90 seconds at 9 am: Oil down, gold up

Ireland closes tax loophole; German growth falls sharply; China loosens monetary conditions; UST 10yr 2.22%, oil prices sink; (NZ rich!); NZ$1 = US$0.786, TWI = 76.5

15th Oct 14, 7:29am by David Chaston

Here's my summary of the key news over the weekend in 90 seconds at 9 am, including news that benchmark interest rate yields are sinking fast.

But first, the Irish government has moved to close one of the world’s most well-known corporate-tax loopholes, amid a broader tax crackdown on largely American-based technology companies. It should net Ireland billions. And it seems unlikely that the tech companies will move away from Ireland.

In Germany, they have cut their official growth forecasts from 1.8% to 1.2% for this year and they don't expect next year to be any better than 1.3% growth. This comes after some very disappointing export data; Germany's European neighbours are not buying like they used to.

In China, the cost of steel is falling fast. It looks likely that their annual steel consumption could actually decline for the first time in almost 20 years. (Despite this, fast-falling iron ore prices are actually starting to move higher again yesterday.)

Overnight, China’s central bank cut short-term borrowing costs for banks for the second time in less than a month, suggesting Beijing is under increasing pressure to combat their slowing economy, and loosening monetary conditions is one way to do that.

Here is a link for you to read at your leisure today. It turns out that New Zealand's ranking in the comprehensive 2014 Global Wealth Survey by Credit Suisse is surprisingly good - all based on the value of our houses it seems. And despite this, the wealth share of the top decile in New Zealand has been declining. Overall wealth has been rising fast but the richest sector is losing share. It's a story that goes against the recently accepted narrative. According to this Survey, inequality is not worsening here. We invite you to read the Report in detail and give us your comments below. WDKHLWA.

Back to the financial markets, UST 10yr yields sunk even faster in New York earlier today and are now at just 2.22%. New Zealand swap rates fell yesterday on the previous move down, and are likely to fall even further on this morning's even larger decline.

The oil price has also seen sharp falls and is now under US$84/barrel with the Brent price now under US$87/barrel. Demand for oil in 2015 will grow far slower than previously forecast as global economies remain weak, the International Energy Agency said overnight. Prices may keep falling for as long as OPEC shows no sign of countering a supply surge. New capital intensive fracking projects look unlikely at these new lower prices.

Gold on the other hand has gained sharply and is now up to US$1,235/oz.

We start today with our currency level fractionally lower. The NZD is at 78.6 USc, 90.0 AUc, and the TWI is at 76.5.

If you want to catch up with all the changes yesterday we have an update here.

The easiest place to stay up with today's event risk is by following our Economic Calendar here »

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25 Comments

by dazz | 15th Oct 14, 8:04am 1413313486

RE Housing wealth in NZ. A commentator recently made the comment (cant remember who) that NZ economy is basically a housing market with a few small tag ons. Id like to see some background and statistics compared to other OECD countries to put some context arround that. Is this worth considering for an artical David?

by Colin | 15th Oct 14, 11:22am 1413325323

A couple of stats re your comments according to the RBNZ New Zealands housing stock is worth around $750b up a mere $150b up since around 2011.

Our GDP is around $182b. So our housing stock represents over 400% of GDP scary insane stuff Aussie is likely to be similar. I do recall the figures for the US around a year ago were under 150% perhaps 120%.

by Ms de Meanour | 15th Oct 14, 10:30am 1413322248

If today's theme is telling David how to do his job, perhaps he could also take a look at Credit Suisse Research's Global Wealth Report 2014, reported on in today's UK Guardian among other places.

Figure 5: NZ shows 6th biggest gain in household wealth in the world 2013 - 2014.

Figure 10: NZ shows the highest growth in median wealth in Asia 2000 - 2014.

Table 1: NZ has "medium" inequality - similar to Australia, Canada, Singapore and lower than Denmark, Norway, Sweden.

Table 2: NZ experienced a slight fall in inequality 2000 - 2007 and a rapid fall 2007 - 2014. The share of total wealth held by the top decile here has decreased by over five percentage points since 2000.

In short, and despite what you'd think from some of the comments often seen round here, it does very much look as though we're doing something right ...

by goNZ | 15th Oct 14, 10:35am 1413322554

peak oil anyone?

Brent crude fell to the lowest level in almost four years after the International Energy Agency said oil demand will expand this year at the slowest pace since 2009. West Texas Intermediate slipped for the fifth time in six days.

by Poission | 15th Oct 14, 12:00pm 1413327600

Fuel price changes are substantive,and will start showing up in data soon.

Avgas for example in the IATA series has dropped 17.8 % in asia/oceania over the last 12 months,which is around the equivalent of a 20% decrease in an airlines wage bill.

There will be substantive windfall profits for transport related industries (little benefit for consumers)

If the depressed fuel price is sustained,NZ may have a current account surplus for the first time in around 40 years.

http://www.iata.org/publications/economics/fuel-monitor/Pages/price-analysis.aspx

by cowboy | 15th Oct 14, 1:23pm 1413332620

NZ will have a CA surplus but the NZ people, customers and supply chain costs will not have an NZ$ advantage.

by steven | 15th Oct 14, 12:33pm 1413329580

Price doesnt equal flow rate.

a) If you look at the price of crude after its peak of $148US a barrel it fell to $35ish part of a recession. So a dropping price says a gap between supply and demand. Since there has been no substantial supply increase in global terms it points to demand destruction, which suggests another recession. Now look at some other things like the BDI whch is also pretty low.

b) As the price falls, oil fields (which take 3~5 years to bring on line) with a marginal cost to develop of say $90 get canned. This means further down the line there will be less oil.

c) Even if there isnt demand destruction and its merely new deamnd is weak then so will be world economic growth. Yet more years of low interest rates with all the issues that causes.

regards

by PeakEverything | 15th Oct 14, 12:36pm 1413329806

Lower oil prices is not good a thing for security of supply. Lots of wells are already losing money having the price of oil drop due to economic stagnation will simply hasten a shortage of wells coming online to replace the 3% depletion rate of established wells. CAPEX has been dropping lately and lower oil prices aren’t going to fix this.

Future historians are going to look at 2008 as the start of the great depression / powerdown. Assuming some new form of energy isn't discovered in the next 10 years of course which seems highly unlikely.

by David Chaston | 15th Oct 14, 1:30pm 1413333003

http://en.wikipedia.org/wiki/Peak_oil#mediaviewer/File:World_Oil_Produc…

where is the worldwide decline in oil production? Even after the data in this chart, production has risen, pushed up by US fracking ...

by PeakEverything | 15th Oct 14, 1:49pm 1413334145

I didn't say there had been a decline in oil production. Perhaps you read my 3% depletion rate comment as such? Overall oil production on existing wells drops approx 3% annually, currently this drop is made up for by new wells coming online. I'm suggesting that lower prices due to economic stagnation is going to make it harder for new wells to be developed as all the cheap oil has oil ready been taken. On top of this fracking wells production drops very quickly up to 30% per year.

by steven | 15th Oct 14, 2:33pm 1413336797

3% might be a bit light...4~5%.

Also looking at the effects of an oil plateau we may see the drop off it initially as very steep for a few years, this is the pattern for previous such events.

regards

by steven | 15th Oct 14, 2:30pm 1413336600

David do you believe in a flat earth?

Otherwise mathematically since we are on a sphere and hence finite we must at some stage for all minerals,

a) reach a maximum in output per day.

b) and then decline to an effective zero.

NB Peak oil is a term applicable to crude conventional oil, fracked and hvy oil are classed as "extras" Those extras however have either low outputs per day that will never ramp up (tar sands), or will have outputs that peak quickly and decline sharply. Even the best estimates for US shale oil say 2016 to 2019 before a steep decline in output per day.

Next I see no sign of strategic thinking form you, or the long term view if you want.

People are taking on 25 and 30 year mortgages based on the assumption of BAU, never ending growth.

Go back to b) It is likely that by 2050 there will be negligable conventional crude oil for sale. Actually its more likely to be 2030 but thats a complexity we wont add in here today.

go back to a) at some point between now and 2050, which is 35 years we must peak and decline in output per day.

It isnt a Q of if its when as we are not on a flat earth. So even if its 17 years from now those with 25 and 30 year mortgages are in the poo.

If you go back to the expected latest peak in conventional crude oil output its 2018, many of these 90+% mortgages will have 20 years still to pay off.

Just how will these be paid?

We may indeed find that the US fracking boom has caused an effective delay of total output of maybe 6 years, maybe.

So waiting until you are after the peak is a bit late, IMHO.

regards

by profile | 15th Oct 14, 3:34pm 1413340443

2022 oil futures are $85 - get in there Steven and make a killing then you can retire from interest.co.nz.

"Gas is now a direct competitor to oil and “a threat to oil demand growth”, Kleinman said, adding that it has the potential to be used as a substitute fuel for oil in every sector except aviation. “The gas-oil price spread was a US story,” said Kleinman, but now it is becoming a worldwide phenomenon that will affect the structure of future oil demand, he added."

http://interfaxenergy.com/gasdaily/article/13903/shale-gas-a-disruptive…

And that old chesnut from the IEA:

"Our analysis suggests there are ample physical oil and liquid fuel resources for the foreseeable future."

by steven | 15th Oct 14, 2:44pm 1413337497

That graph is total oil btw, not conventional crude which is here,

http://www.indexmundi.com/energy.aspx?product=oil&graph=production

Now you might just say that this is still increasing, no worries!!! Is this really the dpeth of how you want to investigate this?

The issue is look at the rate of increase to day V that rate of increase pre 2004 and what happened to the price.

So we'll use your own URL,

http://en.wikipedia.org/wiki/Peak_oil#mediaviewer/File:World_Oil_Produc…

Then maybe look at a whole group of people doing estimates, the kicker is few if any see peak a long way off.

http://en.wikipedia.org/wiki/File:August_2013_peak_oil_models.png

regards

by cowboy | 15th Oct 14, 1:43pm 1413333836

Pretty much the guaranteed result of trying to wean off the baby from a endless credit supply system.

by DFTBA | 15th Oct 14, 12:51pm 1413330689

To addto the general bunch of facts posted above, i was reported recently that Iran is having some difficulty with the low oil prices. Due to sanctions, their cost to produce is a bit higher than fellow oil producing countries.

Also reported was that, on the QT, Saudi is happy for oil prices to be low for a whilel as it will make shale production too costly and drive those out of business.

After which, of course, they'll up the price again....Lots of factors at play, here.

And seriously, do you really believe there is an infinite supply of oil?

by Plutocracy | 15th Oct 14, 3:28pm 1413340117

Profile believes (like DC?) shale (tight oil) is going to 'save the world', this is despite the fact that the low price is currently destroying many tight oil producers who require high prices to remain profitable.

The low oil price must mean the global economy is recovering right?

by profile | 15th Oct 14, 3:45pm 1413341148

Pluto - I don't believe tight oil will "save the world". It doesn't need saving for starters. Lots of things will just eat oils lunch if the price stays relatively high - see gas link above. Chicken littles to the fore when the oil price goes up and when the oil price goes down...

'destroying many tight oil producers' - don't confuse despot government budgets with oil production costs.

"The break-even price can be estimated for each well and play by considering the average IP, EUR, liquid content and well cost. The Eagle Ford has the lowest average break-even price of $45/bbl, followed by the Bakken at $50/bbl. The Delaware and Niobrara have almost the same price at $55/bbl, while the Midland follows at $60/bbl."

http://www.worldoil.com/September-2014-Regional-Report-Permian-Anadarko…

by Plutocracy | 15th Oct 14, 4:18pm 1413343097

You're right, 'save the world' should read 'save the current economic paradigm'.

I guess we'll find out what the break-even price is in the not too distant future! Interesting times.

Falling oil prices raises questions on viability of shale

"The years of cash deficits have piled up the industry’s debts. High-yield bonds issued by energy companies rated at B- or lower total $75bn, up from just $16bn in 2009, according to Fitch, the rating agency.

To be able to continue drilling, US shale companies will have to be able to convince investors that it is worth committing more debt and equity capital to the industry."

by profile | 15th Oct 14, 5:43pm 1413348216

ah Fitch pre housing crisis they handed out all those AAA's "like candy bars at halloween"...

Surely despot government largess/one horse economies will be the unknown factor. Who is more over leveraged carbon traders and green projects reliant on high energy prices or shale oil producers? At least shale oil producers can just stop drilling and take a breather if the price gets too low. No sure luck if you need to constantly bribe your populace.

Certainly interesting times. In addition to the Andarko Permian numbers 30% ROI on $60 oil not so bad:

"Permian production is up 300 Mb/d so far this year (2014) and is expected to increase at least a further 560 Mb/d to reach 2.3 MMb/d in 2019. And according to those economic estimates, Permian/Wolfcamp producers would still make a 30 percent ROI if crude prices fell to $60/Bbl. We do not see production declining in any of the other shale plays either. In the circumstances, the chances of new crude production slowing down enough to put off the DOR by a few years seem slender."

https://rbnenergy.com/here-comes-the-reckoning-day-when-us-refiners-can…

"The reason for the improved capital efficiency is oil and gas volumes have been increasing at a rapid clip," Adkins said. "Initial oil and gas production from three key horizontal plays [Bakken, Eagle Ford, and Marcellus] has increased an incredible 10-fold since 2007."

"The key point is that improved efficiencies have allowed US E&P production per unit of capex to scream higher over the past decade," Adkins said. "We expect this trend to continue over the next few years. That means even in a flat or backwardated commodity price environment, E&P cash flows can still improve."

"We now think E&Ps are capable of growing cash flows solely through volume growth and cost efficiencies and in spite of a backwardated oil curve. This is a massive paradigm shift in the energy sector," Adkins said.

Freed from commodity prices, US E&Ps will obtain stock market multiples in line with manufacturers, Raymond James said, with drillers that currently see stock prices at 5 to 7 times their earnings moving up to multiples of 8 to 10.5 times earnings."

http://www.platts.com/latest-news/natural-gas/washington/us-shale-drill…

by cowboy | 15th Oct 14, 10:37am 1413322650

wow all reads for serious edge of Depression material

by Andrewj | 15th Oct 14, 11:16am 1413324983

Guy Debelle, head of the BIS’s market committee, said investors have become far too complacent, wrongly believing that central banks can protect them, many staking bets that are bound to “blow up” as the first sign of stress.

In a speech in Sydney, Mr Debelle said: “The sell-off, particularly in fixed income, could be relatively violent when it comes. There are a number of investors buying assets on the presumption of a level of liquidity which is not there. This is not evident when positions are being put on, but will become readily apparent when investors attempt to exit their positions.

“The exits tend to get jammed unexpectedly and rapidly.”

http://www.telegraph.co.uk/finance/economics/11162217/BIS-warns-on-viol…

by Colin | 15th Oct 14, 11:23am 1413325414

And the central banks have no ammo left with zero interest rates.

by Gareth Vaughan | 15th Oct 14, 11:37am 1413326233

Here's what's being touted as the first case of internet addiction disorder, which someone who used Google Glass for 18 hours a day apparently has - http://www.theguardian.com/science/2014/oct/14/google-glass-user-treate…

by Poission | 15th Oct 14, 2:48pm 1413337713

Mathmatically the inference of peakoil (the probalisitic model of proven reserves) is not even wrong ie a schoolboy howler .

http://www.rsc.org/AboutUs/News/PressReleases/2008/SignificanceArticle.asp