As the dust settles following OPEC's meeting last week, US shale production has emerged as the bugaboo that drove oil ministers to decide against quota cuts. The only way for OPEC to combat the shale threat, so the theory goes, is to let prices fall so far and for so long that shale producers plug their wells, leaving OPEC back in control. There's a lot to be said for that story, but we think Saudi Arabia is far more focused on the political threat from Iran. In that renewed struggle, US shale oil could be an important ally for the Saudis.
For decades, US policy in the region was predicated on the "twin pillars" of the Gulf, Iran and Saudi Arabia. Iran's revolution split those unlikley allies and Saudi Arabia has since been a stalwart supporter of containing Iran's regional and nuclear ambitions. In 2012, the international community imposed swingeing sanctions on Iran; the loss of Iran's oil would almost surely have led to price spikes and global recession without Saudi Arabia boosting production, in effect a "Saudi Sanction" on Iran as MRP put it at the time.
This year, as its cash reserves dwindle, Iran has been negotiating with the international community to strike a deal in which it sees sanctions fully lifted in exchange for accepting transparent limits to its nuclear enrichment programs. Those talks broke down on the eve of OPEC's meeting, and Iran is left with only the partial lifting of sanctions that was granted earlier in the year. Lower oil prices puts further pressure on Iran with its substantially higher fiscal breakeven costs.
For Saudi Arabia, the prospect of a nuclear rival across the Gulf is an existential threat. Supporting oil prices at the lower end of their recent band is one of the few weapons the Saudis have to pressure Iran's leaders into compliance with international demands ... or to pressure Iran's leaders out altogether in the event civil unrest rises.
However, if prices fall too far and wildcatters in Texas and North Dakota shut down more production, oil prices could spike again and give a reprieve to cash-strapped oil producers like Iran. Higher oil prices will also bring back the wildcatters, so that's a lose-lose proposition for Saudi Arabia. Oil prices just north of $70-$80, in contrast, keeps the pressure on Iran and means shale producers can stay in operation.
After the dramatic drop in oil prices, many analysts have been rushing to move their forecasts lower, to $60 or even $40 a barrel. We think that's premature and those analysts will need to revise their forecasts back up. As that happens, energy stocks have a lot of lost ground that they can recover. As we noted in last Wednesday's DIBs, we think the energy stocks will outperform in 2015 and we've added them to the MRP roster of themes. It's never a good idea to extrapolate from a single day, but the sector certainly is up so far today, posting a 1.7% gain compared to 0.6% for the S&P 500.
- More US shale producers are trimming expansions plans after the OPEC meeting, but without a big drop in current production
- Shale's multiple breakeven production cost points affect Texas wells first, North Dakota wells later
- Shale's "full cycle" costs, including start up expenses, average $70-$80 ... "mid cycle" costs to maintain production are around $40
- Smaller banks are at risk from higher defaults by marginal shale producers
- Energy stocks remain out of favor among investors
- UK fracking plans are gaining momentum, although post-referendum Scotland might opt out
- Bulgaria, Lithuania, and Romania suspect Russian involvement in fracking protests
- Poland's exploration projects are dwindling: 7 of 11 foreign companies have moved on
Best of the Rest
Japan – National finances face a dark future
Insurance – EU watchdog warns on low interest rate threat
Online – Wal-Mart Cites Strong Cyber Monday Orders
Here's MRP's roster of Active Themes
Here's MRP's latest monitors: Macro, Sector and Country
|MAJOR DATA POINTS||Top|
Currencies – Ruble: Suffers worst fall since 1998 crisis
Kseniya Yudaeva, first deputy chairwoman of the central bank, told a group of regional officials that a further drop in oil prices is highly probable, according to the Interfax news agency. She said the central bank was planning for prices to fall as low as $60 a barrel and remain there for a prolonged period, a scenario that only recently had been considered extreme. WSJ
The Kremlin, which in the past supported the exchange rate by buying up the rubles, says it considers the pressure on the currency to be speculative and is happy for it to remain freely floated in markets. AP
Currencies – EMs: Oil slide brings pain and gain
Currencies – Dollar: Dangers of the bull consensus
The performance of currency funds has improved since June, as a divergence in central bank policies triggered clearer trends in exchange rates. But measures such as the Parker FX Index suggest returns remain modest, with many funds failing to take full advantage of the dollar’s surge..... many trades now look crowded: data from the CFTC show that speculators in futures markets are betting almost all major currencies will weaken against the dollar, with near record amounts staked on the euro and yen falling. FT
Currencies – Naira: Nigeria devalues as oil prices drop
Mr Jonathan’s critics are focusing in on his stewardship of Nigeria’s oil resources, on which the country depends for more than 70 per cent of government revenues and more than 90 per cent of hard currency earnings despite the rapid growth of other sectors of the economy. ... Gross foreign reserves have plunged $2bn over the past month to a five-month low of $37.2bn. Foreign exchange reserves were nearly $60bn before the global financial crisis of 2008-09....
The currency’s fall has been accompanied by a slide in the stock exchange, which is down by 15 per cent since the start of the year as foreign investors rush to exit. FT
Japan – Moody’s downgrades credit rating
Moody’s cited heightened uncertainty over Japan’s ability to cut its fiscal deficit ... The difficulty of the balancing act facing the Japanese government—fueling growth while acting with fiscal responsibility—was reflected in the lower rating, Thomas Byrne, senior vice president of the sovereign risk group at Moody’s, told reporters... “The government has to in effect put one foot on the brake and another on the accelerator,” WSJ
The cut by Moody’s was the first downgrade for Japan by one of the top-three ratings companies since Abe came to power in December 2012....
Most of Japan’s debt is owned by domestic investors, with foreigners holding 8.54 percent at the end June, according to the BOJ. The central bank became the biggest single creditor to the government for the first time on record in the first quarter. B
Japan – Survey Points to Upward GDP Revision
Because the quarterly survey is one of the main components used in calculating revised GDP figures due out next week, economists say they now expect a smaller decline in the nation’s GDP in the third quarter. WSJ
The economy probably shrank an annualized 0.6 percent in the three months through September, not the 1.6 percent initially projected by the government, according to a Bloomberg News survey of 12 economists yesterday. B /NYT
Japan – When will stock market growth trickle down?
Individual investors are believed to currently hold around 100 trillion yen in listed stocks. Toshihiro Nagahama, chief economist at Dai-ichi Life Research Institute, said a 10% increase in the Nikkei Stock Average pushes up personal spending by 0.4% three years later. Measures for supporting stock prices are already on the table. These include the BOJ's purchases of exchange-traded funds. Also, the enormous Government Pension Investment Fund plans to increase the amount it puts into domestic stocks. N
In explaining the Bank of Japan's move to fatten its already aggressive monetary expansion program in a Nov. 12 session of the lower house finance committee, Gov. Haruhiko Kuroda said the central bank had taken the step on the assumption that the sales tax rate would be raised to 10% as planned. Policymakers who prioritize curing the budget ills were also dismayed by Abe's decision...
The government has set a fiscal reform goal of lowering the ratio of the primary deficit -- government receipts minus all outlays other than net interest -- to GDP by half from the current 6.6% during the five years to fiscal 2015. It aims to realize a surplus by fiscal 2020. .... the 2015 target of reducing the primary deficit by half is still within reach.... But getting into a primary surplus by fiscal 2020 seems out of reach. The Cabinet Office had admitted the target would be a long shot even if the sales tax hike went ahead as planned. N
|POLITICS & FISCAL POLICY||Top|
Japan – Abenomics faces an electoral test
Public opinion surveys show that more than two-thirds of voters disagreed with the timing of the election—one wasn’t required until 2016—and that support for Mr. Abe and Abenomics is declining. Yet they also show a strong lead for Mr. Abe and the LDP over the opposition.... “It’s an election without a cause,” Yukio Edano, secretary-general of the opposition Democratic Party of Japan, told reporters last week. WSJ / AFP
Japan – Abe is bound to return as PM / t
BOJ – Four Members Challenged Kuroda Easing Move
“The effects that could be brought by additional monetary easing wouldn’t be worth the accompanying costs and side effects,” the minutes quoted some members as saying..... The dissenters also warned that the BOJ’s purchases of Japanese government bonds could be “perceived as effectively financing fiscal deficits,” WSJ
At the BoJ’s policy board meeting last week, three of the four Halloween rebels fell in line with the governor, leaving Takahide Kiuchi, a former investment bank economist, as the lone dissenter against expansion. Since the birth of the QQE policy, Mr Kiuchi has consistently argued it should go on no longer than two years, preferring structural reforms ... The three rebels felt that lodging another objection to the policy could cause unnecessary turbulence in the market FT / R
BOJ – How long can JGB buying keep a lid on interest rates?
If the BOJ fails to take an exit strategy at a proper timing, such as reducing purchases of JGBs gradually, "built-up pressure on the interest rates to rise might eventually blow out," said Masahiro Nishikawa, vice president of the securities division at Goldman Sachs Japan. There are some signs of this happening. In the credit default swap (CDS) market, the insurance premium on JGBs has risen N
44% of the companies failed the toughest of several stress test scenarios WSJ
Insurance – Revolution changes landscape of risk management
Not only do they promise stronger returns than mainstream investments – over the past 12 years, catastrophe bonds have produced annualised returns of more than 8 per cent – but their performance also seems to have little correlation with that of other assets. FT
Online – Cyber Monday sales start slow as early discounts hurt
Research firm comScore said late Sunday that e-commerce spending for the first 28 days of the November and December shopping season totaled $22.7 billion, up 15 percent from last year. Sales jumped 32 percent to $1 billion on Thanksgiving Day and 26 percent on Black Friday to $1.51 billion. The firm expects people to spend about $2.5 billion on Cyber Monday alone. AP
Shopping on smartphones and tablets yesterday accounted for about 20 percent of e-commerce sales, up from a total of 17 percent the previous year, according to IBM. B / IBD / FT
While conventional wisdom holds that online sales should be more profitable, because websites don’t need the pricey real estate and labor necessary to maintain a store network, many retailers actually earn less or even lose money online after factoring in the cost of shipping, handling and higher rates of returns. For retailers that outsource their Web and fulfillment operations, costs can run as high as 25% of sales WSJ
Online – To Gain the Upper Hand, Amazon Disrupts Itself
Online – US retailers warn of Chinese giant Alibaba’s impact
In TV and radio ads over the weekend, the Alliance for Main Street Fairness, which includes Best Buy, Target, JC Penney and other major chains, called on Congress to end special tax treatment for Alibaba and other online giants... Alibaba presently sells to American consumers through its global retail service AliExpress. But its core Taobao service, often likened to eBay's marketplace, is not yet available to U.S. customers in English. R
Security – Hackers Target Biotech
Some senior executives have been duped into clicking on links sent from the accounts of longtime clients, in which the supposed client reveals that they found an employee’s negative rants about the executive in an investment forum. In another case, hackers posed as an adviser to one of two companies in a potential acquisition.... In each case, the links or attachments redirected their victim to a fake email login page, designed to steal the victim’s credentials, so that the attacker could log into their email and read the contents. NYT
Victims also include firms in other sectors, as well as corporate advisors including investment bankers, attorneys and investor relations firms R
The ‘FIN 4’ group uses targeted emails containing malicious links and downloads to get passwords for board level executives and corporate development teams, most of them US-based, as they conduct talks concerning mergers and acquisitions. Up to five organisations per deal have been hacked to build a picture of the chance of a deal’s success. FT
In one example FireEye tracked, the hacking group obtained a confidential document prepared for the U.S. Securities and Exchange Commission about a public company’s attempted acquisition. Hackers then used the document for what is known as a spearphishing e-mail, an attempt to persuade someone to reveal a password. Because the document was real, it gave the deception credibility B / wsj
One common technique, FireEye said, is a simple trick where the hackers embed prompts for Microsoft Outlook usernames and passwords inside corporate documents they send to executives. Once a recipient enters a username and password, hackers can take over an email account, then send emails to other employees who may be working on a deal. In some cases, they then strike up conversations with other executives... the hackers used Microsoft Outlook’s filter settings to hide emails to victims... The filter would block a message such as, “This email doesn’t sound like you, Bob. You get hacked?” WSJ
Security – FBI warns of ‘destructive’ malware in wake of Sony attack
Monday's unprecedented attack on Sony Pictures Entertainment... brought corporate email down for a week and crippled other systems as the company prepares to release several highly anticipated films during the crucial holiday film season.... Sony has hired FireEye Inc's Mandiant incident response team to help clean up after the attack, a move that experts say indicates the severity of the breach. R
Hackers who knocked Sony Pictures Entertainment’s computer systems offline last week used tools very similar to those used last year to attack South Korean television stations and ATMs... The similarity would reinforce a hunch among some investigators... that North Korea played a role in the breach at the film and television studio....
Sony Pictures is set to release this month “The Interview,” a comedy in which U.S. spies enlist a television host played by James Franco and his producer, played by Seth Rogen, to assassinate North Korean leader Kim Jong Un. In June, a spokesman for the Pyongyang government said distribution of the movie would be “the most undisguised terrorism and a war action” and threatened a “strong and merciless countermeasure” if the U.S. government “patronizes the film.”...
high-quality copies of five Sony movies, including the Brad Pitt World War II drama “Fury” and a coming adaptation of the musical “Annie,” leaked onto the Internet.... Executives at the studio assume the leaks are connected to last week’s attack although they have no evidence... Four of the five films have yet to be released in theaters. WSJ
|TRADE & TRANSPORTATION||Top|
Pipeline – Russia to abandon South Stream
State gas firm OAO Gazprom said the new pipeline to Turkey would carry as much gas as South Stream, and the gas flow could be extended to the EU via a hub on Turkey’s border with Greece. Turkey will get a 6% price cut on supplies from next year, and could receive further discounts, WSJ
The Russian president directs energy and pipeline strategy personally, as perhaps the major source of power he wields in the international arena. NYT
EU-candidate Turkey's deepening energy ties with Russia are likely to raise eyebrows in Europe and the United States, coming as Western powers have imposed economic sanctions on Moscow R
Turkey already is a major importer of Russian gas, coming second only to Germany. In addition to gas, Russia will invest $20 billion in a contract to build Turkey's first nuclear power plant. AP
Officials in countries that stood to benefit from South Stream questioned whether Russia’s decision was final or a political ploy to gain more favorable terms. “This is a tactical step from Russia; this is not a final decision. This is a tool for pressure on Bulgaria,” Martin Dimitrov, the deputy chairman of the energy committee in Bulgaria’s parliament, told Bulgarian Radio.... Saipem SpA, a unit of Italian energy company Eni SpA that has a €2 billion ($2.5 billion) contract to install the first sub-sea line for South Stream, said Tuesday it hadn’t been contacted and is continuing to carry out its work. WSJ
Guar – As shale dream fades, India’s growers chase new markets
about 60 per cent of the flour-like gum obtained after milling guar is used in shale drilling to raise the viscosity of proppants... The food industry is already the second-biggest buyer. Guar gum acts as a stabiliser in sauces and noodles... Guar is also used by the textile industry as a thickening agent for printing dyes... With the food industry taking up some of the slack from the oil sector, albeit at much lower prices, India's guar gum exports this fiscal year may be slightly higher R
|ENERGY & ENVIRONMENT||Top|
Some analysts believe U.S. companies will attempt to outlast OPEC, whose resolve to let the market move oil prices may be weakened by the suffering of member countries like Venezuela, Iran and Ecuador, whose economies depend on higher oil prices.... Some U.S. companies will begin absorbing weaker operators. Nasdaq energy analyst Tamar Essner said she expects consolidation first among services companies, then perhaps among pipeline operators. WSJ
Many investors and analysts believe with OPEC on the sidelines it will take cutbacks by companies in the U.S. and Canada to bring supply and demand in line and pull the market out of its swoon. That day may not come until deep into 2015 or beyond, some analysts say. “The era of $100 [a barrel] oil is over,” Citigroup said in a note. “Oil prices appear to be falling rapidly to—if they haven’t already reached—production costs.” WSJ
Part of OPEC’s problem is that U.S. shale is a many-headed beast, with multiple resource basins and operators. So there isn’t a single price below which production gets shut down. Rather, estimates of break-even prices in U.S. shale span a range: Citigroup , for one, estimates this to be around $70 to $90 a barrel using full-cycle costs.
“Full-cycle costs” is the crucial phrase, as it incorporates big up front charges such as acquiring land. In core shale regions where land and infrastructure is already locked up, the cost to keep drilling could be as low as $40, Citi estimates. WSJ
Shale – US: Lenders caught in energy sell-off
Shale – US: October permits drop: is the slowdown here?
Billionaire wildcatter Harold Hamm, a founding father of the U.S. shale boom whose personal fortune has fallen by more than half in the past three months, said U.S. drilling will slow as producers cut back amid falling oil prices.... “Will this industry slow down? Certainly,” Hamm said yesterday in a telephone interview. “Nobody’s going to go out there and drill areas, exploration areas and other areas, at a loss. They’ll pull back and won’t drill it until the price recovers. That’s the way it ought to be.” B
Shale – US: Even After Selloff, Energy Stocks Find Few Buyers
The price/earnings ratio of S&P 500 energy companies over the next 12 months stood at 13.5 on Friday, down from 14.7 on June 30, according to FactSet. For the broader S&P 500, the figure is 16.2, up from 15.6 at midyear. WSJ
Shale – US: 19 regions will no longer be profitable at $75
Estimates of the price that drillers need to break even have varied. The Paris-based International Energy Agency said about 96 per cent of U.S. shale production remains profitable at $80 a barrel. Analysts at Sanford C. Bernstein LLC said one-third of the output added in the first three months of 2014 is uneconomic with WTI at $80. About 80 per cent of potential growth from U.S. shale oil in 2015 would remain economic at $70 a barrel, IHS Inc. said...
At least a dozen companies including Continental Resources Inc. and SandRidge, both based in Oklahoma City, said on conference calls in the past month that they would reduce capital spending plans because of lower prices. B
Shale – US: ‘The Downside of the Boom’
even as the state has hired more oil field inspectors and imposed new regulations, forgiveness remains embedded in the Industrial Commission’s approach to an industry that has given North Dakota the fastest-growing economy and lowest jobless rate in the country... Through early October of this year, companies reported 3.8 million gallons spilled, nearly as much as in 2011 and 2012 combined. NYT / NYT
Shale – US: ‘Oil in Arcadia’
Hazards are not restricted to oil and gas. Few commentators like to acknowledge the pollution associated with producing the rare earth elements essential to much modern clean technology. Nor are the hazards restricted to shale. Far more pollution has been caused by conventional onshore and offshore production over the decades. North Dakota's track record on pollution control and safety is considerably better than alternative sources of U.S. fuels such as Nigeria or Venezuela. r
Shale – UK: Ineos announces $1b push
The proposals by the Switzerland-based chemicals group sparked intense debate in Scotland, where fracking faces strong opposition ... The plans could also fuel calls for control over fracking – the process of using high pressure fluids to extract gas from rock – to be devolved to Scotland as part of a package of new powers promised by the main political parties ahead of September’s independence referendum... A YouGov poll commissioned by Ineos found higher levels of opposition to fracking in Scotland than in north west England. FT
Shale – Poland: Dreams put on hold
That has left domestic, state-backed companies such as PKN Orlen, Lotos and PGNiG with the financial and regulatory backing of the government, and a handful of well-funded global players, to wait for a change in fortunes. FT
Still, Poland remains Europe's leader in shale gas exploration. A new law simplifying license procedures will take effect Jan.1, while a bill easing exploration taxes should be implemented in mid-2015, officials said. AP
Shale – Hungary: Looks to develop gas production
Shale – Romania: Russian Money Suspected Behind Fracking Protests
What has become a tide of protest against fracking in Eastern Europe, where countries are most dependent on Russian energy, began three years ago in Bulgaria, a member of the European Union but far more sympathetic to Russian interests than any other member of the 28-nation bloc. Faced with a sudden surge of street protests by activists, many of whom had previously shown little interest in environmental issues, the Bulgarian government in 2012 banned fracking and canceled a shale gas license issued earlier to Chevron. NYT
Shale – Bulgaria: Sees Russian hand in protests in 2012/13
Mr Borisov, who declined to comment, may now be bracing for further confrontation with Moscow. His centre-right Citizens for the European Development of Bulgaria party, known as Gerb, finished first in last month’s general election, returning him to the prime minister’s office. FT
Shale – Market: ‘Numerous other commodities have been tumbling’
|LABOR & EDUCATION||Top|
Japan – Waiting for economywide wage hikes
If workers receive raises in April 2015, Japan would move forward on "the second turn of a virtuous cycle," Abe told corporate and labor representatives gathered at his office on Nov. 19..... the Japanese Trade Union Confederation... will seek a base pay raise of at least 2% in next spring's shunto negotiations -- its biggest demand in 17 years. N
Japan – There’s No Recession With Companies
Including one-off summer bonuses, workers earned 2.4% more than a year earlier in July, according to government data, the fastest increase since 1997, which is a clear sign of progress. Wage growth has slipped since... Pay is more than keeping pace with underlying inflation of around 1%.....
Even after the recent rally, Japanese equities look inexpensive, at 13.9 times estimated 2015 earnings compared with 15.9 times for the S&P 500. That discount is a reversal from the historic norm for the two indexes. WSJ
The 10 Tallest Buildings That Were Never Finished
the Council on Tall Building and Urban Habitat... reports that "a building is considered to be 'Never Completed' when site works had begun, but were completely halted, and no reports indicate that construction will continue." The top spot goes to the gigantic Nakheel Tower in Dubai, which would have stood as high as one kilometre (3,300 feet). bi
Warren Hatch, PhD, CFA
Portfolio Management and Global Investment Strategy
McAlinden Research Partners
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