Mish's Global Economic Trend Analysis

Oil Collapses to Six-Year Low, Brent Crude Hits Parity with West Texas Intermediate; Keystone Connection?
Steen Jakobsen Warns "Euro is Not a Good Idea and ECB About to Make Biggest Mistake in History"
Bright Light Shines on Medicare Fraud; Is There an Easy Way to Stop Fraud?

Oil Collapses to Six-Year Low, Brent Crude Hits Parity with West Texas Intermediate; Keystone Connection?

Posted: 13 Jan 2015 03:23 PM PST

In late 2011, Brent traded with a huge 40% premium to West Texas Intermediate (WTI). The spread collapsed to parity in July of 2013, but surged to a 22.5% premium late last year.

The spread went negative again today, but a late day rally in Brent vs. WTI saved the day for Brent as the following chart shows.

Price of Brent Divided By Price of WTI

click on any chart for sharper view

Price of Brent vs. Price of WTI

Betting on the Return of WTI-Brent Parity

The Financial Times spoke of Betting on the Return of WTI-Brent Parity back on October 20, 2011. The reason given at the time seems rather amusing today - expectation the Keystone pipeline would be completed.

The price difference between West Texas Intermediate and Brent crude reached a record high of more than $28 a barrel earlier this month. But, almost unnoticed, the market has started to price a return to the parity between the two benchmarks in five years.

The bet on a return to WTI-Brent parity appears based on progress to build several new pipelines that promise to de-bottleneck Cushing, the key delivery point for the WTI benchmark, and the return of Libyan crude.

Even taking into account the potential for delays, most traders believe that in five years, TransCanada's 700,000 b/d "Keystone XL" pipeline would be in operation. Indeed, the company says it could be moving oil by late 2013 or early 2014. The US State Department gave a provisional green light to the $7bn project, although final approval is several months away.

But the price difference between WTI and Brent is also coming under pressure for contracts for delivery in 2012 and 2013, suggesting that traders are not only betting on pipelines. The return of Libya to its pre-ward output level of 1.6m b/d, expected by late next year, would play a large role on the five-year forward spread, putting pressure on Brent prices.

Keystone Pipeline Synopsis

Some pieces of the Keystone Pipeline Project are completed, but President Obama has sat on others.

Keystone Phases

The Keystone Pipeline (Phase I), delivering oil from Hardisty, Alberta 3,456-kilometre (2,147 mi) to the junction at Steele City, Nebraska and on to Wood River Refinery in Roxana, Illinois and Patoka Oil Terminal Hub (tank farm) north of Patoka, Illinois, completed in June 2010.
The Keystone-Cushing extension (Phase II), running 480-kilometre (300 mi) from Steele City to storage and distribution facilities (tank farm) at Cushing, Oklahoma, completed in February 2011.
The Gulf Coast Extension (Phase III), running 784-kilometre (487 mi) from Cushing to refineries at Port Arthur, Texas was completed in January 2014, and a lateral pipeline to refineries at Houston, Texas and a terminal will be completed in mid-2015.
The proposed Keystone XL Pipeline (Phase IV), which would essentially duplicate the Phase I pipeline between Hardisty, Alberta, and Steele City, Nebraska, with a shorter route and a larger-diameter pipe. It would run through Baker, Montana, where American-produced light crude oil from the Williston Basin (Bakken formation) of Montana and North Dakota would be added to the Keystone's current throughput of synthetic crude oil (syncrude) and diluted bitumen (dilbit) from the oil sands of Canada.

The first two phases have the capacity to deliver up to 590,000 barrels per day of oil into the Mid-West refineries. Phase III has capacity to deliver up to 700,000 barrels per day to the Texas refineries. By comparison, U.S. oil production was about 9,000,000 barrels per day in early November, 2014; and in the preceding twelve months through August 2014, the US imported an average of about 7.5 million barrels of oil per day.

The Keystone XL proposal faces criticism from environmentalists and a minority of the members of the United States Congress. In January 2012, President Barack Obama rejected the application amid protests about the pipeline's impact on Nebraska's environmentally sensitive Sand Hills region. TransCanada Corporation changed the original proposed route of Keystone XL to minimize "disturbance of land, water resources and special areas"; the new route was approved by Nebraska Governor Dave Heineman in January 2013. On April 18, 2014 the Obama administration announced that the review of the controversial Keystone XL oil pipeline has been extended indefinitely, pending the result of a legal challenge to a Nebraska pipeline siting law that could change the route.

Senate Advances Keystone

Yesterday the Huffington Post reported Senate Advances Bill To Approve Keystone Pipeline Despite Obama's Veto Threat.

The Senate advanced legislation Monday night to approve the Keystone XL pipeline, even though President Barack Obama has already said he would veto it.

The Senate voted 63-32 to clear a procedural hurdle and begin debate on the bill. Ten Democrats and one independent, Angus King (Maine), voted with every Republican to move the bill forward. Those Democrats included Sens. Michael Bennet (Colo.), Tom Carper (Del.), Bob Casey (Pa.), Joe Donnelly (Ind.), Heidi Heitkamp (N.D.), Joe Manchin (W.Va.), Claire McCaskill (Mo.), Jon Tester (Mont.), Tom Udall (N.M.) and Mark Warner (Va.). A final vote is expected later this week.

Despite the strong vote, the Senate lacks the two-thirds majority vote needed to overcome a veto. The House passed the bill last week by a vote of 266 to 153 -- also shy of the 290 votes needed to clear a veto.

Congressional action on Keystone comes after the Nebraska Supreme Court cleared the way last week for the proposed pipeline's route through the state. The Obama administration had been waiting for the Nebraska ruling to render its own decision on the pipeline, which is still forthcoming.

Speculation Synopsis

The primary reason many gave for the price discrepancy between Brent and WTI was the Keystone pipeline.

That's a questionable proposition given pipeline capacity of 700,000 barrels per day vs. US production of about 9 million barrels per day in early November, 2014 with the US still importing an average of about 7.5 million barrels per day.

Obama Threatens Keystone Veto

The House voted 9 times in 2014 for the XL project, but every time passage was held up in the Senate.

Obama put XL on hold pending a review by the Nebraska Supreme Court. Now that the Nebraska Supreme Court OK'd Keystone, President Obama issued a Formal Position saying he "strongly" opposes the bill.

Thus, Obama's true position all along comes to the forefront: He never wanted to approve XL in the first place. Instead he hoped that Nebraska would kill XL for him.

Now, forced to take a position, Obama promises to veto the bill.

Weak Demand

Since 2012-02-25, the price of crude is down from $128.40 to $46.81. That's a decline of 63.5%!

Whatever fundamental or speculative reason there once was for the sometimes huge price discrepancy between Brent and WTI is now gone.

What remains is oversupply coupled with solid evidence of a hugely slowing global economy led by Asia and Europe. The US will soon follow.

For further analysis of the supply-demand setup, please see What's Behind the Plunge in Oil? Winners and Losers? Boon to Spending or Recessionary?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Steen Jakobsen Warns "Euro is Not a Good Idea and ECB About to Make Biggest Mistake in History"

Posted: 13 Jan 2015 11:58 AM PST

Saxo Bank CIO and chief economist Steen Jakobsen warns the US is not Europe, the Euro is not a good idea, and the ECB is About to Make Biggest Mistake in History.

Via Mish-modified translation from El Economista.

Steen Jakobsen has never been less outspoken regarding historic moment that is about to live the Eurozone. He explains his particular vision of the economy, bluntly. This morning, visiting Madrid, Jakobsen warned that quantitative easing (QE), printing money to buy government bonds, will be the biggest mistake of the European Central Bank, making matters worse.

In his view, the ECB wants to get funding rates low for listed and public companies. However, big companies have taken much of the credit, while SMEs (small and medium size enterprises) remain unfunded. Funding goes to the 20% of companies that "never again will create jobs." Interest rates declining few tenths more will not improve the economy.

Europe is not USA

Jakobsen says success stories like the three QE Federal Reserve (Fed) cannot be extrapolated to the Eurozone. His reason? The US is a net debtor and falling interest rates affects international creditors and rising national income. In Europe the opposite is true. Citizens of the euro countries are net savers, which means that falling interest rates deteriorates their income and does nothing to activate the economy.

In addition, Jakobsen believes that monetary stimulus suffers from a glitch: "The negative deposit facility and buying sovereign bonds are counter each other." This means that banks will not be willing to get rid of their bond portfolio to deposit excess liquidity at the ECB when interbank rates are negative.

In the case of monetary policy in the US, Jakobsen believes the Fed will have a very difficult raising interest rates in 2015. In his view, unless wages start to increase steadily, neither the Fed nor other major central bank may tighten monetary policy.

Consequences of Poor Construction of the Euro

To Jakobsen, many of the current problems stem from poor construction of the euro. "I do not think that the euro is a good idea. It's poorly built, without a fiscal union, and without consolidation of common funding streams for all member states. As designed, the euro does not have sufficient foundation to support the Eurozone.

ECB Has Done Nearly Everything Wrong

So the ECB has done it all wrong? No ... but almost.

The great mistake of the European entity was to allow the economic cycle of the economy take its course. "They have not allowed the market to purge mistakes and now the situation is worse.

Had the business cycle been left alone, many broken banks would have been acquired by larger ones, reducing debt and generating a prone position to lay the foundations for recovery indicates. Instead, entities transferred bad debts from one place to another, from financial institutions to "bad banks", not solving anything in the process.

"Full-Board Bingo"

That's a "full-board" European bingo, with every square covered.

The euro cannot and will not work because it's fatally flawed as I have noted for years.

Fatal flaws include no fiscal union, wildly differing social agendas of member states, wide variances in productivity, wage discrepancies, and retirement benefit discrepancies.

Those problems make it impossible to conduct monetary policy. The "Target2" system of payments is icing on the fatally flawed cake. (See Eurozone Target2 Imbalances Rise Again, Led by Italy).

Finally, I maintain QE did not work in the US either, unless "work" means creating one of the biggest equity bubbles in history coupled with the absolute biggest junk bond bubble in history.

Nothing Fixed Anywhere

It's not just Europe. Nothing has been fixed anywhere.

Bernanke says letting Lehman fail was his biggest mistake. What a bunch of nonsense. Lehman failed in every sense of the word.

In effect, Bernanke wanted to bail out a failed institution at taxpayer risk and expense. The markets need to purge excesses. Instead, central banks refuse to allow just that, blowing bubbles of increasing amplitude over time in the wake.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Bright Light Shines on Medicare Fraud; Is There an Easy Way to Stop Fraud?

Posted: 12 Jan 2015 11:58 PM PST

At long last, a bright light shines on something I have been discussing for years - Fraud.

Investigators now use data mining tools to claw back billions stolen by crooked doctors and clinics.

The Financial Times reports Big Data Diagnoses Medicare Fraud.

Late on an April evening in 2010, agents with the Federal Bureau of Investigation broke into a medical clinic in Bath Beach, Brooklyn, an area popular with Russian immigrants. Once inside, they installed a hidden camera in an air-conditioning vent in the ceiling directly above a desk.

Over the next six weeks, the camera recorded a blonde-haired woman stuffing envelopes with $100 bills, which she handed to elderly patients. In exchange, patients handed over their Medicare identification number, which Bay Medical used to bill for services that the patients would often never receive. If there were any doubts about the legality of the scheme, Bay Medical kept a Soviet-era poster pinned to the wall showing a woman with her finger pressed against her lips and a simple message in Russian: "Don't Gossip."

Bay Medical fleeced Medicare, the US taxpayer-funded healthcare programme for the elderly and disabled, for $50m in illegal payments, US authorities later proved. Its employees used the proceeds of the fraud to splurge on plastic surgery, luxury cars and vacations.

Fraudulent billings are estimated to make up as much as 10 per cent of Medicare spending in the US, according to the most recent study. Medicare, which funds hospital visits, prescription drugs and other services for retirees and the disabled, paid over $600bn to provide medical services to 51m Americans in 2013, according to the US Government.

Though still in start-up mode, US investigators' embrace of big data analysis could save taxpayers billions of dollars a year from healthcare fraud alone. Ultimately, the US Department of Justice hopes to adapt these tactics to crack down on other forms of fraud.

The DoJ says the scheme is already paying off. For every dollar spent to combat healthcare fraud, the US government has collected $8 in recoveries from forfeiture, asset seizures and fines, amounting to $4.3bn in 2013 and a total of $19.2bn over five years.

Data Mining Questions

Why does fraud take years to prove? And why the slow start?

Data mining was launched as an experiment in 2007 in Miami, a hotbed of healthcare fraud. The DoJ, the FBI and the Department of Health and Human Services' office of inspector-general wanted to see if data could be as good as a human at rooting out fraudsters. "You might see one medical equipment provider getting referrals for 500 wheelchairs from the same doctor, or a home health agency that's getting 60 per cent of its referrals from the same doctor," says Leslie Caldwell, chief of the DoJ's criminal division. "A lot of this can be gleaned from the data."

That paragraph belongs in the "duh?" category. Nonetheless, Leslie Caldwell, chief of the DoJ's criminal division claims "The idea of using real-time data to generate fraud cases is unique," she said.

Unique to whom? Google uses real-time data every second to deliver ads. One might not expect Government to react so fast, but what we have seen so far is glacial.

What About Disability Fraud?

And what about other types of fraud? I have written about disability fraud at least a dozen times. Here are a few key samples.

October8, 2013: Mainstream Media Finally Catches on to Disability Fraud: 60 Minutes Reports on "Disability USA"

January 7, 2014: 102 Police and Firefighters Caught in Disability Scam

September 11, 2013: States Have an Incentive to Promote (Not Stop) Disability Fraud; So How Much Fraud Is There?

March 27, 2013: Unwilling to Work; 25% in Hale County AL Collect Disability, 14 Million Nationwide; A Simple Solution

Please read the preceding two links if you have not done so. States actually have an incentive to promote fraud, and they do just that. Hale county is preposterous.

Fraud will continue until the expectation is that it will be caught and prosecuted.

Easy Way to Stop Fraud?

Is there an easy way to stop fraud? Of course there is.

All Congress need do is pass a law that ...

Anyone caught in fraud loses Medicare benefits
Anyone caught in fraud loses Social Security benefits
Anyone caught in fraud loses disability benefits
Anyone caught in fraud loses food stamp benefits
Anyone caught in fraud loses pension benefits at state and federal level
Any doctors caught in fraud lose their license in every state
Whistleblowers get 5% of fines collected for fraud
One time amnesty for any individuals (not doctors or companies) turning themselves in.

Fraud would drop 80% in a month.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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13.1.15

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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