Wednesday, August 15, 2018

Whatever? -- August 15, 2018

WTI futures are down about 3/4% tonight.


See this post, earlier today.

Idle Rambling -- The Chinese Trade War -- August 15, 2018


Later, 6:28 p.m. CDT: after writing the note below, it suddenly dawned on me. If relatively mild sanctions -- some of which have not even been implemented yet -- are supposedly hurting China this much, think what much stricter sanctions are doing to Iran: a much smaller nation, and a much less diverse economy. Something tells me the big story below has to do with the country not mentioned: Iran.
Original Post

I promised a reader I would get back to him regarding this article in yesterday's New York Times: Trump's trade war is rattling China's leaders.

For now, I'm going to assume folks can get to the article who want to see the article. If unable due to a paywall, the lede:
Trump’s tariffs and trade threats. But as it becomes clear that a protracted trade war with the United States may be unavoidable, there are growing signs of unease inside the Communist political establishment. 
In recent days, officials from the Commerce Ministry, the police and other agencies have summoned exporters to ask about plans to lay off workers or shift supply chains to other countries.
With stocks slumping and the currency dropping 9 percent against the dollar since mid-April, censors have been deleting a torrent of criticism online, some of it directed at President Xi Jinping’s leadership.
I found the article fascinating, and "right on target."

These are some random data points that pinged around in my little mind when I read the article.
  • most recently, about four weeks ago (?), Scott Adams mentioned in passing but very clearly stated that China will blink / acquiesce / drop tariffs / come back to the bargaining table once we see one or two large banks in China fail -- Scott Adams didn't pick that out of thin air -- his source was impeccable, no doubt, only because it seemed to be such an odd prognostication
  • despite the media trying to convince us otherwise, Trump is a very, very smart man -- he would not take serious action on any issue without really understanding the issue -- and unlike most presidents, he is not politically ideological -- he is laser-focused on American business
  • Trump is a business man; he is an international businessman; he knows what's going on in China, Russia; his detractors are not business men, they do not know what is going on in China, Russia
  • unlike most politicians: no "bridge is too far." He is willing to meet one-on-one with anyone, and willing to bargain
  • several years ago, I commented that China's Achille's heel is its huge young, male population. A legacy of the one-child mandate, China has a huge, male population -- China needs to keep them employed; even a small country like Saudi Arabia knows they can't have a dispossessed young male population; this bullet, by the way, should be the #1 bullet in this list, but I put it here for a reason
  • a lot of folks don't think a country can implode overnight; hellooooo -- take a look at Venezuela; Chinese leaders know that no country is "too big to fail"
  • because China is autocratic / dictatorial, anti-Trumpers think China can outlast Trump; perhaps China can, but there are a lot of very, very rich, strong, influential business leaders and political leaders that are more worried about numero uno (themselves) than their leader -- a very, very rich banker whose bank fails ...
  • and, finally, a lot of Chinese probably don't like the idea of a premier who is now "premier-for-life"
From the linked NY Times article:
If the trade war escalates — and Mr. Trump has shown no sign of backing down — some worry that the public’s faith in the economy could be shaken, exposing the nation to much more serious problems than a drop in exports. New economic data on Tuesday showed slower growth in investment and consumer spending, and there are fears that the financial crisis in Turkey could spread.
China’s leaders have argued that they can outlast Mr. Trump in a trade standoff. Their authoritarian system can stifle dissent and quickly redirect resources, and they expect Washington to be gridlocked and come under pressure from voters feeling the pain of trade disruptions.
But the Communist Party is vulnerable in its own way. It needs growth to justify its monopoly on power and is obsessed with preventing social instability. Mr. Xi’s strongman grip may be hindering effective policymaking, as officials fail to pass on bad news, defer decisions to him and rigidly carry out his orders, for better or worse.
Wouldn't it be ironic if North Korea turned out not to be the big story of the year, but rather talk of regime change in Beijing?

A bridge too far? From the linked article:
All of this coming together suggests Xi’s grip on authority has been loosened,” said Willy Wo-lap Lam, a longtime observer of Chinese politics at the Chinese University of Hong Kong. “He’s unable to fill his function as the final arbiter who settles differences among his closest advisers.”
It is unlikely Mr. Xi’s position is in any jeopardy. But the trade dispute, along with a scandal over tainted vaccines and protests over failed investments, have already emboldened some critics of his sweeping centralization of power.
And Scott Adams' comment on banks?
The worst case for China, however, is that the trade war undermines economic confidence. The nation’s housing market teeters on a mountain of debt, and low-interest loans from state banks have built overcapacity in many industries. The worry is that prolonged trade tensions could cause money to rush out of China despite currency controls and prompt much bigger financial and economic troubles.
And so it goes.

Crude Oil Imports And Saudi Arabia -- August 15, 2018


Later, 9:14 p.m. CDT: see this article from oilprice -- a screenshot of that headline is here. Has anyone asked whether Iranian oil is light, heavy, or both? That could make a big difference.
WTI is a light crude oil, with an API gravity of around 39.6 and specific gravity of about 0.827, which is lighter than Brent crude. It contains about 0.24% sulfur thus is rated as a sweet crude oil (having less than 0.5% sulfur), sweeter than Brent which has 0.37% sulfur.
Iranian oil:
  • light: 33.6 (heavier than WTI); with a sulfur content of 1.46%, would be considered sour
  • heavy: 29.6; with a sulfur content of 2.24%, definitely sour
I'm getting way out in front of my headlights, but this may be interesting. The world's largest consumer of oil (by far): the refineries along the Gulf Coast are optimized for heavy oil. As US refiners maintain/increase production, they will have plenty of light oil, but they need heavy oil. If Iran is a major source of global heavy oil, that changes the equation. I have consistently said that Iran's production does not matter (all that much).

But after seeing the weekly petroleum data today, I'm beginning to wonder if I might be missing something. The data points, again that caught my attention:
  • refiners are operating at 98.1% capacity; I don't recall a higher number
  • US crude oil inventories (light oil, I imagine) increased a whopping amount, almost 7 million bbls, a build/an increase rarely seen in the past three years
  • at the same time, the US appears to be importing "near-record" amounts of oil (heavy oil, I imagine)
For a discussion of this data -- US refiners, heavy oil, light oil, imports, etc., see the original post.

Maybe the oilprice article is onto something. Again, like all articles, this article does not differentiate between heavy and light oil.

From the oilprice article, some data points making a case for higher-priced oil:
  • some ultra-bullish hedge funds think that the US sanctions will remove much more than one million bopd
  • some think as much as two million bopd could be taken off the market
  • one ultra-bullish hedge fund suggests that OPEC "has the lowest spare capacity ever right now"
  • that hedge fund suggests $150 in less than two years (18 months to 2 years)
  • Iran's oil exports peaked in April this year at 2.7 million bopd; has been dropping every month since
  • Bank of America Merrill Lynch: total cut-off of Iranian exports would lead to a price spike above $120/bbl
I'm not convinced that taking 1 - 2 million bbls of "oil" off the global market will make any difference. HOWEVER, taking 1 - 2 million bbls of "heavy oil" off the global market -- after what I saw in the weekly petroleum data today -- makes me think the ultra-bullish hedge funds may be correct -- but if they turn out to be right, they were right because they knew the heavy oil/light oil angle and held that close to their chest; or they did not know that and will simply be lucky.

I'm still not convinced, but it is interesting.

On another note: the 2020 rule that sea-going tankers must move to sulfur-free fuel suggests that Iran could be hit hard -- having sour oil -- as far as I can tell. There are several Iranian gradesa nd I only looked at two of them .... 

The biggest problem I have with the article: this statement without providing support for this statement: "... all-time low spare capacity ..." From the article:
According to Pierre Andurand, who manages the US$1.2-billion Andurand Commodities Fund, the world’s spare capacity is at its lowest ever, and this will be a real issue with global oil supply.
What is the basis of that statement? It's been my impression that experts have been arguing "spare capacity" for quite some time.

Original Post 

This is a blurb I posted earlier following the release of the weekly petroleum report today. See this post also.

Imports? up a huge amount -- up by over one million bbls -- total imports right at 9.0 million bbls -- I haven't seen an increase this big in quite some time; what gives?

Quick: how much oil does the US produce? Somewhere between 10 and 11 million bopd.

So, the US is importing almost as much heavy oil as the amount of light oil that we are producing.
  • over the past four weeks, crude oil imports averaged about 8.1 million bopd, almost 1% more than the same four-week period last year; why? 
  • why? of course, the report doesn't say why, but this is what I think is going on -- US refineries are optimized for heavy oil; the US produces almost exclusively light oil (how did this happen? President Obama can tell you, but I digress); 
  • the refineries are operating at 98.1% capacity; that's a lot of oil -- a lot of light oil, but they need heavy oil to balance out the barbell -- the mix of heavy oil / light oil that the refineries-optimized-for-heavy-oil can actually refine
  • there are reports that we are back to exporting "record" amounts of oil from Saudi Arabia; why? we need their heavy oil, now that we can't get enough heavy oil from Canada (Keystone XL killed by President Obama); Venezuela is imploding
  • irony: President Obama's staff favored Iran; hated Saudi Arabia; tried to change the balance of power in the Mideast -- Saudi Arabia vs Iran; not only does Trump put the original sanctions back on Iran, but due to the aborted Keystone XL, Saudi Arabia comes back the winner -- and in an era of "lower prices longer," Saudi Arabia needs all the markets it can get
Anyway, that's my two cents worth. That and fifty cents will get you a senior cup of coffee.

By the way, this might also explain the huge growth in US crude oil inventories. The refineries are operating at 98.1% capacity but they don't need more light oil from the Permian or the Eagle Ford or the Bakken; they need more heavy oil overseas.

Foot In Mouth Disease Is Contagious
Governor Cuoma Caught It from President Obama

First, we had President Obama telling successful businesswomen that "they didn't make that.

Now, we have President-wanna-be Cuomo telling us the US was never that great to begin with:

Wow, Look At These MRO Wells -- We Are Clearly Into Bakken 2.5 -- August 15, 2018

Active rigs:

Active Rigs57563174194

Four new permits:
  • Operator: Hess
  • Fields: Alger (Mountrail); Manitou (Mountrail)
  • Comments: Hess has permits for a 4-well Ruland/Dobrovolny pad in NWNE 13-155-94 (three Ruland wells; one Dobrovlny well)
Four permits renewed:
  • Whiting: one Crane Creek State permit in Mountrail County
  • Enerplus: one Terrier permit in McKenzie County
  • BR: one Chuckwagon permit in McKenzie County
  • Sinclair: one Uran permit in Mountrail County
Four producing wells completed:
  • 33550, 5,898, MRO, Kattevold USA 14-34TFH, Sanish, t6/18; cum 40K after 38 days;
  • 33549, 5,284, MRO, Pfundheller USA 44-33H, Reunion Bay, t7/18; cum --
  • 32012, 7,151, MRO, Ranger USA 24-34TFH, Reunion Bay, t7/18; cum --
  • 33562, 4,882, MRO, Lois USA 14-34H, Reunion Bay, t7/18; cum --
More On Those Wells 

Note the amount of water used in these fracks. These are very moderate fracks. I would have expected at least ten million gallons of water and would not have been surprised to see 12 - 15 million gallons:
  • 33550, 33-061-04052: 6/11/18 -- 7/1/18; 7.85 million gallons; 90.3% water;
  • 33549, 33-061-04051: 6/11/18 -- 7/1/18; 8.50 million gallons; 88.8% water;
  • 32012, 33-061-03833: 6/13/18 -- 7/2/18; 6.31 million gallons; 88.4% water;
  • 33562, 33-061-04055: 5/31/18 -- 6/12/18; 6.93 million gallons; 89.3% water;

Disconnects? -- August 18, 2018

First, this story: oil companies place few bets in U.S. offshore lease auction.

Sometimes I wonder about oilprice:

I have to wonder what any CEO is smoking if he/she suggests a gazillion dollars needs to be spent exploring deep water starting next year. 

Weekly Petroleum Report -- EIA; WTI Plunges -- August 15, 2018

NOTE: it looks like the NDIC Director's cut release date has changed to tomorrow, Thursday, August 16, 2018, at 3:00 p.m. Link here.

Now, back to the weekly petroleum report. You should be sitting down before going further.

Link here. See also this post.
  • US crude oil inventories: increased by a whopping 6.8 million bbls
  • WTI after the report: wow, down about 3.4%; falls $2.30; falls below the $66 support level; trading at $64.76; 
  • bad news for US shale operators: it is interesting to note that rig count has fallen steadily in the Bakken for the past couple of weeks; indicator that terminals/refineries were "full"?
  • really, really bad news for Saudi; needs $70 oil is what they say; in fact, they probably need $80 oil  
  • US refinery operating capacity: 98.1% -- wow
  • think about that: refineries are working at 98.1% capacity and yet, inventories rose by a whopping 6.8 million bbls
  • there seems to be a disconnect between what the EIA is telling us about US production (EIA says US production is falling) and what the producers are seeing
  • imports? up a huge amount -- up by over one million bbls -- total imports right at 9.0 million bbls -- I haven't seen an increase this big in quite some time; what gives? 
    • over the past four weeks, crude oil imports averaged about 8.1 million bopd, almost 1% more than the same four-week period last year; why? 
    • why? of course, the report doesn't say why, but this is what I think is going on -- US refineries are optimized for heavy oil; the US produces almost exclusively light oil (how did this happen? President Obama can tell you, but I digress); the refineries are operating at 98.1% capacity; that's a lot of oil -- a lot of light oil, but they need heavy oil to balance out the barbell -- the mix of heavy oil / light oil that the refineries-optimized-for-heavy-oil can actually refine
  • I tracked inventories for about a year when producers / Saudi Arabia said they were going to cut back on supply -- at that time, they started at 450 million bbls in US crude oil inventory and reduced it towards 400 million bbls; today it stands at 414.2 million bbls
  • the old threshold was 350 million bbls (below that, bullish for oil traders; above that, bearish for oil traders
  • I set the new number at 400 million bbls (below that, bullish for oil traders; above that, bearish for oil traders
  • clearly, very, very bearish right now -- and it's the height of the driving season in the US
  • if gasoline prices are not falling in your neighborhood, the refineries are making out like bandits
  • production: magic numbers are about 10.5 and 5.0 respectively; this week, 10.2 million bbls for gasoline; 5.3 million bbls for distillate fuel 
  • see SeekingAlpha report here
Gasoline demand:

Notes to the Granddaughters

My wife -- your grandmother -- has signed up for a financial management course. It's a free course. Won't cost her a thing. She says she doesn't know anything about managing money. Actually she does quite well. I will be her instructor. The financial management course will be to show her where our assets are and how to access them after I die ... which, of course, could be sooner than later.

On the bike ride home today I got to thinking about investing, something I've enjoyed doing since 1984.

Good, bad, or indifferent, it's been very, very enjoyable.

When it comes to home finances, I think folks go through four phases: pre-savings phase; savings phase; investing phase; spending phase. Obviously there may be bits and pieces in each and overlap between the phases, but the "heading" suggests the focus. I assume there are books on this.

Wow, wow, wow -- google "savings phase" "investing phase" "spending phase" -- and this is the first hit: Personal Investment Crash Course, a screenshot from the introduction:

So, nothing new under the sun. I'm impressed that I came up with that on my own. The author of that book calls my "pre-savings phase" the "earnings phase." The writer was obviously an optimist. The writer was also not a faux socialist. I don't think faux socialists have an "earnings phase."

I think "pre-savings" stage is a better handle. Infants, many teenagers, many millennials (by definition?), and most faux socialists never have an earnings stage.

My designations allow for infants and faux socialists to be included from the beginning. Some faux socialists will skip the first two phases and go directly to the investing phase (e.g., those who inherit huge estates) or to the spending phase (e.,g, those who inherit huge estates but prefer not to become active investors).

Everybody can be in a pre-savings phase at some point in their lives. Some infants may never grow up to be earners -- for many different reasons -- but they can be in the pre-savings group. It's not a given that they are in a pre-earnings phase; that suggests all infants grow up to become earners. Obviously that is not the case.

I can imagine, also, a fair number of Americans never reach the savings phase. From that group, even a smaller number reach the investing stage. For the purpose of this discussion I am talking about active investors, not those who are accidental (and often unknowing) investors. In that latter group are those who have no interest in investing and no investments outside of their pension plan provided by their employer.

And finally there is the spending stage. I have never fully moved from the investment stage to the spending stage. For me, I think that would be impossible. I enjoy investing too much. I suppose 80% of my investments [including military pension; social security; 401(k)] are professionally managed; in some cases I am using the term "professionally" very loosely. Perhaps better said, some of my investments are managed by others; they are on auto-pilot; I have no control over them; they are what they are.

My wife has lived with me all these years and has gone through the same phases with me. For much of her life, although a professional white collar individual, she was not employed outside the home and did not earn money as such. She spent money but that was mostly for family needs and she, psychologically, alongside me, felt she was with me in the saver's stage early in our life together, and then seamlessly transitioned into the investment stage.

Her parents were not particularly well off, and the combination of her experiences as a child (a family with almost not money; part of the pre-savings group for most of their lives) and her life with me, for the most part, in the investment phase, she has never (nor have I) moved into the spending phase.

I doubt I will ever move into the spending phase.

However, assuming I die before my wife, she will have the option of staying in the investment stage or move to the spending phase.

Our finances are such, that I feel strongly she needs to move to the spending stage. That does not mean she quits all investing. She will need a financial advisor and a tax accountant after I die. She and the other two will still have to manage her investments.

My focus during our financial management course will be to instruct her how to transition into the spending phase. She will tell me, "no problem." LOL.

For me, it could be quite a learning experience, but I've already come up with some tools that will help her. I can't wait to get started.

Number Of Active Rigs Trending Down In The Bakken -- August 15, 2018

NOTE: it looks like the NDIC Director's cut release date has changed to tomorrow, Thursday, August 16, 2018, at 3:00 p.m. Link here.

The market: Dow is down almost 300 points in early morning trading. I'm not watching CNBC so I don't know what the talking heads are saying:
  • lots of talk recently that the market was getting ahead of itself
  • profit-taking
  • WTI close to breaking through the $66-floor and no suggestion that production is going to change much
  • bitcoin plunging recently (thought today, is up 2.5%)
  • 10-year bond still in trading range below 3% -- around 2.8%
  • Turkey contagion -- yesterday CNBC opined that the market had absorbed Turkish news
  • mid-August; trading doldrums
  • so, someone will have to provide the "30-second elevator" speech why the market is down so much today 
  • WSJ: says it is due to continued trade talk tension; sure!
WTI: eleven cents away from going below $66 which appears to be some kind of "floor" right now

Canada: it can't get a break -- it's only going to get worse; great news for US shale light oil -- rule change cuts demand for Canadian oil -- Bloomberg:
  • 2020: crude oil tankers will have to use low-sulfur oil
  • old story, but for those who did not know where that heavy, sulfur oil was coming from, now they do: Canada
Permian: Diamondback to buy Energen in $9.2 billion deal to boost Permian presence (note spelling error in headline at the link -- this is a Reuters article, based in London -- they may spell the Permian differently in England).
  • 96,900 acres (if I understand the article correctly) 
  • $9.2 billion
  • works out to about $95,000/acre
  • the article doesn't specifically say 96,900 acres and the article doesn't say "net" or "gross" acres, but generally these sales are figured in "net" acres
US retail sales increase strongly in July. FoxBusiness
  • rose more than expected in July
  • retail sales increased 0.5% 
  • analysts had expected 0.1%
  • year-over-year, retail sales have increase 6.4%
  • data for June was revised to 0.2%, down from 0.5%
Disclaimer: this is not an investment site.

Apple roundup:
  • Apple still has a long way to go to reach "net cash neutral" -- Motley Fool
    • to become "net cash neutral" will require the company to "dispense" copious amounts of cash in the years ahead
    • considering Apple's cash-generating capabilities, this is going to be tougher than it sounds
    • no it's not
  • posted August 4, 2018, that Berkshire Hathaway had 255 million shares (my estimate)
  • confirmed today: from the AP, Berkshire Hathaway has 252 million shares
  • Berkshire Hathaway keeps buying more AAPL -- The WSJ
  • on a day that the market is plummeting -- the Dow is down almost 300 points -- AAPL shares are down very, very little; down 0.44% in early morning trading
Where are they getting these figures? For breakeven costs --
  • SCOOP: mid-60s
  • Eagle Ford: $48 - $61
  • Bakken: $53 - $56
  • Niobrara: $63
  • Delaware Basin (Permian): $57
  • Midland Permian: $37
Back to the Bakken

Wells coming off the confidential list today:
  • 30526, 1,016, CLR, Burr Federal 19-26H, Sanish, 4 sections, Three Forks 1, 63 stages; 15 million lbs, a nice well; t6/18; cum 40K after 38 days; Burr Federal wells are tracked here;
Active rigs:

Active Rigs57563174194

RBN Energy: factors driving SoCal's recent natural gas prices.
A perfect storm of hot weather, transportation constraints and limits on storage use recently sent natural gas prices in Southern California surging to the highest levels seen in that market going back to at least 2007. Spot prices at the SoCal Citygate hub averaged close to $40/MMBtu in late July and were again up over $20/MMBtu last week, levels that were several times higher than the national benchmark Henry Hub — and, for that matter, every other U.S. market hub — on the same day. Prices since then have retreated, but the whipsawing price action raises questions about what’s in store for SoCal this coming winter. Today, we analyze the factors behind the recent record prices and prospects for continued volatility at SoCal.