PM Daily Market Commentary - 5/6/2015

davefairtex
By davefairtex on Wed, May 6, 2015 - 11:57pm

Gold fell -1.80 to 1190.70 on moderate volume, while silver dropped -0.03 to 16.51 on moderately light volume.  That sounds fine, until you find out that the Euro jumped +1.46% vs the buck; as a result, gold in Euros dropped -1.58% on the day, a big move lower.

Gold continues to look weak, especially gold priced in Euros - it has dropped almost 10% over the past three weeks.  My sense is, this is a continuing unwind of the long gold/long dollar Grexit trade.

The mining shares did not appreciate gold's poor performance today: GDX fell -2.52% on moderately heavy volume, while GDXJ fell -1.58% on moderately light volume.  The senior miner ETF is on the cusp of breaking its uptrend line; if it does, selling in the miners could become quite heavy.  Many individual miner charts have already broken down.  Miner outperformance of gold is at risk right now.

The buck was sold hard today, dropping -1.03 to 94.18, making a new cycle low.  The dollar sold off slowly in Asia and London trading, and when a surprisingly weak ADP employment report was released at 08:15 EDT, the buck started dropping more seriously, and it kept on being sold through most of the day.  The ADP employment report doesn't normally cause trouble, but it is foreshadowing a weak Nonfarm Payrolls report due out on Friday, and last month the ADP report properly forecast how Nonfarm Payrolls would end up looking.  Nonfarm Payrolls is a huge market-mover, and a weak report would most likely send the dollar and equities lower.

Note that the dollar peaked on April 13th, almost the same day gold in Euros peaked.  Right now, gold and the buck are positively correlated, which is a relatively rare circumstance.  Gold and the dollar were also positively correlated back in January of this year, in the run-up to the Greek election.

SPX (US equities) dropped today, down -9.31 to 2085.15.  No particular report caused the drop - the market was just weak for most of the day, although it did manage to recover in the last hour.  VIX rose +0.84 to 15.15.  Down-day volume continues to be high, which is a sign of distribution.  Still, my guess is that even a moderately positive Nonfarm Payrolls report would be enough to send the market screaming higher.  Right now at least, money is fleeing bonds, not stocks.

Bond ETF TLT was crushed today, dropping -1.71% and making a new cycle low, closing below its 200 MA for the first time in 16 months.  Notice how TLT peaked at end of January, at the same time gold in Euros peaked.  Since then, gold (in Euros) and TLT have both sold off.

The CRB (commodity index) fell -0.25%, attempting a rally and failing.  CRB is up 10% off its March lows.

WTIC (west texas crude) rose +0.03 to close at 60.70.  That doesn't sound very eventful, but it was: WTIC executed a perfect "sell the news" failed rally today driven by good news - a drop in oil inventories.  The Petroleum Status report at 10:30 EDT showed an inventory drop of -3.9 million barrels, which caused oil to spike higher to 62.58.  However WTIC then promptly sold off for the rest of the day, printing an evil-looking tombstone doji.  These relatively rare candles typically signal a top, especially in cases like this.

Manipulation?  I don't think so.  This sort of thing happens at the tops.  For weeks, the market had been hoping for a negative inventory number and so oil was repeatedly bid higher on these expectations.  When the good news finally arrived, there was nobody left who would push prices higher, so the spike happened for a few brief minutes, and then a large number of traders sold, ringing the cash register on the good news.  This is a perfect case of "sell the news" - especially news that the market has been expecting for a while.  Goldbugs imagine it only happens to them, but it happens in every market.  "Stock drops on fantastic earnings."   I'd guess the high is probably in for oil, at least for a while now.

Gold (in Euros), the dollar, and US treasury bonds are all selling off, I believe as an unwind of the Grexit safe haven trade.  Now we have to see if the crisis in Greece will resume, or if hints of renewed inflation will help provide a bid under gold.

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7 Comments

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5063
shale asset writedowns: shoe yet to drop

So two of my favorite shale producers: OAS and CLR reported their Q1 2015 earnings today.  I was expecting some big asset write downs, as the value of the oil wells they drilled in the past were written down based on the current realized price of oil.

Largely, this didn't happen.

On its balance sheet, CLR has about $14 billion in "net property and equipment"; they had impairments this quarter of $147 million, or about 1% of assets.  CLR is saying that, after the price of oil was chopped in half, CLR's oil wells are worth basically 99% of the value they had back when oil was $100/bbl.

Given the bulk of the production takes place in the first 3 years, I'd guess that the economic value of the existing wells might have dropped more than just 1%.  Maybe - 20-30%?  More?

But in shale-land, if you don't write your assets down, you can still sell newly-printed stock to hopeful bottom-pickers or draw down on your line of credit, drill more wells, and remain alive for another quarter.  OAS sold $470 million in a secondary offering, CLR drew down on a line of credit and raised $800 million - CLR spent $1.2 billion in Q1 2015 alone in drilling.

"We lose money on every well, but we make up for it in volume."

Reality in the shale space remains far away.  The shoe has yet to drop.

KugsCheese's picture
KugsCheese
Status: Diamond Member (Offline)
Joined: Jan 2 2010
Posts: 1428
CME Quote Stuffing

This is from Patrick Byrne's talk at Mises:

 

KugsCheese's picture
KugsCheese
Status: Diamond Member (Offline)
Joined: Jan 2 2010
Posts: 1428
davefairtex wrote: So two of
davefairtex wrote:

So two of my favorite shale producers: OAS and CLR reported their Q1 2015 earnings today.  I was expecting some big asset write downs, as the value of the oil wells they drilled in the past were written down based on the current realized price of oil.

Largely, this didn't happen.

On its balance sheet, CLR has about $14 billion in "net property and equipment"; they had impairments this quarter of $147 million, or about 1% of assets.  CLR is saying that, after the price of oil was chopped in half, CLR's oil wells are worth basically 99% of the value they had back when oil was $100/bbl.

Given the bulk of the production takes place in the first 3 years, I'd guess that the economic value of the existing wells might have dropped more than just 1%.  Maybe - 20-30%?  More?

But in shale-land, if you don't write your assets down, you can still sell newly-printed stock to hopeful bottom-pickers or draw down on your line of credit, drill more wells, and remain alive for another quarter.  OAS sold $470 million in a secondary offering, CLR drew down on a line of credit and raised $800 million - CLR spent $1.2 billion in Q1 2015 alone in drilling.

"We lose money on every well, but we make up for it in volume."

Reality in the shale space remains far away.  The shoe has yet to drop.

Tied at hips to banks.  No more write downs.  M2M is dead and gone.

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

Kugs-

So many years ago I used to work with market data that came (more or less) direct from the exchange.  Things were pretty orderly back then.  Someone at the exchange must be asleep at the switch right now (or maybe they somehow make money on it) to let this kind of thing go on.  The bandwidth required just to forward the flood of bogus quotes is absurd.

This is the kind of thing it would take me about ten seconds to fix.  Please, someone put me in charge.  Problem is gone tomorrow.  Its not even hard.

 

Jim H's picture
Jim H
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Joined: Jun 8 2009
Posts: 2379
Announcing the passing of M2M....

Great point Kugs.  I do think we can stick a fork in mark-to-market.. the concept is all but dead given the distortions that have been built into the matrix at this point. 

Dave,  Forget about stocks.  Please apply your skills to creating a physical Gold marketplace that prices Gold (and Silver, and Platinum, and Palladium) based on actual supply vs. demand.  Futures are fine, but they can't wag the physical market, and nobody should be able to print contracts more than 10X the Gold they hold.  Now wouldn't that be novel! 

Doug's picture
Doug
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Joined: Oct 1 2008
Posts: 3125
completed

As I understand it, the increased production comes from wells that have been drilled but not "completed."  They don't produce until they are completed.  As they are completed, they begin production which, as we have seen, declines rapidly.  But, until they run through the stock of drilled but not completed wells, production is likely to increase.  Seems to me once that happens, they will have to start drilling like crazy to catch up, if it is economically feasible to do so.

I'm open to being corrected on this subject.

Doug

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5063
OAS: Q1 2015 costs

So at the risk of beating a dead horse...

For the full year 2014, OAS had a "realized price per BOE" of $87.20, and a gross income (after all operational costs for producing oil from an already-completed well are subtracted) of $51.70 per BOE.

In Q1 2015, OAS had a realized price per BOE of $36.10 per BOE, which resulted in a gross income of $8.50 per BOE.

What does this mean?

Average production per well is about 100 BOE/day.  If wells last perhaps 3 years (3-year production of 110k barrels), and they cost $8M to drill, the cost of drilling is about $72/BOE produced.

So previously: $51.70 - $72 = -$20/BOE, or a $2.2M loss per well drilled, over the lifetime of each well.

And now: $8.50 - $72 = -$63/BOE, or a $6.9M loss per well drilled, over the lifetime of each well.

 

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