Today’s economic data dropped the Atlanta Fed’s GDP nowcast to +2.4%, down .4… Note the estimate started out at over 3.5% and is below Blue Chip consensus estimates…
“The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2016 is 2.4 percent on September 30, down from 2.8 percent on September 28. The forecast of third-quarter real consumer spending growth declined from 3.0 percent to 2.7 percent after this morning’s personal income and outlays report from the U.S. Bureau of Economic Analysis (BEA). Following yesterday’s GDP revision from the BEA and the Advance Economic Indicators release from the U.S. Census Bureau, the forecast of the contribution of inventory investment to third-quarter growth decreased from 0.60 percentage points to 0.26 percentage points and the forecast of the contribution from net exports increased from -0.13 percentage points to 0.13 percentage points.”+ read more
Two tip top oil analysts, Daniel Yergin and Ed Morse are interviewed here: http://www.bloomberg.com/news/videos/2016-09-29/yergin-opec-sends-message-there-s-coherence
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Bloomberg does a nice job describing how the OPEC deal came to fruition here: http://www.bloomberg.com/news/articles/2016-09-29/in-opec-hotel-dealmaker-s-bold-gambit-wins-saudi-iran-agreement
The Saudis made this concession:
“On the eve of the OPEC talks in Algiers, Al-Falih made a final concession, for the first time saying that Iran — alongside Libya and Nigeria — should be allowed to “produce at the maximum levels that make sense.’’”
which led to this deal:
“Five hours later, OPEC emerged with a deal: a production cut that set a target of 32.5 million to 33 million barrels a day, a little below current output. Brent prices surged, closing 5.9 percent higher. ”
Despite a sharp move higher in oil prices from the news, some traders are questioning how much OPEC will actually cut, given the concessions…
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The Carpe Diem blog (https://www.aei.org/publication/blog/carpe-diem/) put together a nice chart showing the share of consumer spending on energy:
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The WSJ lists 5 reasons why an OPEC deal on production cuts may not be long term bullish… Here is one of them:
“The group proposed cutting its collective output to between 32.5 million barrels a day and 33 million barrels a day, from 33.2 million barrels a day in August. That cut is only a fraction of the reduction producers reached in 2008.
If OPEC cuts its production to 33 million barrels a day, that still wouldn’t be enough to bring production back in line with demand until the second half of 2017, according to estimates by the International Energy Agency.
And some analysts estimate the actual cut could easily be much smaller. A lot will depend on Iran and Libya, where output is just beginning to recover, and on Nigeria, where it may be about to pick up again, according to strategists at Société Générale.”
Looking at a long term chart of WTI futures, we see that we have most recently been in $40/50 price range and a $30/60 range since 2015… Is the OPEC “agreement” enough to take us up to $60? Or is supply still overwhelming demand enough to take us below $40?
Implied volatility rose significantly into the OPEC meeting as you can see in the lower portion of the chart below (charts are from barchart.com):
My guess here is that there will be lots of price push/pull due to divergent market opinions into the November OPEC meeting and that implied vols move stubbornly lower…. Implicit in this view is that $43/44 WTI is a short term floor…
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The EIA summarizes their weekly numbers released yesterday in a report called This Week In Petroleum found here: http://www.eia.gov/petroleum/weekly/
Here is a chart showing oil stocks compared to the 5 year range:
Oil stock levels are still above 5 year highs, but headed lower… However, seasonally, we would expect stocks to build over the next two months… Looking at “days supply” gives us a better sense of stock levels relative to current demand:
The day’s supply chart shows that we are getting closer to crossing last year’s number or moving toward a market in balance (at least as compared to last year)… Gasoline has already crossed:
Distillates are getting close:
So, in the U.S., at least, the commodity cycle is at work… Low prices have slowly stimulated demand and reduced production…
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Bloomberg does a nice job describing some problems with investing in “long only” commodity strategies here: http://www.bloomberg.com/news/articles/2016-09-21/buy-hold-lose-how-commodities-roll-is-undercutting-investors
“While spot prices tracked by the Bloomberg Commodity Index are up 16 percent this year, the total return for funds linked to the gauge was about half that amount, data compiled by Bloomberg show. The performance gap has been widening since the first quarter of 2015 and is now the largest in five years, just as investors pour more money into commodities.
Other indexed products have a similar shortfall. Through Wednesday, the S&P GSCI Index had returned 2.5 percent for the year; spot prices for its constituent commodities were up about 14 percent. United States Oil Fund LP, the leading exchange-traded fund for crude investors, lost 5.5 percent while West Texas Intermediate oil, which it tracks, has risen 22 percent.”
“Part of the problem is how fund managers try to mimic price changes. Rather than buy raw materials that have to be stored, they use futures contracts. But when those expire — sometimes every month — returns suffer if contracts are replaced at higher cost. That occurs when markets are in contango, meaning that commodities for immediate delivery are cheaper than in the future, as they are now for everything from corn to crude.”
Do read the whole article…
Me: In 2008 and beyond, another problem arose… Commodities, especially oil, became highly correlated to equity markets… Large diversified funds lost the diversification that the strategy provided…
And why would anyone invest in “long only” commodities in the first place? There is no natural income stream like one receives from owning stock… Inflation protection with diversification and yield roll were successfully sold to investors as benefits during the 90’s and 00’s…. The yield roll occurs because, in theory, producers hedge by selling forward which would tend to keep the front month price higher than the back (backwardation)… But after 2008, investors were losing on the roll with a now correlated asset… Some decided to invest in oil and other commodity producers, who, by selling forward to hedge, took advantage of “contango” markets (higher forward month prices)… This, in turn, helped increase valuations of oil producers leading to spinoffs of the producing arms of integrated oil companies…
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There was some talk of a deal to cut production by a million barrels… I like their attitude… If you can’t get a deal to freeze production, go for a million barrel cut.. But the Wall Street Journal quotes some analysts who bring us back to reality:
“However, any deal remains unlikely, Citigroup said in a note.
The disparity between Saudi Arabia and Iran, in terms of what level of Iranian production is acceptable, will likely see talks at this meeting, or meetings in the near future fail,” the bank said. “None of the current scenarios seem plausible.”
Goldman Sachs on Wednesday cut its oil-price outlook to $43 a barrel in the fourth quarter, down from its previous forecast of $50 a barrel. An OPEC deal could boost prices, the bank said, but the oversupply of crude and the potential for increased output from Libya and Nigeria would continue to weigh on the market.”+ read more
From the WSJ:
“Since the price of oil began its decline in mid-2014, analysts at major investment banks have struggled to accurately predict its moves, both short- and long-term.”
I would argue that analysts have always struggled to accurately predict future prices (think $200 predictions in 2008, just before the market dropped to $35)… There are just too many moving parts…
But the article is worth a look:
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The Economist does an excellent job laying out the Saudi family tree here:
And future potential infighting is succinctly put:
“In April last year, four months after King Salman, his uncle, had ascended to the throne, he duly became crown prince. That was a dramatic break with tradition, because the past six kings of Saudi Arabia have all been sons of the founding monarch and several more are still alive. They were waiting in a brotherly queue. But at last it was decided that the succession would jump a generation. Prince Muhammad bin Nayef, now 57, is officially next up.
That now seems less certain. In the past year King Salman’s own much younger son, also a Muhammad, aged only 31, has burst onto the scene as minister of defence and deputy crown prince, tasked with weaning the kingdom off oil. Overshadowing his older cousin, he has hogged the limelight, promising a string of drastic reforms. King Salman seemed to be grooming him to be his immediate successor.
Crown Prince Muhammad is unlikely to take the mooted demotion lying down…..”
Do read the whole thing…
And, also from The Economist, here is a chart showing sovereign wealth of selected countries including Saudi Arabia:
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