Are Banks About To Derail The New U.S. Shale Boom?

Authored by Irinia Slav via OIlPrice.com,

Just when international oil benchmarks are sliding down, banks are preparing to review the credit lines of U.S. E&Ps. Starting in April, lenders will reassess companies’ creditworthiness on the basis of reserves, production trends, current prices, and future prospects for the industry, among others. Should anything spark worry, banks will be quick to start reducing their exposure, cutting credit lines and arresting producers’ recovery at a crucial point.

This year, U.S. E&Ps have announced an overall spending increase of $25 billion from 2016, an 11-percent rise, as a clear sign of continuing optimism after the November OPEC-non-OPEC deal that aimed to shave 1.8 million barrels of crude off daily global supply.

Besides boosting spending plans, producers have been adding rigs at a respectable pace: at the end of last week, active oil and gas rigs in the United States totaled 789, an increase of 313 over a year ago. They are also investing in more efficient drilling technologies, aiming for ever lower production prices in the aftermath of the oil price crash.

The banks could put a stop to all this if they deem the outlook for oil prices or any other element of their assessment methodology unfavorable. For oil prices, more bad news seems to be on the way if we are to trust Goldman Sachs.

The investment bank said in a note yesterday that record-high investments in 2011-2013 could start bearing fruit this year and the next two, adding around a million barrels of crude to global daily production on an annual basis in the period 2017-2019. That will only happen if the mega projects that swallowed the huge investments deliver as expected, which is by no means certain.

This message contrasts with an earlier one, contained in another note to investors, which saw global oil supply tightening thanks to the OPEC deal. In fact, at the time – a month ago – Goldman was of the opinion that the draw in global stockpiles would completely offset the rise in U.S. shale output.

But for now, Brent crude is now trading below $51 and WTI has dropped below $48 a barrel. Investors are watching OPEC again for a possible extension of the production cut deal, but it’s still uncertain if it will happen, and even if it does, no one knows what the effect of an extension would be.

OPEC Jawbone Fails - Oil Spike Erased In 24 Minutes

Well that did not last long...

*  *  *

The bounce off a $47 handle on Friday in WTI was fading fast again this morning...

following news that money managers cut their bullish Brent and WTI oil bets by 154,871 to a net-long position of 699,209 contracts - the biggest decline on record.

While the drop was large, net longs remain extreme suggesting the long squeeze has more to go...

Which of course OPEC had to try and jawbone away...

• OPEC SUPPORT INCREASES FOR EXTENDING OIL SUPPLY CUT INTO H2, BUT NON-OPEC PARTICIPATION NEEDED – OPEC SOURCES - Reuters News

More details from the original Reuters note:

OPEC oil producers increasingly favor extending beyond June a pact on reducing crude supply to balance the market, sources within the group said, although Russia and other non-members need to remain part of the initiative.

The Organization of the Petroleum Exporting Countries is curbing its output by about 1.2 million barrels per day (bpd) from Jan. 1 for six months, the first reduction in eight years. Russia and other non-OPEC producers agreed to cut half as much.

The deal has lifted oil prices LCOc1, but inventories in industrial nations are rising and higher returns have encouraged U.S. companies to pump more. A growing number of OPEC officials believe it may take longer than six months to reduce stocks.

"An extension is needed to balance the market," an OPEC delegate said. "Any extension of the cut agreement should be with non-OPEC."

OPEC sources told Reuters in February that the group could extend the supply-reduction pact, or even apply deeper cuts from July, if inventories fail to drop to a targeted level.

The group wants stocks in the industrialized world to fall to the average of the past five years. According to the most recent data, for January, inventories of crude and refined products stood 278 million barrels above this level.

Five other OPEC sources said it was increasingly clear that the market needed more than six months to stabilize but added that all producers - in OPEC plus non-members - had to agree.

"The ministers will meet in May to decide, but everyone has to be on board," an OPEC source from a major producer said.

OPEC next meets to decide output policy on May 25 in Vienna. There will also be a gathering in May of OPEC and non-OPEC producers, OPEC Secretary-General Mohammad Barkindo said last month.

"Hard negotiations are on the way," another one of the sources said.

There are several catches:

Russia, the largest of the 11 outside producers working with OPEC, has not publicly said whether it supports extending the supply cut, but is wary about the revival of U.S. shale output due to higher oil prices.  "It"s too early to know whether everyone will agree to this," a source from a non-OPEC participant in the deal said, referring to prolonging the output curb.

Despite the potential complication admitted by the OPEC sources that a deal is contingent on getting all OPEC and non-OPEC members, algos were delighted with the initial headline...

... although it is unclear how long the kneejerk move higher will continue.

New Study In D.C. Finds That New $15 Minimum Wage Could Cost 1,200 Jobs

Authored by Ted Goodman via The Daily Caller

A new study that analyzes the potential effects of a $15 minimum wage in the District of Columbia (Washington, D.C.), found that an increase to $15 could cost 1,200 jobs.

The District of Columbia’s Office of Revenue Analysis released a report Thursday, asserting that 150,000 workers in the District would be affected by the higher minimum wage and as many as 1,200 jobs could be lost by 2020 due to the new policy.  Of course, nearly one-third of those jobs are in the food service industry where young people, already suffering from massive unemployment rates, represent a disproportionate percentage of the labor force. 

The study further states that as many as 2,000 jobs could succumb to the increased minimum wage by 2026.

The mayor’s “Fair Shot Minimum Wage Amendment Act,” stipulates that the minimum wage increases to $15 an hour by 2020, with incremental increases each year. The minimum wage is currently $11.50.

The findings revealed that nearly two-thirds of the pay increases will benefit non-D.C. residents who work in the District, but live elsewhere (likely Virginia or Maryland, which borders D.C.). While nearly two-thirds of the pay increases go to non-residents, D.C. residents will absorb 80 percent of the job losses.

“This study proves what we’ve known all along: this dramatic D.C. wage hike will hurt the most vulnerable in the District, costing them jobs and important economic opportunities,” Jeremy Adler, Communications Director for America Rising Squared, a conservative policy organization, told the Daily Caller News Foundation (TheDCNF).

“D.C. must focus on creating more good-paying jobs for workers that need them the most and it’s clear an artificial minimum wage increase is the wrong approach to achieving this goal,” Adler continued.

The Obama administration proposed an increase to the federal minimum wage from $7.25 to $9.00 an hour in 2013. The former president continued to call for an increase in the federal minimum wage throughout his presidency.

Seattle, Washington raised its minimum wage to $15 in 2014, followed by San Francisco and Los Angeles. New York Gov. Andrew Cuomo signed into law a new $15 minimum wage for his state in 2016, and the University of California proposes to pay its low-wage employees $15.

Oil Tumbles Below $48 As JPM Warns Of Possible Commodity Liquidations

Any hopes for an early rebound in oil following last week"s torrid plunge in WTI and Brent appear to be dashed, at least at the open, when WTI promptly tumbled below $48/barrel.

While there have been no materal adverse catalysts over the weekend, three factors are being mentioned by Sunday night trading desks as drivers behind the latest seloff.

First: price momentum has simply persisted from the Friday US selloff, as Asian funds catch up to the US action. 

Second, some have pointed to a report by JPM"s Nikolaos Panigirtzoglou from Friday evening, which warns of "commodity downside" as a result of persistent near-record net long futures positioning, and warns that "a pending normalization/mean-reversion of spec positions in commodity futures has begun." Here are some of the reports highlights:

• Spec positions stood at pretty elevated levels as of last Tuesday March 7th, the latest available snapshot, suggesting that this normalization is at its beginning rather than its end phase.

• Even if we assume that the change in the open interest since last Tuesday reflects entirely a build up of short spec positions or a reduction of long spec positions, the commodity position overhang would remain.


• This pending mean reversion in commodity spec positions is unlikely to be prevented by the growth of commodity index products.


• In our opinion, the demand for long positions in commodity futures contracts created by passive commodity index products acts merely as a background force.


• Mean reversion is primarily driven by active investors such as hedge funds and in particular CTAs.


• Simple return momentum trading models suggest that CTAs are turning incrementally more negative across most commodities.


• We get a similar overbought picture in commodity equities, by looking at the short interest of the biggest commodity stocks in world equity markets.


• Therefore any further unwinding of commodity futures positions is likely to be accompanied by an increase in the short interest of commodity stocks.

A third possible catalyst for the drop is the yet another prominent voice in the oil industry has slammed the OPEC gambit, this time Leonardo Maugeri, a "Senior Fellow with the Geopolitics of Energy Project and the Environment and Natural Resources Program at the Harvard Kennedy School’s Belfer Center", though better known as the former head of strategy at Italian energy giant, Eni. His reported is titled simply "OPEC’s Misleading Narrative About World Oil Supply" and as the title suggests, Maugeri is the latest to point out that the OPEC emperor is naked and that OPEC"s actions have, at best, served as psychological support to oil prices:

At a time when energy market headlines focus mainly on OPEC cuts, observers may be forgiven for concluding that a supply crunch and higher prices are imminent. On the contrary, there is still too much oil in global markets. In this context, OPEC production cuts (which notably fall short of the original target envisaged by the organization) appear to serve mainly as a psychological support to oil prices.

... the global oil market remains highly vulnerable to the actual status of oil supplies. There’s a paradox: so far, OPEC’s effort to convey the message of an exceptional level of compliance with cuts has helped sustain oil prices—but in so doing it has also incentivized oil output increases in many countries. The United States is by far the main beneficiary of such price support. In early February, almost all US shale oil producers have presented plans to strongly increase their shale oil output in the course of 2017.

To make matters worse, a heavy global refinery maintenance of around 3 mbd—concentrated in March and April—would lower crude demand and could add to temporary crude builds. When it starts to ease, the OPEC and non-OPEC cuts will be close to expiration—June 30, 2017.

Whatever the reason, for now the selling has continued, and if JPM is correct and momentum and trend chasing CTAs are now in charge, the next level may be far - and sharply - lower from current prices.

Judge Rules Health Insurance Companies Matter More Than Taxpayers

Largely overlooked last week in the wake of President Donald Trump’s court battle was another controversial judicial ruling.

On Thursday the US Court of Claims rewarding Moda Health, an Oregon-based health insurer, $214 million for losses it took participating in the high risk insurance pools established under the Affordable Care Act. The dispute came after Republicans eliminated funding for tax payer subsidies to those firms that lost money writing insurance for high risk individuals.

As Judge Thomas Wheeler wrote:

The Court finds that the Government made a promise in the risk corridors program that it has yet to fulfill. Today, the Court directs the Government to fulfill that promise. After all, to say to [Moda], "The joke is on you. You shouldn"t have trusted us," is hardly worthy of our great government.

Of course history shows that this behavior is quite characteristic of "our great government."

After all, Obamacare itself was sold to the public based on multiple (and intentional) lies. These included, the cost of Obamacare and the impact it would have on individuals pre-existing insurance coverage, as well as their ability to keep their doctor. The Supreme Court was only able to maintain Obamacare by interpreting the individual mandate as a tax, after the legislation’s defenders explicitly argued it wasn’t.

The result of all of this was government effectively telling its citizens, "The joke is on you. You shouldn’t have trusted us."

Of course it is not Moda Health’s fault that government lied through its teeth, and it is easy to find sympathy in their plight. As they argued in this case, the company only “aggressively” engaged in the ACA’s high risk insurance pools because they had an expectation to be compensated by government, as initially outlined in the law. As such, the company has been suffering severe losses and almost went into receivership based on their dire fiscal situation.

Yet it is not the Obama Administration that will be left paying Moda Health hundreds of millions of dollars, but the taxpayers who themselves were victims of fraud. Further, since Moda is just the first of many health insurers suing the government of the change in policy, if this precedent continues the costs to taxpayers will end up being billions of dollars.

At the end of the day, Moda was not forced to enter the high risk market and did so knowing this was a highly controversial piece of legislation that was subject to change, and with a government that has a history of not upholding its promises. Just as contracts based on Ponzi schemes and other fraudulent forms of financing are not held up in court, Moda Health and other health insurance companies should not be entitled to the money Obamacare’s victims.

All last week’s court ruling demonstrated was that the interests of health insurance companies are to be protected at the expense of the American people. Unfortunately, that mindset also explains how America’s health system became what it is today.