90 seconds at 9 am: Rates flatten

US factories humming; wage push coming in Japan; Russia in tough spot; Bright Foods boss corrupt; swap curve flattens; oil price down again; NZ$1 = 77.7 USc, TWI = 78.3

16th Dec 14, 7:25am by David Chaston

Here's my summary of the key issues that affect New Zealand overnight with news other than the Sydney disaster in Martin Place.

American manufacturing output recorded its largest increase in nine months in November as production expanded across the board, according to the latest Federal Reserve data. Capacity utilisation also pushed above 80% for the first time since early 2008, pointing to underlying strength in their economy.

Now that the Japanese election is out of the way, observers are wondering how their Government will address their issues. One way floated today is that a major push is coming to get the big Japanese industrial companies to pay higher wages.

Things got tougher for Russia today. For months, Russia’s ruble has been falling in line with a decline in oil. But now, the selloff has stepped up a gear. The ruble has almost halved in value since the start of 2014. Their central bank has spent billions defending it, all to no avail, all wasted. And China is making a new push to increase its influence in ex-Soviet states along its borders.

In China, it was announced that Beijing will build a second major international airport. This one project is a NZ$17 bln piece of stimulus.

And here is some Chinese news that has a New Zealand connection. The (now ex) chairman of state-owned Bright Foods is facing major corruption allegations. Bright Foods is the majority shareholder in Synlait Milk.

Benchmark UST 10 year bond yields recovered some of yesterday's losses and is now at 2.12%. But the flattening trend continues. The 1-5 NZ swap differential is at a seven year low, the 2-10 curve similarly, both lower than yesterday.

The oil price is down again, now at US$56.50/barrel although the Brent price is essentially unchanged at US$61.50/barrel, which may be because of chaos in Libya and its oil field security issues.

The gold price also fell again and is now at US$1,214/oz level.

We start today at 77.5 USc, 94.2 AUc, and the TWI is at 78.

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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47 Comments

by MortgageBelt | 16th Dec 14, 8:30am 1418671844

Meanwhile the RBNZ knows better than all other macro events globally, and steadfastly continues with a tightening bias! Unbelievable.

by Andrewj | 16th Dec 14, 8:43am 1418672580

Crashing crude may blow a $1.6 trillion hole in the global oil sector, annuallyhttp://www.marketwatch.com/story/crashing-crude-may-blow-a-16-trillion-…

by steven | 16th Dec 14, 9:39am 1418675940

All those rigs going idle.

So really what this heralds is a sooner drop off in output and a steeper one.

I'd use the F word but DC would slap me.

regards

by Andrewj | 16th Dec 14, 8:44am 1418672640

General Business Conditions Index Retreats below Zero For the first time in nearly two years, the general business conditions index signaled a decline in business activity for New York manufacturers.

http://www.newyorkfed.org/survey/empire/empire2014/2014_12Report.pdf

by steven | 16th Dec 14, 9:18am 1418674680

A wee bit more of a concern is,

"It’s impressive just how quickly and convincingly the wheels have been coming off the Russian economy."

http://krugman.blogs.nytimes.com/2014/12/15/putin-on-the-fritz/?module=…

The oil price collapse is probably substantially down to the US Shale players over-producing. Isnt the free market great for geo-politcal stability....um not.

Rammed home by yet more free market "investors" aiming to make a "killing",

"The ruble tumbled the most since 1998, sliding past 60 for the first time, as traders tested Russia's willingness to defend the currency."

http://www.bloomberg.com/news/2014-12-15/ruble-weakens-to-record-before…

"Eichengreen et al (pdf), in a good discussion of all this in the Latin American context, give the example of Chile, which was hit very hard by falling copper prices at the end of the 1990s despite a much more favorable institutional setup than Russia right now — and, of course, without having de facto invaded a neighboring country."

hmmm, a happy xmas for everyone?

by profile | 16th Dec 14, 2:05pm 1418691927

So free market entrepreneurs who gave us $40 oil are bad and the OPEC cartel and despot petrostates who gave us $100 oil are good?

"Each operator is so small, it can increase production without pushing down the market price. That makes them price “takers,” not price setters. And because shale wells are short-lived, producers don’t have to plan far ahead, says Karr Ingham, a petroleum economist in Amarillo, Texas. Singly the shale busters are nothing. Collectively, their breakneck production is breaking OPEC’s neck. This is the remorseless, leaderless free market at work."

http://www.businessweek.com/articles/2014-12-11/shale-oils-relentless-p…

by King of the whiners | 16th Dec 14, 2:33pm 1418693604

LOL - someone who is prepared to utter the words 'free market' in connection with the ultimate creation of the Fed's cheap money program ie the shale oil industry.

Oooooo the irony........

As for broken necks - let's see whether the Saudi's or the US shale oil producer's necks get broken in the next 6 months..........ie. the remaining cheapest producer taking out the high cost producer (artificially created by access to cheap government cash). Isn't that your precious free market in action, or did I get something wrong?

by profile | 16th Dec 14, 2:58pm 1418695097

"Profile has his uses - it will be enjoyable to torment him/her as the price of oil continues to drift up. Brent good and strong just under $110 and WTI trading strongly above $100, the latter in particular having risen markedly when the shale oil narrative was that all that US oil was going to send prices down. Well surprise, surprise it aint working out that way. Come to think of it the owner of this website should be tormented for the same reason, he has blown the shale oil trumpet pretty strongly."

Torment me Whiner, torment me. I'm surprised you still comment on oil.

"Oooooo the irony......." I haven't seen such irony since Scarfie mis-spelled imbecile during one of his rants.

by King of the whiners | 16th Dec 14, 3:09pm 1418695741

Once the Saudi's have finished with the US shale industry we will be back at $100 quicker than you can say ' the Saudi's destroyed my shale oil company portfolio'.......

by profile | 16th Dec 14, 3:18pm 1418696326

Oh well just torment away 'til then. I just love how chicken littles are so sure about the future.

"There are some important differences between the current slump and its forerunners.

First and foremost, all the previous episodes occurred against a backdrop of slowly declining domestic oil production rather than the boom that has occurred since 2011.

Second, the output from hydraulically fractured oil wells is initially much higher than from conventional wells but then declines more rapidly.

So, production should be somewhat more responsive to the fall in prices and reduced rates of drilling than in previous episodes.

But anyone expecting the plunge in prices to translate quickly into an equally big decline in drilling rates and a sharp reduction in production is likely to be disappointed.

Experience suggests a relatively large decline in prices is needed to generate even a fairly modest response in output."

http://www.reuters.com/article/2014/12/15/usa-shale-drilling-kemp-idUSL…

by steven | 16th Dec 14, 3:57pm 1418698620

I dont think its anything to do with the Saudi's myself. I think the US shale oil players did the same thing to themselves as they did with Gas, over-produced and collapsed the price.

What maybe the shale players were hoping is that the mythical ability of the Saudi's to absorb losses by reducing production for the good of the shale players wallets just didnt happen.

So nothing more than a free market destroying itself.

by Andrewj | 16th Dec 14, 4:01pm 1418698889

The' house of Saud', do nothing without Uncle Sams approval.

by steven | 16th Dec 14, 4:05pm 1418699147

Good point....

Be that as it may I still dont see much evidence its Saudi as responsible for or even participating in this mess that's unfolding. All I see is opinions.

by Kumbel | 16th Dec 14, 5:01pm 1418702469

Not normally my area of interest but if you haven't already seen Jeff Frankel's take on this it's worth the quick read. Implications for dairy prices? Don't know if soft commodities behave the same as the hard ones.

by steven | 16th Dec 14, 6:41pm 1418708480

So many unknowns. I'd guess that there is a topping % of speculation which has run for the hills. Has that triggered a fall that is continuing and will continue?

What I can see from the oil price is the drop is accelerating.

http://www.oil-price.net/

take a peak at the 1 year for the best curve.

Will milk do the same?

I hope not.

by iconoclast | 16th Dec 14, 7:16pm 1418710618

When Oil hit $147 in July 2008, that last spike was driven by derivative traders being squeezed to death and frantically covering short positions. It lasted one day. It was never the price of physical delivered oil.

As the speed of this current decline accelerates you will begin to observe derivative traders being squeezed again, this time longs, which will manifest itself in a sudden spike down as traders holding long positions have their resolve tested

While a new low will be achieved, it will be momentary as someone capitulates, it is unlikely to represent the price of physical oil

by steven | 16th Dec 14, 7:40pm 1418712012

Yep, the actual price for new oil, physical stuff is probably in the $80~90 range. The rest in the future is heading towards $100 and much beyond that we as in the global economy cannot function, ie $120.

by steven | 16th Dec 14, 10:13pm 1418721180

That curve is heading steeper and steeper if there is a spike down then it the graph will look more like a brick in free fall.

Lets say the real price for new fields is $90/barrel, who the hell is going to invest (or more importantly get finance) while oil is well below that and might well stay there? The junk bond market is toast and thats usually the last port of call so on one to lend has to mean a lot less drilling.

One word, ominious.

by iconoclast | 16th Dec 14, 11:03pm 1418724235

My personal view

Nothing to do with fundamentals and other mumbo-jumbo

These are the "oil wars"

USA, and Saudi Arabia and OPEC, at the behest of USA, are showing Russia how it's done. I suspect USA government will be subsidising the Shale-Oil-Frackers. The derivative traders will be collateral damage. But, they will become the low price. That acceleration you see suggests that time is drawing near. Today Bank of Russia lifted OCR interest rates to 17%

Obama's version of Reagan's "Star Wars"

by steven | 17th Dec 14, 8:41am 1418758874

Fair enough. Personally I go with Occams razor, I think its just individuals acting like lemmings purely on chance causing a mass effect.

In either case the impacts we see are the same. From my viewpoint I have to wonder that the "controllers" (whether its "lets make this happen", or "lets not stop it") cant see how risky their strategy of [in-]action is.

Im just waiting on the riots to splash across our screens as the budget cuts bite, guess that could be 6 months off yet? Oil might bounce back and hit $160, even $200 (very briefly) if we see a major player or two do a Libya. If the likes of Obama are doing this on purpose, OMG is all I can say.

by Stephen Hulme | 16th Dec 14, 11:58pm 1418727538

Might I suggest the downward pressure is caused by oil hedge market makers acting to lay off risk via delta hedging - as more downside hedges are sought more outright positions are sold - at some point the hedges wil be lifted and the opposite will be observed. Most action is a function of hedges being lifted and reset.

by steven | 17th Dec 14, 8:54am 1418759670

Im sure given how complex things are these days almost anything is possible if someone thinks they can make a $ at it. Even if it kills the economy....

by Andrewj | 16th Dec 14, 5:10pm 1418703057

Think, Russia/Syria.

http://money.cnn.com/2014/07/31/news/economy/sanctions-russia-targets-l…

by steven | 16th Dec 14, 10:18pm 1418721538

So the oil we'll need is being not developed as we deny the Russia the technology. Cutting nose off to spite face springs to mind.

by profile | 16th Dec 14, 5:34pm 1418704447

The world didn't end when the gas price collapsed so it is a long bow to draw to say it will now.

Far more people people are benefiting out if this tight oil boom cf the domestic gas boom or a housing boom for that matter. Including your good self so it is not just about innovative/"greedy" shale players wallets.

by steven | 16th Dec 14, 6:34pm 1418708070

There you go twisting words into a lie again, I never said the world will end, I said we are staring at a Greater Depression mk2. So the world wont end, it will go on for some billions of years yet. We as a species will however be long gone.

Im not sure how you think how Im benefiting, except as yet I have not lost a lot. Lets go back to 2008, I lost 22% of my mainpension in that 1 year alone. Right now it looks like that payout will be 1/2 what was projected. The other 2 Im hoping will be paid, if not I will have to work til Im dead.

Now rinse and repeat that this time around and consider just how that will be impacting the BBs. As an example the US ones with their 401Ks that they were complaining were wiped out.

So what we are seeing is crazy risk taking by the (US in particular) banks and they are not being curtailed if anything almost encouraged.

On top of that we have all the money that has been invested in the US shale plays and that faces a substantial write down.

Maybe you think Im benefiting on housing? I live in it, the value doesnt matter, I cannot realise it until I sell it and $s is even riskier long term than a house. I fully expect its price to drop 50~75% in the next decade but who cares it was a make believe valaue anyway, its utility remains.

by profile | 16th Dec 14, 8:34pm 1418715257

Wasn't speaking literally Steven. But Great Depression mk2 does sound pretty bad. I assume you drive a car/use petroleum products so there is some personal benefit from those innovative frackers.

Lower oil prices prices are generally better for most people than compared with a domestic gas boom or a housing boom.

by steven | 16th Dec 14, 8:59pm 1418716741

Since I accept the science of man made climate change I minimise my car use. So as a result the present price drop saves me maybe $10 a month. The problem is it wont stay there, so it will go up again and it will send us into recession again. It seems you can only see the short terms things, you ignore or cannot see what the impacts on medium and longer term will be.

The only innovation I see from the frackers is their book keeping and sales pitch. Iooks more like a ponzi scheme. Horizontal drilling isnt a new technology its decades old.

Dont think Im right? well watch the junk bond market.

Lower gas and oil prices are only good if a) they stay there and b) dont change the climate so much we kiss our food system bye bye.

by steven | 16th Dec 14, 7:49pm 1418712584

Ngas isnt oil, especially as the Ngas is "trapped" in the USA.

by profile | 16th Dec 14, 8:36pm 1418715399

Hence the term "domestic" gas boom rather than a global gas boom. Though by all accounts the world is awash with gas too.

by steven | 16th Dec 14, 4:03pm 1418698994

Um, 6months? could be though if the futures markets / hedging is out to 2 years for teh shale players then it may not be as fast as some expect.

I dont think it will be Saudi, far more likely to be the other players like Russia and South American nations go pop first.

I dont see how that can be great for us.

by steven | 16th Dec 14, 4:00pm 1418698812

Not as simple as you say.

and I dont think its just breaking OPECs neck, its breaking the shale players as fast by the looks of it.

Sure is the free market at work, the Q is are you prepared for the connsquences of that.

by The best statu… | 16th Dec 14, 11:15am 1418681721

Russia Shocks With Emergency Rate Hike, Boosts Interest Rate From 10.5% To 17%. From Zerohedge but also tweeted by Bloomberg.

by King of the whiners | 16th Dec 14, 12:11pm 1418685071

Latest news out of the US shale oil patch. These are the prices being quoted to the producers at the well head to buy their oil:

Bakken oil closed on Plain’s bulletin today at $39.69. Down some 50 dollars for the year.

Flint Hills was offering $37.75 for sweet bakken oil.

Sub $40 oil prices. Lets see how long the shale oil boom can tolerate those prices - and then lets see what happens to the US economy once the shale oil boom has gone 'pop'.....

by Plutocracy | 16th Dec 14, 12:56pm 1418687786

Bail out time by the Fed?

by King of the whiners | 16th Dec 14, 1:27pm 1418689666

It has to be a possibility. Yields on the junk paper issued to keep most of the shale oil companies drilling are going through the roof, come debt roll over time/issuances of new debt there will be no obvious buyers. Protective oil prices hedges will largely be unwound by Easter 2015. The shale oil bubble is largely the creation of ultra cheap Fed money in the first place - without QE few of these companies could have got away with drilling on a negative cash flow basis. Once the industry really starts to go into widespread retrenchment and its contribution to the US 'recovery' is revealed watch for the wails to begin from the resident shale oil state politicians for a bail out. Don't think for a moment it can't happen - the US bailed out its car industry in 2008-2010 without even blinking.

by profile | 16th Dec 14, 1:41pm 1418690507

From the weekend FT:

"The bulk of high yeild energy debt does not reach maturity until 2017, when about $13.7bn of bonds are due."

We will be all out of oil by 2017 so that should help the oil price.

When do we start to panic?

by King of the whiners | 16th Dec 14, 2:43pm 1418694211

Chuckle. The top 25 US shale oil companies were cash flow NEGATIVE to the tune of a total of $9 BILLION last year. That was when oil prices were around the $100/barrel mark. Now they are getting sub-$50 a barrel. Do tell how that's going to play out and whether 'panic' is required?

I seem to recall you were a bit of a spruiker for US shale oil Mr Profile. Have skin in the game do we? Hurting much?

by profile | 16th Dec 14, 3:02pm 1418695369

Yes I rushed out and bought a lot of oil stocks when I thought the oil price was going to go down.

by Plutocracy | 16th Dec 14, 5:18pm 1418703518

It's a concern when they're cash flow negative at $100, especially as they've undoubtedly been tapping the areas in the shale which are cheapest to produce. Must be some major pain at the moment, I wonder if the shale junk bubble is about to burst.

by King of the whiners | 16th Dec 14, 5:35pm 1418704515

Look at this juicy graph here - US shale oil junk bonds in freefall - pulling the broader US junk debt market with it now:

http://fuelfix.com/blog/2014/12/15/u-s-shale-junk-debt-tumbles-amid-oil…

''The $173 billion in U.S. energy junk bonds make up the biggest portion of the high-yield debt market after the Federal Reserve set low interest rates for years and pushed yield-starved investors toward riskier investments.

Now, as prices for those bonds are in free fall, those investors may begin wondering “what sector would be next,” prompting them to avoid or sell off more debt-market sectors, said Phil Flynn, senior market analyst at Price Futures Group in Chicago. “It doesn’t take a lot for one sector to affect another.”

by steven | 16th Dec 14, 7:09pm 1418710185

That's Ok profile says we'll be fine.

by steven | 16th Dec 14, 7:22pm 1418710958

I doubt its as bad as $100, or I hope it isnt. Its probably more like $80~$90, but as the poorer plays get started on it will go what way.

by profile | 16th Dec 14, 7:43pm 1418712190

Permian/Wolfcamp producers would still make a 30 percent ROI if crude prices fell to $60/Bbl.

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

by steven | 16th Dec 14, 10:03pm 1418720612

Interesting piece full of hyperbol. So because the US Govn does not allow the export of crude oil (so I understand) US producers cannot get the world price, so they are whinning. This is just another piece of such crap to allow them to export. Refineries cant keep up? yet who wants the finished product? US car mileage is down.

Note it was written in august 2014 and we have already seen that some players are cutting back on drilling so no drop in output? hmmm we'll see.

Then the claim of a 30% return even on $60 (I guess implying approx $40 as break even then ), not an academic level paper so you have to take that with a pinch of salt to say the least. Add in that some prices posted above by another poster quoted $37 then that looks ominious to me. Add in that when you look at the price drop over the last year the graph curve is getting steeper and steeper so where is it going to? kind of think $30~35 is quite possible again.Then there is that 30% ROI even at $60 and yet lots of what I have read by oil geologists say closer to $80 as break even.

So the Q is profile if you think they are telling the truth put your balls on the line and buy those junk bonds, here is no liquidity in the market so you will be able to buy, buy, buy. I mean they are paying a fantastical interest rate, you just cant lose.

good luck with that one, I'll keep my ones for the wifey.

by profile | 17th Dec 14, 2:30am 1418736606

The point is tight oil doesn't cost anything like $100 to extract so Pluto can rest easy. Eagle Ford breaks even at $45, Bakken $50 going by the Anadarko October data. And there will be nothing like a price slump to get those costs down.

The ~$37 posted above has a substantial location logistics costs - well head price - oil located where pipelines/rail aren't.

by steven | 17th Dec 14, 7:19am 1418753971

Um no, a) some wells may indeed be highly profitable where they are in the sweet spots and got lucky with say an inground fault that has given that well un-usually good output. b) The sweet spots are just that and if you look at the drilling maps of the plays are highly drilled, the difference between a sweet post and not is obvious. c) Rest easy? only for tonight, a few years from now when they have to drill the marginal spots the price will be $100.

So when you buy a gas guzzler based on the price today and do it with 5 years HP, thats one expensive pile of stationary steel 5 years from now, the loss of capital and (maybe even interest if you did it on your house value) of course remains.

It seems you have zero ability or wish to consider the future and plan for it.