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The Worst Case If The Oil Slump Continues: "A Profit Recession"
With hopes high, at least among corner offices of the majors, that this week's OPEC meeting will somehow manage to slow down the biggest plunge in crude prices since Lehman, it will take much more than mere talk and hollow promises to offset the recent cartel-busting actions of Saudi Arabia. So in a worst case scenario where supply remains unchanged even as global energy demand continues to decline sharply due to the ongoing global slowdown...
... what is the worst case scenario that could happen - aside from the mass energy HY defaults discussed previously - should the price of a barrel of oil continue to correlate the change in 2014 global GDP estimated? Here are some thoughts from Deutsche Bank.
The plunge in oil is a net negative to S&P EPS, particularly for Energy, Industrials and Materials. We expect 2015 EPS growth of ~5% with Financials up 10%, Energy down 10% and ex. Energy & Financials up 6%.
... Every $5/bbl lower oil price lowers energy earnings by 5-10% and S&P EPS by ~$1, all else equal. Lower oil prices adversely affect Industrials and Materials via lower US and global capex. About 1/3rd of S&P 500 capex is done by the energy sector. The boost to Consumer earnings from lower oil prices is small and should be offset by stronger FX as many have foreign exposure.
Since 1960, there have been only 10 instances when there was a decline in trailing 4-qtr EPS, of which only 3 were not during economic recessions. 1967 was on aggressive Fed tightening, but 1985-86 was caused by ~50% decline in oil prices coupled with a strong dollar and 1998 by ~40% decline in oil prices and Russian default.
Energy is capital intensive to produce. Rising energy prices drive energy exploration. Simply looking at GDP accounts understates the share of energy capex as it only accounts for direct spending on energy related equipment and construction. Financial accounts show that 32% of S&P 500 capex is done by the energy sector and we think is a more accurate representation.
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Bottom line: as we, jokingly, hinted when we summarized the outcome of the "secret" deal between John Kerry and Saudi Arabia, the costs joke may be on the US after all: in attempting to crush the primary Russian funding source, Obama may have sown the seeds of not only a profit, but broad economic recession. Which, all things considered about the current administration, is about par for the course.
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Does not compute - lower energy prices means, more money in the pockets of consumers?
THE
Nigerian National Economic Council: is concernedhttp://hedgeaccordingly.com/2014/11/nigerian-national-economic-council-o...
It means bad juju for fracking. A lot of that was done by selling junk bonds.
You would think. But the market mechanisms for price discovery have been abolished. Scarcity, abundance, supply, demand--all meaningless and all equally destructive when price can no longer register value.
To artificially and in this case arbitrarily depress a price is as damaging as artificially raising prices (e.g. the carbon tax witchcraft that we once imagined would unleash a "green jobs revolution"--remember that?--oh, youth). It sends the wrong signals. In this case the energy sector tanks beyond what ordinary patterns of production, distribution, and consumption would predict, and entire provinces like Alberta or a large swathe of the U.S. shale patch financed with junk bonds suddenly finds itself upside down financially and tanks the whole system.
We are so effing doomed.
I am sure they will adjust FASB to make everything look ok....kind like the banks
" But the market mechanisms for price discovery have been abolished. Scarcity, abundance, supply, demand--all meaningless and all equally destructive when price can no longer register value."
If the free market was working, the price of oil would be headed down and shale oil speculators would be getting crushed. Just like now.
Only some consumers, there are more consumers and even more businesses that can't afford it anymore and have been forced out. The overall effects of $100 oil have reduced economic activity to the point that the price is to high for what is left of the market. Plus you have to account for all the price increases that have taken place because of that higher oil cost. That is priced into the economy now, and changes the equations for everyone about what they can spend for energy in the face of higher costs for everything else. Energy has gotten so high it is killing back economic activity. This is the wave of the future.
less money for the Oligarchs, wow wonders won't cease.
Three Quick Observations
1) Brainwashing
Yesterday I had a home heating problem. Call the HVAC contractor and the tech came over. Then, we talked.
He’s 29 years old. Wife 27 and works for FedEx. 3 kids.
He’s was telling that business is very good. Wish gasoline would go to $2 dollars a gallon. I asked him what would happen if gasoline went to $5 dollars, instead? He said no way because US has lots of oil.
I asked him where you heard that US has lots of oil. His answer: “Everybody knows that. And we’re going export it.”
2) Growth (energy need) is Slowing Down
By Brian Rose: In 2005 China’s GDP was a bit less than $2 trillion.
In 2014 China’s GDP over $9 trillion.
6% growth in 2014 is equal to $540 billion; this is equal to 27% growth in China in 2005.
This is why Albert Bartlett says people are innumerate.
So, yeah, China’s growth rate is slowing, but it’s total increase in demand for resources is higher than it’s ever been.
3) Human (religious, education, political, and massmedia) Deceit
By Leo Smith: I think the real revelation – if such is the word – has been that the PTB either do not know WTF is going on, or they are supremely indifferent to it, as long as their narrow elitist clique survives.
The move today is not about solving mankinds problems… It is in fact about moving the paper ownership of every single asset from personal ownership to corporate government and bank ownership.
The mechanism for that is simply taxation to reduce net wealth of the citizen, and printing money to lend to him, to enable him to survive.
The final result is that by a sleight of hand, banks and governments end up owning everything, and the citizen is indebted to them lifelong. It is in essence an indentured serfdom. Neo Feudalism.
In this context renewable energy are not facts and solutions, they are simply convenient lies – emotional narratives to justify a course of action that has as its real purpose something entirely different.
And that is total control of the energy market by those who understand that he who has energy, can rule the world. And its far too important to give to citizens.
Whether the vaunting ambitions of these power brokers, and their willing puppets contain the seeds of their own destruction is moot. One suspects they are the sort of people who want to be big fish, even if the pond dries up completely.
So, when I hear some of us here saying “When will the people wake up”, that “market knows best”, or, “religious will save us”, I know then, that I am not talking to a serious person.
http://peakoilbarrel.com/bakken-sweet-spots-petering/comment-page-1/#comment-451142
http://ourfiniteworld.com/2014/11/18/eight-pitfalls-in-evaluating-green-energy-solutions/#comment-47781
+100, or whatever people write to express absolute agreement and well done on a high quality post.
Such a great post - its nice to see more posters finally coming to - I know that soon the inflexion point will be reached and the number of those losing faith in the system will outpace those being won back over by it
Fuck you junker
More on this graphic ;
In 1986, as the graphic shows the $ appreciated and the P/E fell. To counter that, head US thug Ronnie Reagan imposed the Plaza accords on Japan to appreciate the Yen. It brought the Yen up to ease the pain as Japan was top competitor then. Then in 1987 Reagan imposed the Louvre accords on Japan to bring the YEn rise into line as the strong Yen was draining investment into Japan.
It set into motion the fall of Japan into RE bubble from which it never recovered. King Ronnie was no friend of his "friend" the Japs.
And today, the US is at the receiving end, as he that calls the shots is Saud; to bring down US Shale, but as sweetner for Obama, it does take out Putin!
So Saud is like Reagan to Japan, friend and foe to the US!
Thats the price the USA pays for losing its UNILATERAL control of Oil geopolitics, sign of the times!
Good catch Falak.
Gotta wonder, why did the Japs go along with it? They shot themselves in both feet not only once but twice! All because Fed/Rothschild/Zionist cabal ordered the hit. Amazing how far reaching their muscle is.
I like cheap oil. I must be a traitor.
So do I, but just like every other fucking market out there, oil is manipulated. At some point reality is going to rear its ugly head because, unlike paper and digital promises, oil is a tangable substance that somebody actually has to extract and move.
Which the Middle East can do profitably at $20 a barrel. Does anyone here give a shit about all the morons here in the US who went all in on oil staying above $80 a barrel forever? Fuck em!
Fuck em indeed - and XOM is going to enjoy for the first time, a moment of not being the biggest player in the country. I know I won't miss the oil oligarchy
Isis is the closest at 42 dollars a barrel
Very missleading tought.
Cheap oil price by manipulation have people unprepaired for the real price coming any time soon.
Obama can fuck up a wet dream.
Lower prices are a symptom of deflation.
Available money is so concentrated that consumption will continue to tank.
Doesn't matter how low oil goes, profits will more likely decline, not increase.
why fill up the tank today when I can save 5 bucks tomorrow and 10 bucks next week?
So when do the Derivatives blow up.. I would have thought something tied to Oil had to screw somebody Big Time.
the real black swan is one big gooey black blob in somebody's derivative portfolio
see how it works, delay keystone pipe-line, (there was no way in hell it was going to pass with o'bama as president), but it kept the marxist population division agenda alive for years.
no way to stop fracking politically, so go behind close doors, and scheme to drive them out, same as coal.
got to remember these are industry jobs, americans are only allowed service industry, manual, or agriculture labor jobs.
how many mensa members did it take to start a gas war in a global ression, how ever many it was, china thanks you.
i know it's a ways down the road, but opec members, must be like people owning horse stables, and see cars driving by.
thats why putins getting harassed, russias the only thing between opec, selling sand, or nat. gas.
i have zero problem with cheap oil. even if my current job security directly correlates to it, as a resident of great American oil patch in the WTX. let the free market forces roll on... even if they aren't really free.. besides i can always find a non-finance job somewheres if the time comes...
Production numbers:
12-1st half 89.68128717
12-2nd half 89.83083083
13-1st half 89.61196729
13-2nd half 90.69364283
14-1st half 91.10622417
I am a bit obsessed with alternative sources of crude oil. I have taken note of two reports about cutting edge technology to turn sea water into burnable fuel. How come this is not on your collective radar sets?
Here are two links:
http://news.yahoo.com/video/us-navy-turns-seawater-fuel-120039759.html
This is about the US Navy and how it is about to be crude oil independant. Won't take too much time. Since it is claimed that the US Navy is the single largest consumer of oil products, this should be quite something.
http://www.intelligentliving.co/salt-water-powered-car-gets-european-app...
This is the second time salt water to burnable fuel has come up.
So, will it matter much about peak oil, shale/fracking/mess, what the Saudi's say/do? I don't know.....
Ever seen a "ring of death" around a new wally world? Same thing on a world scale. Go figure.