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Will Oil Kill The Zombies?
Submitted by Raul Ilargi Meijer of The Automatic Earth blog,
Oil producer Russia hikes rates to 10.5% as the ruble continues to plunge, while fellow producer Norway does the opposite, and cuts its rates, but also sees its currency plummet. As Greek stocks lose another 7.35% after Tuesday’s 13% loss on rumors about what the left leaning Syriza party will or will not do if it wins upcoming elections, and virtually anonymous Dubai drops 7.42%. We all know the story of the chain and its weakest link, and beware, these really still ARE global markets.
Meanwhile someone somewhere saved WTI oil from falling through the big, BIG, $60 limit for most of the day Thursday, and then it went south anyway. And that brings to mind the warnings about what would, make that will, happen to high yield energy junk bonds. Of which there’s a lot out there, but not much is being added anymore, that market has been largely shut to companies, especially in the shale patch. So how are they going to finance their fracking wagers? Hard to see.
And something tells me this Bloomberg piece is still lowballing the debt issue, though I commend them for making the link between shale and Fed ‘stimulus’ policies, something all too rare in what passes for press in the US these days.
Fed Bubble Bursts in $550 Billion of Energy Debt
The danger of stimulus-induced bubbles is starting to play out in the market for energy-company debt. Since early 2010, energy producers have raised $550 billion of new bonds and loans as the Federal Reserve held borrowing costs near zero, according to Deutsche Bank. With oil prices plunging, investors are questioning the ability of some issuers to meet their debt obligations. Research firm CreditSights predicts the default rate for energy junk bonds will double to 8% next year. “Anything that becomes a mania – it ends badly,” said Tim Gramatovich, chief investment officer of Peritus Asset Management. “And this is a mania.”
I think it’s obvious that the default rate could be much higher than 8%.
The Fed’s decision to keep benchmark interest rates at record lows for six years has encouraged investors to funnel cash into speculative-grade securities to generate returns, raising concern that risks were being overlooked. A report from Moody’s this week found that investor protections in corporate debt are at an all-time low, while average yields on junk bonds were recently lower than what investment-grade companies were paying before the credit crisis. Borrowing costs for energy companies have skyrocketed in the past six months as West Texas Intermediate crude, the U.S. benchmark, has dropped 44% to $60.46 a barrel since reaching this year’s peak of $107.26 in June.
Yields on junk-rated energy bonds climbed to a more-than-five-year high of 9.5% this week from 5.7% in June, according to Bank of America Merrill Lynch index data. At least three energy-related borrowers, including C&J Energy Services, postponed financings this month as sentiment soured. “It’s been super cheap” for energy companies to obtain financing over the past five years, said Brian Gibbons, a senior analyst for oil and gas at CreditSights in New York. Now, companies with ratings of B or below are “virtually shut out of the market” and will have to “rely on a combination of asset sales” and their credit lines, he said.
When you’re as addicted to debt as the shale industry has been – and still would be if they could still get their fix -, then seeing prices for your products drop over 40% and the yields on your bonds just about double (just for starters), then you have not a problem, but a disaster. And one that’s going to reverberate through all asset markets. It’s already by no means just oil that’s plunging, – industrial – commodities (iron ore, nickel, copper etc.) as a whole are way down from just a few months ago. I read a nice expression somewhere: “the economy is topped with a copper roof”, which supposedly means to say that where copper goes, the economy will follow.
But this is by no means all of the news, it’s not even the worst. To get back to oil, there are some very revealing numbers in the following from CNBC, which call out to us that we haven’t seen nothing yet.
Oil Pressure Could Sock It To Stocks
With crude sliding through the key $60 level, oil pressure could stay on stocks Friday. West Texas Intermediate futures for January closed at $59.95 per barrel, the first sub-$60 settle since July 2009. The $60 level, however, opens the door to the much bigger, $50-per-barrel level. Besides oil, traders will be watching the producer price index Friday morning, and it’s expected to be off 0.1% with the fall in energy. Consumer sentiment is also expected at 10 a.m. EST.
Consumers stepped up and spent in November, as evidenced in the 0.7% gain in that month’s retail sales Thursday. That better mood should show up in consumer sentiment. Stocks on Thursday gave up sizeable gains after oil reversed course and fell through $60.
“Oil has pretty much spooked people,” said Daniel Greenhaus, chief global strategist at BTIG. “There just isn’t a bid. With everything in energy and the oil price collapsing as it is, who is going to step in and be a buyer now? The answer is nobody.” Oil continued to slide in after-hours trading. “The selling appears to have accelerated a little bit after the close with really no bullish news in sight,” said Andrew Lipow, president of Lipow Associates. WTI futures temporarily fell below $59 in late trading.
“The big level is going to be $50 now in terms of psychological support. Much as $100 is on the upside,” said John Kilduff of Again Capital. Oil stands a good chance of getting there too. Tom Kloza, founder and analyst at Oil Price Information Service, said the market could bottom for the winter in about 30 days, but then it will be up to whatever OPEC does.
That was just the intro. Now, wait for it, check this out:
“It’s (oil) actually much weaker than the futures markets indicate. This is true for crude oil, and it’s true for gasoline. There’s a little bit of a desperation in the crude market,” said Kloza.”The Canadian crude, if you go into the oil sands, is in the $30s, and you talk about Western Canadian Select heavy crude upgrade that comes out of Canada, it’s at $41/$42 a barrel.”
“Bakken is probably about $54.” Kloza said there’s some talk that Venezuelan heavy crude is seeing prices $20 to $22 less than Brent, the international benchmark. Brent futures were at $63.20 per barrel late Thursday.
“In the actual physical market, it’s fallen by even more than the futures market. That’s a telling sign, and it’s telling me that this isn’t over yet. This isn’t the bottoming process. The physical market turns before the futures,” he said.
I see very little reason to doubt that what’s happening is that the media are way behind the curve in their reporting of what’s really going on. WTI and Brent are standards, and standards are one thing, but what oil actually sells for is quite another matter. Many companies – and many oil-producing countries too – must sell at whatever price they can get just to survive. And there is no stronger force in the world to drive prices down.
That is today’s reality. And while there are many different estimates around about breakeven prices for US shale plays, if we go with the ones from WoodMacKenzie, we get at least some idea of how bad the industry is hurting with prices below $60 (click to enlarge):
If prices fall any further (and what’s going to stop them?), it would seem that most of the entire shale edifice must of necessity crumble to the ground. And that will cause an absolute earthquake in the financial world, because someone supplied the loans the whole thing leans on. An enormous amount of investors have been chasing high yield, including many institutional investors, and they’re about to get burned something bad.
What it amounts to is that the falling oil price will chase a lot of zombie money out of the markets, the stuff created through a combination of QE-related ultra low interest rates and money printing, plus the demise of accounting standards that allowed companies to abandon mark-to-market practices. This has led to the record stock market valuation that we see today, and that could vanish in the wink of an eye once even just one asset, one commodity, starts being marked to market in defiance of the distortion official policies have imposed upon the global marketplace.
We might well be looking at the development of a story much bigger than just oil. I said earlier this week that it would be hard to find a way to bail out the US oil industry, but that’s merely one aspect here. Because if oil keeps going the way it has lately, the Fed may instead have to think about bailing out the big Wall Street banks once again.
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this basically says it all:
http://vimeo.com/channels/philiac/110663286
Teddy Lewis
Body Heat-1981: I got a serious question for you: What the fuck are you doing? This is not shit for you to be messin' with. Are you ready to hear something? I want you to see if this sounds familiar: any time you try a decent crime, you got fifty ways you're gonna fuck up. If you think of twenty-five of them, then you're a genius... and you ain't no genius. You remember who told me that?
Texas Tea, a bubblin' crude
Now we frack for it
With attitude
Drill sideways under anothers' land
Injecting friendly stew
A drop extracted from a beach of sand
No, but it should fix the "Tin Man"...
The clusterfuck will be worth it if it kills fracking. Chaos is a bonus.
Title: Will Oil Kill The Zombies?
Yes. It will, eventually.
How can you be sure?
a) Our entire survival grid, as well as your refrigerator, depends on it.
b) About 1/3 of the oil is for food production and distribution.
So, enjoy while last. It is gonna get messy, when it ends.
Oil is just the leading edge, the FED's magical money seeped into all the cracks and crevices and all the debt it created will be bubbling up soon. Everybody is over-leveraged and a couple of bad quarters will kill a lot of 'players' but the whole economy will feel it.
KnuckleDragger-X
You wrote: “FED's magical money seeped into all the cracks… will bubbling up soon.”
No. It will NOT because you will see less and less purchasing power by most, as there will be less money seeping through the cracks.
But when the US dollars lose its global monopoly, then America party is over. Prepare for high inflation and shortages.
However, the bankers will still have some sort of QE; so no shortages for them. And some banks will even have SDR’s; which will be the next “Bank-Money” Ponzi scheme, because the world still can take some debt.
However, when oil exporters NO longer have the additional oil to export, then, the SDR party, too, will be over.
The Oil Nartative is a sexy one....
http://hedgeaccordingly.com/2014/12/oil-production-narrative-uber-alles-...
Damn, that someone shines a light on one HUGE Elephant in the room. Pity the chair upon which it resides was not certified and tested for the load it supports.
Now I know British Gas has just topped up with cash but its burn rate is such that it either stops work now and lasts 6 months or it continues at current and flames out within 3. Some folks, for sure, are sure shit out of luck and by spring will be gone(along with the money)
Black.
Swan.
It was always going to be a system shock like this that takes the teetering house of cards down, and not one of the usual suspects, like the Euro, Japan, Greece, China, Ukraine, etc. I don't imagine there were too many people a year ago who were planning on WTI trading with a 57 handle. I know I wasn't. I just knew the fan was going to be hit with shit soon, but not from which direction. Oil at or below these prices for very long and international financial markets are going to get real ugly.
More money has been made and LOST in the oil field than any other place on earth. Buyer beware.
I thought oil took second place to DC?
DC lobbying has much better profit margins,
but it's also more slimy and gooey.
Thats why they built it on swampland.So the congresscritters would feel right at home.
Calm down. Oil coming up throgh the pipe in the ground is a daily asset. Like a farmer who grows GMO wheat, or such. It FLOWS every day. Every weekend. Every holiday. And deposits some kind of money in a checking account somewhere. It doesn't COST. It pays.
NOBODY IS LOSING ANYTHING> This is a figment of your fucked up accounting mentality, go work for Citibank you asshole.
My parents tell the story of the time they planted 10lbs of seed potato and harvested 8lbs of spuds in the fall. The eight pound were free, but not the initial 10.
So it's an industry with revenue but no costs? Fantabulous!
This is the dumbest thing I have ever seen on ZH. (except only the tinhat dickweeds supporting Obama.) What about maintenance, sunk financing costs, and taxes???????????????
I think his point is that oil is a hard asset or valuable commodity like gold or silver versus say worthless fiat paper.
Oil prices will go down but oil will always be valuable unless some alternative is found.
Question now is, who will be the first to fall from the graceful ignorance of a nation asleep at the wheel as the train kept on a rollin off the cliff!
https://www.intellihub.com/like-clockwork-pension-plans-looted-nationwid...
Background:
https://www.youtube.com/watch?v=_EvGn22Mplg
Who are the zombies? And which one will be the first to topple?
"It doesn't COST. It pays." There is a cost associated with every well genius. It doesn't magically find itself and flow out of the ground to the refinery while the balance of your bank account increases. If the product of (price of oil) x (volume of production) is greater than the cost of production then there will be a profit. If not, there will be a loss. Don't hurt your brain thinking about it for too long though.
whole thing, includin' upcomin' nuke exchange, a bankster algo. scrap the graphs and charts and start the underground machine toolin' for AR-15s, et al.
AKs more dependable
there ya go!
The expert from RBC Capital says Oil related investment accounts for 2.5% of CapEx and so we should not get our nicknacks in a twist.
Talking about drowning i've had to put the other half out stripping (well mutual consent after a black eye ) however, with her ass dropping a centimetre every quarter the law of diminishing returns is rearing it's ugly head.
The shale boom was one of the biggest plusses this economy had going for it. How long do prices have to stay where they are to bust the entire thing?
we're still good, man.
Always have the ace up your sleeve.
Our ace?
hookers & blow.
bring it.
Don't overanalyze. Short WLL into the ground and short BOKF into the ground that will follow WLL in time
Seems like a clear-cut case of "credit-driven malinvestment", straight out of an Austrian economics textbook. But the oil industry has a long history of swinging between over- and under-investment. This too shall pass.
We would be foolhardy to separate OIL & DEFENSE EXPENDITURE.
Subprime originations were over $600 billion per year for a few years before the subprime bubble burst. So it looks like shale losses might be only a third or a quarter of subprime.
And you trust TBTJ not to have re-hypothecated these loans like the RMBS ones ?
More fool you then.
Never said anything about re-hypothecation. Just said there was less money loaned. Maybe you should get some reading glasses.
Maybe you should.
You state origination of loans figures, which after the shennagins last time ,where the liabilities were understated by a factor of ten, what makes you think it might not be by a 100 times.
Not like anyone went to jail to discourage them.
We just don't know anything, excepting they lie about everything now.
OH NO! Retarded muppets are going to get burned! Cry me a fucking river!
It would be great to see volume measures - actual consumption - as opposed to just price measures. Prices are falling, not just because there is excess supply relative to demand, but, that anticipated demand, in my opinion, must also be seen to be falling perhaps even more. I think quantity demanded (at whatever price) is falling - in other words an inward shift in the demand curve rather than a movement along. Price is really just a monetary phenomenon. Doesn't mean much if it is not associated with quantity purchased. For example, you could have $100 oil, but, if volume demanded is diminishing, then as a producer, the price doesn't matter much.
It would be good to see not only consumption measures, but, also the distribution - where the oil is consumed (manufacturing, fuel, products, etc.). Just an ask, not a complaint. cheers ZH'ers.
my roomate's mother-in-law....
Why are you rooming with a married couple???? Kinky stuff?
GTFO with these stupid posts. It's really f'ing old. Get lost.
Probably not. Daryl Dixon only has three bolts left for his crossbow. I have 20,000 rounds left but I am not getting any ass. Chicks dig this Dixon dude with his three bolts. Well, whatever. Raise it.
Nah, oil won't kill the Zombies. There are too many walking dead and wounded in this nation already.
when will the central banks start to buy oil?
and if the people find out that the banks are propping up oil prices, will they riot?
think oil will find a bottom around $40 but won’t stay there too long and creep back to $60 were it will stay for at least 6-8 months. After that oil can spring back up to $80-$90 is possible over a year.
Pure my somewhat informed guesstimation. We’ll see …
This video in shale oil is interesting.
It says the average well only last 3 years
( and break even price 80USD.
If they run out in 3ys then I presume for
such expensive product hedging the price
would be part of the process to proveed).
Is so I wounder for the expensive oil in the U.S. if there really is a lot
of unhedged shale oil given its short life span .
It should just mean new projects will be put off until prices rise again.
Ie so the shale should act as a price resistance on upside .
Prices above 90 they can hedge / mine .. Below wait ect ..
http://youtu.be/xliyZMPJvjk
Not an expert, but i think that there are large upfront costs like exploration and drilling, then there are on going production costs, pumping and transport. Those prices are probably far less than $60 per barrel cost quotes. so until the current wells run dry, the companies keep cash flowing by pumping. Maybe they pump even more just so they can keep the lights on. If this price sticks it will kill almost all new wells.
I remember the OPEC-er's oil embargo in the '70's: doubled the gas price, stations out of gas, odd-even fill up days. I think the US should return the favor: refuse imported oil, and support the domestic oil producers. Why? BECAUSE THE MONEY WOULD STAY IN THE US and be turned over and over in the economy buying equipment, providing good paying jobs to citizens who would need goods and services, rinse, repeat.
Ever since the '70's "we" have been saying we need to be energy independent, so here's the opportunity. Run out of oil AND nat gas? There are areas that haven't even been explored because of 0baMao's policies.
IMHO
I am just saying shale mines that only last 3 years should be easy to hedge
(3y liquidity is deep) and most oil is produced in the first year, so I dont
See how this will be a problem. If they were long term projects 5-20ys
that required high prices then they may have long term financing
But 3 year life spam prob would be financed / hedged at inception .
Also the US and Saudis are working together, if this was real issue
Saudi would cut production or face invasion / change of Govt..
Ie its planned
Well yes most of the shale production has been hedged but that doesn't help a bit going forward. The shale operators are already shutting down right now. There won't be any shale drilling activity six months from now and production will drop 90% in three years so they can't continue to rig the oil price long enough to collapse Russia like they did in the 1980's. With a crude price under $80 offshore is unprofitable so offshore exploration will also stop dead. The problem with this scheme is that it takes a decade or more to restore oil exploration after the crude price reached profitability, primarily because of the reluctance to finance until stability has been well established.
Then there are the financial problems that are going to happen if the crude price remains below the cost of production for longer than three months. Most certainly $50 crude will crater the financial system and will require so much money production just to keep it above water that hyperinflation is a certainty. Remember the Western World is already in a near depression.
I have heard of many people selling their mineral rights and their land and walking away with millions. I would assume that billions have been spent and much of it leveraged. I would think that they need to drill and produce at some level to service the debt.
Regarding the business about physical prices versus futures. First, with regard to WTI, the futures contract calls for delivery of WTI, domestic sweet, and certain foriegn crudes at Cushing, Ok. All of these are what would be considered high quality sweet crudes. When you go out to the field, lets say a well in western Texas which produces a lower gravity and higher sulfur crude, it's price at the wellhead much lower to reflect the quality difference. Plus, if for example, it is far from a pipeline, it will be gathered by truck, moved to an injection station, perhaps on a small pipeline, a gathering system, via that pipe to a larger pipeline system and eventually on to refinery buyer. Those transportation costs are a part of the price discount field versus delivery point. Each well head price will reflect quality differences and location differences, it is always thus, and with unusual exceptions these are discounts from the futures price. In point of fact it is common for the various types and grades of crude to be quoted as WTI minus x$.
As to the loans and bonds, no doubt some lenders are going to lose. But not all, in many instances, especially to small drillers, lenders required a hedging program in place on a sufficient portion of production to insure repayment. Are lenders foolish enough to abandon this practice? Of course they are! Think sub prime housing loans. And they will abandon good lending practices again and again so long as they are bailed out by Washington.
I am not saying that oil price isn't going to hurt a lot of folks, it damn sure will, I am saying there are a ton of folks writing about oil matters who are really ignorant but dont let that stop them from speaking with absolute certainty......a lot of heat and no light.
Dropping oil prices add a new surprising new dimension to the stability of the world financial system. While often heralded as a godsend to the economy and the end consumer we must remember lower prices hurt both producers and those in the business of oil exploration, drilling, and sales.
When financial problems occur in the energy sector it is often accompanied by political instability and sometimes her ugly sister war. As a rule the economy loves stability, bottom-line dropping oil prices means more risk for an already shaky world economy. All this is being complicated by the recently strong dollar.
The dollars strength and the rising American stock market could also be taken as a sign of an unstable global economy. The money flowing in from other countries in search of a safe home screams of a bigger problem! When a strong shift in currencies occurs someone usually gets hurt and this can lead to bankruptcy, default, or contagion.
http://brucewilds.blogspot.com/2014/11/dropping-oil-prices-increase-risk-to.html
We have been dancing with oil's ugly sister, war, for the last decade! Maybe, now that we're self sufficient we can turf the expense of the foreign invasions and pull the war profiteers off the public tit.
There is a simple fix for this problem... government intervention...pick a number where most shale oil producers can remain solvent and pay their debt obligations ....say 80 bucks... and fix the domestic US price at that number by a means of import duties (tax revenue) on foreign supply. The banksters and pols wins..and since the elections are over who gives a f*** about the consumer.
This CAN'T be an issue...
Why, I hear tell pretty much every day on my high-falutin SiriusXM radio that now is the best time in a generation to invest in oil, and that by g-d, I can write off up to 80% of the drilling costs in the first year!!111
As my wee little grandson told me the other day,
"Papa, you've got to shoot them in the face to kill them."
Smart kid but growing up a little too fast if you ask me.