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Leonard Brecken

Leonard Brecken

Leonard is a former portfolio manager and principal at Brecken Capital LLC, a hedge fund focused on domestic equities. You can reach Leonard on Twitter.

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Fed Defers Rate Hike, But Oil Fundamentals Don’t Matter Anyway

I have long maintained that various distortions of fundamental data by the media and analysts are partly to blame for why oil prices are de-coupled from reality. The insistence of even the smartest people on relying upon government agency data without questioning it is also a major contributing factor. The latter is especially true as the both the EIA & IEA slowly revise production down and demand up, as they can’t hide the facts forever.

Instead they use revisions to bury the trends and refocus attention to newly minted worries like Chinese demand. These worries stay in focus in markets & media until such time as those placing them in the public domain have repositioned their portfolio or have moved on because the data becomes too obvious to hide. Dubbed “selective perception” we are now at the tipping point where the data showing falling U.S. production and inventories can’t be hidden from investor’s radar. The production declines are real and are being confirmed slowly by the very agency that has missed it so badly. Below demonstrates the massive drop in U.S. production as prices have collapsed and as new worries surface on demand and Iran. Related: For Canadian Oil Sands It’s Adapt Or Die

(Click to enlarge)

The never ending revolving door of negatives (dubbed moving the goal posts by the media, creating “selective perception” among investors) also serves in explaining how under-weight investors are in energy despite the supposedly “good” economy. Look at the chart below and explain how bearishness goes far deeper than even the 2008 credit crisis, the worst economic meltdown since the Great Depression. Related: The Shale Delusion: Why The Party’s Over For U.S. Tight Oil

(Click to enlarge)

At the same time we are now coming to the E&P mea culpa as the fall redetermination is upon us. This has been the trigger repeatedly mentioned in the media and by some investors (probably those short) as the event to create the capitulation bottom in equities. Those who are short would of course spin it as such because, as I said, shale producers were not free cash flow positive before the crash even when oil prices were at $100 oil.

This is why cries from Goldman Sachs and others that oil will remain low (now for 15 years) are simply absurd. I call it “spin” because bankruptcies shouldn’t be the pivotal point. Bankruptcies are unlikely to change production at all as either the underlying assets will still produce to cover interest on debt or get sold to better financed players. Yet I believe it will serve as the catalyst to bring equities to bottom as shorts will use it as the psychological trigger. Related: Aussie PM Ousted As Commodities Pressure Proves Too Much

Today we found out the fate of interest rates via the Fed. They held at zero finally admitting my long held view that the economy is slowing. I simply don’t subscribe to a rate increase anytime soon, due to deteriorating underlying data, despite media spin telling otherwise.

Whether the insistence to raise rates is tied to a grander plan to prop the U.S. dollar based on fears of de-dollarization or to depress commodities using them as QE4, who is to say? Given the madness of central banks and the amount of price manipulation going on, it wouldn’t surprise me that they do raise rates over next few quarters if only to provide the impression that things are getting better even though they are not. Regardless I believe the U.S. dollar has peaked and will decline either way as recognition that the U.S. economy isn’t on sure footing starts to sink in. A rate increase will only serve to put a nail in any strength left in the U.S. economy.

Despite all these factors, I honestly can’t say where prices are going. This past year proves that it is impossible to predict when the markets will start paying attention to fundamentals vs. propaganda. It’s obvious that forces want low oil; if nothing else to boost consumer spending or reduce carbon emissions or to force bankruptcies in the E&P sector. When that reverses, I simply can’t say, as markets remain decoupled from fundamental reality.

By Leonard Brecken for Oilprice.com

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