Links for 2015-12-13

Quick links to a few items I found interesting.

Bloomberg reports that Exxon wants to be first in line to frack in Colombia:

Exxon Mobil Corp. has filed for an environmental permit to explore for shale oil and natural gas in Colombia using hydraulic fracturing technology, in a bid to become the first driller to use the controversial technique in the Andean nation.

But Jim Brown notes that a whole lot more other projects have been cancelled:

Energy investment bank, Tudor, Pickering, Holt & Company said the oil industry has deferred or cancelled about 150 projects that could unlock 125 billion barrels of oil over their lifetime. Those 150 projects could produce about 19 million barrels per day at their peak.

Bill McBride summarizes the consensus prediction of a Fed hike this week:

Most analysts think the federal funds rate will be increased from a target range of “0 to 1/4 percent” to a range of “1/4 to 1/2 percent”. The current effective rate is 0.14 percent, close to the middle of the current range.

21 thoughts on “Links for 2015-12-13

  1. Jeffrey J. Brown

    Interesting WSJ article (do a Google Search for the title, for access). Last week, the Journal noted that Chesapeake bonds that traded at 80¢ on the dollar a few months ago were currently trading at 30¢ to 40¢ on the dollar. I suspect that there are some huge losses on the books of a lot of pension funds.

    WSJ: The Liquidity Trap That’s Spooking Bond Funds
    The specter of a destabilizing run on debt is haunting markets

    The debt world is haunted by a specter—of a destabilizing run on markets.

    Last week, this took on more form even if there weren’t concrete signs of panic. Only one mutual fund manager, Third Avenue Management, has said it would halt redemptions to forestall having to dispose of assets in a fire sale. The rest of the industry has been quick to say that while redemptions are elevated, particularly in high-yield bond funds, there doesn’t seem to be a rush to for the exits.

    Still, growing angst comes as the oil-price rout continues and the U.S. Federal Reserve appears ready to raise rates. This has investors worried—and starting to ask the fearful question: “Who’s next?”

    Goldman Sachs, for one, put out a note Friday warning Franklin Resources “is most at risk” given the large high-yield holdings of its funds, poor performance and large outflows. On Friday, its shares fell sharply. Meanwhile, there were unusually large declines Friday in the value of exchange-traded funds that track high-yield debt.

    The idea of a “run” on mutual funds might sound strange. Typically, runs are associated with highly leveraged banks engaged in maturity transformation, funding long-term loans with short-term debt. Nearly all the programs designed to avoid destabilizing runs—from deposit insurance to the Fed’s discount window to liquidity requirements—are built for banks.

    But unleveraged investors, including mutual funds, can also give rise to runs. That is because there is a liquidity mismatch in mutual funds that hold relatively illiquid assets funded by investors entitled to daily redemptions.

  2. Anarchus

    Under current law, the Fed Funds rate is highly likely to trade at a 5-15 basis point discount to the IOER rate at the Fed, since Freddie Mac and Fannie Mae can’t receive interest income on their excess reserves at the Fed. In many respects, this Fed tightening, if it comes, is going to be interesting to watch closely.

    1. Steven Kopits

      Yes, Nicole had asked me to update my forecast on this, but other fish frying.

      Bottom line:
      1. productivity and activity surge from shale producers in 2014 (but not really 2015)
      2. increase of 1 mbpd this year from Saudi (related to Yanbu refinery) + 600 kbpd Iraq increase
      3. some kind of demand weakness (demand curve shift) per Jim ICE and BoE models

      To appearances, the market has not cleared yet. I’ll probably have a CNBC article on this over the weekend.

      1. Steven Kopits

        That 1 mpbd increase is the sum of Iraq and Saudi increases. Pretty much, that’s the source of supply increases this year–not US shales, which more or less peaked in last 2014 / early 2015.

        1. Nony

          I think that US shale oil helped make the Saudis increase production and helped prevent them from decreasing production (as done in 2008-9). If the Saudis had pulled barrels off the market as needed to keep oil at $100+, US LTO was going to add 1.5-2 MM bpd in 2015. [Recall that the increases were actually accelerating in size.] Do that for the next few years and SA would have been sitting at 3 MM bpd (as in 1986) and US would have been 15+. Not a doubt in my mind that we couldn’t rock something like that. The GS and other extremely cornie forecasts (predicated on high price enduring) for shale would have come true. All the skeptics as LTO ramped up had been repeatedly getting proved wrong. What do you think the Bakken would be doing if we had kept 200 rigs there instead of dropping down to 65? Same situation for the EF (except it is even more fast decline because of age and geology). And the Permian was really ramping up…look what it has done in the face of low prices and imagine it at $100+.

          The effect of US LTO as a wedge to drive prices down is right in line with an Adelman type view of the oil markets as affected by a partially effective cartel. It is eerie to read his commentaries on the 1986 drop. And it’s not just about the wiggles on the graph supporting one talking head over another. It’s about thinking about markets with more of a micro viewpoint: supply and demand curves, and I’m NOT talking about inventory differentials! 😉 With considering market structure (OPEC, SA) more. With thinking about hard to predict factors like technology and the threat of it, not just Hubbert peaks and the depletion of fixed resource (more tractable in terms of simple projections, but not necessarily more impact) , when considering supply.

          All of this just goes to show that ‘hundred here to stay’ was wrong. And it’s NOT just about current glut. Look at the DEC2019 contract (click to enlarge to full history and shift view to line or area).

          It hasn’t been 100+ since 2012. Even at the time of James’s 100+ to stay blog post (JUL14), it was only 90 or so. So even then, the markets didn’t support hundred to stay. And interesting to note how there was that little runup from 75 to 90 or so around JUN-AUG of 2014. It basically makes predictions like James’s of sustained high prices look like they might have been affected by (or part of) a temporary blip in the long term outlook.

          And then since that bubble, price dropped to ~80 by late NOV14. And then the massive crash right around late NOV-early DEC to under 70. Since then 2015 has steadily dropped the long term outlook down to below 55. That is “lower for longer”. At least the “Bayesian bet” of the market on lower for longer.

          The drop over the last year in LT outlook is basically saying the opposite of what James said in late NOV14 in the face of the price crash: “Here’s my advice to anybody who’s contemplating selling $85 oil at $66 a barrel– don’t do it. If you can wait a few years, that $85 oil will be worth more than it costs to produce. But selling it at a loss in the current market is a fool’s game.”

          Not selling at $65 was a bad bet. And I made this point at the time. (That it could turn out wrong.) Markets CAN drop even lower. [It wasn’t just theoretical, it happened. And a sound analysis at the time would have at least considered/discussed that possibility.] So producers should not speculate on recoveries. They should sell into the market.

          1. Steven Kopits

            I am under the impression the Saudis increased their oil production to provide crude to their new Yanbu refinery, a 400 kbpd monster which came online last spring. The logic goes as follows: the Saudis didn’t want to lose their crude customers, so they kept crude sales at customary levels; however, they raised crude to provide feedstock to Yanbu. Hence the awkward timing of the Saudi crude production increase. In essence, it was forced by their downstream investments.

          2. Nony

            Interesting. Yes, the SA volume would make sense off of that.

            I do think that they cut in 2009, so they didn’t care about their specific customers at that time. And sure, they might want to stay at certain accounts, but also oil is pretty fungible.

            Their public statements said that they didn’t want to cut so they didn’t end up in 1986. They wanted other producers to cut. And they clearly (probably rightly) feared that they would have to take huge volumes off the market to maintain oil at 100+ year in/out.

  3. Nony

    HH natural gas is at record inflation adjusted lows. Obviously a lot of this is from the warm winter (immediate low demand), but the systemic outlook keeps getting lower and lower for natgas, also (and long term demand is actually rising….just shale gale supply is so powerful.)

    Marcellus hub (not citygate, but dist.) pricing is in the low $1s and even dipping below.

    It has been written about, that companies are actually shutting off production in the Marcellus, even for completed wells, because of the low prices. (Even creating a form of “storage” from shutin wells that can come online when local App pricing goes over $1.50. Note, that this has economic and physical effect, but is not accounted for in the standard EIA storage report…nevertheless, it was common practice 15+ years ago.)

    Despite all this, we still see occasional peak oil writers and commenters saying that the Marcellus is running out of steam! (With tacit or stated cause being geological depletion of sweet spots, rather than lack of local market and transport to external markets.) This is not how an economist should analyze the supply demand price picture in Susquehanna County! 😉

  4. Steven Kopits

    Completely OT:

    The current spending bill adds $680 bn to the deficit over ten years.

    With an FAA (incentive plan), that would cost each member of Congress personally $3.2 million dollars in foregone bonuses over the ten years. Now, do you think that spending plan would have passed with an FAA in place? Not a chance.

    Incentives matter.

    1. baffling

      on a similar note, with all those unpaid tax cuts in the spending bill, it appears all those conservative deficit scolds were crying crocodile tears.

      steven, your faa has some interesting characteristics. but i see no reality towards its existence, at least here in the usa. out of curiosity, has such a program ever been implemented by a government anywhere in the world? if not, has anybody come close with a similar type of program? would be interesting to see the outcomes if so.

      1. Steven Kopits

        “all those unpaid tax cuts in the spending bill, it appears all those conservative deficit scolds were crying crocodile tears.”

        And now you know why the Tea Party exists.

        Singapore has had something like this for a long time (of course), and last I checked, they were on their way to doubling German per capita GDP in 2020. Singapore delivers similar govt services to the US at about half the share of GDP.

        The FAA as described in my blog is essentially liberal, ie, it is geared to maximizing GDP growth and minimizing debt. As I replied to Anon2345 in an earlier comment, this would tend to make foreign policy pacifist, ie, no wars unless it increases GDP without incurring debt. (The very definition of an oxymoron, I think.) For this reason, a straight liberal FAA might not be appropriate for a hegemon like the US; it could make our foreign policy too passive. Similarly, one could argue that an FAA would be anti-egalitarian. Think about how you could reduce debt without affecting GDP, and well, you can see a potentially anti-egalitarian bias from such an incentive plan.

        Thus, you would probably want to try a liberal FAA on a country 1) with no meaningful external security considerations and 2) so under-performing in terms of employment and economy that just an improvement in GDP growth would tend to reduce in inequality. So we’re looking for poorly run, geopolitically unimportant countries. That’s right! Argentina! And lets not forget Greece and Hungary. And you could probably try it in Italy and Spain without much risk.

        And note the implication for a Sunni caliphate. It will tend to deliver governance focused on internal stability and external pacifism. And that’s just what we’d like to see, with the US providing territorial guarantees to the caliphate, as it does implicitly for the Kurds. That’s the tool you use to prevent a collapsed dictatorship devolving into unhealthy theocracy. We substitute the self-realization of the individual (ie, liberal, principal-based) for the pro-rata self-realization as a member of a group (conservative, agent-based). Sunnis could be as proud for their culture, art, architecture and food as for the commitment to jihad. So, we want to substitute some positive goals for negatives. We want to build a society based on hope, not fear. An FAA is the critical tool in that effort.

        As for the reality of an FAA in the future: To my mind, the attitudes of the readers here to an FAA are analogous of the attitude of Middle Eastern Arabs to modern democracy. The Arabs’ view is well behind a modern mentality, and terrorism in large part arises from that dissonance. At the same time, Americans’ view is well behind the democracy of the future. The Arabs are living in the past, and struggling with the present. Americans are living in the present, and struggling with the future. There’s a scene in Chariots of Fire where John Gielgud’s character is scandalized by Ben Cross’s character hiring a professional as a coach in preparation for the Olympics. He is appalled at the violation of the amateur ethic in sports, but Cross’s character is clearly pointing to the way of the future.

        We’re having the same discussion now about the professionalization of politics–and with it, macroeconomics.

  5. Nony

    Weekly rig count showed US gas down 17 and oil up 17. Not sure what to make of that. Random variation (after all, oil was down 21 last week). Little bit of lag to react to sub 30 prices (like in coming weeks, we see some drops as contracts expire). Reclassification or actual moving of contracted gas rigs to oil? (Oil is in the dumps, but gas is just insanely low.) Or some other factor, we don’t know. News stories say that oil reacted to it, but I’m not seeing much different than the little shifts we see any day. But maybe oil was slightly down and gas slightly up. Not much though.

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