Posts Tagged ‘Natural Gas’

The petrodollar system is being undermined by exponential growth in technology and shifting geopolitics. What comes next is a paradigm shift…

 

In the summer of 1974, Treasury Secretary William Simon traveled to Saudi Arabia and secretly struck a momentous deal with the kingdom. The U.S. agreed to purchase oil from Saudi Arabia, provide weapons, and in essence guarantee the preservation of Saudi oil wells, the monarchy, and the sovereignty of the kingdom. In return, the kingdom agreed to invest the dollar proceeds of its oil sales in U.S. Treasuries, basically financing America’s future federal expenditures.

Soon, other members of the Organization of Petroleum Exporting Countries followed suit, and the U.S. dollar became the standard by which oil was to be traded internationally. For Saudi Arabia, the deal made perfect sense, not only by protecting the regime but also by providing a safe, liquid market in which to invest its enormous oil-sale proceeds, known as petrodollars. The U.S. benefited, as well, by neutralizing oil as an economic weapon. The agreement enabled the U.S. to print dollars with little adverse effect on interest rates, thereby facilitating consistent U.S. economic growth over the subsequent decades.

An important consequence was that oil-importing nations would be required to hold large amounts of U.S. dollars in reserve in order to purchase oil, underpinning dollar demand. This essentially guaranteed a strong dollar and low U.S. interest rates for a generation.

[ZH: Still, the underlying concept of how Petrodollar recycling, or as some call it, petrocurrency mercantilism works, leaves some confusion. So in order to alleviate that, here courtesy of Cult State, is a quick and simple primer that should hopefully answer all questions. From CultState:

So what is petrocurrency mercantilism?

It’s when a national bank and an energy producer collude to generate artificial demand for a currency at the expense of the purchasing power of other currencies.

The flowchart below shows how it all works.

Given this backdrop, one can better understand many subsequent U.S. foreign-policy moves involving the Middle East and other oil-producing regions.

Recent developments in technology and geopolitics, however, have already ignited a process to bring an end to the financial system predicated on petrodollars, which will have a profound impact on global financial markets. The 40-year equilibrium of this system is being dismantled by the exponential growth of technology, which will have a bearish impact on both supply and demand of petroleum. Moreover, the system no longer is in the best interest of key participants in the global oil trade. These developments have begun to exert influence on financial markets and will only grow over time. The upheaval of the petrodollar recycling system will trigger a resurgence of volatility and new price trends, which will lead to a renaissance in macro investing.

Let’s examine these developments in more detail.

First, TECHNOLOGY is affecting the energy markets dramatically, and this impact is growing exponentially. The pattern-seeking human mind is built for an observable linear universe, but has cognitive difficulty recognizing and understanding the impact of exponential growth.

Paralleling Moore’s Law, the current growth rate of new technologies roughly doubles every two years. In the transportation sector, the global penetration rate of electric vehicles, or EVs, was 1% at the end of 2016 and is now probably about 1.5%. However, a doubling every two years of this level of usage should lead to an automobile market that primarily consists of EVs in approximately 12 years, reducing gasoline demand and international oil revenue to a degree that today would seem unfathomable to the linear-thinking mind. Yes, the world is changing—rapidly.

Alternative energy sources (solar power, wind, and such) also are well into their exponential growth curves, and are even ahead of EVs in this regard. Based on growth curves of other recent technologies, and due to similar growth rates in battery technology and pricing, it is likely that solar power will supplant petroleum in a vast portion of nontransportation sectors in about a decade. Albert Einstein is rumored to have described compound interest (another form of exponential growth) as the most powerful force in the universe. This is real change.

The growth of U.S. oil production due to new technologies such as hydraulic fracturing and horizontal drilling has both reduced the U.S. need for foreign sources of oil and led to lower global oil prices. With the U.S. economy more self-reliant for its oil consumption, reduced purchases of foreign oil have led to a drop in the revenues of oil-producing nations and by extension, lower international demand for Treasuries and U.S. dollars.

China has agreed with Russia to purchase Russian oil and natural gas in yuan.
◦As an example of China’s newfound power to influence oil exporters, China has persuaded Angola (the world’s second-largest oil exporter to China) to accept the yuan as legal tender, evidence of efforts made by Beijing to speed up internationalization of the yuan. The incredible growth rates of the Chinese economy and its thirst for oil have endowed it with tremendous negotiating strength that has led, and will lead, other countries to cater to China’s needs at the expense of their historical client, the U.S.
◦China is set to launch an oil exchange by the end of the year that is to be settled in yuan. Note that in conjunction with the existing Shanghai Gold Exchange, also denominated in yuan, any country will now be able to trade and hedge oil, circumventing U.S. dollar transactions, with the flexibility to take payment in yuan or gold, or exchange gold into any global currency.
◦As China further forges relationships through its One Belt, One Road initiative, it will surely pull other exporters into its orbit to secure a reliable flow of supplies from multiple sources, while pressuring the terms of the trade to exclude the U.S. dollar.

The world’s second-largest oil exporter, Russia, is currently under sanctions imposed by the U.S. and European Union, and has made clear moves toward circumventing the dollar in oil and international trade. In addition to agreeing to sell oil and natural gas to China in exchange for yuan, Russia recently announced that all financial transactions conducted in Russian seaports will now be made in rubles, replacing dollars, according to Russian state news outlet RT. Clearly, there is a concerted effort from the East to reset the economic world order.

ALL OF THESE DEVELOPMENTS leave global financial markets vulnerable to a paradigm shift that has recently begun. In meetings with fund managers, asset allocators, and analysts, I have found a virtually universal view that macro investing—investing based on global macroeconomic and political, not security-specific trends—is dead, fueled by investor money exiting the space due to poor returns and historically high fees in relation to performance. This is what traders refer to as capitulation. It occurs when most market participants can’t take advantage of a promising opportunity due to losses, lack of dry powder, or a psychological inability to proceed because of recency bias.

A current generational low in volatility across a wide spectrum of asset classes is another indicator that the market doesn’t see a paradigm shift coming. This suggests that current volatility is expressing a full discounting of stale fundamental inputs and not adequately pricing in the potential of likely disruptive events.

THE FEDERAL RESERVE is now in the beginning stages of a shift toward “normalization,” which will lead to diminished support for the U.S. Treasury market. The Fed’s total assets stand at approximately $4.5 trillion, or five times what they were prior to the financial crisis of 2008-09. The goal of the Fed is to “unwind” this enormous balance sheet with minimal market disruption. This is a high-wire act a thousand feet in the air without a safety net or prior practice. Additionally, at some not-so-distant future date, the U.S. will need to finance enormous and growing entitlement programs, and our historical international sources for that financing will no longer be willing to support us in that endeavor.

The market participants with whom I met theoretically could have the ability to accept cognitively the points made in this article. But the accumulation of many small losses in a low-volatility and generally trendless market has robbed them of confidence and the psychological balance to embrace any new paradigm proactively. They are frozen with fear that the lower- return profile of recent years is permanent—ironic in an industry that is paid to capture price changes in a cyclical world.

One market legend with whom I spoke suggested he wouldn’t have had the success he enjoyed in his career had he begun in the past decade. Whether or not this might be true, it doesn’t mean that recent lower returns are to be extrapolated into the future, especially when these subpar returns occurred during the quantitative-easing era, a period that is an anomaly.

I have been fortunate to ride substantial bets on big trends, earning high risk-adjusted returns using time-tested techniques for exploiting these trends. Additionally, I have had the luxury of not participating actively full-time in macro investing during this difficult period. Both factors might give me perspective. I regard this as an extraordinarily opportune moment for those able to shed timeworn, archaic assumptions of market behavior and boldly return to the roots of macro investing.

The opportunity is reminiscent of the story told by Stanley Druckenmiller, who was promoted early in his investment career to head equity research at a time when his co-workers had vastly more experience than he did. His director of investments informed him that his promotion owed to the same reason they send 18-year-olds to war; they are too dumb to know not to charge. The “winners” under the paradigm now unfolding will be market participants able to disregard stale, anomalous concepts, and charge.

RELATEDLY, THERE IS a running debate as to whether trend-following is a dying strategy. There is plenty of anecdotal evidence that short-term and mean-reversion trading is more in vogue in today’s markets (think quant funds and “prop” shops). Additionally, the popularity of passive investing signals an unwillingness to invest in “idea generation,” or alpha. These developments represent a full capitulation of trend following and macro trading.

Ironically, many market players who wrongly anticipated a turn in recent years to a more positive environment for macro and trend-following are throwing in the towel. The key difference is that now there is a clear catalyst to trigger the start of the pendulum swinging back to a fertile macro/trend-following trading environment.

As my mentor, Bruce Kovner [the founder of Caxton Associates] used to say, “Nobody rings a bell at key turning points.” The ability to properly anticipate change is predicated upon detached analysis of fundamental information, applying that information to imagine a plausible world different from today’s, understanding how new data points fit (or don’t fit) into that world, and adjusting accordingly. Ideally, this process leads to an “aha!” moment, and the idea crystallizes into a clear vision. The thesis proposed here is one such vision.

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The geopolitical reality in the Middle East is changing dramatically.

The impact of the Arab Spring, the retraction of the U.S. military, and diminishing economic influence on the Arab world – as displayed during the Obama Administration – are facts.

The emergence of a Russian-Iranian-Turkish triangle is the new reality. The Western hegemony in the MENA region has ended, and not in a shy way, but with a long list of military conflicts and destabilization.

The first visit of a Saudi king to Russia shows the growing power of Russia in the Middle East. It also shows that not only Arab countries such as Saudi Arabia and the UAE, but also Egypt and Libya, are more likely to consider Moscow as a strategic ally.

King Salman’s visit to Moscow could herald not only several multibillion business deals, but could be the first real step towards a new regional geopolitical and military alliance between OPEC leader Saudi Arabia and Russia.

This cooperation will not only have severe consequences for Western interests but also could partly undermine or reshape the position of OPEC at the same time.

Russian president Vladimir Putin is currently hosting a large Saudi delegation, led by King Salman and supported by Saudi minister of energy Khalid Al Falih.

Moscow’s open attitude to Saudi Arabia—a lifetime Washington ally and strong opponent of the growing Iran power projections in the Arab world—show that Putin understands the current pivotal changes in the Middle East.

U.S. allies Saudi Arabia, Egypt, Turkey and even the UAE, have shown an increased eagerness to develop military and economic relations with Moscow, even if this means dealing with a global power currently supporting their archenemy Iran. Analysts wonder where the current visit of King Salman will really lead to, but all signs are on green for a straightforward Arab-Saudi support for a bigger Russian role in the region, and more in-depth cooperation in oil and gas markets.

In stark contrast to the difficult relationship of the West with the Arab world, Moscow seems to be playing the regional power game at a higher level. It can become an ally or friend to regional adversaries, such as Iran, Turkey, Egypt and now Saudi Arabia. Arab regimes are also willing to discuss cooperation with Russia, even though the country is supporting adversaries in the Syrian and Yemen conflicts and continues to supply arms to the Shi’a regime in Iran.

Investors can expect Russia and Saudi Arabia to sign a multitude of business deals, some of which have already been presented. Moscow and Riyadh will also discuss the still fledgling oil and gas markets, as both nations still heavily depend on hydrocarbon revenues. Arab analysts expect both sides to choose a bilateral strategy to keep oil prices from falling lower. Riyadh and Moscow have the same end goal: a stable oil and gas market, in which demand and supply keep each other in check to push price levels up, but without leaving enough breathing space for new market entrants such as U.S. shale.

Putin and Salman will also discuss the security situation in the Middle East, especially the ongoing Syrian civil war, Iran’s emerging power, and the Libya situation. Until now, the two have supported opposite sides, but Riyadh has realized that its ultimate goal, the removal of Syrian president Assad, is out of reach. To prevent a full-scale Shi’a triangle (Iran-Iraq-Syria-Lebanon), other options are now being sought to quell Tehran’s power surge. Moscow is key in this.

Putin’s unconditional support of the Iranian military onslaught in Iraq and Syria, combined with its support for Hezbollah in Lebanon or Houthis in Yemen, will be discussed and maybe tweaked to give Riyadh room to maneuver into the Russian influence sphere. The verdict on this isn’t yet out, but Riyadh’s move must be seen

in light of ongoing Moscow discussions with Egypt, Libya, Jordan and the UAE.

A growing positive Putin vibe in the Arab world is now clear. The strong leadership of Russia’s new Tsar has become a main point of interest for the (former pro-Western) Arab regimes. The U.S. and its European allies have only shown a diffuse political-military approach to the threats in the MENA region, while even destabilizing historically pro-Western Arab royalties and presidents. Putin’s friendship, however, is being presented as unconditional and long lasting.

Even though geopolitics and military operations in the Middle East now are making up most headlines, the Saudi-Russian rapprochement will also have economic consequences. Riyadh’s leadership of OPEC is still undisputed, as it has shown over the last several years. Saudi Arabia’s eagerness to counter the free-fall of oil prices has been successful, but a much bigger effort is required to bring prices back to a level of between $60-75 per barrel. Russia’s role—as the largest of non-OPEC producers—has been substantial, bringing in not only several emerging producers, but also by putting pressure on its allies Iran, Venezuela and Algeria.

The historically important Moscow-Riyadh cooperation in oil and gas is unprecedented. Without Russia’s support, overall compliance to the OPEC production cut agreement would have been very low, leading to even lower oil prices.

The Saudi-Russian rapprochement could, however, be seen as a threat by the West and OPEC itself. Western influence in the region has waned since the end of the 1990s, not only due to the peace dividend of NATO, but especially because OECD countries are moving away from oil. Saudi Arabia had to find new markets, which happened with China and India. The Saudi future is no longer based on Western customers or support, but lies in Asia and other emerging regions. The FSU region has also popped up on Saudi screens. Investment opportunities, combined with geopolitical support and military interests, are readily available in Russia and its satellite states.

For OPEC, the Moscow-Riyadh love affair could also mean a threat. Throughout OPEC’s history, Riyadh has been the main power broker in the oil cartel, pushing forward price and production strategies; most of the time this was done in close cooperation with all the other members, most of them Arab allies. This changed dramatically after Saudi Arabia and Russia agreed to cooperate in global oil markets. Through the emergence of this OPEC/ non-OPEC cooperation, Moscow and Riyadh have grown closer than expected. The two countries now decide the future of global oil markets before they discuss it with some of the other main players like UAE, Iran, Algeria and Nigeria. King Salman’s visit is seen as another step toward a more in-depth cooperation in oil and gas related issues.

Besides global oil market cooperation, Saudi Arabia is and will become more interested to invest in natural gas development, not only to have an interest in Russia’s gas future but also to bring in Russian technology, investment and LNG to the Kingdom.

At the same time, media sources are stating that Saudi Arabia is NOT asking Russia to take part in the long-awaited Aramco IPO in 2018. Russian individual investors and financial institutions, however, are expected to take an interest.

Putin understands not only Russian chess tactics but also the Arab “Tawila” approach. Saudi Crown Prince Mohammad bin Salman already will prepare his Tawila strategy, putting enough stones on the table to ensure his successful end game. MBS, currently de-facto ruler of the Kingdom, is targeting a full house—Russian cooperation in energy, defense and investments—while softening Moscow’s 100% percent support of the Shi’a archenemy Iran.

For both sides, Moscow and Riyadh, the current constellation presents a win-win situation. Moscow can reach its ultimate goal in the Middle East: to become the main power broker and knock the US from the pedestal. For Riyadh, the option to counter the Iranian threat, while also bolstering its own economy and hydrocarbon future, is now within reach.

King Salman’s trip could go down in history as the point of no return for the West. Pictures of Russian President Vladimir Putin and King Salman of Saudi Arabia could replace historic pictures of King Saud and U.S. President Roosevelt (Bitter Lake, 1945). In a few years, King-to-be Crown Prince Mohammad bin Salman might tell his children that this was one of the pillars that changed not only the Middle East but also supported his Vision 2030 plan of becoming a bridge between the old (West) and the new (Russia-Asia).

As relations between Russia and the US disintegrate as a result of the escalating proxy war in Syria, which today culminated with Putin halting a Plutonium cleanup effort with the US, shortly before the US State Department announced it would end negotiations with Russia over Syria, tomorrow an unprecedented 40 million Russian citizens, as well as 200,000 specialists from “emergency rescue divisions” and 50,000 units of equipment are set to take part in a four day-long civil defense, emergency evacuation and disaster preparedness drill, the Russian Ministry for Civil Defense reported on its website.

According to the ministry, an all-Russian civil defense drill involving federal and regional executive authorities and local governments dubbed “Organization of civil defense during large natural and man-caused disasters in the Russian Federation” will start tomorrow morning in all constituent territories of Russia and last until October 7. While the ministry does not specify what kind of “man-caused disaster” it envisions, it would have to be a substantial one for 40 million Russians to take part in the emergency preparedness drill. Furthermore, be reading the guidelines of the drill, we can get a rather good idea of just what it is that Russia is “preparing” for.

The website adds that “the main goal of the drill is to practice organization of management during civil defense events and emergency and fire management, to check preparedness of management bodies and forces of civil defense on all levels to respond to natural and man-made disasters and to take civil defense measures.” Oleg Manuilov, director of the Civil Defence Ministry explained that the exercise will be a test of how the population would respond to a “disaster” under an “emergency” situation.

 

Some further details, on the 3-stage, 4 day drill:

I stage: organization of civil defense actions

 

The stage is going to practice notification and gathering of senior officials of federal and regional executive authorities, local governments and civil defense forces, deployment of civil defense management system on all levels, readying civil defense communication and notification system. After the National Crisis Management Center have brought the management signals, all management bodies, state authorities, forces and facilities on duty and people will be notified through notification systems available.

 

II stage: Planning and organization of civil defense actions. Deploying a team of civil defense forces and facilities designed to respond to large disasters and fires.

 

The stage plans to practice deployment a mobile interagency multi-functional team of civil defense forces and facilities in each federal district in order to carry our rescue and other urgent operations, civil defense actions and to deploy special civil defense units in constituent territories; putting rescue military units, divisions of the federal fire service, rescue units on standby. The stage provides for the team to be reinforced, activation of backup control centers and practicing collecting and exchanging information in the field of civil defense.

 

III stage: Organization of actions of civil defense management bodies and forces for response to large disasters and fires.

 

The stage will deal with the use of the civil defense team to respond to large disasters and fires, setting up aerial and mobile control centers, revising of routes for save evacuation of people, organization of vital services; taking off fire and rescue units of the federal fire service to put out fires and conduct rescue operations at potentially dangerous facilities, including closed administrative territorial entities.

 

The drill will rehearse radiation, chemical and biological protection of the personnel and population during emergencies at crucial and potentially dangerous facilities. Fire safety, civil defense and human protection at social institutions and public buildings are also planned to be checked. Response units will deploy radiation, chemical and biological monitoring centers and sanitation posts at the emergency areas, while laboratory control networks are going to be put on standby.

The fact that among the measures tasked for the civil defense team will be a response to “disasters and fires” as well as the rehearsal of “radiation, chemical and biological protection”, makes it clear that Russia is about to hold its biggest nuclear war drill since perhaps the end of the Cold War.

Why now? Perhaps, in addition to the sharp deterioration in relations between Russia and the west, where tensions are on par with the cold war, another answer may come from the Chairman of the Joint Chiefs of Staff Joseph Dunford, who last week warned Congress that the implementation of a No Fly Zone in Syria as proposed by John Kerry recently, and a centerpiece of Hillary’s foreign policy strategy, would result in World War III.

During testimony before the Senate Committee on Armed Services last week General Joseph Dunford rang the alarm over a policy shift that is gaining more traction within the halls of Washington following the collapse of the ceasefire brokered by the United States and Russia in Syria saying that it could result in a major international war which he was not prepared to advocate on behalf of. Senator Roger Wicker of Mississippi asked about Hillary Clinton’s proposal for a no fly zone in Syria in response to allegations that Russia and Syria have intensified their aerial bombardment of rebel-held East Aleppo since the collapse of the ceasefire.

“What about the option of controlling the airspace so that barrel bombs cannot be dropped? What do you think of that option?” asked Wicker. “Right now, Senator, for us to control all of the airspace in Syria would require us to go to war against Syria and Russia. That is a pretty fundamental decision that certainly I’m not going to make,” said the Chairman of the Joint Chiefs of Staff suggesting the policy was too hawkish even for military leaders.

As a reminder, Hillary Clinton strongly argued in favor of a no fly zone ever since October 2015, just days after Russia began a bombing campaign aimed at maintaining the stability of the Syrian government. “I personally would be advocating now for a no fly zone and humanitarian corridors to try to stop the carnage on the ground and from the air, to try to provide some way to take stock of what’s happening, to try to stem the flow of refugees,” said Clinton in an interview with NBC in October 2015.

Despite the warnings, the former Secretary of State and current presidential candidate, who has a well-known hawkish position towards regime change and matters related to Russia, has continued to advocate this position which has gained traction in recent weeks among top US diplomats.

Clinton is note alone: as the WSJ reported in June, more than 50 US diplomats endorsed a notorious dissent memo, demanding that that the Obama administration employ military options against Assad, such as the implementation of a no fly zone if not a direct attack against the Syrian regime. The argument from the diplomats is that the situation in Syria will continue to devolve without direct action by the US military, an argument of dubious legality if undertaken unilaterally without a UN Security Council resolution but which as Sputnik reports, the US Ambassador to the UN Samantha Power has been laying the groundwork for under the controversial “right to protect” theory of international law arguing that Russia’s opposition to a resolution should be ignored because they are a party to the conflict.

Russia, in turn, has countered that if the Assad regime falls then terrorist groups including ISIS and al-Nusra Front will likely fill the resulting power vacuum descending the country into an even greater harbor for international terrorism. Ultimately, the Syrian conflict is fundamentally about the transport of energy, and whether Russia maintains its dominance over European natural gas imports, or if – with the Syrian regime deposed – a Qatar natural gas pipeline can cross the territory and make its way to Europe.

As for the Russian nuclear war drill, we can only hope that any such rising hints of nuclear warfare remain in the realm of the purely theoretical.

After dropping more than 80% in two years, oil prices have started to recover. But a full rebound remains uncertain, stuck at the crossroads of a worldwide recession and the House of Saud’s suicide mission to keep pumping more oil.

In February 2016, the oil industry and energy dependent countries panicked as oil prices collapsed from a high of $145 per barrel to a low of $27 per barrel. Market analysts speculated that the collapse in oil prices would cause unrest in oil-rich countries and whiplash investors who had tossed their fortunes into speculative US shale oil fields.

Since then, oil prices have rebounded considerably. Resting just below $50 per barrel, many hope the catastrophe has been averted. But with market turmoil surrounding the recent Brexit referendum potentially sparking a global recession and the Saudi Kingdom’s pledge to continue flooding the market, many risks remain for the oil industry.

The best case scenario may be that we are now seeing a new normal, with oil prices hovering between $40 and $60 per barrel for the foreseeable future as market oversupply comes off of the market due to a wave of bankruptcies in the US shale industry. Since 2015, over 130 US oil and gas companies have filed for bankruptcy, with US and Canadian oil production sagging by over 2 million barrels per day.

The question remains whether the crash was due to a surge of new supplies that came onto the market during the boom time by countries like the US and Canada, or if the collapse in prices was part of an intentional Saudi strategy to force competitors out.

Did Saudi Arabia Crash the Market Intentionally? Likely.

In 2015, market analysts prepared for the threat of a global recession after Chinese economic data showed signs that Beijing may face headwinds in the coming years. While everybody was preparing for demand to fall, the Saudi Kingdom made a curious decision to increase oil production.

Saudi Arabia increased production by 2 million barrels of oil per day, a roughly 20% increase, with the Crown Prince demanding an additional 20% hike in oil production by 2017. Nonetheless, market watchers believed that Saudi Arabia, whose budget is based on a $66.70 per barrel oil price, would back away from pumping oil as prices started to cascade – they were wrong.

As energy analyst Marin Katusa explained on Radio Sputnik, Saudi Arabia forced US shale oil properties out of business and proceeded to purchase those same US oil sites for pennies on the dollar in bankruptcy. The Saudi Kingdom not only ravaged America’s energy renaissance, but also sought to preserve market share from Iran, no longer hindered by international sanctions in the wake of the historic nuclear deal.

On Monday, Loud & Clear’s Brian Becker sat down with Ed Hirs, the Managing Director for Hillhouse Resources, and Zafar Bangash, author of the book “The Doomed Kingdom of the House of Saud,” to separate fact from fiction on Saudi Arabia’s role in the oil price meltdown, and what to expect next.

Oil Prices Made a Surprise Recovery Since February – Will it Last?

“The oil market is following the path that OPEC lined out for it,” said Hirs. “If you look back at the OPEC statements in 2015, the ministers said that they would continue producing and let the attrition of supply from high cost resources slip away from the market and let the ever growing demand set the floor for the market, at which point prices would begin to increase as the excess inventory gets worked out of the system.”

Hirs explained that although the collapse in oil prices has been devastating for many countries oil-based economies, the market waves have matched very closely with what oil analysts expected, with most experts predicting a rebound to well over $50 per barrel by the end of the year.

Was this a Deliberate Effort by the Saudis to Target Rivals?

Hirs said that while it could be argued that Saudi Arabia intentionally undercut the market, a separate line of thought is that the US shale oil was the last to enter an already crowded market and failed to offer competitive prices.

In support of this secondary line of thought, he pointed to oil industry models showing that for every 1% increase in oil supply, prices fall by 25%. In his estimate, consistent with previous reports from OPEC, the world oil market is oversaturated by roughly 2%, explaining at least 50% of the collapse from the high of $145 per barrel.

Zafar Bangash disagreed with the economist’s assertions that the phenomenon was solely a matter of supply and demand, arguing that Saudi Arabia fabricated the market dislocation in order to penalize the United States and Iran over the 2015 nuclear agreement.

“The Saudis were extremely upset and frightened by the agreement that Iran signed with the P5+1 countries that led to Iran coming on board with respect to their production,” he said. “Iran is producing quite a substantial amount of oil on the market right now, so the Saudis were trying to punish Iran as well undercut American shale oil production because they see Iran as not only a challenger, but also as an existential threat to their hegemony in the Muslim world.”

“In addition to this economic war, there is a political war, and I don’t see how the Saudis can win that, and they caused a lot of economic grief for themselves as well, with their budgets running deficits for the first time,” Bangash added.

“On the one hand they have been able to undermine shale oil considerably, but on the other hand they will continue to pay the price both economically and politically.”

20160526_russwash
So foreign ministers from the 28 NATO member-nations met in Brussels for a two-day summit, while mighty military power Montenegro was inducted as a new member.

Global Robocop NATO predictably discussed Afghanistan (a war NATO ignominiously lost); Iraq (a war the Pentagon ignominiously lost); Libya (a nation NATO turned into a failed state devastated by militia hell); Syria (a nation NATO, via Turkey, would love to invade, and is already a militia hell).

Afghans must now rest assured that NATO’s Resolute Support mission – plus “financial support for Afghan forces” – will finally assure the success of Operation Enduring Freedom forever.

Libyans must be reassured, in the words of NATO figurehead secretary Jens Stoltenberg, that we “should stand ready to support the new Government of National Accord in Libya.”

And then there’s the icing on the NATO cake, described as “measures against Russia”.

Stoltenberg duly confirmed, “We have already decided to enhance our forward presence in the eastern part of our alliance. Our military planners have put forward proposals of several battalions in different countries in the region. No decision has been taken on the numbers and locations.”

These puny “several battalions” won’t cause any Russian planner to lose sleep. The real “measure” is the deployment of the Aegis Ashore system in Romania last week – plus a further one in Poland in 2018. This has been vehemently opposed by Moscow since the early 2000s. NATO’s argument that the Aegis represents protection against the “threat” of ballistic missiles from Iran does not even qualify as kindergarten play.

Every Russian military planner knows the Aegis is not defensive. This is a serious game-changer – as in de-localizing US nuclear capability to Eastern Europe. No wonder Russian President Vladimir Putin had to make it clear Russia would respond “adequately” to any threat to its security.

Predictably all Cold War 2.0 hell broke loose, all over again.

A former NATO deputy commander went ballistic, while saner heads wondered whether Moscow, sooner rather than later, would have had enough of these shenanigans and prepare for war.

That worthless Patriot

A case can be made that the Beltway – neocons and neoliberalcons alike – do not want a hot war with Russia. What they want, apart from racking in more cash for the Pentagon, is to raise the ante to such a high level that Moscow will back down – based on a rational cost analysis. Yet oil prices will inevitably rise later in 2016 – and under this scenario Washington is a loser. So we may see a raise of interest rates by the Fed (with all the money continuing to go to Wall Street) trying to reverse the scenario.

Comparisons of the current NATO buildup to pre-WWII buildups, or to NATO when opposed to the Warsaw Pact, are amateurish. The THAAD and Patriot missiles are worthless – according to the Israeli Defense Forces (IDF) themselves; that’s why they tried to improve them with Iron Dome.

Meanwhile, those new NATO army “battalions” are inconsequential. The basic thrust behind the Pentagon’s moves under neocon Ash Carter continues to be to draw Russia ever further into Syria and Ukraine (as if Moscow actually was involved in, or wanted, a Ukrainian quagmire); trap Russia in proxy wars; and economically bleed Russia to death while crippling the bulk of oil and natural gas income to the Russian state.

Russia does not want – and does not need – war. Yet the “Russian aggression” narrative never stops. Thus it’s always enlightening to come back to this RAND corporation study, which examined what would happen if a war actually took place. RAND reached an “unambiguous” conclusion after a series of war games in 2015-2015; Russia could overrun NATO in a mere 60 hours – if not less – if it ever amounted to a hot war on European soil.

The Rand Corporation is essentially a CIA outpost – thus a propaganda machine. Yet it’s not propaganda to state the Baltic States and Ukraine would completely fall in less than three days before the Russian Army. However, the suggestion that additional NATO air power and heavily armored combat divisions would make a material difference is bogus.

The Aegis changes the game in the sense that it qualifies as a launch area for US missile defense. Think US missiles with minimum flying time – around 30 minutes – from Moscow; that’s a certified threat to the Russian nation. The Russian military has also been “unambiguous”; if it is ascertained that NATO – via the Pentagon – is about to try something funny, there are grounds for a preventive strike by Iskander-M systems out of Transnistria – as in the destruction of the US missiles by conveniently armed precision weapons.

Meanwhile, Moscow has pulled a stunning success – of course, it’s far from over – in Syria. So what’s left for the Pentagon – via NATO – is essentially to play the scare tactics card. They know Russia is prepared for war – certainly much better prepared than NATO. They know neither Putin nor the Russian military will back down because of kindergarten scaremongering. As for a too conciliatory tone by the Kremlin towards Washington, things may be about to change soon.

Say hello to my S-500

The Russian military are about to test the first prototypes of the S-500 Prometey air and missile defense system, also known as 55R6M Triumfator M – capable of destroying ICBMs, hypersonic cruise missiles and planes at over Mach 5 speeds; and capable of detecting and simultaneously attacking up to ten ballistic missile warheads at a range of 1300 km. This means the S-500 can smash ballistic missiles before their warheads re-enter the atmosphere.

So in the case of RAND-style NATO pussyfooting, the S-500 would totally eliminate all NATO air power over the Baltic States – while the advanced Kornet missile would destroy all NATO armored vehicles. And that’s not even considering conventional weapon hell.

If push comes to nuclear shove, the S-400 and especially the S-500 anti-missile missiles would block all incoming US ICBMs, cruise missiles and stealth aircraft. Offensive drones would be blocked by drone defenses. The S-500 practically consigns to the dustbin stealth warplanes such as the F-22, F-35 and the B-2.

The bottom line is that Russia – in terms of hypersonic missile development – is about four generations ahead of the US, if we measure it by the development of the S-300, S-400 and S-500 systems. As a working hypothesis, we could describe the next system – already in the drawing boards – as the S-600. It would take the US military at least ten years to develop and roll out a new weapons system, which in military terms represents a generation. Every Pentagon planner worth his pension plan should know that.

Russian – and Chinese – missiles are already able to knock out the satellite guidance systems for US nuclear tipped ICBMs and cruise missiles. They could also knock out the early alert warnings that the satellite constellations would give. A Russian hypersonic ICBM flight time, launched for instance from a Russian nuclear sub all the way to the US East Coast, counts for less than 20 minutes. So an early warning system is absolutely critical. Don’t count on the worthless THAAD and Patriot to do their job. Once again, Russian hypersonic technology has already rendered the entire missile defense system in both the US and Europe totally obsolete.

So why is Moscow so worried by the Pentagon placing the Aegis system so close to Russia’s borders? A credible answer is that Moscow is always concerned that the US industrial military-complex might develop some really effective anti-missile missiles even though they are now about four generations behind.

At the same time, Pentagon planners have reasons to be very worried by what they know, or hint. At the same time the Russian military – in a very Asian way – never reveal their full hand. The key fact of the matter needs to be stressed over and over again; the S-500 is impenetrable – and allows Russia for the first time in history to launch a first strike nuclear attack, if it ever chooses to do so, and be immune to retaliation.

The rest is idle babbling. Still, expect the official Pentagon/NATO narrative to remain the same. After all, the industrial-military complex is a cash-devouring hydra, and a powerful enemy is a must (the phony Daesh “caliphate” does not count).

The Threat Narrative rules that Russia has to meekly accept being surrounded by NATO. Russia is not allowed any response; in any case, any response will be branded as “Russian aggression”. If Russia defends itself, this will be “exposed” as an unacceptable provocation. And may even furnish the pretext for a pre-emptive attack by NATO against Russia.

Now let those Pentagon/NATO planners duly go back to play in their lavish kindergarten.

 

For the first two months of 2016, it seemed as if a modest, if stable, rebound was finally taking place among one of the hardest hit transportation sectors of 2015, rails. Atlas, like virtually everything else, this too has proven to be nothing more than a dead cat coming back to life and getting run over by a train.

As RBC writes in recent notes, rail traffic declines have again intensified. “On a Y/Y basis, traffic slowed by 14% Y/Y for the 11 week as all rails posted stiff volume declines and on a segment basis only Motor Vehicles carloads were higher (+7% Y/Y). Since week 7 when volumes grew by +4% Y/Y, the sharpest traffic declines has come in intermodal carloads (from growth of + 17% Y/Y for week 7 to a -12% Y/Y decline last week). Coal headwinds have also intensified in recent weeks and segment remains the major lagged so far this quarter (-30% Y/Y QTD).

Visually:

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“Coal stockpiles at electric generating facilities totaled 197 million tons at the end of 2015, the highest level since June 2012 and the highest year – end inventories in at least 25 years.”

The full details from EIA’s Today in Energy, by Tim Shear:

As coal stockpiles at power plants rise, shippers are reducing coal railcar loadings

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Source: U.S. Energy Information Administration, Electric Power Monthly and Association of American Railroads

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In 2015, the stockpile build from August to December was 40 million tons, far higher than the 11 million ton average stockpile build for these months over 2001 – 14. Stockpiles this December increased by more than 8 million tons.

Source: U.S. Energy Information Administration, Electric Power Monthly

 

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This means that just as oil inventories hit all time highs at the end of 2015 and into 2016, the same was taking place at US power plant coal stockpiles; worse, since much electric generation, the excess coal capacity in the market is so vast, that it will take pervasive, acute bankruptcies to reset some semblance of equilibrium. It also means that the Peabody bankruptcy will be only the start, and that tens of thousands more hard- working Americans will soon loose their jobs.