The "Unknown Unknowns" That Threaten U.S. Shale

Authored by Tsvetana Paraskova via OilPrice.com,

Three years after the oil price crash, the U.S. shale patch is on its second growth phase and is expected to continue to increase its production, at least through the next five years.

The global oil markets have become increasingly dependent on U.S. tight oil supply - and the oil industry is still coming to grips with this new reality, Simon Flowers, Chairman and Chief Analyst at Wood Mackenzie, wrote in a recent article.

Current projections put the Permian on the forefront of the United States’ ability to deliver increased tight oil supply to the global markets. However, forecasts for the shale patch are as dynamic as production and drilling rates are. And some ‘known unknowns’ have been surfacing such as higher gas-to-oil ratios in some wells, and the parent/child wells issue, Flowers says.

Wood Mackenzie said last month that signs had started to show that intensified drilling in the Permian doesn’t deliver commensurate volumes of oil. Although WoodMac thinks that such setbacks could just be growing pains and Permian drillers could indeed ‘change the laws of physics’, it had warned three months ago that drillers might soon start to test the region’s geological limits. If exploration and production companies can’t overcome the geological constraints with tech breakthroughs, Permian production could peak in 2021, putting more than 1.5 million bpd of future production in question and potentially significantly influencing oil prices, WoodMac said in September.

In his December article, WoodMac’s Flowers included this observation in the Permian’s ‘known unknowns’:

“Growth might also be constrained by shareholders demanding that independents rein back from volume-driven targets.”

Those ‘known unknowns’ serve as a warning: the oil market can’t be complacent and just assume that the Permian boom will deliver as expected, according to Flowers. The Wolfcamp may be the star of the Permian, WoodMac says, but “there are more than likely ‘unknown unknowns’ out there too. And if there are, there’s not another Permian ready to step in; and conventional options will take time to crank into action.”

The Eagle Ford and the Bakken combined represent nearly half of the current U.S. tight oil production, according to Wood Mackenzie, which is expressing new doubts that those two plays could offer long-term commercial drilling inventory as operators move out beyond the sweet spots. Therefore, the analysts downgraded the growth rates for both plays from the mid-2020s, but have significantly upgraded the Permian growth pace, especially for the Wolfcamp basin.

If the Permian turns out to have ‘unknown unknowns’ alongside the ‘known unknowns’, the U.S. shale patch may not deliver as expected.

Currently, WoodMac’s supply/demand balance forecasts show that the U.S. and OPEC will “do battle for contestable demand that will climb to over 5 million b/d by 2024.”

The analysts believe that U.S. shale will take the lion’s share of that demand—90 percent—as its production will double to 9.6 million bpd by 2024 from 4.9 million bpd in 2017, while OPEC will be left with meeting less than 1 million bpd of that additional demand.

Three years after the oil price crash, the most unexpected outcomes in the global oil market are the second wave of U.S. shale growth, OPEC’s “zealous adherence” to the cuts, and the resilience of some non-OPEC non-U.S. producers, WoodMac says.

While Mexico, China, and Africa as a whole have been “heavy casualties” of the lower-for-longer oil prices, Russia, Canada, and the North Sea have surprised on the positive side by adapting remarkably well to the low oil prices. Russia is the “poster child” of this resilience. Canada is also doing well with Duvernay liquids where breakevens are competitive with U.S. plays, and with better uptime from oil sands projects. The North Sea has also been a positive surprise, with the UK leading the way with aggressive cost cuts that have helped to raise oil production, WoodMac says.

Still, U.S. tight oil, especially the Permian, will be the main growth story over the medium term, but ‘unknown unknowns’ may be lurking out there and could restrain the pace of that growth.

Ruble, Real Tumble As Oil Slumps On Weaker IEA Outlook

WTI Crude is tumbling this morning, breaking down below $56 following a monthly report Tuesday from the International Energy Agency that said 2017 price gains along with milder-than-normal winter weather are slowing demand growth. This drop is weighing on oil-producers with the Ruble and Real dropping most...

The IEA reduced its demand estimate for next year by 200,000 barrels a day to 98.9 million a day, according to projections in its report. Forecasts for demand growth next year also fell by 100,000 barrels a day to 1.3 million a day.

“The market balance in 2018 does not look as tight as some would like, and there is not in fact a new normal” that would buoy prices above $60, said the Paris-based agency.

“If you put two and two together, it shows that we are going to be a little bit oversupplied in 1Q,” Michael Loewen, a commodities strategist at Scotiabank in Toronto, said by telephone referring to the IEA report. “Traders in the market are focusing on that right now. We rallied too far, too quick.”

This oil move has pushed the Ruble down to 3-month lows...back over 60 Ruble per USD...

"Take That OPEC" - WTI Slides As US Crude Production Jumps To Record High

WTI/RBOB extended losses post-API data overnight, but DOE data sparked some algo chaos as a surprise crude build (+2.24mm vs -2.45mm exp) was offset by a bigger than expected gasoline draw (exactly opposite what API reported). In addition, US crude production jumped to a new all-time high - take that OPEC!

 

API

• Crude -1.562mm (-2.45mm exp)


• Cushing +812k


• Gasoline +520k (-1.85mm exp)


• Distilates-3.133mm

ADOEPI

• Crude +2.24mm (-2.45mm exp)


• Cushing +720k


• Gasoline -3.31mm (-1.85mm exp)


• Distilates -3.359mm

Last night"s API data showed smaller crude draw and a surprise gasoline build, but DOE surprised with a big crude build and biugger gasoline draw (and a notable build in Cushing stocks)...

 

Production has normalized back at cycle highs as storm effects fade, surging to new cycle highs in the last week

 

And total US Crude output just hit a new record high...

 

The trend is not OPEC"s friend...

 

WTI was back below $57 and RBOB below $1.80 ahead of the DOE data, sinking after last night"s surprise gasoline build

“If the EIA data disappoints then it could take further steam off the market,” says Jan Edelmann, analyst at HSH Nordbank.

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.

Is Another Oil Head-Fake Coming?

Authored by Charles Hugh Smith via OfTwoMinds blog,

The dramatic declines in the costs of oil production will be boosting supply at the very moment that demand is falling.

Over the past decade I"ve addressed what I call Head-Fakes in the cost of oil/fossil fuel: even though we know the cost of extracting and processing oil will rise over time as the easy-to-get oil is depleted, oil occasionally plummets to such low prices that we"re fooled into thinking it will remain cheap for a long time to come.

This drop in price is a head-fake, because over time the depletion of the cheap-to-extract oil will push global prices higher.

Why does this matter? Economists have noted for decades that spikes in energy costs tend to trigger recessions for the obvious reason: the more households and businesses spend on energy, the less they have to spend on goods and services.

When the price of oil drops, people buy larger, fuel-hungry vehicles because the operating costs are reasonable at the moment of purchase. The need to conserve declines across the board, setting up a high consumption level that establishes a high cost basis when oil returns to its "natural" price levels.

Correspondent Joel M. submitted an article that explains one reason why oil may plummet in price: oil companies are dramatically dropping the costs of production in order to remain profitable as oil has fallen from $100/barrel to $50/barrel. Ironically, this drive to lower costs to make oil profitable at $50/barrel or lower is sparking a production and investment boom that promises to boost production in the near-term.

Race to Bottom on Costs May Cause Oil to Choke on Own Supplies (via Joel M.).

Wael Sawan, the head of Shell’s deep-water business, said the company had been able to reduce the cost of its wells by 50 percent over two years. The biggest reason: Shell now uses just four standard well designs worldwide, compared with dozens previously, according to Sawan.

"We are going to see more material cost saving in the next couple of years," he said in an interview.

With costs down from shale to mega-projects, companies big and small are starting to green-light more investment. Shell for example just approved the Kaikas deepwater oil field in the U.S. Gulf of Mexico, the first to get a go-head from the company in more than two years. The project will make money at less than $40 a barrel after Shell reduced its projected costs by 50 percent.

Though the global stock market is in a euphoric uptrend at the moment, many observers see the inevitability of a global recession as China dials back its astonishing credit expansion/housing bubble. Having created $30 trillion in new credit, China"s financial authorities are trying to cool down that runaway credit expansion without choking the Chinese economy. Their modest tightening in 2014 deflated their housing bubble, and the trickle-down effects soon slowed the global economy to a crawl.

As many of us have noted, no structural problems have been solved over the past eight years globally; all we"ve done is create unprecedented sums of new money in the form of credit and sovereign borrowing to keep the bubbles inflated. At some point, diminishing returns on new debt will trigger a break in the ability of households, corporations and nations to service their rising debt loads, and a retrenchment/recession of some size will occur--even if central banks flood the financial sector with liquidity and lower interest rates.

They can"t force households and corporations to borrow more, though they will try.

Any significant reduction in global demand for oil will trigger a sharp, sustained decline in the price of oil. Price for commoditized goods and services is set on the margin; a 5% decline in demand doesn"t necessarily reduce price by 5%; if the drop in demand shifts the the global supply into chronic over-supply, it may trigger a price drop of 25% or more.

The dramatic declines in the costs of oil production will be boosting supply at the very moment that demand is falling. This imbalance will crush the price of oil, perhaps as low as $25/barrel. Some analysts are predicting sub-$20 oil.

Low prices will devastate profits and oil-exporting nation"s oil revenues, and perversely remove incentives to conserve energy. These two dynamics will then set up the next oil spike, as production will decline while demand will be boosted as economies use more "cheap oil."

The global economy will quickly adjust to low oil prices, and decisions will be made to raise consumption based on those low prices.

When oil inevitably spikes higher as supply is slashed and demand increases off the recessionary trough, everyone will be "surprised" that low prices didn"t last.

That"s the oil head-fake in a nutshell.

Rig Count Drops For 3rd Time In 6 Weeks As US Shale Heavyweights Boost Production

The pace of US oil rig count growth has slowed dramatically in the last six weeks as the lagged response to oil prices indicated. While US oil production continues to trend higher, in lagged response to the rise in rigs, it is also nearing its apex. However, four U.S. shale companies recently reported second-quarter production that beat targets and increased their respective full-year output growth guidance.

This is the 3rd weekly drop in the US oil rig count in the last six weeks...

Crude Production (in the Lower 48) topped 9mm last week for the first time since July 2015, and this week it rose once again to a new cycle high...but judging by the slowdown in rig count growth, production may be set to slow.

However, despite the slowdown in US oil rig count growth, OilPrice.com"s Tsvetana Paraskova notes that US shale heavyweights are set to boost production this year.

In a sign that the U.S. shale patch is boosting output that has been keeping a lid on oil prices, four U.S. shale companies reported second-quarter production that beat targets and increased their respective full-year output growth guidance.

EOG Resources reported on Tuesday Q2 total crude oil volumes rising 25 percent to 334,700 barrels of oil per day, setting a company oil production record. The company raised its full-year 2017 U.S. crude oil growth target to 20 percent from 18 percent and total company production growth target to seven percent from five percent, keeping capital spending plans intact.

“EOG can continue to grow at strong rates within cash flow,” Chairman and CEO Bill Thomas said.

Devon Energy beat its midpoint guidance with Q2 net production averaging 536,000 oil-equivalent barrels per day, and said that it was on track to achieve its full-year 2017 production targets. The company cut full-year capital outlook by US$100 million, citing “strong capital efficiencies” and saying it is keeping planned drilling activity for the year.

Diamondback Energy reported Q2 2017 production 25 percent higher than in Q1 2017, and raised full-year production guidance by 5 percent.

Newfield Exploration Company also beat its production targets and increased the mid-point of its full-year 2017 domestic production outlook.

Newfield Exploration now estimates that its year-over-year domestic production growth, adjusted for prior-year asset sales, will be around 8 percent.

“In the best parts of the basins, shale is here to stay,” Rob Thummel, managing director at Leawood, Kansas-based Tortoise Capital Advisors LLC, told Bloomberg, commenting on the shale drillers’ Q2 updates and guidance.

U.S. drillers expect to continue raising production this year, but some are adjusting spending to the expected cash flows in the current oil price environment, after prices failed to rise as much as analysts and investors had expected a few months ago.

“$50 a barrel is still a pretty critical number and that number is going to be even more critical as we move into next year,” Tortoise Capital Advisors’ Thummel told Bloomberg, noting that the lower oil prices could mean that companies would not hedge production as much as they would at higher prices to protect future output.

*  *  *

Furthermore, OPEC compliance with production cuts agreed last year fell to 86 percent in July, according to a Bloomberg survey published on Aug. 1. That’s the second consecutive monthly drop -- now at the lowest since January -- and is down from 105 percent in April and May.

OPEC output rose by 210,000 barrels to 32.87 million barrels a day in July, driven by Libya, which added 180,000 barrels a day.

This Nation Just Became The World's Newest Energy Superpower

Authored by Dave Forest via OilPrice.com,

Lots of news this week on energy companies from one particular spot on Earth.

India.

In Lebanon — where reports suggest Indian state oil firm ONGC will bid for offshore blocks. In Canada — where Indian officials are said to be negotiating coking coal supplies. And even in Venezuela, where the cash-strapped government is seeking to sell ONGC a 9 percent stake in the key San Cristobal oil field.

And a new study released this week suggests it’s not coincidence we’re hearing so much about Indian companies on the energy stage.

In fact, India has quietly become one of the world’s biggest energy investors.

That revelation came from the International Energy Agency (IEA) — which released a report yesterday on energy investment trends for 2016. Showing that India’s investment in energy projects surged during the past year.

All told, India’s spending on electricity, oil and gas, coal and renewables jumped by 7 percent in 2016, as compared to the previous year. Reaching nearly $100 billion.

As the chart below shows, that rise was enough to vault India into third place globally for energy investment. Edging out oil giant Russia. India moved into third place globally for energy spending in 2016.

(Click to enlarge)

Of course, India’s energy spending is still a long way off second-place U.S. and top investor China. But the rapid rise of energy investment here shows this is an up-and-coming spot for project funding in oil and gas, and beyond.

IEA attributed India’s ascent to new government policies helping to modernize and expand the economy. Further evidence the country is “getting its act together” in becoming a true natural resource superpower.

That’s an important point of note for project developers globally. Especially given Indian firms seem to have appetite for places further out on the risk spectrum — evidenced by this week’s action in places like Lebanon and Venezuela.

As a final point of interest, the IEA study also showed that — for the first time ever — electricity passed oil and gas as the top energy sector for investment in 2016. Coming as capital spending in the global petroleum space plunged 38 percent between 2014 and 2016.

The group says however, that petro-spending should jump in 2017. Watch for Indian companies to be a big part of those deals and new projects.

The Major Wildcard That Could Send Oil To $120

Authored by Nick Cunningham via OilPrice.com,

The latest rally in oil prices ran up against a wall yet again, and the same fears about oversupply have not receded in the slightest. The expectation from most oil analysts is that there is very little room on the upside for oil prices and that we will have to wait until 2018 at the earliest before the market gets closer to “balance.”

But the one major wildcard for oil prices is geopolitics, which, however unlikely given the degree of supply overhang that still exists, could send prices up. But how high? The latest blockade of Qatar, which has mushroomed into a regional political crisis in the Middle East, would have caused a severe spike in oil prices in the past, even though Qatar is a relatively minor producer. However, the simmering standoff not only failed to register, but occurred at a time of falling oil prices.

If a crisis involving heavyweight oil producers was shrugged off by the market, it is hard to imagine some other event causing a sharp price spike, even if more barrels were on the line.

But that is exactly what some analysts are afraid of, warning that the markets are overlooking some potentially massive geopolitical problems looming just over the horizon.

"Venezuela"s 2 million barrels of oil a day could literally go any day. Mexico looks poor. Azerbaijan"s in trouble. China"s own production is collapsing rapidly," Neil Dwane, the chief investment officer of European equity at Allianz Global Investors, told CNBC last week.

"One only has to have one mistake and the only thing you"ll be talking about all morning is oil at $120."

Herman Wang of S&P Global Platts agreed with that sentiment, although he expects the price spike to be less severe.

"There are plausible scenarios where you could see, perhaps not $120 a barrel, but an elevated oil price, say $70 to $80 on some of these geopolitical and some of the supply concerns. Venezuela certainly is a mess right now," Wang told CNBC"s Squawk Box last week.

But there are a few reasons why some analysts would roll their eyes at the prospect of triple-digit oil prices in the near future. After all, oil inventories are still sky-high even if they are starting to come down; U.S. shale production has roared back, adding roughly 0.5 mb/d since late last year; and Libya and Nigeria have restored around 400,000 barrels per day of disrupted production. Not only that, but sharper gains are expected to be forthcoming from the U.S., Nigeria and Libya, while other long-term projects in Canada and Brazil are set to add production this year. 

However, not all of that is guaranteed. The U.S. shale rally recently hit some bumps in the road. More importantly, the geopolitical uncertainty in unstable countries such as Libya and Nigeria could quickly knock production offline once again. For example, Reuters reported that heavy clashes took place in Libya on July 9, underscoring the fact that the country’s recent calm is highly fragile.

Also, the peace in the Niger Delta is also starting to look rocky. Former militants, according to Reuters, are unhappy with government promises, and have threatened a return to violence.

"This peace is a graveyard peace," a local chief in the Niger Delta told Reuters. "Nobody can assure anybody that nothing will happen in the Delta." Nigeria is aiming for 2 mb/d of production in August, which would be the highest total in a year and a half, and almost double the low point from last year.

There is also the vaguer and more uncertain variable of the recent ascendance of Saudi Crown Prince Mohammed bin Salman, who has brought a more hawkish approach to Saudi foreign policy. The escalation of confrontation against Qatar is one clear consequence of that. So is the war in Yemen. More conflicts could arise from a more belligerent Saudi government. “We contend that the region could be subject to more volatility and heightened risk,” as a result of Mohammed bin Salman taking over as crown prince, RBC wrote in a note last month.

But it is Venezuela that could be the mother of all black swan events. As Neil Dwane of Allianz Global Investors mentions, Venezuela has already seen the near total breakdown of society, and its oil production of 2 million barrels per day (mb/d) could unravel. It still seems unthinkable at this point, but becoming more likely by the day. Already, Venezuela’s oil production has eroded sharply, falling to 1.96 mb/d as of May 2017, down from 2.375 mb/d in 2015. Meanwhile, Venezuela’s refining industry is in shambles, forcing the country to increasingly import gasoline to avoid fuel shortages.

The street protests in the South American country just marked their 100^th day, and show no sign of slowing down.

The oil market is rather depressed and subdued at the moment, but could awaken at moment’s notice if large volumes of oil production are disrupted from some unforeseen event.

Another Day, Another V-Shaped Panic-Buying Spree in Crude Oil

Suuposedly catalyzed this time by EIA forecast production cuts, WTI crude has spiked off an early tumble for the 3rd day in a row, running stops above $45. It appears the algos missed the fact that EIA also cut its price forecasts for the next two years, cut demand growth estimates, and confirmed OPEC production is higher than expected...

The trigger - apparently:

• *EIA LEAVES 2017 U.S. CRUDE OUTPUT ESTIMATE UNCH AT 9.33M B/D


• *EIA CUTS 2018 U.S. CRUDE OUTPUT ESTIMATE TO 9.9M B/D FROM 10.01

But then there"s this...

• *EIA CUTS 2017 WTI CRUDE PRICE EST. TO $48.95/BBL FROM $50.78


• *EIA CUTS 2018 WTI CRUDE PRICE EST. TO $49.58/BBL FROM $53.61


• *EIA CUTS 2017 GLOBAL FUEL DEMAND TO 98.39M B/D FROM 98.46


• *EIA GUTS 2018 GLOBAL FUEL DEMAND TO 100M B/D FROM 100.08

And...

• TOTAL OPEC-13 OUTPUT IN JUNE RISES TO ABOUT 32.47 MILLION BPD LED BY NIGERIA, LIBYA  VS. 32.14 MBPD IN MAY

But the machines don"t care...

We"ll see how long this lasts this time - remember API data after hours today.

What Oil Bulls Are Missing: "The Oil Is Just Being Moved Elsewhere"

Dispensing his usual dose of optimistic crude oil buzzkill, Bloomberg energy strategist Julian Lee points out something troubling to both OPEC, and those who are hoping that the latest dip in oil will finally lead to a sharp rally. He writes that while at first glance, this year’s diminishing U.S. oil stockpiles appear to support the notion OPEC is finally getting the global crude glut under control. Surging exports mean that the market should treat that idea with caution.

The problem is that, as has been the case over the past year, stockpiles aren"t coming down because the oil is being used, it"s just being moved overseas. And nowhere is this more visible than in the record  amount of oil exported overseas.

First, the good news.

In the last week of June, the EIA reported the biggest drop in combined crude and refined-product stocks (including SPR stocks) in four years. In the four months through June - when OPEC crude delivery cuts to the U.S. was expected to show up in lower import numbers - the oil stockpile tumbled by almost 21 million barrels (indicatively, at that rate, it would take two-and-a-half years to get total inventories back to their five-year average level). Regardless, on the surface the drop is even more impressive when one considers that this is the first year since at least 2000 that total U.S. oil inventories have fallen between the end of February and June 30. The average increase in stockpiles over that period has been 53.9 million barrels.

But here a question emerges: what has happened to all that oil?

U.S. demand did hit a record in the last week of June, but more than half of the week-on-week increase came from the volatile "other oil products" category, not core fuels like gasoline, diesel or jet fuel. In fact, Lee writes that gasoline demand has lagged last year"s level all year and still shows little sign of exceeding it. Over the weekend, we presented BofA"s amazement at the failure of gasoline demand to rise during the peak of driving season, prompting the bank"s energy analyst to ask "Where Is Driving Season?", more specifically, "is this year"s driving season over before it began?"

A chart from Julian Lee confirms that US driver are certainly not the cause behind the decline in oil stocks.

So if the oil is not being used up domestically, where is it going? The answer: "the oil has been sent elsewhere."

As Lee explains, while the U.S. remains a big net importer of oil (as dreams of energy independence have years to go before being realized) the excess of imports over exports has slipped after the ban on overseas sales was lifted last year.

And here"s the punchline: the U.S. exported 149 million more barrels of crude and refined products in the four months through June than it did in the same period of 2016. This was the biggest growth in U.S. crude exports in barrel terms in living memory, some 1.255mb/d year over year.

Indeed, as the EIA reported recently, US crude oil and petroleum product gross exports have more than doubled over the past six years, increasing from 2.4 million barrels per day (b/d) in 2010 to 5.2 million b/d in 2016. Exports of distillate, gasoline, propane, and crude oil have all increased, but at different paces and for different reasons.

Some additional detail: Restrictions on exporting domestically produced crude oil were lifted in December 2015, and in 2016, the United States exported an average of 520,000 b/d. U.S. crude oil exports reached 1.1 million b/d in February 2017, the highest monthly level on record. While Canada remains the largest destination for U.S. crude oil exports, Canada’s share of total U.S. crude oil exports has declined, dropping from 92% in 2015 (427,000 b/d) to 58% in 2016 (301,000 b/d). Other leading destinations for U.S. crude oil exports in 2016 included the Netherlands, Curacao, China, Italy, and the United Kingdom.

Why does this matter? For two main reasons:

First, had those barrels not been exported, U.S. inventories would have risen by 128.6m bbl, hitting never before seen levels.

Second, the surge in U.S. exports is contributing to growing inventory levels elsewhere. According to Lee, stocks in the key European storage hub of ARA, or Amsterdam-Rotterdam-Antwerp region, are up 5.5 million barrels since the end of February, Genscape data show. Separately, while Chinese government data, notoriously unreliable when it comes to oil flow data, show commercial stockpiles almost unchanged between the end of February and the end of May, oil exports to Asia"s biggest economy have soared. In the first four months of 2017, 55 million barrels of crude and products flowed from the U.S. to China - more than the first nine months of 2016. Here the 2 billion barrel question is just how much crude is truly stored in China"s SPR...

According to London-based consultancy Facts Global Energy, global oil inventories on land are "no lower now than when the output cutback deal was implemented in January." Which means that when one nets out total inventories around the globe, OPEC has failed to make even a dent in net stocks. Worse, the recent reduction in the volume of oil stored on tankers has been entirely offset by an increase in the volume in transit.

Lee"s conclusion: "Oil bulls will probably welcome the big drop in U.S. inventories. But it"s too early to send the bears into hibernation." As for the alternative, it may be too late for some oil bulls: as we reported over the weekend, one of the world"s most famous oil cheerleaders, Astenback"s Andy Hall, just threw in the towel last week, warning that any bounce in oil will likely be capped for years to come.

Is The Second Shale Boom Grinding To A Halt?

Authored by Nick Cunningham via OilPrice.com,

There are some early signs that the shale boom is once again coming to a halt, beaten back by another bear market.

The oil rig count declined by 2 last week, the first decline in six months. It is too early to tell whether or not this is a trend – it is one data point, after all – but if the surging rig count starts to flatten out or even decline a bit, it would provide a huge lift to the oil market.

It would also suggest that U.S. shale can’t continue to grow at such a rapid clip with oil prices below $45 per barrel. Shale is often likened as the new “swing producer,” that is, a source of supply that ramps up and down on short notice in order to balance the market. Reasonable people can debate that moniker, but if forthcoming data in the next few weeks shows that shale is slowing down, it would appear that prices in the mid-$40s are the threshold around which shale turns on and off.

(Click to enlarge)

A second piece of data also adds some weight to the notion that U.S. shale could be struggling with oil prices in the $40s. The EIA reported that U.S oil production dipped by 100,000 bpd for the week ending on June 23, the largest weekly decline in over a year.

(Click to enlarge)

More solid evidence comes from the retrospective monthly numbers, which are published with a several month delay but tend to be more accurate. The EIA just reported figures for April, which show U.S. oil production dipping to 9.083 mb/d, down from 9.107 mb/d in March. It was the first monthly decline in output in 2017.

Again, these are only a few data points, so they do not necessarily prove anything. But if they are the start of a trend – if rig counts flatten out and production starts to fall – it would be a significant development. The EIA has predicted that the U.S. will grow production from the roughly 9.3 million barrels per day (mb/d) currently up to 10 mb/d by next year. That could be a difficult target to meet if the rebound starts to fizzle.

Moreover, a slowdown and perhaps even a decline in production would also dispel the belief that shale can continue to grow at sub-$40 oil prices. A lot of shale companies have boasted about their lower breakeven prices, and some say they can even make money with oil below $30 per barrel. That may be true for individual companies, but not for the industry as a whole. Conventional wells deplete at a rate of around 5 percent annually, and shale wells decline at a much faster rate. Without heavy drilling activity, overall production will fall. We will need more data, but again, that threshold for growth could pivot around the $45 price level.

Of course, slowing production will induce higher prices, which in turn, could provide more breathing room for drillers.

In fact, only two weeks after oil officially entered bear market territory, the market is starting to regain a bit of confidence, which is no doubt influenced by the sudden slowdown in U.S. shale. Hedge funds and other money managers staked out the most bearish position on crude futures in nearly a year, but the most recent data showed that the buildup of short bets slowed to a trickle. The past week of oil price gains could reverse that rush towards a bearish positioning. “That slowdown was the prelude to what should be probably a pretty sizable net change in the position next week,” John Kilduff, partner at Again Capital, told Bloomberg. The liquidation of bullish bets could be “running out of steam,” he said.

That might mean that there is a little more room for oil on the upside. Sharp selloffs can slow things down, setting up the conditions for a tighter market. "Sentiment has turned and I think we should be going up (in price). I don"t think it"s going to last, but the momentum at the moment is with the bulls," PVM Oil Associates strategist Tamas Varga said in a Reuters interview.

Others are in agreement. "You are going to see crude oil inventories globally and domestically begin to decline month after month. That will support crude oil prices, boosting the entire sector," Rob Thummel, managing director for Tortoise Capital Advisors, told CNBC, adding that the “fundamentals are set up for a second-half comeback.”

It is also possible that the latest string of data pointing to a slowdown in the shale patch could be a one-off anomaly. If the rig count and weekly production figures resume their year-long climb, sentiment will quickly turn negative once again. David Leben, director of commodity derivatives at BNP Paribas, told the WSJ that the situation is not dramatically different from two weeks ago. “All the bearish things are kind of still in play,” he said.

The Looming Energy Shock

There will be an extremely painful oil supply shortfall sometime between 2018 and 2020. It will be highly disruptive to our over-leveraged global financial system, given how saddled it is with record debts and unfunded IOUs.

Due to a massive reduction in capital spending in the global oil business over 2014-2016 and continuing into 2017, the world will soon find less oil coming out of the ground beginning somewhere between 2018-2020.

Because oil is the lifeblood of today"s economy, if there’s less oil to go around, price shocks are inevitable. It"s very likely we"ll see prices climb back over $100 per barrel. Possibly well over.

The only way to avoid such a supply driven price-shock is if the world economy collapses first, dragging demand downwards.

Not exactly a great "solution" to hope for.

Pick Your Poison

This is why our view is that either

1. the world economy outgrows available oil somewhere in the 2018 – 2020 timeframe, or


2. the world economy collapses first, thus pushing off an oil price shock by a few years (or longer, given the severity of the collapse)

If (1) happens, the resulting oil price spike will kneecap a world economy already weighted down by the highest levels of debt ever recorded, currently totaling some 327% of GDP:

(Source)

Remember, in 2008, oil spiked to $147 a barrel. The rest is history -- a massive credit crisis ensued.  While there was a mountain of dodgy debt centered around subprime loans in the US, what brought Greece to its knees wasn’t US housing debt, but its own unsustainable pile of debt coupled to a 100% dependence on imported oil --  which, figuratively and literally, broke the bank.

If (2) happens, then the price of oil declines, if not collapses. Demand withers away, the oil business cuts back on its exploration/extraction investments even further, so that much later, when the global economy is trying to recover, it then runs into an even more severe supply shortfall. It becomes extremely hard to get sustained GDP growth back online.

If you really want to understand why I hold these views, you need to fully understand and digest this next chart. It shows the amazingly tightly-coupled linear relationship between economic growth and energy consumption:

(Source)

This chart above says, if you want an extra incremental unit of economic growth you"re going to need to have an extra incremental unit of energy.  More growth means more energy consumed.

And today, oil is still THE most important source of energy. It"s the dominant energy source for transportation, by far.  A global economy, after all, is nothing more than things being made and then moved, often very far distances. Despite what you might read about developments in alternative and other forms of energy, our dependency on oil is still massive.

Plunging Investment

Resulting from the start of oil"s price decline in 2014, the world saw a historic plunge in oil investments (exploration, development, CAPEX, etc) as companies the world over retracted, delayed or outright canceled oil projects:

(Source)

In the chart above, note the two successive drops in oil investment from 2014-2015 and then again into 2016.  So far 2017 is shaping up for another successive decline, which will mark the only three-year decline in investment in oil"s entire history.  So what"s happening here is actually quite unusual.

This isn’t just a slump. It’s an historic slump.

We don’t yet know by how much oil investment will decline in 2017, but it’s probably pretty close to the rates seen in the prior two years.

Next, take note of the dotted blue arrow in the chart.  See how far oil investment climbed during the years from 2009-2014?  Not quite a doubling, but not far off from one either.  Remember those years, I’ll return to them in a moment.

The key question to ask about the 2009-2014 period is: How much new oil was discovered for all that spending?

Turns out: Not a lot.

Practically No Discoveries

There is one hard and fast rule in the oil business: Before you can pump it, you have to find it.

The growing problem here is that oil discoveries were horrible in 2016, really bad in 2015, and terrible in 2014. That recent three year stretch is the worst in the data series:

(Source)

Again: you have to find it before you can pump it. And around the world, oil companies are just not finding as much as they used to.  

Remember that blue dotted line on the oil investment chart above?  Here’s its counterpart, showing discoveries over the same time frame -- it’s just a straight slump downwards:

Global oil discoveries fell to a record low in 2016 as companies continued to cut spending and conventional oil projects sanctioned were at the lowest level in more than 70 years, according to the International Energy Agency, which warned that both trends could continue this year.

Oil discoveries declined to 2.4 billion barrels in 2016, compared with an average of 9 billion barrels per year over the past 15 years. Meanwhile, the volume of conventional resources sanctioned for development last year fell to 4.7 billion barrels, 30% lower than the previous year as the number of projects that received a final investment decision dropped to the lowest level since the 1940s.

(Source)

Now it"s clear why the oil companies pulled back their investment dollars so rapidly when prices slumped:  They were spending more and finding less throughout the 2009-2014 period, so they were already feeling the pain of diminishing returns. When the price of oil cracked below $100 a barrel, they wasted no time reining in their investment dollars.

Should we be concerned about this record lowest level of oil project funding in 70 years?  Why, yes, we should.  Everyone should:

"Our analysis shows we are entering a period of greater oil price volatility (partly) as a result of three years in a row of global oil investments in decline: in 2015, 2016 and most likely 2017," IEA director general Fatih Birol said, speaking at an energy conference in Tokyo.

"This is the first time in the history of oil that investments are declining three years in a row," he said, adding that this would cause "difficulties" in global oil markets in a few years.

(Source)

To give you a visual of the process, here’s a chart to help you understand why it takes years between making an initial find and maximum production:

(Source)

This bears repeating: Oil is the most important substance for our economy, we’re burning more of it on a yearly basis than ever before, and we just found the lowest amount since the world economy was several times smaller than it is now. And all this is happening while we"re reducing our efforts to find more at an unprecedented rate.

There’s no way to speed up the process of oil discovery and extraction meaningfully, no matter how much money and manpower you throw at it.  It simply requires many years to go from a positive test bore to a fully functioning extraction and distribution/transportation program operating at maximum. 

In Part 2: Preparing For The Coming Shock we provide the evidence that shows why by 2019, or 2020, oil prices will have forced a new crisis upon the world.

More economic growth requires more energy. Always has and it always will. Oil is the most important form of energy of them all. But everyone assumes -- especially today when it appears as if we"re "awash" in it given the current supply glut -- that we will always have access to as much as we need.

That"s not going to be the case soon. And you are one of the few to understand why.

You get to use that awareness to make conscious decisions about your own life right here and right now. You can position yourself for safety, as well as to take advantage of what are likely to be once-in-a-lifetime investment opportunities.

But you also need to prepare for those in your life, like most other people today, who lack the ability, insight, or capability to join you at this early stage.

Click here to read the report (free executive summary, enrollment required for full access)

Has Permian Productivity Peaked?

Authored by Nick Cunningham via OilPrice.com,

The U.S. shale industry might have just received a huge windfall with the nine-month extension of the OPEC cuts. Shale output was already expected to come roaring back this year, but the extension of the cuts provides even more room in the market for shale drillers to step into.

The sky is the limit, it seems. However, there are growing signs that the U.S. shale industry could be reaching the end of the low-hanging fruit. Or, more specifically, drilling costs are starting to rise and the enormous leaps in production that can be obtained by simply adding more rigs also appears to be running into some trouble.

According to the EIA’s Drilling Productivity Report, productivity (as opposed to absolute production) is set to fall next month in the Permian Basin. In other words, the average rig will only be able to produce an estimated 630 barrels per day of initial production from a new well, down 10 b/d from the 640 b/d that such a rig might have produced in May. That is convoluted way of saying that the ever-increasing returns on throwing more rigs at the problem might be hitting a ceiling.

(Click to enlarge)

This is a very notable development – it is the first time that the EIA predicts falling well productivity per rig since it began tracking the data several years ago. Still, because the rig count has increased so much, there will still be more production coming out of the Permian. It’s just that as drillers gobble up all the best spots to drill, it will become more and more difficult to find easy pickings.

Moreover, simply drilling the wells is only one part of the equation. As Collin Eaton of Fuel Fix notes, companies are drilling wells at a faster pace than contractors can frac them. The shortage of completion crews means that the backlog of drilled but uncompleted wells (DUCs) has shot up over the past year, rising by more than 60 percent to 1,995 in April 2017 from a year earlier.

(Click to enlarge)

The strain on contractors means that drilling costs will also rise. Oilfield service companies bore the brunt of the market downturn over the past three years, forced to slash their rates because of the lack of work. Oil producers have consistently and repeatedly boasted about their “efficiency gains,” but much of the cost-savings came from soaking service companies.

That could be at an end. The rise in drilling activity means that oilfield service companies finally have more leverage to hike their prices. The results could be an upswing in costs for producers. Service costs could jump by 20 percent this year, according to an estimate from S&P Global Platts.

But it isn’t all rosy for service companies either. Fuel Fix notes that they have to rebuild their rig fleets after scrapping so many during the last few years. Also, finding enough people to return to work after savagely cutting payrolls will be a challenge.

Overall, however, production is still expected to increase. Generous financing from Wall Street will ensure that capital is not a limiting factor. Consequently, the shale industry will continue to shower West Texas with money, rigs and people. Oil will flow in larger volumes this year and probably next year, barring another downturn. The Permian, for instance, is still expected to add more than 70,000 bpd of additional output between May and June.

Also, OPEC’s determination to prevent another downturn in prices provides some certainty to shale drillers. OPEC is erasing some of the risk for drillers to deploy resources in the Permian. On an annual basis, the EIA estimates that U.S. oil production will average 9.3 million barrels per day (mb/d) in 2017 and a staggering 10.0 mb/d in 2018.

But if well productivity has peaked, the marginal barrel will be a bit trickier to produce next year than it was in, say, late 2016.

4 Wildly Different Oil Price Scenarios For 2020

Authored by Nick Cunningham via OilPrice.com,

After the nine-month extension of the OPEC deal, there is a growing consensus that oil might bounce around in the $50s and $60s for the rest of the year. But as we move into 2018 and beyond, there is a great deal of disagreement among analysts about what happens to oil prices.

One school of thought is that the severe cuts to upstream spending that have stretched into a third year are sowing the seeds of a supply shortage around 2020. The IEA is probably the most recognizable forecaster that falls into this camp. The agency has repeatedly pointed to the fact that new oil discoveries are at their lowest level in 70 years. "There were no discoveries because there is no money for exploration. You find something if you look for it," the IEA’s executive director Fatih Birol said earlier this year.

The IEA says the industry must step up spending if they are to avoid a supply crunch in a few years’ time. “[W]e are emphasising an important message: more investment is needed in oil production capacity to avoid the risk of a sharp increase in oil prices” by the early 2020s, the IEA wrote in a March report.

Alan Bannister of S&P Global Platts echoed that warning more recently, pointing to natural depletion from conventional oil production – which still makes up the vast majority of global supply – on the order of 3 to 4 percent per year. “We’ve not really seen the effect of that yet, because all the projects that were put in place three years ago when prices were high are still being completed – we’re still seeing extra volume coming on,” Bannister told CNBC in an interview. But because the sharp cutbacks in upstream spending means that there will be many fewer barrels coming online to replace depleting fields, “it does sow the seeds for a potential super bull run…It could go well over $80 in the next two to three years,” he added.  

But other analysts have an entirely different view, expecting oil prices to remain low for the foreseeable future, although for varying reasons.

Some focus on peak demand, which mainly comes down to alternatives to oil. The most fervent believers in both electric vehicles and autonomous vehicles argue that oil demand is nearing a peak, so there is little chance of another major bull run. Tony Seba, co-founder of tech-focused think tank Rethinkx, says that demand will peak by 2020-2021 and will plummet thereafter, forcing oil prices down to $25 per barrel by 2030. "At $25 a barrel, that means deep-water, sands, shell oil, fields, most are going to be stranded, and also all the refineries and pipelines associated with these expensive oils are also going to be stranded,” Seba told CNBC.

Even if more mainstream oil forecasters don’t see such a dramatic scenario on the horizon, they do see some supply-side forces that prevent an oil price spike. Namely, improving technology and falling breakeven prices for shale production could put a ceiling on the price of crude for the next few years. For example, Morgan Stanley just downgraded its forecast for Brent in 2020 from $70-$75 to just $60 per barrel. The investment bank said that about 1.5 mb/d of new supply that it had expected would be needed in 2020 will no longer be needed because of much better results from shale.

Goldman Sachs agreed with that sentiment a few weeks ago, stating that they are growing more confident that longer-term oil price range is “drifting lower.” Goldman says it sees lower prices over the next five years because of the “growing visibility on the sources of future supply.” And they also pointed to the resilience of U.S. shale as a principle reason for oil prices remaining low not just for the near-term but into the 2020s. Goldman cites the surprise profitability of shale companies today even though oil prices have bounced around at $50 per barrel, their ability to ramp up supply, and the abundant capital that Wall Street is willing to shower on shale drillers. 

So, we have dramatically different visions for what might play out over the next five years. On the one hand, there are those worried that the depth and length of the current downturn will merely create a stronger bull run in five years. Today’s cutbacks create tomorrow’s shortage.

On the other hand, there are those that think the oil market is fundamentally different than in the past. Shale has truly altered the supply picture, and the downturn in prices has been met with steady innovation, leading to the cost of the marginal barrel to structurally fall. As a result, oil prices could remain low for years, if not forever.

For 2017, analysts are converging on a consensus for oil prices, but the forecasts for what happens after 2020 are diverging.

New Home Prices Are Over 50% Higher In Canada Than The US

Authored by Kaitlin Last via BetterDwelling.com,

The price of new homes is quickly diverging in Canada and the US.

 Data from the Canadian Housing and Mortgage Corporation (CMHC) show that new homes are selling for substantially more than the same time last year.

Meanwhile south of the border, data from the US Bureau of Census show that new home prices are on the decline.

This has lead to an even wider gap between the average price of a new home in Canada and the US.

Canadian New Construction Is Higher

The price of a new home across Canada is up for the second month in a row. The average sale price in April was CA$751,881 (US$559,123). This represents an 11% increase from the same time last year, when measured in Canadian dollars. When compared in US dollars, that increase drops to a much more conservative 2.64%. Even after factoring in the loonie’s decreased buying power in Canada, new home prices still climbed.

US New Construction Is Lower

American new home builders aren’t seeing such steep climbs in sale prices. Actually, they aren’t seeing climbs at all. The average price of a new home in the US was CA$495,271 (US$368,300). This represents a 3% decline from the same time last year, when measured in US dollars. In Canadian dollars, this was a 0.49% decline from the same time last year. Both forms of measurement show declining home prices in the US, curious since their economy is in a much better state than Canada right now.

US Vs. Canadian Prices

New homes are trading at substantially higher values in Canada than the US in April. The average new home in April 2017 was 51% higher in Canada than the US. The same time last year, prices in Canada were only 36% higher. It appears in a post-crash United States, new home buyers are taking much more conservative strides. In a hasn’t-crashed-in-decades Canada, new home buyers are optimistic about future values.

The gap between new home sale prices in Canada and the US is growing substantially. The US is a country with a booming economy, almost 10 times the population of Canada, and less land mass. Somehow, new home prices in the US are dropping compared to the same time last year. In sparsely populated Canada, prices are increasing – despite the precarious position of our economy.

Are Americans being overly cautious on homeownership, or are Canadians demonstrating irrational exuberance for homeownership, much like the US did in a pre-2006 America? Tell us your thoughts in the comments.

US Crude Production Hits 21-Month Highs As Rig Count Rises For 19th Straight Week

For the 19th week in a row, the number of US oil rigs rose (up 2 to 722). This is the largest number of oil rigs since April 2015 as Lower 48 crude production (much to the chagrin of OPEC) surges to its highest since August 2015.

Lagged WTI prices lead rising rig counts...NOITE - if the relationship holds then we would expect the rig count rised to stall here...

And rising rig counts lead US crude production...

And this is why it matters...

And prices are holding their post-OPEC losses...

“It was so well telegraphed a lot of people were probably thinking they’d take it the extra mile,” Jasper Lawler, senior market analyst at London Capital Group, told Bloomberg. “One of the things worth noting is that the ramp-up into the meeting and the drop down have averaged out; markets are definitely not as optimistic as they were”

"Sell The News" - WTI Tumbles Below $50 After OPEC Disappointment

Confident anchors across the media have been proudly proclaiming the rise above $50 as proof that the oil market is heading toward equilibrium again and OPEC"s production cut deal extension will be awesome... except the market seems to be disappointed as it"s clear no other non-OPEC nations will join the agreement (cough US shale cough) and "sell the news" has sent crude back below $50...

The full details are as follows:

• No new countries will join the supply cut


• Cut remains set at -1.8mmb/d, a continuation of the original deal


• The next OPEC meeting will be November 30

And the reaction...

Gnome Underpants Gold Model, Report 21 May, 2017

There is a often-promoted plan to grow your wealth. Here’s the background. The dollar is going to be worthless. Soon! The reason is because [their peeps in high places tell them / the Chinese / end of the petrodollar / historical fiat currencies / Rothschild Jekyll Island Master Plan Private Fed / Fed printing] will cause the dollar to collapse and gold will rocket to $50,000. In fact, it’s a miracle that the price is a mere $1,253 and it hasn’t already. It will, once people discover this One Weird Secret that They Don’t Want You to Know that we have been reiterating every day for decades.

(By the way, Monetary Metals is about to publish the data to finally shine the full sunlight of disinfectant on this—stay tuned)

The plan has three phases.

Phase 1: You gotta buy gold. Now. In fact, call 1-800-BUY-GOLD now! That number, again, is one eight hundred bee yoo wye gee oh ell dee.

Phase 2: Price goes up

Phase 3: Profit!

This is a bit reminiscent of the underpants business model on South Park. South Park of course showed phase 2 as “???” but the analogy holds.

Pay particular attention to the context switch. The story switches midway from the-dollar-will-collapse to gold-will-go-up.

In fact, these are the same thing. It is important to realize because a higher price of gold does not make you richer. Sure, you have more dollars but each of them is worth proportionally less. And why would you want to exchange your gold for collapsing Rothschild private bank petrodollar printing press Monopoly money? On top of this, the tax man will take a big chunk of any price appreciation. So, if you sell you have less wealth.

Aside from being wrong as a matter of fact, it is an example of dollar thinking. It comes from the belief that gold is to be sold. That is not historically how people thought about it. Gold is money and those who have it should seek to earn a return on it, not sell it.

This week, the prices of the metals went up. Perhaps that rubber stopper under the silver elevator is durable.

However, as always we are interested in the supply and demand fundamental of the metals. We will show graphs, but first, the price and ratio charts.

The Prices of Gold and Silver

Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio. It moved lower this week.

The Ratio of the Gold Price to the Silver Price

For each metal, we will look at a graph of the basis and cobasis overlaid with the price of the dollar in terms of the respective metal. It will make it easier to provide brief commentary. The dollar will be represented in green, the basis in blue and cobasis in red.

Here is the gold graph.

The Gold Basis and Cobasis and the Dollar Price

We changed to the August contract.

August is far from expiration, and we see no sign of temporary backwardation (another phenomenon that disproves the naked short manipulation theory). And we see something clear and revealing. There is a steadily rising scarcity (i.e. the cobasis, the red line) and falling abundance (the basis, the blue line). The trend has been ongoing for many months, with not a lot of jitter. The scarcity of gold, as indicated by the August gold spreads, has been on the rise.

For somewhat less time, the price of gold has been rising.

Our calculated fundamental closed the week up another $21, to $1,275. That’s hardly “call 1-800-BUY-GOLD now before it hits $10,000” territory, but noteworthy nonetheless.

Now let’s look at silver.

The Silver Basis and Cobasis and the Dollar Price

Last week, we said that “silver does not yet show any backwardation, though it’s close at -0.03%.” This week, it’s +0.1%. However, this is definitely temporary backwardation. The near contract in silver tends to fall earlier than the near contract in gold.

Obviously, past a certain date, speculators looking to bet on silver would not buy the July contract but instead the September. Everyone may have his own boundary, in part depending on how long they want to hold the position. But clearly, for the marginal silver speculator, we are past that point in the July contract.

So there is an imbalance, less and less buying. The selling (to roll July) may not be urgent yet, but silver is less liquid than gold. So a small imbalance will show up as a change in basis.

Our calculated fundamental price of silver was down a few pennies.

We will end on an amusing note. The previous week, we said:

"We saw a technical analysis trader write a note this weekend. He said he plans to short silver on Monday. When the technicals and then fundamentals align, that can make for an interesting week."

Assuming he shorted it early on Monday morning, he might have top-ticked it at $16.40. On Tuesday, he could have closed at $16.05, for a gain of 2.1%. There has to be an easier way to earn a few bucks (and we never recommend naked-shorting gold or silver).

Well, as of Friday silver is $16.84. Depending on how much leverage he used, that could be a big owwie.

Keith will be speaking at the Mining Investment Europe event in Frankfurt in mid-June. He will be in London the week of June 19, and in New York the week of June 26. If you’re interested in attending a Monetary Metals seminar on GOFO and transparency in the gold market in either city, or to meet with Keith to discuss gold investment, please click here.

© 2017 Monetary Metals

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.