frackers

What’s Next for Oil: Whiplash

roller-coaster gc2smOff the keyboard of Thomas Lewis

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roller-coaster This is the closest we could come to a chart showing what is next for ojl and gas prices, and how it’s going to feel. (Photo by Patrick McGarvey)

Published on The Daily Impact on January 18, 2015


A savvy investor once told me that if you read something in the news, it is no longer true, if it ever was. I keep this in mind as I read over and over that the world is awash in 3 billion barrels of surplus oil. This glut — always and everywhere specified as 3 billion barrels — is present, the conventional wisdom (oxymoron alert) goes, because the crafty Saudis refused to cut production when the price of oil tanked (metaphor alert). They did this, it is said, to run the pesky American oil frackers out of business before they took over the world. This reminds me of the engraved plaque found in many Irish bars: “The Lord invented whiskey to keep the Irish from ruling the world.” An endearing sentiment, but probably not true.

[“The Saudis have won,” somebody said to me the other night. Really? They’re burning cash so fast that, despite having one of the world’s largest foreign-exchange reserves, they’re on course toward bankruptcy in four years. They have been forced to cut back on the subsidies that up to now have bought their subjects’ loyalty by providing them with cheap gas, electricity and water; gas prices alone have shot up 50% this year. When Iran tried that a few years ago, revolution appeared in the streets like a sudden flame, and the government reversed course immediately.

To suggest that the Middle East is a tinderbox is to understate the obvious; to say that it has become immeasurably more flammable since the Arab Spring, similarly goes without saying; and to conclude from the foregoing that this is hardly the time to thrust people more deeply into worse poverty with less hope, would not challenge the reasoning powers of a candidate for US president. The Saudi royal family is terrified and rightly so by existential threats from ISIS, Iran and increasingly its own people.]

But back to the 3 billion barrel glut. Question 1 is where did that number come from that everyone is using without qualification? Why, from the International Energy Agency (IEA), one of whose jobs is to keep track of world oil stocks. That’s oil that has been pulled from the ground but has not yet made it to a refinery: it’s in tankers, in pipelines, on rail cars and in tank farms. And it is true that IEA has just estimated those stocks at 3 billion barrels.  

BUT those stocks did not just appear because prices fell — or in order to make prices fall. If you go back ten years or more in IEA records, you find that there have always been around 2.7 billion barrels in the pipeline, so to speak. So the present number, far from representing a sudden tsunami of unwanted oil, represents an uptick of just 300 million barrels, a 10 per cent increase. It represents about a three day supply of oil at current global consumption rates.

Far from being a tsunami of excess oil swamping the world, this glut is hardly enough to get our shoes wet. There are two implications to putting this excess in its proper perspective:

  1. Any return to anything like normal demand will vaporize the glut in a matter of days. Which means that’s how long it will take for prices to head back toward $100 a barrel from the current under-$40.
  2. Although encouraged to ramp production back up by the return of high prices, the oil industry will not be able to. True, they can uncap sealed wells and re-erect mothballed rigs — although even doing that, which will require finding new sources of financing and hiring workers, will take a dismaying length of time. But virtually all the oil companies in the world have for years been cutting back on the money they spend looking for new oil fields. Before the price crash they were cutting back because it wasn’t working, they weren’t finding new oil no matter how much they spent. Since the price crash they’ve been cutting  back viciously because they can’t afford it. But the result is the same: there are precious few new oil wells to drill, even at a profit.

Thus the prospect of peak oil, far from having been disproved by current events, as some are gloating, hasn’t even been much delayed by current events. And if there is to be a recovery from the current doldrums of the oil industry it will be wrenching, recession-inducing recovery because we all know what economies do when oil prices spike.

On the other hand, if the economic news continues to be as bad as it is now, and the expected global depression locks most of the world’s people into long-term poverty, and their ability to buy anything continues to wither as it is withering now, why then we will be all right. With respect to peak oil.

As long as we can’t afford to buy gas, it will remain cheap. The minute we start buying it again, it will become expensive and scarce. And it will happen so fast that the thrill of victory and the agony of defeat will be simultaneous.


Thomas Lewis is a nationally recognized and reviewed author of six books, a broadcaster, public speaker and advocate of sustainable living. He also is Editor of The Daily Impact website, and former artist-in-residence at Frostburg State University. He has written several books about collapse issues, including Brace for Impact and Tribulation. Learn more about them here.

The Crash of 2015: Now Arriving at Gates 3,7,12,19…..

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Published on the Daily Impact on August 10, 2015

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If the world economy were an airline, what we’d be seeing now is hundreds of late and cancelled flights, missing airplanes, bankruptcies, thousands of staff layoffs and millions of unhappy customers. (Whoa, that was supposed to be a metaphor!) If we were in a hub airport of this airline, every incoming flight would be a tattered, smoking airplane with flat tires and bullet holes bearing more bad news from shell-shocked passengers. Some examples:

International Arrivals:

From China: The Shanghai Composite Index lost 13.4 percent of its value in July. That’s more than a correction and would have been a crash if the government had not a) halted trading in half the stocks listed, b) forbade the selling of large blocks of shares, and c) bought most of the shares that were sold. To say that these measures are not working (except that they have temporarily frozen the crash at gunpoint) is an understatement. The Chinese Crash of 2015 is well under way. [See: Peak Insanity: Chinese Brokers Now Selling Margin Loan-Backed Securities, and “China’s Hard Landing Suddenly Gets a Lot Rougher,” among many others.

From Greece: With the Grexit crisis declared over, the Greek stock market opened last Monday, and promptly crashed; all stocks down 23 %, bank stocks 30%. By Friday it had clawed back about 20 points but was some 600 points down on the year.

From Puerto Rico: On Monday, Puerto Rico became the first U.S. Commonwealth Territory ever to default on a debt payment.

From Venezuelafood riots are breaking out in the aftermath of the economic devastation wrought by the crash of oil prices.

From Canada: Implosion of the tar-sands-oil patch and a related bursting of the housing bubble has the country in an all-but-declared recession.

From EverywhereCommodities are tanking and taking the currencies of the commodoties-exporting nations with them. As happened just before the crash of 2008, the price of virtually every industrial commodity –not just oil, but copper, coal, steel, lumber, you name it — has crashed because of drastically slowing manufacturing worldwide, especially in China.

Domestic Arrivals:

From North Dakota and Texas: America’s zombie shale-oil frackers are finally running out of gas, so to speak, after being propped up despite the crash of oil prices by 1) an avalanche of investment and credit from money handlers convinced the dip was only temporary, and 2) hedge contracts that meant they were still getting some $90 a barrel when the market was around $50. The avalanche is now going the other way and the hedge contracts are running out. Investopedia lists seven major players on the verge of bankruptcyAccording to Bloomberg Business News, North American oil producers have seen a stunning $1.3 trillion of their equity valuation vanish in one year as a result of the crash in oil prices. The sudden loss in value has hit a multitude of pension funds and insurance companies hard.

From New York: The stock market is on its knees. The Dow Jones Industrial average at the end of the week  down 700 points since July 16, and 900 points off the market peak in May. In addition to oil and energy issues, tech stocks (Apple, Twitter, Yelp, etc.), mainstays of the recent market, are down sharply. As are the up-to-now-reliable cash cows, the media stocks — Disney, CBS, Time Warner etc.

From Washington: In each jobs report the government insists that the unemployment rate is stable and job creation is improving. Look a little further and you see that each month, the number of people leaving the labor force is far larger than the number of jobs created; and that the number of jobs vanishing each month is rising fast; the number of jobs cut in the US in July, 106,000, was the highest monthly total since 2011 and up 136% from the previous month, 125% year-to-year.

From all overFactories’ output  and consumer spending are weakening as oil production drops (as even the Energy Information Administration is now admitting).

This is far from an encyclopedic review of the bad news that arrived at our gates last week. I have been assembling it for a week, and found that by the time a draft got to be a few hours old, much of the bad news had been replaced by worse news. And then of course I was waiting to hear how the Republican candidates for President would deal with these urgent and mounting threats. Still waiting. You heard anything?

Gotta go. New arrival at Gate 78.


Thomas Lewis is a nationally recognized and reviewed author of six books, a broadcaster, public speaker and advocate of sustainable living. He also is Editor of The Daily Impact website, and former artist-in-residence at Frostburg State University. He has written several books about collapse issues, including Brace for Impact and Tribulation. Learn more about them here.

The Crash of 2015: Reckoning Day

From the keyboard of Thomas Lewis
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You have a perfect plan. Then things begin to go south and before you know it, a day of reckoning.

You have a perfect plan. Then things begin to go south and before you know it, a day of reckoning.

First published at The Daily Impact  April 1, 2015

The next phase of the Crash of 2015 begins today. The first quarter of the year is now complete, and that means two things for the debt-logged companies trying to stay alive in the U.S. oil fracking patch: it’s time to report the value of their assets to the issuers of their lines of credit; and it’s time to repay or roll over a bunch of the debt with which they are logged.

That first one is the killer. These companies, virtually every one of which has had negative cash flow from the beginning of the so-called “oil revolution, have sustained themselves first with stock issues, then with junk-bond issues, then with subprime loans. As slack as the underwriting of those loans has been, they do actually require the existence of assets whose value at least approaches the amount of the loan.

You and I, to get a loan, have to pledge a house or a car or something else that actually exists and can be seized by the lender if default occurs. Oil companies’ assets, on the other hand, consist mostly of oil that they say is in the ground they own or lease, that they say they can get at any day, and that will be worth money — if it is, and if they do.

You and I would not have the gall to take a deal like that to our banker, but it sure has worked for the frackers. As business analyst and blogger Wolf Richter put it, “loans to over-indebted, junk-rated companies soared from about $40 billion in 2009 to $210 billion in 2014 before it came to a screeching halt.”

Lenders typically review the status of their outstanding lines of credit after the first and third quarters. The last time they looked at the frackers, the oil the companies claimed to own was valued at $99 a barrel. Today, it’s going to be more like $50 (they don’t use the current market price, but a moving average).

If you owned a $200,000 house, with a $150,000 mortgage, and had income, you’d be good to go. Then you lose your job, somebody builds a pig factory next to your house and it now appraises at $100,000. The bank wants $50,000 in cash, now. Ouch. Only a fracker could appreciate your pain.

This agony is going to roll out over the next two weeks ago as financial statements are finalized and released. But already, Bloomberg News counts 10 companies circling the drain, gasping for cash. One of the bigger fish, Sabine Oil and Gas of Houston, has maxed out its credit line, says it is about to default on some $2 billion of its debt, and has “substantial doubt” about its continued existence.

In today’s enchanted world of high finance, normally banks don’t care whether loans are repaid or not, because before the ink is dry on the closing statement the loan is whisked out the back door to become part of a collateralized debt obligation, or some other Frankenstein security, the bankers get the money back that they just lent out, they pocket substantial fees, and do the next deal. But the collapse of oil prices was so sudden, and so completely not foreseen, that a lot of the smartest guys in the room got caught with hot paper still in their hip pockets.According to the Wall Street Journal (reposted here), “Citigroup Inc.,Goldman Sachs Group Inc.,UBS AG and other large banks face tens of millions of dollars in losses on loans they made to energy companies last year.”

In addition to the junk loans, coming to a head now, there are the junk bonds, which have been rotting fast since last fall. And if you still don’t see here the same deadly portents that preceded the crash of 2009, consider one more: Deutsche Bank has said publicly it foresees a 15% forfeiture rate of oil patch HY (high yield, i.e. junk) bonds.  “A shock of that magnitude,” says Deutsche Bank, “could be sufficient to trigger a  broader HY market default cycle. “

This is not an April Fools story. It is a story about some fools in April, facing a day of reckoning.

 

 


Thomas Lewis is a nationally recognized and reviewed author of six books, a broadcaster, public speaker and advocate of sustainable living. He also is Editor of The Daily Impact website, and former artist-in-residence at Frostburg State University. He has written several books about collapse issues, including Brace for Impact and Tribulation. Learn more about them here.

 

 

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