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Goldman: A Biden SPR Release Is Now Fully Priced In And Will Send Oil Price Even Higher In 2022

Goldman: A Biden SPR Release Is Now Fully Priced In And Will Send Oil Price Even Higher In 2022

Bloomberg is out with a surprisingly objective…



This article was originally published by Zero Hedge

Goldman: A Biden SPR Release Is Now Fully Priced In And Will Send Oil Price Even Higher In 2022

Bloomberg is out with a surprisingly objective article (“surprising” because it goes against the very “green” ideology espoused by both the media company’s billionaire owner and the Biden administration) titled “Biden’s Remedy for High Gasoline Prices: Blame Oil Companies” which echoes what we said yesterday, yet which does not address the elephant in the room, namely that while Biden is (of course) scapegoating someone for his own failures, the solution remains just one: some form of SPR release or “volume exchange” (as JPM explained yesterday).

There is just one problem: at this point an SPR release – which has been fully priced in – would send oil prices higher.

As Goldman’s commodity strategist Damien Courvalin explains, while such a release would provide a short-term fix to a structural deficit, “it is now fully priced-in” following the $6/bbl move lower in recent weeks, which are pricing in a release of more than 100 mb into OECD stocks, and – worst of all – would not help the slow global supply response that only higher oil prices can overcome. In fact, according to Courvalin, “if such a release is confirmed and manages to keep oil prices depressed in the context of low trading activity into year-end, it would create clear upside risks to our 2022 price forecast.”

Below we excerpt from Courvalin’s note which we urge all those who write Biden’s daily agenda and speeches to read before they commit another inflationary disaster.

The White House consideration of an SPR release had already pushed Brent down by $4/bbl in recent weeks, with the potential participation of China likely behind the latest additional $2/bbl sell-off that occurred yesterday (November 17). On Goldman’s pricing model, the $6/bbl move lower since late October is already pricing a release of well over 100 mb into DM stocks (assuming in fact that rising COVID cases have further exacerbated the recent move lower).

Ironically, this is well beyond what is likely to be announced with reports suggesting a 30 mb US release and a similar aggregate amount from other countries. As a result, “such a potential announcement is already fully priced in” according to Courvalin, with low trading liquidity into year-end the likely only reason for any additional price downside from here.

As Goldman has argued since August 2020, higher oil prices are justified by a strong demand recovery in the face of a slow supply response. This slow supply response has itself three roots, that only higher oil prices can overcome:

  1. the damage to investors caused by oil producers’ capital destruction over the last seven years, now compounded by ESG allocation inefficiencies, and
  2. the demand uncertainties of COVID, China and energy transition.
  3. In the case of OPEC, the slow production increase is the rational response to a steeper global oil cost curve, with oil finally returning to levels that balance their fiscal budgets.

Net, actions to lower oil prices in the short-term would further delay the required global supply response. As Goldman explains, “from a central bank perspective, this would be akin to not raising rates in the face of inflation (Fed in 1965) or, conversely, hiking rates in the face of a recession (Fed in 1928, ECB in 2008).”

As a result, if such a release is confirmed and keeps oil prices below the bank’s 4Q 2021 $85/bbl Brent forecast, it would introduce clear upside risks to the bank’s 2022 price forecast. This in fact suggests that OPEC could consider halting its production hikes to offset the detrimental SPR impact of lower oil prices on the needed recovery in global oil capex, an unlikely event admittedly given China’s potential participation in a strategic release.

In any case, one thing is clear: the three structural roots of the slow supply response requires higher oil prices, even if it means a rout for the Dems in the miderms. Here’s why:

First, an investor payback for poor returns. The oil upstream sector, especially shale, over-invested from 2014 through 2019, destroying significant equity and debt values. This has left investors wary of the sector, requiring producers to focus on returning cash to shareholders through debt buybacks and dividend payouts. Despite these efforts, the recent profitability has been too brief to overcome such damage to investors, leaving the sector trading at a large discount to both the broader market (S&P500) and long-dated oil prices. This is still a long ways away from maximizing shareholder returns, providing little mandate to raise capex, and with the forces of ESG now an additional headwind. Specifically, by cannibalizing investor’s capital away from oil and gas, ESG principles are further raising the cost of capital of producers, increasing the marginal cost of production that needs to be cleared by higher oil prices. This is the main reason why the producer response has been slow, with the return on capital employed of the two largest US producers – pointed out by the White House in a letter to the FTC yesterday – only now back to their cost of capital.

Second, demand uncertainty. In the short-run, this uncertainty is due to the still present COVID risk, with measures to contain successive waves systematically weighing on mobility. The increasingly more important source of uncertainty is, however, that of the path to decarbonization. The focus on shifting away from hydrocarbons, while necessary, creates an uncertain return proposition for long-cycle oil and gas projects, which still represent the bulk of global supplies. The rational response to such uncertainty is to either delay investment or focus on short-cycle solutions. Beyond the volumetric uncertainty of where oil demand will be in ten years time, this uncertainty is increasingly regulatory, with still unclear rules in the US in terms of drilling, emissions and taxation. While action is indeed required in these areas to lower emissions, the lack of clarity is rationally delaying investment. We observed the same outcome in 2014 when a potential lift of the US crude export ban was still unclear, delaying any major investment in US refining capacity.

Third, OPEC. The group still has spare capacity and is only ramping up gradually. While it could do more, there are two reasons for such a slow response. First, half of its members can’t meet their quotas given their own under-investment. This complicates changing quotas as such a decision needs to be unanimous. Second, the slow supply response of shale producers has brought the group its pricing power back, leaving a slow ramp-up in output fiscally more beneficial than higher volumes. As we argued in 2014, this is the rational response to a steepening global cost curve, with prices finally back to near core-OPEC’s fiscal breakevens. The nature of the current SPR release – presented in part as targeted at OPEC – raises the question of what the group does next. The rational decision would be to halt production hikes to offset it – since the positive price impact always exceeds the volumetric hit. Conceptually, such a decision could be argued to help support prices to the level needed to stimulate the (slow) recovery in drilling activity globally. A global shortage in coming years is indeed not in OPEC’s interest as it would lead inevitably lead to a global recession – and much lower oil revenues – or accelerate  the energy transition away from oil.

Ultimately, Goldman is correct that the decision to release oil from strategic reserves remains mostly political, precipitated by rising inflationary pressures across the economy. Yet, while oil prices are indeed up significantly, they are ultimately not historically elevated, especially when factoring in wealth effects. In the US for example, current spending on gasoline represents 4.3% of total US consumer expenditures, well below the 6% average level of the 2010-14 period, when the last emergency coordinated SPR release occurred. On a global scale, Goldman’s estimate of oil consumer spending per GDP (based on retail prices covering 98% of global demand) shows that current prices are only in their 65th percentile since 2000.

The political nature of this release may lessen the sustainability of its bearish price impact. For example, structured as a loan, barrels would need to be returned at a later date, creating buying demand for deferred contracts as a hedge (an especially appealing strategy given the backwardated forward curves). The EIA’s forecast for lower oil prices next year as well as the historical pattern of US SPR volumes ending up exported would also point to the use of exchanges of barrels rather than a sale, just as JPM predicted yesterday. With India, Korea and China having all already conducted swaps this year to be repaid in 2022, similar government loans would actually become an additional bullish catalyst next year when these barrels will have to be returned from commercial inventories. Meanwhile, the lack of bearish impact of past Chinese SPR releases is ultimately indicative of the scope of the current deficit.

So given Goldman’s expectation that an SPR release – which is already more than fully priced in – will not lower oil prices in 2022, with
risks to the bank’s forecast skewed to the upside if a deal with Iran does not occur, Courvalin believes the White House will be pushed to consider additional actions to try to lower US gasoline prices. This is consistent with yesterday’s news that the White House urged the FTC once again yesterday to investigate US retail gasoline prices, which have indeed outperformed crude oil prices in recent months. Of course, this outperformance reflects refining, regulatory and distribution dynamics, as pump prices need to reflect:

  1. the historical pattern of a lagged pass through of crude prices into gasoline prices,
  2. the tight level of gasoline and diesel inventories, leading both to compete and outperform crude in order to defend refiners’ yield incentives,
  3. regional closures in US refining capacity,
  4. the impact of government biofuel mandates and elevated RINs values, and
  5. retail and distribution margins supported by rising input and labor costs

Of these, the Biden admin can only directly impact RIN values – pointing to weaker RFS blending requirements in 2021-22. Marketing margins have also remained elevated, making up 20% of current retail prices (at the high end of the historical range), with the FTC asked for a second time to investigate this sector. This may however still reflect the inflationary effects of the COVID shock, with costs per gallon sold increasing due to a still above-average number of employees as well as wage inflation.

Tyler Durden
Thu, 11/18/2021 – 16:40

Author: Tyler Durden


Hillary: “Americans Just Don’t Appreciate What Joe Has Done For Them”

Hillary: "Americans Just Don’t Appreciate What Joe Has Done For Them"


This might be the longest-ever Thanksgiving…

Hillary: “Americans Just Don’t Appreciate What Joe Has Done For Them”


This might be the longest-ever Thanksgiving weekend for Joe Biden. While he’s been enjoying a warm blanket and a hot cup of Ovaltine with his family in Nantucket, the President’s poll numbers have been in virtual free-fall. It seems that the nation is fast losing confidence in his ability to handle important issues like the economy, the border, foreign policy and crime running wild on America’s streets. In short, the majority of Americans, both Democrat and Republican, do not believe Joe is capable of fulfilling his duties as the chief executive of the world’s premier superpower.

At present, Biden’s average job approval rating stands at around 40%, a steep drop from the 55% percent average approval rating he enjoyed last May.

No one really knows just how low Joe will go.

Still, this hasn’t stopped his ardent allies from rushing to his defense, and blaming his flagging numbers on social media trolls (see deplorables).

Carlos Garcia from The Blaze writes…

Former presidential candidate Hillary Clinton tried to explain away President Joe Biden’s poor polling by accusing Americans of not appreciating what Biden has done for them, and blamed social media.

Clinton made the comments while a guest on Rachel Maddow’s MSNBC show Tuesday evening.

“You know, democracy is messy. You know, a lot of people got, oh I think, kind of frustrated looking at the messy process of legislation,” said Clinton.

“And they didn’t really appreciate that, within a year, the Biden administration has passed two major pieces of legislation through both the House and the Senate, they passed another major piece through the House that will be soon be in the Senate,” she continued.

“By any measure those are extraordinary accomplishments and they really will help many millions of Americans with healthcare and prescription drug prices, as well as climate change and so much else,” said Clinton.

“But because of the way we are getting our information today,” she concluded, “and because of the lack of gatekeepers and people who have a historic perspective who can help us understand what we are seeing, there is a real vulnerability in the electorate to the kind of demagoguery and disinformation that, unfortunately, the other side is really good at exploiting.”

Both Maddow and Clinton accused Republicans of undermining the results of fair elections and calling for violence as a political solution in the interview.

Biden’s poll numbers have suffered greatly after a cascade of damaging incidents plaguing his administration. Among the worst were the disastrous retreat from Afghanistan, the painful cost of high inflation, and the crisis of illegal immigration at the border.

One poll from October found that only 38% of Americans thought Biden deserved a positive job rating.

Watch Hillary’s clip here: 

Tyler Durden
Sun, 11/28/2021 – 17:30

Author: Tyler Durden

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Silver price under pressure despite the risk-off sentiment

Silver price extended the week’s losses in Friday’s session despite the risk-off market sentiment. In the coming week, focus will be on Fed policymakers’…

Silver price extended the week’s losses in Friday’s session despite the risk-off market sentiment. In the coming week, focus will be on Fed policymakers’ remarks and data related to its industrial and precious metal status.

Market mood

The fear & greed index shifted from a greed level of 64 to the fear end of the spectrum. On Friday, the index’s reading was at 31. Both the market volatility and safe-haven demand are exhibiting extreme fear. Usually, risk aversion boosts precious metals based on their safe-haven status.

However, a strengthening US dollar is exerting pressure on silver price. Concerns over the new wave of COVID-19, coupled with positive economic data from the US, boosted the dollar index to its highest level since July 2020. Besides, slowed growth of the Chinese economy has raised concerns over silver’s industrial demand.

In the new week, silver price will be reacting to manufacturing PMI from China and other economies. Besides, investors will be keen on Jerome Powell’s testimony as well as speeches from various Fed policymakers. The speeches come a few days after Fed meeting minutes that exuded a hawkish tone. The nonfarm payrolls data scheduled for Friday will further influence the metal’s price movements.

Silver price technical outlook

Silver price has been under pressure over the past week. The week’s losses defined a trend reversal after the precious metal hit a four-month high in the previous week. Since Monday, it has dropped by about 6.89%.

The precious metal ended the week at 23.17; down by 1.83%. On a four-hour chart, it is trading below the 25 and 50-day exponential moving averages. Besides, with an RSI of 26, it is in the overbought territory.

In the coming week, I expect silver price to remain under pressure amid the strengthening US dollar. However, it may begin the week on a corrective rebound as it finds support along the psychological level of 23.00.

It may bounce back to find resistance along the 25-day EMA at 23.72. Subsequently, it may trade within the formed horizontal channel with 23.16 and 23.72 as the lower and upper borders respectively. Above the aforementioned resistance level, the bulls will be eyeing the 50-day EMA at 24.03. On the flip side, a move below Friday’s low of 22.94 will likely place the support zone at 22.35.

silver price
silver price

The post Silver price under pressure despite the risk-off sentiment appeared first on Invezz.

Author: Faith Maina

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New Zealand cash rates – the canary in the coal mine?

My son, Angus, ventured into the Sydney residential market at the beginning of the year acquiring a small apartment, with what I considered to be an enormous…

My son, Angus, ventured into the Sydney residential market at the beginning of the year acquiring a small apartment, with what I considered to be an enormous loan from one of the Big Four. At the time the fixed four-year home loan rate was around 1.95 per cent per annum. Today, the advertised rate has jumped 1.0 per cent per annum to around 2.95 per cent. This reflects the Australian four-year Government Bond yield moving up from 0.20 per cent at the beginning of 2021 to the current 1.32 per cent.

The likely response to this change from property buyers today is that a much higher proportion of their mortgage will be attributed to a variable home loan. This rate typically reflects the Reserve Bank of Australia’s (RBA) cash rate, and at 0.10 per cent per annum it is currently at a record low, and well below the “emergency low” of 3.0 per cent per annum implemented during the Global Financial Crisis (6 months to September 2009).

Across the ditch, the Reserve Bank of New Zealand (RBNZ) has raised its official cash rate for the second time in two months by 0.25 per cent to 0.75 per cent per annum to counter growing inflation, which hit 4.9 per cent in the September 2021 quarter, and is expected increase to 5.7 percent in the March 2022 quarter.

RBA vs RBNZ cash rate

Markets are currently pricing in five more 0.25 per cent increases by the RBNZ over the next twelve months to a targeted 2.0 per cent per annum. Will New Zealand be seen as a canary of the coal mine moment given inflation has become a global problem? Only time will tell, however if cash rates happen to jump by 1.5 per cent and this filters through into the rate for variable home loans. The tailwinds currently being enjoyed by asset owners (with debt) – close to nil interest rates – could easily become headwinds.

The US inflation figure for October 2021 hit 6.2 per cent, a 30 year high.  Selected CPI subcategories saw the following 12 month changes: Beef +24 per cent, gasoline +51 per cent, natural gas +28 per cent and used cars and trucks +26 per cent. The UK was not far behind, with an inflation rate of 4.2 per cent for October.


Global supply chain bottlenecks and shifting consumer demand from services to goods could well be transitory, but as the Founder of Bridgewater Associates, Ray Dalio, warns, “raging inflation” is eroding people’s wealth today – particularly those who have their money in cash.

Author: David Buckland

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