Thursday, August 21, 2014

If I Were A Central Banker, This Would Be My Number One Graph


I am still bullish on consumer spending.  Just too many cool gizmos out there, extended adolescence of millennials, and retirement of baby boomers.  Money is a state of mind.  As long as the right mindset exists - desire, motivation and commitment - there will be lots of money to spend.

Saturday, July 19, 2014

Money Supply: China:US

I played around with some of the Chinese and US money supply data.  I didn't occur to me that Chinese money supply is so large, but then again it is a large economy with very large upside potential.  Notice that the M1 ratio has gone flat but M2 and M3 ratios are still moving upward.

Graph #1: M1 China:US

Graph #2: M2 China:US

Graph #3: M3 China:US

Thursday, June 19, 2014

NY Fed back in the game

Repos are back, and in a big way.  The NY Fed is taking over the game, though I wonder if they didn't take over the game initially during the financial crisis.  From the FT:
The Federal Reserve Bank of New York has emerged as the single largest player in an important segment of the short-term lending market that was at the epicentre of the financial crisis. 
The Fed’s decision to quadruple its trading with government money market funds in the repurchase or “repo market” is a sign that the central bank is now engaging more directly with the shadow banking system at the expense of large Wall Street banks. 
Historically, the repo market was where big banks pawned out their securities such as Treasury bonds to lenders including money market funds, insurers and mutual funds, in exchange for short-term financing. Now the Fed is stepping in to trade as well as it prepares to end its current near-zero interest rate policy. 
Armed with a balance sheet of $4.3tn of bonds purchased during quantitative easing, the Fed is using what it calls its reverse repo programme, or RRP, to trade with money funds at a time when tough new regulatory standards have made such borrowing less attractive for the banks.
Like the article says, the Fed is now becoming a dealer of last resort.  I am not sure if I want to visit that casino much less be dealt any cards.

Dealer of last resort

Wednesday, May 14, 2014

Is Now The Time For Oil Exports?


Forget about the Keystone XL Pipeline, the biggest issue facing the US upstream oil industry may be the congressional oil export ban.  As previously discussed, Light Louisiana Sweet (LLS) was trading below West Texas Intermediate (WTI) due to a large increase in Gulf Coast inventories - TransCanada's Market Link pipeline is projected to fill to capacity sometime this summer.  Rooted in both the 1920's Jones Act (maritime law) and the 1970's oil crisis, the current oil export restrictions mean that companies may export some refined products and export oil to the US East Coast and Canada (Jones Act).  Potential downward pressure on the price of light oils may be alleviated by a congressional lifting of the oil export ban.

Map 1 (Source: RBN Energy)
Beginning this summer, a significant build-up of export (takeaway) capacity will take place in the Permian Basin of west Texas and southeast New Mexico (1, 2).  By the end of 2015, nearly 850,000 barrels per day of capacity, in the form of new pipelines and upgrades, will have been added to the basin's transportation infrastructure.  The Gulf Coast refining market which will receive the overwhelming majority of this new capacity are engineered to process heavier oils (i.e., Saudi and Venezuelan) rather than the light oils and condensates (usually 45+ API) produced in the US's ultra-tight oil plays (i.e., Eagle Ford and Cline).

This presents a challenge to the operators in these light oil and condensate plays.  With a lack of capable domestic refining capacity for their product and an increase in both production and inventories, price spreads will likely make export an attractive possibility.  However, there are many barriers to exporting oil, besides determining logistics and finding markets.

Graph 1 (Source: RBN Energy)
In the late 1970's, the congress sought to restrict oil exports as a means to alleviate fears of domestic oil shortages and price shocks.  While the US does export oil in the form of refined products, current environmental restrictions prohibit the construction of new refineries.  The build up in inventory due to the lack of capable demand appears to be preventing domestic oil from appreciating to the same level as other benchmarks, such as Brent.

...and the Williston Basin...and Canada

The Keystone XL Pipeline, under environmental review by the Obama administration, may pose another challenge to domestic oil producers.  The expansion of the Keystone pipeline will largely bypass the heart of the Williston Basin - traversing through the southern margin of the basin where the Bakken has pinched out.  The State Department's most recent executive summary of the Keystone XL Pipeline indicates that 730,000 of the 830,000 barrels per day of capacity are designated for Western Canadian Sedimentary Basin oils (tar sands).  Up to 100,000 barrels per day have been set aside for US oils, but operators have so far been able to only make just 65,000 barrels per day of promises (or commitments) toward the pipeline.

Map 2 (Source: Enbridge)
The Permian and Keystone XL pipelines are not the only projects putting potential downward pressure on oil prices.  Parts of the Williston Basin are serviced by pipelines that run south, from Montana and North Dakota to Guernsey, Wyoming.  This system is also undergoing significant pipeline expansion in the Rockies.  The Pony Express, a former gas pipeline undergoing conversion to oil, will increase takeaway capacity by up to 240,000 barrels per day.  Also, Enbridge's two projects - the Sandpiper pipeline and the Line 9B reversal - will also alleviate congestion for Williston Basin producers.

By Rail and Barge

There is one catch to the Jones Act and other congressional oil export bans - some oil may be exported to Canada.  This has lead to an expansion in rail shipments to Canada and the US East Coast.  While oil shipment by rail has come under increased scrutiny (1, 2) due to some very tragic accidents (1, 2), it looks like it will remain a pillar of takeaway capcity for the Williston Basin.
Photo 1 - Barge loading facility somewhere
 near the Houston Ship Channel (Source: Google)

Barge operators have been beneficiaries of the oil-by-rail movement (and due to overstocked Gulf Coast inventories).  While many Gulf Coast refineries have train-accessible off-loading facilities (for refined products), they do not have sufficient train-accessible unloading facilities to handle the increase in oil production.  However, many rail lines terminate near waterways.  Oil shipments by rail can be offloaded from trains and onto barges.  The barges (30,000+ barrels) can then sent to the refineries where barge access can accommodate the greater volumes of oil.  Barge operators will stand to benefit from any Jones Act shipments to Canada, as well as shipments to the US East Coast.

The crude wall

In the next two years, significant upgrades to US liquid hydrocarbon pipeline infrastructure will likely change the trajectory of government and American attitudes toward oil exports.  Even ethane, produced in dry gas basins along with methane, may develop an export market to European and Asian buyers due to a US supply gut.

The crude wall may be coming.  With the increase in takeaway capacity, operators' ability to expand their production may lead to the US becoming the world's largest oil producer in a few years.  Today, both Russia and Saudi Arabia vie at times for the title of both largest producer and exporter of oil.  The resulting increase in production will likely continue to decrease US imports, reshape the trade deficit and change US-international politics.

Tuesday, April 22, 2014

Gulf Coast Crude Inventory Record

From the EIA:
Crude oil inventories on the U.S. Gulf Coast (USGC) reached 207.2 million barrels (bbl) on April 11, a record high. The elevated inventory levels are the result of the continuing strong crude oil production growth, the opening of TransCanada's Marketlink Pipeline, and a drop in crude oil inputs at USGC refineries as a result of seasonal maintenance.
The main driver of the recent crude oil inventory builds on the USGC is start-up of TransCanada's 700,000-bbl-per-day (bbl/d) Marketlink Pipeline, which runs from the Cushing, Oklahoma storage hub to the Houston area. In late January, TransCanada completed the first delivery of crude oil via Marketlink to USGC refineries. Trade press has reported that crude oil deliveries via Marketlink are expected to average 525,000 bbl/d in 2014. The pipeline start-up has been a main driver of recent corresponding draws at Cushing.
Graph 1

Meanwhile, at Cushing:
Crude oil inventories at Cushing, Oklahoma, the primary crude oil storage location in the United States, decreased 13 million barrels (32%) over the past two months. On March 21, Cushing inventories were less than 29 million barrels, more than 20 million barrels lower than a year ago and the lowest level since early 2012. Cushing is the delivery location for the New York Mercantile Exchange (Nymex) West Texas Intermediate (WTI) crude oil futures contract.
The recent drawdown of stocks at Cushing resulted from three factors:
  • The startup of TransCanada's Cushing Marketlink pipeline, which is now moving crude oil from Cushing to the U.S. Gulf Coast
  • Sustained high crude oil runs at refineries in Petroleum Administration for Defense Districts (PADD) 2 (Midwest) and 3 (Gulf Coast), which are partially supplied from Cushing
  • Expanded pipeline infrastructure and railroad shipments that have made it possible for crude oil to bypass Cushing storage and move directly to refining centers in PADDs 1 (East Coast), 3 (Gulf Coast), and 5 (West Coast)

Graph 2

This is leading to a discount in Light Louisiana Sweet (LLS) (the Gulf Coast benchmark) to West Texas Intermediate (WTI) (the US benchmark).  WTI is already trading at a discount to Brent (sort of the world/European benchmark) and the TransCanada pipeline may cause further discount in LLS.
Graph 3

Sunday, April 13, 2014

Another Spectre For Rising Consumer Spending

Delinquency rates on consumer and credit card loans are at 20+ year lows.
Graph 1

Charge-off rates are at 15 and 20 year lows.
Graph 2

Looking at cars, 48-month financing looks like it is supercheap by recent historical comparison, and the inventory to sales ratio is moving upward (suggesting favorable conditions for consumers).  The housing market still looks tight.  This could mean that people (especially young persons and young couples) will look toward car purchases as a way to substitute the American dream.  Also, appears to be a trend in leasing autos.
Graph 3

The market seems to have changed since the recession, and why not?  Fiat acquired Chrysler in the wake of the recession, and Chevrolet required a massive loan from the federal government to prevent liquidation bankruptcy.  These kinds of corrections may have helped correct the flawed thinking of those and other automakers.
Graph 4

Wednesday, April 9, 2014

Value Invest Much?

Two charts I made to capture the EV/EBITDA (Enterprise value to Earnings ratio) of the US stock market and US economy, as closely as possible.

First: The stock market

A = Nonfinancial Corporate Equities
B = Nonfinancial Corporate Debt
C = Nonfinancial Corporate Savings
D = Corporate Profits

(A + B - C) / (D)
[(Nonfinancial Corporate Equities) + (Nonfinancial Corporate Debt) - (Nonfinancial Corporate Savings)] / [(Corporate Profits)]
Graph 1

Second: The whole US economy

A = Nonfinancial Corporate Equities
B = Homeowner's Equity
C = Total Credit Market Debt
D = Total Saving
F = Federal Taxes
G = State and Local Taxes

(A + B + C - D ) / (E - F - G)
[(Nonfinancial Corporate Equities) + (Homeowner's Equity) + (Total Credit Market Debt) - (Total Saving)] / [(GDP)-(Federal Taxes)-(State and Local Taxes)]
Graph 2

Now, it would be nice if the data extended further back, and obviously we need some comparisons to their peers.  However, that will have to wait.