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Forget China - Oil Price Is Main Driver Of Market Turmoil
Commentators are linking the current market turmoil to problems in China. Our team sees the oil price as the main driver behind the market route. Low oil prices are positive for consumers and it will lower production costs for numerous industries. However it will also lower the investments in energy such as sustainable energy and oil producers will see their high profits turn into losses. Low oil prices have devastating effects on the financial sector that is involved in lending to the oil industry and in the trade of oil related derivatives. World oil production is about 90 million barrels a day, representing a cash flow of about nine billion dollars a day which comes down to three trillion dollars a year. With the oil price 40 to 50% lower, this flow is also cut by 40 to 50%. This amounts to 10% US GDP. Compare it with the 0.5% growth we are now missing in China, we prefer to keep our eyes on the oil price. These extreme moves can not be without consequence.
Many oil producers receive a fixed price for their oil as they covered their production with price insurance in the form of derivatives. With the current oil price, we just guess insurance providers paid out about 35 dollars a barrel to compensate the losses of the producers. Only for the US shale production this amounts roughly to 120 Million dollars a day. Somehow the financial sector has to cover these losses.
The US Energy Information Administration (EIA) stated in 2014 that most shale producers revenue has covered 75% of the production costs including initial investments, back then the oil price was about $95 a barrel. Even in 2014 this cast doubt on the profitability of US shale producers. Producers now claim they have lowered the production costs and are more efficient to reassure investors. But it is hard to believe they are now able to produce 50% cheaper. As investors are not buying this and start to flee the market, shale producers borrowing cost are starting to sky rocket, adding more pressure on the industry. Investors fear have already resulted in a spike in US junk bond rates. The energy sector accounts for about 15 percent of junk bond issuance. KKR has amortized 5 billion on two energy related bankruptcies. Restructuring of production companies will be inevitable.
Russian, Saudi and Norwegian sovereign wealth funds have used their profits to invest in US and European securities, like stocks and bonds. These funds see their cash inflow halted while profits start to turn into losses. The Norwegian sovereign wealth fund, one of worlds largest sovereign wealth fund, recorded a loss in the first quarter. Russia and Saudi Arabia need 100 dollars a barrel to get their budget balanced. The oil price is so low now these funds have to dis-invest. Saudi-Arabia’s postpone selling assets from it sovereign wealth fund, mainly US treasuries, as they chose to cover their budget deficit by issuing sovereign bonds themselves. Another sign the market being stressed.
Not only financial institutions selling assets to cover their oil related losses, add selling pressure to the market but also the decline of the share price of oil companies will be a drag on stock indices. Oil and oil related industries are part of nearly all big stock indices, a downturn in oil will in the end have its effect on these indices. The decline of major indices will have a negative effect on related ETF’s and comparable products. Most products that track indices are covered by stock portfolios. As investors start to buy these products, managers have to add stock to their portfolio in accordance with the index composition. If indices start to fall, ETF’s and comparable products start to under-perform, investors will sell these products forcing portfolio managers to sell stocks, adding extra pressure to the stock markets at large.
In 2013 we informed our clients that oil was in an extreme bubble. From our analyses we expect the oil price will rebound after producers have been forced out of the markets. In the processes of re-balancing we are expecting that too much capacity will be eliminated, pushing oil in a new bubble. For the moment we are expecting oil producers to start to minimize their loses by producing even more oil. The oil crisis has just begun. There is much volatility but for the moment we see no reason to invest in oil or oil stocks as the real carnage has not started yet.
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B.S.
Central banks / fiat money drive the turmoil.
When I see "fuel surcharge" deleted from my concrete, block, lumber and drywall deliveries I will believe that oil prices went down, it appears that transport would have everyone believe it is still 120 bbl
Don't worry that fuel surcharge will go up as the price of oil starts to climb. Now that you're used to it, it's never going away regardless of what oil does.
List of people/things the MSM blames the poor economy on:
1. China
2. Russia
3. Saudis/Price of oil
4. ISIS
5. Bush
6. Gun culture
7. Global Warming
8. Ol' Dixie
9. Capitalism
10. Trump supporters
....
NaN. Central Banks
NaN. Government policies
Ahead of the curve...
Fri, 08/28/2015 - 13:56 | 6482418
Oh regional IndianVote up! 10
Vote down! -3
Single point analysis like this is pretty pointless.
The story that really matters right now is Oil...and it's derivatives, Dollar and Gold...
Fx and metals are finaicial plays, oil is about as real as it gets....
In this world, control of oil is control...
Who has it?
I'm going to weaken it...
;-)
https://www.youtube.com/watch?v=FjmWeypvoQg
China is blaming the crash on a journalist. Beat that!
http://www.planbeconomics.com/2015/08/china-blames-journalist-for-market...
11. White privilege.
More like momo's blowing stops cause market turmoil...........like the martial arts, using your opponent's momentum against them.
Agreed. Central banking intervention is the main cause of turmoil.
Explains the years of massive artificial price supports by the CB's/Banking Cartel through the derivatives market.
Why did they stop?
oil
ammo
Yeah right, and the fed ZIRP policy has nothing to do with this mess.
Whoever has the oil wins the war.
Whoever has the most nukes wins the war. Whoever still has oil gets to clean up the mess afterwards.
I only care how much money I have and I want more.
If we just had $100.00 a brl. oil again everything would be fabulous.
how dumb.... we are all tapped out to buy crap... give us helicopter money now, then oil will go up...
putting the cart before the horse.
Wild swings in Oil today.
All well and good, but once the hole is punched, the hole is punched. If the explorers over-leveraged and go tits up, giving their investors a haircut at the neck in the process, it doesn't matter. The hole is still there. There for someone with cash to come in and scarf it up at a bargain basement price. All he's gotta do is cover the marginal costs of production and the rest is gravy.
Ain't capitalism grand?
Propaganda. This is just more anti-cheap-hydrocarbon-energy frothing at the mouth by euro progressive eco-weenie assclowns.
"Russia and Saudi Arabia need 100 dollars a barrel to get their budget balanced."
Fuck Russia and Fuck China. And fuck you euro assclowns at gefira. Oil price was normally low and should go back to low again and fucking stay there.
Get over it.
Grimaldus
The problem, as with everything, was the financialization of oil.
Had oil not been turned into the latest greatest leveraging scheme by Wall Street, it probably never would have gone north of $40 in the first place.
Rebalancing and true price discovery is needed. Oil needs to settle at $45 a barrel and allow this price to filter all the way through the supply chain. $45 still represents a 100% increase to the price of oil at the close of the 20th century.
The USA can have $1.65 gasoline. Shipping rates can come down and perhaps the economy can truly mend.
Forget China, those 1.4 billion chopstick-using people behind that great wall, what could they matter?
Imagine if China was flying these over the US, killing people, being judge, jury & executioner. How do you think Americans would react?
http://www.rt.com/news/313909-china-new-heavy-drone/
There's NFW I'm taking a long drive with gas this cheap.
It's ... it's ... it's Un-American!
Sounds pretty fucked up to me, just like about everything else about the way it all works, but really? Low oil prices are bad??? For the producers certainly and some oil longs, but for everyone else and I would think certainly for the economies of the world it has got to be of major benefit.
Frankly, who gives a crap about rigged fake markets being in turmoil?
Lower oil price massively benefits REAL-ECONOMY activity.
So? Who cares? A couple of US Presidents repeatedly asked the Saudis to increase production to lower the price, and they flat out refused!
OK, well the US and West in general has hydrocarbons, lots of them, real competitive production options, and every time a commodity gets too high, for too long, substitution or replacement by cheaper production appears. It's called a free market, as opposed to a cartel.
And if the Saudi's have difficulty balancing their budgets, you know what, they can cut their fucking spending! We're sick of being gouged by those arseholes, live lower on the hog.
As for the Russians, boo-bloody-hoo!
I bought in last fall at $80 BBL,doubled down when WTI hit $45 last winter,lost my wife and dog in the divorice proceeding this spring,got back to break even early this summer,and then road it all the way back down to $37 BBL in August..My only regret;..losing my dog..
The politics of OIL have gone the way the politics of money line has gone: batshit crazy.
When a power construct leads its nations to the edge of the cliff what can you expect?
To win control of Asia, the USA first bombed Nam, then ping ponged China, then having made headway, outsourced from their Labour Union controlled (or troubled) homelands their production to new capitalism's "big easy" land; as autocratic as was Batista for the Mob in Cuba.
Oligarchy and political autocracy go hand in hand. Its like the Pope and Emperor in medieval times; Until a Pope says : Dicatus Papae..and then we have civil war for three centuries.
China as Putin were prepared to be autocratic Popes in their own lands to help the Oligarchs of USA/EU make their money; provided they got paid their "indulgences".
Now its no longer working. As the Oligarchy of imperial homeland has gone "batshit" crazy!
So Dictatus Papae has been declared by Putin and Dicatus Papae in Chinese is now imminent.
There goes the global "entente cordiale"; we are back to every con-man for himself.
The holy grail in today's age is the petrodollar greenback. For that the new Templars and their enemies will fight to the finish.
Its the stuff of empires and of legends.
Meanwhile the Serfs go back to being Serfs.
It is interesting to note that in the West it was in those medieval days that people acquired an individual status : a name, a face, a signature and a piece of paper of property rights. This, before they were given the right to "free will" during the enlightenment.
Now the clock moves back for all except the few. And for those who are not from DCs but from the hinterlands of Africa and Asia; all controlled or destroyed by TPTB; their people have reverted to premedieval days.
They don't have a face, a name, a signature not even a country. Which makes them exploitable and if worst comes to worst, expendable.
The premise of the article is BS, the oil fell because of rise in production and falling demand.
And the fall in demand is result of too much debt strangling the real economy, where as falling oil prices is in fact the solution.
But the premise is even more fundamentally wrong, because the market turmoil is also a result of way too much debt.
So fall in oil is a symptom, not a cause.
Plus the market turmoil is mostly the result of rigging, and the rigging is also the cause and symptom of too much debt.
So I think the author's premise has it all wrong.
u also say : Batshit crazy !
This article must have been written prior to the 23% pop?? WTF? WOMMI MISSING here. Which way did he go George??
I think of it this way: With fiat money everywhere and more and more every day and oil prices still falling, we have some serious pain coming.
The only thing one needs to understand is that for decades there has been no reality to pricing virtually everything, so trying to compare the scams of today compared to the scams of the day before is pointless -- except where ginning up enough consent to rule is involved. It is entirely likely that the industry could break even at zero/bbl in the quantum world of post-normal economics and the only things left with genuine value are food, water and air. Everything else is utter BS.
Its sort of a chicken and egg scenario. Which came first, 60% labor participation rate, falling wages, reduced consumption, or falling oil prices? It's just another link in the chain that begins with the consumer being broke and ends with the consumer being broke.
That is the thing, if 95% of the economy lacks disposable income, it doesn't matter how big the economy is.
Austerity at the micro level will eventually mean austerity at the macro level, there is no way around this.
So how is China's consumption of oil these days?
"...the real carnage has not started yet."
Well you could have fooled me!