OPEC Has Failed to Stop US Shale Revolution Admits Energy Watchdog
Here is the opening of this topical article by Ambrose Evans-Pritchard for The Telegraph:
The current crash in oil prices is sowing the seeds of a powerful rebound and a potential supply crunch by the end of the decade, but the prize may go to the US shale industry rather Opec, the world's energy watchdog has predicted.
America's shale oil producers and Canada's oil sands will come roaring back from late 2017 onwards once the current brutal purge is over, a cycle it described as the "rise, fall and rise again" of the fracking industry.
"Anybody who believes the US revolution has stalled should think again. We have been very surprised at how resilient it is," said Neil Atkinson, head of oil markets at the International Energy Agency.
The IEA forecasts in its "medium-term" outlook for the next five years that US production will fall by 600,000 barrels per day (b/d) this year and 200,000 next year as the so-called "fracklog" of drilled wells is finally cleared and the global market works off a surplus of 1m b/d.
But shale will come back to life within six months - far more quickly than conventional mega-projects and offshore wells - once crude rebounds to $60. Shale output is expected to reach new highs of 5m b/d by 2021.
This will boost total US production of oil and liquids by 1.3m b/d to the once unthinkable level 14.4m b/d, widening the US lead over Saudi Arabia and Russia.
Fatih Birol, the IEA's executive director, said this alone will not be enough to avert the risk of a strategic oil crisis later in the decade, given the exhaustion of existing wells and the dangerously low levels of spare capacity in the world.
David Fuller's view
Long-term forecasting is more guesswork than analysis, not least as there are too many variable factors. Additionally, most forecasts are influenced by an element of hopeful self-interest. Considering these factors, what can we conclude about the International Energy Agency’s forecasts?
This item continues in the Subscriber’s Area, where a PDF of the report is also posted..
Saudi Arabia to U.S. Oilmen: Cut Costs or Get Out of Business
Here is the opening of this report from Bloomberg on a confrontational meeting in Houston:
The world’s most powerful oilman brought a harsh message to Houston for executives hoping for a rescue from low prices: high-cost producers -- many of them sitting in the room -- need to either “lower costs, borrow cash or liquidate."
For the thousands of executives attending the IHS CERAWeek conference, the message from Saudi Arabia oil minister Ali al-Naimi means deeper spending cuts, laying off more roughnecks and idling drilling rigs.
"It sound harsh, and unfortunately it is, but it is the most efficient way to rebalance markets," Naimi told the audience in Houston on Tuesday.
As many as 74 North American producers face significant difficulties in sustaining debt, according to credit rating firm Moody’s Investors Service. Shale explorers from Texas to North Dakota will be “decimated” in coming months amid a wave of restructurings and bankruptcies, said Mark Papa, the former EOG Resources Inc. chief executive officer who helped create the shale industry more than a decade ago. The survivors will be more conservative, Papa, who is now a partner at private-equity firm Riverstone Holdings LLC, said during a panel discussion on Tuesday.
The message will resonate beyond the American energy industry as declining spending, rising debts and layoffs are starting to spread to Main Street, with the impact spreading from regional banks in Oklahoma to the economies of cash-strapped Venezuela and Brazil.
For the oil industry itself, the warning is a sign of more months -- and perhaps years -- of financial pain. The S&P 500 Oil and Gas index has fallen roughly 60 percent since mid-2014 to its lowest since 2009. The debt of junk-rated U.S. oil companies is yielding more than 20 percent, the highest in at least 20 years, according to Bank of America Corp.
Naimi told the executives in Houston that Saudi Arabia believed that freezing oil production -- as it just agreed with Russia -- would be enough to eventually balance the market. Over time, high-cost producers will get out of the business, and rising demand will slowly eat up the oversupply, he said. The International Energy Agency believes that means another two years of low prices.
The freeze agreement isn’t "cutting production. That is not going to happen," Naimi said.
David Fuller's view
Well, Ali al-Naimi has chutzpah and this is certainly a game of attrition. It may also be a game of high-stakes poker. Every oil producer is losing, so who will blink first?
That remains to be seen but the economic damage is already considerable and increasing. The US is both a loser within its oil sector and a big winner in terms of national consumption of oil. If the US wants to up the ante, it can subsidise its oil sector.
Sea Levels Are Rising Faster Than They Have in 2,800 Years
Here is the opening of this unsettling scientific report from CBC News:
Sea levels on Earth are rising several times faster than they have in the past 2,800 years and are accelerating because of human-caused global warming, according to new studies.
An international team of scientists dug into two dozen locations across the globe, including a salt marsh and coastal wetland in Newfoundland, to chart gently rising and falling seas over centuries and millennia. Until the 1880s and the world's industrialization, the fastest seas rose was about three to four centimetres (1 to 1.5 inches) a century, plus or minus a bit. During that time global sea level really didn't get much higher or lower than eight centimetres (three inches) above or below the 2,000-year average.
But in the 20th century the world's seas rose 14 centimetres (5.5 inches). Since 1993 the rate has soared to 30 centimetres (a foot) per century. And two different studies published Monday in the journal Proceedings of the National Academy of Sciences, said by 2100 that the world's oceans will rise between 28 to 131 centimetres (11 to 52 inches), depending on how much heat-trapping gas Earth's industries and vehicles expel.
David Fuller's view
Most of us do not want to believe this because it is too frightening. However, it makes sense to me that the climate is warming and I see more evidence to confirm rather than refute this view. I hope I am wrong or that technology provides a solution, because the long-term economic consequences of rising sea levels are appalling.
(See also: Bill Gates Q&A on Climate Change: ‘We Need a Miracle’ – This is an excellent article and video, in my opinion.)
Email of the day on negative interest rates
My brokerage provides an international trading platform which holds foreign currencies in cash (for example, if I want to buy shares in London I would convert dollars to GBP in my account, which I would use to buy shares - I could even hold foreign currencies as cash to bet on currency moves). Of course, many brokerage houses do this.
In November, the brokerage indicated it had to start charging 0.2% for cash held in Euros, due to negative interest rates in Europe. By Jan, this had increased to 0.5% (annual rate on average daily balance, paid monthly). Naturally any Euros in my account became dollars in November. I doubt I was the only one who did this.
The brokerage expects to begin charging for cash held in Yen shortly.
Some depositors are being hit by NIRP.
The implications seem obvious.
Eoin Treacy's view
Thank you for sharing your experience. I suspect that in order to pay interest on your deposits your brokerage is purchasing short-dated paper and since this has a negative yield you end up paying for it. Negative yields rather than negative rates at the deposit window are likely to blame I suspect but I would welcome additional feedback from subscribers.
The Fed: No longer to the rescue
This article by Russ Koesterich for Blackrock may be of interest to subscribers. Here is a section:
In the past, soft growth, tightening financial conditions and falling inflation expectations would have at least provoked a response from the Fed. Although we still believe that central banks in Europe, Japan and probably China will continue to ease, the Fed is in a bit of a bind. Economic data, particularly manufacturing, are soft while inflation expectations remain near multi-year lows. That said, most measures of realized inflation are improving. U.S. core inflation is now running at 2.2%, the fastest pace since the fall of 2008. Prices on imported goods, both oil and non-energy-related products, continue to fall, but housing and medical inflation are accelerating.
The Fed is unlikely to raise interest rates four times this year, as it suggested last December, but will the central bankers wait out all of 2016? Probably not, yet this is exactly what the futures market is suggesting. As such, any hikes would represent a more hawkish stance than the market is currently discounting. If this occurs in the context of a stronger dollar, it will represent a further tightening of already challenging financial market conditions.
For investors, there are several implications. First, the Fed is unlikely to provide the same backstop for asset prices as it has in recent years. Second, in a world in which central bank policy is both less available and less potent, volatility is more likely to remain above its historical average.
Finally, today's inflation expectations are most likely too low. Even in a world of slow growth, weak productivity and diminishing labor market slack, inflation may be higher than today's diminished expectations suggest. Under this scenario, Treasury Inflation Protected Securities (TIPS) may represent a good long-term opportunity.
Eoin Treacy's view
This is a useful summary of some of the background issues that are currently affecting investor confidence. The Fed is now less likely to step in to support prices at the first sign of trouble and that represents a change to the status quo which has prevailed since 2009. That’s a major evolution and helps to explain why the main Wall Street indices have been largely rangebound for more than a year.
Eoin's personal portfolio: profit taken in US Long Bond short, loss taken on oats position and update on sugar position
Inside the New Microsoft, Where Lie Detection Is a Killer App
This article by Dina Bass for Bloomberg may be of interest to subscribers,. Here is a section:
Microsoft truly embraced the technology when it started Bing in an attempt to catch up with Google. Satya Nadella ran engineering and technical strategy for the search division before becoming chief executive officer two years ago and has been sprinkling machine learning like fairy dust on everything his company touches. "Microsoft is now in this place where they have machine learning very deeply embedded," Domingos says. "They’re investing a lot in making machine learning less Wild West."
Like Google and Amazon, which have both used the technology to improve their own products, Microsoft is weaving machine learning into its own operations. This isn't simply about helping the company save money and function better; the more Microsoft uses the technology itself, the easier it is to explain and sell. "Customers are confused," says Joseph Sirosh, lured from Amazon in 2013 to oversee engineering for Microsoft’s machine learning efforts. "Cutting through that noise has been a bit of a challenge. It has been also hard for our own field and sales people to go talk to customers and educate them about all the use cases."
CFO Amy Hood’s finance department has come to rely on algorithms—using them to help forecast sales and how many licenses the company will sell in a given period. "It turns out to be very, very accurate for that application," Sirosh says. "Amy Hood is a big fan of this. She can sleep nicer knowing that a machine learning model predicted her quarter."
Eoin Treacy's view
Major technology companies are investing heavily in machine learning with the aim of answering questions we have not yet learning how to ask. It’s hard to take the ego out of decision making. Strong personalities generally tend to get their way not because what they want is the most appropriate course of action but because they can shout loudest, have the best connections or the most persuasive argument. Machine learning holds out the promise of creating data driven business models with reduced influence of big personalities. We might someday hope that governments adopt the same data driven methods.