Don’t Panic About North Korea’s Latest Missile Launch. (But Still Worry)

North Korea ended two months of relative calm with a bang this week, launching its most powerful intercontinental ballistic missile yet in defiance of U.S.-led efforts to halt Pyongyang’s nuclear progress.

The missile reportedly traveled more than 2,800 miles into space – ten times higher than the International Space Station – flying for more than 50 minutes before splashing down in the Sea of Japan. Experts say it is another major leap forward in North Korea’s nuclear capabilities, potentially putting the entire U.S. mainland in range, including Washington, D.C.

Continue reading “Don’t Panic About North Korea’s Latest Missile Launch. (But Still Worry)”

GOP Optimism Grows For Tax Bill

There is growing likelihood on Capitol Hill that the Senate will pass its version of the Republican tax reform package this week, as party leaders offer changes in a scramble to win over a half-dozen holdouts.

It’s still difficult to predict the outcome with certainty, as ongoing horse trading is changing the dynamics of the tax reform landscape by the hour. But the belief among Senate Republicans that they’ll get the necessary votes for passage is much stronger than it was yesterday. Continue reading “GOP Optimism Grows For Tax Bill”

Internet Regulation Food Fight Far from Finished

In a big win for internet providers, federal telecom regulators are ditching utility-style internet rules. As we predicted in July, the five-member Federal Communications Commission will ditch the net neutrality rules that went into effect in 2015. They will split along party lines, with the Republican majority voting to do away with the 2015 framework at the FCC’s upcoming December meeting.

The Obama-era rules, implemented when Democrats had a 3-2 majority on the commission, barred web providers from blocking or throttling lawful content. They also banned so-called fast lanes—special agreements between web providers and content makers to speed up their data. Continue reading “Internet Regulation Food Fight Far from Finished”

Justice Dept. Trumps Blockbuster AT&T, Time-Warner Deal on Antitrust Grounds

The Justice Department moved this week to block AT&T’s proposed merger with Time Warner Cable. Now, the courts must decide the fate of the blockbuster deal that, if approved, would give America’s largest telecom company control over a media empire that includes CNN, HBO and other cable staples.

Will the merger go through? Flip a coin. This isn’t how antitrust cases of this kind normally proceed. The Justice Department regularly blocks transactions it deems “anti-competitive,” among them AT&T’s 2011 bid to acquire rival T-Mobile. But so-called “vertical mergers,” which involve firms operating at two different levels of an industry, have a better record of success.

Continue reading “Justice Dept. Trumps Blockbuster AT&T, Time-Warner Deal on Antitrust Grounds”

Consumer Watchdog Down But Not Out

The Consumer Financial Protection Bureau is set to lose some of its potency. Although Republicans—who have opposed the agency since its inception—will succeed in extracting some of its teeth, the GOP won’t be able to totally defang it.

Now that CFPB Director Richard Cordray is stepping down at the end of the month, President Trump, a critic of the consumer watchdog, is free to nominate a more business-friendly replacement. The administration also will work with congressional Republicans, many of whom want to dismantle the agency, to revamp its structure and refocus its mission. Continue reading “Consumer Watchdog Down But Not Out”

Where Do Oil Prices Go Next?

The oil market has been nothing if not volatile this autumn. At the beginning of September, the price of benchmark West Texas Intermediate hovered near $47 per barrel after spending most of the summer trading in the mid-$40s. Then suddenly, in the wake of Hurricane Harvey, WTI went on a tear, shooting up to $57 per barrel by early November: A tidy 21% gain at a time when oil demand tends to be low.

Had crude finally begun a sustained rebound after several years of depressed prices? Many oil bulls seemed to think so. Or at least, many did until earlier this week, when WTI dropped sharply after the International Energy Agency issued a prediction that global oil demand will grow more slowly next year than previously expected. Are oil prices just taking a breather before the next leg up? Or did this week’s drop mark the end of the autumn rally?

I asked two highly regarded oil market analysts that question, and got two very different answers. Stephen Schork, editor of energy investing newsletter The Schork Report, believes that the rally is “pushing up against the ceiling” and can’t last much longer. He attributes much of the price rise to speculators who have taken out long positions in oil futures, meaning they are betting heavily on continued gains. Many oil producers, he adds, are locking in today’s prices via hedging strategies: A sign that the sellers of the commodity don’t expect prices to keep rising.

Schork also notes that Saudi Arabia has been cutting its production substantially, perhaps in a bid to push up prices as it prepares for an initial public offering of part of Saudi Aramco, the state oil company. (Higher oil prices would make the Aramco IPO easier to sell to investors.)

Overall, he thinks WTI might top out at $60 per barrel. But if so, it’ll quickly retreat.

Phil Flynn, an oil analyst with trading firm PRICE Futures Group, thinks there’s room to run. Oil prices fell from $100 per barrel in 2014 to as low as $26 per barrel in 2016 because of oversupply. Now, Flynn notes, global inventories of crude oil are shrinking, which is exactly what OPEC was trying to accomplish when the cartel decided late last year to curb its collective output. The global economy is expanding briskly, which should prompt higher oil consumption. (Flynn thinks the IEA is low-balling global oil demand.) “I think we’re going to $60 per barrel,” he says; it’s just a matter of how quickly.

In the long term, Flynn sees prices rising beyond the $60-level as demand outruns supply.

Both make compelling arguments, but who is right?

I think the answer is a bit of both. It seems clear that, barring a sharp global economic slowdown, oil demand will keep growing. OPEC succeeded at reining in excess supply. Data from the IEA show that stored oil supplies stashed around the world’s developed economies have been dwindling for months (though they remain ample relative to the historic average). Strong demand and reduced supply usually push prices higher.

U.S. shale oil production is the wildcard for prices, however. American oil production has been rising steadily week by week, according to the Department of Energy’s data. Domestic output now stands at more than 9.6 million barrels per day, up almost 1 million b/d from a year ago. As I wrote last week, more and more of that crude is reaching the global market now that the U.S. allows oil exports. So, crude from Texas and other oil-patch states is just supplanting the oil that Saudi Arabia isn’t pumping, undercutting OPEC’s efforts to prop up prices.

This rally may be over. Late autumn is generally a time of weak demand in the U.S., the world’s largest oil consumer. The summer vacation driving season is in the rearview mirror. Domestic crude production looks set to keep rising. And Wall Street probably got too excited in bidding up prices. The market was due for a pullback.

But I think prices will gradually trend higher next year. WTI has averaged about $50 per barrel this year. I look for the average to run closer to $55 per barrel in 2018, though volatile day-to-day prices fluctuations will no doubt continue. I can’t rule out steeper gains, but they seem unlikely. Higher prices only serve to spur more drilling in places such as the Permian Basin of Texas. Many wells that might not be profitable at $55 per barrel start to look good at $60 or higher. And shale producers have shown they can ramp up output quickly when prices spike.

The U.S. oil industry looks well-positioned. Global oil demand will grow. OPEC will keep its output in check. U.S. production will ratchet up. And overseas demand for American crude is expanding. Simultaneously, U.S. operators are coaxing more oil from each new well in a bid to lower per-barrel production costs. Given all of that, prices won’t need to jump much to pump up energy sector profits.



Sizing Up The GOP Tax Plans

Congressional Republicans’ push to overhaul the tax code is centered around two basic principles: Providing corporations with a big tax cut while helping average Americans. But like almost every major issue lawmakers tackle, competing House and Senate bills aimed at achieving these goals aren’t as simple or clear-cut as their authors want the public to believe.

Independent analyses of the tax plans undercut the GOP’s rosy predictions for how much middle-income earners would benefit (especially the House version). Although Senate Republicans’ measure is akin to the one House Republicans are preparing to approve this week, they take significantly divergent paths. If both bills pass intact, Republicans will have to broker a compromise among themselves to advance final legislation to President Trump’s desk. Such an endeavor would be messy and contentious, with success far from guaranteed. Continue reading “Sizing Up The GOP Tax Plans”

Assertive Saudi Prince Sets His Sights On Lebanon

As you relax over the holiday weekend, pay close attention to what’s happening in Lebanon. Tensions are rising in this perennial Middle East battleground, with potentially big implications for the stability of an already unstable region.

The trouble began Saturday when Lebanese Prime Minister Saad Hariri resigned during a trip to Saudi Arabia, saying his life was threatened by the Iran-backed militia-cum-political party Hezbollah. Continue reading “Assertive Saudi Prince Sets His Sights On Lebanon”

U.S. Oil Exporters Cash in on Higher Prices, Strong Demand

Here’s something the oil market hasn’t seen lately: A price rally.

After falling as low as $46 per barrel on Aug. 30, when Hurricane Harvey forced Gulf Coast refineries to shut down, benchmark West Texas Intermediate crude oil has soared to about $57 per barrel. The price run-up reflects several factors: Improving economic growth around the world; hints from OPEC that its current policy of limiting crude exports will continue for longer than first scheduled; and turmoil in Saudi Arabia, where several high-ranking officials and members of the royal family have been arrested on corruption charges. (Anything that threatens the internal stability of OPEC’s largest oil producer is bound to raise concerns about potential interruptions in crude shipments.)

OPEC members undoubtedly are celebrating oil’s sudden bull market. Starting in 2014, the cartel watched oil prices tumble from $100 per barrel to as low as $26 in early 2016. Prices have since recovered in fits and starts but seemed unable to break above $50 per barrel. Originally, increased U.S. production was to blame. And American firms’ ability to keep wringing more crude from shale fields has kept a ceiling on the price recovery.

What’s good for OPEC is also good for Texas and North Dakota. Why? Because U.S. energy firms are filling the void in the global market left by OPEC. Pumping fewer barrels has helped lift crude prices, but the barrels that OPEC isn’t selling are increasingly being supplied by American wells instead.

Last week brought a milestone for the U.S. energy industry: Exports of American crude oil jumped to 2.1 million barrels per day, the highest level on record and the first time that daily exports topped the 2 million-barrel mark. That underlines the trend of steadily rising exports that began after Congress lifted a ban on U.S. oil exports in late 2015.

The U.S. is still a net importer of oil. Daily production of about 15 million barrels of crude and other liquid fuels is nowhere near enough to satisfy demand of roughly 20 million barrels. So why is American oil departing the country for overseas markets?

Not all oil is equal. And American barrels are highly sought overseas. Much of the shale oil bounty unleashed by advances in hydraulic fracturing and horizontal drilling is “light and sweet” crude, meaning it is low in density and sulfur content. Many refineries around the world covet such grades of crude, whereas many U.S. refineries are designed to process heavier, “sour” grades with higher sulfur content.

Also, not all oil costs the same. American oil enjoys a distinct cost advantage over foreign rivals. The most familiar American crude benchmark, West Texas Intermediate, currently trades at a wide discount to Brent, the most prominent global benchmark.

That price “spread” makes it cost-effective to export more U.S. crude. In a recent webinar held by S&P Global Platts, Associate Editorial Director Matthew Cook estimated that it costs about $2 per barrel to export American oil to Europe. The price gap between WTI and Brent of $7 per barrel makes such a sale highly profitable for firms able to take advantage, such as BP and Trafigura, two of the biggest crude exporters operating in the U.S.

Given the favorable economics of exporting, expect more U.S. barrels to flow from the Gulf Coast to Europe, Asia and elsewhere. S&P Global Platts Managing Editor John-Laurent Tronche says that ports such as Corpus Christi, Texas, can ship out even more and are racing to add to their export capacity. Today the U.S. can export up to 2.7 million barrels of oil each day, comfortably above last week’s record-high level.

The combination of higher prices and strong exports is especially good for companies operating in the prolific Permian Shale basin of West Texas. S&P Global Platts estimates that a new well can break even in the Permian when oil prices are as low as $30 per barrel. Today’s $57 price makes many Permian wells quite profitable. And the Permian region is connected to Gulf Coast ports by an extensive pipeline network. Not surprisingly, production is growing fast in the Permian.

Of course, today’s profits can evaporate tomorrow if oil prices suddenly retreat. And the oil market has been nothing if not volatile recently. In my next issue, I’ll look at this rally’s durability and where prices are headed.

The Driverless Car Race Shifts into High Gear

The race to make driverless car service a reality is revving up. Carmakers are ramping up investment in an array of technologies fundamental to autonomous vehicles. The industry poured more than $80 billion into self-driving technology recently, according to a tally by the Brookings Institution spanning August 2014-June 2017. It’s a full-fledged spending spree on everything from artificial intelligence software to sensors to computer chips.

“Every manufacturer in the world wants to be an early mover—or at least avoid competitive disadvantage,” notes the Brookings report. Investments by car companies, tech giants and venture capitalists will only accelerate. The whole industry is riding on more than a decade of development, steep price drops on sensors and other key hardware and breakthroughs in artificial intelligence software. Carmakers know they are also competing outside of their industry—against Apple, Google and China’s Baidu to name a few—on the technology front. Continue reading “The Driverless Car Race Shifts into High Gear”