PM Daily Market Commentary - 3/12/2015

davefairtex
By davefairtex on Fri, Mar 13, 2015 - 3:09am

Gold dropped -1.20 to 1152.20 on moderately heavy volume, while silver rose +0.09 to 15.56 on moderately light volume.  Gold rallied in Asia after the dollar started declining, at one point hitting a high of 1165.70.  Had it closed there, gold would have made a swing low marking a reversal - but instead, gold steadily sold off during London and NY trading, losing all of its gains on the day by closing time in NY.

A failed rally in gold on a day with a reasonably large drop in the dollar is not a great sign.  I expected better behavior out of gold once the buck fell, but that didn't happen.

In some sense, trading is easy.  Once something is quite oversold like gold is today, usually the first "swing low" will mark a reversal.  But until the conditions of that swing low are met, the careful trader doesn't buy.  If the market can't demonstrate to you that traders are willing to buy and take the risk of holding overnight - the market just isn't ready to rebound, for whatever reason.

Miners lost a little ground today, with GDX dropping -0.71% on moderately heavy volume, and GDXJ down -1.83% on heavy volume.  Some selling is expected after the big rally on Wednesday, especially since gold isn't behaving so well.  Based on how the miners did today, it looks like they want to continue moving higher - if gold can only find a low, I think the miners will do well.

The USD corrected today, dropping -0.49 to 99.29, after momentarily rising above 100 early in the Asia trading session.  The dollar is very extended, and is due for a correction.  A close below today's low (98.64) will mark a swing high.  It has done this a number of times during this long dollar rally and the resulting corrections have been very shallow - but even a shallow correction will be better for gold than a continuing move higher in the buck.

US equities (SPX) rallied strongly today, marking a swing low with some serious enthusiasm, closing up +25.71 to 2065.95.  Unlike gold, equity traders were unafraid to take equities home overnight.  Remember, the longer term trend in equities remains up - that's likely why.  SPX rallied sharply right at the open and just kept moving higher through to the close.  VIX dropped -1.45 to 15.42.

Long bond ETF TLT fell -0.07%, losing strength on the equity market rally.   Bonds are in a bit of a "no-mans-land" position and my guess is TLT will resume dropping if equities continue to be strong.  JNK is attracting buyers again, which supports a renewed "risk on" stance.

There were a flurry of economic reports today with a bunch of mixed messages: positive Jobless Claim numbers, poor Retail Sales, deflation in Import Prices (due to the strong dollar), and an unfortunate build in Business Inventories.  I didn't correlate any releases with moves in the equity market.

The CRB (commodity index) fell -0.57%, dropping ever closer to the low marked in late January.  Today's performance was dismal given the weakness in the dollar.

WTIC fell -1.49 [-3.08%] to 46.93, closing below its recent trading range; oil is looking bearish once again.  Given current momentum, a retest of the 44 lows is likely within a week.

For now, miners still look good, and that's a positive sign for PM in general.  If gold cooperates, we should see a reasonable rally in the mining shares. What will it take for gold to rally?  That I can't say.  All we can really do is just wait for the COMEX gold buyers to appear.  The charts will tell us when this happens.

Note: If you're reading this and are not yet a member of Peak Prosperity's Gold & Silver Group, please consider joining it now. It's where our active community of precious metals enthusiasts have focused discussions on the developments most likely to impact gold & silver. Simply go here and click the "Join Today" button.

7 Comments

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5063
A top in Bakken production: Jan production off -37k bpd

Director's Cut (North Dakota's Director of Mineral Resources) details the news:

https://www.dmr.nd.gov/oilgas/directorscut/directorscut-2015-03-12.pdf

Bottom line for busy executives, in January:

  • Oil production peaked in December; January production dropped by -36,854 b/d to 1,190,490 b/d.
  • 132 wells drilled, 57 wells were completed.  825 wells are awaiting completion.
  • Completions required for break-even (according to the Director): 111
  • Bakken average realized oil price: $31.41.

Note: there are 5.5 months worth of uncompleted wells (825 @ 150/mo) ready to come back online once prices start to improve.

Nobody makes money at $31.41.

If zero new wells are completed next month, production will decline at 66k b/d.

As the Bakken goes, so goes shale in the rest of the country.

 

Nate's picture
Nate
Status: Platinum Member (Offline)
Joined: May 5 2009
Posts: 573
oil

Dave,

Assuming no Middle East (or Soviet) oil disruptions, when do you think oil and energy equities will bottom?

Nate

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5063
energy bottom

Nate-

Assuming no Middle East (or Soviet) oil disruptions, when do you think oil and energy equities will bottom?

Gee Nate, why don't you ask me a hard one!

I can't give you a market prediction.  What I can give you is my sense of where things are.

Brent/WTIC spread is about $10 right now.  Politics might get that to converge by changing the laws to allow US oil exports (!) as if we were back in the good old days prior to 1970.  That would help WTIC and hurt Brent.  Anyone long WTI - and the shale drillers - would benefit.

Oil production maxed out in January.  My most timely source of data is the ND Directors Cut.  (More clever folks pay for well-by-well production updates and do the math themselves - but I'm too cheap to do that).  ND doesn't apply any moving averages to smooth things out, they just provide the straight production numbers.  My guess is, US production has peaked right along with Bakken in January in spite of what EIA is reporting.  So far, that hasn't impressed the oil markets; WTIC closed today at $45.

I think we could see a decent-sized WTIC short covering rally if the politicans allow exports again.

Short of that, near term, trend for oil seems to be lower.  We might well break 44 support for WTIC.  I have to see how the market responds if/when prices break below 44.

There still seems to be a decent bid underneath oil equities.  Look at ratio XLE:$WTIC.  Its still relatively bullish, in spite of XLE's poor performance over the recent month or so.

My guess is, oil equities will bifurcate.  Overseas oil should do better than the shale gang, given the price differential.  Oil storage problems in the US shouldn't affect things overseas, and (my guess) most overseas E&P company shares will be hit less hard by a US-specific storage issue at Cushing.

My guess is, we lose maybe 50-100 kbpd per month off US production going forward.  Given we're about 1 Mbpd over, it might be 10 months before we are back to break-even, best case.  And that assumes global economy doesn't slow down further.

Who knows when the market itself will "look through" the current oversupply.  That's a total mystery to me.

I do have a sense as to when supply & demand will equalize.  I just don't know when the market will decide that is a sure enough thing to start a price rebound.

 

theordore's picture
theordore
Status: Bronze Member (Offline)
Joined: Aug 29 2013
Posts: 48
Energy bottom

     Thanks for a very helpful comment DaveFaitex.  
     Please clarify what you mean by "back to break-even".  Do you mean back to cost and revenue balance in domestic oil production generally, or shale in particular, or what?  
     Would you agree that the medium-to-longer term price movements on Brent or WTI will be heavily affected by Big-Boy speculation about the unfolding of the world-wide supply-demand balance in the crude oil business?  If so, the market will move decidedly upwards when those speculators develop a dominant sense that the balance is shifting systematically toward an increase in the demand-to-supply ratio world-wide.  
     The good news for us Little Guys, I think, is that we should see that shift in speculative sentiment both in the trading-action charts and the fundamental data on production and consumption.
     The key then is to get a very good access to the right charts and oil business data, keep them up to date, and stay on top of the story they unfold.  That way you will not have to forecast the trend change  -- instead just stay on top of your up-to-date data. This is where you could get to be worth your weight in gold Dave!  That is, in terms of helping us Little Guys.
     Please consider renaming your series "PM and Energy Daily Market Commentary".

    Here's a key difference between oil and PMs.  Big money will be made to the up-side (by Little Guys) in PMs when there is a financial Black Swan the Powers cannot control or a serious geopolitical event.  These could happen next week, next month, or ten years from now. I am already tired of waiting, so all I am doing now in PMs is focusing on getting the amount of PM hard assets I feel is useful for my family in a community crisis.  Thanks to the Great Ones for keeping the hard asset prices within my reach!

  Big money will be made in oil when some major producers decide that it is in their best interest to restrain output so as to better manage supply on the world market.  That time will not be far off if Brent gets pushed down close to $20 per barrel.  Now if you add to that just a modest revival of growth in the emerging markets and Europe, Brent will not be sticking around near $50.  Such a convergence of events may be many months away; but I feel it's safer to bet on it than to bet on a serious turnaround in PM prices. 

    So let us give  big cheer for the crash of the Brent spot price down to $20, and make sure we have funds to not miss the buying opportunities that that will create in the relevant ETFs.  Once we load up down there, we just have to go to sleep and ask Grand-Ma to wake us when Brent gets back to $50  -- not even $75!  That may be many months away; but this patience will be rewarded, something we cannot say of the PMs.

 

 

 

Nate's picture
Nate
Status: Platinum Member (Offline)
Joined: May 5 2009
Posts: 573
Thanks!
davefairtex wrote:

Nate-

Assuming no Middle East (or Soviet) oil disruptions, when do you think oil and energy equities will bottom?

Gee Nate, why don't you ask me a hard one!

Thanks for the response, Dave.  Many on this site respect and appreciate your efforts. One other signpost I am watching is when XOM purchases another producer. They have a decent record of buying near the bottom. 

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5063
break-even

theo-

By break-even I was referring to supply & demand here in the US.  My rough gauge of that is the weekly Petroleum Status Report, which has been suffering inventory builds of from 1-2 mbpd per day.  If we need to lose 1 mbpd in order to bring supply & demand to even, I'm guessing that is from 5-10 months away.  Still, the adjustment may start to accelerate 2-3 months from now.  I'm surprised any drilling is taking place, to be honest.  Certainly completions are way, way down - down much more than drilling.

Here's a factoid: according to EIA, once shale drilling & completion stops entirely, the aggregate decline rate across the US is 331k bbl/day for each month there is no drilling, vs production of 5,498k bpd.  So if/when drilling stops completely, adjustment should take about 3 months.

However, price gains will be capped by all those completions that are just waiting to happen.  It should lead to an interesting market, but probably not a V-shaped bottom.

There is a nasty thing coming during the next earnings cycle (due out in May) when all the shale drillers must revalue their "oil in the ground" at current prices - or revalue it right off the balance sheet since it is just not economical to drill.  I believe that the write-downs are going to be truly astonishing.  Stock prices should adjust to reflect this, as well as some dramatically poor earnings for the less well hedged companies.  By end of March, these results will be in the can. 

Many company oil hedges are gone after mid-year.  Then things become even more exciting.

Nate: I'm guessing the oil majors will come in to pick over some tasty bits at about that time.  Perhaps that will need to wait for the August earnings cycle.

However, I'd be surprised if the majors are willing to acquire entire companies, given the debt loads.  If I were them, I'd pick up unencumbered assets in BK, or as a deal done by a desperate company to raise cash to stay alive for a few more months.  "We're selling non-core assets..." which will probably translate to "selling the family silver in order to live another day."  If prices are low enough, the option to produce shale oil is definitely worth something to the oil majors.

Mr Hamm's ex-wife may end up getting the best deal in the shale space after cashing that check for $944 million.

Here's a chart: shale rigs required for break-even production volume (not break-even profitability) for the US.  We had a crossover just this month.  Note EIA data lags realtime by about a month.  Also note: this series was constructed by me.  "Shale rigs" include rig counts from the following regions: Bakken, EagleFord, Haynesville, Marcellus, Niobrara, Permian, Utica.  Note also the Permian region is a big producing region, but isn't strictly shale, and that a number of these regions mostly produce gas, so this doesn't quite capture the "shale-and-oil-centric" nature of the discussion here.

The "shale rigs to break-even" number was derived from declines in production matched up to "productivity per rig" values provided by EIA on a per-region basis.

theordore's picture
theordore
Status: Bronze Member (Offline)
Joined: Aug 29 2013
Posts: 48
Energy Bottom

     Great help!  Thanks Dave
    I'm banking on the final bottom (whether in the 40s or the 20s for WTI)  not being V-shaped; because the turnaround will then be too fast for retail traders to get on board if they are using the charts and production and demand stat's to guide their moves, as I plan to do with your help. 

     I'm reading that computerized trading (algos) and HFTs are increasing their influence in markets where institutions are the Big Boys, oil being one them, of course, and if that is so it means that us Little Guys have to sit down and think hard about the implications for both strategy and tactics.  We need some crash courses on how the financial markets *really* function in 2015, and how to deal with these new realities. 

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Login or Register to post comments