The big global banks have begun to warn clients that the blistering rally in oil and industrial commodities in recent weeks has run far ahead of economic reality, raising the risk of a fresh slump in prices over the summer.
Barclays, Morgan Stanley and Deutsche Bank have all issued reports advising investors to tread carefully as energy and base metals fall prey to unstable speculative flows in the derivatives markets.
Oil has jumped 40pc since January even as the US, China and the world economy as a whole have been sputtering, falling far short of expectations.
“Watch out: this rally may not last. The risks for a reversal in recent commodity price trends are growing,” said analysts at Barclays.
“There is a huge disconnect between the price action in physical markets where differentials are signalling over-supply and the futures markets where all looks rosy.”
Miswin Mahesh, the bank’s oil strategist, said a glut of excess oil is emerging in the mid-Atlantic, with inventories rising at a rate of 1m barrels a day. Angola and Nigeria are sitting on 80m barrels of unsold crude and excess cargoes are building up in the North Sea and the Mediterranean.
Morgan Stanley echoed the concerns, warning that speculators and financial investors have taken out a record number of “long” positions on Brent crude on the futures markets even though the world economy keeps falling short of expectations. “We have growing concerns about crude fundamentals in the second half of 2015 and 2016,” it said.
Shale producers in the US are taking advantage of the artificial surge in prices to hedge a large part of their future output, more or less guaranteeing that the US will continue to pump 10m b/d and wage a war of attrition against high-cost producers in the rest of the world.
A comparable dynamic is playing out in the copper market, where net long positions have jumped 60pc since the start of the year and helped power the longest rally in copper prices since 2005, even as industrial output grinds to a halt in China.
The warnings come as a draft report from OPEC painted a gloomy picture of energy industry, predicting that oil wouldn’t touch $100 in the next 10 years.
The mini-boom in energy and metals has taken on huge significance since it is being taken as evidence that global recovery is under way and that the dangers of a deflationary spiral have abated. Barclays said that this in turn is a key factor driving up global bond yields, and therefore in repricing the cost of global credit.
If the commodity rally is being driven by investor exuberance in the derivatives markets – rather than a genuine recovery in the world economy – it is likely to short-circuit before long and could even lead to a relapse into deflation. It is extremely difficult for central banks to navigate these choppy waters, raising the risk of a policy mistake.
Fresh data suggest that the US economy may have contracted in the first quarter, and is currently growing at a rate of just 0.8pc, below the US Federal Reserve’s stall speed indicator.
Deutsche Bank has also warned that the energy rally is showing “signs of fatigue”, with near-record inventories in the US, and little likelihood of further stimulus from central banks at this stage to keep the game going. “We see fresh downside risks to crude oil prices heading into the summer,” it said.
Durable oil rallies are typically driven by OPEC cuts but this time the cartel has boosted supply by 500,000 b/d to 31m as Saudi Arabia tries to drive marginal drillers out of business across the world.
Contrary to expectations, America’s shale producers have yet to capitulate. The rig count has fallen by more than half but output has held up longer than expected. While a few drillers have gone bankrupt, others are already signalling plans to crank up production.
Houston-based EOG said it expects to boost output in the third quarter at the Eagle Ford basin in Texas, benefiting from dramatic gains in technology that are cutting shale costs at an astonishing speed. Devon Energy has raised its growth target to 25pc to 35pc this year, having cut its production costs by a fifth in the first quarter.
Tactical stockpiling of crude oil by China and other countries has masked the scale of oversupply but oil analysts say this effect may be fading. The deep economic slowdown in resource-hungry emerging markets has snuffed out the commodity supercycle. There is little sign yet of a durable rebound.
China is still slowing as President Xi Jinping deliberately engineers a deflation of the country’s investment bubble.
A series of cuts in the reserve requirement ratio and interest rates – including a 25pc reduction over the weekend – merely offsets “passive tightening” caused by capital outflows and rising real borrowing costs.
It is not yet a return to ‘”stimulus as usual”.
Not everybody is willing to throw in the towel on crude oil.
Michael Wittner, from Societe Generale, said US output will decline in the coming months as the delayed effects of lower investment start to bite, ultimately vindicating the Saudi’s shock strategy of flooding the market.
Crude stockpiles tend to build up from March to May. This is the “window of greatest vulnerability for a crude price correction”, Mr Wittner said. That window will be closing within weeks.
National Oilwell Varco (NOV) has acquired 97% of the shares in Seabox for an undisclosed amount from a group of shareholders led by HitecVision.
Seabox is a Norwegian subsea technology company founded around the patented SWIT technology (Subsea Water Intake & Treatment). The technology enables treatment of raw seawater on the seabed (as opposed to on a platform) for injection into oil & gas wells for pressure support and increased oil recovery.
The company was established in 2004, and has, through a series of Joint Industry Projects backed by the Norwegian Research Council and by potential end-users such as ExxonMobil, ConocoPhillips, Shell, Total, Statoil, GDF Suez and others, developed the technology to a level where it is now ready for commercialization. Seabox has 12 employees.
Helge Lunde, CEO of Seabox comments: “We are very excited to team up with NOV’s global organization, which will significantly increase our reach and chances of succeeding in commercializing our technology. We are both proud and happy for their recognition of our efforts and technical solutions, and their commitment to backing us through the coming growth phase. We are convinced that our growth will be faster and stronger together with NOV.”
Michael Hjorth, President of Flexibles and Subsea Production Systems, comments: “NOV has a strong history and presence in Norway, where some of our key technologies for drilling, turret mooring and deck cranes have been developed, and to a large degree also manufactured. When it comes to subsea, which is an area where NOV wants to develop and expand, Norway is pretty much the “Silicon Valley” of the industry, so it is natural for us to search for new technologies and ideas here. In Seabox we have found what we deem to be innovative yet robust technical solutions, which offer more cost effective solutions but more importantly will offer the oil & gas companies greater flexibility in optimizing their reservoir drainage and field profitability. This is a huge market, with some 250 million barrels of seawater injected daily world-wide, which is almost three times the daily oil production. We are excited to explore these market opportunities together with Seabox.”
APRIL 14, 2015
ISIS is operating a camp just a few miles from El Paso, Texas, according to Judicial Watch sources that include a Mexican Army field grade officer and a Mexican Federal Police Inspector.
The exact location where the terrorist group has established its base is around eight miles from the U.S. border in an area known as “Anapra” situated just west of Ciudad Juárez in the Mexican state of Chihuahua. Another ISIS cell to the west of Ciudad Juárez, in Puerto Palomas, targets the New Mexico towns of Columbus and Deming for easy access to the United States, the same knowledgeable sources confirm.
During the course of a joint operation last week, Mexican Army and federal law enforcement officials discovered documents in Arabic and Urdu, as well as “plans” of Fort Bliss – the sprawling military installation that houses the US Army’s 1st Armored Division. Muslim prayer rugs were recovered with the documents during the operation.
Law enforcement and intelligence sources report the area around Anapra is dominated by the Vicente Carrillo Fuentes Cartel (“Juárez Cartel”), La Línea (the enforcement arm of the cartel) and the Barrio Azteca (a gang originally formed in the jails of El Paso). Cartel control of the Anapra area make it an extremely dangerous and hostile operating environment for Mexican Army and Federal Police operations.
According to these same sources, “coyotes” engaged in human smuggling – and working for Juárez Cartel – help move ISIS terrorists through the desert and across the border between Santa Teresa and Sunland Park, New Mexico. To the east of El Paso and Ciudad Juárez, cartel-backed “coyotes” are also smuggling ISIS terrorists through the porous border between Acala and Fort Hancock, Texas. These specific areas were targeted for exploitation by ISIS because of their understaffed municipal and county police forces, and the relative safe-havens the areas provide for the unchecked large-scale drug smuggling that was already ongoing.
Mexican intelligence sources report that ISIS intends to exploit the railways and airport facilities in the vicinity of Santa Teresa, NM (a US port-of-entry). The sources also say that ISIS has “spotters” located in the East Potrillo Mountains of New Mexico (largely managed by the Bureau of Land Management) to assist with terrorist border crossing operations. ISIS is conducting reconnaissance of regional universities; the White Sands Missile Range; government facilities in Alamogordo, NM; Ft. Bliss; and the electrical power facilities near Anapra and Chaparral, NM.