Just a week after Obama held a press conference announcing that he sent a stern warning to Vladamir Putin regarding his alleged “election hacking” efforts (see “Obama Told Putin To “Cut It Out” On Hacking“), the Washington Post is reporting that the Obama administration is close to announcing a series of economic sanctions and other measures to punish Russia for its “interference” in the 2016 presidential election.  Quoting “U.S. officials,” WaPo said that an announcement from the Obama administration could come as early as this week and would likely include “covert cyber operations.”

According to WaPo’s “sources”, the delay in sanctions against Russia have come from Obama’s inability to take unilateral actions under current laws.  While Obama previously signed an executive order that would allow him to freeze the assets in the United States of people overseas who have engaged in cyber acts, it only applies to actions that have threatened U.S. national security or financial stability.  Further, per a “senior administration official,” use of the existing law would require (1) actual election infrastructure to be designated as ‘critical infrastructure’ and (2) the administration to prove that such infrastructure was actually “harmed,” conditions which the National Security Council say have not been met. 

The White House is still finalizing the details of the sanctions package. Holding up the announcement is an internal debate over how best to adapt a 2015 executive order that gave the president the authority to levy sanctions against foreign actors who carry out cyberattacks against the United States.

The order was used as the “stick” in negotiations over a highly-publicized 2015 agreement with China that neither nation would hack the other for economic gain.

But officials concluded this fall that the order does not cover the kind of covert influence operation that the Intelligence Community believes Russia carried out during the election — hacking political organizations and leaking stolen emails with the goal of influencing the outcome.

The April 2015 order allows the Treasury Department to freeze the assets of individuals or entities who used digital means to damage U.S. critical infrastructure or engage in economic espionage.

The National Security Council concluded that it would not be able to use the authority against Russian hackers because their malicious activity did not clearly fit under its terms, which require harm to critical infrastructure or the theft of commercial secrets.

“You would (a) have to be able to say that the actual electoral infrastructure, such as state databases, was critical infrastructure, and (b) that what the Russians did actually harmed it,” a senior administration official told The Post. “Those are two high bars.”

Of course, laws are merely suggestions for an Obama administration that has grown quite comfortable legislating through executive action from the White House.  As Zachary Goldman, a sanctions and national security expert at New York University School of Law, points out the current laws simply require the Obama administration to “engage in some legal acrobatics to fit the DNC hack into an existing authority, or they need to write a new authority.”

“Fundamentally, it was a low-tech, high-impact event,” said Zachary Goldman, a sanctions and national security expert at New York University School of Law. And the 2015 executive order was not crafted to target hackers who steal emails and dump them on WikiLeaks or seek to disrupt an election. “It was an authority published at a particular time to address a particular set of problems,” he said.

So officials “need to engage in some legal acrobatics to fit the DNC hack into an existing authority, or they need to write a new authority,” Goldman said.

Administration officials would like Obama to use the power before leaving office to demonstrate its utility.

And, not surprisingly, another administration official points out that “part of the goal here is to make sure that we have as much of the record public or communicated to Congress in a form that would be difficult to simply walk back.”  Yes, that is the problem with legislating through executive action rather than acknowledging the will of the American people and trying to work with Congress.

And while Obama and Democrats continue their crusade to delegitimize the Trump administration, we would point out once again that, despite all the rhetoric, not a single person has gone on the record and/or presented a single shred of tangible evidence to confirm Russian involvement in the DNC and/or John Podesta email hacks

As OPEC, which currently is pumping crude at a record rate yet has managed to fool algos and “experts” into bidding up crude to multi-month highs on “promises” it will cut a little over 1 million bpd in output starting in 2017, an “agreement” which Russia and other Non-OPEC nations may or may not join depending on whether OPEC states comply with the cuts (Russia has made it very clear it won’t start cutting for a a while in the new year), a problem OPEC has long hoped to avoid mentioning, let alone addressing, has emerged. We are talking, of course, about US shale, the biggest marginal swing producer in the world.

The problem, in a nutshell, is one of clean balance sheets (those companies which had to file bankruptcy, have done so by now, and as a result most now have a far lower All-In Production Cost, not to mention far less debt, and re-energized management teams) as well as one of rising efficiency due to drilling technological advances. Nowhere is this more evident than in this excerpt from Bloomberg:

[A]t 8.8 million barrels a day, the U.S. is already pumping almost as much crude as two years ago, with just a third of the rigs it operated at the peak, data from Baker Hughes Inc. and the Energy Information Administration show.

And while drillers have added about 200 rigs since May according to Baker Hughes, taking advantage of rising prices as talk of an OPEC supply cut circulated, one wonders what will happens to US oil production once the number of rigs returns to its recent historical levels between 1,800 and 2,000?

One thing we do know is that after two years of quietly avoiding the spotlight, the shale industry is ready to return with a bang, and according to Reuters, “US shale drillers are set to ramp up spending on exploration and production next year as recovering oil prices prompt banks to extend credit lines for the first time in two years.”

The credit increase is small, but with major oil producers worldwide aiming to hold down production in 2017, U.S.-based shale drillers are looking to boost market share to take advantage of higher prices, and greater availability of capital will make that easier.

 

North America-focused oil and gas producers are expected to increase capital investments by 30 percent in 2017, according to analysts at Raymond James. A number of shale producers including Pioneer Natural Resources, Diamondback Energy and RSP Permian have forecast bigger budgets and increased output for next year.

 

Every six months, oil and gas producers negotiate credit with banks based on the value of reserves in the ground. Through the latest round of talks in the fall, 34 companies had their available credit lines raised an average of about 5 percent, or more than $1.3 billion, according to data compiled by Reuters.  The combined bank credit for the companies stood at $30.3 billion, compared with $28.9 billion at the end of spring 2016.

 

The industry’s available credit had been cut by 40 percent over the past three reviews as it contended with a two-year price rout. “The ‘animal spirits,’ seem to be coming back to the exploration and production market, albeit slowly,” said Reorg Research analyst Kyle Owusu, referring to the human emotion that drives confidence.

 

Of the 34 companies, 12 saw increases of 5 to 90 percent, while 10 companies had their borrowing bases cut in the latest round, and 12 companies’ credit limits were left unchanged.

Curiously, despite the recent renaissance within shale, overall U.S. crude oil production is forecast to fall to 8.8 million barrels per day in 2017 from 8.9 million bpd this year, according to the DOE. But, according to many analysts, shale output could increase from 200,000 to 500,000 bpd in 2018.  Furthermore, according to a Citi report, if oil prices jump by another $10 from the current level of ~$50, shale output could quickly rise by a further 500,000 barrels.

Still, some such as SocGen head of commodities research Mike Wittner,, believe that shale companies could struggle to revive output quickly enough to disrupt the re-balancing of the oil market. “It’s going to take them a while to gear up,” Wittner said. “The investment’s got to gather pace, the drillers and the fracking contractors also need time. It’s a gradual process.”

And then there are those like commodity expert Ritterbusch & Associates who believe that US shale will be able to return to recent output levels far faster than consensus, and certainly OPEC believes.

According to a recent report by Ritterbusch, US drillers are returning to work at a pace that will threaten the tenuous agreement among OPEC and other major producers to cut output.  

“It appears OPEC is already furthering a US shale recovery despite the fact that OPEC cuts have not even begun,” Ritterbusch & Associates writes, pointing to the rapidly rising rig count and increased output from US fields.

As a result, and taking a contrarian stance to the consensus, Ritterbusch now expects US oil production to rise to 9 million bpd as soon as the end of Q1 in 2017, from 8.8M currently.

Such an accelerated return to production  would not only allow US producers to grab “a significant portion of OPEC’s market share,” but more importantly would cause the OPEC production cut agreement to break apart as early as next spring, Ritterbusch says, as Saudi Arabia once again panics and scrambles to recapture market share lost not to Iran and/or Iraq this time, but to a newly resurgent US shale industry, which as a reminder, is what caused the historic OPEC cartel breakdown on Thanksgiving 2014 which sent the oil price crashing and from which it has yet to recover.

As a reminder, all this excludes the all too high likelihood of a surge in production from previously mothballed regions like Nigeria and Libya, both of which are aggressively ramping up output to recapture long lost market share, and are willing to aggressively underbid the competition in the process.

If Ritterbusch is right, buy lots of 6 month Brent/WTI puts, because today’s high price will be a fond memory once the latest OPEC agreement collapses as it becomes every oil producer – and shale – for himself.

Oil Slides After Biggest Inventory Build In 6 Weeks