What We're Reading

When it comes to energy, there is one matter everyone agrees on. For the near future, at least, the world will need more of it—and how it is produced and used will be a critical factor in the future of the global economy, geopolitics, and the environment. With that in mind, McKinsey took a hard look at the data, modeling energy demand from the bottom up, by country, sector, and fuel mix, with an analysis of current conditions, historical data, and country-level assessments. On this basis, McKinsey’s Global Energy Insights team has put together a description of the global energy landscape to 2050.

It is important to remember that this is a business-as-usual scenario. That is, it does not anticipate big disruptions in either the production or use of energy. And, of course, predicting the future of anything is perilous. With those caveats in mind, here are four of the most interesting insights from this research.

Global energy demand will continue to grow. But growth will be slower—an ave

The stock market continues to weaken, as evidenced by these ETF charts.    If you zero in on a sector you wish to short, I would bear in mind that ETFs are comprised of market leaders.  I would look for names "outside" of the ETF components; consider them leaders and you want the weaklings to short.

The reasons for weakness are numerous. 

Consider the election weight (a Trump win would weigh on equities but Clinton weighs on pharma pricing).  Then there are flat-to-dropping sales.  Of course the USD movement (up will weigh on commodities and large caps with overseas exposure).  Then there's those who feel we are already at or above maximum value and they're not buying here.  They're hedged, short some and long financials ahead of the Fed rate hike.  Then there's that Fed hike itself.  High dividend is flushing down the toilet (SDY) in September.  Overseas weakness with China not helping boost confidence for demand.  And we also have more failure at the OPEC talks with no offer from o

With disruptions fading and Libya now reaching a deal to end their brigade, oils top may be in for now.  This man, however, feels it's going to be a very long road ahead for crude oil bulls.

When crude oil was stopped by it's 200 month simple moving average in June, I wrote here that this posed a problem for the energy sector.  We analyzed rig counts and even questioned here if the Saudis had it wrong.  I had already posed here that there would be no recovery in 2015 and we should be fearful of the nasty word "deflation" here and it doesn't appear I was wrong.  Who's feeling the most pain from these prices?  We took a look here as these countries could pose good buying opportunities down the road.  What's being said now on crude oil's recent drop in price is even more interesting.....at least until there's a disruption in supply or the Saudi's change their mind.

Back in January, Morgan Stanley drew similarities between the current oil crash and the one in 1986— when oil prices fell 45%.  Though they have been making these parallels for six months, analysts are now saying that the current crash could fare even worse.  "On current trajectory, this downturn could become wor

Received this SoberLook email from member Ryan and had to chuckle.  Did oil bulls (who are always drooling at the mouth) truly feel OPEC would cut production at some point to satisfy their desire for higher pricing?  Come on.  How much can the U.S.consumer handle with new jobs created at the low end of the scale?  What would happen with $5 gas gasoline?  Carpools would become all the rage here in my locale. At a time when the U.S. consumer needs money to spend, the impact of higher oil would be the last thing we need.

With low oil, the weak will fail and M&A will continue in the crowded space.  Let new technology force cost savings (as we're seeing it every where else) and bring O&G production up to 21st century standards.  I've written about it several times and I think the Saudis knew it was time.

In 2014 the Saudis could no longer accept the loss of crude oil market share as the North American production levels shot up sharply over a three-year period.

Source: Yardeni Researc

Had to share this monthly chart of crude oil because I am one that has viewed it bearishly since it broke it's 200 month sma; prior support during the financial crisis. (click chart to enlarge)

Blame it on fracking.  Blame it on OPEC.  Blame it in fuel efficient cars.  Blame it on whatever you wish but just because it was bullish for years, does not mean it will always be the same.

Natural gas has been embraced by the U.S. and continues to grow.  Coal is all but dead; being dropped by one country after the next.  There obviously is no U.S. oil shortage (thank you Bakkens) and our dependency on overseas oil becomes less with each passing day.

Yes they have shut down rigs to cut back on the oversupply but (imo) barring any disruption in production, I see this years move in crude oil as nothing more than back-n-fill.  The 200 month is an interesting overhead obstacle.  And that strong U.S. Dollar?  No, that not going to help it either (again barring a disruption).

It's not a bear mark

As the latest Baker Hughes rig count continues to plummet with the collapse in oil pricing some are still trying to catch a bottom.

Total Rigs down to 1633
Down -43 or -2.6% compared to last week
Down -144 or -8.1% year-over-year

Gas seems to be shuttering more than oil and inland waters more than land or offshore.

With many pundits forecasting crude to remain low for a few years (barring disruption in supply) this will be interesting to monitor going forward.

With Schlumberger (SLB) to layoff 9000 and Baker Hughes (BHI) to layoff another 7000, this is only the tip of the iceberg.

Data courtesy of Baker Hughes

Click charts to enlarge

Dick Evans, chairman and CEO of San Antonio based Cullen Front Bank (CFR) made the rounds in December chatting with CNBC in an effort to reassure investors that the low price crude oil was only temporary and would not translate into a revisiting of the bloodbath of the 1980's, however their chart says that investors aren't drinking the koolaid.  (chart right - click to enlarge)

The same investor fear can be seen in southern lender BOK Financial which operates in Oklahoma, Texas, New Mexico, Northwest Arkansas, Colorado, Arizona, and Kansas/Missouri. (chart below - click to enlarge)

I believe that barring an OPEC cut in production or some outside supply disruption, crude will NOT recover in 2015 as explained in this post.   Is this what these bank charts are hinting at?

The next question is if these banks begin to see defaults in oil and gas names, just how many dominos lie behind in the high-yield bond financial trail.  As Becky Quick points out, hedging only lasts for so long so i

While guests on CNBS CNBC and Bloomberg are busy encouraging you to buy oil names which are down over 50%, I wouldn't expect to reap any big rewards any time soon.  In fact I believe there will be much more pain ahead, depending on the strength of the company you chose.  Iran sanctions may be giving it a boost near term but once they're lifted (or eased) their production is expected to double which is once again, bearish for this oversupplied market

While everyone is in agreement that crude oil is in a bear market, quite often one strategy is to buy the laggard and anticipate it to outperform the following year.  The trouble with crude oil however, are the fundamentals.

1. U.S. consumer Demand (figure 1)  Consumption has been dropping since 2000 thanks to more fuel efficient autos and younger Americans (millennials born from 1980 to early 2000s) being drawn to work in and the lifestyles of large metropolitan areas.  Baby boomers (born 1946-1964 or 51-69 years of age) will contribute

Volatility definitely increased leading up to this weeks quadruple witching and the S&P (400, 500 and 600) index re-balancing taking place tonight after the close.  Selling the last two weeks resulted in oversold conditions in the near term charts and massive short covering at the market as every fund and investment bank bought new shares (as they rebalanced ahead of the indexes), resulted in two astounding days of back to back two percent gains.  Bulls were partying in the streets but is it warranted?   Has anything truly changed? 

Yes, the Fed has reassured investors that they have no intention of raising rates any time soon which is what everyone wanted to hear but we still have a bull market which has had an incredible six-year run so just "who" is going to buy at these elevated levels for their 2015 portfolio?

I also do not believe that crude oil (and oil/gas companies) are out of the woods yet either.  There's that pesky $OVX which is the VIX for crude oil.  Note how it's not c

After hearing one analyst commenting that lower prices at the pump would translate into increased oil demand, I had to open up the commentary notepad.  (click on charts to enlarge)

The first thing that immediately came to mind was the rising costs elsewhere in Americans pocketbooks that would take up the slack of lower gasoline prices, such as rent.  Social Security recipients for example will see an increase of 1.9% in 2015 however this is no where on pace with the increases in average rents which continue to climb.  In fact, how about a rent increase of 6.9% in November according to Trulia?  Ouch!

Indeed incomes, when adjusted for inflation, have definitely not kept pace since 2000. (chart right).  Add to this the fact that the majority of new jobs being created are at the low end of the pay scale and you have a situation where any savings at the pump are not going to translate into further driving and gasoline demand but to holiday spending, consumer staples and yes, pay the rent.

Russia's central bank raised interest rates last Friday from 9.5% to 10.5% in an effort to support the falling currency and battle inflation.  When that did nothing, they shocked markets by raising it again overnight from 10.5% to a whopping 17% in what some are calling an emergency move.  This was their sixth interest rate hike this year to support the currency.

The central bank early on Tuesday also increased the maximum volume of foreign currency it provides to Russian banks via its foreign-exchange repurchase agreement auctions for 28 days to $5 billion from $1.5 billion.

Sadly the RUB/USD barely moved. (left image - click to enlarge)

Russia's economy still depends in large measure on sales of oil and gas, which account for about two-thirds of exports, despite liberal policymakers calling for structural economic reform for years.

That means swings in global oil prices have a significant impact on Russia's balance of payments, and therefore the rouble exchange rate.  This will c

According to Ashraf Laidi:  The following sobering analysis on the S&P500 reinforces our expectations that recent record highs in US equity indices will not be revisited before at least six weeks.

A decline of at least 10% is expected to follow.

-        Last week’s 3.6% decline in the S&P500 single-handedly erased all of the prior seven weeks’ consecutive gains.

The last time the S&P500 erased at least three weeks’ of consecutive gains was the week after the October 2007 record. Stocks fell more than 50% thereafter and took six years to regain that high.

-        And for an unprecedented finding, last week’s S&P5 500 decline took place after SEVEN weekly consecutive gains, which had NEVER been seen before in the index.

Seven consecutive weekly gains have occurred in the past (Aug-Jul 1989, Aug-Sep 1993, Apr-May 1997, Feb-Mar 1998, Dec 2003-Jan 2004, Apr-May 2007, Mar-Apr 2009, Dec 2010-Jan 2011, Jan-Feb 2013), but never in any of those cases has the streak-breaking week fallen by more

I have to throw a flag in from the sidelines calling foul on the learned men on CNBCs Fast Money table Friday (video below) as traders remain bullish on the big screen.  In fact, they do not believe crude's fall will impact our rally.  Really?  Josh Brown stated there was no correlation b/w the price of oil and the S&P500 and did their level best to downplay the selling in crude oil.  Alright, overlay a comparison chart (left) and you won't see black gold having an enormous impact on the market with a few exceptions BUT, the energy complex represents an average of 6.9% of U.S. GDP. 

If it's a bear market, this changes the scenery.  Come on Josh; there's much more that you're not saying and we know it.  Stay with me here.  So typically if we saw a ten percent correction in crude, another sector in the S&P would merely step up to the plate and help lead such as tech or financials.

This time, however, we see regional banks such a Cullen-Frost (who lend to oil names down here in Texas fo

China's state-controlled energy giant Sinopec wants to sell some long-term liquefied natural gas (LNG) import deals as a slowing economy makes them unprofitable, sources say, signalling the end of a five-year boom fueled by rising Chinese demand.

Kos here:  Note LNG and GLNG are two names in this space.  LNG shown left - click chart to enlarge..

Asia's thirst for energy has helped drive a "dash for gas" in producer countries from Australia to Canada, with LNG emerging as the fastest growing fuel source since the beginning of the century on the back of soaring Chinese imports. But just as long-planned projects start to come on stream China's economy is stuttering, which is likely to crimp demand and pull down domestic gas prices to levels that make imports unprofitable.

"We talk about China choking on LNG. There's just too much coming onto the market," said Gavin Thompson, Head of Asia Gas Research at Wood Mackenzie. Analysts say falling crude prices, which have dropped around 40 per

Indeed, I've read much concern over this area as oil collapsed so it does merit a warning.  From ZeroHedge:

The S&P 500 Energy sector stocks are down over 12% year-to-date, tumbling over 3% today to fresh 20-month lows. The spread (or risk) of high-yield energy credits surged again today, breaking above 850bps for the first time... The overall high-yield credit market is being dragged wider by this contagion as hedgers try to contain the collapse that is possible. For now, the S&P 500 remains entirely ignorant of the fact that over a third of its CapEx was expected to come from this crushed sector...

According to DB

US private investment spending is usually ~15% of US GDP or $2.8trn now. This investment consists of $1.6trn spent annually on equipment and software, $700bn on non-residential construction and a bit over $500bn on residential. Equipment and software is 35% technology and communications, 25-30% is industrial equipment for energy, utilities and agriculture, 15% is transpor

It's been bandied about a great deal lately so I thought I would post these graphics from CNBC to make things simpler to understand.  Clearly some drilling projects require higher prices to remain profitable while others, maybe not so much.  To explain a little on the price spreads, it all comes down to "when" each project was established where older ones may be require updating technology speaking and higher maintenance costs where newer ones are utilizing higher-tech equipment and can operate at a lower price on oil to break even.   Cost is also affected by how deep they have to drill to reach oil and how many barrels per day it puts out versus how much you invested in the well.  Clearly Saudi Arabia has the advantage but as they do, they drain their cash reserves (as does everyone else).

After Friday's spectacular 10% sell off in black gold, I went back to my earlier post on shorting crude oil and felt pretty darn good as I made myself a turkey sandwich for lunch.  Some would say it was a capitulation bottom but I just didn't see the volume which would come with such a move.   Yes there was heavy selling but it was funds getting OUT of energy names and forced selling - not buying a dip.  Sure, it can snap back and a near term bottom is most likely in but I will not be trading that.  The top is in in my opinion.  I will view any move higher (without an event risk occurring) as an opportunity to re-short at a higher level.

I still believe the entire sector is extremely over crowded with over 100 oil companies just in the U.S. alone.  While deflation in any sector is difficult to swallow, I may not be too far from the truth.  According to the WSJ:

Energy stocks are on sale following a five-month plunge in crude oil, but so far few investors are heeding the temptation

As the price of oil extends a free fall that began this summer, countries around the world that rely on oil revenues are bracing for an imminent economic and budget hit.  The drop is widening budget gaps in the Gulf states like Saudi Arabia, the United Arab Emirates, Qatar, Oman and Bahrain that rely heavily on oil to pay government services.

With oil and gas production accounting for some 70% of Russia's government spending, Moscow also faces a big shortfall—after budgeting based on $100-a-barrel oil for 2015. Russia's economic growth was already slowing before the plunge in oil prices. Trade sanctions imposed by the U.S. and Europe—in response to the invasion of the Ukraine—will further crimp growth and government spending.

The impact of budget gaps among big producers like Saudi Arabia and Russia, though, will be softened somewhat by large reserves built up during boom years. But a protracted era of cheap oil would force them to undertake serious belt-tightening.

Note:  Click on a c