AuthorTopic: Guess What Happened The Last Time The Price Of Oil Crashed Like This?…  (Read 4752 times)

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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.



Offline Mister Roboto

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Re: Guess What Happened The Last Time The Price Of Oil Crashed Like This?…
« Reply #1 on: December 01, 2014, 05:18:31 AM »
Are there any websites at which one may readily monitor the performance of this junk-bond market?
« Last Edit: December 01, 2014, 06:03:00 AM by Mister Roboto »

Offline Eddie

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Re: Guess What Happened The Last Time The Price Of Oil Crashed Like This?…
« Reply #2 on: December 01, 2014, 05:30:20 AM »
Zero Hedge will be all over it, and I'm sure RE will keep us apprised.
What makes the desert beautiful is that somewhere it hides a well.

Offline Mister Roboto

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Re: Guess What Happened The Last Time The Price Of Oil Crashed Like This?…
« Reply #3 on: December 01, 2014, 08:50:43 AM »
I have to say that I'm pretty dubious about this idea that the Kingdom of Saudi Arabia is launching some kind of price war to bring down the shale oil industry.  If what's happening is just plain old demand-destruction and the Saudis know this, of course they're not going to raise prices by cutting their production, because they know they would just be fucking themselves over in so doing.  However, the one thing that gives me pause is that perhaps they know how vulnerable the mirage of the "tight oil miracle" really is, and striking now might just recover them (to their way of thinking) the market-share they have probably lost to US shale oil.  Of course, that would also mean that they don't realize what a huge financial ponzi has been constructed on top of the shale oil boom and that if they were to pop that bubble, a lot more than just the US shale oil industry would go boomsies.

I am curious to know what other diners think of this Saudi Price War theory.

Offline jdwheeler42

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Re: Guess What Happened The Last Time The Price Of Oil Crashed Like This?…
« Reply #4 on: December 01, 2014, 09:11:31 AM »
I am curious to know what other diners think of this Saudi Price War theory.
I think it is very much part of their exit strategy, but yeah, I don't think they deliberately started it to put the frackers out of business.  The most important thing is they have their own Free Shit Army problem, only in that part of the world people tend to lose their heads, literally.  That oil revenue is truly a matter of life or death for the House of Saud, to keep the populace placated.
Making pigs fly is easy... that is, of course, after you have built the catapult....

Offline Eddie

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Re: Guess What Happened The Last Time The Price Of Oil Crashed Like This?…
« Reply #5 on: December 01, 2014, 10:15:38 AM »
What I don't buy is that right now, today, that we have enough demand destruction in the USA that it suddenly drove down gas prices. A certain amount of fuel usage here is inelastic...like I'm still going to fill up my car to drive to work and take my kids to soccer practice. It simply isn't that bad yet, at least not here.

Now, in China...I don't know. Europe I don't know. It's a global market, and what happens here isn't the whole story.

I would guess that the Sauds think they can live off selling $60/barrel oil for longer than the frackers can remain solvent. And they definitely have lots of obligations that are getting harder and harder to fund each day, and the ME is full of batshit crazy jihadists, who would like to kick out the Sauds and thin the population with some ethnic cleansing.
What makes the desert beautiful is that somewhere it hides a well.

Offline Surly1

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Re: Guess What Happened The Last Time The Price Of Oil Crashed Like This?…
« Reply #6 on: December 01, 2014, 10:21:21 AM »
I have to say that I'm pretty dubious about this idea that the Kingdom of Saudi Arabia is launching some kind of price war to bring down the shale oil industry.  If what's happening is just plain old demand-destruction and the Saudis know this, of course they're not going to raise prices by cutting their production, because they know they would just be fucking themselves over in so doing.  However, the one thing that gives me pause is that perhaps they know how vulnerable the mirage of the "tight oil miracle" really is, and striking now might just recover them (to their way of thinking) the market-share they have probably lost to US shale oil.  Of course, that would also mean that they don't realize what a huge financial ponzi has been constructed on top of the shale oil boom and that if they were to pop that bubble, a lot more than just the US shale oil industry would go boomsies.

I am curious to know what other diners think of this Saudi Price War theory.

FWIW... and it's just an opinion... neither the Saudis nor OPEC want to cut production because they would lose market share to the other cutthroats around the table. No cartel discipline, no incentive to cut. Also, the Saudis may be in the best position to weather $60/bbl. oil or even lower due to lower production costs. The fact that oil's lower price is putting a vise around the nutsack of Russia/BRICS is a bonus to Uncle Sugar. Legislation favorable to the Kochs is almost guaranteed to emerge from the colon of the new RepubliConfederate Congress, so look for the coming fracker bailout, and for MKing to buy a new Corvette with his Christmas bonus.

The fact that everybody is operating on borrowed money, coupled with the geopolitical tension sure to rise under such budget pressure in each affected country, makes the contemplation of "boomsie" sobering indeed.

But in terms of Saudi intentions: the old saying, "Don't worry about what other people are thinking about you; they're thinking only about themselves," comes to mind. It is more likely the Saudis are looking to their own interests first, with concern for North America tight oil a distant second, if at all. They have much graver threats facing them much closer to home.
"...reprehensible lying communist..."

Offline Surly1

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Re: Guess What Happened The Last Time The Price Of Oil Crashed Like This?…
« Reply #7 on: December 01, 2014, 10:22:31 AM »
It's a global market, and what happens here isn't the whole story.

I would guess that the Sauds think they can live off selling $60/barrel oil for longer than the frackers can remain solvent. And they definitely have lots of obligations that are getting harder and harder to fund each day, and the ME is full of batshit crazy jihadists, who would like to kick out the Sauds and thin the population with some ethnic cleansing.

 :emthup: :emthup: :emthup:
"...reprehensible lying communist..."

Offline azozeo

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Re: Guess What Happened The Last Time The Price Of Oil Crashed Like This?…
« Reply #8 on: December 01, 2014, 10:29:04 AM »





>>>>>>>> MKing to buy a new Corvette with his Christmas bonus.<<<<<<<<<<<<<<<<<<<

Does General Motors make a wind up,  plastic, corvette now ?

Real men drive Porsche's anyway
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 MKing

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Re: Guess What Happened The Last Time The Price Of Oil Crashed Like This?…
« Reply #9 on: December 01, 2014, 10:46:47 AM »





>>>>>>>> MKing to buy a new Corvette with his Christmas bonus.<<<<<<<<<<<<<<<<<<<

Does General Motors make a wind up,  plastic, corvette now ?

Real men drive Porsche's anyway

Bullshit. Read men ride sportbikes, safety cages are for those limited to machines that can't fall over, with this big wheel thing, and a stop pedal, and a go pedal, and a safety cage built around them so that when their incompetence catches up with them, they walk away.

Pussies all. Real man, in action.




Sometimes one creates a dynamic impression by saying something, and sometimes one creates as significant an impression by remaining silent.
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Offline MKing

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Re: Guess What Happened The Last Time The Price Of Oil Crashed Like This?…
« Reply #10 on: December 01, 2014, 11:17:00 AM »
On topic, I should mention that those of us in the industry when this happened last (say, 1986) basically wandered in the oil wilderness for years, waiting for SUVs to be sold in massive numbers to soak up all the surplus capacity, China to begin to modernize and build roads, basically people to just begin to WANT to use MORE.

Those were the lean years for the oil and gas industry, 1986 through about 2000 or so. Cheap fuel, growing economies, good stock market. I suppose it is possible we'll have that scenario again, but I believe I made more in the market between 09 and present than I did between 86 and 2000, so I'll go for the bigger gain scenario on this one.
Sometimes one creates a dynamic impression by saying something, and sometimes one creates as significant an impression by remaining silent.
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Offline azozeo

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Re: Guess What Happened The Last Time The Price Of Oil Crashed Like This?…
« Reply #11 on: December 01, 2014, 01:40:17 PM »


>>>>>>>> MKing to buy a new Corvette with his Christmas bonus.<<<<<<<<<<<<<<<<<<<

Does General Motors make a wind up,  plastic, corvette now ?

Real men drive Porsche's anyway


Bullshit. Read men ride sportbikes, safety cages are for those limited to machines that can't fall over, with this big wheel thing, and a stop pedal, and a go pedal, and a safety cage built around them so that when their incompetence catches up with them, they walk away.

Pussies all. Real man, in action.


[/quote]

There are bikes & then there are real big boy kinda bikes that kick ass.
Saddle bags & bose sound systems on 2 wheels don't make the man.

Real men loose the blood in their head at green lights.

<a href="http://www.youtube.com/v/WREyAicJXkM&fs=1" target="_blank" class="new_win">http://www.youtube.com/v/WREyAicJXkM&fs=1</a>
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 MKing

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Re: Guess What Happened The Last Time The Price Of Oil Crashed Like This?…
« Reply #12 on: December 01, 2014, 02:28:08 PM »
There are bikes & then there are real big boy kinda bikes that kick ass.

True.

Quote from: azozeo
Saddle bags & bose sound systems on 2 wheels don't make the man.

Again, true.

Quote from: azozeo
Real men loose the blood in their head at green lights.

<a href="http://www.youtube.com/v/WREyAicJXkM&fs=1" target="_blank" class="new_win">http://www.youtube.com/v/WREyAicJXkM&fs=1</a>

Now incorrect. You see...said bicycle didn't run the circuit, it only did the straightaway. As any lowbrow knows, drag racing is all you can do when you are crippled in some manly way, and thereby rendered incapable of being a real man because you are scared of cornering.

Try it sometime....perhaps at triple digit speeds....knees are easy, elbows not so much, see if you don't come back all butched up and much more manly than the straightaway weenies.


Sometimes one creates a dynamic impression by saying something, and sometimes one creates as significant an impression by remaining silent.
-Dalai Lama

Offline jdwheeler42

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Re: Guess What Happened The Last Time The Price Of Oil Crashed Like This?…
« Reply #13 on: December 01, 2014, 02:58:10 PM »
But in terms of Saudi intentions: the old saying, "Don't worry about what other people are thinking about you; they're thinking only about themselves," comes to mind. It is more likely the Saudis are looking to their own interests first, with concern for North America tight oil a distant second, if at all. They have much graver threats facing them much closer to home.
This is the saying that comes to my mind regarding Saudis vs. frackers:
Making pigs fly is easy... that is, of course, after you have built the catapult....

Offline Mister Roboto

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Re: Guess What Happened The Last Time The Price Of Oil Crashed Like This?…
« Reply #14 on: December 02, 2014, 06:00:56 AM »
@Surly:



 :'( :'( :'( :'(  Boomsies indeed.   :'( :'( :'( :'(

 

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