counterpart at HSBC that the City could collapse like a Jenga tower following Brexit and predicted that financial services firms would cope if the UK left the EU without a deal. bit.ly/2rmBH5l

A key associate of mining magnate Beny Steinmetz has declined to testify at an arbitration hearing in Paris at the last minute, on the advice of his lawyers. bit.ly/2rmzWVS

Sky News

Fever-Tree boss Charles Rolls sold 3.9 percent stake in the company for 73 million pounds. bit.ly/2rmFBLM

Jeremy Corbyn is making a controversial return to election campaigning after the Manchester bomb attack with a speech blaming UK foreign policy for terrorism at home. bit.ly/2rmU76f

The Independent

Theresa May is urging the world’s leading industrial nations to come together to pressure tech companies to remove “harmful” extremist content from the web. ind.pn/2rmsNVQ

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Oil bulls were unhappy with yesterday’s OPEC announcement, which disappointed by adding nothing to the 9 month supply cut extension announcement which had already been leaked and largely priced in while leaving key questions unanswered, including what it has planned for the long-term.

The broader Wall Street commentary was similarly downbeat: “To say that yesterday’s performance was disappointing for bulls is an understatement,” Tamas Varga, analyst at PVM Oil Associates wrote in an emailed report. “It is, however, not a foregone conclusion that the trend is definitely turning. The question now is whether yesterday’s sharp drop in oil prices was a panic long-liquidation or the technical picture is now firmly turning bearish.”

Barclay’s analyst Michael Cohen captured the mood best with a note overnight titled “No light at the end of the tunnel:, in which he writes that “OPEC and several non-OPEC countries finalized plans to extend production cuts for an additional nine months (through Q1 2018) without specifically articulating an exit strategy. During the press conference, Saudi Energy Minister Khalid Al-Falih expressed confidence in the plan to extend the cuts through Q1 2018, saying that inventories would fall below the five-year average before year-end, but cuts should remain in place during Q1 2018 due to seasonal demand weakness, which we highlighted yesterday (OPEC’s Vienna Meeting: Intermission, May 24, 2017).  By our calculations, if half of the supply deficit is applied to OECD stocks, we do not see the inventory level approaching the five-year average by this timeframe.“

This is exactly what we warned about in “The Math Behind OPEC’s Revised Production Cut Still Does Not Work.”

Below we excerpt some other of the key highlights from MS, which was clearly soured on the outlook for oil prices after OPEC’s meeting:

• OPEC may still be underestimating shale. Saudi Oil Minister Khalid Al-Falih made several comments that highlighted an interpretation contrary to our thinking about the state of the US shale industry.
• Cost inflation is not yet an issue for US E&Ps. The first comment related to “significant cost inflation” that has hit the industry this year. This belief runs counter to reports from many US E&Ps and the oilfield service companies during their Q1 earnings calls (Figure 3). Those that are experiencing cost inflation have been able to mitigate total well costs through further efficiency gains.
• Most US E&Ps are still drilling their core acreage. The second comment was that as activity ramps up, producers are moving into more expensive shales, which runs counter to E&P reports that the industry has several years of tier 1 (low breakeven) drilling inventory.
• The US oil and gas sector is focused on growth and will slow when prices dictate. The third comment related to a “hope” that shale producers would moderate production. US E&Ps will moderate activity only if prices constrain activity. At current price levels, many producers will continue to meet or exceed their 2017 production guidance.
• The extension should afford some price stability over the next nine months, allowing US producers to move forward with 2017 and even 2018 development plans. During Q1 2017, many E&Ps used $50 oil to provide guidance for 2017. In our view, producers will not diverge from guidance unless prices are significantly below this level ($40-45) for a sustained period.
• The JMMC will monitor country production levels and recommended adjustments if necessary. As we highlighted yesterday, the JMMC is the new mechanism to make recommendations and will be meeting on a bi-monthly basis to discuss the progress of the deal. This new function adds additional uncertainty to what balances will look like over the coming months. If prices fall or rise too much, the JMMC may propose actions to re-stabilize prices.
• The recasting of a new producer group, “NOPEC,” which includes 24 countries that account for around 60% of production.  Russian energy minister Novak and Saudi Minister Al Falih took pains to highlight that through regular interaction the group can promote “healthy markets.”  Furthermore, the countries are “better poised to approach challenges that might lie ahead.”
• Equatorial Guinea has joined OPEC. This will end up being an accounting change. We expect its almost 300 kb/d of output to decline next year.

Next, Barclays’ implications and outlook:

Market balance implications:  If OPEC is taken at its word and maintains 100% compliance over the summer, the balances would likely be 500-600  kb/d tighter than what we currently assume, and this would coincide with an inventory draw that presents upside risk to our $56/b forecast in 2H17 and 1Q18 and downside risk to our forecast in the remainder of 2018 assuming no further changes to OPEC output. For now, we maintain our forecast, as other prevailing factors would likely offset further oil price appreciation, such as accelerated US tight oil growth and demand destruction that would occur as prices increase. We will publish an update to our comprehensive market balance in our upcoming Blue Drum monthly publication. We are already calling for US liquids production to grow 1.2 mb/d from Q4 2016 to Q4 2017 and an additional 1 mb/d from Q4 2017 to Q4 2018.  With this agreement, there is scope for output to move even higher over the next 18 months.

 

The implication of OPEC’s action creates a situation that will force it gradually to exit its market management mode. Minister Al Falih tried to assuage fears that it has an exit strategy in mind by saying it will cross that bridge when it comes to it in November 2017 and next year. In our view, the more accelerated declines we will see in stocks in the coming quarters and the floor OPEC has provided for the coming nine months are likely to result in aggressive growth in US tight oil, which we are already forecasting, and OPEC is likely to struggle to find a big enough hole to fit its incremental supply, keeping the proverbial light at the end of the tunnel out of reach for longer than just the first quarter of 2018.

* * *

Separately, in a just as disappointed note released overnight by another recent oil bull, Morgan Stanley’s Martijn Rats, the commodity analyst echoed what Goldman said yesterday, and lowered its year end oil price forecast from $60 to $55 because while “OPEC’s extended cut will likely lead to stock draws in 2Q/3Q and provide some oil price support, when this agreement ends, and coincides with strong shale growth, the market looks oversupplied again. This has become our expectation for 2018, and we lower price forecasts as a result.“

Other higlights:

OPEC chooses the lesser of two evils: In recent weeks, OPEC found itself faced with a difficult choice: extend the production cuts to bring down bloated inventories, or end the cuts to prevent further loss of market share. The experience of the 1980s has shown that the latter can become as problematic as the former. Clearly, OPEC decided for the former, but it is storing up problems for 2018, in our view.

 

Near-term we see inventories drawing and providing support for oil prices: Global oil inventories finally started drawing in March, at a rate of ~0.9 mb/d based on monthly data. Weekly data suggests this has continued in April and May. With demand getting a seasonal tailwind, and OPEC extending its cuts, we expect inventory draws to accelerate in 3Q. Altogether, we estimate that global stocks will fall by ~100 million bbl in the balance of the year. Although these draws are smaller and are coming later than we once expected, this should nevertheless provide some price support in coming months. We forecast WTI to end 2017 at $55/bbl, down from our previous forecast of $60/bbl.

 

 

But the outlook for 2018 is starting to look troublesome – End of OPEC agreement + Strong shale growth = Loose market: We do not expect that OPEC will extend its output cuts much beyond 1Q. By historical standards, that would be an unusually long period of output restraint. However, non-OPEC production has already returned to year-on-year growth and is set to accelerate in 2018, driven by shale. When the end of the OPEC production cuts meet strong shale growth, the market is almost certainly oversupplied again. As a result, we lower our end-2018 WTI price forecast to $55/bbl, from $60/bbl before, although we could still see lower prices at some point during 2018.

 

All of this has implications for long-term prices too: Our previous long-term price forecast of ~$70/bbl for WTI by 2019/20 was based on our estimate that ~1.5 mb/d of 2020 demand would need to be supplied by projects that have not been sanctioned yet, but that have break-even oil prices around that level. However, with stronger shale growth, slightly weaker demand and some additional cost deflation, the reliance on this 1.5 mb/d has almost entirely been wiped out. We still see 1.6 mb/d of 2020 demand that needs to come from projects with break-evens of $55-65/bbl, so we lower our end-2020 WTI forecast to $60/bbl.

 

How long until OPEC is back to the drawing board, or at least jawboning, of even more cuts, and even longer production halts? The answer: not long at all, as this hit moments ago from Reuters:

• RUSSIA’S NOVAK SAYS OPEC+ MONITORING COMMITTEE MAY DISCUSS POSSIBILITY OF ADJUSTING GLOBAL OIL OUTPUT CUT DEAL IN JULY

via http://ift.tt/2qiTASO Tyler Durden