The Wall Street Examiner » Wall Street Examiner Exclusives http://wallstreetexaminer.com Get the facts. Sun, 21 Dec 2014 03:07:56 +0000 en-US hourly 1 The Central Fact – The Same Whales Rule In The Worldwide Liquidity Pool http://wallstreetexaminer.com/2014/12/the-same-sharks-swim-in-the-worldwide-liquidity-pool/ http://wallstreetexaminer.com/2014/12/the-same-sharks-swim-in-the-worldwide-liquidity-pool/#comments Sat, 20 Dec 2014 18:27:38 +0000 http://wallstreetexaminer.com/?p=221064 A central tenet of my view of the markets is that there’s just one worldwide pool of liquidity, and it is ruled by the same Killer Whales operating out of a few world financial capitals. We call those whales (or sharks if you prefer) Primary Dealers. They feed in the ocean of cash pumped in by the world’s major central banks, essentially the Fed, the ECB (Europe), and the BoJ (Japan). The PBoC (China)  is also playing a growing role as it integrates its financial markets with the rest of the world’s, but its system does not use Primary Dealers, per se, and its linkages to the rest of the world are more obscure. The BoE (UK) is a minnow in the sea of big fish. It swims along with them.The same banks feed at the BoE trough.

Here are the Big 3’s Big Fish. 13 big banks are the kings of the financial world. 28 others are also players who drink from one or two central bank fountains and play in the worldwide sea of liquidity.

The Big Fish- Click to enlarge

The Big Fish- Click to enlarge

(Download PDF)

Central banks only pretend to make policy. Once they print the money and purchase securities from the Primary Dealers (or lend the cash to them), the dealers decide what to do with it. The dealers are the real policy makers. The central banks have no control over where the cash goes once they intone “Abracadabra” (Aramaic for “I will create as has been spoken”) and magic wand wave the cash into existence.

With Quantitative Easing, the central banks bring the money into existence by making deposits in the Primary Dealers’ accounts at the central banks in payment for the securities the central banks purchase from the Primary Dealers, or by making loans to them. What the dealers do with the money from there is up to them, although they are loosely required to purchase government securities when the central government auctions them. Since there are always plenty of other bidders for the government paper, the Primary Dealers end up with billions in excess cash.

That is why this happens.

Major Central Bank Balance Sheets and US Stocks- Click to enlarge

Major Central Bank Balance Sheets and US Stocks- Click to enlarge

In 2001 the IMF surveyed 39 of the world’s national governments to get an idea of whether Primary Dealer systems were positive factors for financial system development. Not surprisingly, there was broad agreement that Primary Dealer systems were “to be highly recommended.”

The IMF study asked the nations about the advantages and disadvantages of Primary Dealer systems.  On the disadvantages question, 11 of the 20 developed nations in the survey either had no comment or said there were no disadvantages. 7 of the nations beat around the bush with niggling issues. Two, the UK and Canada cited the need to supervise and regulate. The UK cited “cartels” as an issue. Singapore cited an “unlevel playing field.”

Only one, Belgium, the headquarters of the ECB, nailed it. Belgium said:

A concentration of PDs is developing in the banking community over the world, with the same PDs evident globally. The result is a certain degree of oligopoly power.

There you have it, right from the horse’s mouth. This fact has been the basis for my research in tracking the actions of the major central banks every week for the past dozen years.

I talked about this in the summer of 2013 in a documentary about the Fed by CNBC Africa’s Lindsay Williams. Here are the excerpts from that documentary where I discuss these facts. 

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Radio Free Wall Street- Delayed Videos Posted http://wallstreetexaminer.com/2014/12/radio-free-wall-street-delayed-videos-posted/ http://wallstreetexaminer.com/2014/12/radio-free-wall-street-delayed-videos-posted/#comments Fri, 19 Dec 2014 18:49:44 +0000 http://wallstreetexaminer.com/?p=220857 I have posted 3 new Radio Free Wall Street videos for unrestricted access. To subscribe and see the latest program in real time go to RadioFreeWallStreet.fm. Or you can watch all of these past videos on YouTube.

These were originally posted September 30-October 20. They’re still relevant.

 

 

 

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What Becomes Of The Broken Market http://wallstreetexaminer.com/2014/12/what-becomes-of-the-broken-market-who-have-left-and-now-departed/ http://wallstreetexaminer.com/2014/12/what-becomes-of-the-broken-market-who-have-left-and-now-departed/#comments Wed, 17 Dec 2014 14:29:22 +0000 http://wallstreetexaminer.com/?p=220480 The November industrial production data reported yesterday shows no slowdown yet in US oil and gas production, and as goes oil and gas, so goes the US economy.

There’s more data and analysis below, but in honor of the occasion I wrote new lyrics for that great old Temptations classic, What Becomes of The North Dakotans. Here’s to the Temps lead singer Jimmy Ruffin, who passed away in Las Vegas in November.

What Becomes of the North Dakotans (with apologies to Jimmy Ruffin)

As I walk this field where I once grew beans,
I have visions of many things.
But the oil boom was just an illusion,
Trailed by bad debts and confusion.

What becomes of a broken market,
which had a boom that’s now departed?
I know we’re going to find,
A price where we can hold the line.
Maybe.

Drilling rigs grow all around
But for me they come a tumblin’ down.
Every day when the price goes much lower,
I want to stick my head in a snow blower!

I walk in shadows,
Searching for price lows.
Offers alone,
No buyers in sight.
Hoping and praying for someone who’ll cover,
Price is moving and goin’ lower.

(Refrain)

I’m searching though I don’t succeed,
For someone’s rigs, there’s a growing need.
All is lost, there’s no place for beginning,
All that’s left is an unhappy ending.

What becomes of a broken market,
which had a boom that’s now departed?
I know we’re going to find,
A price where we can hold the line.
I’ll be searching everywhere.
Just to find some gas to flare.
I’ll be looking everyday,
I know I’m gonna find a play.
Nothings gonna stop me now,
I don’t want no farm to plow…

And now, on with the story.

The BEA’s Oil and Gas Production Index for November rose by 1.55 points to 161.04 (2007= 100). This is one of the rare series where there’s no seasonality, so I need not rant about the media not reporting the actual, not seasonally adjusted data like I usually do. In fact, the media doesn’t even bother to report the oil and gas production component index of industrial production, so, sadly, there’s nobody to harangue. I miss it.

The year to year gain was 11.5%. That’s a bit of deceleration from the peak growth rate of 13.9% that was hit in June, but it’s still not too shabby. The oil and gas drilling boom/bubble–whatever you want to call it–was still raging last month while prices were already collapsing.

US Oil and Gas Production - Click to enlarge

US Oil and Gas Production – Click to enlarge

The question is how long this can go on.

It may take a while for production to be shut in. Exploration activity will slow but the drilling that has started but is not yet producing will continue to come on stream. That’s because the bulk of production costs are in finding oil. Once found, the lifting costs are very low. Where the oil has been found or almost found, the drilling and production will go on.

The US EIA said that lifting costs of US oil in 2007-09 were less than $13/BBL. Inflation might have added a bit to that since then, but one of the big component costs is energy, and that will obviously be lower now. Taxes will also be lower.

Under any circumstances, the current lifting costs are still a long way below current market prices even after the crash. So it’s likely that wells that are being drilled will continue to come on stream for a while longer. Due to the short productive life of fracked wells, existing production falls off quickly, but there’s no evidence that is having an impact yet.

The US oil boom should continue to contribute to the world wide oil glut for some months to come. While we may hear anecdotal reports of production shutdowns, the industrial production data should be the first hard data we get on that.

Oil and Gas and Total Industrial Production - Click to enlarge

Oil and Gas and Total Industrial Production – Click to enlarge

The oil and gas boom and its ripple effects throughout the entire energy and industrial complex have contributed mightily to overall US growth. Without the boom, US growth would look a lot more like the rest of the world, that is, moribund. Which leads to the question, when the wells stop what happens to the US economy.

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Media Reports It Wrong Again – Housing Starts Actually Plunged In November http://wallstreetexaminer.com/2014/12/media-reports-it-wrong-again-housing-starts-actually-plunged-in-november/ http://wallstreetexaminer.com/2014/12/media-reports-it-wrong-again-housing-starts-actually-plunged-in-november/#comments Tue, 16 Dec 2014 16:20:57 +0000 http://wallstreetexaminer.com/?p=220475 Don’t believe everything you read in the mainstream media. Especially don’t believe anything in the financial news media until you’ve looked at the data yourself.  It’s no wonder investors are so often caught flatfooted in the markets. Financial “journalists” feed their readers and viewers a constant stream of misinformation and bad data. Financial reporters are so atrocious at serving their audience I have to believe that they are, wittingly or unwittingly, part of a deliberate and elaborate campaign of disinformation… unless you believe in Coincidence Theory.

Housing starts collapsed in November. They weren’t good, they weren’t even so-so as media reports intimated. The seasonally adjusted annualized number which the paid flacks report is absolute nonsense. It’s fiction.

Actual, not seasonally adjusted single family starts were down by 10,400 units in November to 47,700 units. November is always a down month but this was the worst November performance since 2008, in the teeth of the housing crash.  On a year to year basis starts were down by 6.3%. It’s absurd that you can’t find that fact anywhere near the mainstream media headlines. In fact, Bloomberg outright lied about it, “While housing starts declined 1.6 percent…” They used the fictitious data. It’s not ok to use seasonally adjusted data because it “usually” accurately reflects the trend.It is especially not ok to use it when reporting the year to year change, which obviously has NO seasonality.

Multifamily starts fell 10.6% year over year.

A picture tells the story at a glance.

Housing Starts - Click to enlarge

Housing Starts – Click to enlarge

This kind of misimpression happens often enough that it is damaging and dangerous, fooling not only the public and the media which disseminates it, but also the genius clowns who make policy.

 

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Wall Street Traders and Pundits Shocked To Discover That Greece Has A Financial Crisis http://wallstreetexaminer.com/2014/12/wall-street-traders-and-pundits-shocked-to-discover-that-greece-has-a-financial-crisis/ http://wallstreetexaminer.com/2014/12/wall-street-traders-and-pundits-shocked-to-discover-that-greece-has-a-financial-crisis/#comments Wed, 10 Dec 2014 02:50:11 +0000 http://radiofreewallstreet.fm/?p=21201 Read more →

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This is a syndicated repost courtesy of Radio Free Wall Street. To view original, click here.

Lee Adler discusses the market’s reaction to discovering that Greece has a financial crisis and China engaged in a qualitative margin call. You’ll find out what these shocking and unforeseeable events mean for the market in this revealing video report.

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Why should you subscribe? Here’s how one subscriber puts it.

Today’s RFWS was absolutely outstanding. (I’m glad I actually watched this one rather than just listening while running.) When it comes to financial journalism, Lee, you remain an island of sanity in a huge sea of crap. Thanks.

Bob

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Central Banker Trickle Leaves More Americans Riding The Bus http://wallstreetexaminer.com/2014/12/central-banker-trickle-leaves-more-americans-riding-the-bus/ http://wallstreetexaminer.com/2014/12/central-banker-trickle-leaves-more-americans-riding-the-bus/#comments Mon, 08 Dec 2014 19:11:24 +0000 http://wallstreetexaminer.com/?p=219320 The mainstream media exploded with excitement last week as automakers reported their strongest sales since 2003. Was it really all that or does this silver lining have a dark cloud hovering overhead?

Here’s what the actual, not seasonally adjusted, November data looks like going back a few years.

Auto Sales- Click to enlarge

Auto Sales- Click to enlarge

We note first that November sales were the strongest that they have been since 2001, thanks in part to the subprime auto loan boom. Second, the annual growth rate has been in a declining trend since 2012. Finally, auto sales per capita grown strongly since 2010, but are below the levels of 1999 to 2005.

Have the banks and automakers squeezed the subprime auto loan lemon dry? Perhaps not. The NY Fed household credit data showed that approximately 20% of auto loans issued in the second quarter were to subprime borrowers. A decade ago this percentage was typically 25%.

Back in 2010 Ben Bernanke said that by printing money and giving it to Primary Dealers stock prices would rise which would lead to stronger economic growth that would benefit everybody. This is also known as central banker trickle theory. Bernanke was right about the first part or course. Stock prices have zoomed 35% above the 2007 highs and car sales per capita have barely exceeded the 2007 level. But apparently the dealers and bankers have been good at holding the trickle in, pooled in their own and their cronies’ accounts. Everybody else is left to drive their old junkers or ride the bus.

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Lee Adler Tells Lindsay Williams What Went Wrong This Year and What to Look for in 2015 http://wallstreetexaminer.com/2014/12/lee-adler-tells-lindsay-williams-what-went-wrong-this-year-and-what-to-look-for-in-2015/ http://wallstreetexaminer.com/2014/12/lee-adler-tells-lindsay-williams-what-went-wrong-this-year-and-what-to-look-for-in-2015/#comments Thu, 04 Dec 2014 18:23:06 +0000 http://wallstreetexaminer.com/?p=218959 Lindsay Williams of South Africa’s Fine Business Radio and CNBC Africa asked me to review 2014 in a nutshell and look ahead to next year. As for this year, apparently hedge funds forgot the two oldest rules in the book. And next year the Fed and ECB will face big problems in trying to continue to rig the markets and interest rates.

I misspoke on the crude futures positions. Specs record long, not short. Producers were record short, but the capital destruction occurred because large specs were record long. That contributed to the closing of those 400 hedge funds.

Listen here or the player below.

For more podcasts and videos visit Radio Free Wall Street or on a 6 week delayed basis at the Wall Street Examiner YouTube Channel.

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Even if Fed Could Raise Rates, Oil Puts It In A Double Bind http://wallstreetexaminer.com/2014/12/even-if-fed-could-raise-rates-oil-puts-it-in-a-double-bind/ http://wallstreetexaminer.com/2014/12/even-if-fed-could-raise-rates-oil-puts-it-in-a-double-bind/#comments Wed, 03 Dec 2014 03:28:11 +0000 http://radiofreewallstreet.fm/?p=20771 Read more →

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This is a syndicated repost courtesy of Radio Free Wall Street. To view original, click here.

Lee Adler again addresses the issue of the problems the Fed faces in raising rates. The oil price collapse only adds to those problems. Then he looks at the crude oil price chart and shows what to look for, and how all of this affects the outlook for stocks.

Subscribers may click here to open or right click to download this video and play in your media player.

To listen to audio only, click here.

To see samples of past videos on a delayed basis go to our Youtube channel.

Why should you subscribe? Here’s how one subscriber puts it.

Today’s RFWS was absolutely outstanding. (I’m glad I actually watched this one rather than just listening while running.) When it comes to financial journalism, Lee, you remain an island of sanity in a huge sea of crap. Thanks.

Bob

Subscription prices will be going up in mid September. Join now and lock in the current price! Use the form below.

If you are not a subscriber and would like to see or hear not only today’s program but all weekly video programs, click this button to start your subscription. It takes less than a minute to complete the signup form and start watching or listening to all Radio Free Wall Street programs. To learn more click here or join and listen right now. By clicking this button, I agree to the Wall Street Examiner’s Terms of Use.

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You Can’t Predict The Future, Except Sometimes When You Do http://wallstreetexaminer.com/2014/12/you-cant-predict-the-future-except-sometimes-when-you-do/ http://wallstreetexaminer.com/2014/12/you-cant-predict-the-future-except-sometimes-when-you-do/#comments Tue, 02 Dec 2014 15:23:39 +0000 http://wallstreetexaminer.com/?p=218655 They say you can’t predict the future. Except, if you’re paying attention, you sometimes can, at least in the short run. I wrote the following for subscribers of the Wall Street Examiner Professional Edition Fed Report on October 2.

I want to interject a few thoughts about the new bull market in the US dollar. I normally don’t bother with theorizing, but in this case I had a few thoughts, that, if correct, could be important.

I see two reasons behind the dollar rally. First, the Fed is printing less and less dollars, and relatively less dollars than other central banks are printing or trying to print.

Second, there’s a greater need for dollars which are suddenly in short supply. When US investors bought overseas stocks and commodities priced in dollars they exchanged dollars for those purchases. If they were foreign stocks, the dollars were used to purchase the currencies in which the stocks were priced, causing the relative values of Euro, Yen, Pounds etc to rise against the dollar. In many cases the sellers of commodities also converted the dollars to their local currencies. That was then.

Now, those markets have in many cases entered bear markets. Money printing or lack thereof has failed to stimulate those markets because all roads ultimately lead to the Last Ponzi Games Standing, the US Treasury market and US stock market. US investors are dumping those foreign assets and commodities, and when they do, they exchange them for dollars. The buyers must often raise dollars in a market where there are not enough dollars to meet the demand, hence a massive short squeeze.

Investors are now demanding dollars in greater numbers than available to meet these transactional requirements, forcing their value up relative to the local currencies for which they must be exchanged. The problem is partly the false belief in the US as a haven from the economic problems of the rest of the world. While it may appear true in the short run, in the long run it is not. But presently it causes panic capital flight into US assets.

Theoretically—and I must parenthetically warn here that in theory there’s no difference between theory and practice but in practice there is—this could be bullish for US stocks. That idea seems crazy given the recent selloff. But just keep this thought in mind just in case US stocks reverse and resume a rally and Treasuries continue to rally from here. There’s a theoretical case for it.

That said, we’ll rely as always on what the technical indicators are showing.

Wall Street Examiner Professional Edition Fed Report, October 2, 2014

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Why Oil Is Finally Declining, Which Could Lead to Disaster http://wallstreetexaminer.com/2014/12/why-the-price-of-oil-is-finally-declining-and-why-it-will-lead-to-disaster/ http://wallstreetexaminer.com/2014/12/why-the-price-of-oil-is-finally-declining-and-why-it-will-lead-to-disaster/#comments Mon, 01 Dec 2014 18:31:02 +0000 http://wallstreetexaminer.com/?p=218557 The price of oil has finally started to obey the law. What law is that? The Law of Supply and Demand. Thanks to the US fracking boom that has done this (see chart) to US production, the supply of oil worldwide has outstripped demand since 2012. So why haven’t prices fallen before this summer? And are falling oil prices now a good thing? Or not?

US Oil Production - Click to enlarge

US Oil Production- Source US EIA – Click to enlarge

While US production was exploding, other countries had level or declining production. Meanwhile consumption was falling in developed nations, but the developing world more than made up for that. Worldwide consumption has been steadily increasing since 2009. However, because of the US fracking boom, with the exception of 2011 supply has exceeded demand. Prices should have been declining since 2012, right?

World Oil Supply and Demand- Click to enlarge

World Oil Supply and Demand- Click to enlarge

After the oil price bubble peaked in 2008, the price of oil did crash when demand dropped. That drop in demand created a huge oversupply just as the US fracking boom was in its infancy. Then the Fed and its cohort central banks started printing money helter skelter in 2009. The results showed up not only in world stock markets but in commodities as well, particularly oil. The price of oil rose in spite of the fact that world oil production continued to outstrip demand. For the biggest speculators and financiers in the world, oil was a money substitute, a hedge against the massive money printing campaigns of the Fed, the BoJ, and the ECB. It worked for a while, and the oil market even helped in 2011 when supply fell below consumption for a year. But then the US production increase again overran world wide consumption.

The price of oil fell from around $107 to $85/BBL in early 2012 after the Fed had been on hold for a year. That along with other falling commodity prices was enough to spook the Fed into starting QE3.  In spite of oil supply outgrowing demand from 2012 on, the price of oil returned to $107 concurrent with the money printing campaigns of the big central banks. With supply greater than demand for oil worldwide, the most logical explanation for this price increase is the inflationary effect of money printing as wealth holders again used crude oil as a money substitute.

The Fed announced and followed up on a program of ending its money printing operations in 2014. The speculators who were holding oil as a hedge against central bank money expansion began to sell. That trade has continued to unwind with growing urgency. The price of a barrel of crude started falling this summer (2014), leading to a crash in October and November.

The speculation of when the Fed will open the floodgates to stem these latest deflationary effects will come soon enough. In the meantime, as long as worldwide oil supply continues to exceed demand, there’s no real floor on how low the price goes until production begins to be withdrawn, and supply and consumption come back into equilibrium. From a technical perspective there’s intermediate support around $65. If and when that breaks, the next target could be major support around $30-40.

Crude Oil Price - Click to enlarge

Crude Oil Price – Click to enlarge

“Experts” (almost none of whom foresaw this collapse) have begun to speculate about when oil sands and oil shale production would come offline. That should depend not on the total cost of production, which many pundits are citing, but the variable cost. As long as the price is high enough to cover variable costs, production will continue, and may even grow for awhile. Natural gas production continued rising for nearly a year after its price fell sharply on two separate occasions.

The EIA says that the lifting cost of crude in the US averaged $12.18 per barrel in the 2007-09 period. From that perspective, there’s no reason for existing production to be shut in any time soon. But what about finding and starting new wells? The costs of finding onshore oil averaged around $20 per barrel. With total cost of around $32 a barrel for onshore production, oil exploration and putting new wells into production might continue for a while longer as well. There doesn’t seem to be a reason for the supply of oil to shrink any time soon. Meanwhile, weak economies around the world should see demand growth continue to slow.

The central banks have been frustrated in their insane and misguided aim to increase inflation because QE and ZIRP actually foster the opposite of what central bankers expect. Central bankers and conomists think that to get inflation they only need to print more money, not recognizing that the inflation that does result from money printing, asset inflation, leads eventually to consumer goods deflation. ZIRP and QE cause malinvestment and overinvestment that leads to excess productive capacity. That leads to overproduction and oversupply. Oversupply puts downward pressure on prices. That spurs a vicious cycle where the central banks print more money to try to create inflation. That puts more cash into the accounts of the leveraged speculating community and off we go again.

While ZIRP and QE encourage waves of excess speculation and malinvestment, they do so at the expense of investment in labor. Businesses become speculators in their own stocks and products rather than in costly and uncertain investments in labor. The value of labor falls in the marketplace. Mass wage and salary incomes fall. Consumption falls. Demand trends weaken, putting downward pressure on the prices of consumption goods. That causes a vicious cycle in business where executives perpetually look for ways to shrink costs, exacerbating the economic decline of middle class working people. The “middle class” can increasingly no longer afford to buy the products of those who employ them. Thus we get the spectacle of things like WalMart holding charity food drives to benefit its workers, who are not paid enough money to feed their families.

The oil price experience is a perfect illustration of what happens when central banks promote over speculation in commodities and commodity production. As the lifeblood of both industrial production and transportation, and as a money substitute, oil is the most important commodity in the world. A bubble economy built on the back of oil price speculation and production is placed at enormous risk when the price of the underlying good collapses. A boom built on virtually free and unlimited financing becomes a ticking time bomb when the value of the collateral collapses. The only policy solution offered is extend, pretend, and pray. How many times that will work, and for how long is anyone’s guess.

We got an object lesson from the collapse of the housing bubble. Clearly central bankers did not learn the lesson. They are about to get taught again. No doubt the mass of middle class workers and consumers will again become collateral damage as central bankers seek first and foremost to preserve their constituents, the banks and bankers who feed at the central bank trough.

When Will The Fed Activate The Oil Price Put?

When Will The Fed Activate The Oil Price Put?

Postscript:

David Stockman sent me this comment:

I don’t think the variable lifting cost has much to do with prospects for oil shale. They whole story is the super-fast decline rates—-@60-75% after three years. So when the drilling stops, shale oil production will start falling with only a short, decline rate given lag. The real issue is when does drilling stop. Answer: #1, when they can’t raise any more Wall Street junk; and #2, when oil stays under $65 long enough to make new drilling a loss. Needless to say, the fully loaded cost of shale drilling plus lifting cost varies a lot among the various provinces, but I doubt $65 will produce breakeven in most areas/ Remember, the real good stuff has already been drilled.

The $65 cost applies to Canadian oil sands.  EIA data on US fracking is in the $32 range, so exploration and drilling activities probably won’t be threatened at current prices. However, we have all seen Wall Street research that says US production costs are in the $65 range. I don’t know which number is right. Removing that supply in the short run could bring world supply and demand closer to being in balance, which would stabilize prices. Canadian oil sands production will be the number to watch in the months ahead. With the rebound in prices today the immediate threat of an oil sands production shutdown has been averted for the time being. The other question is what happens to all the debt issuance that was dependent on an assumption of $100 crude.

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