Energy Prospectus

(One take on the deflation. The Fed's blamed for cheerleading, but of course that's one thing you do when depressive conditions and
oligarchic concentrations of wealth freeze business,as in the late 1920s. k1f)

Commodities Are Screaming Trouble But the Fed Isn’t Listening

By Pam Martens and Russ Martens: July 31, 2015 (Wall Street Parade)

The commodities slump has accelerated this past month with gold now trading at five-year lows and the U.S. crude benchmark, West Texas Intermediate (WTI), down 19 percent in just the past month, 49 percent on the year, and 57 percent in the past two years. In early morning trade, WTI is at $47.82 versus $110 two years ago.

Minutes of the Federal Reserve’s Open Market Committee meeting on December 16 and 17 reveal that the Fed was expecting an upturn in oil prices this year, writing: “…inflation was projected to reach the Committee’s objective over time, with longer-run inflation expectations assumed to remain stable, prices of energy and non-oil imports forecast to begin rising next year, and slack in labor and product markets anticipated to diminish slowly.”

CNN Money is reporting this morning that major iron ore or metals exporting countries like Peru (copper), Chile (copper), South Africa (iron ore and gold), Australia (iron ore and gold), Brazil (iron ore), Zambia (copper), and Democratic Republic of the Congo (metals and crude oil) are experiencing a serious economic impact from the plunge in commodity prices over the past year.

There are three major culprits behind the global glut and commensurate decline in the price of industrial commodities. The growing gap in income and wealth equality worldwide is aggravating the consumers’ inability to boost economic activity; China is the world’s largest importer of industrial commodities and it’s experiencing both an economic slowdown and a loss of investor confidence as a result of wild gyrations in its stock market and unprecedented government props to prevent a collapse; and, finally, Fed Chair Janet Yellen’s incessant chatter about an upcoming hike in U.S. interest rates has elevated the U.S. Dollar, putting more downward pressure on commodity prices.

Most industrial commodities are priced in U.S. Dollars, making them more expensive as foreign currencies decline in value. According to the Bloomberg Dollar Spot Index, the U.S. Dollar is now trading at its highest level since 2004 versus 10 other major currencies.

The rout in foreign currencies is now forcing some countries to raise interest rates to defend their currencies at one of the most inopportune times in terms of economic weakness. Bloomberg Business is out with the following disturbing news this morning: “All of the 24 most-widely-traded emerging-market currencies tracked by Bloomberg have weakened over the past month except for the Hungarian forint. An index of their exchange rates has dropped 8 percent this year to the lowest on record in data going back to 1993. The current pace of declines would make this the worst year since 2008.”

Growing comparisons to the conditions leading to the financial crisis in 2008 are causing investors to rethink their exposure to roller coaster markets and the potential for liquidity air pockets. That lack of confidence is being exacerbated by a growing feeling that the Fed is either living in a fantasyland of economic optimism or simply talking its book to support the U.S. Dollar and prevent a capital flight.

One thing is for sure, as the above chart of metals and mining stocks shows, Ms. Yellen is presiding over a lot of pain in a broad number of arenas.

U.S. crude oil production is now on-track to decline by over 1,000,000 barrels per day from the peak in March. By this time next year, U.S. oil imports will exceed 8.5 million barrels per day (July imports were over 7.5 million barrels per day).

We can kiss energy independence good-by.

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Dan, one million barrels per day decline? Is that a typo or will we be producing 365 million fewer barrels next year? That seems enormous.

The number of wells being completed during the 2nd half of 2015 will not even replace the decline in production from the wells completed in the 2nd half of 2014. Shale wells decline by AT LEAST 50% in one year. The 4th quarter production this year of the horizontal wells completed in Q4 2014 is probably less than 30% of their initial production.

There is no way we can drop 1,000 rigs and not have a BIG drop in production.

Per EIA report last week: U.S. oil production declined by 191,000 barrels per day in the three weeks ending July 24.

Where are these declines showing up?I don't see many production declines reported or forecast in any of the public company reports. Keep hearing about doing more with less and substantial increases in efficiencies. A million barrels a day seems like a lot.

Chuck;

I think part of what EIA is reporting for July is "catch up", since U.S. production peaked in March (per Raymond James) and EIA's flawed model was showing production growth through June.

Go here to see EIA weekly supply estimates: http://www.eia.gov/dnav/pet/pet_sum_snd ... blpd_w.htm

Keep in mind that the seven large regions that EIA tracks closely are only 50% of U.S. production. Outside of these big areas there is almost no drilling activity going on and they are on steady decline. I also think the big drop in July may be a lot of sub-economic wells that the operators were hoping to keep going. The 20% drop in oil price in July probably caused a lot of sub-economic wells to be shut-in.

Send me an e-mail (dmsteffens@comcast.net) and I will send you a couple Raymond James reports that will explain how flawed the EIA forecast models are.

BTW one service that I get which has been much more accurate than EIA, says YOY demand growth in the 2nd quarter for refined products was 3.25 million barrels per day. Global supply/demand is much tighter than EIA and IEA are saying. Could it be that they want to keep fuel prices low for as long as they can?

In 2009 it was clearly shown that EIA and IEA had flawed forecast models for production and demand. However, they have not corrected them. Keep in mind that these government agencies have NO DATA COLLECTION SYSTEMS of their own. They rely on state reports (where there is a 90 day lag) and SWAG's for estimates in many foreign countries.

Proof of all this is that the reports that there is a global oil "GLUT" of 2 million bbls per day result in "Missing Barrels" of more than 500 million barrels.

The missing barrels is what really worries me. Based upon this sound analysis the market would appear to be much closer to balanced than anyone would admit or acknowledge. And we have $45 oil. It seems like the traders and shorts are in total control of the market and that market principles have been usurped. I can't stop thinking about David Einhorn's "mother frackers" speech. I hear he is taking it in the shorts himself on Pioneer but it would appear that the shorts have crushed a lot of portfolios.

It is a reality that the "speculative traders" do control oil, gas and all commodity prices.

Dan - your thought process is logical. But every company that reported today seemed raised guidance except NOG, and there were quite a few reporting today. For the week, I only recall seeing 3-4 flat or down guidance projections in what has been a very busy week for E&P earnings announcements and conference calls so far. So, a bit of conundrum is presented. It is clear and obvious that current rig count should not hold production flat, but....

Do we have stripper, privates, royalty trust decay, etc making up the negative delta?