HOW FAR IS OBILIVION?

How far is oblivion nobody knows.

But from the fear in the market about a global economic crapout it must appear to many just beyond the horizon.

At any rate as we've said before the cure for low prices is low prices. The same holds for too much supply or too much demand. Unlike investors, markets are dynamic. The lower oil prices get the more supply has to come off the market eventually creating more demand.

And no different from other occasions that supply can come off the market in a variety of ways. That we're not there yet at $82 and change a barrel misses the point. The market will know it when the market sees it. 

Pick your entry points well. Unless we're way off base--and we could be--it won't be before long you'll espy tidbits about big-time investors easing into energy.

U.S. Oil Producers May Drill Themselves Into Oblivion

By Matthew Philips   October 13, 2014

---

     

Photograph by Andrew Burton/Getty Images

An oil drilling rig on July 30, 2013, near Watford City, N.D.

Remember the fall of 2008? As the world spun out of control and the price of everything crashed, a barrel of oil lost 70 percent of its value over about five months. Of course, prices never should’ve been as high as $146 that summer, but they shouldn’t have crashed to $40 by the end of that year either.

As the oil market has recovered, there have since been three major corrections, when prices have fallen at least 15 percent over a few months. We’re now in the midst of a fourth, with oil prices down more than 20 percent since peaking in late June at around $115 a barrel. They’re now hovering in the mid-$80 range and could certainly go lower. That’s good news for U.S. consumers, who are finally starting to reap the rewards of the shale boom through low gasoline prices. But it could spell serious trouble for a lot of oil producers, many of whom are laden with debt andexaggerating their oil reserves.

In a way, oil companies in the U.S. are perpetuating the crash by continuing to drill and push up U.S. oil production to its fastest pace ever. Rather than pulling back in hopes of slowing the amount of supply on the market to try and boost prices, drillers are instead operating at full tilt and pumping oil as fast as they can. Just look at the number of horizontal rigs in the field:

STORY: Will Cheap Oil Choke the Russian Economy?

BloombergThere is a record number of horizontal oil rigs in the field

Over the past five years, the amount of horizontal rigs deployed in the U.S. has almost quadrupled, from 379 in early 2009 to more than 1,300 today. This is of course purely a fracking story. Almost all the recent gains in U.S. oil production are the result of horizontal drilling techniques being used across much of the Midwest, from Texas to North Dakota. Unlike conventional vertical wells, where more wells do not always equal more oil, the strategy in a shale field appears to be to drill as many as possible to unlock oil trapped in rock formations.

As the number of horizontal drill rigs has exploded, the number of vertical rigs in the U.S. has gone in the opposite direction, falling almost 70 percent over the past seven years.

BloombergVertical drilling is so 2006

So will U.S. oil producers frack their way into bankruptcy? That’s a real possibility now. They’ve certainly gotten more efficient at drilling, and don’t need the same price they did to remain profitable. But we’re getting pretty close. Back in July, Goldman Sachs estimated that U.S. shale producers needed $85 a barrel to break even. That’s about where we are right now. The futures market points to even lower prices next year, with contracts for oil next April trading at about $82 a barrel. Certainly, some producers need higher prices than others. Those at the bottom of the cost curve could benefit from a potential wave of bankruptcy that spreads across the oil patch; they could then scoop up some assets on the cheap.

STORY: Cheap Oil and Expensive Oil Tankers: This Is Contango

One final note of caution: The U.S. natural gas industry ran through this same cycle a few years ago with companies getting themselves into trouble by flooding the market with gas, crashing the price and themselves in the process. By mid-2012, the price of natural gas got too cheap to drill. The number of natural gas rigs in the field still isn’t anywhere close to returning to where it was a few years ago. 

STORY: Oil Prices Fall, and the Global Economy Wins

BloombergNatural gas rigs are still relatively scarce.

Philips is an associate editor for Bloomberg Businessweek in Washington. Follow him on Twitter@matthewaphilips.

---

AT LEAST FOR NOW

 
Badlands NGL LLC is a California start up company. At least for now.

According to the North Dakota Governor Jack Dalrymple, the firm plans to move to Colorado and build a $4billion plastic manufacturing plant in Dalrymple's state. Gov. Dalrympled made the announcement today at a new conference with the CEO of Badlands, William Jeffery Gilliam.

The fracking boom in North Dakota no doubt has something to do with the location choice of Badlands.

The plant will convert ethane, a byproduct of natural gas processing, into polyethylene, which is used to make a wide variety of plastic consumer and industrial products, according to the governor’s office.

The project will be the largest private investment in North Dakota’s history, according to the office.

Badlands, which currently has fewer than 10 employees, is establishing its headquarters in Denver, as well as offices in Bismarck, North Dakota, according to The Associated Press.
Badlands’ plastic plant, along with two proposed fertilizer plants, would help soak up the abundant supply of natural gas in North Dakota.

Currently, about a third of North Dakota’s natural gas is burned off in a process called “flaring” because there are no pipelines nearby to carry the natural gas to market.


Manufacturing plants in North Dakota’s Bakken oil field, such as the Badlands’ proposal, would be good news for Colorado-based oil and gas companies with operations in the state because North Dakota officials have enacted policies that will restrict oil production if flaring is not reduced.

“This project is fully aligned with our goals to reduce flaring, add value to our energy resources right here in North Dakota and create diverse job opportunities across the state,” Dalrymple said. “By advancing the responsible development of our energy resources and by adding value to all of our resources, the opportunities in North Dakota are boundless.”

The facility will be able to produce 1.5 million metric tons of polyethylene, or 3.3 billion pounds annually, and will employ 500 highly trained people in manufacturing, marketing, administrative, safety, financial and executive positions. The project will take at least three years for full development, the office said.

Meanwhile, California considers a hold on fracking in its state.

But a recent report from the Bureau of Land Management apparently cleared the way for new leasing agreements in 2015.

The Bureau of Land Management has announced plans to resume oil and gas leasing for fracking in California at the same time it has released an independently produced report finding that current fracking methods aren’t fouling air and water and don’t raise the risk of earthquakes in the state.

The California Council on Science and Technology, with researchers from the Lawrence Berkeley National Laboratory and the Pacific Institute, drafted the independent technical study for the BLM after a lawsuit filed by environmental groups alleged the agency did not know the risks of fracking in the state. 

The suit was filed in 2012 by the Center for Biological Diversity and the Sierra Club.
Last year, the BLM suspended auctions for oil and gas leases. The CCST’s report moves the federal government closer to reopening lease auctions in California; the next step is an environmental review, which will incorporate the report’s findings.

Expect the turmoil to continue at least for now.

NOT SO FAST

Much of the shale oil boom has taken place in North Dakota at what's known as the Bakken site.

The uplift to the state's coffers comes in more ways than one. In 2013 North Dakota took in more than half of its tax revenues from oil and gas. Anyone who's followed the boom there knows the state is short on pipelines, an important factor in the cost of production and shipping.

Oil and gas pipelines are hardly on the invited guest list of most environmentalists. 

What’s troubling for North Dakota is that not only does the state have one of the highest oil production taxes in the nation at 11.5 percent, but thanks to the state’s extreme weather conditions and lagging infrastructure (we need pipelines!), the state is also one of the most expensive oil plays in the nation.
Meaning that if oil prices drop, one of the first places in the nation it’s going to become unprofitable to pump oil is North Dakota.

That makes the Keystone/Sandpiper pipeline delays loom large, as well as the Legislature’s decision to not only refuse reform for the state’s taxes on oil production but to actually raise them last year.
The oil markets being what they are, who knows what will happen, but suffice it to say that while dropping oil prices might be good for the rest of the country, they’re potentially devastating for North Dakota.

My guess is that these fears probably won’t put much of a damper on spending (naturally), but you can bet that those looking to abolish the state income tax (of which there are a growing number) will have to overcome this obstacle.

http://bakken.com/news/id/223068/bad-falling-oil-prices-hurt-nd/ 

When you factor in things like population, housing, industry and commerce, the state, as the chart shows, is one of the ones that has been most rewarded by rising oil prices.

There are a couple of issues here like those looking to get rid of the state income state tax as more and more around the nation realize that they're getting less and less for their trouble.

Bureaucratic greed is another issue, but we'll leave that for later. In any upcoming slowdown or recession these issues will only get larger.

Sure there are concerns about a global slowdown. But to those   who hail the U.S. oil glut as the second coming of cheaper energy as far as the eye can see, we have three words: Not so fast.
t. man hatter

SCALING TIME?

Good news is like yin and yang, almost always good for some and bad for others.

The International Energy Agency's latest report released today is a case in point. Crude oil prices hover near four year lows as demand seems to be drying up faster than the Los Angeles River in  mid-July.

The debate rages whether the price of oil has to hit $80 or even $70 a barrel to crimp U.S. shale producers enough to cut production. Much of the concern centers on a slowing global economy from China to Europe to Russia 

Of recent concern is OPEC members cutting prices rather than the expected move of cutting back production. Two days ago Iraq joined Saudi Arabia and Iran in cutting prices as other OPEC members like Venezuela are feeling the pain.

Meanwhile, stories like these,"Growth Fears Pushing Fund Managers From Risky Positions, Survey Finds," "Growth Jitters Topple Stocks Again" and "What Can Be Done To Revive Global Economic Growth?" abound.

Germany's announcement today about expected growth weakness for the rest of this year and into 2015 didn't help the situation. Officials there cut forecasts to 1.2% for this year down from a previous 1.8% and only 1.3% for 2015 off from a previously expected 2%.

One can depend on MSM doing what they do best, spreading gloom disguised as their brand of truth. Are these troubling times? Yes. Could things possibly get worse? Always a posibility. But it's just that possibility that creates opportunity.

Risk and opportunity go together like Siamese twins despite regulators' best efforts to outlaw any and all risk.

What this situation ought to be saying to you is what if these dire predictions are incorrect? Even the IEA report suggested demand will increase and might already be underway.

“Recent data suggest that may already have started to happen. Record-high refinery throughputs in August and improved margins worldwide suggest demand is perhaps not as dismal as it might appear,” citing big changes in trade flow were masking demand perception as oil producers descend on Asian markets.

As the U.S. imports less oil producers like Nigeria, Angola and others look elsewhere. The cost of producing oil in the U.S. ranges between $76-$77 a barrel, according to some observers.

Another headline we spotted today went something like this: The global recovery is a long way off. Maybe so. But our mood smells a scaling into position opportunity here. With the risk-reward figures growing in our favor daily with each nasty headline.

Like we said, good news is like yin and yang. Lower energy prices up to a point may help the economy, but what they ultimately bring with them may turned into one of those be careful what you wish for situations.

In the interim we will be going scaling. 
t. man hatter

NAYSAYING GROWS

One of the things one learns when the market turns nasty as it has people start jumping on the we-knew-it bandwagon. Here's a quote from one site.

Monday was the third straight day of losses for the major stock indexes, and the second time in three days that the Dow fell more than 200 points while the S&P 500 just had its worst three-day plunge since November 2011. 

Those for sure are facts, but the implied message is look out below. Now we're not suggesting "look out below" is incorrect. It might be spot on. But our sense is a rally is coming that will sooth some nerves, especially those of the Fed, because a weak stock market coupled with a disappointing housing market can't be good news for those folks.

After all, they've put so much into creating this paper asset charade what would such a double whammy do to their already questionable reputation? Despite all the MSM Fed worshipers, a declining set of believers is not what they seek. And you can bet with an upcoming election there are some nervous politicos also out there.

A declining equities market raising fears of another recession isn't what incumbents running for re-election want to see on the November menu. It would also deal a huge blow to all the Keynesian worshipers who love to publish chats like this one from Business Insiders, a leftist outfit masquerading as a pro-business publication.
http://www.businessinsider.com/brookings-fiscal-impact-on-the-economy-2014-10?

The implication here and the reference to the Yellen speeches is that more government spending is necessary to bring back the past good times and make them more permanent. But here's another look that puts the lie to this Keynesian myth most economists spread around today.

http://theeconomiccollapseblog.com/archives/12-charts-that-show-the-permanent-damage-that-has-been-done-to-the-u-s-economy
A brief disclaimer. Because we singled out Business Insider for what it is doesn't mean we think their opposition is any better when it comes to the truth.

INTUITION

We are not recommending anything here, just suggesting there is some wisdom here often overlooked when it comes to markets specifically and life in general.

We do not personally know or have any association with anyone mentioned here. Here are the words of a popular George Michael's song from some years back.

I feel so unsure
As I take your hand and lead you to the dance floor
As the music dies something in your eyes
Calls to mind a silver screen and all its sad goodbyes

I'm never gonna dance again
Guilty feet have got no rhythm
Though it's easy to pretend
I know you're not a fool

I should have known better than to cheat a friend
And waste a chance that I'd been given
So I'm never gonna dance again
The way I danced with you

Time can never mend
The careless whispers of a good friend
To the heart and mind ignorance is kind

There's no comfort in the truth, pain is that all you'll find

I'm never gonna dance again
Guilty feet have got no rhythm
Though it's easy to pretend

Market Music, from Patrick Schotanus

October 10, 2014
Good morning Mr. Niederhoffer:

In your bestseller, The Education of a Speculator, you wrote:

I need to know what is happening in the markets…I hooked up a music synthesizer to the computer, linked it to the interface between the computer and quote screen, and generated a program that would give a musical summary of the markets. I used piano tones for stocks, strings for interest rates, the cello for short-term rates, and the violin for the 30-year bond. The Japanese yen was registered with the high flute, corresponding to the favorite instrument in Japan, the shakuhachi. The English horn, the French horn, and the Alpenhorn stood in for the other currencies.

A lot has changed since then, particularly in terms of software tools becoming available to achieve this. In that spirit, the "music" in this video has been created by turning market data (prices, returns, volatility, and other time series) into MIDI-format (via our software tool) which subsequently was imported into what is called a Digitial Audio Workstation (DAW). The latter allows users to assign instruments (from a single guitar to a whole orchestra) to those data-sets and turn them into sound.

I created this video as part of my PhD research. The fact that it does, indeed, sound like music with a certain rhythm and timbre (rather than random audio-signals) is exactly what distinguishes my approach from earlier attempts at sonification of market data. In the final step, the resulting "composition" is linked to software which allows the creation of visuals that dynamically respond to the sounds (e.g. the small coloured spectra you see appearing against a backdrop of coloured fog).

The video captures a specific period in finance history. Usually I then ask watchers how they would allocate percentage wise a hypothetical portfolio across stocks, bonds, and cash based purely on this video (i.e. "Don't analyse the video but focus on how it makes you feel; what did it convey?").
What's the purpose of all this? Please allow me to share another quote, this time from Jack Schwager's The New Market Wizards:

"Every market has a rhythm, and our job . . . is to get in sync with that rhythm . . . There's no sense of self at all. There's just an awareness of what will happen. The trick is to differentiate between what you want to happen and what you know will happen. The intuition knows what will happen." 

Although some investors/traders have a natural ability to intuitively get a sense for market rhythms, others may need a little help. The investment research method I'm developing is aimed at that: offering a structured, disciplined approach (including advanced software) to train investors' intuitive abilities to sense the market mood in general and its rhythms (i.e. swings) in particular. Massive amounts of data can be efficiently transformed this way to benefit from the whole spectrum of the human-computer bandwidth. Perhaps you're familiar with the behavioural finance concept of System 1 and System 2 of the human mind (e.g. Kahneman, 2011)? Audiovisuals are particularly suited to appeal to System 1 abilities.

Why is this important? Because I believe we have gone way too far in quantifying markets, inspired by the flawed premise of the "market as machine". As a result, what we casually refer to as "the market's mind" has become imbalanced (at multiple levels). Apart from the obvious suspects like HFT, VAR, and flash crashes, monetary policy is also misinformed by this bias. Moreover, we try to understand market sentiment and moods purely analytically (e.g. put/call ratio, bulls/bears spread, etc.) while increasingly repressing our emotions by outsourcing decision-making to algorithms. By distorting the delicate process of discovery it is no wonder we're facing secular stagnation, for example.

Admittedly, this is just my opinion, but should you be interested in the background to all of this I would be happy to send you a short introduction (derived from my thesis + draft paper).
Happy to discuss and clarify.
Warm wishes,
Patrick
http://www.dailyspeculations.com/wordpress/?p=9719

The friend betrayed here is you when you fail to discover and listen intuitively to the market's rhythm, fail to honor your intuitive side.

Much of our lives is spent developing what is revered in society today, the intellectual side. This is not to play the importance of that down, just raise the question how much time have you spent developing the intuitive. In most cases the answer to that is clear--very little.

The rule is what one focuses on expands. This is not just some feely-touchy goodie from the world of self-help or improvement. It's part of the universal law like water seeking its own level. In medicine there's a parallel construct: If you listen to the patient he will tell you what's wrong.

One of the major criticisms of modern medicine is that there's very little listening going on. 

Learning to listen to the market is as much of part of it all as the palaver about stochastic oscillators, MACD, new highs versus new lows and so on.

t.man hatter