Nymex light crude (April 2015 contract) broke support at $45/barrel, warning of a decline to $35/barrel*.
* Target calculation: 45 – ( 55 – 45 ) = 35
The Catch-22 of energy storage | On Line Opinion
John Morgan questions whether wind and solar are viable energy sources when one considers energy returned on energy invested (EROEI).
There is a minimum EROEI, greater than 1, that is required for an energy source to be able to run society. An energy system must produce a surplus large enough to sustain things like food production, hospitals, and universities to train the engineers to build the plant, transport, construction, and all the elements of the civilization in which it is embedded. For countries like the US and Germany, Weißbach et al. estimate this minimum viable EROEI to be about 7……
The fossil fuel power sources we’re most accustomed to have a high EROEI of about 30, well above the minimum requirement. Wind power at 16, and concentrating solar power (CSP, or solar thermal power) at 19, are lower, but the energy surplus is still sufficient, in principle, to sustain a developed industrial society. Biomass, and solar photovoltaic (at least in Germany), however, cannot. With an EROEI of only 3.9 and 3.5 respectively, these power sources cannot support with their energy alone both their own fabrication and the societal services we use energy for in a first world country.
Energy Returned on Invested, from Weißbach et al.,1 with and without energy storage (buffering). CCGT is closed-cycle gas turbine. PWR is a Pressurized Water (conventional nuclear) Reactor. Energy sources must exceed the “economic threshold”, of about 7, to yield the surplus energy required to support an OECD level society.
These EROEI values are for energy directly delivered (the “unbuffered” values in the figure). But things change if we need to store energy. If we were to store energy in, say, batteries, we must invest energy in mining the materials and manufacturing those batteries. So a larger energy investment is required, and the EROEI consequently drops…[to the buffered level].
Read more at The Catch-22 of energy storage – On Line Opinion – 10/3/2015.
Another downward leg for crude?
Nymex Light Crude is headed for another test of support at $45/barrel. Breach would signal a decline, with a medium-term target of $35/barrel*.
* Target calculation: 45 – ( 55 – 45 ) = 35
Saturation of available storage capacity (see Crude in Contango) is expected to force sellers into the market and drive prices lower.
Gold falls as Dollar soars
Ten-year Treasury Note yields are testing support at 2.00%. Recovery above 2.50% would indicate another test of 3.00%. But 13-week Twiggs Momentum below zero continues to signal a down-trend. Another peak below zero would warn of a decline to test the all-time low at 1.40%. Breakout above 3.00% appears remote at present, but would signal the end of the secular (20+ year) down-trend.
The Dollar is on a tear, testing long-term resistance at 100. Rising 13-week Twiggs Momentum signals a strong (primary) up-trend. Breakout would offer a new target of 110*, but first expect retracement to confirm the new support level.
* Target calculation: 100 + ( 100 – 90 ) = 110
Gold
Gold fell through long-term support at $1200 and is testing the last line of support at the recent lows of $1140/$1150 per ounce. Reversal of 13-week Twiggs Momentum below zero warns of another (primary) decline, with a target of $1000*. Breach of support at $1140 would confirm.
* Target calculation: 1200 – ( 1400 – 1200 ) = 1000
Crude in contango
Nymex WTI Light Crude is testing resistance at $54/barrel, while Brent Crude is at $62/barrel. WTI above $54/barrel would signal a bear market rally, but is likely to leave the primary trend unaltered. Breach of support at $45/barrel would signal another decline.
The crude oil market is in contango, with spot prices lower than future prices, encouraging traders to store oil until prices rise. But Leslie Shaffer reports that oil storage is nearing full capacity:
“We’re going to see pretty fast inventory builds over the next few weeks,” Francisco Blanch, head of commodity research at Bank of America-Merrill Lynch, told CNBC Wednesday, noting that global supply is running around 1.4 million barrels a day above demand.
“If you run out of space, prices tend to react a lot more violently to adjust that supply and demand imbalance and that’s what we expect over the next few weeks,” he said, forecasting both WTI and Brent will fall toward $30 a barrel.
Dollar breaks out, Gold tests support
The 5-year breakeven rate for inflation — calculated by deducting the yield on 5-year TIPS from the 5-Year Treasury yield — rallied in recent weeks and is testing resistance at 1.60%. But the long-term trend is down and we should expect another test of support at 1.2%.
Apart from Japan, deflationary pressures are rising in all major OECD countries. Given the global trend, the Fed is likely to raise interest rates at a leisurely pace. Expect low inflation and low interest rates for the next 2 to 3 years.
Can you spot the direction of the trend? pic.twitter.com/75Gq9cAENp
— David Schawel (@DavidSchawel) March 1, 2015
10-Year Treasury yields rallied along with the inflation breakeven and are now testing resistance at 2.15%. Breakout would test the descending trendline around 2.40%. But reversal below 2.0% remains as likely and would signal another test of 1.65%.
The Dollar
The Dollar Index broke through resistance at 95.50, offering a medium-term target of 100*.
* Target calculation: 90 + ( 90 – 80 ) = 100
Gold
Low inflation undermines support for gold. Spot Gold is testing long-term support at $1200/ounce. Reversal of 13-week Twiggs Momentum below zero warns of another decline. Breach of support at $1200 would signal another decline, while follow-through below $1150 would confirm.
* Target calculation: 1200 – ( 1400 – 1200 ) = 1000
Gold and the impact of Beijing on Fed monetary policy
The prospect of higher interest rates is fast approaching, but 10-Year Treasury yields retreated below 2.0%, warning of another test of the December low at 1.40%.
The weight of foreign purchases, for reasons other than yield (dollar peg/currency manipulation), may be overwhelming the market response. This has happened before, in 2004/2005, when the Fed was alarmed to find that long-term yields failed to respond to monetary tightening. The graphs below are from a 2012 report by DO Beltran (and others) at the Fed. The Fed Funds Rate was steadily increased between mid-2004 and the end of 2005, but 10-year yields declined slightly over the same period.
The reason was fairly obvious: a massive surge in foreign purchases (mainly from China) had left the long-term market awash with liquidity. US monetary policy was effectively being controlled from Beijing.
I cannot understand why this abuse has been tolerated.
The Dollar
The Dollar Index has been consolidating for the last 5 weeks, but the narrow range is a bullish sign and the Dollar is likely to strengthen further. Breakout would offer a medium-term target of 100*.
* Target calculation: 90 + ( 90 – 80 ) = 100
Gold
Spot Gold is testing support at $1200/ounce. Reversal of 13-week Twiggs Momentum below zero warns of another decline. A trough below the zero line would strengthen the bear signal.
* Target calculation: 1200 – ( 1400 – 1200 ) = 1000
The strong Dollar, low inflation and higher interest rates all point to another decline, but so far support has held firm. Completion of another trough at this level would strengthen the argument that gold is forming a long-term bottom. Possibly with help from Beijing.
China’s infrastructure boom is over
This might be the most mind-blowing fact I learned this year: http://t.co/jJB3cEoq7j pic.twitter.com/Dr34RLeJbU
— Bill Gates (@BillGates) December 12, 2014
China has been on a record-breaking infrastructure binge over the last decade, but that era is coming to an end. Fall of the Baltic Dry Index below its 2008 low illustrates the decline of bulk commodity imports like iron ore and coking and thermal coal, important inputs in the construction of new infrastructure and housing.
High-end commodities like copper held up far better since 2008, but they too are now on the decline.
With the end of the infrastructure boom, China’s economy may well prove to be a one-trick pony. Transition from a state-directed infrastructure ‘miracle’ to a broad-based consumer society will be a lot more difficult.
Gold and the bull-trend in bonds
10-Year Treasury Yields found support above the December low of 1.40%, recovering above medium-term resistance at 2.00%. The outlook is hardening around a Fed increase in short-term rates by mid-year. A higher trough would suggest that the long-term down-trend in yields, shown below on an annual chart, is coming to a close. But only breakout above resistance at 3.00% would confirm that the secular bull-trend in bonds has ended.
The Dollar is strengthening on the back of low inflation and expectations of higher rates — bearish signs for gold.
Spot Gold remains in a bear trend, testing support at $1200/ounce.
Reversal of 13-week Twiggs Momentum below zero warns of another decline. A weekly close below $1180 would strengthen the bear signal.
* Target calculation: 1200 – ( 1400 – 1200 ) = 1000
Grantham: Lower oil price is new normal | Macrobusiness
By Houses & Holes
Reproduced with kind permission from Macrobusiness.com.au
From Jeremy Grantham:
The simplest argument for the oil price decline is for once correct. A wave of new U.S. fracking oil could be seen to be overtaking the modestly growing global oil demand.
It became clear that OPEC, mainly Saudi Arabia, must cut back production if the price were to stay around $100 a barrel, which many, including me, believe is necessary to justify continued heavy spending to find traditional oil.
The Saudis declined to pull back their production and the oil market entered into glut mode, in which storage is full and production continues above demand.
Under glut conditions, oil (and natural gas) is uniquely sensitive to declines toward marginal cost (ignoring sunk costs), which can approach a few dollars a barrel – the cost of just pumping the oil.
Oil demand is notoriously insensitive to price in the short term but cumulatively and substantially sensitive as a few years pass.
The Saudis are obviously expecting that these low prices will turn off U.S. fracking, and I’m sure they are right. Almost no new drilling programs will be initiated at current prices except by the financially desperate and the irrationally impatient, and in three years over 80% of all production from current wells will be gone!
Thus, in a few months (six to nine?) I believe oil supply is likely to drop to a new equilibrium, probably in the $30 to $50 per barrel range.
For the following few years, U.S. fracking costs will determine the global oil balance. At each level, as prices rise more, fracking production will gear up. U.S. fracking is unique in oil industry history in the speed with which it can turn on and off.
In five to eight years, depending on global GDP growth and how quickly prices recover, U.S. fracking production will start to peak out and the full cost of an incremental barrel of traditional oil will become, once again, the main input into price. This is believed to be about $80 today and rising. In five to eight years it is likely to be $100 to $150 in my opinion.
U.S. fracking reserves that are available up to $120 a barrel are probably only equal to about one year of current global demand. This is absolutely not another Saudi Arabia.
Saudi Arabia has probably made the wrong decision for two reasons:
First, unintended consequences: a price decline of this magnitude has generated a real increase in global risk. For example, an oil producing country under extreme financial pressure may make some rash move. Oil company bankruptcy might also destabilize the financial world. Perversely, the Saudis particularly value stability.
Second, the Saudis could probably have absorbed all U.S. fracking increases in output (from today’s four million barrels a day to seven or eight) and never have been worse off than producing half of their current production for twice the current price … not a bad deal.
Only if U.S. fracking reserves are cheaper to produce and much larger than generally thought would the Saudis be right. It is a possibility, but I believe it is not probable.
The arguments that this is a demand-driven bust do not seem to tally with the data, although longer term the lack of cheap oil will be a real threat if we have not pushed ahead with renewables.
Most likely though, beyond 10 years electric cars and alternative energy will begin to eat into potential oil demand, threatening longer-term oil prices.
Exactly right, though in my view the equilibrium price will be more like $50 than $30 for the next half decade.
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