From Peak to Peak

“Our ignorance is not so vast as our failure to use what we know.”

-M. King Hubbert


Just ask anybody, there is no shortage of the oil in the world. Or at least that’s the consensus view these days. In the short run, this is clearly correct. But what about in the longer term, say 5 or 10 years down the road?


We’ve been recently reacquainting ourselves with the work of M. King Hubbert and are in the middle of reading, “The Oracle of Oil”, by Mason Inman. Hubbert, as many of you know, is the geologist known for popularizing the idea of peak oil in the United States. He predicted that for any given geographical area, the rate of petroleum production of the reserve over time would resemble a bell curve.


Based on this theory, Hubbert presented a paper to the 1956 meeting of the American Petroleum Institute in San Antonio, Texas, which predicted that overall petroleum production would peak in the United States between 1965, which he considered most likely, and 1970, which he considered an upper-bound case. While his analysis was originally widely discredited, when domestic oil production actually peaked in 1970 Hubbert was very much validated.


In the Chart of the Day today, we look at U.S. oil production going back to 1861. As the chart shows, 1970 has been, so far, the peak in domestic oil production at ~9.6 million barrels per day. Interestingly, 2015 was a closed second with a production rate of some ~9.4 million barrels per day. Clearly, if prices had not started to decline in 2015, drilling and investment would have stayed at high levels and production grown beyond Hubbert’s peak in 2016.


But as it is, production in the United States is on the decline and, as of the most recent weekly data from the EIA, is down about 4.0% year-over-year. Despite this decline, which is largely due to somewhat tepid demand, inventory in the U.S. remains at record levels and is up 10.9%+ year-over-year. Eventually, though, declining production will begin to draw down this inventory.


At that point, investors in energy will likely get all bulled up on the price of oil. In reality, if the last couple of years have taught investors anything, it’s that there is no shortage of supply. And as for Hubbert’s Peak, at least on a strictly linear basis, the peak will likely be blown through in the next cycle of investment in domestic oil production with just a little bit of “Drill baby, drill!”


From Peak to Peak - OPEC cartoon 02.16.2016


Back to the Global Macro Grind 


In the shorter term, oil, and really markets globally, are being roiled this morning because OPEC could not agree on production cuts. This fact seems to have shocked almost everyone except our policy team led by former Secretary of Energy Spencer Abraham and former Vice Chairman of the IEA Joe McMonigle who wrote the following last night:


“Since the production freeze proposal was first introduced in February, we have repeated our view in subsequent client notes that "a freeze is not a freeze without Iran." It now seems our mantra is also the official Saudi position from Doha.


Over a dozen oil producers from OPEC and Russia met in Qatar on Sunday to discuss a potential agreement to freeze production at January levels. While Iran made it clear it would not participate in the freeze as it ramps up post-sanctions production, many freeze proponents pushed for an agreement that excluded Iran as a way to support a "positive trend" in oil prices.


But as we pointed out in our Friday preview note on the freeze meeting, "the Saudi's would only support a freeze if all other producers agreed to participate, including and most especially Iran." Based on our analysis, we concluded in our Friday note that "there is no chance Saudi Arabia reverses its position and agrees to freeze production on Sunday."


The deal was dead Saturday morning Riyadh time when Saudi Deputy Crown Prince Mohammad Bin Salman reiterated his position in an interview from King Salman's private desert ranch that the Kingdom would not freeze production without Iran. 


So oil ministers left Doha without reaching any agreement creating almost certain downward pressure on oil prices when the market opens on Monday. Oil was already down last Friday as pessimism grew about achieving an agreement in Doha. Any sell off Monday is now about the realization that there will be no agreement at the June 2 OPEC meeting either. The freeze is not a bridge to any future agreement.”


According to the CFTC, longs were adding to their positions into this weekend and long positions were peaking near a 9-month high. As a result, the sell off this morning is not entirely shocking.


Speaking of peaks, or lack thereof, there are a few more to highlight this morning:

  • Chinese housing prices clearly have NOT peaked with new home prices up +4.9% year-over-year and increasing in 62 cities;
  • U.S. corporate profit margins may have peaked, according to a report from Bloomberg this morning, which shows corporate profits their highest levels in 2014, at 9.7%, and are now closer to 9.0%;
  • The NABE highlighted a similar peak this morning with its survey that showed for the first time since the Great Recession more business owners are highlighting declining profits than expanding profits;
  • Spanish growth rates may have peaked, as both the IMF and Spanish cut government growth rate forecasts for the first time since 2013; and
  • In the global currency markets, the Japanese Yen clearly has not peaked breaking to new 19 month highs this morning as the Nikkei suffers its second -3% daily loss.


The bigger question of course is whether U.S. equities have peaked. In our models, U.S. equities remain in a bearish formation and, all else being equal, we have a hard time seeing them make a move towards a new peak with profit margins in decline. After all, there has only been one time since 1973 when profit margins narrowing by 60 or more basis points didn’t precede a recession. 


So . . . Peaking late cycle anyone?


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.67-1.81%

SPX 2041-2091

Nikkei 15160-17065

VIX 13.03-18.72
USD 93.90-95.45

Gold 1210--1266


Keep your head up and stick to the ice,


Daryl G. Jones

Director of Research


From Peak to Peak - 04.18.16 chart

The Macro Show Replay with Energy Analyst Joe McMonigle | April 18, 2016

CLICK HERE to access the associated slides.

An audio-only replay of today's show is available here.

Birds-Eye View: Key Call-Outs (AGU, CF, MON)

We presented the bear case on Agrium last Wednesday at 11:00 a.m. with a blackbook and conference call. To summarize, we believe the retail business is misunderstood and subject to short-termism from an analysis perspective. In our view operating margins in the retail business, which have been stable post-recession, will contract meaningfully as the sector continues its long cyclical downturn. Ping us back directly for the deck or related inquiry.

Aside from our core thesis, below we outline some important catalysts to watch from a global trade perspective that will have implications for the competitiveness and profitability of U.S. farmers:

  • EM FX Move: After a sharp EM currency move for the Brazilian Real and Argentine Peso, the currencies of the two largest soybean exporting countries have appreciated meaningfully against the USD since Jan-Feb lows, which should have implications for the profitability and competiveness of Argentine exports as they are now selling a record stockpile onto global markets in volumes not seen since 2012. Robust Chinese demand and a bout of rainy weather in Argentina is also helping support prices and bullish speculation on the CME.   
  • Brazil Factor: In Brazil, there is speculation on the direction of monetary policy and currency in particular should Rouseff be ousted (speculation for more hawkish policy from a new regime). With the lower house of congress voting to move forward with impeachment proceedings over the weekend, this appears more likely. Forward sales of commodities are reportedly being curbed significantly, and for soybeans specifically, this could shift some incremental buying to U.S. Markets: LINK
  • Long Bias in Soybeans: Aggregating net futures and options positioning from the CFTC shows a soybean market leaning +2.4x and +1.9x on a 6-mth and TTM z-score basis.
  • Fertilizer Rates: With muted application rates in the fall window, fertilizer prices and regional spreads have moved higher off the Jan. lows (urea and ammonia), with a jump in the Cornbelt/NOLA ammonia spread. Although volumes should come in strong Y/Y given the muted fall application season, prices are still down considerably Y/Y. As the last chart shows, we believe there is quite a bit of margin to lose on pricing after an unprecedented increase in money spent on crop input expenditures over the last several years. 

Birds-Eye View: Key Call-Outs (AGU, CF, MON) - FX


Birds-Eye View: Key Call-Outs (AGU, CF, MON) - Argentine Ending Stocks


Birds-Eye View: Key Call-Outs (AGU, CF, MON) - Argentine Exports


Birds-Eye View: Key Call-Outs (AGU, CF, MON) - CFTC Position Monitor


Birds-Eye View: Key Call-Outs (AGU, CF, MON) - Cornbelt NOLA ammonia spread


Birds-Eye View: Key Call-Outs (AGU, CF, MON) - Ferts Expenses



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REPLAY! This Week On HedgeyeTV

Our deep bench of analysts take to HedgeyeTV every weekday to update subscribers on Hedgeye's high conviction stock ideas and evolving macro trends. Whether it's on The Macro ShowReal-Time Alerts Live or other exclusive live events, HedgeyeTV is always chock full of insight.


Below is a taste of the most recent week in HedgeyeTV. (Like what you see? Click here to subscribe for free to our YouTube channel.)




1. Dale: ‘What Are You Buying’ (4/15/2016)



In this excerpt from The Macro Show, Hedgeye Senior Macro analyst Darius Dale discusses the recent reflation rally and provides critical context about why we remain bearish. 


2. LinkedIn: ‘Proceed With Caution’ | $LNKD (4/13/2016)



Hedgeye Internet & Media analyst Hesham Shaaban removed LinkedIn from his Best Ideas Long list heading into fourth quarter earnings. Good call. The stock is down 50% year-to-date. In this brief excerpt from The Macro Show earlier today, Shaaban responds to a subscriber’s question about whether LinkedIn is now “too cheap to ignore” and gives a deep dive explanation as to why he’s cautious on the stock.


3. About Everything | When Less Is More (4/13/2016)



In this complimentary edition of About Everything, Hedgeye Demography Sector Head Neil Howe discusses why "we’re entering a new era in which simplicity — not choice — is the hallmark of a cutting-edge brand."


4. McCullough: ‘We Are Vigilantly Bearish On Corporate Earnings & Junk Bonds’ (4/12/2016)



In a recent excerpt from The Macro Show, Hedgeye CEO Keith McCullough responds to a subscriber’s question about the latest permabull narrative that a weaker dollar will lead to “widespread earnings beats.”


5. Gen-X Weighs on Housing Market (4/11/2016)



In this brief excerpt from The Macro Show earlier today, Hedgeye Housing analyst Christian Drake discusses the demographic and structural headwinds facing U.S. housing.

This Week In Hedgeye Cartoons

Our cartoonist Bob Rich captures the tenor on Wall Street every weekday in Hedgeye's widely-acclaimed Cartoon of the Day. Below are his five latest cartoons. We hope you enjoy his humor and wit as filtered through Hedgeye's market insights. (Click here to receive our daily cartoon for free.)




1. Past Peak (4/15/2016)

This Week In Hedgeye Cartoons - the cycle


Recent data continues to confirm our bearish thesis on the U.S. economy, like Friday's terrible US Industrial Production report which slowed to -2% year-over-year in March.  


2. Look Out Below! (4/14/2016)

This Week In Hedgeye Cartoons - recession cartoon 04.14.2016


"Unlike many strategists (who missed calling the cycle top in US Consumption, Employment, and Profits last year), we have stayed with The Cycle call we’ve had all along here in Q2," Hedgeye CEO Keith McCullough wrote recently.


3. The Central Bank Of Neverland (4/13/2016)

This Week In Hedgeye Cartoons - Draghi Peter Pan cartoon 04.13.2016


Central planners are increasingly pushing on a string as macro markets continue to move in direct opposition to the best efforts of policymakers at the ECB and BOJ.


4. Earnings: Dead In The Water (4/12/2016)

This Week In Hedgeye Cartoons - earnings cartoon 04.12.2016


In what is already expected to be an ugly quarter for corporate earnings, Alcoa kicked off 1Q earnings season with a bang last night. The aluminum producer missed revenue estimates, earnings fell by 92% and reduced guidance for the year. 


5. The Cycle (4/11/2016)

This Week In Hedgeye Cartoons - GDP cartoon 04.11.2016


The U.S. growth outlook is getting pretty grim. The Atlanta Fed's GDPNow tracker for U.S. economic growth in Q1 2016 just hit 0.1% after a spate of new negative data.


We've been making this bearish call for a while now and highlighted in our Q2 Macro themes that "the U.S. economy faces its toughest GDP comp of the cycle in 2Q16."

The Week Ahead

The Economic Data calendar for the week of the 18th of April through the 22nd of April is full of critical releases and events. Here is a snapshot of some of the headline numbers that we will be focused on.



The Week Ahead - 04.15.16 Week Ahead

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