Junk Bonds

Oil Crash 2016 Terrifies Banksters

Oil Barrels with Red Arrow isolated on white background. 3D rendergc2reddit-logoOff the keyboard of Michale Snyder

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Published on The Economic Collapse on January 18, 2016

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Discuss this article at the Energy Table inside the Diner

Last time around it was subprime mortgages, but this time it is oil that is playing a starring role in a global financial crisis.  Since the start of 2015, 42 North American oil companies have filed for bankruptcy, 130,000 good paying energy jobs have been lost in the United States, and at this point 50 percent of all energy junk bonds are “distressed” according to Standard & Poor’s.  As you will see below, some of the big banks have a tremendous amount of loan exposure to the energy industry, and now they are bracing for big losses.  And the longer the price of oil stays this low, the worse the carnage is going to get.

Today, the price of oil has been hovering around 29 dollars a barrel, and over the past 18 months the price of oil has fallen by more than 70 percent.  This is something that has many U.S. consumers very excited.  The average price of a gallon of gasoline nationally is just $1.89 at the moment, and on Monday it was selling for as low as 46 cents a gallon at one station in Michigan.

But this oil crash is nothing to cheer about as far as the big banks are concerned.  During the boom years, those banks gave out billions upon billions of dollars in loans to fund exceedingly expensive drilling projects all over the world.

Now those firms are dropping like flies, and the big banks could potentially be facing absolutely catastrophic losses.  The following examples come from CNN

For instance, Wells Fargo (WFC) is sitting on more than $17 billion in loans to the oil and gas sector. The bank is setting aside $1.2 billion in reserves to cover losses because of the “continued deterioration within the energy sector.”

JPMorgan Chase (JPM) is setting aside an extra $124 million to cover potential losses in its oil and gas loans. It warned that figure could rise to $750 million if oil prices unexpectedly stay at their current $30 level for the next 18 months.

Citigroup is another bank that also has a tremendous amount of exposure

Citigroup (C) built up loan loss reserves in the energy space by $300 million. The bank said the move reflects its view that “oil prices are likely to remain low for a longer period of time.”

If oil stays around $30 a barrel, Citi is bracing for about $600 million of energy credit losses in the first half of 2016. Citi said that figure could double to $1.2 billion if oil dropped to $25 a barrel and stayed there.

For the moment, these big banks are telling the public that the damage can be contained.

But didn’t they tell us the same thing about subprime mortgages in 2008?

We are already seeing bank stocks start to slide precipitously.  People are beginning to realize that these banks are dangerously exposed to a lot of really bad deals.

If the price of oil were to shoot back up above 50 dollars in very short order, the damage would probably be manageable.  Unfortunately, that does not appear likely to happen.  In fact, now that sanctions have been lifted on Iran, the Iranians are planning to flood the world with massive amounts of oil that they have been storing in tankers at sea

Iran has been carefully planning for its return from the economic penalty box by hoarding tons of oil in tankers at sea.

Now that the U.S. and European Union have lifted some sanctions on Iran, the OPEC country can begin selling its massive stockpile of oil.

The sale of this seaborne oil will allow Iran to get an immediate financial boost before it ramps up production. The onslaught of Iranian oil is coming at a terrible time for the global oil markets, which are already drowning in an epic supply glut.

Just the other day, I explained that some of the biggest banks in the world are now projecting that the price of oil could soon fall much, much lower.

Morgan Stanley says that it could go as low as 20 dollars a barrel, the Royal Bank of Scotland says that it could go as low as 16 dollars a barrel, and Standard Chartered says that it could go as low as 10 dollars a barrel.

But the truth is that the price of oil does not need to go down one penny more to have a catastrophic impact on global financial markets.  If it just stays right here, we will see an endless parade of layoffs, energy company bankruptcies  and debt defaults.  Without any change, junk bonds will continue to crash and financial institutions will continue to go down like dominoes.

We are already experiencing a major disaster.  Things are already so bad that some forms of low quality crude oil are literally selling for next to nothing.  The following comes from Bloomberg

Oil is so plentiful and cheap in the U.S. that at least one buyer says it would pay almost nothing to take a certain type of low-quality crude.

Flint Hills Resources LLC, the refining arm of billionaire brothers Charles and David Koch’s industrial empire, said it offered to pay $1.50 a barrel Friday for North Dakota Sour, a high-sulfur grade of crude, according to a corrected list of prices posted on its website Monday. It had previously posted a price of -$0.50. The crude is down from $13.50 a barrel a year ago and $47.60 in January 2014.

While the near-zero price is due to the lack of pipeline capacity for a particular variety of ultra low quality crude, it underscores how dire things are in the U.S. oil patch.

A chart that I saw posted on Zero Hedge earlier today can help put all of this into perspective.  Whenever the price of oil falls really low relative to the price of gold, there is a major global crisis.  Right now an ounce of gold will purchase more oil than ever before, and many believe that this indicates that a new great crisis is upon us…

The number of barrels of oil that a single ounce of gold can buy has never, ever been higher.

Barrels Of Oil Per Ounce Of Gold

All over the planet, big banks are absolutely teeming with bad loans.  And to be honest, the big banks in the U.S. are probably in better shape than some of the major banks in Europe and Asia.  But once the dominoes start to fall, very few financial institutions are going to escape unscathed.

In the coming days I would expect to see more headlines like we just got out of Italy.  Apparently, Italian banks are nearing full meltdown mode, and short selling has been temporarily banned.  To me, it appears that we are just inches away from full-blown financial panic in Europe.

However, just like with the last financial crisis, you never quite know where the next “explosion” is going to happen next.

But one thing is for sure – the financial crisis that began during the second half of 2015 is raging out of control, and the pain that we have seen so far is just the beginning.

 

 

 

 

 

 

 

 

 

 

 

 

Fedpocalypse Now?

FredaAmericanOstrichAmerican Ostrich - Anthony Freda Illustrationgc2smFrom the keyboard of James Howard Kunstler
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FredaAmericanOstrichAmerican Ostrich - Anthony Freda Illustration
 
Originally Published on Clusterfuck Nation December 14, 2015

“Here’s another fine mess you’ve gotten me into….”
— Oliver Hardy


If ever such a thing was, the stage is set this Monday and Tuesday for a rush to the exits in financial markets as the world prepares for the US central bank to take one baby step out of the corner it’s in. Everybody can see Janet Yellen standing naked in that corner — more like a box canyon — and it’s not a pretty sight. Despite her well-broadcasted insistence that the economic skies are blue, storm clouds scud through every realm and quarter. Equities barfed nearly four percent just last week, credit is crumbling (nobody wants to lend), junk bonds are tanking (as defaults loom), currencies all around the world are crashing, hedge funds can’t give investors their money back, “liquidity” is AWOL (no buyers for janky securities), commodities are in freefall, oil is going so deep into the sub-basement of value that the industry may never recover, international trade is evaporating, the president is doing everything possible in Syria to start World War Three, and the monster called globalism is lying in its coffin with a stake pointed over its heart.

Folks who didn’t go to cash a month ago must be hyperventilating today.

But the mundane truth probably is that events have finally caught up with the structural distortions of a financial world running on illusion. To everything there is a season, turn, turn, turn, and economic winter is finally upon us. All the world ‘round, people borrowed too much to buy stuff and now they’re all borrowed out and stuffed up. Welcome to the successor to the global economy: the yard sale economy, with all the previously-bought stuff going back into circulation on its way to the dump.

A generous view of the American predicament might suppose that the unfortunate empire of lies constructed over the last several decades was no more than a desperate attempt to preserve our manifold mis-investments and bad choices. The odious Trump has made such a splash by pointing to a few of them, for instance, gifting US industrial production to the slave-labor nations, at the expense of American workers not fortunate enough to work in Goldman Sachs’s CDO boiler rooms. Readers know I don’t relish the prospect of Trump in the White House. What I don’t hear anyone asking: is he the best we can come up with under the circumstances? Is there not one decent, capable, eligible adult out there in America who can string two coherent thoughts together that comport with reality? Apparently not.

The class of people who formerly trafficked in political ideas have been too busy celebrating the wondrous valor of transgender. Well, now the wheels are going to come off the things that actually matter, such as being able to get food and pay the rent, and might perforce shove aside the neurotic preoccupations with race, gender, privilege, and artificial grievance that have bamboozled vast swathes of citizens wasting a generation of political capital on phantoms and figments. Contrary to current appearances, the election year is hardly over. There is still time for events to steer history in another direction.

Mrs. Yellen and her cortege of necromancers may just lose their nerve and twiddle their thumbs come Wednesday. If they actually make the bold leap to raise the fed funds rate one measly quarter of a percent, they might finally succeed in blowing up a banking system that deserves all the carnage that comes its way. There is something in the air like a gigantic static charge, longing for release.

 

 


James Howard Kunstler is the author of many books including (non-fiction) The Geography of Nowhere, The City in Mind: Notes on the Urban Condition, Home from Nowhere, The Long Emergency, and Too Much Magic: Wishful Thinking, Technology and the Fate of the Nation. His novels include World Made By Hand, The Witch of Hebron, Maggie Darling — A Modern Romance, The Halloween Ball, an Embarrassment of Riches, and many others. He has published three novellas with Water Street Press: Manhattan Gothic, A Christmas Orphan, and The Flight of Mehetabel.

Death Watch in the Oil Patch

 Pumpjack-1024x768  gc2smOff the keyboard of Thomas Lewis

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Pumpjack-1024x768

Oil pumpjacks starting to suck oil instead of money. (You and I know, of course, that grasshopper pumps are not used in fracking, but have become a universal symbol for the oil bidness in the Mainstream Media, so there you go. And here you are.).

Published on The Daily Impact on October 28, 2015


In the same sense that brave individuals are said to “fight” stage four cancer, the American oil industry has spent a harrowing year fighting reality. Since oil prices tanked last summer, the industry has drawn down its strategic reserves of whitewash, pig lipstick, shinola and embalming fluid to keep things looking good even as they were decomposing. They did a pretty good job, but then they’ve had a lot of practice.Their theory, apparently; when you’re kicking the can down the road, a myth is as good as a mile. Consider a brief compendium of the lies, damned lies and statistics the oil guys have sold the country in the past few years.

Myth Sold: The Oil “Revolution.”  Hydraulic fracturing was a technological breakthrough that was going to make America number one in world oil production again, restore American energy independence and guarantee American hegemony for (pretty much) ever.    

Fact: Fracking is an extremely expensive and environmentally destructive way to wring the last few drops of  oil out of source rock. While it temporarily increased US oil production, it never equalled our peak production of 1970, and while it temporarily decreased our oil imports (which are now on their way back up), it never threatened our status as the world’s largest importer of oil.

Myth Sold: Technology Will Save Us. When oil prices cratered, the frackers reassured their investors, lenders and us that they could handle it. They had improved the fracking technology so much they could continue to make a profit producing $50-a-barrel oil.

Fact: The much-hyped changes were just so much tinkering, and profits remained illusory. Virtually every company involved in the fracking patch had negative cash flows from the beginning. Operating profits from the wells were wiped out by the costs of replacing the wells every three or four years, because of their hideous depletion rates. Conventional wells produce for 20 years, five time longer than fracked well.

Myth Sold: Efficiency Will Save Us. Like the old line about balancing the federal budget by eliminating waste and fraud, this sounds reasonable but never happens. The frackers concentrated on the “sweet spots,” the small areas of their holdings with the best returns, and they started placing four drilling rigs, instead of one, on each pad.

Fact: Thus their production actually increased for a few months after the price crash. But, well productivity is flatlining now and with the rig count down by about half, new wells are not being brought on line and production has started to fall sharply.

Myth Sold: Hedging Will Save Us. For the first year or so of depressed prices, frackers benefited from hedges — contracts to sell their product at last year’s prevailing prices. The theory was, prices would be back up before the hedges ran out.

Fact: The hedges have run out. The people who used to take the other side of the hedges are not answering frackers’ phone calls. Maybe because their phones have been disconnected.

Myth Sold: Junk Bonds Will Save Us. And so they did, for a while. Infusions of cash — from, among others, vultures hoping to acquire cheap oil company assets and ride the resurgence to a new, new oil revolution — in the form of junk bonds, leveraged loans, sub-prime loans, covenant-lite loans, etc., kept the bubble inflated.

Fact: What resurgence? Banks and other lenders, reluctant to recognize the mounting losses, continued to pretend that the oil companies whose assets’ worth had been cut in half were still solvent. Nothing wrong here! Why do you ask?

New Fact: Right now, the banks are conducting a mandatory review of the worth of the assets pledged against their fracking loans, that is, the value of the oil the companies still have to extract. This spring, the banks assessed the oil at last year’s prices, and with fingers tightly crossed rolled over the loans.

It was a stretch then; can they do it again, eke out a few more months of myths? On the one hand, maybe so, denial is not just a river in Egypt. On the other hand, good as they have been, the sellers of the myths appear to be sold out.  


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: It’s Here

Off the keyboard of Thomas Lewis

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panic

A CNBC anchor after trying to explain hedging against the volatility of stocks indexed to the Volatility Index. The end is near now.


Published on the Daily Impact on August 31, 2015

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Screw it, I’m calling it. I’ve been watching the so-called “markets” of China, the United States and a couple dozen other countries fall off a cliff, get up, stagger upward, fall off another cliff, and repeat. I’ve been listening to the chattering class say over and over again, this is normal, seen this before, everybody buy the dip. I’ve been watching the zombie oil-fracking revolution in this country go into spasms, jerking a few feet forward, a few feet back, gasping for breath, while the cheerleaders agree: perfectly normal, blood pressure okay, reflexes good, lend them more money. This is not normal, it is not okay, it is the Crash of 2015.

We will not likely agree on this until we stop using wildly different languages with which to discuss it. First of all, to refer to these things as “stock markets,” as if they were places where equities were bought and sold based on the soundness and prospects of the companies listed, is akin to putting your faith in the tooth fairy and Santa Claus.

These places are casinos filled with gambling addicts using other people’s money to bet, not on the future of a stock but on the popularity of a stock among the greater fools on whom the gambler must unload the shares of Consolidated Aggregators he just bought on the dip. In this casino, trading in shares themselves is like playing the slot machines, there in the lobby of the casino for the amusement of the little people risking their quarters. The real games are played in private rooms with derivatives, futures, hedges, credit default swaps, junk bonds. The master of the universe are even gambling on the outcomes of corporate lawsuits (and for what reason, do we suppose, has that practice alone drawn the disapproving attention of the drones of Washington?). They are buying hedges against the volatility of securities indexed to the volatility of the market. If you can think about that one for more than 30 seconds without your head exploding, your mellowness index is in the stratosphere. Increasingly the gambling is being done by machines, programmed by the Masters to detect the circumstances under which they are to blow up the world.  

The commerce of the world, like the Gulf Stream in the Atlantic Ocean, is slowing down, bestowing unimaginable collateral damage as its does so. The prices of all industrial commodities (not just oil) have tanked, taking down the economies and currencies of the countries who depend for their existence on the exploitation of their natural resources. The volume of stuff being shipped from pace to place has withered. Both commerce and the Gulf Stream are losing the sources of their energy: in the case of the Gulf Stream, it’s temperature differential; in the case of trade, it’s money in the hands of the middle class, being spent on consumer goods.

Money, not credit. The Masters like to pretend they are the same thing but they are not. To issue consumers more credit cards, or more mortgage refi’s, is not the same thing as providing them with a living wage. To inject more money into the equity of banks and corporations, as the central banks have been doing for decades, does not, it turns out, create a tide of well being that lifts all boats. It’s like feeding the cow at the wrong end. No matter how much nutritious food you ram in, it’s just not going to help.

They have got away with this madness — the Masters, the Pundits, the Shills and the Gamblers — largely because decent people cannot believe anyone could possibly be crazy enough to do what they seem to be doing. Decent people tend not to remember the Housing Bubble Crash, the Dot-Com Crash, the Savings and Loan Crash, the Enron Crash, etc. etc.

Even if they’re gambling, surely it’s still true that the house never loses? Yes, that’s still true. As long as there are customers in the house. Look around. The customers are cashing in their chips and leaving China, the emerging markets, the junk-bond markets and the US markets as fast as they can without actually yelling “fire” and trampling each other.

Believe it. They are crazy, and this is the Crash of 2015.

It is not the Crash of the Industrial Age, not yet, although that, too, is ongoing. We will probably emerge from the Crash of 2015 onto the littered, downward slope of depression toward the ultimate collapse, still it seems several uncomfortable years in the future.  But we will have cause to remember the Crash of 2015.


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.

True Believers

From the keyboard of James Howard Kunstler
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oil shock for law firms
 
Originally Published on Clusterfuck Nation  August 17, 2015
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There is a special species of idiot at large in the financial media space who believe absolutely in the desperate and tragic public relations bullshit that this society churns out to convince itself that the techno-industrial high life can continue indefinitely, despite the mandates of reality — in particular, the fairy tales about oil: we’re cruising to energy independence… the shale oil “miracle” will keep us driving to WalMart forever… our wells doth overflow as if this were Saudi America… don’t worry, be happy…!

Such a true believer is John Mauldin, the investment hustler and writer of the newsletter Thoughts From the Frontline, who called me out for obloquy in his latest edition. After dissing me, he said:

“I have written for years that Peak Oil is nonsense. Longtime readers know that I’m a believer in ever-accelerating technological transformation, but I have to admit I did not see the exponential transformation of the drilling business as it is currently unfolding. The changes are truly breathtaking and have gone largely unnoticed.”

Mauldin is going to be very disappointed when he discovers that the vaunted efficiencies in shale drilling and fracking he’s hyping will only accelerate the depletion of wells which, at best, produce a few hundred barrels of oil a day, and only for the first year, after which they deplete by at least half that rate, and after four years are little better than “stripper” wells. The PR shills at Cambridge Energy Research (Dan Yergin’s propaganda mill for the oil industry) must have pumped a five-gallon jug of Kool-Aid down poor John’s craw. He believes every whopper they spin out — e.g. that “Right now, some US shale operators can break even at $10/barrel.”

The truth is the shale oil industry couldn’t make a profit at $100/barrel. The drilling and fracking boom that began around 2005 was paid for with high-risk, high-yield junk bond financing and other sketchy, poorly collateralized financing. Most of the earnings in the early years of shale oil came from flipping land leases to greater fools. Now that the price of oil has fallen by more than 50 percent in the past year, the prospect dims for that junk financing to be repaid. Since that was “bottom-of-the-barrel” financing, the odds are that the shale producers will have a very hard time finding more borrowed money to keep up the relentless pace of drilling needed to stay ahead of the short depletion rates. They are also running out “sweet spots” that are worth drilling.

We will look back on the shale oil frenzy of 2005 to 2015 as a very interesting industrial stunt borne of desperation. It gave a floundering industry something to do with all its equipment and its trained personnel, and it gave wishful hucksters something to wish for, but it never penciled-out economically. Shale oil production turned down in 2015 and the money will not be there to get the production back to where it was before the price crash. Ever.

Some additional uncomfortable truths should temper the manic fantasies of hypsters like Mauldin. One is that we are no longer in the cheap oil age. All the new oil available now is expensive oil — whether it’s Bakken shale or deep water or arctic oil — and it costs too much for our techno-industrial society to run on. That is why the world financial system is imploding: we can’t borrow enough money from the future to keep this game going, and we can’t pay back the money we’ve already borrowed. We have to get another game going, one consistent with contraction and with much lower energy use. But that is not an acceptable option to the people running things. They are determined to keep the current matrix of rackets going at all costs, and the certain result will be very messy collapse of economies and governments.

Industrial economies face a fatal predicament: Oil above $75/barrel crushes economies; under $75/barrel it crushes oil companies. We’ve oscillated back and forth between those conditions since 2005. The net effect in the USA is that the middle class is rapidly going broke. All the financial shenanigans aimed at propping up Wall Street and Potemkin stock markets was carried out at the expense of the middle class, now deprived of jobs, incomes, vocations, stability, and prospects. They may already be at the point where they can’t afford oil at any price. That “energy deflation” dynamic, in the words of Steve Ludlum at the Economic Undertow blog, is a self-reinforcing feedback loop that beats a path straight to epochal paradigm shift: get smaller, get local, get real, or get out.

The hypsters and hucksters won’t believe this until it jumps up and bites them on the lips. These are the same idiots who believe we are going to continue Happy Motoring by other means — self-driving, all-electric cars — and who think there is some reason for human beings to travel to other planets when we haven’t even demonstrated that we can plausibly continue life on this one.

As I averred last week, America is at the bottom of a self-knowledge low cycle in which we are incapable of constructing a coherent story about what is happening to us. The techno-industrial fiesta was such a special experience that we can’t believe it might be coming to an end. So, one option is to believe stories that have no basis in reality. As Tom McGuane wrote some forty years ago: “Life in the old USA gizzard had changed and only a clown could fail to notice. So being a clown was a possibility.”


James Howard Kunstler is the author of many books including (non-fiction) The Geography of Nowhere, The City in Mind: Notes on the Urban Condition, Home from Nowhere, The Long Emergency, and Too Much Magic: Wishful Thinking, Technology and the Fate of the Nation. His novels include World Made By Hand, The Witch of Hebron, Maggie Darling — A Modern Romance, The Halloween Ball, an Embarrassment of Riches, and many others. He has published three novellas with Water Street Press: Manhattan Gothic, A Christmas Orphan, and The Flight of Mehetabel.

The Crash of 2015: On Track, Behind Schedule

Off the keyboard of Thomas Lewis

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As demonstrated in Paris in 1895, what matters is not whether the train wreck was on time. What matters is that it’s a wreck. (Wikipedia Photo)

Published on the Daily Impact on June 22, 2015

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The dominoes are toppling, just as we have been expecting for nearly a year now, but slower than we thought. The fact-resistant strain of humans (Thank you, Borowitz Report) now in charge of the world are trying to use vast amounts of money to counteract gravity, and, counterintuitively, succeeded in slowing the dominoes’ fall. But not for long.

To review our expectations of last summer: the hideous decline rate of fracking wells (of up to 90% in three years) was forcing frackers to borrow huge amounts of money to put up large numbers of new wells at a breakneck pace in order to preserve the illusion (it was always an illusion) of a revolution in American oil leading to prosperity and “energy independence.” On average, it cost the frackers over $4 to get $1 of revenue in the door during the first quarter of this year. A year ago, with oil commanding $100 a barrel, they were still spending $2. As the old joke goes, the only way to make any money when you’re losing on every transaction is to make up for it with volume. But since most of the money spent was capital expenditure — i.e. new wells — their operating statements showed profits and nobody looked at the balance sheets.

We ran this scenario on our abacus and concluded that these guys were going to go broke. And that when they did, not only would U.S. oil production resume its long slide toward zero, begun in 1970, but they would blow up the junk-bond market, almost certainly the bond market, and probably the stock market. These expectations were in place before the price of oil tanked last fall, and set the expectations in concrete.

Now, let’s review the state of play:

Are they broke? Pretty much. As Bloomberg reports (“The Shale Industry Could be Swallowed by its Own Debt”), S&P has so far this year lowered the outlook or downgraded the credit of almost half the exploration and production companies it rates. Amazingly, despite the awful numbers, lenders have continued to pour money into the zombie companies (See “Oil Money: Too Dumb to Fail”) as they struggle to keep pumping so they can turn over their debt so they can keep pumping. Remember the old advice — when you find yourself in a hole, stop drilling? They don’t.

Has the junk-bond market fallen apart yet? Looks like it. “Investors” experiencing sudden attacks of vertigo pulled $5.5 billion out of the junk bond market in the two weeks ending June 17, and $3.6 billion so far this year out of the funds based on high-risk “leveraged” loans.

Is the regular bond market in danger? Oh, yeah. According to Bank of America Merrill Lynch, last week “High grade credit funds suffered their biggest outflow this year, and double the previous week.” Some of this was no doubt related to the hair-on-fire volatility of the European and Asian bond markets during the last month or so, but not all of it.

Is oil fracking production declining? Yes, indeed. According to the U.S. Energy Information Administration, fracking output declined last month, by more this month, and will continue falling off at least through the end of the year. (It’s really a forever thing, but they can’t bring themselves to say it.) [See “It’s Official: The Shale-Oil Boom is Over”]. Worldwide, 150,000 jobs in oil and gas production have vaporized, with the U.S. having the “fastest and steepest decline.”

Is the stock market in trouble? Deeply. On Thursday, the Nasdaq tech-stock index reached its highest number in history, but only the uninformed, the inexperienced and the truly, deviously evil are celebrating it. It’s like having a party because grandma, at 99, just recorded her highest temperature ever. Stocks are hideously over-valued, highly leveraged, and insanely volatile — all sure signs of impending crash. Every day now, you can find some Master of the Universe talking of the need to have at hand a bag of “physical cash” in preparation for what they are referring to as a “systemic event.”

How much more clearly, and with how much more authority, could we possibly be told to brace for impact?


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: Day 29-30

From the keyboard of Thomas Lewis
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Maybe we could still live in the top floor? If we could just slow it down a little?

Maybe we could still live in the top floor? If we could just slow it down a little?

First published at The Daily Impact  January 29, 2014

A couple of things to keep firmly in mind as we watch the Crash of 2015 unfold, pretty much on the schedule I’ve been writing about here for six months. First, the drop in oil prices is not the cause of this disaster, merely an accelerant. The fracking industry is succumbing to its inherent high expense, toxicity, rapid depletion rates and over-reliance on junk financing. Similarly, the stock market crash we expect to follow the fracking collapse would have come anyway because of its inherent instability, and indeed may yet occur before the chain reaction in the fracking fields has run its course. And finally, what is happening to fracking is also happening to the legacy oil business, only slower.

Ignore the noise about how this is all a plot by Saudi Arabia, or by all of OPEC, to destroy the gallant frackers of America. The Saudis control the world oil business the way the legendary horse trainer said he controlled his horse: “I look real close and see what he’s going to do,” he’s supposed to have said, “and then I tell him to do that.” The Saudis look real close and see where the market just went, and then say yeah, we did that.

To remind ourselves of the sequence we’re expecting to see in this crash, beginning in the fracking patch: layoffs, contractions, capital starvation, production declines, defaults, junk-bond market collapse, widening financial damage, stock market crash, recession. So, how are we doing so far?

Layoffs and contraction, check: The number of oil rigs operating in the United States has dropped to its lowest since 2013, and most of that decline came in the Bakken play in North Dakota. The total dropped by 49 in the week ending Jan. 23, bringing the total down to 1,317, according to Baker Hughes. In seven weeks, The number of US rigs has dropped by a record 258. If the trend continues a few more weeks, there will not be enough rigs operating to maintain production, and analysts such as John Kemp of Reuters foresee a sharp decline in fracking production beginning at midyear.

The numbers are even worse than they look at first glance when you take into account that current procedure in the fracking patch is to use rigs to drill up to four wells from a single pad, rather than moving the rig each time. Thus a stacked rig doesn’t just mean the loss of one well, then another and another, but four wells, then eight, 16 and so on in the same time frame.

In slower motion, the same disaster is spreading through the legacy oil business. More than 30,000 layoffs have been announced across the industry as companies slash budgets, according to Bloomberg News. Exploration and production spending is expected to drop by more than $116 billion, a 17 percent decline, because of falling crude revenues, according to an estimate from Cowen & Co.  BP has frozen wages, Chevron has delayed its 2015 drilling budget and Shell has canceled a $6.5 billion Persian Gulf investment; New York-based Hess Corp. on Wednesday reported a fourth-quarter net loss of $8 million

Capital starvation, check: The fracking boom got this far with stock offerings, junk bonds, and “leveraged” loans. The stock prices of the operators have tanked, and the markets for more junk bonds and loans are essentially closed to frackers. (The reason we will continue to see production continue, even increase, in the short term is that the operators, in debt to their eyeballs, have to pump oil or die.)

The damage is already metastasizing to the general junk-bond market. The total value of such bonds issued is down one-third from last year; just this week, two offerings by companies not in the oil business — Presidio Holdings ($400 million) and Koppers Holdings ($400 million) — failed for complete lack of interest, even though they were offering as much as 11% return; investors in high yield mutual funds withdrew nearly a quarter of a billion dollars last week, a week that saw leveraged-loan funds bleed out nearly three-quarters of a billion.

Next, production declines and defaults. Stay tuned.

[UPDATE: Red flags up at Bloomberg Business News, which counts $390 billion vaporized by the oil implosion so far, with losses now “starting to show up in investment funds, retirement accounts and bank balance sheets.” Read it and run.}

 

***

 

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.

 

 

Attention in the Crowded Theater: Fire!

From the keyboard of Thomas Lewis
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Firefighters try to snuff an oil well fire in Iraq in 2003. What is happening to the oil business today, especially in the United States, is akin to a thousand such fires.

Firefighters try to snuff an oil well fire in Iraq in 2003. What is happening to the oil business today, especially in the United States, is akin to a thousand such fires.

First published at The Daily Impact  January 7, 2015

The flames of the next financial crash are leaping up everywhere you look (if you look without wearing the rose-colored glasses): in the Bakken fracking fields of North Dakota, the Eagle Ford in Texas, the tar sands of Alberta, the deep waters of the Gulf of Mexico. They are lighting up the night sky in all directions, and in the daytime the smoke is sickening the light and smelling up the air in the skyscraper offices of the Masters of the Universe where they shuffle decks of junk bonds, subprime loans and derivatives. Along with the smoke, you can smell the fear. This is going to be bad.

Serious testimony in a minute, but first an odd moment of clarity that I caught by accident yesterday on CNBC during its “Closing Bell” program. One of the female anchors was interviewing an analyst sent over from Central Casting to opine on oil prices. How low could they go, she asked him, somebody was predicting $20 a barrel? “Well,” oozed the analyst, “the models don’t support $20 a barrel.” Which is when the anchor person lost it (I was caught off guard, and am reconstructing this from memory, so consider it a paraphrase).

“You know what?” She said. “This conversation is driving me crazy. What do you mean the models don’t support $20? The models didn’t see any of this coming. None of them predicted any of this. Nobody saw any of it coming. Doesn’t anybody have any idea what is going on?”  

I wonder if we will see her face again, now that she has committed the worst sin a journalist can commit on air — blurting out the truth.

With respect to the narrow question of why oil prices collapsed in June, no one has a clue. One of the analysts on that very CNBC panel said as much, averring that the fundamentals of supply and demand do not explain the price movement. The best estimate of the current world surplus of crude oil over demand is two per cent. Two. On what planet does an oversupply of two percent for a machine burning 90 million barrels a day lead to a 50% drop in prices?

As to the larger question of what is happening to the oil industry and everything related to it — and everything is related to it — lots of people know what is going on but they can’t go on television with their hair on fire. It’s not considered audience-friendly. But let’s review what they know:

  • The number of US oil rigs actively looking for or extracting oil is dropping fast. A report out Monday from oil field services company Baker Hughes showed the number of rigs operating in the United States declined for the fourth consecutive week — by 29 in the latest count, to 1,811. That, combined with last week’s decline of 35, marked the largest two-week drop in the U.S. rig count since 2009. (Ahem: you remember what else was going on in 2009?)
  • Layoffs are rising of stunned workers who thought they were in a bonanza that would last for years. For weeks now, many players in the fracking patch have been announcing that nothing is wrong but that as precautions they are laying down rigs and reducing exploration budgets and cutting production forecasts. So far just one company, American Eagle Energy, has suspended drilling entirelyuntil oil prices rebound. There will be more, directly.
  • Collateral damage is spreading to oil-patch service providers: Civeo, a Houston-based company that builds lodging for oil workers,announced on December 29 that it would cut its workforce by 45 percent because of lower demand for “man camp” trailers. U.S. Steel has just announced the shuttering of two plants in Texas and Ohio that make oil drilling equipment and that employ 750 people. In Williston, North Dakota “The Bakken Club,” which offered exclusive services to oil-patch players including fine dining, airport shuttling, and corporate events, has been closed because it can’t pay its rent.The Federal Reserve Bank of Dallas, estimates that 250,000 jobs could be lost in 2015 if oil prices don’t rise.

 The “Don’t Worry Be Happy” chorale  has a new verse, about how it takes a year for plans to reduce output to show up as reduced output, so maybe prices will recover first and hesto presto, no pain! That was true when the average productive life of an oil well was on the order of 20 years, but the productive life of a fracking well is about three years. This, as they say, changes things.  Wells playing out in the Bakken in November, for example, subtracted 60,000 barrels per day from the field’s production. In November, that was more than made up for by new wells coming on line. In January, after God-knows-how-many more rigs have been idled, 77,000 barrels per day will be lost. Get the picture?

Not yet? Then look at this picture. Geological consultant and shale-oil expert Arthur Berman explained to Oilprice.com that the chorale’s other verse, about frackers breaking even at the new low price, because of their new technologies, makes no sense:

“Continental Resources is the biggest player in the Bakken. Their free cash flow—cash from operating activities minus capital expenditures—was -$1.1 billion in the third- quarter of 2014. That means that they spent more than $1 billion more than they made. Their debt was 120% of equity. That means that if they sold everything they own, they couldn’t pay off all their debt. That was at $93 oil prices. And they say that they will be fine at $60 oil prices? Are you kidding?”

But wait, there’s more. If you call right now, we’ll give you the latest increases in junk bond and leveraged-loan rates, which are driving up driller’s expenses as fast as their revenues are shrinking. And the latest quotes for the tanking share prices of just about any company having anything to do with oil. Oh, and the even-worse-case scenario in the Canadian tar sands.

You might have to let the phone ring for a while. I’ll be in the bunker, putting out my hair.

***

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.

 

 

Oil Price Crash!!! Part 2

logopodcastOff the microphone of RE

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Aired on the Doomstead Diner on December 16, 2014

http://evsroll.com/images/Historic-Oil-Price-Graph.gif

Discuss this Rant at the Podcast Table inside the Diner

Before going into the Rant, I thought it would be a good idea to review the price charts and profitability aspects as the price continues to crater here, with the Saudis now Jawboning a possible $40 Handle.  Below some charts for where we are right now as background for the Rant.

http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2014/12/20141212_EOD17.jpg

Here we see how vast the decoupling of Stocks and Credit is from the cratering price of Oil.  In all likelihood, both will catch up (or rather DOWN) here in short order.

http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2014/12/fig%20133.jpg

On the international level, this chart gives you a good idea of how much Red Ink various OPEC countries are bleeding at the current price. It gets bigger obviously as the price goes further south.  The Saudis are sitting on a pile of money to try to weather the storm, but Venezuela is already broke.  The Ruskies are seeing a Run on the Ruble as well as dealing with sanctions.

http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2014/12/20141212_CL3.jpg

http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2014/11/20141107_shale.jpg

At a price in the $50 Handle range, most of the Fracking Plays are money losers.  They’ll probably pump dry what is already drilled as the costs are sunk in the ground already, but new drilling and new CapEx will not occur until prices come back up, if they ever do.  Market Cap of Energy Companies is getting hammered and many will go into Chapter 11.  Halliburton has lost half its Market Cap since July, EOG Resources about a third of theirs.

http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2014/12/20141212_EOD3.jpg

Bond Yields for the Energy Sector are skyrocketing, which means the Bond Prices are collapsing since Price moves inversely to Yield.  Rolling over old debt and financing money losing operations is going to become increasingly more difficult.

http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2014/12/Barrons%20top%20tick.png

Stocks are trailing Oil in the Crash, but are likely to get a lesson in Gravity soon.

http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2014/12/20141212_rig.jpg

Rig Counts are already declining, a pattern likely to accelerate after January 1st.  Large Layoffs and Unemployment in the sector is likely soon.

Now, LET’S RANT!!!!


Snippet:

liquidation…The latest Jawboning from the Saudis is they are prepared to let it fall to the $40 range, but it is unclear that even a $40/bbl price will get demand to rebound here in countries now sporting 50% youth unemployment. If they start giving it away FREE, that might get it to rebound, which brings us right back to how this whole system got rolling.

In the beginning, when Oil came Spurting up out of the Ground on Jed Clampett’s farm, it cost close to nothing to extract it. John D. Rockefeller and Standard Oil provided cheap oil to leverage up all the industries that depend on consuming it, the automotive and airline industries primarily. For around 100 years from 1875 to 1975, Oil price was FLATLINED at below $1/bb, and then the first of the Oil Shocks hit with the Embargo from OPEC, and then around 2000 the price went parabolic and shot up to over $100, precipitating the crash of 2008.

The price dropped into the $30 range, and then Da Fed began its EZ money policies, providing a stream of ZIRP money for Wall Street to gamble with, which they did in spades, funding the Shale Revolution with a ton of junk bonds, now all set to go worthless. What they forgot to do here was fund the consumption end of the equation, and as a result demand has been dropping steadily, to the point now where there is a glut of oil on the market and the producers have to do a Liquidation Sale at whatever they can get for it, EVERYTHING MUST GO!

For the rest, LISTEN TO THE RANT!!!

In case you missed it, here is Oil Crash!!! Part 1

Note: For non-native speakers of English and people who prefer to read rather than listen, you can find the Full Transcript HERE on Thursday

Guess What Happened The Last Time The Price Of Oil Crashed Like This?…

Off the keyboard of Michael Snyder

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Published on The Economic Collapse on November 30, 2014

This is where stock and gas prices are going. To see the panic index, read from right to left.

This is where stock and gas prices are going. To see the panic index, read from right to left.

Discuss this article at the Economics Table inside the Diner

Price Of Oil Causes A Junk Bond Crash - Public DomainThere has only been one other time in history when the price of oil has crashed by more than 40 dollars in less than 6 months.  The last time this happened was during the second half of 2008, and the beginning of that oil price crash preceded the great financial collapse that happened later that year by several months.  Well, now it is happening again, but this time the stakes are even higher.  When the price of oil falls dramatically, that is a sign that economic activity is slowing down.  It can also have a tremendously destabilizing affect on financial markets.  As you will read about below, energy companies now account for approximately 20 percent of the junk bond market.  And a junk bond implosion is usually a signal that a major stock market crash is on the way.  So if you are looking for a “canary in the coal mine”, keep your eye on the performance of energy junk bonds.  If they begin to collapse, that is a sign that all hell is about to break loose on Wall Street.

It would be difficult to overstate the importance of the shale oil boom to the U.S. economy.  Thanks to this boom, the United States has become the largest oil producer on the entire planet.

Yes, the U.S. now actually produces more oil than either Saudi Arabia or Russia.  This “revolution” has resulted in the creation of  millions of jobs since the last recession, and it has been one of the key factors that has kept the percentage of Americans that are employed fairly stable.

Unfortunately, the shale oil boom is coming to an abrupt end.  As a recent Vox article discussed, OPEC has essentially declared a price war on U.S. shale oil producers…

For all intents and purposes, OPEC is now engaged in a “price war” with the United States. What that means is that it’s very cheap to pump oil out of places like Saudi Arabia and Kuwait. But it’s more expensive to extract oil from shale formations in places like Texas and North Dakota. So as the price of oil keeps falling, some US producers may become unprofitable and go out of business. The result? Oil prices will stabilize and OPEC maintains its market share.

If the price of oil stays at this level or continues falling, we will see a significant number of U.S. shale oil companies go out of business and large numbers of jobs will be lost.  The Saudis know how to play hardball, and they are absolutely ruthless.  In fact, we have seen this kind of scenario happen before

Robert McNally, a White House adviser to former President George W. Bush and president of the Rapidan Group energy consultancy, told Reuters that Saudi Arabia “will accept a price decline necessary to sweat whatever supply cuts are needed to balance the market out of the US shale oil sector.” Even legendary oil man T. Boone Pickens believes Saudi Arabia is in a stand-off with US drillers and frackers to “see how the shale boys are going to stand up to a cheaper price.” This has happened once before. By the mid-1980’s, as oil output from Alaska’s North Slope and the North Sea came on line (combined production of around 5-6 million barrels a day), OPEC set off a price war to compete for market share. As a result, the price of oil sank from around $40 to just under $10 a barrel by 1986.

But the energy sector has been one of the only bright spots for the U.S. economy in recent years.  If this sector starts collapsing, it is going to have a dramatic negative impact on our economic outlook.  For example, just consider the following numbers from a recent Business Insider article

Specifically, if prices get too low, then energy companies won’t be able to cover the cost of production in the US. This spending by energy companies, also known as capital expenditures, is responsible for a lot of jobs.

“The Energy sector accounts for roughly one-third of S&P 500 capex and nearly 25% of combined capex and R&D spending,” Goldman Sachs’ Amanda Sneider writes.

Even more troubling is what this could mean for the financial markets.

As I mentioned above, energy companies now account for close to 20 percent of the entire junk bond market.  As those companies start to fail and those bonds start to go bad, that is going to hit our major banks really hard

Everyone could suffer if the collapse triggers a wave of defaults through the high-yield debt market, and in turn, hits stocks. The first to fall: the banks that were last hit by the housing crisis.

Why could that happen?

Well, energy companies make up anywhere from 15 to 20 percent of all U.S. junk debt, according to various sources.

It would be hard to overstate the seriousness of what the markets could potentially be facing.

One analyst summed it up to CNBC this way

This is the one thing I’ve seen over and over again,” said Larry McDonald, head of U.S strategy at Newedge USA’s macro group. “When high yield underperforms equity, a major credit event occurs. It’s the canary in the coal mine.

The last time junk bonds collapsed, a major stock market crash followed fairly rapidly.

And those that were hardest hit were the big Wall Street banks

During the last high-yield collapse, which centered around debt tied to the housing sector, Citigroup lost 63 percent of its value in the following 60 days, Kensho shows. Bank of America was cut in half.

I understand that some of this information is too technical for a lot of people, but the bottom line is this…

Watch junk bonds.  When they start crashing it is a sign that a major stock market collapse is right at the door.

At this point, even the mainstream media is warning about this.  Just consider the following excerpt from a recent CNN article

That swing away from junk bonds often happens shortly before stock market downturns.

“High yield does provide useful sell signals to equity investors,” Barclays analysts concluded in a recent report.

Barclays combed through the past dozen years of data. The warning signal they found is a 30% or greater increase in the spread between Treasuries and junk bonds before a dip.

If you have been waiting for the next major financial collapse, what you have just read in this article indicates that it is now closer than it has ever been.

Over the coming weeks, keep your eye on the price of oil, keep your eye on the junk bond market and keep your eye on the big banks.

Trouble is brewing, and nobody is quite sure exactly what comes next.

Knarf plays the Doomer Blues

https://image.freepik.com/free-icon/musical-notes-symbols_318-29778.jpg

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