OPEC To Take Drastic Action Despite Shale Slowdown

Authored by Nick Cunningham via OilPrice.com,

WTI recently dipped below $50 per barrel for the first time in a month, erasing the strong September rally. It’s no coincidence that after two weeks of price declines, OPEC has tried to talk up the oil market again, hinting that more drastic action could be forthcoming.

Echoing the world’s top central bankers, OPEC’s Secretary General said that the oil cartel might need to take “extraordinary” measures to balance the oil market next year. “There is a growing consensus that, number one, the re-balancing process is underway,” OPEC’s Mohammad Barkindo told reporters on Sunday in New Delhi. “Number two, to sustain this into next year, some extraordinary measures may have to be taken in order to restore this stability on a sustainable basis going forward.”

As always, OPEC is vague on the specifics, but the working assumption is that the group will agree to an extension of the cuts until at least mid-2018, or perhaps even as late as through the end of the year. There’s been some discussion about deeper production cuts, but there aren’t a ton of analysts who see OPEC going that far, despite Barkindo’s cryptic language.

Meanwhile, Saudi Arabia engaged in a bit of its own psy-ops with the oil market on Monday, saying that it was taking “unprecedented” steps to cut its oil exports. Saudi Aramco said it would lower exports by 560,000 bpd next month, “the deepest customer allocation cuts in its history.”

The comments are consistent with the country’s longstanding pattern of trying to jawbone the market when it wants higher prices. Based on Monday’s activity, the effort didn’t work.

“The fact that we did not get any significant strength from the Saudi news is rather disheartening for the bulls,” Stephen Schork, an analyst and author of the Schork Report, told the WSJ. “The market is very skeptical of this.”

Of course, real cuts to oil exports will be felt if they are carried out, but after a few years of getting jerked around by every utterance from OPEC, the markets want to see proof in the pudding. Aggressive rhetoric no longer moves the market the way it did a year ago, so we’ll have to just wait and see what OPEC does at its November meeting.

“With rising production levels and no definitive word from OPEC and the Russians that they are going to extend the cut or deepen it, the rally seems to have lost its momentum,” Gene McGillian, a market research manager at Tradition Energy, said in a Bloomberg interview.

That reaction seemed to be widespread on Monday. “I think that without the support of products and Brent, the market may get dragged lower in the near term as it’s apparent that the market doesn’t care much about OPEC already jawboning about an extension of the deal,” Scott Shelton, a broker at ICAP, told Reuters.

The ironic thing is that while OPEC ponders more drastic action, there are signs that U.S. shale is actually not doing as well as everyone thought it would be at this point. Production is up, but signs of strain are showing. The rig count fell last week, after weeks of unimpressive gains. The slowdown suggests the industry is becoming more cautious, particularly with oil prices running out of steam.

In fact, some cracks are becoming visible in the Permian basin, often cited as the most attractive shale basin in the U.S. Costs are on the rise and some drillers are running into production problems. Production is up, but profits are scarce.

That could lead to a wholesale rethink for the industry - the days of explosive growth in the shale patch could be coming to an end. A growing number of investors are demanding that E&Ps slow down and focus on profitability, which will likely come at the expense of the industry’s blistering growth rate.

OPEC has yet to enjoy the fruit of this potential receding tide of shale drilling - oil looks softer than it did a few weeks ago and hedge funds and other money managers have pared back their bullish bets lately, a harbinger of more cautious sentiment.  

But while OPEC is nervous about near-term oil prices, and is planning “extraordinary measures,” they can at least take comfort in the fact that the shale bonanza is moderating.

What's Next For Oil: Interview With Former DOE Chief Of Staff

In this week"s MacroVoices podcast, Erik Townsend and Joe McMonigle, former chief of staff at the US Department of Energy, discuss the state of the global energy market, and OPEC’s rapidly diminishing ability to control oil prices. McMonigle believes investors will be hearing more jawboning from the Saudis, OPEC"s de-facto leader, over the next two weeks as they try to marshal support for extending the cartel"s production-cut agreement past a March 2018 deadline.

Of course, anyone who’s been paying attention knows the cuts have done little to alleviate supply imbalances that have weighed on oil prices for years. In a report published by the International Energy Agency earlier this month, the organization notes that non-compliance among OPEC members, and non-members who also agreed to the cuts those non-members who also agreed to cut oil production, increased again in July. According to the IEA data, non-compliance among the cartel’s members rose to 25 percent in July, the highest level since the agreement was signed in January. Meanwhile, noncompliance for non-members rose to 33%.

Given that oil prices have fallen since OPEC members and non-members first agreed on the cuts last November, the Saudi"s might have difficulty convincing their peers that the cuts are having an impact, other than allowing US shale producers to flourish.

OPEC will meet Nov. 30 in Vienna.

Erik: Joining me now as this week’s featured interview guest is former US Department of Energy Chief of Staff Joe McMonigle, who now heads up the energy research team at Hedgeye. Joe, I think everybody understands that the key question in today’s oil market is whether the rebalancing that OPEC production cuts were supposed to achieve is really happening or if the supply glut is actually still continuing. So let’s start with your high-level view first. Is OPEC effectively managing supply or are they really just managing market sentiment?

Joe: I think, to date, they have been managing sentiment and, of course, engaging in verbal intervention in the market. Yes, they did do this production cut deal a year ago—well, actually last November. They’re eight months into that deal now, and it’s really had not that much of an impact on the market. I think, originally, when the deal was announced, I think oil bulls really liked the idea and prices were boosted as a result. But many people, a lot of very savvy oil analysts and forecasters at banks, predicted big inventory draws in the spring that just never materialized. And, of course, the return of higher prices has incurred shale to rise—which, of course, we can get into later because It’s sort of a different phenomenon. But, just to really judge the effectiveness of the production cut deal, last Friday oil ended at—or settled at—47 and some change. It was actually a penny lower than it was a year ago.

So, just to judge—obviously, prices in the last couple days have fluctuated a little bit—but, really, if you’re looking at where prices were a year ago versus where they are today, I don’t think you can really say that the production cut deal has had a lot of influence or has been very effective. And I think as a result the markets started out really impressed, and I think they’ve been pretty disappointed as we’re into month eight now, almost nine months of the deal.”

In the coming works, McMonigle said he expects "two competing narratives" to emerge in the oil market. The first, advanced by the Saudis, will be news of large export cuts, particularly to the US. The other will be the story of rising shale production.

“Erik: OPEC has another meeting coming up on November 30th. And, as we all know, they’re in the habit of using the periods leading up to these meetings to jawbone the market with their various propaganda announcements. So, there’s been talk about the production cuts maybe being extended, or even increased, at this meeting. There’ve also been rumors about maybe taking exempt countries that didn’t participate in the cuts and making them not exempt next time around.

So, what do you see actually happening on November 30th? And how do you think the propaganda campaign is going to play out between now and then?

Joe: I think you’re totally right; jawboning is really part of the OPEC playbook. And I think you’re going to see it in the next two weeks now—even before August is over—I think two competing narratives. One, you’re going to start seeing from the Saudis announcements or leaks about big cuts in crude exports, particularly to the US. And they sort of signaled that they were going to do that in July. I certainly expect them to have done it. Of course, a lot of it has to do with lower demand from China as well. But they will show some big cuts, I think, in crude exports. And then juxtapose that with, I think, what you’re going to see from the US—which we’ve seen really, I think, throughout the summer—and that’s really rising US production—and a lot of other forecasts from banks and other oil analysts about rising US production. And I think Barclay’s came out with a forecast report earlier this week or late last week that had oil going to ten-and- a-half million barrels a day by the end of 2018.

So, I think you’re going to start seeing more of that, and I think that’s really making it difficult for OPEC to regain the narrative about the production cut deal. And I think they badly want to try to get that back. In terms of the next meeting, already, yesterday, you had the Kuwait oil minister say that they’re going to make a decision to consider whether to extend the production cut deal or to basically end it. Unfortunately, neither of those scenarios is really what the market wants to hear. I think the market wants to hear that there’s going to be deeper cuts, and that’s really not been on the table. I think there was some potential anticipation of that, potentially at the last OPEC meeting. We thought there really Wasn’t a chance of that happening. We wrote a note for clients that basically said—“longer not deeper” was the title of our note.

I think at the very least you’re looking at another extension. Even though it’s extended into the end of first quarter 2018, I think they will probably want to signal at that November meeting that they will extend. I think that’s at a minimum. However, I would not preclude, potentially, more drastic action at that meeting. But I think it’s too early to tell. I think we have to really see where the market is in late October and early November.

And I think the main reason for that is really the Aramco IPO coming up. And I think it’s just—we’re going to talk about that later I think—but I think that’s really, it’s a central focus of the Saudi Arabian government, of their economic reforms, so they have a lot riding on it. And, therefore, I think there’s the potential that there could be some unilateral Saudi action of deeper cuts.

So that’s something I now put in the realm of possibility as I look at the different options coming up at the November 30th meeting.”

While inventories data released in recent weeks have shown large drawdowns in the US, McMonigle said any declines have been more than offset by climbing shale production.

"Erik: I want to come back to the Aramco IPO in a few minutes, but let’s start with touching on the official US data that comes from your former employer, the Department of Energy.

It used to be pretty easy to read these reports, but lately we’re kind of getting conflicting data. There were quite a few much bigger than expected drawdowns in crude oil inventory in recent weeks, although this week it appears to be much more in line with inventory, around a 3 million barrel drawdown, which is for this time of year pretty normal.

Those big drawdowns would have been very bullish. But then we also see that there’s been steadily increasing domestic production in these Wednesday reports. That would be a bearish sign. But then on Fridays we get the rig count, which looks like it’s finally starting to level off a little bit. So that would tend to go the other way.

When you net all these things together, what do you see in the data? Are we looking at a bona fide rebalancing of the market that’s actually occurring? Or is there still a production glut?

Joe: I guess I side on the production glut side. I think—certainly there’s been some drawdowns, and I think that’s positive news. It’s hard—it’s impossible to say it’s not positive news, although I think most observers thought the drawdowns would occur sooner and they’d be even greater than they are. But a sustained several weeks now of drawdowns, I think has been positive. As you point out, the signals, however, about rising US production to really record levels, and the resiliency of US shale, I think is really a big counterweight to these inventory draws.

Now we’re also entering a phase here where the end of summer, the high demand season, is going to be switching over. And there’s going to be refinery maintenance, and—so I think a lot of the contributing factors, in terms of gasoline and other product inventories, are probably going to start stalling out. And so I think you’re going to see the market struggle here in the fall, even with further draws.

And, of course, crude exports from the US, which now are allowed as a result of lifting the crude export ban in 2016—I think, first of all, no one really thought, until prices really recovered to big levels, that there would be significant exports. But, again, the market has really been surprised, I think, about very strong crude exports. And of course that’s affecting the drawdown numbers as well.

So I think it’s a much more complicated data array to consider now, as we go into the fall. And I think—definitely you put your finger on it—the US production number, I think, is the big complicating factor in what would otherwise be very bullish news."

The former DoE chief also had this interesting detour into the petrodollar system:

Erik: A lot of people think the reason that the US dollar has remained the world"s reserve currency, 45 years after the Bretton Woods system collapsed in 1971, is the so-called petrodollar system in which Middle East oil producers price their oil in US dollars regardless of who it"s being sold to. And many of those nations also reinvest their profits in US Treasury Bonds.  But recently we"re seeing pressure from Russia and China to stop transacting in dollars. Iran, in particular, seems to have come to favor Euros over dollars for its oil exports. So do you think the petrodollar system—or even the US dollar"s hegemony as the global reserve currency—is at risk in the longer term in light of these developments? And what do these changes mean for the price of oil as you look ahead?  

Joe: First of all, I don"t profess to be an expert on currencies and its impact on oil prices. But certainly, historically, there"s been an inverse relationship between the dollar and oil prices. I do think the supply glut has kind of interfered a bit with that relationship. And it hasn"t necessarily worked as clockwork as it has in the past. I"m not sure the moves by China and Russia are really going to have that much of an impact, or any impact at all. So I do think the dollar really remains the preferred currency, not just in oil but in commodities in general. 

I will tell you an interesting story from my time at DOE. When oil prices really surged to $100 levels, the Saudis—and in particular Minister Al-Naimi, at the time the oil minister of Saudi Arabia—really talked out loud about potentially changing the currency for oil prices from dollars to Euros, just so that they could lower those skyrocketing prices they felt were impacting demand and having a greater impact on markets than it probably should. So, certainly I think market participants are looking more at currencies right now. But I don"t really put much stock in the moves—or the noise, I guess I would characterize it—from Russia and China.

This is just a modest selection of of the items discussed on the interview which also includes:

• Is the oil supply glut rebalancing?


• Is OPEC just jawboning the market?


• Import data impacting oil inventories


• Outlook for U.S. oil production


• Update on Venezuelan geopolitics


• What can go wrong with Iran?


• Is the Petrodollar system at risk?


• Is the Saudi Aramco IPO going to happen?


• Is the term structure signaling bullish prices

Listen to the rest of the interview below:

 

US Crude Production At Cycle Highs As Rig Count Stabilizes; Desperate Saudis Jawbone Deeper Cuts To Come

A tough week for crude oil, which tumbled after algos tagged $50 stops yesterday following the biggest gasoline inventory build in 7 months. While the US oil rig count has stopped rising in the last few weeks, production continues to hit cycle highs stalling prices, but the Saudis are not giving up on their incessant jawboning - hinting that "deeper cuts" are still on the table.

US oil rig counts rose by 3 to 768 last week - it has fallen 3 times in the last 7 weeks and is practically unchanged in the last 2 months...

Just as we predicted, the lagged response to the shifting oil price has been a stalling of the rising rig count...

But even with the US oil rig count declining for 3 of the last 7 weeks, crude production in the Lower 48 rose once again to 9.048mm b/d - the highest since July 2015...

WTI prices had a disappointing week - not helped by the biggest gasoline inventory build since January...

Once WTI algos tagged $50, it was a one-way street lower

“We are stuck in a range and having found some support at $48/bbl, it’s moving higher” says Ole Hansen, head of commodity strategy at Saxo Bank. “We’re really unable to make a clean break”

But as OilPrice.com"s Tsvetana Paraskova notes, the Saudis are not giving up on their incessant jawboning.

OPEC and its non-OPEC partners have not closed the door to the possibility of extending the production cut agreement or even lowering production levels, Saudi Oil Minister Khalid al-Falih told Saudi-owned newspaper Asharq Al-Awsat in remarks published on Friday..

Al-Falih’s comments were aired just a day after OPEC confirmed reports that its crude oil production increase last month, reporting a daily rate of 32.869 million barrels, up by 172,600 bpd. Libya, Nigeria, and Saudi Arabia were the main drivers behind the OPEC production increase, with Libya raising its output by 154,300 bpd—by far the biggest increase among the cartel’s members. Nigerian oil production rose by 34,300 bpd to 1.748 million bpd, while Saudi Arabia’s went up by 31,800 bpd to 10.067 million bpd.

“The possibility of continued production cuts is on the table, and the door to extension of reduction has not been closed. If further actions are needed by the market, whether to extend or change production levels, they will be examined on time and agreed through 24 countries,” Asharq Al-Awsat quoted the Saudi minister as saying.

Saudi Arabia, however, will not take unilateral actions to tweak production and will seek consensus among all parties concerned, according to the most influential of OPEC’s oilmen.

Earlier this week, OPEC held a meeting with some of the producers and cited its members Iraq and the UAE, as well as non-OPEC signatories to the deal Kazakhstan and Malaysia, as laggards in compliance, but added that they “all expressed their full support for the existing monitoring mechanism and their willingness to fully cooperate.”

“It is too early to predict what will happen following the first quarter of next year,” al-Falih told the Saudi newspaper.

Just two months ago, the minister told the same outlet that the oil market had started to show signs that it was headed in the right direction, and expectations pointed to the market returning to balance in the fourth quarter this year.

The shrinking contango structure of the oil market has almost disappeared of late, in a sign that the market is tightening.

An Open Letter To The Fed's William Dudley

Authored by MN Gordon via EconomicPrism.com,

Dear Mr. Dudley,

Your recent remarks in the wake of last week’s FOMC statement were notably unhelpful.

In particular, your excuses for further rate hikes to prevent crashing unemployment and rising inflation stunk of rotten eggs.

Crashing Unemployment

Quite frankly, crashing unemployment is a construct that’s new to popular economic discourse, and a suspect one at that.

Years ago, prior to the nirvana of globalization, the potential for wage inflation stemming from full employment was the going concern.  Now that the official unemployment rate’s just 4.3 percent, and wages are still down in the dumps, it appears the Fed has fabricated a new bugaboo to rally around.  What to make of it?

For starters, the Fed’s unconventional monetary policy has successfully pushed the financial order completely out of the economy’s orbit.  The once impossible is now commonplace.

For example, the absurdity of negative interest rates was unfathomable until very recently. But that was before years of central bank asset purchases made this a reality.

Perhaps, the imminent danger of crashing unemployment will give way to the impossibility of negative unemployment.  Crazy things can happen, you know, especially considering the design limitations of the Bureau of Labor Statistics’ birth-death model.

Secondly, muddying up the Fed’s message with inane nonsense like crashing unemployment severely diminishes the Fed’s goal of providing transparent communication.  In short, Fed communication has regressed from backassward to assbackward.

During the halcyon days of Alan Greenspan’s Goldilocks economy, for instance, the Fed regularly used jawboning as a tactic to manage inflation expectations.  Through smiling teeth Greenspan would talk out of the side of his neck.  He’d jawbone down inflation expectations while cutting rates.

Certainly, a lot has changed over the years.  So, too, the Fed seems to have reversed its jawboning tactic.  By all accounts, including your Monday remarks, the Fed is now jawboning up inflation expectations while raising rates.

Congratulations and Thank You!

History will prove this policy tactic to be a complete fiasco.  But at least the Fed is consistent in one respect.  The Fed has a consistent record of getting everything dead wrong.

If you recall, on January 10, 2008, a full month after the onset of the Great Recession, Fed Chair Ben Bernanke stated that “The Federal Reserve is not currently forecasting a recession.”  Granted, a recession is generally identified by two successive quarters of declining GDP; so, you don’t technically know you’re in a recession until after it is underway.  But, come on, what good is a forecast if it can’t discern a recession when you’re in the midst of one?

Bernanke’s quote ranks up there in sheer idiocy with Irving Fisher’s public declaration in October 1929, on the eve of the 1929 stock market crash and onset of the Great Depression, that “Stock prices have reached what looks like a permanently high plateau.”  By the month’s end the stock market had crashed and crashed again, never to return to its prior highs in Fisher’s lifetime.

To be fair, Fisher wasn’t a Fed man.  However, he was a dyed-in-the-wool central planner cut from the same cloth.  Moreover, it is bloopers like these from the supposed experts like Bernanke and Fisher that make life so amiably pleasurable.  Do you agree?

Hence, Mr. Dudley, words of congratulations are in order!  Because on Monday you added what’ll most definitely be a sidesplitting quote to the annals of economic banter:

“I’m actually very confident that even though the expansion is relatively long in the tooth, we still have quite a long way to go.  This is actually a pretty good place to be.” – William Dudley, June 19, 2017

Thank you, sir, for your shrewd insights.  They’ll offer up countless laughs through the many dreary years ahead.

Too Little, Too Late

When it comes down to it, your excuses for raising rates are not about some unfounded fear of a crashing unemployment rate.  Nor are they about controlling price inflation.  These are mere cover for past mistakes.

The esteemed James Rickards, in an article titled The Fed’s Road Ahead, recently boiled present Fed policy down to its very core:

“Now we’re at a very delicate point, because the Fed missed the opportunity to raise rates five years ago.  They’re trying to play catch-up, and yesterday’s [June 14] was the third rate hike in six months.

“Economic research shows that in a recession, they [the Fed] have to cut interest rates 300 basis points or more, or 3 percent, to lift the economy out of recession.  I’m not saying we are in a recession now, although we’re probably close.

“But if a recession arrives a few months or even a year from now, how is the Fed going to cut rates 3 percent if they’re only at 1.25 percent?

“The answer is, they can’t.

“So the Fed’s desperately trying to raise interest rates up to 300 basis points, or 3 percent, before the next recession, so they have room to start cutting again.  In other words, they are raising rates so they can cut them.”

Unfortunately, Mr. Dudley, the Fed miscalculated.  Efforts to now raise rates will be too little, too late.  To be clear, there ain’t a snowball’s chance in hell the Fed will get the federal funds rate up to 3 percent before the next recession.  You likely won’t even get it up to 2 percent.

Nonetheless, you should stay the course.  If you’re gonna raise rates, then raise rates.  Don’t cut them.  Raise them.  Then raise them some more.

Crash stocks.  Crash bonds.  Crash real estate.  Crush asset prices.  Purge the debt and speculative excesses from financial markets.

Let marginal businesses go broke.  Let too big to fail banks, fail.  You can even consult with Dick “The Gorilla” Fuld, if needed.  Then let nature do its work.

In essence, bring the paper money experiment to a close and shutter the doors of the Federal Reserve.  No doubt, the economy and millions of people will suffer a painful multi-decade restructuring.  But what choice is there, really?

Let’s face it.  The Fed can’t hold the financial order together much longer anyway.  Why pretend you can with utter nonsense like crashing unemployment?  It’s insulting.

Your credibility’s shot.  Better to get on with it now, before it’s forced upon you.

P.S.  What’s up with Neel Kashkari?  The man has gone rogue.

Lower 48 Production Nears Cycle Highs As Rig Count Rises For 18th Straight Week

While much was made of this week"s drop in US crude production, it was driven by an Alaskan supply drop, not the Lower 48 whose production is at Aug 2015 highs. WTI back above $50 on the back of more OPEC jawboning appears to have everyone convinced this time is different, but for the 18th week in a row US oil rig counts rose (by 8 to 720).

• *U.S. OIL RIG COUNT +8 TO 720 , BAKER HUGHES SAYS :BHI US


• *U.S. GAS RIG COUNT 180 , BAKER HUGHES SAYS :BHI US

The 18th weekly oil rig count rise...

Production from the Lower 48 continues to soar...

And WTI dipped a little on the print...

And while prices hover above $50, OilPrice.com"s Brian Noble warns that as breakeven prices converge an oil price crash nears...

No one should underestimate the impact of AI (artificial intelligence) on the future of the entire capital markets complex. The LinkedIn group, Algorithmic Traders Association, has recently been running a series of articles warning of the seismic shift that is and will continue to be felt in the global hedge fund industry as machines take over from people on trading desks.

But what intelligent human being would ever suddenly have turned bullish on the morning of Monday 15 May 2017 just because of renewed jawboning from Saudi Arabia and Russia, indulging in the same old two-step as they did at Doha in April 2016 and Vienna in November of last year. That is however precisely what the machines did. Hallelujah.

In the past couple of weeks, crude oil futures really did a round trip. First, they took a beating. WTI futures fell on May 4th to $45.52 per barrel, coming down from an April peak of $53.40, hitting the lowest point since the deal between OPEC and non-OPEC oil producers was signed last November. Since then, WTI has rallied up above $49 on as confidence grows over an OPEC cut. So is this more noise or a portent of things to come?

Despite the occasional rally, it’s hard to see that the outlook for oil is encouraging on both fundamental and technical levels. The charts look to be screaming double top for WTI, while the fundamentals seem to be saying Economics 101: too much supply, too little demand. The parallel with 2014 is there if you want to see it.

At the heart of the matter is the same old cast of characters that recur again and again. What’s different this time is the rise in cheap U.S. production, primarily shale. While it’s perfectly true that there isn’t enough U.S. shale to flood the world with oil, a lot of what there is is historically cheap to produce so as to give crude from the Middle East a real run for its money; and a solid proportion of that production has been sold forward at attractive levels in the futures market ensuring financial stability for U.S. producers. This growing price competiveness is nothing new. In the Bakken, for example, the average breakeven cost per barrel was $59.03 in 2014, which fell to $29.44 in 2016, a reduction of 50 percent in just two years. Meanwhile, U.S. oil production has risen to approximately 9.3 million barrels a day and is estimated by the EIA to reach 10 million barrels a day by 2018. In the meantime, crude oil inventories remain stubbornly high. Most recent EIA data puts crude oil inventories at 527.

8 million barrels, stuck at the higher end of the 5-year range.

In a recent and highly informative article in Business Insider originally published in The Motley Fool and using energy industry consultant Rystad Energy research, author Matthew DiLallo shows that it costs Saudi Arabia around $9 per barrel to breakeven, Russia $19 and U.S. shale a little over $23. That said, the simple average of Saudi/Russian breakeven would be about $14, a number which can only go higher, while U.S. shale breakeven is declining significantly, with production also growing significantly. So who’s going to win this one?

DiLallo sums it up nicely: “Saudi Arabia has the lowest oil production costs in the world thanks to two strategic advantages: Abundant pools of oil close to the surface and no taxes on production. Because of that, it can make money in almost any oil price environment. That said, Saudi Arabia made a mistake by trying to use its low costs to kill the shale revolution; it only made shale stronger.”

Let the Saudis and their close allies the Russians do whatever it takes. Because they’re going to have to do a lot more than that.

WTI Crude Crashes Below $50 As Hedgies Lose Faith In OPEC

Oil is headed for its biggest weekly loss since early March as signs that OPEC will continue with output reductions are offset by growing U.S. production and inventory gluts. Having tried and failed to spark some momentum yesterday (via Saudi jawboning and Goldman confidence), WTI Crude just plunged below $50 for the first time since March.

"It all comes down to whether OPEC can deliver inventory cuts," Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis, said by telephone. "So far we haven’t seen a lot of evidence that they’re succeeding."

It seems Goldman"s muppets aren"t buying it this time.

Erasing 70% of the early April bounce...

“We are once again seeing the emerging stalemate between OPEC and non-OPEC cutting efforts on one side and rising U.S. production on the other,” said Ole Sloth Hansen, head of commodity strategy at Saxo Bank A/S in Copenhagen. “We are currently testing the lower end of the range. This market is unlikely to go anywhere for the foreseeable future.”

OPEC has lost the confidence of the hedge funds.

OPEC Rumor-Mill Utterly Fails - Oil Tumbles On Production-Cut Deal Extension Chatter

Just as Reuters" John Kemp warned, it seems the hedge funds have abandoned OPEC. In the good ol" days (of the last year), one mention of production cut deal extensions, or high production cut compliance rates, would have been enough to see levered buying with both hands and feet, self-reinforcing the "success" of OPEC"s plan. Today - that failed!

WTI plunges below $50 and we tweet that OPEC is due any time now...

OPEC headline generator activated

— zerohedge (@zerohedge) April 21, 2017

Sure enough seconds later the folowing headline drop...

• *OPEC COMMITTEE SAID TO SEE MARCH CUTS COMPLIANCE AT ABOUT 98%


• *OPEC TECH COMMITTEE SAID TO SEE NEED FOR 6-MO CUTS EXTENSION

But the reaction was a disaster...

As we noted previously, reported stocks need to start falling soon if hedge fund managers’ confidence in rebalancing is to be maintained.

Which is why the daily jawboning by OPEC in the form of its recurring messaging about high levels of compliance has lost much of its effectiveness and is no longer enough to justify a bullish position in crude.

As a result, reported stock changes now matter more for oil prices and calendar spreads than compliance assessments by OPEC’s secondary sources.

Kemp"s conclusion: "OPEC’s credibility is on the line: stocks need to show a significant draw during the second and third quarters or many hedge funds are likely to give up on the bullish narrative prevailing since late 2016."

Oil Fundamentals Bearish Despite Overall Bullish Sentiment in the Market (Video)

By EconMatters

We discuss the EIA Oil Inventory report in this video, focusing on the glut of inventories, especially the record product inventory levels on the east coast. Oil should be much lower based strictly on the current inventory levels. OPEC Jawboning, Equities up in high liquidity environment, Import Taxes, Trump Optimism, and Geo-political tensions with Iran all propping up Oil, keeping it higher than the fundamentals of the market currently justify.

The longer oil markets are manipulated against the fundamentals, the harder the next leg down in the oil market is going to be when it comes! Maybe we will finally have some majors declare bankruptcy this time around, and go full stock out of business in the next inevitable oil market crash testing last year`s lows.

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