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Beige Book: "Lower Oil Prices A Concern For The Oil Industry"

Tyler Durden's picture




 

While superficially the November Beige Book, which is chronically bad at spotting actual trends as was the case in the 2005-2007 period when it came to the housing bubble and the BB had absolutely no warnings about what only in retrospect would be a glaringly obvious bubble, was among the more optimistic ones seen in recent months (there were only 13 instances of "weather" in the document), here is what the Fed's assessment had to say about the only thing that matters currently for the US economy (in addition to the soaring US Dollar of course): oil.

Excerpts:

  • Energy and mining activity was higher on net, though lower oil prices were a concern for the oil industry in the Atlanta and Dallas Districts.
  • Chemical manufacturers in the Boston District indicated that the falling price of oil relative to natural gas had made U.S. producers less competitive, because foreign chemical producers rely more heavily on oil for feedstock and production.
  • Atlanta reported that the recent drop in oil prices led firms to reevaluate their operations, though steady production is anticipated for both deepwater and onshore drilling; in the Dallas District, lower oil prices weighed on the outlook for drilling activity.
  • Several Districts cited the decline in the price of oil over the reporting period and its effects on gasoline and diesel fuel prices.
  • One firm in the chemical industry cites falling oil prices as a problem because chemicals are produced in the United States using natural gas whereas in the rest of the world, they are produced using oil. As a result, the fall in oil prices over the last few months has made foreign rivals more competitive, partly reversing U.S. chemical firms’ prior advantage resulting from declines in the price of natural gas relative to oil in recent years
  • We heard several reports indicating that although there is some financial belt-tightening by exploration and production companies, drilling programs should continue in most regions even though medium-term projections for oil and gas prices are at low levels.
  • Rail shipments of agricultural products were up and volumes of chemical products, such as crude oil, liquefied natural gas, and sand for hydraulic fracturing, posted double-digit increases from a year ago
  • Industry contacts reported that the recent drop in oil prices led regional exploration and production firms to evaluate operational flexibility, cost-management strategies, and extraction technologies, although steady production is anticipated in both deepwater and onshore drilling.
  • In early November, oil and gas exploration activity decreased in North Dakota... Despite recent declines in oil prices, officials in North Dakota expect oil production to continue increasing over the next two years.
  • Respondents remained optimistic about future drilling but were closely monitoring the price of oil, which was close to many firms’ breakeven price. Oil prices were at a four-year low due to signs of an oversupplied global market and were expected to weaken marginally in coming weeks. Total revenues in the energy sector were expected to decline somewhat as a result of lower oil prices.
  • Outlooks remained optimistic, but some contacts noted concerns about the potential effect of declining oil prices on the District economy.
  • The price of West Texas intermediate crude oil fell sharply over the reporting period, resulting in a notable decline in gasoline and diesel prices. The price of natural gas dropped slightly as well, reflecting rapid growth in inventories.
  • Work related to mergers and acquisitions picked up, while demand for legal services from oil and gas companies slowed in response to increased uncertainty regarding future oil prices.
  • Respondents noted increased optimism as year-end figures pointed to solid growth in 2014, although some contacts whose clients are in oil and gas production said they expect a possible slowdown in business because of declining oil prices.

Altogether, there were 37 instances of the word "oil" in the November Beige Book. Expect this number to soar in the coming months.

 

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Wed, 12/03/2014 - 15:19 | 5513626 Bell's 2 hearted
Bell's 2 hearted's picture

was Fischer out getting coffee when they wrote this?

Wed, 12/03/2014 - 15:58 | 5513850 zerozulu
zerozulu's picture

Oil industry is a mafia, needs beating.

Wed, 12/03/2014 - 16:04 | 5513889 NotApplicable
NotApplicable's picture

But by a bigger mafia DBA "bankers?"

 

Wed, 12/03/2014 - 15:20 | 5513628 orangegeek
orangegeek's picture

WTI oil monthly shows a vertical descent

 

http://bullandbearmash.com/chart/wti-monthly-tanking-forecast-wave-3-lon...

 

A rising USD should drive oil down further.

Wed, 12/03/2014 - 15:22 | 5513640 Bell's 2 hearted
Bell's 2 hearted's picture

and exports

 

but hoo cares ... just ramp up subprime lending to the masses ... what could go wrong?

Wed, 12/03/2014 - 15:40 | 5513740 Ness.
Ness.'s picture

but hoo cares...

 

Cindy Lou Who, that's hoo.  

Wed, 12/03/2014 - 15:21 | 5513629 Jim Shoesesta
Jim Shoesesta's picture

ohhh, lower priced oil lets all us get lubed up cheaper for the next time we have to take in the ass. 

Wed, 12/03/2014 - 16:29 | 5514049 MalteseFalcon
MalteseFalcon's picture

Affordable and reliable electric cars are coming to market in 2015, so there isn't going to be a "next time".

Time is up for the "oil game".

Wed, 12/03/2014 - 15:21 | 5513633 KnuckleDragger-X
KnuckleDragger-X's picture

They still print the Beige Book?

Wed, 12/03/2014 - 15:25 | 5513645 Bay of Pigs
Bay of Pigs's picture

Might as well ask your local coffee shop barista what they think of the "Beige Book".

It means diddly squat.

Wed, 12/03/2014 - 15:22 | 5513641 Kaiser Sousa
Kaiser Sousa's picture

"Gold trading on China’s largest physical bullion bourse is already exceeding last year’s record volume as the world’s biggest consumer seeks to exert its influence on the global market.

The volume of all contracts on the Shanghai Gold Exchange, including those in the city’s free-trade zone, was 12,077 metric tons in the 10 months to October, compared with 11,614 tons during all of 2013, according to data on the bourse’s website. This may climb to 17,000 tons by the end of the year, the exchange’s Chairman Xu Luode said at a conference today.

China overtook India as the world’s largest gold user last year while European consumption shrank amid a global flow of gold from west to east. While China vies to extend its influence over the bullion market with new contracts aimed at luring international investors, trading volumes are still a fraction of those in London, where benchmark prices are determined.

“Asia more generally is becoming more important and there are going to be increasing flows in this direction,” Wayne Gordon, an analyst at UBS Group AG in Singapore, said by phone today. “But at least at this stage, London’s still where the trade is. The reality is that everybody still uses London values as the benchmark.”

http://www.bloomberg.com/news/2014-12-03/shanghai-gold-exchange-bullion-...

Wed, 12/03/2014 - 16:03 | 5513880 chubbyjjfong
chubbyjjfong's picture

“But at least at this stage, London’s still where the trade is. The reality is that "everybody "still uses London values as the benchmark.”

The benchmark paper price.  "Everybody" is starting to realise that buying pieces of paper is not a particularly wise investment decision.  The time is quickly approaching where we will look back at the London exchange at this period in time with astonishment, that some folks willingly participated in this lunacy.  

Wed, 12/03/2014 - 15:27 | 5513657 sam i am
sam i am's picture

Health care, insurance companies, Banks, retirement 

funds are heavily invested in oil. Low oil will eventually 

hurt and hurt bad.

Wed, 12/03/2014 - 15:28 | 5513662 Kaiser Sousa
Kaiser Sousa's picture

yeah right...$16 dollar Silver....

"With the paper price of silver now below the break-even for the majority of the primary silver mining companies, India imported a massive 1,243 metric tons of silver in October alone.  What is quite interesting about this figure is that it comes in at one metric ton shy of the previous record set in May, 2011 at 1,244 mt (Source: Koos Jansen article). Why are these two records interesting?  Because, the huge imports in October were a result of a new low price in silver, while the record set in May took place when silver was at the opposite all-time high.  When the price fell like a rock in May, 2011 (from a high of $49 after 5 consecutive CME Group margin hikes), investor in India thought this was a great bargain.

Of course, the Fed and Central Banks had another plan for gold and silver… three years worth of gut-wrenching declines.   Total Indian silver imports in 2011 were 4,120 metric tons (mt).  As the price of silver continued to drift lower, demand for the shiny metal in India declined significantly in 2012 to a mere 1,922 mt. Well, it doesn’t take Indians too long to figure out a good deal when they see one.  So, in 2013 when the paper price of silver dropped off the proverbial cliff from $32 in February to under $20 by June, Indian silver demand increased dramatically.  Not only was 2013 a robust year for Indian silver imports…. a staggering 5,819 mt, it blew away its previous record set in 2008 at 5,049 mt."

http://srsroccoreport.com/massive-indian-silver-imports-setting-up-for-a...


Wed, 12/03/2014 - 15:29 | 5513664 Bill of Rights
Bill of Rights's picture

Amazing how irrelevant the beige book releases have become.

Wed, 12/03/2014 - 15:30 | 5513666 Bell's 2 hearted
Bell's 2 hearted's picture

Prepared at the Federal Reserve Bank of Chicago and based on information collected on or before November 24, 2014.

 

Before horrid black friday weekend retail sales

Wed, 12/03/2014 - 15:35 | 5513705 pendragon
pendragon's picture

concern for the oil industry but great for geopolitics. watch putin squirm

Wed, 12/03/2014 - 16:07 | 5513904 847328_3527
847328_3527's picture

O&G layoffs will begin Christmas Eve with bright pink and green slips I'm sorry to say. Gonna be a bleak holiday for many Middle Class engineers.

 

Gee, thanks Barry.

Wed, 12/03/2014 - 16:14 | 5513950 delivered
delivered's picture

It's amazing to me how quickly MSM has become an expert on the oil industry. Over the course of three months, the end retail price of oil has decreased by roughly 35%+/- with just about every Tom, Dick, and Harry financial writer in MSM chiming in on the subject. Some of the articles are nothing but great news as they focus on the demise of OPEC, Russia, etc. and the benefit to the consumer with increased USDs to spend. Others are focused on all of the negatives as it relates to the damage to the oil sector, the debt supported by the oil sector, and destablizing countries that rely heavily on energy production. To be quite honest, I don't believe anyone, even the so called experts, have any idea how this is going to play out with so many variables in play but some items to consider are as follows:

- I worked through (with one of the Big Eight accounting firms at the time) and witnessed the energy bust in the late 1980's in the oil belt stretching from Denver through Texas and numerous other states. The price of oil moved to $40 a barrel before collapsing to the low teens and then stablizing I believe in the $20 range. Just above every industry was impacted by this ranging from commercial real estate to residential real estate to entertainment to construction to you name it but it took time, over a couple of years, to work through the entire regional economy. The point is, the full effect of this drop in price will not be felt until it works through the entire system over the course of a couple of years as this is when the real pain will start. Companies may survive for a short time period with $65 pricing but over a longer period, the trickle down effect of reducing jobs, drilling, profits, etc. will be felt through the entire region.

- I can't believe how many articles I've read that are just focused on "variable" production costs being managable in relation to the price of oil. No problem with the price drop they say as we can still produce as our variable produciton costs are let's say, $28 per barrel. But what they fail to focus on are two key data points which clearly the authors don't understand. First, a large number of producers don't receive the stated price of barrel as noted on the markets (the retail price at a major distribution point). They recieve a heavily discounted price based on location (as significant costs are present to transport the oil to market). So if the retail price is $65, then the price at the point of production or manufactured price may be 20% or lower. Second, it's clear most writers don't understand the balance sheet and cash flow statements as if they did, they would quickly understand that on top of let's say $28 variable cost, the equivalent amount of cash need to service the company's debt load may be 2X this figure (or higher for leveraged producers) to cover both variable costs and to repay debt. When you factor in both of these factors, on a cash flow basis, producers can quickly move from generating positive cash flow to negative cash flow very quickly.

- Show me an industry that can survive a 35% decrease in sales price without having a long-term and decimiating effect on the industry as a whole. It's one thing to work through a 5 to 10% price decrease but something completely else to attempt to recover this type of price decrease. 

- For the US, the old argument of the consumer benefiting from the price decrease makes sense, but 30 years ago. Today, while the consumer may benefit, there's a much more profound effect from lower oil prices on the domestic GDP given the high level of production in the country. The impact from a "tax savings" via not shipping USDs to OPEC to purchase oil is not nearly as strong as it once was.

- Energy and specifically oil is at the basis of the global capitalist system. Prolonged decreases in energy prices will eventually ripple through the world economy and could in fact create even more deflationary pressures as the price of everything from chemicals to plastics to fertilizers decreases (thus creating lower costs which in competitive markets will result in price decreases). And as we all know, the one thing the world's CBs fear above all else, is deflation and for one simple reason. Debt/loans are based on collateral (or should be). If the value of collateral decreases, the underlying support for the loan decreases which means the value of the assets on the book's of banks will decrease. This type of deflationary collapse is what the CBs are most worried about as given the extreme leverage that has spread throughout the world's economies, even the slightly problem in the collateral value chain would destroy banks around the world.

I'm by no means an expert on this subject but for once I would like to see MSM undertake a thorough and informative analysis of the situation before dumping their sensationalist articles on the massive without having done their homework or even understanding basic financial statements. But then again, why would I expect anything else from MSM as they are nothing more than paid puppets spewing the crap their masters want/need the sheeppies to believe. 

Wed, 12/03/2014 - 21:03 | 5515021 DerdyBulls
DerdyBulls's picture

I see you speak from experience. I was at a small accounting firm in Oklahoma during this time. I had friends in the oil patch. My senior partner was involved heavily in drilling and the accounting firm had quite a number of energy accounts. All of them went bust. His oil operation went broke too. My boss went from being a multimillionaire to broke in short order. I can remember him paying me and one other employee the last money he had. I clearly remember seeing him break down and cry out to God right there at his desk while signing the checks. He went bankrupt.

This was common everywhere in those days. If you weren’t riding a lot of cash you were out. The multitude of industries and small businesses that are crushed by this kind of event boggled the mind. We can’t feel sorry for them though. It has to do with oil. Oil is evil. Everyone involved with it is rich, and dirty.

 

Wed, 12/03/2014 - 16:32 | 5514058 Moe Hamhead
Moe Hamhead's picture

Idiots!  Lower oil prices are never a problem, lower profits is the issue.

Wed, 12/03/2014 - 23:10 | 5515388 Bemused Observer
Bemused Observer's picture

But these go to eleven...it's one louder.

Wed, 12/03/2014 - 21:00 | 5515012 emersonreturn
emersonreturn's picture

thanks delivered.  nice post.

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