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Oil: Theater of war

A look at the competitors in the oil price war

A look at the competitors in the oil price war

Disposition

So we have now an all-out oil price war between Saudi Arabia and Russia.

Russia is planning to increase its oil supplies undoing the December output cut once its term ends in March. It is assuring that its fund reserves are ready to absorb the damage from lower oil prices for as long as up to 10 years (with oil prices at $25-30 per barrel).

Saudi Arabia, in response, prepares to increase its own supplies for up to 12mln barrels per day. It also offers its crude under huge discounts, especially in Europe, to push away Russia from its core market.

The opposition doesn’t end here, however: the situation is actually a triangle of relationship rather than a Russia-Saudi Arabia standoff. The US is involved heavily, but indirectly, although it may be not that obvious: recently they just commented that they were hoping to see the oil market in an “orderly” condition.

Let’s observe the starting points of each protagonist here.

The US

Strengths

  • ·The strongest world economy gives the US the highest strategic resilience to withstand any economic damage in the long-term.
  • ·The “newly-founded” domestic shale oil production satisfies a big part of domestic oil demand and enables oil exports.

Weaknesses

  • ·The strongest world economy pushes the internal domestic oil demand chronically higher than the domestic oil production capacities and hence obliges the country to import oil from other countries.
  • ·With the exception of just a few, the US shale oil producers’ break even price for a barrel of oil is well above the current price – that means, they are losing the game now and will most likely stay out as drilling new wells is not profitable.

US oil imports, exports

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Near-deal from May now being used as benchmark on how much tariffs to be rolled back – report

US contemplates removing more tariffs than anticipated

China and the US are discussing linking the size of tariff rollbacks to the preliminary terms set in the deal that failed in May, according to Bloomberg who cites two people familiar.
The White House is still debating the precise percentage internally but the report says a deal would at least include removing the Sept tariffs and eliminating the planned Dec tariffs.
China has demanded that all tariffs imposed after May be removed immediately and those from beforehand be lifted gradually.
The report says that some of the $250B in tariffs imposed in 2018 are under consideration to be rolled back and that opposition to the move has softened. Overall, the White House is looking at the tariffs holistically and debating on whether to remove somewhere between 35% and 60%. Those percentages fall inline with what percentage of the overall deal Phase One accomplishes.
For reference, the US currently has tariffs on $360B in goods. That number was $250B before the May talks fell apart. On May 10, the US also raised the tariff rate on those $250B in goods to 25% from 10%.

Overall this report reflects a generally positive take and shows that both sides are working on a deal and perhaps closer than anticipated. This is the first indication they’re working off the May text but it’s also a hint that the US may remove more tariffs than anticipated. It would be a great signal for markets if anything from May or earlier was lowered.

Fitch reports on Chinese tariffs impacting US agriculture

Chinese tariffs stinging farmers

Chinese tariffs stinging farmers
  • Chinese tariffs on US agricultural imports escalate trade related risks to US farm sector , which is experiencing falling sales and land values
  • Ongoing trade wars impact equipment loan and lease ABS collateral performance
  • Ongoing trade wars have placed greater pressure on already stressed US agricultural sector
Biting tariffs will get Trump to the dealing table quicker than anything else, I would say. He won’t want to see tariffs stinging the US.

US imposes new China tariffs, raising levies to pre-WWII level

The U.S. slapped fresh tariffs on Chinese goods on Sunday to bring the average to more than 20%, comparable with levels seen during the protectionist era preceding World War II.

At 12:01 a.m. EDT, the U.S. imposed additional tariffs of 15% on about $110 billion in imports from China, covering 3,243 items. Consumer goods account for about half — far more than the 20%-plus of the previous round last September, which included such products as furniture. China’s corresponding tariffs against U.S. products took effect at the same time.

U.S. President Donald Trump postponed tariffs on 555 items on the original list — including smartphones — until Dec. 15 to soften the impact on the year-end shopping season. More than 80% of American imports of these goods come from China, and finding alternative sources is difficult. Higher tariffs are likely to lead to price increases, which risk weighing on consumer spending and thus the broader economy.

Digital consumer devices such as smartwatches are among the largest import categories by value affected by Sunday’s tariffs. More than half of all apparel is taxed as well.

China is retaliating with additional duties of 5% to 10% on $75 billion in imports from the U.S. The first tranche covers 1,717 goods including soybeans and crude oil, while the second set being implemented Dec. 15 will cover 3,361 items including autos.

But all told, fewer than 1,800 of these items — only about 35%, including crude oil — are new additions. Most have already been hit by previous rounds of tit-for-tat tariffs.

Beijing has already imposed tariffs on about 70% of its imports from the U.S. by value, and after these rounds, the only items left untouched will be those that it would be disadvantageous to domestic industry to tax, such as large aircraft. Previous tariff rounds have already led to sharp declines in imports of affected goods, and further hikes are unlikely to have much of an effect.

With the September duties, the average American tariff on Chinese goods rises to slightly above 21%, up from about 3% before the trade war, according to Chad Bown of the Peterson Institute for International Economics. China’s average tariff on imports from the U.S. climbs to nearly 22%. (more…)

US stocks erase yesterday’s declines (and then some) and close with decent gains

Ignores the 2-10 going negative again

The US stocks erased the declines from yesterday (and then some). The gains also ignored what was a flattening of the yield curve to flat 2-10s again (although positive now by a basis point or two).
The final numbers are showing:
  • The S&P index +23.92 points or 0.82% at 2924.43
  • The NASDAQ index of 71.646 points or 0.90% at 8020.20
  • The Dow industrial average of 240.29 points or 0.93% at 26202.73.
Below is a summary of the % change high/% change low/% change close for the North American and European major indices.  Most European indices had an even better day.
Ignores the 2-10 going negative againBelow are the changes and ranges for the US debt curve (from 2-30 years).  The 2-10 spread is 1.53 bps currently, down from 4.32 bps at the close yesterday. The thing about today’s move is the yields are higher across the board with the shorter end up more due to the taking out more of the 50 BP cut idea.
US yields are higher with a flatter yield curve.

Trump’s new tariffs send Indices skidding lower.

Major indices end near session lows.  Give up big gains in the process

Pres. Trump surprised the stock market by announcing 10% tariffs on $300B of China good effective September 1. He is on the wires saying that the tariffs can be raised beyond 25%, and said that the 10% is for a short term period.  I guess the combination means, the 10% will go to 25% if there is no progress, not the other way around (that is how I read the it).
The news reversed strong gains.
At the highs, the:
  • Dow was up 1.16% or 311.32 points
  • S&P was up 1.11% or 33.21 points
  • Nasdaq was up 1.66% or 135.61 points
At the close the final numbers are showing:
  • Dow, down -1.05% or -280.85 points at 26583.42
  • S&P down -0.90% or -26.82 points at 2953.56
  • Nasdaq down -0.79% or -64.298 points at 8111.12

25 Rules of Trading Discipline

 

  1. The market pays you to be disciplined.
  2. Be disciplined every day, in every trade, and the market will reward you. But don’t claim to be disciplined if you are not 100 percent of the time.
  3. Always lower your trade size when you’re trading poorly.
  4. Never turn a winner into a loser.
  5. Your biggest loser can?t exceed your biggest winner.
  6. Develop a methodology and stick with it. don?t change methodologies from day to day.
  7. Be yourself. Don?t try to be someone else.
  8. You always want to be able to come back and play the next day.Once you reach the daily downside limit, you must turn your PC off and call it a day. You can always come back tomorrow.
  9. Earn the right to trade bigger. Remember: if you are trading poorly with two lots you must lower your trade size down to a one lot.
  10. Get out of your losers.
  11. The first loss is the best loss.
  12. Don?t hope and pray. If you do, you will lose.
  13. don?t worry about news. it?s history. (more…)

Justin Fox’s The Myth of the Rational Market:Book Review

Justin Fox’s The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street(Harriman House, 2009) isn’t exactly hot off the press, but I discovered it only recently. It’s a fast-paced history, replete with interesting (sometimes chatty/catty) details, of theories about the financial markets from Irving Fisher to Robert Shiller.
The cast of characters is huge. I list them here to give a sense of the scope of the just shy of 400-page book: Kenneth Arrow, Roger Babson, Louis Bachelier, Fischer Black, John Bogle, Warren Buffett, Alfred Cowles III, Eugene Fama, Irving Fisher, Milton Friedman, William Peter Hamilton, Friedrich Hayek, Benjamin Graham, Alan Greenspan, Michael Jensen, Daniel Kahneman, John Maynard Keynes, Hayne Leland, Robert Lucas, Frederick Macaulay, Burton Malkiel, Benoit Mandelbrot, Harry Markowitz, Jacob Marschak, Robert Merton, Merton Miller, Wesley Mitchell, Franco Modigliani, Oskar Morgenstern, M.F.M. Osborne, Harry Roberts, Richard Roll, Barr Rosenberg, Stephen Ross, Mark Rubinstein, Paul Samuelson, Leonard “Jimmy” Savage, Myron Scholes, William F. Sharpe, Robert Shiller, Andrei Shleifer, Herbert Simon, Joseph Stiglitz, Lawrence Summers, Richard Thaler, Edward Thorp, Jack Treynor, Amos Tversky, John von Neumann, and Holbrook Working. (more…)

When Strengths Become sabotage

The tricky thing about playing to our strengths is that it is often our strengths, applied across situations uncritically, that can hold us back.  The dark side of strengths are sometimes called derailers, because of their potential for interfering with progress and derailing success.
Consider the following examples:
1)  The diligent hard worker who periodically burns out and fails to maintain valuable friendships and personal relationships;
2)  The process-oriented trader who develops good trading habits, but fails to innovate and expand those habits;
3)  The trader who processes information very well through teamwork and social interaction, but who falls prey to consensus thinking; 
4)  The caring manager who has great relationships with employees, but avoids conflict and does not effectively uphold work standards;
5)  The trader who is passionate about markets and learning about trading and who loses money by overtrading.
In each case, a strength carries the seed of its own undoing:  what powers us down the track can also derail us. (more…)