All of the PowerShares DB Crude Oil ETNs are based on a total return version of the Deutsche Bank Liquid Commodity Index-Oil (the "Index") which is designed to reflect the performance of certain crude oil futures contracts plus the returns from investing in 3 month United States Treasury bills. The Long ETN is based on the Optimum Yield™ version of the Index and the Short and Double Short ETNs are based on the standard version of the Index. The Optimum Yield™ version of the index attempts to minimize the negative effects of contango and maximize the positive effects of backwardation by applying flexible roll rules to pick a new futures contract when a contract expires. The standard version of the index, which does not attempt to minimize the negative effects of contango and maximize the positive effects of backwardation, uses static roll rules that dictate that an expiring futures contract must be replaced with a contract having a pre-defined expiration date.
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U.S. Secretary of State John Kerry is traveling to Kiev today to "reaffirm the United States' strong support for Ukrainian sovereignty" as Russian troops take control of Crimea and threaten a full-scale invasion. In response, Ukraine has mobilized its reserves.
The U.S. has threatened to isolate Russia economically and is considering a range of sanctions unless it withdraws from Ukraine, including freezing assets, visa bans, action against banks and even expulsion from the G8. However, some European countries rely on Russia for energy so forging a widespread agreement on sanctions could be tough.
All sides are examining a get-out option for Russia that would involve sending international observers to Crimea and eastern Ukraine to protect the rights of ethnic Russians - one of Vladimir Putin's ostensible reasons for seizing Crimea - under any new government in Kiev.
The crisis has sent Russian markets tumbling and prompted the country's central bank to temporarily hike interest rates to 7% from 5.5%. The USD-RUB is +1.2% to 36.457 after earlier hitting 36.65. The broad ruble-based MICEX stock index is -9.4% and the dollar-based RTS is -11.1%.
Ukraine has put its troops on high combat alert, appealed to Nato for help and warned of war after Russian President Vladimir Putin received parliamentary approval to invade Ukraine.
Russia has effectively seized control of Crimea, which was part of Russia until 1954. Russian soldiers - although not identified as such - have surrounded Ukraine military bases in the province and taken over three major airports.
President Obama and other western leaders have spoken with Putin and warned him against further military intervention, with Obama making economic threats. U.S. legislators have condemned Russia's actions and have called for sanctions, but have stopped short of demanding military action.
The developments in Ukraine have troubled but not roiled global markets so far, although the country's main stock index and currency have been hit badly. Gas and oil are a particular focus given that Ukraine is a key east-west energy route.
Given Ukraine’s location, the country's situation obviously will impact Brent more than WTI; meanwhile, WTI’s losses are limited after U.S. government data yesterday showed crude supplies at Cushing, Okla., declining to a four-month low.
Phillips 66 (PSX -2.8%) has dropped 3.5% YTD, while Delek US (DK -5.3%) has plunged 17%, Valero (VLO -4.3%) has slipped 3.8%, Holly Frontier (HFC -3.1%) has fallen 8.2% and Marathon Petroleum (MPC -4.4%) is off 8.5% in 2014.
Goldman's research, explains analyst Jeff Currie, shows oil has relatively small leverage to the "vulnerable" emerging market economies thanks to very low price elasticity, and he notes oil has been unresponsive (i.e. flat to up) amid the EM troubles this year (combined with record seasonal low stocks).
Gold, in contrast, has a good deal of price elasticity (think jewelry demand) and very large leverage to "vulnerable" EM economies. Currie's team also expects "spillovers" from the EM slowdown to developed market economies hitting gold investment demand.
Gold meanwhile is up another 0.5% today and has taken out $1,300 per ounce for the first time in three months.
One of the top drivers of refiners' outperformance of late has been the expectation that U.S. crude oil prices would fall relative to Brent crude, giving a boost to their profit margins; that view is now the consensus, and Credit Suisse thinks it might be priced into refiner stocks.
The firm downgrades refiners is sees as most exposed - Delek US (DK), Western Refining (WNR) and Phillips 66 (PSX) - to Market Perform from Outperform on signs that oil prices could be stronger than the market expects.
It cites five factors: Overall refining runs in the East of Rockies region are higher; crude inventories are lower; crude imports have fallen; maintenance likely will be down Y/Y; and a temporarily slower trajectory of domestic production growth may occur due to the normal winter impacts.
A flood of new oil from Texas to the Great Plains has swamped refineries, driving down pump prices 10% since March while global oil prices have hovered at ~$107/bbl; it suggests the world crude market is having waning influence on U.S. gasoline, which instead is beginning to track lower-priced domestic oil.
As cheaper oil translates to cheaper gasoline, the likes of Exxon (XOM) and Conoco (COP) will have a tougher time convincing U.S. lawmakers that ending export restrictions would benefit the country, says RBN Energy's Sandy Fielden, since "the most obvious thing that’s going to happen [given more exports] is that crude prices will go up and so will gasoline."
Lifting strict export limits would halt the decline in U.S. crude prices while costing motorists as much as $10B/year in higher fuel prices, according to Barclays.
Deutshce becomes one of the most bearish on the Street, cutting its gold price forecast to an average of $1,141 for the year, down 14.7% from the bank's previous estimate, and far below 2013's $1,413 average.
Last week, BAML also joined the rush of firms cutting their gold targets.
Deutsche also slashes its forecast for silver by 19% to $19 per ounce, and WTI crude to $88.75 per barrel, $10 below 2013.
"A third year of rampant U.S. oil supply growth propelled by tight/shale oil development, combined with the potential for the normalization of Iranian oil exports, is increasingly painting a picture of an oversupplied global oil balance, which poses meaningful downward pressure on oil prices."
Natural gas is held steady at $4.25 thanks to excess volume withdrawn from storage thus far this winter.
The six-month agreement by which Iran will scale back its nuclear program in return for $6-7B worth of sanctions relief will start being implemented on January 20.
Shortly afterwards, Iran and the P5+1 world powers will begin talks over a final deal.
Plenty of stumbling blocks exist, including an Iranian parliamentary bill that calls for the country to enrich uranium up to 60%. In the U.S., there are proposals in Congress to stiffen the sanctions against the country, although President Obama has pledged to veto any such measures while negotiations are taking place.
News of the implementation of the deal follows a report that Iran is in talks with Russia for the latter country to receive 500,000 bpd of oil from Iran in return for equipment and other goods.
Iran is reportedly in talks with Russia for the latter country to receive 500,000 bpd of oil from Iran in return for equipment and other goods.
The deal, worth a possible $1.5B, would increase Iran's crude exports by 50%.
Given that Russia produces its own oil, the Iranian crude may well be sold onto other buyers.
It's not clear whether the transaction would go into effect before or after the finalization of an agreement between Iran and six world powers - including Russia - that would ease the sanctions on the Persian nation in return for the scaling back of its nuclear program.
South Sudan's government has finally begun delayed talks with rebel negotiators in an attempt to end over three weeks of fighting that has left more than 1,000 people dead and caused 200,000 to flee their homes.
Meanwhile, Sudan and South Sudan, which is the third-largest oil producer in sub-Saharan Africa, have spoken about forming a joint force to guard the latter's crude fields from rebels. The discussions follow fighting in two oil-rich states, Unity and Upper Nile. (Previous)
The severe cold weather sweeping across the U.S. threatens to curtail booming oil production as it disrupts traffic, strands wells and interrupts drilling and fracking operations.
Output in North Dakota typically slows in winter as producers scale back on drilling and well completion services, but analysts are bracing for a worse than usual impact on output from the state that could affect operations of companies such as Continental Resources (CLR), Marathon Oil (MRO) and Hess (HES).
U.S. crude oil prices haven't moved much yet, but the price differential for Bakken crude jumped last week and bitter cold in northern Alberta has pushed Canadian heavy crude prices to five-month highs; demand for natural gas has surged to new records, which analysts say should keep prices over $4/mcf, at least for the short term.
Mildly supportive EIA inventory numbers aren't enough to pull oil out of a big slide begun just before the new year. Off 1% today to $94.50 per barrel, February WTI crude was over $100 on December 27. USO -1.3%.
Natural gas is steady as the EIA reports a 97 bcf draw on inventories. Total stocks of 2.974 tcf are off 562 bcp from a year ago, and 289 bcf below the 5-year average. UNG +0.3%.