AuthorTopic: Oil Price Crash!!!  (Read 40486 times)

Offline azozeo

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Re: Oil Price Crash!!!
« Reply #15 on: December 12, 2014, 06:59:29 PM »
Why ever do we allow important things to be designed or decided by stupid and greedy people?
Because they're the ones who show up....

Plain & simple......
Psychopaths run the show !
I know exactly what you mean. Let me tell you why you’re here. You’re here because you know something. What you know you can’t explain, but you feel it. You’ve felt it your entire life, that there’s something wrong with the world.
You don’t know what it is but its there, like a splinter in your mind

Offline roamer

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Re: Oil Price Crash!!!
« Reply #16 on: December 12, 2014, 08:54:35 PM »
Can someone explain to a guy like me--who knows very little about the relation of oil to funnymoney (I know enough to know I don't know)--what the hell is going on? Put it in plain language, please.

My weak understanding is that much of the shale boom would not have been financed without QE pushing easy money into the banks,  the other component is that once the boom got going alot of others got funded in the game through high interest junk bonds.  It all is well and fine so long as prices stayed high enough for it to be marginally profitable but of course once prices go south the thing unravels like a ponzi since the economics were marginal to begin with and did not have built in resilience to tolerate price drops.

Despite looking like an organized ponzi or a funny money scheme nothing that coordinated or directly sinister seems to have happened.  One of the unintended consequences of QE is that it fueled risky bets that would not have gotten started otherwise and in the case of the Bakken boom once fueled it really took off and snowballed. 

Now the bill is due for those bets, and it looks like the end result will be that we ate up alot of wealth to temporarily keep the net energy decline at bay.  It will be very interesting to see how this bill is paid.  My hunch is all direct investors get burned badly but that the banks will come out fine and the rest of the bill will likely get paid by everybody with indirect market exposure.   
« Last Edit: December 12, 2014, 09:19:51 PM by roamer »

Offline K-Dog

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Re: Oil Price Crash!!!
« Reply #17 on: December 12, 2014, 10:04:38 PM »

Despite looking like an organized ponzi or a funny money scheme nothing that coordinated or directly sinister seems to have happened.

No nothing sinister about Obama turning blue as he blows bubbles with a polyethylene soap bottle in one hand and his bubble dipper wand in the other held up to his face.  A hint to the artists among you.  That would make a great cartoon.  Don't forget to make the ears big.
Under ideal conditions of temperature and pressure the organism will grow without limit.

Offline RE

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Re: Oil Price Crash!!!
« Reply #18 on: December 13, 2014, 03:00:46 PM »
Can U Spell B-A-N-K-R-U-P-T ?

RE

"This $550 Billion Mania Ends Badly," Energy Companies Are "Shut Out Of The Credit Market"

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"Anything that becomes a mania -- it ends badly," warns one bond manager, reflecting on the $550 billion of new bonds and loans issued by energy producers since 2010, "and this is a mania." As Bloomberg quite eloquently notes, the danger of stimulus-induced bubbles is starting to play out in the market for energy-company debt - as HY energy spreads near 1000bps - all thanks to the mal-investment boom sparked by artificially low rates manufactured by The Fed. "It's been super cheap," notes one credit analyst. That is over!! As oil & gas companies are “virtually shut out of the market" and will have to "rely on a combination of asset sales" and their credit lines. Welcome to the boom-induced bust...

 

As Bloomberg reports, with oil prices plunging, investors are questioning the ability of some issuers to meet their debt obligations. Research firm CreditSights Inc. predicts the default rate for energy junk bonds will double to eight percent next year.

“Anything that becomes a mania -- it ends badly,” said Tim Gramatovich, who helps manage more than $800 million as chief investment officer of Santa Barbara, California-based Peritus Asset Management. “And this is a mania.”

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 Investors Service 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...

Energy companies are no longer able to access credit...

 

“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.

The Fed’s three rounds of bond buying were a gift to small companies in the capital-intensive energy industry that needed cheap borrowing costs to thrive, according to Chris Lafakis, a senior economist at Moody’s Analytics in West Chester, Pennsylvania.

 

Quantitative easing “has been one of the keys to the fast, breakneck pace of the growth in U.S. oil production which requires abundant capital,” Lafakis said.

 

One of those to take advantage was Energy XXI, an oil and gas explorer, which has raised more than $2 billion in the bond market in the past four years.

 

The Houston-based company’s $750 million of 9.25 percent notes, issued in December 2010, have tumbled to 64 cents on the dollar from 106.3 cents in September, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. They yield 27.7 percent.

 

Energy XXI got its lenders in August to waive a potential violation of its credit agreement because its debt had risen relative to its earnings, according to a regulatory filing. In September, lenders agreed to increase the amount of leverage allowed.

And the blowback is coming...

“There are distortions in multiple markets,” said Lawrence Goodman, president of the Center for Financial Stability, a monetary research group in New York. “It is like a Whac-A-Mole game: You don’t know where it is going to pop up next.”

 

...

 

“Oil companies that have high funding costs in the Eagle Ford and the Bakken shale plays are the ones that are most exposed right now due to lower crude prices,” Gary C. Evans, chief executive officer of Magnum Hunter Resources (MHR) Corp., said in a phone interview.

 

...

 

For other energy borrowers at risk, “the liquidity squeeze” will probably occur in March or April when banks re-calculate hoe much they may borrow under their credit lines based on the value of their oil reserves.

 

Deutsche Bank analysts predicted in a Dec. 8 report that about a third of companies rated B or CCC may be unable to meet their obligations should oil prices drop to $55 a barrel.

 

“If you keep oil prices low enough for long enough, there is a pretty good case that some of the weakest issuers in the high-yield space will run into cash-flow issues,” Oleg Melentyev, a New York-based credit strategist at Deutsche Bank, said in a telephone interview.

*  *  *

As we noted previously, here is Deutsche Bank's most granular research:

Here are the details:

 
 

So how big of an impact on fundamentals should we expect from the move in oil price so far and where is the true tipping point for the sector? Let’s start with some basic datapoint describing the energy sector – it is the largest single industry component of the USD DM HY index, however, given this market’s relatively good sector diversification, it only represents 16% of its market value (figure 2). Energy is noticeably tilted towards higher quality, with BB/B/CCC proportions at 53/35/12, compared to overall market at 47/37/17. We find further confirmation to this higher-quality tilt by looking at Figure 3 below, which shows its leverage being around 3.4x compared to 4.0x for overall market. Similarly, their interest coverage stands at noticeably higher levels, even having declined substantially in recent years (Figure 4).

 

 

Energy issuer leverage has increased faster than that of the rest of the market in recent years, but this trend has largely exhausted itself in recent quarters. As Figure 5 demonstrates, growth rates in total debt outstanding among US HY energy names have been only slightly higher relative to the rest of HY market. It is almost certain in our mind that with the current shakeout in this space further incremental leverage will be a lot harder to come by going forward.

 

Perhaps the most unsustainable trend that existed in energy going into this episode shown in Figure 6, which plots the sector’s overall capex expenditure, as a pct of EBITDAs. The graph averaged 150% level over the past four years, clearly the kind of development that could not sustain itself over a longer-term horizon. Our 45%-full sample of issuers reporting Q3 numbers has shown this figure coming down to 110%, a move in the right direction, and  yet a level that suggests further capacity for decline. This chart also shows, perhaps better than any other we have seen, the extent to which current economic  recovery in the US has in fact been driven by the energy development story alone.

 

 

The next question we would like to address here is to what extent the move in oil so far could translate into actual credit losses across the energy sector. To help us approach this question we are borrowing from the material we are going to discuss in-depth in next week’s report on our views on timing/extent of the upcoming default cycle. For the purposes of the current exercise we will limit ourselves to saying that we have identified total debt/enterprise value (D/EV) as an important factor helping us narrow down the list of potential defaulters. Specifically, our historical analysis shows that names that go into restructuring, on average, have their D/EV ratio at 65% two years prior to default, and, expectedly, this ratio rises all the way to 100% at the time of restructuring. From experiences in 2008-09 credit cycle we have also determined that there was a 1:3 relationship between the number of defaulting issuers and the number of issuers trading at 65%+ D/EV prior to the cycle. Again, we are going to present detailed evidence behind these assumptions in the next week’s report.

 

For the time being, we will limit ourselves to applying these metrics to current valuations in the US HY energy sector, and specifically, its single-B/CCC segment. At the moment, average D/EV metric here is 55%, up from 43% in late June, before the 26% move lower in oil. About 28 pct of energy B/CCC names are trading at 65%+ D/EV, implying an 8.5% default rate among them, assuming historical 1/3rd default probability holds. This would translate into a 4.3% default rate for the overall US HY energy sector (including BBs), and 0.7% across the US HY bond market.

 

Looking at the bond side of valuation picture, we find that energy Bs/CCCs are trading at a 270bp premium over non-Energy Bs/CCCs today (Figure 7). This premium implies incremental default rate of 4.5% (= spread * (1 – recovery) = 270 * (1-0.4) = 4.5%). Actual default rate among US HY Bs/CCCs is currently running at 3%, a level that we expect to increase to 5% next year (not to be confused with overall US HY default rate, currently running at 1.7% and expected to increase to 3.0% next year).

 

The bottom line is hardly as pretty as all those preaching that the lower the oil the better for the economy:

 
 

In the next step we are attempting to perform a stress-test on oil, defined this way: what would it take for overall US energy Bs/CCCs segment to start trading at 65%+ total debt/enterprise value? Our logic in modeling this scenario goes along the following lines: if a 25% drop in WTI since June 30th was sufficient to push their average D/EV from 43 to 55, then it would take a further 0.8x similar move in oil to get the whole sector to average 65 = (65-55)/(55-43) = 0.8x, which translates into another 20% decline in WTI from its recent low of $77 to roughly $60/bbl. If this scenario were to materialize, based on historical default incidence, we would expect to see 1/3rd of US energy Bs/CCCs to restructure, which would imply a 15% default rate for overall US HY energy, and a 2.5% contribution to the broad US HY default rate.

How should one trade an ongoing collapse in oil prices? Simple: sell B/CCC-rated energy bonds and wait to pick up 10%.

 
 

If this scenario were to materialize, the US energy Bs/CCCs would have to trade at spreads north of 1,800bp, or about a 1,000bps away from its current levels. Such a spread widening translates into a 40pt drop in average dollar price from its current level of 92pts for energy Bs/CCCs.

It gets worse, because energy CapEx is about to tumble, which means far less exploration (and US fixed investment thus GDP), far less supply, and ultimately a higher oil price.

 
 

As the market adjusts to realities of sharply lower oil prices, it is important for to remember that the US HY energy sector is a higher quality part of the market. Higher credit quality will help many of them absorb an oil price shock without jeopardizing production plans or ability to service debt. Their capex rates, expressed as a pct of EBITDAs, have already declined from an average of 150% over the past four years to roughly 110% today. We still consider this level to be high and thus subject to further pressures. This in turn should work towards slower rates of supply growth, and thus ultimately towards supporting a new floor for oil prices. A 25% in oil price so far has pushed debt/enterprise valuations among US energy B/CCC names to a point suggesting 8.5% future default probability, while their bonds are pricing in a 9.5% default probability.

And the scariest conclusion of all:

 
 

Finally, our stress-test shows that a further 20% drop in WTI to $60/bbl is likely to push the whole sector into distress, a scenario where average B/CCC  energy name will start trading at 65% D/EV, implying a 30% default rate for the whole segment. A shock of that magnitude could be sufficient to trigger a  broader HY market default cycle, if materialized.

And now back to the old "plunging oil prices are good for the economy" spin cycle.

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Offline knarf

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Re: Oil Price Crash!!!
« Reply #19 on: December 13, 2014, 04:22:08 PM »
The World Should Have Learnt Enough Lessons
BILL FLECKENSTEIN

Everyone needs to buckle up because there is a lot to cover as I try to do justice to the wild events that took place in markets from Thursday through today, and what I think some of the ramifications may be.

First of all, let's take a step back. Those of us who object to money printing and know that it only leads to misallocation of capital are often talking about unintended consequences, which are usually impossible to see ahead of time. One such consequence — as perverse as it is sounds — is that money printing helped cause the price of oil to break. I know that sounds absurd, but here is how that happened.

Oil Not So Well

Money printing caused the stock market to go to the moon and suppressed the level of interest rates here and around the world. It also caused the junk bond market to be completely forgiving, so anything with a pulse is once again financeable. A lot of what received financing was exploration and production companies in the shale oil business (roughly $200 billion of junk debt outstanding). This ultimately created lots of jobs and plenty of oil supply here in America.

This capacity has now come on line at a moment when the world economy is very weak and getting weaker. Thus, when the Saudis decided not to try to support the oil market and keep it rigged, along with our excess supply, the always present cheating-wherever-possible OPEC, and world economic weakness, it caused the oil price to get smashed over the Thanksgiving holiday (in addition to the prior weakness). I suspect that the price of oil will stay below $80 for quite some time, as this will require a period of a lot of corporate re-jiggering.

Despite the fact that money printing, which is a bad thing, caused the price of oil to break, the breaking itself is beneficial to lots of businesses. However, from an economic standpoint, the amount of money that consumers will save may not help the economy as much as people think, because job creation will also suffer. Still, those who believe in money printing think it is the greatest thing in the world. What it has wrought is a stock market that has soared, a dollar that has gone with it because folks misinterpret the stock market strength as a sign of economic strength, suppressed bond markets, and an oil price that is at a level where people think it is bullish for the economy.

Bleak Friday

Meanwhile, as I noted, the world economy is weak and there are no signs of any accelerating strength here in America, as GDP growth this quarter looks to be about 2% to 2.5% and retail sales over Thanksgiving were reported to be about 11% lower than last year. To be fair, that is not exactly a just comparison because so many Black Friday sales started early, but the reason those sales started early is because the retail data in October was no good. So an 11% decline year over year is probably not accurate, but the start to the holiday shopping season was not all that strong.

The bottom line is expectations are ridiculously high for everything here in the U.S. when the actual facts have only deteriorated. For example, since the low in 2008 we have added about $6 trillion to the national debt, which has gone from roughly $11 trillion to $17 trillion, and is now over 100% of GDP. Of course, that level of debt "doesn't matter" because of the Fed's monetization, which brings us to where we are now with no more monetization, along with earnings expectations for a lot companies that I believe are going to be way too high. Thus, fourth-quarter earnings reports are liable to be a recipe for disappointment. So regardless of how maniacal the stock market trades between now and the end of the year or into early January, I think it is on borrowed time, as there is no way the ridiculous expectations that folks have can be met.

All Goosed Up and Nowhere to Go

Meanwhile, if you want to know how dicey things are, the stock market has never been more expensive from a price-to-sales standpoint (thank you, Fred Hickey, for pointing that out in his most recent letter, which was fabulous, as usual), while the market-cap-to-GDP ratio, which is said to be a favorite barometer of Warren Buffett (everyone's favorite "stock guy"), was only higher in the first quarter of 2000. So the risks are obscenely high and the problems are intractable, meanwhile expectations are even higher than the risks. In short, there is no way that 2015 doesn't lead to trouble, even if the rest of 2014 continues to be a fantasyland.

Turning to the action, the Nasdaq lost 1.5% early on, as some tech names were sold off, along with about a 3% slide in the price of AAPL (which saw a 6% drop in the space of five minutes early in the day). (For those who agree with the foregoing rant, not that it impacts the market, but we ought to be rooting for higher prices to create an even better setup for put buying into the Q4 earnings reports.) The Dow and S&P lost 0.2% and 0.75%, respectively.

Away from stocks, green paper saw a wild ride over holiday weekend and today, but by day's end it was lower, which may turn out to be meaningful. A lot of times if you have a period where the markets are closed over holidays, people have time to think things through and the action on a day like today is more signal and less noise, but we'll just have to see how that goes.

Tranche Warfare

Government bonds were weak, and while we're on that subject, I think there are going to be serious problems in junk bonds. When you combine that with the fact that mutual funds promise daily liquidity, I don't think it is going be all that long before we start to see problems in the junk market, and potentially at some point even in some of the various government bond markets (last night Moody's downgraded Japan ever so slightly).

I don't really understand why people worry about defaults in countries that have printing presses. What they ought to worry about is the fact that these countries are going to monetize their debts and either destroy their currencies (although that is hard to do when other countries are doing the same thing), or have inflation eat up their paltry interest income. Nonetheless, that is more likely to be a problem for 2015 than right now.

As for oil, after trading just under $64 a barrel overnight for West Texas Intermediate, the market bounced 5% or so and closed at $69-plus. That is still a nasty decline from last Wednesday and a 30%-plus loss for the year, but given the euphoria in the U.S., I think folks are only looking at whatever positives they can think of for the price of oil declining and none of the negatives, as I noted previously.

COMEX Puts Double Black Diamond Sign Over Gold Pit

Lastly, turning to the metals market, I had expected the Swiss to vote no on its gold referendum, which they did, and I had expected bears to sell gold on the back of that simply because they sell every news event. Meanwhile, one-month GOFO rates today were nearly 50 basis points, or about six times more negative than the previous lows of the last couple of years. (To put that in perspective, the most negative lease rates had been prior to what's gone on in the last couple of weeks was minus 11 basis points.)

At any rate, I felt that the gold market would be sold following the Swiss vote and that would be the "wrong" thing and we would potentially have a great setup for the market to turn and finally rally. That thought process was scrambled with the smashing of oil Thursday and Friday, and gold along with it. I couldn't help but think that gold was being sold for two wrong reasons, the Swiss vote and the fact that oil had declined. Yes, cheaper oil takes some of the heat off of the upside price pressures throughout the food chain, but no one had really been worried about that in the first place.

Having said that, last night about an hour after the gold markets opened, I felt pretty stupid thinking anything constructive given that gold was gutted for about $20 instantly after opening and traded as low as about $1,145 before turning around and rallying about $45 in the early going to close at $1,212. Silver saw an even more violent turnaround: literally in the space of about two minutes it traded from $15.40 or so to $14.20-ish, then reversed to close at $16.50.

In the Right Case At the Wrong Time

Given the policies of the world, the bullish case for precious metals has never been stronger, yet it is perversely occurring at a time when sentiment could not be worse. (I wonder if most bears even know that despite all the "great" things that have happened, and all the hatred, gold is up about 1% in dollar terms and even more so in terms of other colored paper?) Most everyone who can fog a mirror hates gold and knows it "needs" to drop to $1,000, $800, $600 or some other made-up number, though they can't really tell you why. Usually the reason is because the stock market is higher, or the dollar is strong, or the Fed is going to raise rates. All three of those are false reference points, but any bearish case has worked so whatever the bears say is what happens.

Completely overlooked during the carnage was the fact that Friday the Indians actually scrapped the re-export requirement on the part of gold dealers, as had been rumored early last week, instead of raising the import duty, which is a bullish development. A very good case can be made that the gold market does not want to spend time below — pick a number: $1,150, $1,180, or $1,200 — but until the price of gold really gets over $1,200 and spends some time there, that idea is just a hypothesis.

The fact of the matter is, in the midst of what the market had interpreted as bad news for gold, i.e., some bullish economic reports or the recent actions I have described, the price plunged to the $1,150 area, but that was soundly rejected. I think once gold starts spending time above $1,200 folks will understand that $1,200 is not the right price and is in fact too low, but we will have to wait and see what happens. One thing I am certain of is that when people look back a year or two from now and realize how wildly bullish people were on U.S. financial assets, the dollar, the Fed, money printing, and Keynesian economics, and consequently bearish on gold, they will shake their heads and wonder how they could have been so crazy?

Some People May Have to Pull an All-Nighter

When you look at the wild, impossible outcomes that people have bought into — be it 1999, 2007, or now — it is just mind boggling that so few seem to be able to learn their lesson, with no one less able than the mainstream press. In the weekend's Financial Times, John Authers stated that, "A full-blown repeat of the bubbles and crises of the late 1990s remains unlikely." Why, you may ask? Because, "The world should have learnt enough lessons to avert that." So there you go. We should have learned our lessons, therefore we did, so everything's groovy. Like I've said often recently, if the current financial events were in a novel, no one would believe them because they're so outlandish.

Positions in stocks mentioned: none.
Everything, I mean EVERYTHING, is a BIG FUCKING MESS!!

Offline JoeP

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Re: Oil Price Crash!!!
« Reply #20 on: December 13, 2014, 04:47:06 PM »
Very good article IMO.  Haven't seen much from Fleck in awhile.  I read his articles back before the last recession...he knew a load of shit was headed towards the fan in 2006.  A couple of years early, but spot on. 

Can you provide a link?
 
just my straight shooting honest opinion

Offline knarf

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Re: Oil Price Crash!!!
« Reply #21 on: December 13, 2014, 06:37:41 PM »
http://www.financialsense.com/contributors/bill-fleckenstein/world-should-have-learnt-enough-lessons
Everything, I mean EVERYTHING, is a BIG FUCKING MESS!!

Offline RE

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Oil Price Crash!!!: REALITY CHECK!
« Reply #22 on: December 13, 2014, 09:55:04 PM »
Real Pigman vs Pigman stuff going on here.


Keep your eyes UP for Falling Banksters and Energy Shills.

Not a good time to fly in Private Jets if you sold Fracking as an Energy Solution.


Guido is going to lose a LOT of MONEY here, and La Cosa Nostra is never happy about losing MONEY.

You Sleep with the Fishes with Luca Brasi.

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RE

The Crude Crash Comes To Wall Street: Counterparty Risks Rear Their Ugly Heads Again

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In late 2006, default rates on lower-rate subprime private MBS began to rise considerably. Though not a very transparent market to the mainstream media-watching world, bankers knew trouble was brewing as this had not happened before in such a benign house price decline. Banks, knowing what they had on their books, what they had sold to others, and what that meant for risk, began quietly buying protection on other banks as counterparty risk became a daily worry for desks across Wall Street.

The stocks of US financials continued to rise amid "contained" and "no problem" comments from the status quo but credit spreads for the major US banks kept leaking wider even as stocks rallied... then reality dawned on stocks and the rest is history.

 

Today, US financial credit spreads (wider) have decoupled once again from stocks (higher) and that divergence began as oil prices started to slump.

 

Are banks hedging counterparty risk once more 'knowing' what loans and exposures they have to the massively levered US oil industry? Or is it different this time?

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Offline RE

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Oil Price Crash!!!: Meltdown Signs to Watch For
« Reply #23 on: December 13, 2014, 10:41:21 PM »
How To Tell If The Next Financial Crisis Is Upon Us

Submitted by Tyler Durden on 12/13/2014 18:28 -0500


From Howard Hill of Mind on Money

Three Conditions and Three Warning Signs

How to Tell if the Next Financial Crisis is Upon Us.

In the last post, it was suggested that the rapid collapse in oil prices might have set up a repeat of the 2008 financial crisis. Before we all run for the bunkers and the freeze-dried food, we should know the conditions needed for a crisis to happen, and the signposts we’ll see if the crisis gets going.

For a sector correction to become a meltdown, and for that to turn into a global crisis, several preconditions need to be in place.

The first condition is a serious market sector correction.

According to some participants in the market for energy company bonds and loans, such a correction is already underway and heading toward a meltdown (the second condition). Others are more sanguine, and expect a recovery soon.

That smaller energy companies have issued more junk-rated debt than their relative size in the economy isn’t under debate. Of a total junk bond market estimated around $1.2 trillion, about 18% ($216 billion, according to a Bloomberg estimate) has been issued by energy-related companies. Yet those companies represent a far smaller share of the economy or stock market capitalization among the universe of junk-rated companies.

If the beaten-down prices for junk energy bonds don’t stabilize or recover a bit, we might see the second condition: a spiral of distressed sales of bonds and loans. This could happen if junk bond mutual funds or other large holders sell into an unfriendly market at low prices, and then other holders of those bonds succumb to the pressure of fund redemptions or margin calls and sell at even lower prices.

The third condition, which we can’t determine directly, would be pressure on Credit Default Swap dealers or hedge funds to make deposits as the prices of the CDS move against them. AIG was taken down when collateral demands were made to support existing CDS agreements, and nobody knew it until they were going under. There simply isn’t a way to know whether banks or dealers are struggling until the effect is already metastasizing.

The unknown is how much of the $2.77 trillion of junk CDS on bank balance sheets on June 30 this year was energy-related. If history is any indicator, the CDS in the distressed energy sector already far outweighs its 18% share of the junk bond market.

But if we watch for the following three signposts, we’ll know that the crisis play is happening again:

    One sign would be for non-energy junk bonds to begin dropping in price. That would mean large holders are exiting from all junk bonds, not just those companies affected by low oil prices.
    Another sign would be sudden drops in share prices for banks or insurance companies that hold small amounts of energy-related bonds or bank loans, a clue that some market participants think they have derivative exposure.
    A third sign to look for would be the rumors or news that the big, investment-grade energy companies are having trouble renewing their Commercial Paper, bank loans or maturing bonds (the Exxon-Mobils and Shells of the world).

If we see all these signs in a matter of days or weeks, then our global financial system is being tested once again by the small community of speculators that profit from betting against industries, countries, or markets. They made a fortune betting against mortgages. Most of them didn’t retire to enjoy that wealth. They moved on to the next trade, and every day they try to repeat their investing success.

The next time their presence was really visible was the European Debt Crisis of 2011/2012. That didn’t take down the global financial system, but it was close. If Spain, Portugal, Italy and Ireland had followed Greece into debt restructuring, we would have had another global crisis, most likely even larger than the 2008/2009 episode. Only a major commitment from Germany kept the rest of Europe’s weaker countries from failing on their debt, too.

In March of 2012, the Greek “credit event” that triggered payment on CDS was estimated to apply to CDS that equaled 30% of the €300 billion Euro Greek sovereign debt market, or roughly €90 billion, (about $118 billion in US dollars at the time). The “settlement price” for that CDS event was 21.5%. So the winners in the CDS bet took home 78.5% times $118 billion, or approximately $93 billion. That was nearly twice the size of the CDS payoff when Fannie Mae and Freddie Mac went into receivership. Nice trade for those who made it.

Do we need to remind ourselves that Fannie and Freddie were the Exxon-Mobil and Shell of the mortgage business? Or that no target is too big if trillions of dollars can be used to make the bets?

So where will the “next trade” be?

Anywhere there might be weakness.

This month, it’s in energy companies that borrowed more than $200 billion while planning on oil prices staying over $100 a barrel, and gasoline staying over $3 a gallon.

Only time will tell whether there have been enough bets against those optimistic energy companies to make it a problem for everyone, and not just them.
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Offline RE

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Oil Price Crash!!!: Next Stop $40
« Reply #24 on: December 14, 2014, 04:27:36 PM »

Crude Crash Set To Continue After Arab Emirates Hint $40 Oil Coming Next

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In space, no one can hear you scream... unless you happen to be Venezuela's (soon to be former) leader Nicolas Maduro, who has been doing a lot of screaming this morning following news that UAE's Energy Minister Suhail Al-Mazrouei said OPEC will stand by its decision not to cut crude output "even if oil prices fall as low as $40 a barrel" and will wait at least three months before considering an emergency meeting.

In doing so, OPEC not only confirms that the once mighty cartel is essentially non-existant and has been replaced by the veto vote of the lowest-cost exporters (again, sorry Maduro), but that all those energy hedge funds (and not only) who hoped that by allowing margin calls to go straight to voicemail on Friday afternoon, their troubles would go away because of some magical intervention by OPEC over the weekend, are about to have a very unpleasant Monday, now that the next oil price bogey has been set: $40 per barrell.

Luckily, this will be so "unambiguously good" for the US consumer, it should surely offset the epic capex destruction that is about to be unleashed on America's shale patch, in junk bond hedge funds around the globe, and as millions of high-paying jobs created as a result of the shale miracle are pink slipped.

According to Bloomberg, OPEC won’t immediately change its Nov. 27 decision to keep the group’s collective output target unchanged at 30 million barrels a day, Suhail Al-Mazrouei said. Venezuela supports an OPEC meeting given the price slide, though the country hasn’t officially requested one, an official at Venezuela’s foreign ministry said Dec. 12. The group is due to meet again on June 5. 

“We are not going to change our minds because the prices went to $60 or to $40,” Mazrouei told Bloomberg at a conference in Dubai. “We’re not targeting a price; the market will stabilize itself.” He said current conditions don’t justify an extraordinary OPEC meeting. “We need to wait for at least a quarter” to consider an urgent session, he said.

And with OPEC’s 12 members pumped 30.56 million barrels a day in November, exceeding their collective target for a sixth straight month, according to data compiled by Bloomberg. Saudi Arabia, Iraq and Kuwait this month deepened discounts on shipments to Asia, feeding speculation that they’re fighting for market share amid a glut fed by surging U.S. shale production.

The above only focuses on the (unchanged) supply side of the equation - and since the entire world is rolling over into yet another round of global recession, following not only a Chinese slowdown to a record low growth rate, but also a recession in both Japan and Europe, the just as important issue is where demand will be in the coming year. The answer: much lower.

 
 

OPEC's unchanged production level, a lower demand growth forecast from the International Energy Agency further put the skids under oil on Friday, raising concerns of possible broader negative effects such as debt defaults by companies and countries heavily exposed to crude prices. There was also talk of the price trend adding to deflation pressures in Europe, increasing bets that the European Central Bank will be forced to resort to further stimulus early next year.

And while the bankruptcy advisors and "fondos buitre" as they are known in Buenos Aires, are circling Venezuela whose default is essentially just a matter of day, OPEC is - just in case its plan to crush higher cost production fails - doing a little of the "good cop" routing as a Plan B.

According to Reuters, OPEC secretary general tried to moderate the infighting within the oil exporters, saying "OPEC can ride out a slump in oil prices and keep output unchanged, arguing market weakness did not reflect supply and demand fundamentals and could have been driven by speculators."

Ah yes, it had been a while since we heard the good old "evil speculators" excuse. Usually it appeared when crude prices soared. Now, it has re-emerged to explain the historic plunge of crude.

 
 

Speaking at a conference in Dubai, Abdullah al-Badri defended November's decision by the Organization of the Petroleum Exporting Countries to not cut its output target of 30 million barrels per day (bdp) in the face of a drop in crude prices to multi-year lows.

 

"We agreed that it is important to continue with production (at current levels) for the ... coming period. This decision was made by consensus by all ministers," he said. "The decision has been made. Things will be left as is."

 

Some say selling may continue as few participants are yet willing to call a bottom for markets.

There is some hope for the falling knife catchers: "Badri suggested the crude price fall had been overdone. "The fundamentals should not lead to this dramatic reduction (in price)," he said in Arabic through an English interpreter. He said only a small increase in supply had lead to a sharp drop in prices, adding: "I believe that speculation has entered strongly in deciding these prices.""

Unfortunately for the crude longs, Badri is lying, as can be gleaned from the following statement:

 
 

Badri said OPEC sought a price level that was suitable and satisfactory both for consumers and producers, but did not specify a figure. The OPEC chief also said November's decision was not aimed at any other oil producer, rebutting suggestions it was intended to either undermine the economics of U.S. shale oil production or weaken rival powers closer to home.

 

"Some people say this decision was directed at the United States and shale oil. All of this is incorrect. Some also say it was directed at Iran and Russia. This also is incorrect," he said.

Well actually... "Saudi Arabia's oil minister Ali al-Naimi had told last month's OPEC meeting the organization must combat the U.S. shale oil boom, arguing for maintaining output to depress prices and undermine the profitability of North American producers, said a source who was briefed by a non-Gulf OPEC minister."

And as Europe has shown repeatedly, not only is it serious when you have to lie, but it is even worse when you can't remember what lies you have said in the past. That alone assures that the chaos within OPEC - if only for purely optical reasons - will only get worse and likely lead to least a few sovereign defaults as the petroleum exporting organization mutates to meet the far lower demand levels of the new normal.

In the meantime, the only question is how much longer can stocks ignore the bloodbath in energy (where there has been much interstellar screaming too) because as we showed on Friday, despite the worst week for stocks in 3 years, equities have a long way to go if and when they finally catch up, or rather down, with the crude reality...

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Offline roamer

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Re: Oil Price Crash!!!
« Reply #25 on: December 14, 2014, 08:22:52 PM »
This situation reminds me alit of the runup to the 2008 crisis.  I sure fell like a sucker for the deflationary collapse scenario then.  I find myself wanting to fall for it again but I have to remind myself there are no hard rules.  QE is a good example, but a HY junk bond bailout QE style is predictable and unacceptable to many foreign parties, how about an engineered hike in oil prices instead?  Best case kill two birds with one stone, perhaps ISIS pipeline bombing?  Lots of options to get desired outcome and all of them are well outside the market fundamentals people are trying to use to predict the future.

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Re: Oil Price Crash!!!
« Reply #26 on: December 14, 2014, 08:37:50 PM »
This situation reminds me alit of the runup to the 2008 crisis.  I sure fell like a sucker for the deflationary collapse scenario then.  I find myself wanting to fall for it again but I have to remind myself there are no hard rules.  QE is a good example, but a HY junk bond bailout QE style is predictable and unacceptable to many foreign parties, how about an engineered hike in oil prices instead?  Best case kill two birds with one stone, perhaps ISIS pipeline bombing?  Lots of options to get desired outcome and all of them are well outside the market fundamentals people are trying to use to predict the future.

They'll need to bomb more than one ISIS Pipeline.  Demand Destruction is moving too rapidly.  Nuking Iran might do it though.

RE
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Re: Oil Price Crash!!!
« Reply #27 on: December 14, 2014, 09:22:58 PM »
This situation reminds me alit of the runup to the 2008 crisis.  I sure fell like a sucker for the deflationary collapse scenario then.  I find myself wanting to fall for it again but I have to remind myself there are no hard rules.  QE is a good example, but a HY junk bond bailout QE style is predictable and unacceptable to many foreign parties, how about an engineered hike in oil prices instead?  Best case kill two birds with one stone, perhaps ISIS pipeline bombing?  Lots of options to get desired outcome and all of them are well outside the market fundamentals people are trying to use to predict the future.

They'll need to bomb more than one ISIS Pipeline.  Demand Destruction is moving too rapidly.  Nuking Iran might do it though.

RE

Im curious what would they do with surplus oil if demand destruction did move too rapidly, refineries full and tankers full floating around fully loaded. The current projects at least have to play out even if the future ones get shelved. MKing has talked about how dangerous the pressue and explosions can be closing valves, will we see spills all over the earth and ocean.
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Offline RE

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Re: Oil Price Crash!!!
« Reply #28 on: December 14, 2014, 09:38:25 PM »
This situation reminds me alit of the runup to the 2008 crisis.  I sure fell like a sucker for the deflationary collapse scenario then.  I find myself wanting to fall for it again but I have to remind myself there are no hard rules.  QE is a good example, but a HY junk bond bailout QE style is predictable and unacceptable to many foreign parties, how about an engineered hike in oil prices instead?  Best case kill two birds with one stone, perhaps ISIS pipeline bombing?  Lots of options to get desired outcome and all of them are well outside the market fundamentals people are trying to use to predict the future.

They'll need to bomb more than one ISIS Pipeline.  Demand Destruction is moving too rapidly.  Nuking Iran might do it though.

RE

Im curious what would they do with surplus oil if demand destruction did move too rapidly, refineries full and tankers full floating around fully loaded. The current projects at least have to play out even if the future ones get shelved. MKing has talked about how dangerous the pressue and explosions can be closing valves, will we see spills all over the earth and ocean.

That could be an issue, but I think they will dump the inventory at whatever price they can get for it, and keep dumping until the current wells play out.

Just finished recording Oil Crash 2!!!, I'll air it on Tuesday.

RE
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Re: Oil Price Crash!!!
« Reply #29 on: December 14, 2014, 10:09:17 PM »
BTW, price of Gas at the Pump dropped below $3 for the first time since I moved up here, $2.999/10ths/Gallon.  :o

I'm wondering how this will affect production up on the Slope and what happens when a lot of the folks around here who now commute down to Bakken get laid off?

When Oil goes South, Alaska generally goes into Recession.  Could get ugly here pretty soon.

RE
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