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Oil Surges To 5 Week High As BofA Sees Crude Hitting $100 In A “Very Cold Winter”

Oil Surges To 5 Week High As BofA Sees Crude Hitting $100 In A "Very Cold Winter"

Oil rose more than 1% on Monday, supported by concerns over…

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This article was originally published by Zero Hedge
Oil Surges To 5 Week High As BofA Sees Crude Hitting $100 In A "Very Cold Winter"

Oil rose more than 1% on Monday, supported by concerns over shut output in the United States because of damage from Hurricane Ida, with analysts expecting prices to remain rangebound in a stable market over the coming months, while some forecasting that physcial shortages could lead to sharply higher prices, while a cold winter could send oil as high as $100.

Brent crude rose 90 cents, or 1.2%, to $73.82 a barrel - the highest price since the first week of Autgust - while WTI crude was up 99 cents, or 1.4%, at $70.71. Brent has held between $70 and $74 a barrel over the past three weeks.

“Oil prices may not have much room to rise in the near term, but at the same time are not expected to crash soon,” said Stephen Brennock of broker PVM.

Prices found some support from Hurricane Ida’s impact on U.S. output as about three-quarters of the offshore oil production in the Gulf of Mexico, or about 1.4 million barrels per day, has remained halted since late August.

“Hurricane Ida was unique in having a net bullish impact on U.S. and global oil balances - with the impact on demand smaller than on production,” Goldman Sachs analysts said in a note from last Friday. However, the number of rigs in operation in the United States grew in the latest week, energy service provider Baker Hughes said, indicating production could rise in coming weeks.

Separately, the Energy Information Administration (EIA) last week said it expected Brent prices to remain near current levels for the remainder of 2021, averaging $71 a barrel during the fourth quarter.

“Markets still need clarity on the virus impacts beyond the very near term; and until we get that, it seems like most assets, including oil, may continue to drift sideways,” said Howie Lee, an economist at Singapore’s OCBC bank.

Oil prices briefly fell last week amid supply concerns linked to China’s planned release of oil from strategic reserves while the hope of fresh talks on a wider nuclear deal between Iran and the West was raised after the U.N. atomic watchdog reached an agreement with Iran on Sunday about the overdue servicing of monitoring equipment to keep it running. China on Monday said it will announce details of planned crude oil sales from strategic reserves in due course, however as Rabobank noted over the weekend, "the move signaled political vulnerability to rising commodity price inflation, but even more so, it is not enough physical supply to move the dial."

But while prevailing sentiment was cautious, three banks see substantially more potential upside, among them Goldman, Bank of America and Citigroup.

In a note published late on Sunday, Goldman's chief economist Jeffrey Currie wrote that going into autumn, oil is poised to rally significantly, particularly should Iranian deal fall apart. If oil hits target of $80/bbl, “it would be hard for investors to ignore inflation in the most important physical commodity markets.” That is “why we see oil as the catalyst this autumn to attract investors back into the space."

According to Currie the key driver behind ongoing commodity surge is the "growing scarcity across physical markets." The Goldman strategist notes that "since last October, policymaker and investor focus has remained on the vaccine-driven demand recovery from the deepest recession on record. Yet today, physical goods demand has reached such high levels — above pre-pandemic trends in all but oil — that the system is becoming increasingly constrained in its ability to supply these goods."

But now, with the pandemic inventory glut run down, these markets are becoming increasingly exposed to any type of supply disruption or unexpected demand increase. The lower the inventory cover, the bigger the risk and the larger the scarcity premium in prices when one of these events materializes – just as we are seeing in European gas and power today.

Oil likely catalyst to get investors back into commodities and reflation trade. In our view, European energy pricing dynamics offer a glimpse of what is in store for other commodity markets in coming months as micro factors are increasingly in the driving seat, with widening deficits depleting inventories leading to elevated price volatility as markets struggle to find a balance. Going into the autumn we believe oil is the market that is poised to rally significantly, particularly should an Iran deal fall apart. Were oil to reach our target of 80/bbl, it would be hard for investors to ignore inflation in the most important physical commodity markets. This is why we see oil as the catalyst this autumn to attract investors back into the space that should also help prices at the margin. Moreover, current market conditions make now an attractive entry point for base metals, in our view, as copper positioning is the cleanest it has been all year, at only 10% of 2021 highs. Further, for the first time in this bull market, both onshore and DM investors have a large amount of additional length to add, particularly if onshore policy remains supportive. The market is pushing back the likelihood of Fed tapering, but with such a move inevitable once Delta risks recede, we believe the reflation trade unwind is behind us, with risks firmly poised to the upside.

The bottom line according to Goldman is that "oil is set to rally strongly" because despite a large Delta wave in Covid-averse SE Asia, including China, global oil demand barely declined at 98 mb/d.

In addition, OPEC+supply additions materially disappointed vs. their quotas in August even more than Goldman's expectations, while, outside of the group, production in Brazil, Norway, Colombia, SEAsia, and others struggle to ramp up in the face of maintenance, project delays, and higher decline rates from underinvestment. Meanwhile, as Goldman observed last week, Hurricane Ida proved to be a rare bullish storm shock to global balances, "hampering US production that continues to recover slower than the market expects."

As such, Kostin concludes that the market remains in deficit with the only remaining inventory surplus relative to pre-Covid levels in China, where higher demand and refinery runs ultimately necessitate it.

Net, we forecast that OECD stocks will reach their lowest levels since early 2015, driving the forward curve into steeper backwardation initially and ultimately necessitating higherlong-dated prices to incentivize higher production. Accordingly, we reiterate our $80/bbl price target for 4Q21 with upside risks to 1H22.

Citigroup's Ed Morse, who has been traditionally very bullish on oil and has been used by OPEC+ as the cartel's in-house advisor on several occasions, was similarly bullish, noting in a note that Hurricane Ida left the oil market looking stronger than expected at the end of the summer, even if the dynamics for next year are still bearish although he was quick to note that a continued pandemic recovery will support prices into 4Q. However, beyond that U.S. producers are gearing up to supply more oil, Saudi Arabia is planning to raise its output capacity, and Russia’s largest producers also plan to raise production and increase exports.

But while sellside sentiment continues to turn bullish on oil, nothing compares to the note published overnight by BofA commodities head Francisco Blanch who said in a note overnight that a very cold winter could see Bank of America’s 3Q 2022 call for $100/bbl Brent crude oil rolled forward. According to Blanch, If winter turns out to be much colder than normal, demand could surge by 1m-2m b/d as the weather is quickly becoming the most important driver of energy markets.

Noting that global crude oil prices have been range-bound since staging "a remarkable rally all the way through late June 2021 as gasoline demand surged into the summer months" but a lack of product demand leadership from the distillate complex has prevented further upside, Blanch asks rhetorically "has the oil rally stalled?" In his view, the answer is now and he explains why:

As other energy prices like natural gas and coal keep pushing higher, upside risks to the oil market have started to build. For starters, there is an estimated 1.8mn b/d of available gas to oil switching at power plants capacity across Europe and Asia, even if only a fraction of this capacity is likely to be utilized. Switching may also be possible at industrial operations, including some refineries, which could lead to more oil demand this winter.

Yet the rapid spike in gas prices may lead to substitution

Further supporting oil prices, global demand is coming back and OECD oil inventories just dropped to the 10 year average. Looking at US total product demand, we note that volumes are already back to pre-pandemic levels in aggregate. Although the Covid-19 Delta variant remains a problem, particularly for Emerging Markets, consumption is coming back with a vengeance led by China and India. From natural gas liquids used in petrochemical processes, to light products like gasoline, to bunker fuels in shipping and power generation, petroleum demand appears to be very robust. And distillates, the dominant fuel in oil pricing dynamics over the winter months, have lagged due to limited air traffic. But a surge in demand for heating oil and kero could boost distillate demand.

But the big catalyst that could lead to a sharp spike in prices is cold winter weather which could roll forward BofA's $100/bbl oil call.

Blanch first reiterates his base case: "We continue to project that oil prices will remain range-bound in 2H21 and maintain our average Brent crude oil forecast of $70/bbl for this period (Exhibit 40), although we now target Brent to be at $75/bbl by year end as we see growing upside risks. In line with this view, we project deficits over the coming months that should support oil prices into year-end."

Then looking ahead, he hedges that while a new Covid-19 wave, taper tantrum, a China debt crisis, and the return of Iranian crude barrels could push oil lower, "weather is quickly becoming the most important driver of energy markets. If the winter turns out to be much colder than normal, global oil demand could surge by 1 to 2mn b/d. Under this scenario, the oil market deficit this winter could easily exceed 2mn b/d and our $100/bbl oil target for the middle of next year could quickly be rolled forward six months."

Tyler Durden Mon, 09/13/2021 - 10:58

Economics

Goldman Raises Year-End Oil Price Target To $90

Goldman Raises Year-End Oil Price Target To $90

Just days after Goldman’s head commodity analyst Jeff Currie told Bloomberg TV that the bank…

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Goldman Raises Year-End Oil Price Target To $90

Just days after Goldman's head commodity analyst Jeff Currie told Bloomberg TV that the bank anticipates oil spiking to $90 if the winter is colder than usual, on Sunday afternoon Goldman went ahead and made that its base case and in a note from energy strategist Damien Courvalin, he writes that with Brent prices reaching new highs since October 2018, the bank now forecasts that this rally will continue, "with our year-end Brent forecast of $90/bbl vs. $80/bbl previously."

What tipped the scales is that while Goldman has long held a bullish oil view, "the current global oil supply-demand deficit is larger than we expected, with the recovery in global demand from the Delta impact even faster than our above consensus forecast and with global supply remaining short of our below consensus forecasts."

Among the supply factors cited by Goldman is hurricane Ida - the "most bullish hurricane in US history" - which more than offset the ramp-up in OPEC+ production since July with non-OPEC+ non-shale production continuing to disappoint.

Meanwhile, as noted above, on the demand side Goldman cited low hospitalization rates which are leading more countries to re-open, including to international travel in particularly COVID-averse countries in Asia.

Finally, from a seasonal standpoint, Courvalin sees winter demand risks as "further now squarely skewed to the upside" as the global gas shortage will increase oil fired power generation.

From a fundamental standpoint, the current c.4.5 mb/d observable inventory draws are the largest on record, including for global SPRs and oil on water, and follow the longest deficit on record, started in June 2020.

For the oil bears, Goldman does not see this deficit as reversing in coming months as its scale will overwhelm both the willingness and ability for OPEC+ to ramp up, with the shale supply response just starting.

This sets the stage for inventories to fall to their lowest level since 2013 by year-end (after adjusting for pipeline fill), supporting further backwardation in the oil forward curve where positioning remains low.

But what about a production response? While Goldman does expect short-cycle production to respond by 2022 at the bank's higher price forecast, from core-OPEC, Russia and shale, this according to Goldman, will only lay bare the structural nature of the oil market repricing. To be sure, there will likely be a time to be tactically bearish in 2022, especially if a US-Iran deal is eventually reached. The bank's base-case assumption is for such an agreement to be reached in April, leading the bank to then trim its price target to an $80/bbl price forecast in 2Q22-4Q22 (vs. its 4Q21-1Q22 $85/bbl quarterly average forecast). This would, however, remain a tactical call and a likely timespread trade according to Courvalin, with long-dated oil prices poised to reset higher from current levels, especially as the hedging momentum shifts from US producer selling to airline buying (a move which Goldman says to position for with a long Dec-22 Brent and short Dec-22 Brent put trade recommendations).

 

Meanwhile, the lack of long-cycle capex response - here you can thank the green crazy sweeping the world - the quickly diminishing OPEC spare capacity (Goldman expects normalization by early 2022), the inability for shale producers to sustain production growth (given their low reinvestment rate targets) and oil service and carbon cost inflation will all instead point to the need for sustainably higher long-dated oil prices. Remarkably, Goldman now expects the market to return to a structural deficit by 2H23, which leads it to raise its 2023 oil price forecast from $65/bbl to $85/bbl, and the mid-cycle valuation oil price used by Goldman's equity analysts to $70/bbl.

Translation: expect a slew of price hikes on energy stocks in the coming days from Goldman.

Finally, where could Goldman's forecast - which would infuriate the white house as gasoline prices are about to explode higher - be wrong? For what it's worth, the bank sees the greatest risk on the timeline of its bullish view. On the demand side, it would take a potentially new variant that renders vaccine ineffective. Beyond that, however, the bank expects limited downside risk from China, with its economists not expecting a hard landing and with our demand growth forecast driven by DMs and other EMs instead. This leaves near-term risks having to come from the supply side, most notably OPEC+, which next meets on October 4. And while an aggressively faster ramp-up in production by year-end would soften (but not derail) our projected deficit, it would only further delay the shale rebound, which would reinforce the structural nature of the next rally given binding under-investment in oil services by 2023. In addition, a large ramp-up in OPEC+ production would simply fast-forward the decline in global spare capacity to historically low levels, replacing a cyclical tight market with a structural one.

The full report as usual available to pro subscribers in the usual place.

Tyler Durden Sun, 09/26/2021 - 20:36
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Economics

Weekly Market Pulse: Not So Evergrande

US stocks sold off last Monday due to fears over the potential – likely – failure of China Evergrande, a real estate developer that has suddenly discovered…

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US stocks sold off last Monday due to fears over the potential – likely – failure of China Evergrande, a real estate developer that has suddenly discovered the perils of leverage. Well that and the perils of being in an industry not currently favored by Xi Jinping. He has declared that houses are for living in not speculating on and ordered the state controlled banks to lend accordingly. Evergrande is known as a real estate developer and it certainly is but it is also a sprawling company with investments in multiple industries including, of course, an electric car company. Cutting off its financing isn’t just going to affect the Chinese real estate market. And real estate accounts for roughly 70% of household net worth in China so everyone in the country is going to take a hit. But is there a connection to the US or other developed country stock markets?

Real estate represents anywhere from 15 to 25% of the Chinese economy depending on what source you want to believe. The exact number isn’t really important, just suffice it to say that construction is a very large part of China’s economy and speculating on real estate is a national pastime. But the impact of it goes well beyond China. It is well known – according to the news reports I read – that China’s share of global commodity consumption is large and a large part of that goes to the construction industry. I read some research last week that claimed China’s property sector accounted for 20% of global steel and copper output. That sure sounds big and scary – as I’m sure the authors intended – but I would just point out that copper prices are near their all time highs and actually finished higher last week. The general commodity indexes were higher too. If Evergrande’s demise is going to materially impact commodity demand you wouldn’t know it from last week’s action. Maybe China’s commodity consumption isn’t “well known” in the commodity pits.

The doom and gloom crowd spent all of last week trying to convince investors – or themselves – that Evergrande is China’s “Lehman moment”, based on nothing more than the fact that Evergrande and Lehman both involved real estate. And in the case of Lehman that connection was incidental but superficially I guess the comparison made sense. There are certainly banks with exposure to Evergrande but the vast majority of them are Chinese. HSBC has been mentioned as having exposure but they stopped lending on Evergrande properties a few months ago. UBS was said to have exposure but the CEO said last week it was immaterial. Credit Suisse, which seems to be the new Citibank, involved in just about everything that has blown up the last few years, was so happy they avoided this one they almost broke an arm patting themselves on the back. US banks, as best I can tell, have no exposure. There are some junk bond funds with exposure but for the ones I looked at, it was a rounding error. There just doesn’t seem to be much interconnection with the rest of the global financial system and that was reflected in credit default swaps and credit spreads which barely moved on the week. 

Evergrande appears to be mostly a domestic China concern, at least for now. The impact will be seen in Chinese growth figures which were already on the decline. What does that mean for the rest of the world? I don’t know yet but I am old enough to remember the last time the world’s second largest economy popped a real estate bubble. That was Japan in the early 90s and their economy certainly suffered over the next decade but you’d be hard pressed to find a big blowback on the rest of the global economy. Maybe China will be different but I can easily make a case that a Chinese economic slowdown would be beneficial to the rest of the world. Suppose those estimates of commodity consumption are correct and copper and steel prices take a tumble. That probably wouldn’t be pleasant for Chile and Brazil (iron ore) but I’d guess that the rest of the world would welcome cheaper steel and copper. There are plenty of things to worry about right here in the US with political wrangling over the debt ceiling, a possible government shutdown (which I generally take as a positive) and potential tax and spending hikes. I see no need – yet – to start worrying about Xi Jinping’s re-Maoing of the Chinese economy.

For stock investors I think the more important event last week was the rapid rise of the 10 year Treasury yield from Wednesday to Friday. I don’t mean to imply that higher rates mean stocks are going to fall because history says that isn’t the likely outcome. Rising rates are generally associated with rising growth expectations which doesn’t exactly strike fear into stock investor’s hearts. And that is what we saw last week as inflation expectations were unchanged as real rate rose exactly the same as nominal rates. Higher rates will affect which stocks perform well though and we started to see that last week. Higher rates and a steeper yield curve were positive for financials. Energy stocks also had a very good week. In general, I’d expect value stocks to perform better if rates keep rising while growth stocks take a breather.

The move in rates last week came with seemingly no trigger. There was no economic data or other event that should have changed growth expectations. Of course, there really wasn’t any spur for the bond rally of the last 6 months either. But eventually the data caught up with the market and it probably will again. I say probably because markets are not always right, just most of the time. What I think we’re going to see over the next few weeks is the market anticipating the end of the Delta surge and the resumption of the economic re-opening both here and in Europe. Whether it does or not or how long it might last or how far it might go I don’t know. But that investors will try to front run the virus isn’t exactly news. Of course people will try to get ahead of events. 

During the course of an  economic cycle, growth will ebb and flow. We’ve just come through a growth rate slowdown and bond yields now seem to be anticipating a growth rate upturn. I’m not convinced yet and there’s a lot of potential potholes ahead – mostly political – so I’ll continue to classify the environment as slowing growth/strong dollar but that may not last long. One thing I still don’t see is any change in the dollar trend. It is a short term uptrend and I’ve acknowledge that but the long term trend is no trend at all. The dollar index is in the bottom half of the range it’s been in for over 6 years and I don’t know what would change that. The lack of a dollar trend makes our job a bit more difficult and shorter term but we play the hand we’re dealt. 


 

The economic data last week was a little better and better than expected but not significantly so. Housing starts improved as have sales over the last quarter but still well below last year’s peak. Existing home sales are still softening and we’re starting to see some price cuts which is the only thing that is going to have a big impact on sales.

The monthly reading of the CFNAI fell back a bit but the 3 month average moved higher to 0.43, a reading that indicates the economy continues to grow above trend. We had a slowdown but it didn’t amount to much.

 

 

 

This week’s data includes durable goods, personal income and consumption, the Chicago PMI and the ISM manufacturing index. I think the two to keep an eye on are income and consumption. It will be interesting to see if either was impacted by the impending end of extended unemployment benefits.

 

Commodities had a good week which seems curious considering the potential growth impact of Evergrande. But as the title says, maybe it isn’t so Grande. Maybe it is just pequeno. 

US and European stocks were up last week while the rest of the world was down. Is that because a China slowdown is good for the US and Europe and bad for Asia and Emerging markets more generally? Maybe but I think I’ll wait for more evidence on that front before making any big pronouncements.

Value outperformed last week across all market caps.

 

As I said above financials and energy led last week. Of equal importance I think is that real estate and utilities – both rate sensitive – lagged the field. If rates keep rising, that seems likely to continue as well. 

 

The 10 year Treasury yield bottomed in March 2020 around 40 basis points. It rose and then fell back to about 50 basis points in August of last year. It rose too far, too fast (1.75%) and the last six months has been nothing but a correction of that trend. Now, it appears rates are resuming their rise. How far will they go? Assuming the Delta end/re-re-opening narrative takes hold and there are no surprises along the way – some very large assumptions – my inner trader says about 1.85% as a first target. But that’s just an extrapolation so I wouldn’t place any big bets on it. What most investors should know is that rates are in an uptrend because the economy continues to recover from COVID. We had a growth rate slowdown and so far that’s all it was. And the market says it is ending. I’ll take that over all the breathless Evergrande articles any day.

Joe Calhoun

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Economics

As Margins Begin To Slide, Will Corporations Choose To Defend Profits Or Absorb Transitory Shocks

As Margins Begin To Slide, Will Corporations Choose To Defend Profits Or Absorb Transitory Shocks

Having spent much of the summer warning…

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As Margins Begin To Slide, Will Corporations Choose To Defend Profits Or Absorb Transitory Shocks

Having spent much of the summer warning that as a result of surging labor costs, commodity prices and generally "transitory hyperinflation", corporate margins would tumble (which in the view of Morgan Stanley would lead to a 10% correction), three weeks ago we warned that we are about to see a surge in profit warnings as the realization that the current unprecedented ascent in prices is going to be anything but transitory.

Sure enough, shortly after we noted that "Profit Warnings Are Coming Fast And Furious As Q3 Profits Brace For Big Hit" it wasn't until Nike and FedEx's dismal outlooks that the world finally paid attention to the coming stagflationary wave.

As we reported last week, Fedex tumbled after it reported that not only did it miss Q1 earnings - just hours after announcing it was raising prices at the fastest pace in decades - but also slashed guidance, warning about sharply higher labor costs and operating expenses.Picking up on this, earlier today Nordea also chimed in saying that "FedEx adjusted down expectations and cited being 35% understaffed in various parts of the supply chain as an important reason why. This is not good!" Yes... after the fact.

We won't waste our readers' time on why margins are set to plunge, and drag profits along with them absent a continued surge in revenues - we have discussed that extensively in the past few months - but we will highlight a recent note from SocGen's Andrew Lapthorne who cuts through the noise and says that corporates now have to make a decision: defend high margins or absorb "transitory" shocks.

As Lapthorne writes last week, while the rest of the world's attention turns to China, his charts focused on corporate profitability given the concerns about rising costs, supply disruption and now higher energy costs. According to the SocGen strategist, reported EBIT growth in the US has jumped by over 30% and over 55% in Europe, a remarkable surge which has been accompanied by a sharp increase in profit margins as sales growth has easily outstripped the growth in costs. Indeed, as noted recently, US profit margins hit an all all-time high in Q2, leading to a substantial uplift in profit margins to all-time highs.

Why the focus on margins and profitability? As Lapthorne explains, "profit margins act as shock absorbers. If businesses can absorb price shocks and business disruption into their P&L instead of passing the problems onto customers then logic has it that short-term profitability would be hit, but bigger issues, such as the need for policy tightening, is reduced."

And while on aggregate profit margins are healthy enough - for now - to absorb some temporary pain, it will be interesting to see what path the corporates take: to defend margins and risk inflation taking hold, or allow profits suffer for a while?

Tyler Durden Sun, 09/26/2021 - 17:30
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