From the floor: Shale 'distress' grows as $40/b in view

December 12, 2014

Editor’s note: From the floor takes advantage of's unique real-time access to Saxo Bank’s various trading floors around the globe to put our community in touch with the developments that matter to their portfolios.

By Martin O'Rourke

Shale at $40/b
US oil benchmark WTI crude is trading towards the $58/barrel mark and that is putting the shale sector at "distress levels", says Saxo Bank's head of commodities strategy Ole Hansen, who picks out $58.30/b as the level "to look for" today.
Shale oil trades at an $18/b discount to the benchmark putting its price "at close to" the $40/b level.
Hansen highlights West Canadian Select and adds that Canadian dollar weakness is related to the oil price.
"Oil prices have dropped 20% since the Opec meeting," says Hansen, speaking live from the Copenhagen trading floor. "This is not good news for Canadian oil production."
"We're going to see cuts made. The faster we drop, the sooner we will see the markets recover as we create this supply crunch that the markets seem to be looking for," he says.
Saxo's head of equities Peter Garnry warns that "there will have to be some restructuring of the shale oil and gas sector" despite news that two US equity funds have put together an $11 billion warchest to pour into the energy sector.
"That's fine," says Garnry, "but the oil price will keep drifting lower until we get that newsflash that someone has gone into Chapter 11 or Chapter 7."
"That's when we will know that we have finally hit that bottom," he says.

NOK repercussions
There are repercussions for one-month EURNOK volatilites today following yesterday's Norges Bank meeting. "One-month vols are still at very high levels," says the FX Option Desk's Jeppe Norup. "Value is in being long and we expect a lot more vols to come."
Saxo Bank's head of forex John J Hardy says "there was a tremendous move taking NOK lower" after the announcement and says "I don't see why this move should not stop."

Abe's moment
Norup also notes that overnight USDJPY was trading in a 130 pips straddle, up from 90 pips, ahead of the Japanese election on Sunday.
Hardy expects a Shinzo Abe win that "will give him a mandate to pursue more aggressive programmes" which, he says "is very JPY negative."
JPY is nevertheless getting a leg up against USD as corporate high-yield bonds crash in New York. Hardy's got his eye on a one-month USDJPY call spread that should minimise risk of fallout from the election and next week's Federal Open Market Committee meeting.

Paper money
US office supplies giant Staples is up around 10% after an active investor, Starboard Value, took a 5% plus stake in the company. "There is substantial upside potential here," says Garnry who points out that they have been involved in a merger before and the prospect of a similar move can't be discounted.

Gold run
XAUEUR is homing in the psychological €1,000/oz mark having come within a whisker of breaking through during Asian trading. 
Hansen says gold remains stable with a bias towards the upside. "We're seeing quite a bit of movement against the euro which is a key level. If we see a break there, it could indicate additional weakness coming to the euro."

Pressure on Draghi
The TLTRO takeup at €130 billion "was at the low end of expectations," says the Fixed Income Desk's Michael Boye. "The ECB balance sheet is shrinking and confirmed the need for QE but we're not sure the figure was low enough to convince the markets of a January announcement yet."
Greek sovereign yield curves are inverting, he says, with the three-year yield jumping above 10% in "a rather significant 130 basis points move in the day" while the 10-year yield went the other way to drop to 8.9%.

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