If crude’s slump back to a
six-year low looks bad, it’s even worse when you reflect that summer is
supposed to be peak season for oil.
U.S.
crude futures have lost 30 percent since the start of June, set for the
biggest drop since the West Texas Intermediate crude contract started
trading in 1983. That beats the summer plunges during the global
financial crisis of 2008, the Asian economic slump in 1998 and the
global supply glut of 1986.
It
even surpasses the decline of 2011, when prices fell as much as 21
percent over the summer as the U.S. and other large oil-importing
nations released 60 million barrels of oil from emergency stockpiles to
make up for the disruption of Libyan exports during the uprising against
Muammar Qaddafi.
WTI, the U.S. benchmark, fell to a six-year low of $41.35 a barrel Friday. It may slide further, according to Citigroup Inc.
“Summer
is when refineries are all running hard, so actual demand for crude is
as good as it gets,” Seth Kleinman, London-based head of energy strategy
at Citigroup Inc., said by e-mail.
OPEC’s
biggest members are pumping near record levels to defend their market
share and U.S. production is withstanding the collapse in prices and
drilling. The oil market is still clearly oversupplied and “it will get
more so as refiners go into maintenance,” Kleinman said.
Oil
demand usually climbs in the summer as U.S. vacation driving boosts
purchases of gasoline and Middle Eastern nations turn up
air-conditioning.
Crude has
sunk this year even U.S. gasoline demand expanded, stimulated by a
growing economy and low prices. Total gasoline supplied to the U.S.
market rose to an eight-year high of 9.7 million barrels a day last
month, according to U.S. Department of Energy data.
Crude
could fall to $10 a barrel as the Organization of Petroleum Exporting
Countries engages in a "price war'' with rival producers, testing who
will cut output first, Gary Shilling, president of A. Gary Shilling Co.,
said in an interview on Bloomberg Television on Friday.
"OPEC is
basically saying we're not going to cut production, we're going to see
who can stand lower prices longest,'' Shilling said. "Oil is headed for
$10 to $20 a barrel.''
Nothing too awful has happened yet in Greece, China, Ukraine
The
euro is about to fall apart. The Chinese stock market is crashing,
taking the economy down with it. The emerging markets are disappearing
down a plug hole as commodity prices collapse. And what happens to gold?
The ultimate safe haven, the one asset that is meant to provide a
refuge in even the worst of storms, enters a bear market as well.
Plenty
of people have concluded that gold is finished. Use it to make some
nice jewelry, but don’t expect it to have any place in a well-managed
portfolio. If it doesn’t show so much as a flicker of life during that
kind of turmoil, then you might as well forget about it.
But hold on. There is a flaw in that view.
By
any historical standards, we haven’t any real crisis yet. In reality,
the markets are going through a period of remarkable, and possibly
unnatural, calm. Perhaps it is true that gold is no longer a reliable a
store of value. Maybe bitcoin, land, or indeed cash, have taken over the
as natural refuge in times of turmoil.
Saudi-Led Coalition Claims Strategic Victory in Yemen
Saudi-led forces in Yemen have defeated the country’s
rebels at a strategic southern air base. It is the latest victory in a
string of recent gains by the coalition, setting the stage for forces to
make a further push into Houthi-controlled areas. Photo: AP.
But it is far too early to conclude that — let’s wait until something really bad happens.
It
has certainly been a dismal few years for gold investors. After hitting
all-time highs of close on $2,000 an ounce at the peak of the financial
crisis, the price of gold
GCZ5, +0.28%
has been in relentless decline
over the last four years. In the last month, the price has dipped below
$1,100, and keeps on going down. The gold miners
GDX, +0.22%
are in even worse shape, with
many operations no longer profitable at these depressed prices.
That
in itself might not be so bad. Every asset market goes up and down, and
there is no reason to expect gold to be any different. The trouble is,
gold is meant to go up when there is panic in the markets — not down.
That calls into question whether it is still a safe haven — and if it
isn’t there really isn’t much point to it.
Take Greece, for
example. As the country teetered on the edge of a dramatic exit from the
eurozone last month, a fresh financial crisis looked imminent. No one
really knows what happens when a country tumbles out of the euro
EURUSD, +0.3753%
, or what kind of losses might
be triggered right across the financial system if the country defaulted
on its debts. And yet, through that whole saga, the gold price was about
as lively as a Tuesday afternoon at an old people’s home.
Or
take China. The stock market for what will soon be the biggest economy
in the world soars in a frenzy of speculative buying, then collapses
back into an equally dramatic bear market, losing a third of its value
in the space of a couple of weeks. What would happen to the global
economy if China was engulfed in its own version of the credit crunch?
No one can say for certain, but it does not sound good.
And gold? You’d find more life in the cemetery.
It
gets worse. Syria has descended into civil war. Russia has effectively
invaded the Ukraine. Islamic State has taken over swathes of Iraq. None
of those events did anything for the gold price either. It is easy to
see why some analysts are starting to conclude that it is not a safe
haven anymore.
But hold on. There may be
some truth in that, and certainly no one should rule it out. But it is
equally possible that the gold market is quiet because the world is as
well.
Greece? As it turned out, there was never that much chance
of it tumbling out of the eurozone. The Finance Ministry had put
together a Plan B, but it was about as coherent as a Donald Trump policy
speech, and so long as there was no serious preparation in place for a
return to the drachma then the country was always likely to knuckle down
to whatever fresh austerity measures its European Union partners had in
store for it.
The crisis never spread to Portugal or Italy, or anywhere else for that matter. In financial terms, it was a nonevent.
How
about China? Sure, the market is down a lot, and there will be some
small investors in Shanghai nursing heavy losses. The Shanghai index
SHCOMP, +2.26%
is down from close on 5,000 to
3,700. Then again, a year ago it was at 2,000. Anyone whose trading
horizons stretch for more an a couple of month are still going to be
sitting on some very handsome profits.
Volatility in what is
effectively an emerging market is nothing very unusual. If the index
crashed to 1,000 and stayed there, that might be a problem. Until then,
not much has happened.
Nor do any of the other events that have
dominated the news. Syria may be tragedy, and Islamic State a menace,
but economically neither count for anything. Neither does the Ukraine,
and even sanctions against Russia don’t matter much to anyone apart from
Polish farmers and German car manufacturers.
In fact, by any historical standards, the world is remarkably calm, and so are the markets.
Only
a few localized wars disturb the peace, and all the major bourses are
trading in a narrow range. Central banks are maintaining rates close to
zero, with only microscopic rises in interest rates planned. Inflation
has vanished, but deflation hasn’t really taken hold. Growth has
resumed, but only modestly. A more placid outlook would be hard to
imagine.
So what would you expect gold to do in those
circumstances? Drift sideways, and lose some of its value. Which is
pretty much exactly what has done.
Sooner or later, there will be
a genuine crisis. A revolution will topple the Saudi regime. Japan will
default on its massive debts. The Chinese middle class will demand
democracy. France will leave the euro.
Any of those would be
huge. If the gold price did not soar on any of those events, we could
conclude it was no longer a safe haven. But until something on that
scale happens, it is too early to say.
On March 26, I wrote the following on the issue of how the Fed will raise rates:
This is a subject that I have been ranting about for
months. The mainstream media has avoided it assiduously in spite of me
constantly haranguing various Fed reporters about it. Now that Spicer
has broken the story, the floodgates will open. You can be sure that the
Wall Street Journal’s Jon Hilsenrat will be on it like a fly on
horseshit to get all the credit for it next week. He’ll report the Fed
authorized, whitewashed, rubber stamped, and promoted version of the
story. Here’s Why The NY Fed’s Head Trader Is Now Doing A Dog and Pony Show That You Need To Know About
My timing was off by just a week. Hilsy was out today with a WSJ blog
post that reports but, as predicted, soft pedals, the issue.
Minutes released by the Federal Reserve of its March
policy meeting were a reminder that the central bank could face real
operational challenges when it decides to start raising short-term
interest rates.
I’ll say. Their unconventional tools of increasing IOER, or RRP and
TDF, won’t work because they will pay an additional subsidy to the
banks, increasing their income and reducing their cost of funds. ‘Splain
to me again how that will induce them to raise rates.
As part of its bond-buying programs, the Fed has flooded
the banking system with $2.7 trillion of funds known as reserves. Bank
reserves are like a dollar in your pocket – they pay no interest.
Come on Jonny Boy. You know that’s not true. You know that the Fed is
paying interest on those balances. The media even coined an acronym,
IOER. And it’s coming right out of taxpayer pockets because it reduces
the surplus interest income the Fed recieves which it returns to the
Treasury.
This abundance of funds is a giant weight keeping
short-term interest rates near zero. When it comes time to raise
interest rates the Fed will need to either a) eliminate those reserves
or b) pay a higher interest rate than zero to private financial
institutions in exchange for them. The Fed has chosen the latter route
for the early stages of the rate hike cycle, but the minutes showed Fed
officials are still struggling to define the tools they’ll use to pull
this off.
Because they KNOW, but are not saying, that paying interest to the banks won’t induce the banks to raise rates. Au contraire.
Paying higher rates to banks is simple since they have
accounts with the Fed. But the reserves seep out of the banking system
into other financial institutions like money market mutual funds and
officials are reluctant to use a new instrument – overnight reverse repo
trades – designed to manage rates outside of the banking system. Last
September they set a $300 billion cap on these trades. In March they
agreed they might need to ignore their own cap, according to the
minutes.
This is laughable gibberish. Reserves do not “seep out of the banking
system.” They are cash assets on the books of the commercial banking
system. They can move from bank to bank, but like the Hotel California,
they can’t leave unless the Fed extinguishes them. The only way to do
that is for the Fed to sell assets. That results in the liquidation of
the reserve deposits on the Fed’s balance sheet as the banks exchange
their cash for the paper which the Fed sells to them.
Fed officials also entertained ways to eliminate reserves
more quickly than planned, including by selling some securities before
they mature or allowing some to mature without reinvesting the proceeds.
It is striking that they discussed new strategies for eliminating
reserves at the March meeting.
Dude! They discussed it in January! Did you not read those minutes.
They had pages of discussion on it. No one in the mainstream media
reported it. Not you. Not anyone. Just one crazy, lone, independent
analyst, waving his fist at the sky in a raging lightning storm.
Everybody else just played through, as if the sun were shining, no
thunder crashing around them.
For months it had sounded like Fed officials were settled
on their plans on this front – no asset sales and continued
reinvestment of proceeds from maturing securities until after the Fed
had already started raising rates. Now they don’t sound so sure about
that strategy. “A number of participants suggested that it would be
useful to consider specific plans for these and other details of policy
normalization under a range of post-liftoff scenarios,” the minutes
said.
This is where I get to say I told you so. I said that you’ll know the
Fed is serious about raising rates when they start floating trial
balloons about shrinking the balance sheet. Because that’s the only way
they can get rates to go up.
For years, Fed officials have sought to reassure the
public that they had all the tools they would need to raise interest
rates when the time came, even with all of these reserves in the banking
system. The minutes show that even now the mechanics of how they’ll do
this are very much a work in progress, and a possible source of market
uncertainty as the Fed looks toward rate increases later this year.
The truth is that they know that their “unconventional tools” won’t
work. They need to start shedding assets. Whether they do that by
allowing them to run off or selling is the question. My guess is that
allowing paper to mature won’t have much effect initially.
They would need to start selling assets. There are those who would argue
that that will never happen because markets would disintegrate. They
may be correct. Will the Fed be willing to test that?
From March 17-
Whoever would overthrow the liberty of a nation must begin by subduing the freeness of speech.”
Benjamin Franklin, Silence Dogood, The Busy-Body, and Early Writings
I start with that quote because once the media, as well as
politicians for that matter, have no accountability for actions or words
then liberty will dissolve. Over the last few weeks I have witnessed
another litany of lies that the media insists on putting forth. They
come in the form of statements presented as facts to sway opinion while
others are opinions quoted by others. Either way, the bias in talking
down oil prices, reinforcing the “glut” that is fueled in part by
misleading EIA and IEA data, is readily apparent.
Earlier in the year I documented half a dozen media reports which
turned out to be 100 percent false. Now I expose another half dozen in
just the past few weeks. Prices remain unchanged as a result of the
largest drop in production in a year, as well as a large inventory draw
this week via the EIA. The very fact that prices haven’t responded
demonstrates my points. This comes despite the dollar index (UUP) over
the last month remaining essentially flat while USO has fallen over 15 percent (so much for that relationship, except when the dollar rises right?)… Related: A Reality Check For U.S. Natural Gas Ambitions
Even at the time of this article the dollar index is down 1 percent yet oil is down as well.
Here is a list of the latest lies:
1. Iran Agreement to flood market. FALSE. OPEC has even stated that the natural 1.0 to 1.5 million barrels per day (MB/D) rise in demand in 2016 will more than offset
any production rises in Iran which, contrary to earlier reports, won’t
come on line until early 2016. In addition, China will open up refining
to third party, non-state-owned refineries which will reportedly add
another 600,000 B/D in demand in 2016.
2. Iran floating storage will flood market. FALSE. As initially reported in the media, it was Iranian oil floating in storage but it now turns out to be low grade condensate
as stated by PIRA on Bloomberg a few weeks back and then supported by
tankers attempting to move inventory to Asia. Later media reports
corrected earlier ones that the storage is in fact condensate while
failing to report on its grade.
3. U.S. production resilient. FALSE. The latest EIA data
refutes this as does data via EPS calls at Whiting Petroleum (WLL)
& Hess Corporation (HES). Yes, some are increasing production such
as Concho resources (CXO), but in the Bakken both companies confirm that
2H15 production will decline due to lower rigs and depletion. HES
raised production for the year as a result of 1H15 production being
higher than expected by some 5 percent. All in all, next week should see
further production drops.
4. U.S. Inventory resilient.
FALSE. EIA data would have fallen last week by some 4MB as it did this
week ex import surges and continues to be overstated by “adjustments”
made to production that amount to millions of barrels in daily
production.
5. Cushing inventory fears revived.FALSE…see above.
6. OPEC supply will continue. The Saudis, as OPEC’s largest producer and largest contributor to growth in 2015, have already stated that they will reduce output by 200,000-300,000 by summers end. Yes true, OPEC as an entity won’t formally announce a cut but isn’t it misleading to report this?
The S&P 500
can rise to 3,200 within two years, a more than 50 percent upside from
its current level, bullish investor Laszlo Birinyi said Tuesday.
"What we're really trying to tell people is stay with it. Don't let the bad news shake you out," he said on CNBC's "Fast Money: Halftime Report."
The S&P has risen more than 50 percent in the last three years. It has inched nearly 2 percent higher so far this year. Read MoreWhy investors expect 'August angst' to come
Global trends like volatile Chinese stock markets
and Greece's effect on the euro zone have spooked investors this year.
But the founder and president of Birinyi Associates shook off concerns
that the years-long bull market would not persist.
"There's no reason why we can't keep on going," Birinyi said.
Individual stocks look more appealing than specific sectors, he added. Birinyi contended that stocks including Chipotle, Google and Visa would continue grinding higher.
Still, some negative market trends have caught Birinyi's eye. Apple—his biggest holding and the world's largest company by market cap—has shed nearly 6 percent in the last five days. Read MoreWhy we're 'losing' Apple: Technician
Birinyi noted that he could not explain what has held back the stock.
"It is a concern to me because I don't know what's going on," he said.
On the other hand, short seller Bill Fleckenstein,
who correctly predicted the financial crisis in 2007, told "Fast Money"
the entire market could be heading for calamity in the coming months.
Deutsche Bank AG DB, +0.00% Tuesday raised its outlook for gold and silver prices in 2013 and 2014, citing support from stimulus measures by central banks such as the U.S. Federal Reserve.
The bank raised its 2013 gold forecast by 3% to $2,113 a troy ounce and its 2014 outlook by 11.1% to $2,000/oz. Next year, the price of gold could exceed $2,200/oz, it said.
Similarly, Deutsche Bank increased its 2013 outlook on silver by 3% to $44/oz and its 2014 forecast by 11.1% to $40/oz.
A major support for precious metal prices are the recent moves by central banks to expand their balance sheet, said the bank. Since gold is often sought as a hedge against currency weakness and inflation at times of loose monetary policy, such moves tend to boost its appeal to investors.
"We believe central bank action to stimulate growth, avoid deflation and reduce systemic risk is unambiguously bullish for the precious metals sector and specifically gold," said Michael Lewis, a research analyst at Deutsche Bank.
"While we have targeted gold prices moving above $2,000/oz since the beginning of 2011, we believe the Fed's open-ended program of QE announced last month increases our confidence that a surge in the gold price above this level is only a matter of time," he added.
