Asian shares and oil are lower, European shares are little changed, and S&P futures are fractionally in the red after gaining for most of the overnight session, perhaps troubled by warnings from two Fed presidents who warned that markets and valuations appear frothy, and the Federal Reserve may have to raise rates more times than currently forecast. The latest round of Fed hawkishness helped the dollar gain further after recent losses which earlier this week pushed it to 4 month lows. That said, overnight the USDJPY appeared to fade much of yesterday’s gains, dipping back under 111 around the European open, only to see another unexplained jerk higher shortly before 6am eastern.

Summarizing some of yesterday’s key macro events, SocGen’s Kit Juckes writes that “the unnamed ECB source is back, telling Reuters that markets had over-interpreted Mario Draghi’s comments at the last meeting and that a further rise in bond yields would be problematic. Cue lower bond yields, and a slightly weaker Euro. If this morning’s preliminary March German CPI data deliver the expected base—effect-induced slip from 2.2% to 1.6%, we can look forward to this trend going a little further. I’m not sure how far we can go in the absence of a return of political concerns however. The FX market doesn’t have a significant Euro long position that can be flushed out (it probably has a small euro short, instead). And I’m not convinced that interest rate expectations can go that far.”

Juckes was right, and the EURUSD indeed slid further after a series of weak German regional CPIs, which has seen continued pressure following yesterday’s ECB rumors and hawkish Fed commentary. European traders will now look at German prices which are expected to rise 1.8% from the year before after CPI accelerated 2.2% in February.

The ECB’s dovish tone has once again established the diverging outlook between U.S. and European monetary policy, manifesting itself in some recent spread widening between German and US 10-Year yields.

Juckes had some observations on this too, and said that “in recent months, the US/German nominal yield differential has overtaken the real yield differential in terms of its correlation with EUR/USD. Both are better-correlated with the exchange rate than shorter-dated rates. The 10-year yield spread had narrowed from a wide position of 235bp in late December to as little as 196bp last week and is back above 200bp this morning. If the ECB is trying to anchor bond yields (and if they succeed in limiting how much they follow US moves), then the real driver of EUR/USD for a while will be what happens to US yields. The 2.3-2.65% range looks pretty strong and dooms EUR/USD to its current 1.04-1.09 range. That’ll change if the ECB’s view of the world changes after the French elections (which i suspect it will) and there’s a greater tolerance of higher Bund yields in particular. But for now, we’re stuck.”

Back to equities, where we find Asian shares turning mildly lower on Thursday after touching near two-year highs.  MSCI’s broadest index of Asia-Pacific shares outside Japan was down 0.2 percent, stepping back from morning trade when it nudged close its loftiest levels since June 2015. Australian shares firmed 0.4 percent, helped by an overnight gain in oil prices.

China stocks were headed for a fourth day of losses amid worries over property market prospects, sharp declines in newly-listed stocks, and liquidity stress as the month-end approached. The CSI300 index was down 1.0 percent, while the Shanghai Composite Index lost 1 percent.

The tightening trend in China continued, with the one-day loan rate on the Shanghai Stock Exchange, which reflects demand from non-bank financial institutions, jumping before a long weekend (China markets closed Monday and Tuesday) and as the PBOC holds off on using a liquidity tool for the fifth day in a row. The overnight repurchase rate traded on the Shanghai exchange surges as much as 21.67% points to 32%, before closing at 14.96%; in Hong Kong’s offshore market, yuan tomorrow next forward points surge as much as 44 points, the most since Jan. 25. The PBOC again skipped reverse-repurchase operations for the fifth day in a row, taking net withdrawals during the period to 290 billion yuan due to maturities. On the first two days, the PBOC cited “high liquidity,” then over the next two days it referred to “appropriate liquidity.” On Thursday the monetary authority said that there was “high liquidity” in the banking system, and that fiscal spending toward the end of the month offsets reverse repo maturities.

In Europe, the Stoxx Europe 600 Index rose 0.1% at 10:29 a.m. in London after closing Wednesday at the highest since December 2015; the Germany’s DAX continues to close in on record highs seen in 2015.

The dollar index, which tracks the U.S. currency against a basket of six major rivals, was slightly up on the day at 100.030 . It was lifted to a one-week high overnight as the euro slipped on concerns about the impact of Brexit as well as news that ECB policymakers are keen to reassure investors that their easy-money policy is far from ending.  Sterling steadied at after skidding to a one-week low of $1.2377 previously.

“Brexit, to some extent, has been covered in the market already. People went short, covered, and went short again,” said Kaneo Ogino, director at foreign exchange research firm Global-info Co in Tokyo. “As for the dollar, demand is still steady from pure commercial orders, but the Japanese fiscal year ends this week and Tokyo investors don’t want to take new positions,” Ogino said.

Despite the dollar’s gains on the day, it was far lower than levels above 115 yen hit a few weeks ago, and Japan’s Nikkei stock index shed 0.8 percent. “Investors have bought Japanese stocks mainly because of the strong dollar-yen trend. Trump’s healthcare defeat threw a wet blanket on the Japan market’s rally since last November,” said Takuya Takahashi, a strategist at Daiwa Securities.

As we observed yesterday, comments from Boston Fed President Eric Rosengren and San Francisco Fed President John Williams also backed multiple rate hikes, though those officials are non-FOMC voters.

“There’s a huge political fog around the world, in Asia, in the U.S., but underneath it, there’s actually quite a decent economic recovery. And that’s what’s driving markets more than the worries about politics,” said Sean Taylor, Asia Pacific chief investment officer at Deutsche Asset Management.  “The U.S. is continuing to do well. Europe isn’t doing as badly as it was and because of the commodity pickup last year, emerging markets are doing okay,” he said.

The commodity space saw some profit taking, with West Texas Intermediate dropping 0.3% to $49.38 a barrel, after surging 2.4% on Wednesday after a bigger-than-forecast decline in U.S. gasoline stockpiles. Gold slipped 0.2 percent to $1,250.48 an ounce.

Today, traders will look for the latest data on jobless claims and personal spending.

* * *

Bulletin Headline Summary from RanSquawk

• German regional CPIs add pressure on the EUR which continues to remain out of favour from yesterday’s source comments
• Away from the German data, European equities have had a slow start to the morning with little in terms of firm direction
• Looking ahead, highlights include US GDP, Fed’s Mester, Kaplan, Dudley and Williams

Market Snapshot

• S&P 500 futures unchanged at 2,357.00
• STOXX Europe 600 up 0.09% to 378.87
• MXAP down 0.5% to 148.19
• MXAPJ down 0.2% to 482.36
• Nikkei down 0.8% to 19,063.22
• Topix down 0.9% to 1,527.59
• Hang Seng Index down 0.4% to 24,301.09
• Shanghai Composite down 1% to 3,210.24
• Sensex up 0.1% to 29,564.01
• Australia S&P/ASX 200 up 0.4% to 5,896.23
• Kospi down 0.1% to 2,164.64
• German 10Y yield fell 0.9 bps to 0.335%
• Euro down 0.2% to 1.0740 per US$
• Brent Futures down 0.2% to $52.30/bbl
• Italian 10Y yield fell 2.4 bps to 2.137%
• Spanish 10Y yield fell 0.5 bps to 1.638%
• Brent Futures down 0.2% to $52.30/bbl
• Gold spot down 0.3% to $1,250.22
• U.S. Dollar Index up 0.1% to 100.13

Top Overnight News

• Trump Travel Ban Blocked for as Long as Court Battle Goes On
• Oil Stays Above $49 as U.S. Fuel Demand Blunts Crude Supply Gain
• Zuma Said to Face Mass Cabinet Walkout If He Fires Gordhan
• Turkey’s TAI Renews 787 Dreamliner Parts Contract With Boeing
• Autodesk Says It Expects Revenue Growth in Next Two Quarters
• Hikma, Vectura Fall as Mylan Advair Generic Fails to Get Nod
• Great Elm Capital to Start Tender Offer for Up to $10m in Shrs
• Lazard’s Peter Kuo to Join Canyon Bridge as Founding Partner
• GE CEO Says ‘Climate Change Is Real,’ Science ‘Well Accepted’
• GE Renewable Energy Gets $56m Hydro Contract in China
• Lululemon 1Q EPS View Misses Est.
• Partners in Leviathan, Aphrodite Mull Joint Gas Pipeline: Delek
• Ford South Africa Recall to Include Fiesta Model: Star

Asian equities traded mostly in the red after the region shrugged off the mostly positive lead from Wall Street where the energy sector outperformed following a smaller than expected build in DoEs. Nikkei 225 (-0.8%) failed to benefit from a weaker JPY amid fiscal year-end rebalancing, while ASX 200 (+0.4%) bucked the trend and was led by the strength in the commodities complex. Hang Seng (-0.3%) and Shanghai Comp. (-1.0%) were dampened despite a positive earnings report from Big 4 bank China Construction Bank, as the PBoC refrained again from conducting open market operations for the 5th consecutive day while there were also reports the Trump administration are to make preparations to keep large tariffs on Chinese goods. 10yr JGBs were lower despite the cautious risk tone with demand
dampened after the latest weekly securities transactions data showed foreign investors increased their selling of Japanese bonds by more than 3-fold, while today’s 2 year auction also failed to provide any meaningful support with the b/c and lowest accepted price below prior. PBoC refrained from open markets operations again, which resulted to a net daily drain of CNY 40bIn.

Top Asian News

• PBOC Seen Raising Money Rates Twice This Year in Leverage Battle
• Thailand Says National Oil Co. to Be Set Up Only When Time Right
• Hong Kong Feb. Retail Sales Value Fall 5.7% Y/y; Est. -0.6%
• Ajinomoto Seeks Overseas Deals With $1.8 Billion War Chest
• Kotak Mahindra Bank Approves Issue of Up to 62m Shares
• China’s Xi to Meet Trump Next Week at Mar-a-Lago, Xinhua Reports
• Posco Almost Doubles Profit as Global Steel Rally Sustained

In European markets, the notable highlight of the morning has come in the form of the regional CPIs from Germany, which have generally printed lower than previous, while also coming in under the expected figure for the national reading. The softer CPI numbers have seen upside in Bunds. While periphery yields are lower in tandem this morning, with much of the attention here falling on the supply from Italy, which was relatively well digested. Away from the German data, European equities have had a slow start to the morning with little in terms of firm direction. On a sector specific basis, energy names are the significant outperformers, with this coming in tandem with WTI futures briefly retaking USD 49.50/bbl to the upside. Elsewhere H&M are firmly at the bottom of the Stoxx 600 after a downbeat sales update.

Top European News

• Italy Finance Chief Says Le Pen Victory Would Add Permanent Risk
• May’s Opening Brexit Bid to Tie Security to Trade Hits Wall
• OPEC Oil-Cuts Extension Unlikely, Russian VEB Economist Says
• SNB Will Scrap Negative Rate as Soon as Possible, Maechler Says
• H&M 1Q Pretax Beats; New Brand to Be Launched in 2H

In currencies, the euro fell 0.3 percent to $1.0736, after declining 0.9 percent over the previous two days. The British pound was little changed. The Bloomberg Dollar Spot Index rose 0.2 percent.  Not too much to note in the FX markets other than some calm in GBP trade. Some modest weakness seen early on, but this looks to have dissipated in the wake of the Article 50 activation yesterday. All eyes on EUR/GBP to see whether the usual month end flow will impact, but the pair looks well contained in the mid 0.8600’s for now. From the EUR perspective, regional German inflation has softened in March, while the EU wide sentiment indices for business and consumers have missed on expectations, softening a tad on the month also. EUR/USD has drifted (very) steadily lower through the session, but we expect to find support around 1.0700 – if we get there – with close to 2 yards rolling off at the NY cut later today. USD/JPY has traded a very tight range around 111.00, with limited movement in UST yields to trade off. The key 10yr rate is hemmed inside 2.35-2.40%, with the recent Fed speak doing little to spark fresh movement on the curve. More to come from Mester, Kaplan, Williams and Dudley, but we see little that can change sentiment other than from Yellen herself. Hard data now counts for more – as the FOMC consistently communicate data dependency – with core PCE prices due out alongside the final reading of Q4 GDP today and the usual weekly claims data.

In commodities, the broader recovery in the global risk mood looks to have aided the rise in base metals if nothing else, with little to differentiate in terms of the latest gains seen across the board. Copper gains have pushed tentatively through USD2.65, and is struggling a little, with similar price action elsewhere. Given the recent pull-back in the USD, some would have expected a little more upside, which has also helped Oil prices to a modest degree, but the lower rise in inventory as reflected in both the DoE and APIs has largely been the driver here, further ‘supported’ by the disruptions in Libya. WTI still struggling ahead of USD50.00 however. Gold still trading on a USD1250.00 handle, as Silver is above USD18.00, with the tentative recovery in the greenback prompting cautious trade from here.

On today’s calendar, in the US this afternoon we’ll get the third and final revision to Q4 GDP (expected to be nudged up to +2.0% qoq annualized) along with core PCE. The latest weekly initial jobless claims print will also be released. It’s another busy day for Fedspeak with Mester, Kaplan, Williams and Dudley all scheduled to speak. Over at the ECB board members Praet and Nowotny are also due to speak this morning. Also worth watching today is a meeting between President Trump and head of the National Economic Council Gary Cohn where it is expected that the President will be briefed on outlines over options for tax reform.

US Event Calendar

• 8:30am: GDP Annualized QoQ, est. 2.0%, prior 1.9%; Personal Consumption, est. 3.0%, prior 3.0%; GDP Price Index, est. 2.0%, prior 2.0%; Core PCE QoQ, est. 1.2%, prior 1.2%
• 8:30am: Initial Jobless Claims, est. 247,000, prior 261,000; Continuing Claims, est. 2.03m, prior 1.99m
• 9:45am: Bloomberg Consumer Comfort, prior 51.3

Central Banks

• 9:45am: Fed’s Mester Speaks in Chicago on Payment System Improvement
• 11am: Dallas Fed’s Kaplan Speaks in Washington
• 11:15am: Fed’s Williams Speaks at Learning Community Event in New York
• 4:30pm: Fed’s Dudley Speaks in Sarasota

DB’s Jim Reid concludes the overnight wrap

So the grind higher in markets following the AHCA vote debacle last week continues to trudge along in a fairly orderly fashion. With the S&P 500 nudging up another +0.11% yesterday the index is now up +1.68% from Monday’s low point and has barely looked back. We’ve highlighted a few times this week that we think that Trump trades had already been priced out to a large degree and so therefore the disappointment over last Friday’s news may be limited with global growth being the most important factor for now. Indeed it perhaps tells you something that yesterday was the third lowest volume day for the S&P 500 this year and the VIX declined for the fourth session in a row and is not far off the lows of the recent year to date range again. While politics will continue to be an important theme – indeed there are reports this morning suggesting that Republicans are considering a resurrection of the healthcare bill vote again next week – global data surprises are approaching six-year highs and for now it feels like this might be the more important near term driver.

The more significant moves in markets yesterday however came in bonds where yields fell across the board seemingly sparked by a Reuters story which suggested that ECB policymakers are becoming wary of making any new change to their policy message next month. This follows concerns at the ECB that the market over interpreted the message sent out at its March 9th meeting and were swift to start pricing in hikes. The article stated that the intention of the ECB was to communicate reduced tail risk but that instead the market took it as a step to the exit. The article also quoted its sources for the report saying that a previously mentioned deposit rate hike prior to the unwind of QE purchases “would be a communication nightmare” and that “if you raise rates, you can’t communicate that it’s a one-off” and that instead “the market would immediately price in a new rate path”.

As is always the case with these stories there’s always a validity question with regards to the origin of the content and in this case the report quotes ‘six sources’ without any more specifics. That said there’s no smoke without fire and bond yields were quick to move lower in the wake of the story hitting the wires. By the end of play 10y Bund yields had finished 4.5bps lower at 0.342% and are now at the lowest yield in 3 weeks. Yields in Spain, Italy and Portugal fell 4.6bps, 2.3bps and 6.0bps respectively also. Market implied pricing for a 15bp hike in the deposit rate was also pushed back from April 2018  to August 2018 midway through the day. The story also appeared to be attributed to the decent bid for Treasuries which saw the 10y yield tumble 4.1bps and hit the lowest closing yield, at 2.377%, since February 27th. That was despite a chorus of relatively hawkish Fedspeak which we’ll touch on shortly. The Euro (-0.45%) was also the second worst performing G10 currency yesterday while European Banks fell nearly -1% intraday but pared losses to a more modest -0.21% decline. Still, that was in the context of a +0.33% gain for the broader Stoxx 600 after the energy complex rose on the back of a +2.36% rise for WTI Oil and the most in two weeks.

Away from that there was also a close eye kept on UK PM Theresa May’s statement to the House of Commons yesterday as well as the official withdrawal letter following the confirmation of Article 50 being triggered. In a nutshell there wasn’t a huge amount new on the UK side of things compared to what was revealed in the government’s White Paper last month. As our economists noted the UK continues to want to reach agreement on a comprehensive new deal with the EU27 in parallel with the terms of the divorce by March 2019, an unrealistic timetable and one the EU27 opposes. From the EU27 side, EU Council President Donald Tusk responded with a statement of his own and the EU Council released an official statement. The body language from Tusk was negative. Tusk mentioned damage limitation as the primary goal. Combined with last week’s comments from Commission negotiator Barnier on the priority of divorce negotiations and recent press reports, an early assessment of the EU’s stance is that they plan to offer the UK a take-it-or-leave-it option (settlement of the divorce including the UK’s budgetary commitments, then a limited transitional deal), but are preparing for a hard outcome. So with mutually contradictory goals and significant political obstacles for compromise it looks set to be a long drawn out negotiation process with the two year clock now quietly ticking away.

It’s also worth highlighting that today the UK government will release a White Paper concerning the repeal of the EU acquis, and its translation into domestic law. Our economists highlight that this is important for negotiations as the EU27 argue the UK will have to remain under the authority of the ECJ under a transitional deal. On April 27th a special EU Council will be convened to discuss the broad framework for the negotiations. Detailed negotiations are only likely to start in June. In the next few days, it will also be worth closely monitoring rhetoric from both the UK and EU27. So a few things to watch out for.

To the latest in Asia now where bourses have slowly drifted lower over the course of the session despite there being little in the way of newsflow. The Nikkei (-0.25%), Hang Seng (-0.40%), Shanghai Comp (-0.86%) and Kospi (-0.23%) are all in the red while the ASX (+0.30%) is just about holding on to gains. It’s possible that the moves reflect some quarter end profit taking following a strong run for Asia equities so far this year. Futures in the US are little changed and in commodities Oil is holding onto yesterday’s gains while Gold is slightly lower. Back to that Fedspeak yesterday which as we briefly mentioned earlier was fairly hawkish despite limited market reaction. Boston Fed President Rosengren said that “my own view is that an increase at every other FOMC meeting over the course of this year could and should be the committee’s default”, in other words suggesting that he favours 4 hikes this year. This was a view somewhat echoed by the San Francisco Fed President Williams who said that he “would not rule out more than three increases total for this year” and also that the Fed could look to begin shrinking its balance sheet before knowing the size it ultimately should be.

Away from that the economic data was especially thin on the ground yesterday. In the US pending home sales rebounded +5.5% mom in February and more than expected. In the UK mortgage approvals nudged down to 68.3k while net consumer credit printed at £1.4bn in February which was a slowdown compared to the £1.6bn average over the prior six months.

Before we look at today’s calendar, it’s worth highlighting that yesterday our Global Economics Perspectives team published a new report in which they provide ‘quick’ answers to a list of questions they have received from clients globally in recent days. The bulk of the questions this week have been on policy (both fiscal and monetary) and the team also detail their views on US growth and inflation prospects. You can find the link to the report here https://goo.gl/AtY36U.

To the day ahead now where this morning in Europe we’ll be kicking off with the latest confidence indicators for the Euro area before we then get the March CPI report out of Germany. Over in the US this afternoon we’ll get the third and final revision to Q4 GDP (expected to be nudged up to +2.0% qoq annualized) along with core PCE. The latest weekly initial jobless claims print will also be released.

It’s another busy day for Fedspeak with Mester (1.45pm GMT), Kaplan (3.00pm GMT), Williams (3.15pm GMT) and Dudley (8.30pm GMT) all scheduled to speak. Over at the ECB board members Praet and Nowotny are also due to speak this morning. Also worth watching today is a meeting between President Trump and head of the National Economic Council Gary Cohn where it is expected that the President will be briefed on outlines over options for tax reform.

Authored by Peter Korzun via The Strategic Culture Foundation,

The significance of Iranian President Hassan Rouhani’s visit to Russia on March 27-28 goes far beyond the bilateral relationship. Iran is one of the main actors in Syria and Iraq. It has an importance place in the geopolitical plans of US President Donald Trump. Its relationship with Russia is an important factor of international politics. The future of the entire Middle East depends to a great extent on what Russia and Iran do and how effectively they coordinate their activities.

Less than two months are left till the presidential election in Iran. The presidential race formally starts on April 17 and Rouhani has a good chance to win. True, the country’s foreign policy at the strategic level is defined by Iran’s Supreme Leader, Ayatollah Ali Khamenei, but the executive branch of the government led by president implements it. The spiritual leader does not pay visits to other countries but Russian President Vladimir Putin met him in Tehran last year – the second time in the recent 17 years.

This was Rouhani’s first official visit to Russia and the first time he and Putin met within a bilateral framework. The trip took place against the background of growing partnership as both countries have become leading forces of the Astana process that made Iran, Russia and Turkey guarantors of the Syrian cease-fire.

True, the cooperation in Syria is of utmost importance but there is each and every reason to believe that Russia and Iran will have to join together in an attempt to settle the conflict in Afghanistan. As a regional superpower, Iran will gain much by coordinating activities with Russia in that country after the US withdrawal that seems to be inevitable. Such cooperation would become a game-changing factor with far-reaching consequences for the region from the Mediterranean to Pakistan.

The emerging triangle, including Russia, Iran and Turkey, becomes an alliance, could reshape the region. A ceasefire in Syria reached as a result of the Astana process led by the «big three» would reduce the clout of the US, the UK and France. Actually, their influence has already been diminished. The neighboring states will see that progress can be achieved without the «traditional players» representing the West.

Russia is the country that can debunk the myth that the Middle East is threatened by a «Shia threat» emanating from Tehran. It can use its close and friendly relations with leading Sunni states – Egypt, Jordan, the UAE and, perhaps, Saudi Arabia – to play the stabilizing role of mediator between the Shia and Sunni camps. Russia has a unique position to act as an intermediary between Iran and Israel – something nobody else can do.

It’ll take years to heal the wounds and mitigate the contradictions between Shia and Sunni Muslims in Lebanon, Syria and Iraq. Today, the West does not enjoy the clout it once had there. The borders drawn by Western countries caused many conflicts; direct military interventions made them lose trust and support. Under the circumstances, Russia is not exactly an outside actor. Moscow needs peace and stability in the region. This goal can be achieved in tandem with Turkey and Iran. Iraq and Syria can join the trio after they overcome the devastating results of wars. It makes the cooperation with Tehran an issue of paramount importance for Russia.

The bilateral relationship is going to be strengthened by large-scale economic projects.

Despite the importance of foreign policy issues, the talks mainly focused on prospects for deepening trade, economic and investment cooperation, including under large joint projects in energy and transport infrastructure. More than ten major trade and economic agreements were signed during the visit. Russia has already pumped about one billion euros into Iran’ railway network, with serious financial injections into bilateral projects yet to be implemented.

Exports to Iran stand at only around 1 percent of Russian foreign trade, but a trade surplus and the existence of a large market for Russian manufactured goods make Iran an important partner. The bilateral trade grew by 60 percent from $1.2 billion in 2015 to almost $2 billion in 2016.

The resumption of weapons deliveries and participation in infrastructure projects financed by Russian loans have led to the doubling of exports of non-energy products from Russia to Iran. The first batch of S-300 air defense systems was delivered in April 2016.

Russia has agreed to provide Iran with a loan of $2.2 billion for infrastructure projects involving Russian companies. It is planned to build a power plant and enhance generation at another in Iran in a contract worth several billion dollars. Under an agreement signed between the two sides, the Russians will improve efficiency at the Ramin power plant in Khuzestan province to 50-55% from 36% now. Another Russian company will build a 1,400-megawatt power plant in the Iranian city of Bandar Abbas in Hormuzgan province. Russian truck manufacturer Kamaz plans to export 300 trucks in 2017, GAZ signed a memorandum with the Iranian authorities for the supply of 900 buses.

Russia’s role in reaching the Iran nuclear deal, the cooperation in Syria and the allegiance to the policy of rapprochement declared by President Putin provide ample evidence of Moscow’s desire to boost the bilateral ties.

A momentous event to take place this year will provide an impetus to the development of Russia-Iran relations. Tehran is expected to become a full-fledged member of the Shanghai Cooperation Organization (SCO) this June. Iran also has expressed interest in signing a trade agreement with the Eurasian Union.

Russia and Iran are united by common goals and interests. The development of relations between the two great powers is a significant contribution into creating alternative poles of power to change the world for the better.

Authored by Nick Cunningham via OilPrice.com,

Thousands of drilled shale wells are sitting idle, unfracked and uncompleted.

The backlog of drilled but uncompleted wells (DUCs) grew dramatically beginning in 2014, as low oil prices forced drillers to hold off on completion in hopes of higher prices at a later date. After all, why bring production online in a low price environment when the same oil could earn more in the future if prices rebound. That calculation is particularly important given that a shale well typically sees an initial burst of production in its first few months of operation followed by a precipitous decline in output.

The surge in DUCs created an enormous backlog of wells awaiting completion. This “fracklog” loomed over the oil market, threatening to derail any sign of an oil price recovery. As soon as oil prices rebounded to some higher point, the shale industry would bring thousands of already-drilled wells online, and that sudden rush of new supply would push prices back down.

But that was a necessary process in order to shrink the huge inventory of DUCs – and that’s exactly what started to play out last year. As oil prices moved up from $27 per barrel in February 2016 to around $50 per barrel by early summer, the industry began completing a lot of wells. The DUC inventory fell from over 5,600 to just over 5,000 between January and August, a decline of 10 percent, according to the EIA’s Drilling Productivity Report.

By late November, when OPEC announced an ambitious plan to take 1.2 million barrels per day off of the market, combined with nearly 600,000 bpd of non-OPEC cuts, oil prices shot up. One would have thought that the DUC inventory would see another round of completions, reducing the backlog even further.

But that didn’t happen. The DUC list has grown since then, increasing to 5,443 as of February 2017, an increase of roughly 8 percent since October. Why did this happen even though WTI and Brent moved up well into the $50s per barrel? The rig count has increased sharply since the OPEC deal was announced, but why are companies adding rigs back into operation if they are not completing the new wells that they are drilling? For example, in the Permian Basin, the industry drilled 395 new wells, but they only completed 300 of them.

Reuters interviewed industry experts and lawyers and found that a lot of companies are drilling new wells because the terms of their leases require drilling by a certain date or else the companies forfeit their rights to the acreage. Standard leases typically have three-year terms, Reuters says, with an option for a two-year extension. They can drill the wells, but keep them uncompleted and still comply with the terms of the lease, allowing the companies to hold onto the acreage and then come back at a later date to complete the well.

Holding onto land is particularly important these days because land prices in West Texas have skyrocketed, with acreage costing five times as much as it once did a few years ago. Nobody wants to forfeit any prospects amid such a land rush.

Another element contributing to the DUC buildup is that market for fracking crews is tightening, according to Reuters. After a well is drilled, producers contract with fracking crews to complete the well.

“There were a number of completions that were originally scheduled in first quarter and you’ve seen those slide to Q2 and that’s really being driven by…access to service crews and things like that,” Tom Stoelk, the CFO and interim CEO of Northern Oil & Gas Inc, told Reuters. So the uptick in the backlog could just be temporary.

But with drilling activity picking up, oilfield services companies are seeing such an uptick in demand that they are charging more. The rising cost of frac sand, well completions, drilling rigs and even labor are leading to cost inflation across the industry, cancelling out some of the “savings” achieved since the market downturn began in 2014. As such, some companies might be waiting for higher prices.

Once the DUCs are completed, new production will come online. And just as before, that backlog still weighs on the market. Wood Mackenzie estimates that if the Permian Basin’s DUC list was completed, it would add 300,000 bpd in new supply.

That supply sitting on the sidelines will put downward pressure on any new oil price rally.