Tag Archives: oil

Oil, Gold and Bitcoin

The falling price of oil did not garner any mainstream financial media attention until today, when U.S. market participants woke up to see oil (both WTI and Brent) down nearly $2.  WTI briefly dropped below $43.   The falling price of oil reflects both supply and demand dynamics.  Demand at the margin is declining, reflecting a contraction in global economic activity which, I believe the data shows, is accelerating.   Supply, on the other hand, is rising quickly as U.S. oil producers – specifically distressed shale oil companies – crank out supply in order to generate the cash flow required to service the massive energy sector debt load.

I am quite surprised by the rapid fall of oil (WTI basis) from the $50 level, because I concluded earlier this year that the Fed was attempting to “pin” the price of oil to $50:

The graph above is a 5-yr weekly of the WTI continuous futures contract.  Oil bottomed out in early 2016 and had been trending laterally between the mid-$40’s and $55.  I read an analysis in early 2016 that concluded that junk-rated shale oil companies would implode if oil remained in the low $40’s or lower for an extended period of time.  Note that some of the TBTF banks who underwrote shale junk debt were stuck with unsyndicated senior bank debt (i.e. they were unable to find enough investors to relieve the banks of this financial nuclear waste).  Thus, the Fed has been working to keep the price of oil levitating in the high $40’s/low $50’s, in part, to prevent financial damage to the big banks who have big exposure to shale oil debt.

The problem for the Fed is that it can’t control the global supply of oil.  There’s too many players.  With oil pinned in that trading range, U.S. oil companies have been pumping out oil as quickly as possible.  The oil drilling rig count has risen for 22 weeks – Oilpro.com – the longest consecutive streak since 1987.  Rising production from the U.S. and elsewhere is keeping global stockpiles high, especially relative to demand.  As a result, you get chart of the price of oil that looks like the one above.  Oil is now well below both the 50/200 dma plus the RSI and MACD are pointing  straight south, indicating a high probability of lower prices for awhile.  Also, note the rising volume in conjunction with the falling price.  This is indicates that market participants have been and continues to be better sellers.

The Fed is thus unable to pin the price of oil to $50 on a sustainable basis.  Why? Because it has no control over the global supply and demand, which prevents control the price of oil for any meaningful period of time (just ask OPEC about that).  Similar to the Fed’s price-management of oil, the Fed has been keeping gold pinned under $1300 since early November in an effort to prevent a rising price of gold from undermining the dollar’s reserves status and signalling the escalating economic and financial distress in the U.S. This is despite rising demand for physical gold coming from numerous eastern hemisphere countries.  As long as the Fed (and western Central Banks) can continue delivering physical gold into the massive demand vortex in the eastern hemisphere, it can somewhat successfully manage the price.

Also similar to oil, the Fed has no control over the supply and demand of gold, except to the extent that the Fed/western Central Banks are still holding gold that can be leased out or custodial gold that can be hypothecated for the purpose of enabling a continuous flow of physically deliverable to gold the east.   But the difference between oil and gold is that the supply of mined gold is relatively fixed (and has been over a long period of time).  At some point the western Central Banks will run out of access to enough gold that can be delivered to buyers who paid to settle their purchases upfront.  At that point, the chart of the price of gold will look like the recent graph of Bitcoin, Ethereum, etc.

This brings up a quick point about the cryptocurrencies.   When the U.S. blocked Iran’s access to the SWIFT trade settlement system, India began to pay for the oil it imports from Iran with gold.  These were very large-dollar transactions. We have yet to hear any reports of sovereign nations using Bitcoin or other cryptos for payment to settle trade agreements. For me, this highlights yet another difference between the use of gold as a currency vs the cryptos.  I want to make it clear that I’m not in the anti-cryptocurrency camp, but I do believe that, ultimately, precious metals (gold and silver) are much more functional as a form of money than the cryptos.   Bitcoin debuted for peer-to-peer transactions in 2009. Gold has functioned for this purpose for over 5,000 years.  My preference in this situation is to bet big on the form of money that has pedigree.

Avoid Or Short Kinder Morgan: The Reasons May Surprise You

Kinder Morgan has amassed the largest midstream gas transporation asset base in the United States. It did this primarily through the aggressive use of debt issuance to fund acquistions. In order to fund its dividend and related dividend growth rate policy, Kinder issued even more debt rather than pay out a dividend using internally generated funds. This is not unlike a standard Ponzi scheme. It is the view of IRD that Richard Kinder hashome-KinderMorgan managed KMI for his personal benefit rather than for the benefit of long term shareholders. IRD recommends selling this stock if you own it and finding other investment ideas if you are considering buying it.

Click here for access to this report:  IRD’s Kinder Morgan Report

Glencore Mirrors The Entire Global Financial And Economic System

  • Collapsing fundamental economics
  • Plunging end-user demand for its products
  • Overloaded with debt
  • Hidden land-mines in the form of OTC derivatives

Who said “black swans” have to be hidden?   Glencore is in full view.  After a dead-cat bounce from a quick descent that took Glencore stock from 310 (pounds) to 68 in 5 1/2 months, the stock is rolling over again and headed lower:

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This isn’t just about the plunging price of copper, which is now back to its pre-financial system collapse price in 2008 and headed lower. Copper is responsible for generating only 36% of Glencore’s operating income.  This is about the plunging prices and demand for oil and all base metals.

It’s about a company (global financial system) that hides a lot of risk, debt, derivatives, corruption and fraud.  Point of example:  Glencore’s funded debt level is $50 billion and it has the capability to draw on credit lines that would take it up to $100 billion.  But the sleazebag snakeoil promoters cite Glencore as having $19 billion in “liquid” inventories so the debt number that gets quoted and widely accepted is $31 billion.   But it’s not.  It’s $50 billion.  And Glencore’s “liquid” inventory is the same base metals that are plunging in price from oversupply and lack of demand.

Furthermore, over 30% of Glencore’s EBIT is derived from what the Company lables as its “marketing” business.  But this is the legacy business that was originally Marc Rich’s commodities trading company.   It’s a corrupted commodities trading and brokerage business. That means it’s riddled with hidden counter-party risks and derivatives.  We don’t know the full extent of Glencore’s risk-exposure in this area because this an area that global financial regulators give financial firms a lot of breathing room with which to cover up the truth using insidious accounting schemes.  But what I do know for sure is that you can rip and toss out any of the research reports indicating the Glencore’s derivatives exposure is limited to $5.2 billion.   The real number is multiples of that.

With 50 billion (pounds) in funded debt and not including hidden off-balance sheet skeletons – Glencore’s debt to market capitalization (13 billion pounds) is nearly 4:1.  That is an extreme degree of leverage for a volatile, commodities-based business which is headed into an economic depression.

Glencore is a microcosm for the entire global economic and financial system.  Including and especially the United States.  And here’s the kicker.  Deutsche Bank is Glencore’s largest creditor.  We can also very safely assume that Deutsche and Glencore are counterparties to a vast web of derivatives contracts.   I’m sure Deutsche has also tried to off-load credit exposure thru the use of credit default swaps with hedge funds and other shadow banking participants.  But who are those counterparties and how is the risk of default on this “insurance” Deutsche has likely “purchased.?”  Glencore has the possibility of taking down Deutsche Bank, which in turn would take down the entire German system.

The rest will flow from there and there will be a lot of blood, including and especially in the United States.

Just like with Glencore, the true degree of ongoing economic collapse and financial risk exposure has been papered over with both QE and more debt issuance.  It won’t take much trigger a financial nuclear explosion.

I would suggest that this is why the Central Banks and the relateve propaganda machine have shifted into full-gear in their effort to prevent the price of gold from engaging in unfettered price discovery.  I would also suggest that this is why the U.S. conducted a highly visible Trident nuclear missile test along the west coast, in full view of Russia and China.

So Much For Bloomberg’s New Bull Market In Oil

As I mentioned two days ago when oil popped about 10%, Bloomberg was all giddy in declaring a new bull market in oil.  Within two days oil took back all of Monday’s gains, and more.   With oil now down over 10% from Bloomberg’s “point of new bull market,” is this a “correction” or a sell-off from a paper-manipulated bounce:

OIL

Next up: the “new bull market” in fraudulent Government non-farm payroll reports…

Gold has worked down from Alexander’s time… When something holds good for two thousand years I do not believe it can be so because of prejudice or mistaken theory – Bernard Baruch, famous Wall St financier, philanthropist and Presidential advisor

Oil Falls Below $40 – Looks Like My Gartman Call Was “Money”

Friday I published this post: “Time To Short More Oil – Dennis Gartman Went Long:”

NEW RECOMMENDATION:  Amidst the carnage of the global stock markets this morning and even in light of the sustained bear market in crude oil, the narrowing of the contangos in Brent and WTI brings us to become a buyer of crude as noted at length above. We’ll buy a unit of crude oil, split between Brent and WTI, upon receipt of this commentary. We shall, for the moment, give these prices the latitude to move 3% against us, hoping that we can tighten that up when we return Monday.  The Gartman Letter

Dennis Gartman has been notorious for being a “spunk receptacle” for hedge funds looking to unload a bad position.  His audience is moronic high net worth financial advisors and brain-dead institutional “buy the dip” with other people’s money” pension and investment fund managers.  Perhaps the only better contrarian indicator than Gartman is Jim Cramer.

When Gartman says he has to go long crude because the “term structure” mandates it, it tells me some slippery NYMEX or London trader is whispering sweet nothings in his ear to generate buy interest from the herd referenced above.

You can read the rest here:  LINK

We’re on the brink of another financial collapse that will make 2008’s collapse look like nothing more than a boring warm-up band.  Oil will likely eventually see the $20’s.  This blow some big holes in big bank balance sheets and devastate the junk bond market.  Both of those events will ignite the underlying derivatives napalm…

 

Time To Short More Oil: Dennis Gartman Went Long

NEW RECOMMENDATION:  Amidst the carnage of the global stock markets this morning and even in light of the sustained bear market in crude oil, the narrowing of the contangos in Brent and WTI brings us to become a buyer of crude as noted at length above. We’ll buy a unit of crude oil, split between Brent and WTI, upon receipt of this commentary. We shall, for the moment, give these prices the latitude to move 3% against us, hoping that we can tighten that up when we return Monday.  The Gartman Letter

Dennis Gartman has been notorious for being a “spunk receptacle” for hedge funds looking to unload a bad position.  His audience is moronic high net worth financial advisors and brain-dead institutional “buy the dip” with other people’s money” pension and investment fund managers.  Perhaps the only better contrarian indicator than Gartman is Jim Cramer.

When Gartman says he has to go long crude because the “term structure” mandates it, it tells me some slippery NYMEX or London trader is whispering sweet nothings in his ear to generate buy interest from the herd referenced above.

I have always maintained that the plunge in the price of oil of is first and foremost a product of the Demand side of the Supply/Demand function.  Events in China and the hard commodities markets (see Glencore’s stock) reinforce and confirm my view.

But to further bolster my “fundamentalist” view, here’s a picture of the supply/demand function per Merrill Lynch:

UntitledTo be sure, oil has fallen quickly and sharply – conditions which could lead to an “oversold” bounce on short-covering from short term scalpers. The fundamentals will ultimately drive the price of oil into the $30’s. I made that call when oil first dropped below $50 in February and I’ve maintained that call since then.

And consider this:  Merrill’s global “economists'” models are factoring in positive economic growth from the large “developed” market economies.  Clearly that outlook is severely brain-damaged…

Oil And Copper Plunge Monday – World’s Biggest Economies Are In Trouble

China, the EU and the United States.  The economic engines of the world.  China’s Shanghai Stock Exchange Composite index has plunged 27% since June 5th.  It’s down 3.3% as I write this.

Despite the political rhetoric and Wall Street propaganda, the U.S. and European economies are in recession.   There’s no reason to wait for an official declaration of this in the United States because the majority of the economic reports for at least the last six months have been negative to highly negative.

In the U.S. the economic contraction is led by a marked decline in consumer spending. Recall, retail sales actually declined .9% in December 2014 from November.  If you remove the effect of inflation on this metric, retail sales in December would be down over 2%. Note, this decline occurred in what is supposed to be the biggest spending month of the year.  As a reflection of the rapid decline of the consumer,  factory orders have now declined year over year for seven months in a row (source:  Zerohedge):

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To confirm and corroborate this trend in factory orders, this next chart shows the year over year percent change in rail freight carloads:

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If consumer demand declines, factory orders drop as do rail shipments from ports and factories.

Both of the above metrics are reinforced and confirmed by the action in the Dow Jones Transportation index:

DowJonesTransports

This index encompasses rail and truck freight shipping, UPS and Fed Ex, and other goods transportation companies.   It directly reflects the relative amount of consumer spending and industrial activity in the U.S. economy.   Year-to-date this index has diverged by a significant amount vs.  the Dow and the S&P 500.   This stock sector is telling us that the U.S. economy is tanking.

Monday the market gave us two more very loud signals that the global economy is starting to crash.  First, the price of oil plunged over 7% today:

OIL

Of course, the media propaganda attributed the drop in oil to reports that the U.S. and Iran are close an agreement on Iran’s nuclear program. The implication is that removing the sanctions would unleash a flood of Iranian oil on the global market. But this assertion, if not completely disingenuous, is seeded in complete ignorance. It’s been pretty apparent for several weeks now that the U.S. and Iran were getting close an agreement. All you have to do is listen to the howls coming from Fox News on this subject for  the past several weeks.

No Virginia, the plunge in the price of oil reflects declining global demand relative to global supply.  It’s pretty basic supply/demand economics, something which has proved to be over the heads of Keynesian economists.  In fact, I have suspected that the bounce in the price of oil of since mid-March was induced by a combination of technically-driven hedge fund short-covering and Fed-directed Wall Street intervention.  The motivation behind this price intervention would be to protect the Too Big To Fail Banks who are stuck with $100’s of millions in unsold oil shale company leveraged bank loans.  As long as the price of oil remains at a certain level, distressed oil shale companies can stay current on their interest payments.   A former colleague of mine who trades distressed oil debt agrees with my assessment.

Notwithstanding the US/Iran nuclear agreement “narrative” with regard to Monday’s plunge in the price of oil, the price of copper dropped 4%:

Copper

Just to be clear, Iran is not a significant source for the global supply of copper.  Copper is widely regarded as a bellweather indicator of economic health.  This is because copper is used in applications across most sectors of the economy – housing, factories, electronics – any application that uses wires, etc.   Clearly demand for copper is affected directly and indirectly by consumer spending.   Copper is approaching its low of the year, which is a price level not seen since 2009.

The carnage Monday in the price of oil and copper is significant on several levels.  First and foremost, it tells us that the global economy – including and especially the U.S. economy – is tanking.   Second, it is telling us that, despite the extreme effort by Central Banks to prop up the markets and hold the global financial system together, they are beginning to lose control.  There’s just too many holes springing open in the artificial Central Bank “economic dyke.”  Finally, I would suggest that there’s a strong probability that there will be derivatives bombs detonating which are related to Greek sovereign debt, oil shale company debt and a wide array of commodities, especially oil.

Of course, it’s only a matter of time before the Central Banks lose control of the price of precious metals.

Is Oil Crashing? And The “Patient” Insanity

Oil (West Texas Intermediate Crude) dropped 58% ($108 to $45) from mid-June to February.  After a quick “dead cat, short-covering” bounce, it has dropped 13.5% in a week back to $45.  It’s down 4% today.   Is crude getting ready to crash into the $30’s?  click to enlarge:

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Don’t let the “oversupply” narrative coming from Wall Street infect your analysis. The reason there’s an “oversupply” is because demand is cratering. Demand is cratering because end-users, especially in China and the U.S., are going broke. Unequivocally, this plunge in the price of oil represents a plunging economy, globally and in the U.S.

Of course, the cure for this is to convince everyone that the most important event ever is next week’s FOMC meeting, where the entire financial world is supposedly losing sleep over whether or not the Fed will remove the word “patient” in reference to its stance on maintaining a free money policy – aka ZIRP – aka zero interest rate policy.

You just can’t make this up.  It is a fairytale of epic proportions.  Alice in Wonderland meets The Wizard of Oz.   The fact of the matter is that the Fed can not and will not raise interest rates.   Whether or not the Fed includes the word “patient” in its policy statment is nothing more than the most absurd operatic comic book in history.

Oil Price Plunge To Economy/Stock Market: LOOK OUT BELOOOOW

The price of oil (West Texas) dropped nearly $3 and hit it’s lowest level since the 2nd half of 2010. It’s dropped 31% since July.  The explanations being promoted by the mainstream blogosphere for the price decline is either 1) the U.S. has manipulated the price lower to punish Putin/Russia or 2) the Saudis have flooded the market with supply to drive U.S. oil shale/fracking out of business.

Both of those rationales are nonsense.  Too be sure, I have no doubt whatsoever that the price of oil can be teased lower by manipulative activities.   But for the reasons below, I believe that the price of oil can be driven lower for only  a very short period, especially if global demand requires at least as much oil as is profitably being produced.

First, it is more difficult to drive the price of oil lower using futures – as is done with gold/silver – because oil is a depletable commodity and the entity shorting paper oil risks the probability that the long side will ask for actual physical deliver.  Second, IF the price of oil were being manipulated lower using artificial mechanisms, sophisticated oil traders – Wall Street banks, big hedge funds, sovereign funds and oil companies – would buy up this supply and store the oil until the price bounced back.  It’s an asymmetry of information arbitrage play, if you will, and sophisticated entities have superior information to the market in this regard. Also, please note that several banks have invested in oil storage terminals for this purpose.  Third, I find it very hard to believe that greedy multi-national oil companies would agree to piss off Putin at the expense of profits.  And, by the way, Russia is clearly not hurting given that it bought 37 tonnes of gold with cash in October.

Instead, the plunge in the price of oil reflects the collapsing global economy, which – by the way – includes the U.S. economy:

BLOWME

I wrote an article in October which outlined why I thought the U.S. economy hit a wall in the middle of the summer.

To summarize:  1) weekly and monthly nominal retail sales reports started showing declines.  This is highly unusually because typically retail sales always increase at least by the rate of inflation.   Negative retail sales reflect a decline in unit volume, which means consumers are buying less.   McDonalds reported sales declines 12 months in a row, for instance.

2)  Housing sales have been comp’ing year over year negatively for the past year and prices are starting to decline.  This is especially true when you strip away the National Association of Realtor and Census Bureau “seasonal adjustments” and you just compare year over year for each month.   The fact that both entities report their results stated in an “annualized rate” only serves to compound the statistical errors embedded into the numbers by the preposterous “adjustments.”

3)  In general, the various macro/regional economic reports from manufacturing organizations, regional Fed banks and even the Government have been showing declining industrial activity.  This too is in spite of “seasonal adjustments” tortured into the data.

The red line in the oil price chart above shows where I believe that the price of oil began to anticipate and reflect this sudden rate of decline in the U.S./global economy.   The drop in the price of oil reflects a demand-side shock – a lower rate of economic activity globally drives the demand for energy/gasoline lower relative to supply and the price drops.  Thus, a plunging price of oil reflects a plunging economy.   It’s really that simple – just ask the Democrats.

Now, what does this mean for the U.S. stock market.  The U.S. stock market has levitated higher on a flood of printed dollars and the multiplier effect created by the magic of a fractional banking and securities mechanism.  Through the magic of reserve ratio leverage, every dollar printed and given to the banks transmits into several dollars that can pile into the stock market via the banks themselves and through the use of hedge funds  – which are extended up to 10:1 leverage from banks – as a transmission mechanism.  Unless the Fed is clandestinely printing at least the same amount of money that it had been printing, that game is over now.

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(click on the graph to enlarge)  The graph above is a 1-yr daily of the S&P 500.  As you can see, for the last year, every time the SPX extends above the 50 dma (blue line) it tends to correct below the blue line.  This tendency actually goes back for three years.  The latest iteration higher has occurred on noticeably declining volume.   The SPX has also closed higher a preposterous 15 of the last 21 days, including 6 of the last 7.   On several of those 15 days, the SPX was down for the day going into the last 30 minutes of trading and, “miraculously,” would manage to rally into new high territory by the  close.  Today ia a perfect example of that, as it was red even within the last 10 minutes before the close (futures basis) before squeaking out a small gain for the day.  The futures turned red again right after the close.

In addition, notice that the RSI (yellow circle) has now rolled over from an extreme overbought condition.  And the MACD is now rolling over from its most overbought level in the last year.  The MACD is a slower moving statistical indicator than the RSI, which means a change in directional trend is a better directional indicator than the RSI.  The MACD is suggesting that the SPX has a high probability of rolling over here.

This is in the context of this stock market being the most over-valued in history (see this LINK) and in the face deteriorating economic fundamentals.   I have pointed out to colleagues that, on an “apples to apples  GAAP accounting basis,”  the current stock market is far more overvalued than it was in 2000.   Since 2001, the FASB has changed accounting standards in a way that makes it much easier for companies to report much higher non-cash GAAP accounting profits than they were able to manipulate into their GAAP net income in 2000.

One more chart that should freak out:

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The graph above shows one of the Pimco commodity funds vs. the S&P 500 for the last 10 years.   As you can see, before QE started, these two indices were highly correlated.  The divergence of the S&P 500 from the Pimco fund reflects the degree that QE has influenced the market.  I my view, there will be a very painful “regression to the mean” adjustment that will re-establish the correlation between the commodities market and the stock market.  This mean-reversion will occur without the commodities market moving higher…

Given the remarkable degree of official intervention in all of the markets, but especially in the stock market (and of course the gold/silver market), I’m not going to stick my neck out and say the stock market is headed for a plunge, although I think this is a very distinct possibility.  I will say that anyone at the retail level chasing this market is an idiot and any institutional money manager not pulling money out of the stock market right now is guilty of breaching fiduciary duty.    And with the stock market’s “theater” full from wall to wall, including those taking up standing room only space,  and with only one door leading to the exit, when the fire does start it’s going to look like Biblical Armageddon in that graph above.