After reading hundreds of stories from people who probably don't even know what an oil well looks like I'm going to go over a few things they get wrong the most often.
Misconception #1
Something I see a lot are the people who say the shale wells will act as a cap on oil prices.
Whenever oil hits a certain point these people will open their wells and act as a cap for oil prices.
My response to those people:
It don't work that way .
First off these wells are flowing right now .
These wells are producing and not shut in.
These companies that drilled them in a lot of cases are cash strapped and need the cash flow even if they are flowing at a loss.
Its not like these people sit around watching oil prices and the shut the wells in when the price goes below 50 then they open them up once it hits 50.
Once these wells are drilled and the infrastructure is in place those wells are flowing .
There are very few wells in the United States that get shut in due to low price of oil.
The government is very strict on this.
If you go more then 90 days without a well test on an offshore well you must get a waiver or risk losing the property.
But that's not the only reason.
The oil business for most production that does not come from the high majors is highly leveraged.
Some of these companies can't afford to shut wells in just because the price gets to an unprofitable point.
This is especially true for the frac companies .
So there is no way they can be a cap for oil prices because these wells are flowing right now.
And they will keep flowing until they deplete which will not take long . Less then 36 months in most cases.
So the only way these shale wells in tight formations can act as a cap like these stories say is if they are not flowing now .
But they are flowing now which leads to misconception #2 that I'm about to get to .
So now that we know they are not going to be a cap for oil prices that I keep reading about what happens next?
Well the investment to back these people up is getting cancelled which means that not only will they not act as a cap on oil prices they will be a major part of the huge production drop off that's right around the corner.
Misconception #2
The oil companies are more resilient then we thought . The production drop is not as large as we thought it would be.
It has nothing to do with them being resilient. It has to do with the fact that it takes a while for projects planned years in advance to come to an end.
The rig counts are just now dropping. But rigs only have to do with the actual drilling of a well.
On these huge new projects that tap virgin reservoirs most of the time these newly drilled wells sometimes take up to 1 year and sometimes longer to come online .
So it's taken this long for some of the projects that was done back when oil was 100 to start producing its first barrel of oil.
There is a lag period between investment and production.
So we are still basically producing based on 100 oil right now but that ends very soon.
It has nothing to do with the companies being resilient or finding more economical ways to produce the oil.
Its because they just came off the largest spending period in oil business history and they need the cash flow.
These people who have never seen a well have this philosophy that you can just flip a switch on and off like magic.
Both of these misconceptions are both related to each other .
Misconception #1
Something I see a lot are the people who say the shale wells will act as a cap on oil prices.
Whenever oil hits a certain point these people will open their wells and act as a cap for oil prices.
My response to those people:
It don't work that way .
First off these wells are flowing right now .
These wells are producing and not shut in.
These companies that drilled them in a lot of cases are cash strapped and need the cash flow even if they are flowing at a loss.
Its not like these people sit around watching oil prices and the shut the wells in when the price goes below 50 then they open them up once it hits 50.
Once these wells are drilled and the infrastructure is in place those wells are flowing .
There are very few wells in the United States that get shut in due to low price of oil.
The government is very strict on this.
If you go more then 90 days without a well test on an offshore well you must get a waiver or risk losing the property.
But that's not the only reason.
The oil business for most production that does not come from the high majors is highly leveraged.
Some of these companies can't afford to shut wells in just because the price gets to an unprofitable point.
This is especially true for the frac companies .
So there is no way they can be a cap for oil prices because these wells are flowing right now.
And they will keep flowing until they deplete which will not take long . Less then 36 months in most cases.
So the only way these shale wells in tight formations can act as a cap like these stories say is if they are not flowing now .
But they are flowing now which leads to misconception #2 that I'm about to get to .
So now that we know they are not going to be a cap for oil prices that I keep reading about what happens next?
Well the investment to back these people up is getting cancelled which means that not only will they not act as a cap on oil prices they will be a major part of the huge production drop off that's right around the corner.
Misconception #2
The oil companies are more resilient then we thought . The production drop is not as large as we thought it would be.
It has nothing to do with them being resilient. It has to do with the fact that it takes a while for projects planned years in advance to come to an end.
The rig counts are just now dropping. But rigs only have to do with the actual drilling of a well.
On these huge new projects that tap virgin reservoirs most of the time these newly drilled wells sometimes take up to 1 year and sometimes longer to come online .
So it's taken this long for some of the projects that was done back when oil was 100 to start producing its first barrel of oil.
There is a lag period between investment and production.
So we are still basically producing based on 100 oil right now but that ends very soon.
It has nothing to do with the companies being resilient or finding more economical ways to produce the oil.
Its because they just came off the largest spending period in oil business history and they need the cash flow.
These people who have never seen a well have this philosophy that you can just flip a switch on and off like magic.
Both of these misconceptions are both related to each other .
What I find most hilarious about this bust thus far as media pinning the blame on low oil prices.. Utter comedy..
More hussman truth..
european banks are looking sketchy too
http://hussman.net/wmc/wmc160208.htm
Credit default swaps continued to soar last week, particularly among European banks. Given that risks surrounding China and the energy sector are widely discussed, European banks continue to have my vote for “most likely crisis from left field.”
Put simply, the Federal Reserve has created the third speculative bubble in 15 years in return for real economic improvements that amount to literally a fraction of 1% from where we would otherwise have been.
More hussman truth..
european banks are looking sketchy too
http://hussman.net/wmc/wmc160208.htm
Credit default swaps continued to soar last week, particularly among European banks. Given that risks surrounding China and the energy sector are widely discussed, European banks continue to have my vote for “most likely crisis from left field.”
Put simply, the Federal Reserve has created the third speculative bubble in 15 years in return for real economic improvements that amount to literally a fraction of 1% from where we would otherwise have been.
[h=1]Deutsche Bank Says It Has the Cash for Riskiest Debt Payouts[/h]Deutsche Bank AG became the largest lender in at least four years to feel compelled to reassure investors and employees that it has enough cash to pay its debts.
Germany’s biggest bank said in a statement Monday that it has more-than-sufficient means to pay coupons on its riskiest debt both this year and in 2017. Deutsche Bank also published a note to employees from Chief Financial Officer Marcus Schenck that said the firm’s “capital and risk position remains strong.”
The cost of protecting Deutsche Bank’s debt against default has more than doubled this year, while its stock trades at about one-third of the company’s liquidation value. Co-Chief Executive Officer John Cryan has failed to generate confidence in his plan to cut costs and build capital as volatile markets threaten revenue and outstanding regulatory probes raise the specter of continued legal charges.
Deutsche Bank and European rivals including Credit Suisse Group AG and Barclays Plc are getting walloped by a global market rout just as they embark on ambitious overhauls of their securities units. The selloff, as investors seek safety from China’s slowdown and falling oil prices, is complicating that task by reducing revenue from investment banking and making parts of the business more expensive to exit, hampering efforts to ultimately plow more earnings into capital.
[h=3]‘Bad Year’[/h]January marked the worst start to a year for underwriting bonds in Western Europe since 2008, while high-yield bond fees slumped 78 percent from last year, data compiled by Freeman & Co. show. Stock sales in Europe, the Middle East and Africa dropped 60 percent so far this year, data compiled by Bloomberg show. Shares of the three investment banks have tumbled at least 25 percent since that month began, putting them in the bottom half of the 39-company Bloomberg Europe Banks and Financial Services Index.
“It’s going to be a really bad year,” said Lutz Roehmeyer, who helps manage about 11 billion euros ($12.3 billion) at LBB Invest in Berlin, which holds shares of lenders including Deutsche Bank. European banks “can essentially scrap any goals they had set themselves for this year.”
Deutsche Bank said Monday that it still has room to pay about 1 billion euros in 2016, enough to cover about 350 million euros in Additional Tier 1 coupons due in April. The estimated payment capacity for 2017 is about 4.3 billion euros, boosted in part by proceeds from the announced sale of a stake in Huaxia Bank Co., the Frankfurt-based lender said. The 2017 estimate is before any effect from 2016 profit or losses.
Deutsche Bank shares in the U.S. climbed almost 2 percent after that announcement, finishing the day with a decline of 8 percent. The stock dropped 9.5 percent on Monday in Germany, the biggest decline in almost seven years, reaching its lowest price since at least 1992.
The statement did nothing to reverse a selloff in credit markets. The cost to protect against losses on the bank’s riskiest debt continued to climb, reaching the highest level since the height of the European debt crisis in 2011, according to data compiled by Bloomberg.
[h=3]Payment Concerns[/h]The statement came after Simon Adamson, an analyst at CreditSights Inc., signaled concern about the bank’s ability to pay coupons in 2017 if operating results disappoint or litigation costs are higher than expected. A loss in 2015, driven by legal costs and writedowns of goodwill, and declining revenue from the firm’s biggest business in the fourth quarter narrowed the room for error.
Doubts about Deutsche Bank’s ability to pay coupons on Additional Tier 1 debt fueled a selloff in the bank’s bonds and shares this year, with the stock losing about 39 percent of its value. The contingent convertible bonds -- also known as CoCos -- have turned in a similar performance as the cost of protecting the company’s subordinated debt from default for five years using credit-default swaps more than doubled since the end of 2015.
Deutsche Bank’s core long-term returns will be affected either by significant balance-sheet deleveraging or by raising capital, Berenberg analysts wrote in a note to clients Monday.
Cryan has canceled the dividend for 2015 and 2016 and said the firm doesn’t need to raise additional capital. Credit Suisse, also under pressure to strengthen its balance sheet, tapped investors for 6 billion Swiss francs ($6.1 billion) to bolster capital last year.
U.S. lenders including Bank of America Corp. and Morgan Stanley took steps in 2011 to reassure investors amid market volatility tied to the European sovereign-debt crisis. Bank of America announced a $5 billion investment from Warren Buffett to shore up capital in August of that year, while Mitsubishi UFJ Financial Group Inc. issued a statement in October reiterating its alliance with Morgan Stanley.
Before it's here, it's on the Bloomberg Terminal.
Germany’s biggest bank said in a statement Monday that it has more-than-sufficient means to pay coupons on its riskiest debt both this year and in 2017. Deutsche Bank also published a note to employees from Chief Financial Officer Marcus Schenck that said the firm’s “capital and risk position remains strong.”
The cost of protecting Deutsche Bank’s debt against default has more than doubled this year, while its stock trades at about one-third of the company’s liquidation value. Co-Chief Executive Officer John Cryan has failed to generate confidence in his plan to cut costs and build capital as volatile markets threaten revenue and outstanding regulatory probes raise the specter of continued legal charges.
Deutsche Bank and European rivals including Credit Suisse Group AG and Barclays Plc are getting walloped by a global market rout just as they embark on ambitious overhauls of their securities units. The selloff, as investors seek safety from China’s slowdown and falling oil prices, is complicating that task by reducing revenue from investment banking and making parts of the business more expensive to exit, hampering efforts to ultimately plow more earnings into capital.
[h=3]‘Bad Year’[/h]January marked the worst start to a year for underwriting bonds in Western Europe since 2008, while high-yield bond fees slumped 78 percent from last year, data compiled by Freeman & Co. show. Stock sales in Europe, the Middle East and Africa dropped 60 percent so far this year, data compiled by Bloomberg show. Shares of the three investment banks have tumbled at least 25 percent since that month began, putting them in the bottom half of the 39-company Bloomberg Europe Banks and Financial Services Index.
“It’s going to be a really bad year,” said Lutz Roehmeyer, who helps manage about 11 billion euros ($12.3 billion) at LBB Invest in Berlin, which holds shares of lenders including Deutsche Bank. European banks “can essentially scrap any goals they had set themselves for this year.”
Deutsche Bank said Monday that it still has room to pay about 1 billion euros in 2016, enough to cover about 350 million euros in Additional Tier 1 coupons due in April. The estimated payment capacity for 2017 is about 4.3 billion euros, boosted in part by proceeds from the announced sale of a stake in Huaxia Bank Co., the Frankfurt-based lender said. The 2017 estimate is before any effect from 2016 profit or losses.
Deutsche Bank shares in the U.S. climbed almost 2 percent after that announcement, finishing the day with a decline of 8 percent. The stock dropped 9.5 percent on Monday in Germany, the biggest decline in almost seven years, reaching its lowest price since at least 1992.
The statement did nothing to reverse a selloff in credit markets. The cost to protect against losses on the bank’s riskiest debt continued to climb, reaching the highest level since the height of the European debt crisis in 2011, according to data compiled by Bloomberg.
[h=3]Payment Concerns[/h]The statement came after Simon Adamson, an analyst at CreditSights Inc., signaled concern about the bank’s ability to pay coupons in 2017 if operating results disappoint or litigation costs are higher than expected. A loss in 2015, driven by legal costs and writedowns of goodwill, and declining revenue from the firm’s biggest business in the fourth quarter narrowed the room for error.
Doubts about Deutsche Bank’s ability to pay coupons on Additional Tier 1 debt fueled a selloff in the bank’s bonds and shares this year, with the stock losing about 39 percent of its value. The contingent convertible bonds -- also known as CoCos -- have turned in a similar performance as the cost of protecting the company’s subordinated debt from default for five years using credit-default swaps more than doubled since the end of 2015.
Deutsche Bank’s core long-term returns will be affected either by significant balance-sheet deleveraging or by raising capital, Berenberg analysts wrote in a note to clients Monday.
Cryan has canceled the dividend for 2015 and 2016 and said the firm doesn’t need to raise additional capital. Credit Suisse, also under pressure to strengthen its balance sheet, tapped investors for 6 billion Swiss francs ($6.1 billion) to bolster capital last year.
U.S. lenders including Bank of America Corp. and Morgan Stanley took steps in 2011 to reassure investors amid market volatility tied to the European sovereign-debt crisis. Bank of America announced a $5 billion investment from Warren Buffett to shore up capital in August of that year, while Mitsubishi UFJ Financial Group Inc. issued a statement in October reiterating its alliance with Morgan Stanley.
Before it's here, it's on the Bloomberg Terminal.
Japan negative rates fail..
nikkei off over 5%
------------
Following earlier comments from yet another Japanese talking head that deflation will be fixed any day now, the Japanese bond curve continues to collapse with yields hitting record lows across the entire spectrum. Most notably, 10Y JGBs - which were trading 24bps before BoJ NIRP - just traded with a 0bp handle for the first time ever, ready to join Switzerland as the only nations with negative rates at 10Y. As bonds rally, and JPY surges to strongest since 2014, so Japanese stocks are crashing (NKY down 1000 points from intraday highs).
Bond yields are plunging...
nikkei off over 5%
------------
Following earlier comments from yet another Japanese talking head that deflation will be fixed any day now, the Japanese bond curve continues to collapse with yields hitting record lows across the entire spectrum. Most notably, 10Y JGBs - which were trading 24bps before BoJ NIRP - just traded with a 0bp handle for the first time ever, ready to join Switzerland as the only nations with negative rates at 10Y. As bonds rally, and JPY surges to strongest since 2014, so Japanese stocks are crashing (NKY down 1000 points from intraday highs).
Bond yields are plunging...
- *JAPAN 10-YEAR GOVERNMENT BOND YIELD FALLS TO ZERO FOR 1ST TIME
- *JAPAN'S 5-YEAR YIELD FALLS TO RECORD -0.205%
War at 1850/16000 dow rages on.. Smacked below it 4 times today clawing back again...
Yellen toes the line
doesnt want to say yeah thing are bad and we are gonna go off path we already set forth with rate hikes planned .. Needs to stay positive and say this just a blip things will gradually improve.. But at same time if things continue to deteriorate we will change course..
10 AM when she says it to congress and they get to ask ?s .. 10:30 oil data..
doesnt want to say yeah thing are bad and we are gonna go off path we already set forth with rate hikes planned .. Needs to stay positive and say this just a blip things will gradually improve.. But at same time if things continue to deteriorate we will change course..
10 AM when she says it to congress and they get to ask ?s .. 10:30 oil data..
Party time on fed speak day surprise surprise... Oil liked the data bouncing too..
can they manage to hold 1850 and we plod along with no bubble burst yet during a soft patch.. Or just a squeeze before recession clearly sets in..
that at is the ? Place your bets..
can they manage to hold 1850 and we plod along with no bubble burst yet during a soft patch.. Or just a squeeze before recession clearly sets in..
that at is the ? Place your bets..
[h=1]Market Angry About Yellen's "Is NIRP Legal" Confusion[/h]Just as we detailed last week, and it appears Rep. Hensarling has been reading... To wit:
Because, when pressed on The Fed's legal authority to take interest rates negative, Janet Yellen gushed that "Fed authority for negative rates is still a question." This appears to have been taken as bad news by the market (cutting off the potential easing paths of the future in a world of NIRP), and stocks, crude, USDJPY have all tumbled.
Furthermore, she sounded a little hawkish:
It is clear that her NIRP confusion has carry traders concerned as USDJPy plunges. As BofA details,
And then did it...
"There are several potentially substantial legal and practical constraints to implementing a negative IOER rate regime, some of which would be binding at any IOER rate below zero, even a rate just slightly below zero. Most notably, it is not at all clear that the Federal Reserve Act permits negative IOER rates, and more staff analysis would be needed to establish the Federal Reserve’s authority n this area."
No legal authority? No problem. Just call in Mario Draghi's lawyer, or any other legal representative of Goldman Sachs and/or its former employees, and whatever amendments need to be made to the Federal Reserve Act, will be made.
Because, when pressed on The Fed's legal authority to take interest rates negative, Janet Yellen gushed that "Fed authority for negative rates is still a question." This appears to have been taken as bad news by the market (cutting off the potential easing paths of the future in a world of NIRP), and stocks, crude, USDJPY have all tumbled.
Furthermore, she sounded a little hawkish:
- *YELLEN: I DON'T EXPECT THE FOMC WILL FACE RATE-CUT OPTION SOON
- YELLEN: I DON'T THINK IT WILL BE NECESSARY TO CUT RATES
It is clear that her NIRP confusion has carry traders concerned as USDJPy plunges. As BofA details,
We previously recommended selling USD/JPY above 120.88 given the "Kuroda" oversold bounce. Themove has quickly occurred and for this week we can estimate closing support of the 100wk average and cloud of 114.71-114.98. This area has been broken intraweek.
Holding it by the end of week would be an indication of a possible bounce next week. Breaking it and the trend may accelerate to levels shown on the next page of 114.35, 113.03 and 111.90.
Bear in mind that one week before The Bank of Japan unleashed NIRP, they also denied it would do so:
Holding it by the end of week would be an indication of a possible bounce next week. Breaking it and the trend may accelerate to levels shown on the next page of 114.35, 113.03 and 111.90.
And then did it...
The richest country in the world... apparently... according to some... not me though
Take out the top 10% and how much is left? 10 dollars? a hundred?
Tent streets???
Los Angeles, known as the homeless capital of the US, has passed a $1.87bn (£1.29bn) plan to help get an estimated 40,0000 people off the streets
http://www.bbc.co.uk/news/world-us-canada-35546535
Long live the capitalist eutopia!
Take out the top 10% and how much is left? 10 dollars? a hundred?
Tent streets???
Los Angeles, known as the homeless capital of the US, has passed a $1.87bn (£1.29bn) plan to help get an estimated 40,0000 people off the streets
http://www.bbc.co.uk/news/world-us-canada-35546535
Long live the capitalist eutopia!
