Oil Price Plunge? It's The Global Economy, Stupid !

The decline in the price of oil - in the face of surging geopolitical pandemonium - has been lauded as indicative of both US' awesomeness in energy independence and a tax cut for Americans... but, as the following chart suggests, there may be another - much more realistic - explanation for why oil is plunging... demand!

World GDP expectations for 2014 just tumbled to their lowest since estimates started...

Maybe - just maybe - that explains the price of oil...

"God of Crude Oil Trading" Goes All In On Crude At $150 Bet

Andy Hall - known as the God of Crude Oil Trading to some of his peers - has, according to Bloomberg, built his success on a simple creed: Everyone who disagrees with him is wrong. He was one of the few traders who anticipated both the run-up in and the eventual crash of oil prices in 2008. Hall has made billions for the companies for which he’s traded by placing one aggressive bet after another; and now, he is all-in again.Hall is going all in on a bet that the shale-oil boom will play out far sooner than many analysts expect, resulting in a steady increase in prices to as much as $150 a barrel in five years or less. As one industry CEO warned, "anybody who bets against Andy Hall might be making a poor bet."

As Bloomberg reports,

“When you believe something, facts become inconvenient obstacles,” Hall wrote in April, taking issue with an analyst who predicted a shale renaissance could result in $75-a-barrel oil over the next five years.

Hall is going all in on a bet that the shale-oil boom will play out far sooner than many analysts expect, resulting in a steady increase in prices to as much as $150 a barrel in five years or less.

Investing ever-larger sums of his own money, he’s buying contracts for so-called long-dated oil, to be delivered as far out as 2019, according to interviews with two dozen current and former employees and advisers who are familiar with Hall’s trading but aren’t authorized to speak on the record. To attract buyers, the sellers of these long-dated contracts -- typically shale companies that have financed the boom with mounds of debt -- need to offer them at a discount to existing prices.

Hall's reasoning...

...he digs deep, delving into the minutiae of how Texas discloses oil production, the tendency of some shale wells to play out quickly and the degree to which the boom has relied on debt. The simplest of his reasons, though, is that producers have already drilled in many of the best areas, or sweet spots. Hall predicts that growth in shale output will begin to moderate this year and U.S. production will peak as soon as 2016.

“Once those areas have been drilled out, operators will have to move to more-marginal locations and well productivity will fall,” Hall wrote in March. “Far from continuing to grow, production will start to decline.”

How Andy Long does it...

But not everyone agrees...

“We haven’t scratched the surface,” Hall’s former mentor O’Malley says. “There are massive additional shale fields in the United States. Technology does tend to move forward.”

...

Predictions of $75 oil, espoused by Citigroup oil analyst Edward Morse in a Barron’s story in March, really bug him, according to those who know his thinking.

“We are not sure what supports his conviction,” Hall wrote of the analyst’s theories in his June newsletter, although he didn’t identify Morse by name. “It is apparently not facts or analysis.”

The shale revolution faces political, environmental and technical hurdles in other parts of the world that will stall its rollout, Hall wrote. Morse, who also correctly predicted the sharp rise in crude prices in the past decade, says Hall has let his admiration of peak oil theorists cloud his judgment.

“It took a long time for believers in the Cold War to admit it was dead. So, too, is it taking a long time for peak oil believers to admit that it is dead,” Morse says.

So far this year, he appears to be getting confirmation...

So far this year, there are signs that he may be on the right track. In North Dakota’s Bakken and Texas’ Eagle Ford formations, which have accounted for almost all of the jump in U.S. output, the combined year-over-year growth in production in July fell below 30 percent for the first time since February 2010.

Two central questions about technology and shale will likely determine the outcome for Hall: how many wells producers will be able to drill in a finite amount of land that sits atop oil-bearing layers of rock and whether the U.S. renaissance will be repeatable abroad. Hall is betting no on both counts. Morse, and many in the energy world, are betting yes.

Timing is everything...

“He’s a phenomenal trader,” says David Neuhauser, a money manager at Livermore Partners who has followed Hall’s progress as an Occidental shareholder. “I believe he’s right about long-term prices; we’re in the same camp. What I don’t know is how long it will take for the market to catch up.”

*  *  *

Russia would sure be happy itf Andy Long is right... USA not so much... perhaps that is the crucial factor in this manipulated market that overpowers everything?

MCX-Natural gas is showing sign of a reversal

The natural gas futures traded on the Multi Commodity Exchange has risen by about 4 per cent in the past week. The price action over the last one month is suggesting the formation of a double bottom reversal pattern. The key resistance level to watch now will be ₹247 per mmBtu.

A strong break and close above this level will confirm a reversal. The outlook will then turn bullish for the target of ₹257. In such a scenario traders can go long at ₹249 with a stop-loss at ₹246 for the target of ₹255.

On the other hand, inability to breach ₹247 can reverse the contract lower for the targets of ₹240 and ₹235. The outlook will turn bearish if the contract records a strong close below ₹229. The ensuing target on such a break will be ₹220.

MCX-Crude oil: The MCX-crude oil futures contract is stuck in a narrow range of ₹5,650 and ₹5,755 a barrel in the past week. The immediate outlook is not clear. A breakout on either side of this range will decide the next leg of move for the contract. A strong break above ₹5,755 can take the contract higher to ₹5,900 – the 21-day moving average.

On the other hand, decline below ₹5,650 can drag the contract lower to ₹5,500. Traders can stay out of the market for now and wait for a break out to get clear trade signals.

Forget Geopolitical De-Escalation - Here's The Real Reason Why Oil Is Tumbling

As with  every other asset-class in the world now, fundamentals have taken a very distant back-seat to both liquidity (flow) and positioning (technicals) as traders are increasingly (in one way or another) on the same side of the same trade. Mainstream media will proclaim US energy "independence", US sanctions 'winning' over Putin, or US airstrikes 'calming' down Middle East uncertainty; but the real reason oil is plunging is... the biggest mass liquidation of speculative longs in recorded 30 year history over the last few weeks...

Obviously speculators remain massively - unprecedentedly long oil futures still...

Gold and Oil on the Verge of Something Big

Gold and Oil on the Verge of Something Big - Hero's Rarely Win

Everyone has been calling for a bottoming Gold the last year. But the fact is that gold and gold stocks are still clearly in a bear market. Just look at the 200 day moving averages. The previous trends were down and prices have been moving sideways for the past year.

A lot of newsletter and analysts are calling a bottom. Technically it's just a consolidation pattern. Consolidation patterns are a continuation pattern, meaning if the previous trend was down, which it was from 2011 till now, the odds favor price will continue lower after this consolidation.

If this consolidation does happen to be the bottom then we can classify it as a stage I base. Gold and gold stocks will start a new bull market, but price needs to break to the upside of this consolidation pattern. Until it breaks to the upside, it is still in a down trend.

Gold topped out over three years ago. And I am in no rush to try to pick a bottom and be a hero here. I'm just going to continue waiting on the sidelines until price confirms either a new bull market has started or for price to breakdown and we get another leg lower.

Oil Outlook

Taking a look at the big picture of crude oil the chart looks bearish. It too has been trading in a range since 2011 and the price is nearing the apex of a consolidation pattern.

It's important to know that a pennant formation which is what crude oil has formed are the most predictable when price breaks out of the pattern within the first 1/3rd of the formation.

The longer price consolidates and gets squeezed into the narrowing apex of the pennant pattern, the more unreliable. The trend breakout will be, and it becomes at best a 50/50 bet.

Crude oil's previous trend was up, but it's been consolidating for such a long time that price is now squeezed into the apex. This negates that bias for the previous trend to hold true so we have no idea which why it will breakout but when it does expect an explosive move.

A breakdown in crude oil will send price to the $70 or $75 per barrel range, and that will hammer on the Canadian dollar also. I can see $1 USD being equivalent to $1.20 Canadian in a year.

My Gold and Oil Conclusion

Looking at the US dollar, it has been rising partly due to the euro falling. This strong dollar will put a downward pressure on commodities overall.

Gold and oil have not been that exciting for investors since 2011 when they topped out, but both are setting up for massive moves that should last month, if not year or more. Once these new trends emerge expect to see them in the headline news every hour.

It does not matter which way these commodities breakout of the consolidation patterns. With the dollar continuing to rise and the bearish chart patterns for both gold and oil there is a good chance much lower prices are ahead.

This will catch most investor's off guard. It's human nature to try to predict tops and bottoms in the market. But this is why most investors get caught on the wrong side of the market. The market always has a way of catching the majority of people on the wrong side of a position.

I am happily sitting in cash with some of my investment capital waiting for gold and oil to breakout of these large patterns. I would not be surprised if we see $900 gold, gold stocks like the gold bugs index $HUI to be at $150, and $70 per barrel for crude oil. I am not saying this is what I want, but you should be mentally prepared so you can get back into cash position and so you can take advantage of falling prices with me.

Big money will be made on the next price movements in these commodities. Whether we have to go long the market or short sell the market. Either way, we can make money. So don't be a hero and try to pick a top or bottom, just wait for confirmed breakout then invest with the trend.

By Chris Vermeulen

Natural Gas as a Trucking Fuel Fails to Deliver

Much has been made of the potential for natural gas as a fuel for the trucking and rail industries.

The dramatic fall in natural gas prices in recent years has spurred investment in refueling stations for the road trucking industry and forced the rail industry to review their position regarding the economics of using natural gas either as compressed natural gas (CNG) or as liquefied natural gas (LNG) to replace diesel fuel.

So far, though, in spite of US natural gas prices that are a third of global levels, substitution has been limited. Presently, natural gas used as transportation fuel constitutes only about 0.1 % of total US consumption. According to a report, about 18 months ago half of that amount was consumed in California alone. A majority of states use less than 2 million cubic feet per month, and 11 states don’t use any according to this report. California remains, by far, the largest adopter according to EIA data as this recent graph shows and the agency reports for 2013 road transporttaion still only made up 0.126% of natural gas consumption. So, while there has been a lot of development work among engine builders and government agency support for specific programs, wider uptake remains slow.

The argument on purely economic grounds looks compelling at first sight, but on closer examination upfront capital costs and worries about longer-term price competitiveness are overlaying a still limited refueling infrastructure to deter widespread investment.

As an example, using federal government estimates the report assumes that a typical American family puts 12,000 miles on a car. At 25 miles per gallon, they will consume 480 gallons/year, resulting in a cost of about $1,920 at $4 a gallon. Natural gas at an equivalent price of about $2.50/gallon would save the family $720 a year. However, if that savings comes at the cost of a $10,000 vehicle purchase price premium it is no more compelling than that for electric cars with similarly high upfront costs – government subsidies excepted.

The article goes on to apply the same general consideration to high upfront costs of heavy LNG trucks, currently amounting to about $90,000 more than traditional diesel-powered versions. As with CNG cars, this is in part because they aren’t yet being mass-produced. On the other hand, the article goes on, those trucks log a lot more miles than cars, and the accumulated fuel savings should provide enormous business benefits over the long haul.

The energy density of CNG and even LNG is less than for diesel, by 6:1 for CNG and 1.7:1 for LNG making fuel bulk and weight an issue. Natural gas however does burn more cleanly, extending vehicle life, reducing maintenance costs and reducing emissions. Specifically, natural gas is said to cut carbon monoxide emissions by an estimated 90%-97%, nitrogen dioxide emissions by 35%-60%, and carbon dioxide emissions by an estimated 25%-30%. The reduction in emissions, is what is driving federal incentives to adopt the fuel, and explains why California is so far ahead of everywhere else in terms of uptake.

The vagaries of government support aside the greatest threat to LNG or CNG adoption as a trucking fuel, though, could be a dilution of the current cost argument. Natural gas prices may be low now but will they remain low? Australia’s example says they will not, a Motley Fool article points to Australia’s natural gas bonanza spurring the development of export facilities and the rise of domestic prices to compete with supplies being sent to the lucrative Asian market. Pressure from oil and gas firms in the shale gas market to export could equally level US prices to a point closer to world prices. The oil-to-gas ratio has already fallen in the US from 7:1 in 2012, and is expected to reach to 3.4:1 by 2018.

In the long term, the price advantage enjoyed by US consumers for both oil and gas will almost certainly reduce as imports fall and exports rise. Taken together, the potential rise in natural gas prices coupled with the capital costs of converting from diesel to natural gas may not favor a long-term conversion of fuels in the trucking industry and may explain why the rail industry is moving very cautiously in converting existing locomotives or ordering new one’s outside of specific rail road/client programs.

Hedge Funds Snub Natural Gas Rally as Supply Gains Loom

Hedge funds are betting that the rally in U.S. natural-gas prices won’t last.

Money managers cut the combined net-long position across four benchmark contracts by 21 percent in the week ended Aug. 5, after 15 weeks of above-average stockpile increases. Bullish wagers retreated to an 18-month low even as futures traded in New York gained 2.3 percent in the report week, U.S. Commodity Futures Trading Commission data show.

Goldman Sachs Group Inc. cut its price forecast last week as shale-gas production in the eastern U.S. surged to an all-time high. Power demand in June and July fell to five-year seasonal lows amid unusually cool weather from Texas to Boston, Edison Electric Institute data show. Gas futures have dropped 12 percent since the start of summer.

“If you are a money manager and you see above-average storage injections week after week and a decline in price, selling is rational,” Tim Evans, an energy analyst at Citi Futures in New York, said by phone Aug. 8. “There’s no massive heat wave consistently across the U.S. that is going to spike air-conditioning demand, and we continue to see production numbers that show robust growth.”

Natural gas advanced 8.9 cents to $3.897 per million British thermal units on the New York Mercantile Exchange in the period covered by the CFTC report. The contract for September delivery closed at $3.962 on Aug. 8.

Stockpile Gains

Gas inventories rose by 1.567 trillion cubic feet since late March to 2.389 trillion on Aug. 1, the fastest pace of storage injections for the period in U.S. Energy Information Administration data going back to 1994. A deficit to the five-year average narrowed to 20 percent from a record 55 percent.

Power generation in the lower 48 states averaged 83,230 gigawatt-hours from June through July, the least for these months since 2009, Edison Electric data show.

“Extreme heat that would normally cause a lot of A/C demand has not materialized at all,” Kyle Cooper, director of research with IAF Advisors and Cypress Energy Capital Management in Houston, said by phone Aug. 7.

Goldman Sachs

Goldman Sachs reduced its outlook for the fourth quarter to $4 from $4.25, Brian Singer, a New York-based analyst with the bank, wrote in an Aug. 8 note.

Below-normal temperatures in eastern states through Aug. 17 will be followed by above-average readings along the East Coast, said MDA Weather Services in Gaithersburg, Maryland.

The EIA says record production will help boost U.S. supplies to 3.431 trillion cubic feet by the end of October as new wells come online at shale deposits such as the Marcellus in the Northeast, where daily output topped 15 billion cubic feet for the first time last month.

In other markets, net-long positions in benchmark West Texas Intermediate crude fell by 40,360 contracts, or 15 percent, to 236,381 futures and options. Longs fell 7.3 percent, while shorts surged 56 percent. WTI dropped 3.6 percent to $97.38 a barrel in the report week.

WTI futures climbed as much as $1.11 on Aug. 8 as U.S. warplanes attacked Islamic State militants in Iraq, before settling 31 cents higher at $97.65. Prices were down 6 cents to $97.59 at 6:51 p.m. yesterday in New York.

U.S. Airstrikes

Coming to the aid of Kurdish forces near Erbil, the regional capital, the U.S. used fighter jets and armed drones yesterday to destroy several armed trucks and a mortar position held by militants, the U.S. Central Command in Tampa, Florida, said in a statement. Iraq’s parliament adjourned for a week without breaking a deadlock over who should become the next prime minister.

Prices reached a nine-month high in June after the militants captured the Iraqi city of Mosul, before dropping when the rebel advance stalled, sparing the country’s south, home to more than three-quarters of its oil output.

“There’s been an upsurge in geopolitical tension but no interruption of supply so investors see no reason to jump into the market,” John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy, said in an Aug. 8 interview.

Bullish bets on gasoline dropped 1,591 contracts, or 5.2 percent, to 29,164, the lowest since February. Gasoline futures dropped 5.4 percent to $2.7155 a gallon on the New York Mercantile Exchange in the period covered by the CFTC report, the lowest settlement since Feb. 6.

Pump Prices

Regular gasoline at the pump, averaged nationwide, rose to $3.478 a gallon Aug. 9, according to Heathrow, Florida-based AAA, the largest U.S. motoring group. Prices had slipped to $3.475 Aug. 6, the lowest level since March.

Net-short positions in ultra low sulfur diesel more than doubled to 18,602 contracts, the most since June 2013. The fuel dropped 2.1 percent to $2.8469 a gallon in the report week.

Net-long positions on four U.S. natural gas contracts declined by 40,542 futures equivalents to 152,007, the lowest level since Nov. 26. Bullish wagers have dropped in 14 of the past 15 weeks.

The measure includes an index of four contracts adjusted to futures equivalents: Nymex natural gas futures, Nymex Henry Hub Swap Futures, Nymex ClearPort Henry Hub Penultimate Swaps and the ICE Futures U.S. Henry Hub contract. Henry Hub, in Erath, Louisiana, is the delivery point for Nymex futures, a benchmark price for the fuel.

Long positions fell 7.5 percent to 433,643, the least since Jan. 15, 2013.

“Money managers have been cutting their exposure to natural gas since February and this is just following through on that decision,” Evans said. “Prices are still below $4 and it’s not clear that the recovery we saw this week is going to be sustained.”

To contact the reporter on this story: Naureen S. Malik in New York at nmalik28@bloomberg.net

Crude oil rises as Obama authorises air strikes in Iraq

Oil prices rose in Asia today after US President Barack Obama said that he has authorized air strikes against Sunni extremist militants in key crude producer Iraq.

US benchmark West Texas Intermediate crude for September delivery rose 35 cents to $97.69, while Brent crude for September delivery gained 67 cents to $106.11 in mid-morning trade.

Obama in an address yesterday said that he had ordered the air strikes to prevent “genocide” by the so-called Islamic State fighters against the besieged Yazidi minority in Iraq’s north.

“I therefore authorized targeted air strikes if necessary to help forces in Iraq as they fight to break the siege and protect the civilians trapped there,” Obama said.

He did not say whether air strikes have already been carried out.

Desmond Chua, market analyst at CMC Markets in Singapore, said the development could add “significant risk premium to oil prices” as dealers worry about potential supply disruptions.

“The announcement certainly edges up the geopolitical concerns about Iraq and the Middle East region, and comes as a bit of a surprise to investors,” Chua told AFP.

Islamic State insurgents now control large swathes of Iraq’s north and west. The sweeping offensive began on June 9, preventing Baghdad from exporting oil via a pipeline to Turkey and by road to Jordan.

Iraq’s oil ministry had on July 24 said crude exports totalled 2.42 million barrels per day in June, falling far short of a budgeted projection of 3.4 million bpd.

As the number-two producer in the OPEC cartel, Iraq’s 11 per cent of proven world reserves plays a key role in world markets and prices after violence disrupted oil exports from Syria and Libya.

The dip in exports adds to the woes of Iraq, which is heavily dependent on oil revenues, while spending more on military equipment to battle the Islamic State group.

Bulls Fleeing Natural Gas as Goldman Sees Further Decline

Speculators are fleeing natural gas after prices dropped below $4 for the first time since December and power plant production fell to a 13-year seasonal low.

Hedge funds reduced net-long positions, or bets on rising prices, by 11 percent in the week ended July 22, the U.S. Commodity Futures Trading Commission said. Bullish wagers have fallen 51 percent since February.

Futures slid as the output from electricity generators, the biggest consumers of the fuel, fell 11 percent in the week ended July 19 from a year earlier to the least for the period since 2001, according to the Edison Electric Institute. Mild weather and a record pace of inventory gains may push prices lower in the next three months, Goldman Sachs Group Inc. said.

“The move down in prices this early in the summer is surprising,” Breanne Dougherty, a natural gas analyst for Societe General SA in New York, said in a July 25 telephone interview. “The power generation load makes and breaks summers and it’s extremely sensitive to weather.”

Natural gas dropped 7.9 percent to $3.772 per million British thermal units on the New York Mercantile Exchange in the period covered by the CFTC report. Prices closed at $3.781 on July 25, capping a sixth weekly decline, the longest string of losses since the first quarter of 2010.

Gas Supply

Gas inventories, which declined to an 11-year low in late March, have rebounded at the fastest pace since 2001, U.S. Energy Information Administration data show.

Stockpiles rose 90 billion cubic feet to 2.219 trillion in the week ended July 18, a gain bigger than the five-year average for the 14th straight week, according to the EIA.

“While we previously believed that risks to 2014 prices were skewed to the upside, we now see downside risks to U.S. gas prices in the next three months,” Daniel Quigley, an analyst at Goldman Sachs in London, said in a July 22 note to clients.

Power generation in the lower 48 states totaled 82,614 gigawatt-hours in the seven days ended July 19, the least since the week ended June 13, Edison Electric data show.

This month has been the coolest July since 2009, Matt Rogers, president of Commodity Weather Group LLC in Bethesda, Maryland, said in a July 25 e-mail. “We are expecting the cool pattern to continue into August.”

Power Plants

Gas deliveries to power plants dropped 13 percent this month to average 25.9 billion cubic feet a day as of July 25, the lowest for the period since 2009, according to LCI Energy Insight in El Paso, Texas.

Futures may find support between $3.50 and $3.75 for the rest of the stockpiling season, with those prices prompting power plants to switch from coal, Teri Viswanath, director of commodities strategy at BNP Paribas SA in New York, said by phone on July 24.

“The problem with the emergence of this cool fall-like weather is that we don’t expect to see a slowdown in those inventory injections until the reemergence of heating demand,” she said.

In other markets, the downing of a civilian airplane in Ukraine and stockpiles at Cushing,Oklahoma, at a six-year low enticed speculators back to the oil market, boosting bullish bets from a six-month low.

Money managers raised net-long positions in benchmark West Texas Intermediate futures by 7.3 percent to 278,116 futures and options combined in the week ended July 22, CFTC data show. Long positions rose 1.1 percent 307,739 while shorts dropped 35 percent to 29,623.

WTI Jump

WTI futures advanced 4.5 percent to $104.42 a barrel on the Nymex in the period covered by the report. The contract closed at $102.09 on July 25.

Net long gasoline bets fell 22 percent to 34,115. Futures slipped 0.6 percent to $2.8807 a gallon on the Nymex in the week covered by the report and settled at $2.8653 on July 25.

Gasoline at U.S. pumps, averaged nationwide, slid 0.7 cent to $3.543 a gallon on July 24, the lowest since March 28, according to data from Heathrow, Florida-based AAA, the nation’s largest motoring group. Retail prices are down 4.1 percent from a 13-month high on April 26.

Money managers’ bets on ultra-low sulfur diesel flipped to a net short position for the first time since November with 1,520 contracts, the CFTC report showed. Futures fell 0.1 percent to $2.8542 a gallon in the report week and closed at $2.9157 on July 25.

Natural Gas

Net-long positions on four U.S. natural gas contracts declined by 25,772 futures equivalents to 201,090, the least since Dec. 3.

The measure includes an index of four contracts adjusted to futures equivalents: Nymex natural gas futures, Nymex Henry Hub Swap Futures, Nymex ClearPort Henry Hub Penultimate Swaps and the ICE Futures U.S. Henry Hub contract. Henry Hub, in Erath, Louisiana, is the delivery point for Nymex futures, a benchmark price for the fuel.

Long positions fell by 4 percent to 472,613, the least since February 2013. Bearish bets gained 2.3 percent to 271,523, the most since Dec. 10.

“I wouldn’t expect prices to go much lower,” said Societe Generale’s Dougherty. “That said, if we continue to get extremely mild weather as we saw in July through October, we will see a slightly different story.”

To contact the reporter on this story: Naureen S. Malik in New York at nmalik28@bloomberg.net

An Annotated History of World Oil Price Shocks

A sharp increase in Middle East geopolitical tensions, first with the resurgence of a radical al-Qaeda affiliate – now called the Islamic State – making substantial territorial gains in major oil producer Iraq, and more recently with an escalating military conflict between Israel and Hamas, has barely caused a blip in global markets and even in oil prices despite the fact that oil supply today is tight. At the same time, the conflict between Ukraine and Russia – the largest oil producer globally – has reached a more dangerous level, also with little oil price response. Indeed, it is difficult to identify another point in recent history when the Middel East – for all its troubles – was in such a precarious state; yet, as Goldman, rather rhetorically asks, this raises the question of whether the markets are being too dismissive about the recent turn of events.

150 years of oil price shocks...

and a close-up on the chaos of the last 8 months...

Perhaps the following from Goldman best sums up the situation...

At what point does the US panic?

Meghan O’Sullivan: The US should have already panicked.

Major American economic and political interests are at stake. The erasure of the Syria-Iraq border by a group that is considered too radical for al-Qaeda, the takeover of Iraq’s second largest city by IS, the kidnapping of international diplomats, and the declaration of an Islamic caliphate in large parts of Iraq and Syria – each one of these should be a major signal about the gravity of the situation.

Source: Goldman Sachs

The Polar Vortex Is Back In The Middle Of July.

While every single economist and "straight to CNBC" pundit was quick to blast the atrocious economic performance in Q1 as solely due to the "harsh weather", what has emerged in various retail earnings reports so far in Q2 is that, drumroll, they lied. In fact, as one after another "stunned" retailer admits, the depressed spending observed during Q1 continued, if not deteriorated even further, in the second quarter. Which means only one thing, the same thing we said back in January: as a result of Obamacare, the declining credit impulse resulting from the Fed's tapering, and a ongoing contraction in global trade as the world slides back into recession, the US economy is on the verge of stalling and may well enter into a tailspin if one or more exogenous events take place in a centrally-planned world that is priced to perfection.

To be sure, one of the potential scapegoats we highlighted previously was the replacement of the polar vortex with what we dubbed the "solar vortex", ala El Nino, which as we further reported, has already been blamed in advance by the Bank of Japan for a spending collapse set to take place in the second half of 2014, the year when the Japanese economy now almost certainly re-enters recession.

But just to make sure that the abysmal Q1 GDP which has now spilled over into Q2 and will likely see the US economy growing in the mid-2% range, has a sufficiently broad "excuse" in the third quarter of the year, here comes - in the middle of July - the polar vortex 2.0.  As WaPo reports, "However you choose to refer to the looming weather pattern, unseasonably chilly air is headed for parts of the northern and northeastern U.S at the height of summer early next week."

Bearing a haunting resemblance to January’s brutally cold weather pattern, a deep pool of cool air from the Gulf of Alaska will plunge into the Great Lakes early next week and then ooze towards the East Coast.

The atmospheric impact will not be nearly as dramatic, but still temperatures are forecast to be roughly 10 to as much as 30 degrees below average.

This means that in parts of the Great Lakes and Upper Midwest getting dealt the chilliest air, highs in this region could well get stuck in the 50s and 60s – especially where there is considerable cloud cover.

And focusing on next week specifically, "Wednesday morning’s lows may drop into the  40s over a large part of the central U.S."

 

Highs may struggle to reach 80 in D.C. next Tuesday and Wednesday with widespread lows in the 50s (even 40s in the mountains).

More from WaPo:

What’s behind this unusual winter weather pattern primed for the dog days of summer?  A lot of it is simply chance (randomness), but Weather Underground’s meteorologist Jeff Masters says Japan’s typhoon Neoguri is playing a role in the pattern’s evolving configuration:

….the large and powerful nature of this storm has set in motion a chain-reaction set of events that will dramatically alter the path of the jet stream and affect weather patterns across the entire Northern Hemisphere next week. Neoguri will cause an acceleration of the North Pacific jet stream, causing a large amount of warm, moist tropical air to push over the North Pacific. This will amplify a trough low pressure over Alaska, causing a ripple effect in the jet stream over western North America, where a strong ridge of high pressure will develop, and over the Midwestern U.S., where a strong trough of low pressure will form.

What amazes me most about the pattern is not so much the forecast temperatures, but the uncanny similarities in the weather patterns over North America seen in both the heart of winter and heart of summer. All of the same features (refer to the map at the top of this post)  apparent in January are on the map in mid-July: low pressure over the Aleutians (blue shading), a large hot ridge (yellow and red shading) over the western U.S., the huge cold low or vortex over the Great Lakes (blue and green shading), and then the ridge over northeast Canada (yellow and red shading).

It’s not at all clear what this means or what, if anything, it portends.  Weather patterns cycling through a certain circulation regime can repeat (and we’ve seen this pattern multiple times since November-December), but with El Nino forecast to develop, the global configuration of weather systems is likely to change.

So the question is: just how profound of an adverse impact on Q3 GDP (because remember: weather anomalies are never additive to GDP; only wars can do that in a Keynesian world) will the second, summertime coming of polar vortex have on the US economy? Judging by the laughable farce that the economic profession has devolved to, desperately seeking to "explain away" any deviation from a priced to perfection growth rate, if only that of the Fed's balance sheet, not to mention why its forecasts are always wrong we are likely to find out very soon.

Oil Rallies as Extremist Advance in Iraq Threatens Crude Supply

West Texas Intermediate crude headed for the biggest weekly advance since December and Brent gained as escalating violence in Iraq threatened supplies from OPEC’s second-largest oil producer.

Futures rose as much as 1.1 percent in New York, extending a 2 percent rally yesterday, the most in two months. Iraqi Oil Minister Abdul Kareem al-Luaibi speculated that U.S. planes may bomb his nation’s north as militants linked to al-Qaeda, who captured the city of Mosul this week, moved south toward Baghdad. The member of the Organization of Petroleum Exporting Countries produced 3.3 million barrels a day last month, data compiled by Bloomberg show.

“There’s potential for disruption to spread around the Middle East and we’re talking about significant amounts of daily supply,” Michael McCarthy, a chief strategist at CMC Markets in Sydney who predicts Brent may climb to $125 a barrel if there’s an attack on Baghdad. “The market got concerned about potential disruption in Libya; Iraq is a much more serious situation.”

WTI for July delivery gained as much as $1.15 to $107.68 a barrel in electronic trading on the New York Mercantile Exchange and was at $107.02 at 2:52 p.m. Sydney time. The contract rose $2.13 to $106.53 yesterday, the highest close since Sept. 18. The volume of all futures traded was four times the 100-day average. Prices have advanced 4.3 percent this week.

Brent for July settlement, which expires today, increased as much as 73 cents, or 0.7 percent, to $113.75 a barrel on the London-based ICE Futures Europe exchange. The August contract climbed 19 cents to $112.61. Front-month prices are up 4.4 percent this week, the most since July. The European benchmark crude was at a premium of $6.23 to WTI.

Iraq Fighting

The group that calls itself the Islamic State in Iraq and the Levant, know as ISIL, seized Mosul on June 11, forcing a halt to repairs at the main pipeline from the Kirkuk oil field to the Mediterranean port of Ceyhan in Turkey. There were conflicting reports that Baiji, the site of Iraq’s biggest refinery, had been captured.

Prime Minister Nouri al-Maliki’s Shiite-led government is struggling to retain control of Sunni-majority regions as his army units in northern Iraq collapsed amid the extremist advance. U.S. President Barack Obama said he won’t rule out using air strikes to help the government in Baghdad.

The fighting hasn’t spread to the south, which the U.S. Energy Information Administration estimates is home to three-quarters of Iraq’s crude output. The country shipped 5.43 million barrels from the Basrah terminal on the Persian Gulf on June 11, according to al-Luaibi, the oil minister.

Libya, Iran

OPEC, responsible for 40 percent of global oil supply, maintained its production target at 30 million barrels a day at a June 11 meeting in Vienna, leaving output below projected demand for the rest of this year. Group member Libya is pumping at about 10 percent of its capacity because of unrest while Iran next month faces an end to relief from international sanctions, which could curb exports.

WTI may rise next week on concern the conflict in Iraq will disrupt shipments, according to a Bloomberg News survey. Seventeen of 26 analysts and traders, or 65 percent, forecast futures will increase while three said prices will decline.

WTI Trades Near Three-Month High on U.S. Supplies; Brent Steady

West Texas Intermediate traded near the highest price in three months amid speculation that crude inventories fell for a second week in the U.S., the world’s biggest oil consumer. Brent was steady in London.

Futures were little changed in New York after declining 0.1 percent yesterday. Crude stockpiles probably dropped by 2 million barrels last week to 387.5 million, a Bloomberg News survey shows before Energy Information Administration data today. OPEC nations representing 94 percent of the group’s output said they’re at ease with global supply and demand before a meeting in Vienna to decide on a collective production limit.

“Oil has been boosted by an improved growth outlook in the U.S., but it’s being contained by high supply as we start to work into the driving season,” said Ric Spooner, a chief strategist at CMC Markets in Sydney who predicts investors may sell West Texas contracts if prices rise to about $105 a barrel. “The inventory figures tonight may tell the story on how the market will handle this.”

WTI for July delivery was at $104.50 a barrel in electronic trading on the New York Mercantile Exchange, up 15 cents, at 3:38 p.m. Sydney time. The contract settled at $104.41 on June 9, the highest since March 3. The volume of all futures traded was about 45 percent below the 100-day average. Prices have increased 6.2 percent this year.

Brent for July settlement was up 22 cents at $109.74 a barrel on the London-based ICE Futures Europe exchange. The European benchmark crude traded at a premium of $5.30 to WTI. The spread narrowed for a third day yesterday to close at $5.17.

U.S. Supplies

Crude stockpiles expanded by 1.5 million barrels in the week ended June 6, the industry-funded American Petroleum Institute reported yesterday, according to TradeTheNews.com, a newswire. Supplies were at 399.4 million through April 25, the most since the Energy Department’s statistical arm started publishing weekly data in 1982.

Gasoline inventories shrank by 440,000 barrels, said the API, which collects information on a voluntary basis from operators of refineries, bulk terminals and pipelines. The EIA report will probably show a gain of 1 million, according to the median estimate in the Bloomberg survey of 11 analysts.

In China, the world’s second-largest oil consumer is hoarding crude at the fastest pace in at least a decade, shielding itself from supply disruptions. Its oil imports are helping drive prices higher, according to Barclays Plc, Citigroup Inc. and Nomura Holdings Inc.

OPEC Meeting

Oil ministers from Angola, Ecuador, Kuwait and Venezuela said they anticipated that the Organization of Petroleum Exporting Countries will maintain its quota at 30 million barrels a day. Saudi Arabia, Libya, Nigeria and the United Arab Emirates said supply and demand are well-matched. Iraq’s minister said there were indications the limit would be retained, while his Iranian counterpart also expected no change.

The 10 nations accounted for about 28.2 million barrels a day of output in May, data compiled by Bloomberg show. Ministers from Algeria and Qatar declined to comment on the market or OPEC’s production yesterday. The group’s first meeting since December will be held today.