Brent Plunge To $60 If OPEC Fails To Cut, Junk Bond Rout, Default Cycle, "Profit Recession" To Follow

While OPEC has been mostly irrelevant in the past 5 years as a result of Saudi Arabia's recurring cartel-busting moves, which have seen the oil exporter frequently align with the US instead of with its OPEC "peers", and thanks to central banks flooding the market with liquidity helping crude prices remain high regardless of where actual global spot or future demand was, this Thanksgiving traders will be periodically resurfacing from a Tryptophan coma and refreshing their favorite headline news service for updates from Vienna, where a failure by OPEC to implement a significant output cut could send oil prices could plunging to $60 a barrel according to Reuters citing "market players" say.

By way of background, the key reason OPEC is struggling to remain relevant is because, as the FT reportedover the weekend, "US imports of crude oil from Opec nations are at their lowest level in almost 30 years, underlining the impact of the shale revolution on global trade flows. The lower dependence on imports from the cartel, which pumps a third of the world’s crude, comes amid advances in hydraulic fracturing that has propelled domestic US production to about 9m barrels a day – the highest level since the mid-1980s."

The US "shale miracle" is best seen on the following chart showing the total output of the US compared to perennial crude powerhouse, Saudi Arabia:

It is this shale threat that has become the dominant concern for OPEC, far beyond whatever current US national interest are vis-a-vis Ukraine, and Russia's sovereign oil revenues, and as reported previously, Brent has to drop below to $75 or lower for US shale player to one by one start going offline.

Unfortunately, it may bee too little too late for the splintered cartel. As Bloomberg reports, "the days when OPEC members could all but guarantee consensus when deciding production levels for oil are long gone, according to a veteran of almost two decades of the group’s meetings."

The global glut of crude, which has contributed to a 30 percent decline in prices since June 19, has left the Organization of Petroleum Exporting Countries disunited and dependent on non-members to shore up the market, said former Qatari Oil Minister Abdullah Bin Hamad Al Attiyah. The 12-member group is set to meet in Vienna on Nov. 27.

“OPEC can’t balance the market alone,” Al Attiyah, who participated in the group’s policy meetings from 1992 to 2011, said in a Nov. 19 phone interview. “This time, Russia, Norway and Mexico must all come to the table. OPEC can make a cut, but what will happen is that non-OPEC supply will continue to grow. Then what will the market do?”

...

“OPEC had been enjoying easy meetings, and decisions were taken without a sweat,” Al Attiyah said. “Now the situation is different.”

Oil markets are oversupplied by about 2 million barrels a day, and global economic growth is below expectations, he said. “The U.S., which was a major market for OPEC, is no longer welcoming imports. It’s now striving to become an oil exporter. It’s already exporting condensates.”

So if OPEC is unable to reach an agreement, what is the worst case? Back to Reuters, which says that "The market would question the credibility of OPEC and its influence on global oil markets if there was no cut," said Daniel Bathe, of Lupus alpha Commodity Invest Fund.

That could send Brent down to around $60, Bathe said.

"Herding behavior and a shift to net negative speculative positions should accelerate the price plunge," he added.

Fund managers are divided over whether OPEC will reach an agreement on cutting output. Bathe put the likelihood at no more than 50 percent.

The oil price has been falling since the summer due to abundant supply -- partly from U.S. shale oil -- and low demand growth, particularly in Europe and Asia.

As a result, some investors believe a small cut -- of around 500,000 bpd -- would not be enough to calm the markets.

If OPEC fails to agree a cut, prices will drop "further and quite quickly", with U.S. crude possibly sliding to $60, he said. U.S. crude closed at $76.51 on Friday, with Brent just above $80.

It's not all downside: there is a chance that OPEC will agree on a 1 million barrel or more cut, which would actually send prices higher:

"The market really wants to see that OPEC is still functioning ... if there is a small cut, with an accompanying statement of coherence from OPEC that presents  a united front, and talks about seeing demand recovery, and some moderation of supply growth, then Brent could move up to $80-$90."  "Prices below $80 are putting significant strain on the cartel's weakest members such as Venezuela," said Nicolas Robin, a commodities fund manager at Threadneedle. He said a bigger cut -- of 1 million bpd or more -- was an "outlier scenario", but such a move would rapidly push prices above $85.

Then again, even thay may be insufficient if the market prices in an ongoing deterioration in global end-demand: "Doug King, chief investment officer of RCMA Capital, sees Brent falling to $70, even with a cut of 1 million bpd."

So in a worst case scenario, where Brent does indeed tumble to $60, what happens? We already know the answer, as it was presented in "If WTI Drops To $60, It Will "Trigger A Broader HY Market Default Cycle", Says Deutsche":

... it is not just the shale companies that are starting to look impaired. According to a Deutsche Bank analysis looking at what the "tipping point" for highly levered companies is in "oil price terms", things start to get really ugly should crude drop another $15 or so per barrell. Its conclusion: "we would expect to see 1/3rd of US energy Bs/CCCs to restructure, which would imply a 15% default rate for overall US HY energy, and a 2.5% contribution to the broad US HY default rate.... A shock of that magnitude could be sufficient to trigger a  broader HY market default cycle, if materialized. "

This explains why the HY space has been far less exuberant in recent weeks, and the correlation between HY and the S&P 500 has completely broken down.

Finally it is not just the junk bond sector that is poised for a rout should there be no meaningful supply cuts later this week: recall that in another note over the weekend, DB said that should crude prices take another leg lower, then the most likely next outcome is a Profit recession, which while left unsaid, will almost certainly assure a full-blown, economic one as well.

So keep an eye on Vienna this Thanksgiving: the black swan may just be coated with an layer of crude oil this year.

Teck predicts zinc deficit on the closure of mining giants

The Vice President for Treck’s Investor Relations and Strategic Analysis,Greg Waller, stated that, the global market of the metal zinc, will soon face a deficit as the large scale zinc producers like  the Century Mine, owned by the MMG Group based in Australia, is planning on shutting down the mine after the  third quarter of this year. This procedure will most probably erase about 1.5 million tonnes of zinc produce from the global market.

Waller further added that, the metal zinc, might be seen more appealing to the investors right now. The metal has been progressed further more during the cycle. The following three years fill be filled with closure of several dominant zinc mines, from which many number of the has recently stopped their production of zinc. The market of zinc will definitely be in deficit.

He added that, the global zinc market, for  the next four years at least will have to face the lack of exploration zinc projects. Many miners in the process of hiking up the demand of zinc and also the price of the metal, has stocked up their production further increasing the deficit of the metal and making it worse. They are putting up their output until the price of zinc climbs over to 1 dollars per pound.

NATO Jets Surrounding Russia: Before And After

Based on the following "before" and "after" the Ukraine crisis pictures of NATO warplanes located just off the Russian border...

Before:

After:

... one can almost understand why Victoria Nuland was so eager to tell the EU to "fuck off" in her successful attemp to foment Ukraine unrest leading to the overthrow of ex-president Yanukovich, and destabilize the region, giving NATO a pretext for a major arms build up on the other side of the Russian border.

Per CNN, "There used to be only four jets ready to intercept Russian planes that crossed into European airspace. Now there are 18." And rising.

As for what the US response would be if Russia were to park a few squadrons of Mig-35s in Cuba, Canada and Mexico, we leave that to the reader's imagination.

Everything You Need to Know About The Swiss Gold Referendum

On November 30, Swiss nationals head to the polls on three separate issues: abolishing a flat tax on resident, non-working foreigners, an immigration cap, and a proposal on Swiss gold reserves. As Visual Capitalist notes, the one we are most interested in is the latter section of the ballot, and today’s infographic sums up everything you need to know about the upcoming Swiss gold referendum.

The referendum, if passed, will mean that (1) The Swiss National Bank must hold 20% of all assets as gold, (2) Switzerland will repatriate the 30% of their gold held abroad by England and Canada, and (3) Switzerland may no longer sell any gold they accumulate.

In the most recent polling, 38% of respondents supported the initiative, 47% were against, and 15% were undecided. The poll has a 3% margin of error as well. While support is down from the previous poll, anything is still possible on November 30th.

Switzerland currently holds 1,040 tonnes, or 7.7% of its reserves in gold. The country actually holds the highest amount of gold per capita (4.09 oz per citizen). However, it used to be an even bigger holder of the yellow metal. In 2000, the SNB held 2,500 tonnes of gold and it has also been the biggest national seller since.

The implications of the vote are huge. With a “yes”, the SNB would have to purchase at least 1,500 tonnes of gold to meet the 20% threshold for 2019. That’s about half the world’s annual production. It would also put Switzerland back in the top three for most gold holdings worldwide.

Courtesy of: Visual Capitalist

S&P 500 "Most Overbought" Since Feb 2012

The explosive surge in US equity markets off the 'Bullard' lows have swung the Relative Strength Index (RSI) from its most oversold in 24 months to the most overbought in 33 months in a record amount of time. The last time the market was this 'overbought', the S&P 500 fell almost 11% in the following few weeks...

Gold Tops $1200 As China Cuts, Draghi Jawbones

First Mario Draghi made some strong statements speaking in Asia that "it is essential to bring back inflation to target and without delay," which sent EURUSD tumbling BUT did not spark moves in the S&P 500 (though Gold slipped). It was not until the PBOC cut rates that the US equity market perked up and started ripping... along with gold and as the morning progressed, gold has kept going as it is clear the Central Banks of the world have only one policy left... (no wonder the Dutch want their gold back)

It appears that while Draghi's comments impacted European stocks (DAX surged)...

Zinc's premium over lead to extend decline after peak

* Zinc premium over lead hits highest in nearly 6 yrs in late Oct

* Lead may close some of price gap on winter battery demand

* Doubts emerge on scope of zinc supply/demand deficits

(Reuters) - Zinc's premium over sister metal lead is likely to continue to slip in coming months after hitting a multi-year peak as lead demand climbs during the seasonally strong winter and amid doubt over the scope of projected deficits in zinc.

Zinc's price gap over lead expanded to a high of $297 a tonne at the end of October, the strongest in nearly six years, after investors piled into the zinc market on bets that the closure of big mines would lead to deep deficits.

The rich premium of galvanising metal zinc represents a big reversal in the relationship between the two metals, which are often used as the basis for trading strategies, using either the spread or the ratio.

The premium, based on London Metal Exchange benchmark prices, has since pulled back to $226.

The extent to which investors have bought zinc and shunned lead is out of proportion to fundamentals, some analysts argue.

Both metals are typically found in the same mines so lead supplies should also be affected by mines shutting down.

"Lead is moving into structural deficit at least in tandem with zinc, and lead inventories are much lower," BNP Paribas analyst Stephen Briggs said in a note. "The discount to zinc may narrow."

Instead of a premium, a year ago zinc was at a discount to lead by about $200 with zinc weighed down by heavy surpluses.

One reason the lead price has underperformed this year is disappointing demand, partly due to weak sales of electric bicycles in China which use lead-acid batteries. Batteries account for 80 percent of global lead consumption.

That side of the equation is likely to improve in coming months since battery makers often see increased business in cold weather due to increased battery failures.

"Usually lead is seasonably stronger into the back end of the year as well as January and February, so maybe we can see some of that underperformance unwound," said Citi analyst David Wilson.

Temperatures in all 50 U.S. states hit freezing or below this week as unseasonably cold weather moved across the country.

Many bullish zinc investors base their views on big supply/demand deficits developing, but some analysts say any shortfalls may be less than expected, which could curb zinc's gains.

Analyst Jessica Fung at BMO Capital Markets pointed to two recent expansion announcements - by Vedanta Resources at a new mine in South Africa and Boliden at its Odda smelter in Norway.

"These projects...indicate there are opportunities to close the deficit gap in the next few years," she said in a note.