Edge and Odds

The enemy of knowledge is not ignorance, it’s the illusion of knowledge (Stephen Hawking)

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so (Mark Twain)

Edge and Odds

Invest with smart knowledge and objective odds

NEW$ & VIEW$ (4 DECEMBER 2014)

The best account of what really happened:

Saudi Arabia Sees Oil Stabilizing

OPEC’s biggest oil producer, Saudi Arabia, now believes oil prices could stabilize at around $60 a barrel, a level both it and other Gulf producers believe they could withstand, according to people familiar with the situation.

The shift in Saudi thinking suggests the de facto leader of the Organization of the Petroleum Exporting Countries won’t push for supply cuts in the near-term, even if oil prices fall further. Brent crude dropped 62 cents a barrel to $69.92 on Wednesday. (…)

Before last week’s OPEC meeting in Vienna, the Saudis had been considering a Venezuelan proposal to cut the producer group’s oil output sharply. The possible deal finally fell apart when Russia, a major oil producer that isn’t a member of OPEC, refused to participate in a general supply cut, according to people familiar with the situation.

That gave Saudi Arabia and its Gulf allies cover to push an unpopular strategy at OPEC’s main meeting last Thursday of not changing the cartel’s production target, in an attempt to defend market share rather than prices. That view prevailed, leading Brent crude to fall 10% in the past week. (…)

During an early November meeting on the Venezuelan resort island of Margarita, Saudi Arabia’s oil minister, Ali al-Naimi, had told Venezuela’s foreign minister and OPEC representative, Rafael Ramirez, he would support a cut only if the Venezuelan minister could convince others both inside and outside of the cartel to participate, according to people familiar with the situation.

It was a “mission impossible,” said one OPEC delegate. Struggling OPEC members like Iran, Libya and Iraq argue they should be exempted from any move to cut output. Historically, persuading non-OPEC members to join the group in reducing supply has met with limited success.

However, just 48 hours before OPEC’s semiannual meeting last Thursday, Mr. Ramirez gathered senior energy officials from Saudi Arabia, Russia and Mexico—another non-OPEC member—in Vienna’s Hyatt hotel.

On the table was a proposal to take two million barrels a day of oil supply out of the global market of more than 90 million barrels a day, according to people familiar with the situation. The bulk of the cut was to be shouldered by OPEC, but Russia and Mexico combined were expected to contribute a reduction of 500,000 barrels a day, the people said.

The meeting ended without any deal to cut supply, Mr. Ramirez told reporters immediately afterward. Within hours, Russian state oil company OAO Rosneft said it wouldn’t cut its oil output.

Mr. al-Naimi finally decided it would be better to endure short-term pain from low oil prices than risk losing market share in the long run, according to people familiar with the situation. (…)

Mr. al-Naimi told the ministers that enduring lower prices would force high-cost oil producers outside of OPEC, like U.S. shale-oil companies, to cut back production themselves, tightening the market by the second half of 2015, the people added.

The rest of OPEC gave in to Saudi pressure and the cartel reluctantly agreed to maintain its oil production at 30 million barrels a day. On Tuesday this week, the kingdom’s cabinet said OPEC’s decision reflected the group’s “cohesion and unity.”

There Are 300,000 Iraqi Barrels Signaling Oil Glut Will Deepen

Not only is OPEC refraining from cutting oil output to stem the five-month plunge in prices, it’s adding to the supply glut.

Just five days after the Organization of Petroleum Exporting Countries decided to maintain production levels, Iraq, the group’s second-biggest member, inked an export deal with the Kurds that may add about 300,000 barrels a day to world supplies. (…)

The deal allows for as much as 550,000 barrels a day of crude to be shipped by pipeline from northern Iraq to the Mediterranean port of Ceyhan in Turkey, according to the regional government. The Kurds were already exporting about 220,000 barrels daily, according to data compiled by Bloomberg. (…)

Flow of Opec petrodollars set to dry up Collapse in oil price could suck $316bn from global investment

Big oil producers have pumped the windfall they enjoyed from soaring oil prices over the last decade into a huge range of global assets, from US Treasuries and high-grade corporate bonds to equities and real estate. (…)

The flow of petrodollars into the global financial system boosted liquidity, spurred asset prices and helped to keep borrowing costs down. (…)

George Abed, director for Africa and the Middle East at the Institute of International Finance, said at their peak in 2012, Opec petrodollar flows into liquid investments such as US Treasuries, high-grade corporate bonds and equities stood at $500bn. Next year, they could drop below $100bn if prices average $78 a barrel, he said. (…)

Less global liquidity just when the Fed is retrenching…

Dollar’s Rise Causes Pain Abroad A surging dollar and falling commodities prices are confounding central bankers by widening the gap between the U.S. economy and struggling nations in Europe and Asia.

(…) The dollar’s gains are intensifying declines in commodities including food, metals and especially oil, which is down nearly 40% since mid-June. Sluggish growth in Europe and Asia is undermining demand for these goods, leaving markets flooded with extra supply. Most commodities are priced in dollars, so consumers and companies outside the U.S. see their buying power shrink when their currencies weaken.

These trends present new challenges for policy makers in Europe and Japan as they struggle to preserve meager recoveries and fight low inflation. Central banks are considering—or have already introduced—drastic measures, such as negative interest rates and buying billions of dollars in bonds. But the precipitous fall in the price of oil—the most-expensive import for many countries—is reducing the effectiveness of measures aimed at raising consumer prices. (…)

The Bloomberg Commodity Index, which tracks 22 markets, has fallen 11% this year in dollar terms to a five-year low. The same index is down 0.3% in 2014 when converted into euros and has gained 1.5% this year in yen.

That means prices at the pump have dropped 16% in the U.S. from a year ago, according to AAA. But gasoline is down only 6.8% in euro terms for German drivers, according to European Commission data. Travel firms fear a stronger dollar will force customers outside the U.S. to dial back vacation plans. (…)

Fed Beige Book Shows ‘Widespread’ Job Gains Across U.S.
More Cost of Health Care Shifts to Consumers

Americans increasingly have to dig into their own pockets to pay for medical care, a shift that is helping to curb the growth in health spending by employers and the government.

The trend is being accelerated by the Affordable Care Act because many private plans sold by the law’s health exchanges come with hefty out-of-pocket costs, which prompt some people to delay or put off seeking care.

For the exchanges’ 2015 policies, which went on sale last month, “bronze-level” plans have an average deductible of $5,181 for individuals, up from $5,081 in 2014, according to a November report from HealthPocket, which publishes health insurance market analyses. Bronze plans generally cover 60% of consumers’ medical expenses.

While surveys show steeper out-of-pocket costs lead some people to defer even routine medical care, economists say the trend brings an important upside: It is helping fuel a period of historically low growth in health-care spending, which eases the federal deficit.

The federal government said Wednesday that 2013 was the fifth consecutive year in which health spending grew at less than 4%. The 3.6% rate is the lowest since the government began tracking such spending in the 1960s. While economists initially credited the recession for the soft spending growth, the trend continued even as the economy improved.

A study published last year in the journal Health Affairs examined data covering more than 10 million workers at large employers where out-of-pocket costs increased. The study found that the employers’ health spending growth fell over the four years studied, and it attributed about one-fifth of that slowdown to steeper out-of-pocket costs. (…)

Doctors such as David Holte, an orthopedic spine surgeon in Waconia, Minn., say they are seeing a change in peoples’ behavior as out-of-pocket costs rise.

“Patients are shopping around more,” said Dr. Holte of Twin Cities Orthopedics. “Back when everything was covered, they would get tests done and also get stuff done they didn’t need. Now they’re having cost discussions and putting off knee and hip replacements.”

One in three Americans said they or a family member delayed medical care because of costs in 2014, according to a report last month by survey company Gallup. That is the highest percentage since Gallup began asking the question in 2001.

The 2010 health law is likely to continue the shift. To keep premiums low, insurers designed the plans to include steep out-of-pocket charges. Silver plans, which are the most popular plans purchased on exchanges and cover 70% of medical expenses, have an average deductible of $2,927 for individuals and $6,010 for families for 2015, according to HealthPocket.

Since 2009, the average deductible for workers who get employer health coverage has shot up 47% to $1,217 from $826, according to a September survey by the Kaiser Family Foundation and the Health Research & Educational Trust, a nonprofit affiliated with the American Hospital Association. (…)

Another reason why profit margins rose, and middle America got squeezed.

Baby Bust Threatens Growth The U.S. economy, already struggling with stagnant wages and lackluster spending, faces another obstacle to growth: fewer births.

NEW$ & VIEW$ (3 DECEMBER 2014)

“Clearly A Negative Signal”: BofA Shows Thanksgiving Spending Was Biggest Dud Since Lehman

First it was Shoppertrak, then it was the National Retail Federation, then it was IBM, and now, with its own set of internal data, here is Bank of America slamming the door shut on US retail spending as a source of Q4 growth, and proving once and for all that the extended Thanksgiving-weekend, and the start to US holiday spending season, was the biggest dud since Lehman.

From BofA:

The BAC internal data showed a sluggish start to the holiday shopping season. Spending on BAC credit and debit cards over Thanksgiving and Black Friday declined 1.6% yoy. In order to restrict the sample to holiday-related spending, we are measuring “core control” sales, which nets out food services, gasoline, building materials and autos, making it a comparable sample to the Census Bureau’s data. While not as dismal as the 11% yoy decline reported by the National Retail Federation (NRF), our data supports the weak anecdotes.

(…) There are a few reasons to advise caution when interpreting Black Friday sales. For one, measuring sales over a two-day period is naturally noisy, but particularly since retailers adjust the promotion schedule over the years. (…) the promotions start earlier each year making the “door buster” deals of Black Friday less appealing. Moreover, the shift toward online shopping provides greater access to sales and incentives, also taking the focus away from Black Friday. The bottom line is that while we tempered our optimism, we still look for holiday sales to increase this year given the improving economic backdrop.

U.S. Light Vehicle Sales increase to 17.1 million annual rate in November

Based on a WardsAuto estimate, light vehicle sales were at a 17.08 million SAAR in November. That is up 5.5% from November 2013, and up 4.5% from the 16.35 million annual sales rate last month.


The shale slowdown: Oil’s price plunge hits U.S. production

(…) Raymond James Financial Inc., for example, expects WTI prices to stabilize at around $75 a barrel.

“At those levels, companies are going to reduce their capital expenditures,” Raymond James analyst Carlos Newall said Tuesday. “Production is not going to slow to a halt, but it is going to slow. You’ll see a reduction in rig count and then there will be a six- to nine-month lag when you’ll see a reduction in production.”

The three key U.S. shale oil fields are the Bakken in North Dakota and the Eagle Ford and Permian in Texas. Scotiabank economist Patricia Mohr has calculated that the average break-even price in the Bakken and Permian is $69 and $68, respectively, but with individual wells ranging from $54 to $82 a barrel.

But even if prices are above the break-even mark, companies will have to cut their drilling operations as their cash flow plummets from heady levels this year, and financing from banks and capital markets gets tighter.

Enerplus Corp., which pumped an average 22,400 b/d (including associated natural gas production) in the Bakken in the third quarter, expects to pare its 2015 budget by an unspecified amount from about $830-million (Canadian) this year. The Calgary-based company’s break-even costs are $50 (U.S.) in the best areas of the North Dakota play, and a portion of its overall production for next year is hedged at $93 oil, chief executive officer Ian Dundas said in a recent interview.

“We’re not planning on pushing our balance sheet,” he said. “Whatever our growth aspirations would have been in a $95 oil world, they are lower in a $70 oil world. There’s just less money to go around.”

To be sure, not all shale plays are created equal. Even within a zone, analysts say break-even economics can vary from one well to the next, depending on geology and other factors. Drilling in so-called “sweet spots” of the Bakken and the Eagle Ford in Texas, or the Cardium and Duvernay in Alberta, still makes sense even at much lower oil prices, said Callan McMahon, a senior analyst with energy consultancy Wood Mackenzie Group.

A sustained drop in oil prices threatens to weed out the weaker players, pressuring high-cost producers and setting the stage for production cuts and consolidation.

“The guys that had weak balance sheets at $100 oil are in trouble now and will probably not survive,” said Scott Saxberg, chief executive officer of Crescent Point Energy Corp., which pumps crude from the portion of the Bakken that spills over the Canadian border. He was speaking about the industry as a whole, rather than just shale oil producers.

Continental Resources Inc., which is among the largest producers in the Bakken, has already cut expenditures by $600-million and trimmed its forecast for production growth, although it can take up to nine months for lower prices to result in lower volumes at the well head. The company produced an average of 121,604 barrels of oil equivalent per day in the Bakken in the third quarter, up 29 per cent from the third quarter of 2013.

Like other U.S. independent producers active in tight oil plays, Continental has seen its share price pummelled, dropping by half to $39.70 from its August peak. The company said Tuesday it is monitoring the market to determine whether it needs to cut back further.

“We have said that if oil prices declined and stayed at a lower level for an appreciable period, we may adjust capex further and this would likely impact our expected 2015 production growth rate,” Continental vice-president Warren Henry said in an e-mail. “We can’t really be more specific than that since, in that scenario, drilling and completion costs will likely also decline and that would affect our decision.”

Don’t be fooled by all the analysis: the reality is that many wells have already stopped pumping uneconomic oil. The high costs producers have pulled the plug and the marginal guys are being told to do so by their banks. Production is already declining.

From Ed Yardeni:

One of our accounts noted that the seasonally adjusted production numbers show a decline of 0.4mbd over the past 10 weeks through the week of November 21 to 9.0mbd, while the unadjusted data continued to rise by 0.3mbd to 9.1mbd. The former suggest that the plunge in oil prices may be depressing production already, while the latter suggest that’s not so.

Eurozone Private-Sector Activity Slows More Than First Thought Activity in the eurozone’s private sector slowed more sharply than previously estimated in November, according to surveys of purchasing managers, making it likely the currency area’s economy will end a disappointing year on weak footing.

(…) Data firm Markit on Wednesday said its composite purchasing managers index—a measure of activity in the manufacturing and services sectors in the currency bloc—fell to 51.1 in November from 52.1 in October, reaching a 16-month low. That was lower than the preliminary estimate released late last month of 51.4.

Spain’s services sector slowed most sharply during the month, with its PMI falling to 52.7 from 55.9 in October. Spain’s manufacturing sector picked up during the month, but not enough to prevent the composite measure from falling to a nine-month low.

The revised figures recorded a steeper contraction in French activity, and the slowest expansion in German activity for 17 months. The only positive note was sounded in Italy, where private-sector activity rose at the fastest pace in four months.

Markit’s survey of 5,000 manufacturers and service providers also showed that a significant revival in activity is unlikely in the coming months, with new orders falling for the first time since July 2013, while employment was unchanged.

Chris Williamson, chief economist at Markit, said the surveys show there is “a strong likelihood of the near-stagnation turning to renewed contraction in the New Year unless demand shows signs of reviving.”

In a separate release, the European Union’s official statistics agency said retail sales rose by 0.4% in October, having declined by 1.2% in September. But the rise in sales was largely confined to Germany, where unemployment is relatively low, and declines were recorded in France, Spain and a number of other eurozone members.

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Note: I am still travelling. Here’s the link to Markit Eurozone Composite PMI.

Euro Hits Two-Year Low The euro slipped to a two-year low with the latest dose of drab economic data bolstering expectations of further easing ahead of the ECB’s monthly meeting.
China’s Economy Shows Resilience

China’s official nonmanufacturing purchasing managers’ index rose to 53.9 in November from 53.8 in October, while the competing HSBC China services PMI rose to 53.0 from 52.9, according to data released Wednesday.

Link to HSBC China Services PMI