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The Real Reason The Oil Rally Has Fizzled Out

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One of the themes that is emerging as we review investment candidates is the era of oil growth, which is at least going to take a substantial pause, if it is indeed, not totally in the rear view. Company after company has told us that “maintenance capex” is all they are allocating at current oil prices.  An example of this mindset is Parsley Energy, (NYSE:PE) which reduced its capex budget by 50% year over year. This new era of growth restraint has implications for the world energy market that isn’t reflected in the energy structure at present.

Drilling and fracking each picked up slightly from the week prior. Hence the question I pose about seeing the bottom in activity. We saw a bump similar to this once before this summer, and then each category fell back into decline for a month or so. I am not betting that we’ll see another boost this week, as the trading range for WTI just isn’t supportive enough for a big activity inflection.

Source: Baker Hughes

I remain committed to my previously established targets for shale exit production ~5 mm BOEPD. The next way point will be the EIA-914 on Monday.

Why are we where we are?

That’s a question I’ve been wrestling with regards to the pricing of WTI. Oil has definitely plateaued in recent weeks, after a nice run in the spring and early summer. A brief investigation reveals one likely source of the lack of volatility.

 

The answer could be hedging. Using a trading strategy known as a Strangle, funds, and large institutions with exposure to commodities-oil in this case, can limit this with puts and calls. A put gives you the right to sell WTI-for example at a future price, while a call gives you the right to buy at a different price, thus limiting the impact of volatility on your position.

Note: The tight range since late April driven by hedging strategies.

Source  Hedging on this scale has a potential to result in a big dislocation in the market. In a recent WSJ article Marwan Younes, chief investment officer of Massar Capital Management commented: ‘’Hedging has the consequence to push prices back within that range. Historically, long periods of calm in financial markets have tended to end with a burst of volatility. It feels like we have two tectonic plates building up energy. The day it gives way will be a fairly eventful day.’’

WSJ

This is an interesting idea that is supportive of my general diatribe about oil going higher and breaking out of this range. Particularly as regards Younes final line that I have italicized. We need a catalyst for this to happen, and it’s hard to say just what that will be.

I don’t trade futures contracts. I just don’t have the attention span or the temperament to stay that focused on the market. I figure the money I am missing out on in a success case, is more than compensated for by sleeping fairly well at night, and consuming less Maalox.

Under-investment in supply, “Chickens” are coming home to roost

Paul Sankey is a well-known securities analyst, formerly with a big firm-Mizuho, and now on his own. I’ve followed him for years. Sankey has some interesting ideas that coincide with my own. Chief among them is the idea that the oil market is approaching a precipice of supply short-fall that will simply be breath-taking when its full effects land out.

Sankey Research

Another area of agreement between us is that years of under-investment in replacing barrels from aging Brown-field developments will ultimately constrict supply and drive prices higher.

 

Focusing mainly on the decline rate of shale and the lack of new drilling, I’ve made the point repeatedly in OilPrice articles that the shale miracle in the U.S. is over. Here is a link to my most recent writing on this topic. Shale was thought to be impervious to decline by many. Some of us (speaking of myself here) always knew better as we understood the short-decline nature of the rock. Now companies are taking write-offs on shale as they did deepwater assets a few years ago, meaning there are reserves we thought would be available in the years ahead that will now be uneconomic.

The short-lived era of the U.S as “swing-producer” for oil has ended.

Why “war-premiums” for oil don’t last

One thing we should be able to agree on is that the world currently assumes unlimited supplies of crude oil, now the norm thanks to overproduction the last few years, will continue to be the base case going forward.

Is the world right? Obviously you know I don’t think so, but we are certainly getting mixed signals right now. It is worth noting when a giant hurricane that shuts down 80% of the GoM’s producing and refining capacity doesn’t move the market even a little higher it speaks strongly to the markets confidence about future supply.

As noted in the EIA graphic below, last week we edged down still further toward the 500 million barrels mark in inventories, and still crickets from the oil market. It should be noted that this represents about a 30 day supply at current consumption rates.

We think that the +/- 3-mm BOEPD supply/demand gap will accelerate as the year closes, and these inventory draws will continue.

EIA-WPSR

I have previously identified several hot spots that could explode at any time, creating an instant inflection for oil. You know them well. Iran, Venezuela, Iraq, Libya are all experiencing severe economic and social disharmony for various reasons, but no one is shooting at one another taking a war-premium completely out of the price. Should we be so complacent?

One interesting aspect of a war-premium is that it doesn’t last for long. History tells us the sharp spikes in price due to conflict are short-lived, and oil driven higher by conflict reverts quickly to its previous range. The world continues to spin on its axis, infrastructure that may be damaged or destroyed is quickly rebuilt, and importantly no one goes without. A good example is the recent attack on Saudi oilfields in 2019 by Iran. Oil spiked to $80 from $60 overnight, and quickly fell back to $60, and then to $50, and then to $40. Fear comes out of the market as rapidly as it enters.

Macrotrends

What the chart above tells us is that war premiums soon fade. Take the spike circa 1990 when the U.S. led coalition began the response to Iraq’s invasion of Kuwait. A brief spike to $80 was quickly followed by a rapid collapse to the mid-$30’s and over most the next decade to a low below $20. It then took another 10 years for oil to peak again, this time in the financial collapse of 2008.

One takeaway from this chart is that wars are over so quickly these days (Afghanistan excepted), that they don’t have much prolonged impact on the perception of supply security.

Much more important are key producer decisions to restrict production. For example the Arab oil embargo of the early 1970’s led to a 30-year uptrend that was only broken when they opened the taps in 1998. A decision they quickly regretted when the oil price crashed. A “V” shaped rebound led to nearly another 20 years of higher prices, until in 2014, OPEC again opened the taps. This seems to be a mistake they are unable to stop making as they did it again earlier this year.

In short while a shooting war changes the dynamic briefly, decisions by producers have a much more pronounced effect on oil prices.

Your takeaway

Inflation is on the horizon. It’s been ages since we had to worry about generally rising prices. The full effects of the dynamic imposed by the virus, lower employment, business failures, etc. have led governments around the world to print trillions of dollars to provide liquidity. A lesson perhaps learned in 2008 when governments were slow to provide this under-pinning to world markets. The net effect of this is always inflation.

Last week the Chairman of the Federal Reserve, (Fed) Jerome Powell reinforced their position on employment vs inflation making a change to their historic stance of combating inflation. In this speech Powell let it be known that it will let inflation run…to a degree, in support of putting people back to work. Up to this point the Fed had established an arbitrary 2% limit for inflation before it would move proactively to tighten the money supply to drive it down.

This is bullish for oil prices and oil equities in general, telling us we are on the right track with our overall thesis of higher oil prices. Interest rates will stay down hurting savers, but commodities and equities will rise. Oil is a commodity.

Source:- OilPrice.com

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Canada's GDP grew 3 per cent in July – Yahoo Canada Finance

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EDMONTON, ALBERTA - AUGUST 28: Construction continues on the LRT - Light Rail Transit through the city centre as photographed on August 28, 2020 in Edmonton, Alberta, Canada. (Photo by Bruce Bennett/Getty Images)
EDMONTON, ALBERTA – AUGUST 28: Construction continues on the LRT – Light Rail Transit through the city centre as photographed on August 28, 2020 in Edmonton, Alberta, Canada. (Photo by Bruce Bennett/Getty Images)

Canadian GDP expanded by 3 per cent in July, as the economic recovery from the effects of COVID-19 continues.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Statistics Canada says it was the third straight month-over-month increase, but the economy remains 6 per cent below its pre-pandemic level.” data-reactid=”24″>Statistics Canada says it was the third straight month-over-month increase, but the economy remains 6 per cent below its pre-pandemic level.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Growth is also slowing, considering June’s increase was 6.5 per cent.” data-reactid=”25″>Growth is also slowing, considering June’s increase was 6.5 per cent.

All 20 industrial sectors were higher.

Some industries faired better than before the pandemic. Agriculture, utilities, finance and insurance, and real estate rental and leasing sectors surpassed February’s levels.

The manufacturing sector grew 5.7 per cent as factories continued to ramp up production. Accommodation and food services jumped 20.1 per cent, the third straight double digit advance.

“But those figures come off a very low base and are still facing the deepest slump versus year-ago levels. With the resurgence in virus cases, the struggles in those sectors could actually deepen further in the near-term,” said Benjamin Reitzes, director, Canadian rates & macro strategist at BMO.

In another sign of slowing growth going forward, Statistics Canada estimates GDP grew by 1 per cent in August.

“Together, the data are consistent with our call for a roughly 46 per cent annualized gain in Q3 GDP, but the slowing in August, coupled with the surge in the virus in recent weeks, suggest a much smaller gain is in store for Q4,” said Avery Shenfeld, chief economist at CIBC World Markets.

For comparison, annualized GDP fell 38.7 per cent in the second quarter — the worst since Statistics Canada started tracking it in 1961.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Jessy Bains is a senior reporter at Yahoo Finance Canada. Follow him on Twitter&nbsp;@jessysbains.” data-reactid=”33″>Jessy Bains is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jessysbains.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Download the Yahoo Finance app, available for&nbsp;Apple&nbsp;and&nbsp;Android.” data-reactid=”34″>Download the Yahoo Finance app, available for Apple and Android.

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New parents waiting months for financial benefits amid surge in CERB claims – CBC.ca

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Months after having their babies, some parents are still waiting to receive benefits from Canada’s employment insurance program, which has been overloaded during the COVID-19 pandemic. 

“It’s been a complete financial change and strain for us,” said Alanna Los of Brandon, Man., who had her second child July 1. “I’ve been literally on the phone every day almost for the past three months.”

Normally, people applying for parental benefits should expect to wait only about one month for their first payment, according to the federal government’s website. But with millions of Canadians unemployed or under-employed during the pandemic, strain on the employment insurance (EI) system is likely causing delays.

While she was pregnant, Los was on sick leave from her job as a nurse after she was rear-ended in a car crash. Two days after her daughter was born, she called Service Canada to switch over her sick leave payments to her parental leave benefits. The agent with whom she spoke confirmed the change was made and said she was approved, Los said.

Months later, Los said, she hasn’t received any support from the government.

She has had to dip into her savings to pay bills, she said. 

Los isn’t alone. When she posted about her issues on a Facebook group, several mothers shared similar stories, she said. 

“This is a system you’re supposed to be dependant on, but it’s not there for moms right now,” Los said.

‘I’m completely broke’

Leta Jonasson had her son Aug. 12, and has maxed out her credit card waiting for her parental benefit since his birth, she said.

“It’s been pretty stressful,” said the Winnipeg mom, whose spouse was also laid off during the pandemic. 

Alanna Los has been waiting on her parental benefits since the birth of her daughter on July 1. Experts suggest delays are in part due to the strain of paying out emergency benefits to four million Canadians who are unemployed or under-employed because of the pandemic. (Submitted by Alanna Los)

Jonasson, 26, who also has another child, worked as a retail store manager, but she’s been off since March because of the pandemic. She had been receiving support from the Canada Emergency Response Benefit (CERB), but those payments stopped when she applied for parental benefits, she said. 

“I’m completely broke until I get my maternity leave benefit,” Jonasson said.

She said she feels lucky to have family and a partner who support her as much as possible and can’t imagine what others who don’t have that safety net would do. 

“If I didn’t have their help, I’d really be in a bad spot because of bills and everything,” Jonasson said.

Two mothers in Ontario also told CBC News they’ve been waiting more than two months for their parental benefits.

CBC News reached out to Service Canada, but the agency declined to answer questions about ongoing service delays.

“The department understands the difficulties that any delay in benefit payments can cause to claimants and their families, and is working to address the issue as soon as possible,” spokesperson Marie-Eve Sigouin-Campeau said.

‘System is not designed for this’

Service delays are likely due to the strain the government is under having to pay emergency benefits to four million Canadians who are unemployed or under-employed because of the pandemic, one expert says.

Back in May, the federal government said the employment insurance (EI) call centre was experiencing an unprecedented volume of calls, which was affecting service accessibility and wait times. 

At the time, the government said it was working to increase the number of agents taking calls and pursuing additional measures to increase the automation of calls.

There’s likely still a backlog in trying to deal with the high number of people collecting CERB, EI and other government benefits, said Moshe Lander, a lecturer in the department of economics at Concordia University in Montreal.

Prime Minister Justin Trudeau announced July 31 that the government would transition recipients of the Canada Emergency Response Benefit (CERB) to employment insurance (EI). (CBC )

“I think it’s just the nature of trying to process this many claims in extremely irregular circumstances,” said Lander. “The system is not designed for this. And so, of course, it’s not going to work properly.”

‘She-cession’

Bureaucratic hurdles are putting added stress on a demographic that’s already facing a great deal of hardship because of the pandemic, said Katherine Scott of the Canadian Centre for Policy Alternatives.

Women have been disproportionately affected by the economic fallout of the pandemic, and months after the onset of the crisis their return to employment lags behind that of men, Scott wrote in a report earlier this month.

“Women continue to be unemployed in greater numbers and are still working reduced hours in the jobs they do have,” she said. “This has certainly been a she-cession, as it’s been coined.”

WATCH | Manitoba mothers on the financial impact of waiting for parental benefits:

Months after giving birth, some new parents are still waiting to receive parental benefits from Canada’s Employment Insurance program. 1:59

On top of that, the glitches with accessing CERB, EI and parental benefits mean some people are falling through the cracks, she said.

“It’s just crazy-making in the face of acute stress for many, many families,” Scott said.

Scott said the delays could persist or even increase as the government transitions from CERB to EI.

“The stress on the system will actually magnify,” she said.

“If you’re an expectant parent, you’ve got to wonder, will your claim proceed in a timely fashion? And it may well not.”

For parents such as Jonasson and Los, that means more calls to Ottawa, and more stress on their families.

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Secret and unprofitable Palantir goes public – Al Jazeera English

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Seventeen years after it was born with the help of the CIA seed money, data-mining outfit Palantir Technologies is finally going public in the biggest Wall Street tech offering since last year’s debut of Slack and Uber.

Never profitable and dogged by ethical objections for assisting in the Trump administration’s deportation crackdown, Palantir has forged ahead with a direct listing of its stock, which is set to begin trading on Wednesday. In its stock offering, the company is not selling newly minted shares to raise money; it is simply listing existing shares for public trading.

The low-key strategy may not generate the enthusiasm many technology offerings do. But it is in character for a secretive company long reliant on spies, police and the military as customers – and whose founders are holding onto voting control of the company.

The big question for both investors and company management: Can Palantir successfully transition from a business built on the costly handholding of government customers to serving corporate customers at scale? The company is a hybrid provider of software and consulting services that often embeds its own engineers with clients.

Analysts say its future depends on selling multinationals its tools for gathering disparate data from an ever-expanding data universe and using artificial intelligence technology to find previously undetectable patterns. Those can theoretically guide strategic decisions and identify new markets much as they have aided in tracking rebel fighters and sorting military intelligence.

The company sets itself apart from most US technology providers, and just moved its headquarters to Denver from Silicon Valley. Palantir colours itself patriotic and belittles other tech firms that would not unquestionably support US dominance in war-fighting and intelligence.

“Our software is used to target terrorists and to keep soldiers safe,” CEO Alex Karp wrote in a letter accompanying Palantir’s offering prospectus. While Karp acknowledged the ethical challenge of building software that “enables more effective surveillance by the state”, Palantir’s prospectus touts its work helping US soldiers counter roadside bombings and fight the ISIL (ISIS) group.

But investors also have to reckon with the Peter Thiel factor.

The iconoclastic entrepreneur and PayPal co-founder endorsed President Donald Trump in 2016, worked on his transition team and holds the largest chunk of Palantir stock. Thiel already exerts tremendous power from the board of Facebook, which dominates global media and seeks to create a digital currency.

In its IPO prospectus, Palantir paints a dark picture of faltering government agencies and institutions in danger of collapse and ripe for rescue by a “central operating system” forged under Thiel’s auspices. As the offering is structured, Thiel will be the dominant voice among the Palantir co-founders who will retain voting control.

“Is that someone who you want deciding how a component of the [national] security apparatus is designed?” asked New York University business professor Scott Galloway. “If you believe that power corrupts and checks and balances are a good idea, this is just from the get-go a really bad idea.”

Earlier in September, BuzzFeed reported that Thiel hosted a known white nationalist, Kevin DeAnna, at a 2016 dinner party, citing emails it obtained and published whose authors refused to talk to the online news outlet. Thiel declined through a spokesman to discuss the report with The Associated Press news agency. Critics say he shares the blame for Facebook’s incomplete removal of toxic disinformation disseminated by the pro-Trump far-right fringe.

Then there are Palantir’s fundamentals, which Galloway considers lousy. The company has just 125 customers in 150 countries, including Airbus, Merck, Credit Suisse and the Danish National Police. Slightly less than half its 2019 revenues were from government agencies, and three clients – which Palantir did not name – accounted for almost a third of revenues.

“They’re massively unprofitable and they’ve never been able to figure it out,” Galloway said, noting that it took Google three years to earn a profit, and Amazon seven. Over a much longer span, Palantir has accumulated $3.8bn in losses, raised about $3bn and listed $200m in outstanding debt as of July 31.

As the Palantir offering is structured, Peter Thiel will be the dominant voice among the Palantir co-founders who will retain voting control [File: Ben Margot/AP Photo]

Palantir, named for the mystical all-seeing stones from Tolkien’s “Lord of The Rings”, has recently been deepening its relationship with Uncle Sam, including winning a modest contract early in the COVID-19 pandemic for helping the White House gather data on the coronavirus’s impact.

Senior emerging technology analyst Brendan Burke of Pitchbook says he is not worried that Thiel’s association with Trump will hurt the company if Trump loses the election.

“The political connections don’t appear to be the main driver of their recent substantial contract wins,” he said, although he noted that government contracts can be more volatile than corporate ones, where Palantir’s foothold is less firm.

Palantir offers two software platforms. Foundry is designed to link disparate and largely incompatible data sources into a central operating system. It is the company’s primary hope for broadening its business.

An earlier product, Gotham, has been used by defence and intelligence analysts and police departments to identify patterns deep within datasets. But the value of “predictive policing” tools developed with the platform have been questioned for their potential to unfairly target people of colour. The New Orleans and New York City police departments, once customers, have used it.

A 2017 research paper by University of Texas sociologist Sarah Brayne, who studied the Los Angeles Police Department’s use of Gotham, found the software could lead to a proliferation of unregulated personal data collected by police from commercial and law enforcement databases.

On Monday, Amnesty International issued a briefing that says Palantir is failing to conduct human rights due diligence around its contracts with Immigration and Customs Enforcement, calling it “deeply ironic” that the company crows about its determination not to work with regimes like China that abuse human rights.

Palantir’s ICE contracts involve the maintenance and improvement of two products used in deportation raids. One of them, its web-based Falcon tool, has enhanced data accessible to investigators “involving the illegal movement of people into, within, and out of the United States”, according to documents obtained by the AP, including court records, and by the nonprofit Electronic Privacy Information Center in a freedom-of-information request.

Palantir has acknowledged in its SEC filing that “unfavorable coverage in the media” and from social activists could hurt its business. It also says its contractual obligations might prevent it from being able to defend its actions publicly, although it recently named a former Wall Street Journal reporter to its board.

Negative publicity over ICE contracts may also have hurt company recruitment on college campuses.

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