Goldman Cuts 2017 Oil Price Forecast Due To Slower Market Rebalancing | Zero Hedge

Goldman Sachs has cut its long-term crude oil forecasts:

The inflection phase of the oil market continues to deliver its share of surprises, with low prices driving disruptions in Nigeria, higher output in Iran and better demand. With each of these shifts significant in magnitude, the oil market has gone from nearing storage saturation to being in deficit much earlier than we expected and we are pulling forward our price forecast, with 2Q/2H16 WTI now $45/bbl and $50/bbl. However, we expect that the return of some of these outages as well as higher Iran and Iraq production will more than offset lingering issues in Nigeria and our higher demand forecast. As a result, we now forecast a more gradual decline in inventories in 2H than previously and a return into surplus in 1Q17, with low-cost production continuing to grow in the New Oil Order. This leads us to lower our 2017 forecast with prices in 1Q17 at $45/bbl and only reaching $60/bbl by 4Q2017.

But these forecasts are premised on a Chinese recovery:

Stronger vehicle sales, activity and a bigger harvest are leading us to raise our Indian and Russia demand forecasts for the year. And while we are reducing our US and EU forecasts on the combination of weaker activity and higher prices than previously assumed, we are raising our China demand forecasts to reflect the expected support from the recent transient stimulus. Net, our 2016 oil demand growth forecast is now 1.4 mb/d, up from 1.2 mb/d previously. Our bias for strong demand growth since October 2014 leaves us seeing risks to this forecast as skewed to the upside although lesser fuel and crude burn for power generation in Brazil, Japan and likely Saudi are large headwinds this year.

While production growth continues to surprise:

…..This expectation for a return into surplus in 1Q17 is not dependent on a sharp price recovery beyond the $45-$55/bbl trading range that we now expect in 2016. First, it reflects our view that low-cost producers will continue to drive production growth in the New Oil Order – with growth driven by Saudi Arabia, Kuwait, Iran, the UAE and Russia. Second, non-OPEC producers had mostly budgeted such price levels and there remains a pipeline of already sanctioned non-OPEC projects. In fact, we see risks to our production forecasts as skewed to the upside as we remain conservative on Saudi’s ineluctable ramp up and Iran’s recovery.

We expect continued growth in low-cost producer output
Saudi Arabia, Kuwait, UAE, Iraq, Iran (crude) and Russia (oil) production (kb/d)

Tyler Durden has a more bearish view:

While there is much more in the full note, the bottom line is simple: near-term disruptions have led to a premature bounce in the price of oil, however as millions more in oil barrels come online (and as Chinese demand fades contrary to what Goldman believes), the next leg in oil will not be higher, but flat or lower, in what increasingly is shaping up to be a rerun of the summer of 2015.

Source: Goldman Cuts 2017 Oil Price Forecast Due To Slower Market Rebalancing | Zero Hedge

The Man Who Got Russia Right | Foreign Policy

Susan Glasser on George Kennan, author of the famous Long Telegram that formed American policy during the Cold War:

….Based in Moscow a few years later, Kennan saw the historical contradictions that undermined the foundation of the Soviet regime — while at the same time giving it a veneer of power. Russians were “used to extreme cold and extreme heat, prolonged sloth and sudden feats of energy, exaggerated cruelty and exaggerated kindness, ostentatious wealth and dismal squalor, violent xenophobia and uncontrollable yearning for contact with the foreign world, vast power and the most abject slavery, simultaneous love and hate for the same objects.” Looking for an insight into the forces competing for political supremacy in Russia today, you could do far worse than Kennan’s observations.

Today we would call that bi-polar.

……”The strength of the Kremlin lies largely in the fact that it knows how to wait,” Kennan wrote. “But the strength of the Russian people lies in the fact that they know how to wait longer.”

Source: The Man Who Got Russia Right | Foreign Policy

A New Cold War? Russia’s Confrontation with the West

Michael A. McFaul, Stanford University professor of political science; director and senior fellow, Freeman Spogli Institute for International Studies; Peter and Helen Bing Senior Fellow, Hoover Institution; Stanford University, former ambassador to Russia (2012 – 2014).

Colin’s Comment:
Here is what I see as the big picture:

  • The current confrontation is more about the actors than about long-term strategy or geopolitical conflict
  • Russia is part of Europe, culturally and economically, and its destiny lies in the West
  • A strong Russia is in the West’s interest — a weak Russia invites encroachment from China in the East
  • The West has to build a strong deterrent to aggression from the current regime
  • While leaving the door open to long-term participation in European democratic structures, scientific cooperation and trade.

“Putin is not some evil genius from a James Bond movie, he’s the despotic leader of a failing state under immense fiscal strain.”

~ David Llewellyn-Smith from Macrobusiness, commenting on the arrangement between Saudi Arabia and Russia to freeze crude oil output.

Putin: Despotic leader of a failing state….

Russia’s protesting truckers | Euromaidan Press

Vladimir Putin’s worst nightmare — a trucker-Maidan.

Dmytro Homon writes:

First, the protest is spontaneous and is not coordinated from a single center. For that reason, the police have been unable to shut it down because other drivers immediately take the place of the ones detained.

Second, the protestors are not the usual “fifth column” opposition by intellectuals. These are, for the most part, Putin’s voters — tough guys who in elections vote for stability…….

Third, all Russians clearly understand the complaints of the truck drivers. They boil down to the fact that greedy authorities are trying to take the shirt off the back of simple workers…..

For these reasons the usual methods of Russian propaganda are not very effective. The postings of the Olgino trolls (professional commentators from the “troll factory” in the Olgino district of St. Petersburg — Ed.) that these protests are organized by the opposition look ridiculous. Attempts by mass media to ignore the truckers completely are equally ineffective because they have become a major topic in social networks……

Meanwhile, more and more trucks have been arriving to Moscow. What will happen next is a question with no answer yet. In fact, even the truckers themselves do not know what to do after the blockade.

If the Russian authorities use brute force, this risks repeating the fate of Yanukovych. Putin, however, has nowhere to flee from the Kremlin. Well, perhaps to Syria…..

Read more at Russia’s protesting truckers and Putin | Euromaidan Press

Airport Donetsk: There are no victors in war

A surprisingly even-handed documentary of the battle for Donetsk Airport. The overwhelming hardship and sacrifice endured by both sides merely underlines this stark message:

There are no victors in this conflict. Only victims.

The war should not have happened. It was instigated by a cynical politician 1000 kilometers away (in Moscow) to stoke nationalist fervor and shore up dwindling public support. His callous disregard for the sacrifice of Russian and Ukrainian lives, and the economic hardship endured by his fellow citizens — a price he considers worth paying to extend his presidency — highlights what the world faces.

He considers the West weak and vacillating. The sooner we face down this threat, the safer our world will be. These words from William Shakespeare (King John, Act 5, Scene 1) still apply today:

Be great in act, as you have been in thought;
Let not the world see fear and sad distrust
Govern the motion of a kingly eye:
Be stirring as the time; be fire with fire;
Threaten the threatener and outface the brow
Of bragging horror: so shall inferior eyes,
That borrow their behaviors from the great,
Grow great by your example and put on
The dauntless spirit of resolution.
….What, shall they seek the lion in his den,
And fright him there? and make him tremble there?
O, let it not be said: forage, and run
To meet displeasure farther from the doors,
And grapple with him ere he comes so nigh.

Putin’s Crimean gamble: Russia, Ukraine, and the new Cold War

 

From the Brookings Institute:

Since the time of Catherine the Great, Crimea has been a global tinderbox. Most recently, the world was stunned when the forces of Russian President Vladimir Putin invaded and seized Crimea in March 2014. In the months since, Putin’s actions in Crimea, eastern Ukraine and, more recently, in Syria have provoked a sharp deterioration in East-West relations. Basic questions have been raised about Putin’s provocative policies, his motivations, and the future of U.S.-Russian relations—and whether the world has now entered a new Cold War.

On October 26, the Foreign Policy program at Brookings hosted Nonresident Senior Fellow Marvin Kalb for the launch of his new book, “Imperial Gamble: Putin, Ukraine, and the New Cold War” (Brookings Institution Press, 2015). In “Imperial Gamble,” Kalb examines Putin’s actions in Ukraine, the impact on East-West relations, and how the future of the post-Cold War world hangs on the controversial decisions of one reckless autocrat, Vladimir Putin.

Joining the discussion were Thomas Friedman, The New York Times columnist, and Nina Khrushcheva, professor of international relations at The New School. Brookings President Strobe Talbott provided introductory remarks, and Martin Indyk, Brookings executive vice president, moderated the discussion.

Crude testing support

Crude futures (Light Crude December 2015 – CLZ2015) are testing support at $44.50 per barrel. Follow-through below $44.00 would signal another test of primary support at $40. Supply continues to exceed demand with the Saudis and Russians cranking up production and cutting prices to secure key markets in the US and China. Breach of $40 would offer a (long-term) target of $30*. Recovery above $50 per barrel is most unlikely unless there is a serious disruption to supply.

WTI Light Crude December 2015 Futures

* Target calculation: 40 – ( 50 – 40 ) = 30

Oil market showdown: can Russia outlast the Saudis?

Dalan McEndree writing in Oilprice.com :

While the sharp decline in crude prices has saved crude consuming nations hundreds of billions of dollars, the loss in revenues has caused crude exporting countries intense economic and financial pain. Their suffering has led some to call for a change in strategy to “balance” the market and boost prices. Venezuela, an OPEC member, has even proposed an emergency summit meeting.

In practice, the call for a change is a call for Saudi Arabia and Russia, the two dominant global crude exporters, which each daily export over seven-plus mmbbls (including condensates and NGLs) and which each see the other as the key to any “balancing” moves, to bear the brunt of any production cuts…….

Despite the intense pain they are suffering in the low price Crudedome, both the Russian and Saudi governments profess for public consumption that they are committed to their volume and market share policies.

This observer believes the two countries cannot long withstand the pain they have brought upon themselves — and this article only scratches the surface of the negative impact of low crude prices on their economies. They have, in effect, turned no pain no gain into intense pain no gain and set in motion the possibility neither will exit the low price Crudedome under its own power.

Read more at Oil market showdown: can Russia outlast the Saudis? | Oilprice.com

Containment 2.0 [podcast]

Always interesting to listen to James Sherr of Chatham House discuss global geo-politics.

http://www.rferl.org/audio/27310324.html

Can the West contain a Russia that is determined to upend the international order — but which at the same time is deeply integrated into the global economy?

The latest Power Vertical Podcast tackles these questions with guests James Sherr, an associate fellow with — and former head of — Chatham House’s Russia and Eurasia program, and Daniel Drezner, a professor of international politics at the Fletcher School of Law and Diplomacy at Tufts University and author of the books Theories Of International Politics And Zombies and the recently published The System Worked: How The World Stopped Another Great Depression.

Niall Ferguson: The Real Obama Doctrine – Real Daily Buzz

Niall Ferguson on US strategy in the Middle East:

Henry Kissinger long ago recognized the problem: a talented vote-getter, surrounded by lawyers, who is overly risk-averse. Even before becoming Richard Nixon’s national security adviser, Henry Kissinger understood how hard it was to make foreign policy in Washington. There “is no such thing as an American foreign policy,” Mr. Kissinger wrote in 1968. There is only “a series of moves that have produced a certain result” that they “may not have been planned to produce.” It is “research and intelligence organizations,” he added, that “attempt to give a rationality and consistency” which “it simply does not have.”

Two distinctively American pathologies explained the fundamental absence of coherent strategic thinking. First, the person at the top was selected for other skills. “The typical political leader of the contemporary managerial society,” noted Mr. Kissinger, “is a man with a strong will, a high capacity to get himself elected, but no very great conception of what he is going to do when he gets into office.”

Second, the government was full of people trained as lawyers. In making foreign policy, Mr. Kissinger once remarked, “you have to know what history is relevant.” But lawyers were “the single most important group in Government,” he said, and their principal drawback was “a deficiency in history.” ……..

It is clear that [Barack Obama’s] strategy is failing disastrously. Since 2010, total fatalities from armed conflict in the world have increased by a factor of close to four, according to data from the International Institute of Strategic Studies. Total fatalities due to terrorism have risen nearly sixfold, based on the University of Maryland’s Study of Terrorism and Responses to Terrorism database. Nearly all this violence is concentrated in a swath of territory stretching from North Africa through the Middle East to Afghanistan and Pakistan. And there is every reason to expect the violence to escalate as the Sunni powers of the region seek to prevent Iran from establishing itself as the post-American hegemon.

Today the U.S. faces three strategic challenges: the maelstrom in the Muslim world, the machinations of a weak but ruthless Russia, and the ambition of a still-growing China. The president’s responses to all three look woefully inadequate……

Some things you can learn on the job, like tending bar or being a community organizer. National-security strategy is different. “High office teaches decision making, not substance,” Mr. Kissinger once wrote. “It consumes intellectual capital; it does not create it.” The next president may have cause to regret that Barack Obama didn’t heed those words. In making up his strategy as he has gone along, this president has sown the wind. His successor will reap the whirlwind. He or she had better bring some serious intellectual capital to the White House.

Source: Niall Ferguson: The Real Obama Doctrine – Real Daily Buzz

Sen. John McCain on Russia’s airstrikes in Syria

Shades of Churchill in 1938:

Winston Churchill, denouncing the Munich Agreement in the House of Commons, declared:

“We have suffered a total and unmitigated defeat … you will find that in a period of time which may be measured by years, but may be measured by months, Czechoslovakia will be engulfed in the Nazi régime. We are in the presence of a disaster of the first magnitude … we have sustained a defeat without a war, the consequences of which will travel far with us along our road … we have passed an awful milestone in our history, when the whole equilibrium of Europe has been deranged, and that the terrible words have for the time being been pronounced against the Western democracies: “Thou art weighed in the balance and found wanting”. And do not suppose that this is the end. This is only the beginning of the reckoning. This is only the first sip, the first foretaste of a bitter cup which will be proffered to us year by year unless by a supreme recovery of moral health and martial vigour, we arise again and take our stand for freedom as in the olden time.”

On 3 October 1938, Churchill added:

“England has been offered a choice between war and shame. She has chosen shame, and will get war.”

Window on Eurasia: Kyiv Must Work to Isolate Moscow Rather than Negotiate with It

From Paul Goble:

Staunton, August 11 – Up to now, Ukraine has made “a serious error” by trying to negotiate with Russia about the Donbas, Bogdan Yeremenko [former Ukrainian diplomat] says. What it should be doing is devoting all its efforts to isolating Russia internationally. That will have far more impact on Moscow’s behavior than any talks Ukraine might have with it……

Up to now, Russia has acted more effectively than Ukraine by “imposing its will and taking the initiative both on the battlefield and at the negotiating table.” Ukraine in contrast “has held fast to a disastrous strategy responding with diplomacy to armed aggression and reducing the opportunities of its own Armed Forces.”

“…..Diplomatic efforts ought to be concentrated not on talks with Russia but on the creation for it of an uncomfortable foreign policy environment and the resolution of practical issues of securing the defense capacity of the country.”

Read more at Window on Eurasia — New Series: Kyiv Must Work to Isolate Moscow Rather than Negotiate with It, Yeremenko Says.

The Long War [podcast]

Excellent insight into the long-term implications of conflict between Russia and the West. Hosted by Brian Whitmore (RFE/Power Vertical) and co-host Mark Galeotti, New York University professor and expert on Russia's security services, with guest James Sherr, an associate fellow with Chatham House's Russia and Eurasia program.

Podcast: The Long War

The Long War

It's going to be a protracted conflict and Ukraine is just the first major battle.

It's going to be fought in different ways and on multiple fronts: on NATO's eastern frontier; over the countries of former Soviet Union, in the energy market, over the airwaves, and in cyberspace.

We should have no illusions. The West's conflict with Russia is not going away anytime soon, regardless of how the current standoff in Ukraine is resolved.

And what is at stake is nothing short of the future of the international order.

This ain't no Cold War. Russia isn't strong enough for that.

But according to The Russia Challenge, a widely read and highly influential report issued by Chatham House last week, it is shaping up to be a Long War. A protracted looking-glass conflict with a weakening, but still very dangerous, Russia.

On the latest Power Vertical Podcast, we discuss the new Chatham House report and its recommendations.

Enjoy…

The panel make some important points:

  • The post-Soviet transition to a modern democracy was poorly handled by the West and left Russians with a deep distrust of their motives.
  • The most important response to asymmetric warfare is good governance. The last 15 years shows a series of unmitigated blunders that would leave an independent observer with serious questions as to the competence of Western democracies. The West, Ukraine and Baltic States all need to get their house in order.
  • Conventional weapons are important, but the primary response should focus on improved intelligence and policing.

Russia terror alert | Kyiv Post

Kyiv Post quotes Markian Lubkivskyi, an adviser to SBU head Valentyn Nailyvaichenko on the rise of terrorism outside of Eastern Ukraine:

“(Terrorists) are aiming to undermine Ukraine from within,” Lubkivskyi told the Kyiv Post, adding that terrorism is one of Russia’s tools in the war against Ukraine. “This is definitely a planned set of linked actions carried out to demoralize people, scare them, spread chaos and create protest moods.”

One of the latest incidents occurred on Jan. 20, when a bridge near the village of Kuznetsivka in Zaporizhzhia Oblast collapsed under a cargo train that was carrying iron ore to Volnovakha in Donetsk Oblast. As a result, 10 cars derailed.

This was the fourth railway explosion over the last two months.

In January, three fuel tanks on a freight train were set on fire at the Shebelynka station in Kharkiv Oblast, and a bomb blew up a freight tank with petrochemicals at the Odesa-Peresyp railway station. On Dec. 24, explosives hidden under the railways hit a train at the Zastava 1 railway station, also based in Odesa.

Odesa has become the main target of attacks in the last two months.

The word terrorism is widely misused. What we are dealing with is state-sponsored terrorism or war by proxy. Without state sponsorship — in the form of training, weapons, logistics and financial support — most terrorist organizations would shrivel up and die. The level of proxy warfare increased hugely since World War II, when direct confrontation between major powers became dangerous because of the advent of nuclear weapons. Instead of direct confrontation these powers resorted to deniable aggression, by proxy, in order to weaken their enemies. The former Soviet Union was a major sponsor of proxy wars, from Korea and Vietnam to support for guerrilla wars elsewhere in Asia, Africa and South America. It appears that Vladimir Putin has adopted a similar strategy and is expanding its use into Eastern Europe.

It is difficult to win a guerrilla war where there are few conventional battles. The lesson from Vietnam is that you can win every battle, but still lose the war. Far better to identify and attack the sponsor through unconventional (asymmetric) means such as sanctions. Make sure that the cost outweighs the benefits of proxy warfare.

When we read the word “terrorism” in popular media, our first question should be: who is the sponsor and how can we make them desist?

Read more at Russia terror alert.

Fascism, Russia, and Ukraine by Timothy Snyder | The New York Review of Books

Yale University’s Timothy Snyder, a leading historian on Eastern Europe, discusses the Russian media claim that the Ukrainian government are fascist:

The strange thing about the claim from Moscow is the political ideology of those who make it. The Eurasian Union is the enemy of the European Union, not just in strategy but in ideology. The European Union is based on a historical lesson: that the wars of the twentieth century were based on false and dangerous ideas, National Socialism and Stalinism, which must be rejected and indeed overcome in a system guaranteeing free markets, free movement of people, and the welfare state. Eurasianism, by contrast, is presented by its advocates as the opposite of liberal democracy.

The Eurasian ideology draws an entirely different lesson from the twentieth century. Founded around 2001 by the Russian political scientist Aleksandr Dugin, it proposes the realization of National Bolshevism. Rather than rejecting totalitarian ideologies, Eurasianism calls upon politicians of the twenty-first century to draw what is useful from both fascism and Stalinism. Dugin’s major work, The Foundations of Geopolitics, published in 1997, follows closely the ideas of Carl Schmitt, the leading Nazi political theorist. Eurasianism is not only the ideological source of the Eurasian Union, it is also the creed of a number of people in the Putin administration, and the moving force of a rather active far-right Russian youth movement. For years Dugin has openly supported the division and colonization of Ukraine.

Read more at Fascism, Russia, and Ukraine by Timothy Snyder | The New York Review of Books.

Russia: EU is the real enemy | Tim Snyder

Professor Timothy Snyder of Yale University says that, despite the spin, the European Union is Russia’s real enemy — not America — and a Western-leaning Ukraine is part of the problem.

Falling crude threatens gold

Nymex Light Crude broke long-term support at $76/barrel, signaling a further decline. Sharply falling 13-week Twiggs Momentum reinforces this. Brent crude is in a similar down-trend. Long-term target for WTI is $50/barrel*.

Nymex Crude

* Target calculation: 80 – ( 110 – 80 ) = 50

Supply is booming and OPEC members appear unwilling to agree on production cuts [Bloomberg]. Goldman Sachs project WTI prices of around $74/barrel in 2015 [Business Insider], but the following chart of real crude prices (Brent crude/CPI) suggests otherwise.

Nymex Crude

Prior to the 2005 “China boom”, the index seldom ventured above 0.2. The subsequent surge in real crude prices produced two unwelcome results. First, higher prices retarded recovery from the 2008/2009 recession, acting as a hand-brake on global growth. The second unpleasant consequence is a restored Russian war chest, financing Vladimir Putin’s geo-political ambitions.

I suspect that crude prices are not going to reach the 2008 low of close to $30/barrel, but the technical target of $50 is within reach. Given the propensity of gold and crude prices to impact on each other, the bearish effect on gold could be immense.