"What-crash?" ping.
Posted on 12/14/2014 7:43:31 AM PST by expat_panama
"What-crash?" ping.
http://www.ibtimes.com/fundamentals-arent-greasing-crude-oil-price-slide-opec-chief-1755197
‘Fundamentals’ Aren’t Greasing Crude Oil Price Slide: OPEC Chief
http://www.themoscowtimes.com/opinion/article/forget-dollars-start-buying-rubles/513277.html
Forget Dollars, Start Buying Rubles
It is always good for our economy when oil prices are lowered. Everyone will have decreased costs and more money to spend elsewhere. It does decrease the economic outlook for all companies in the near term only due to the fact that income will shoot downward for a time due to oil’s price deflating what people will now spend for the same good (per each company).
In the mid to long term, the economy bounces higher and more jobs migrate to the U.S. from China.
It’s more of a mixed bag now than it has been in the past with the fracking boom. My region of the country suffered worse effects from the 2008 crash than most, I’m in the southeast and in a manufacturing dominated metro. Inexpensive natural gas resulting from fracking has helped fuel, literally, something of a manufacturing renaissance here and so it’s been a godsend. Gasoline prices falling has been and will be as well. However, beyond a certain point prices falling will threaten the domestic industry that led to that manufacturing renaissance and we appear to have reached that point, so it’s become a bad thing from my perspective. The price per bbl of oil needs to remain in viable territory for domestic fracking to continue and expand. Falling price can be bad and is for this reason.
“It is always good for our economy when oil prices are lowered.”
It’s good for the “real” economy.
However, the “real” economy is dwarfed by the “leveraged” economy - which is not real.
The lower price of oil is going to very possibly precipitate the collapse of leveraged assets (including ultimately stocks) because credit to marginal or high-cost energy producers will be destroyed - and the lenders will have to recognize this loss (and the consequences of such a loss).
If we had stuck with a “real” economy for the past 7 years or so, we’d be expecting an uptick economically from lower oil prices. Instead, the “fake” growth and GDP over the past years will revert to a significantly lower level.
Of course the Fed could bail everyone out......and protect those who made irresponsible loans to marginal energy producers by buying all their bonds (just like they’ve done in the housing market). Expect that to happen. Otherwise we must capitulate to all the growth during the Obama administration was mere illusion created by Fed manipulation.
No threat to the Obama economic illusion will be acceptable, that’s why I see marginal oil loans ending up on the Feds balance sheet, along with all the other garbage.
There is an argument making the rounds that this slump in oil is not going to be good for the general economy because there is such a large number of people that work for or are impacted by a slow down negatively. And lower prices do not offset the damage to the sector. Not my position but still a pause point for reflection.
Thanks expat_panama.
” lower prices do not offset the damage to the sector.”
Lower oil prices do help the “real” economy where actual jobs are created in the process of adding true economic value.
However, the “fake” economy built on leverage and debt cannot sustain the default of debt of marginal players in the oil industry which cannot be paid back because of lower oil prices.
Bad news in the “fake” economy seems to be eclipsing the good to the “real” economy, which sprouts this sort of analysis.
The collapse of leveraged assets is something that will happen - and it will affect productive sectors of the economy just as it will the “fake” sectors - that would never have been created if not for “risk free” growth thanks to the Fed.
The Fed will try to bail out the lenders to marginal oil-patch players - attempting to defer the impact of this event in the near term.
It may work for a while - though in this case, I don’t see how the oil-patch jobs created by marginal players can be sustained - pumping high-cost oil out of the ground into an environment where it looks like we’ll have sub-$50 oil for a period of time.
Then again, a war that disrupts Saudi production could make things very interesting....
--except when the lowering is becuase of the crashing economy's falling demand? Then again, even this is good becuase it's the 'self-correcting' aspect of the free market as falling prices stimulate renewed demand...
You’re very welcome!
Although I think lower prices will definitely help the economy it would seem to me such a drastic drop would initially have a negative effect on GDP. Keep in mind this drop in oil not a reaction to a major economic downturn like in 2008.
...the Fed could bail everyone out......and protect those who made irresponsible loans to marginal energy producers by buying all their bonds
***********
Re the matter of bonds, this article discusses the possibility of a spiral of distressed sales of bonds and loans, and not just in the oil sector. A potentially frightening contageon should it happen.
http://www.zerohedge.com/news/2014-12-13/how-tell-if-next-financial-crisis-upon-us
Interestingly, some heretofore steady bank loan funds are already showing signs of weakening prices.
"WE'RE DOOMED!!"
Booms are inevitably followed by busts. The hard part evaluate when you’re int he middle of either is “how far does it go”.
Myself, I separate phrases such as “the general economy” from “stock prices, stock index prices” because they can detach, widely. Nobody can really define what they mean by “general economy” anyway. Interest rates? Corporate profits? Employment? Productivity? Over the past say 5 years, I would say that cop profits have done quite well and that has shown up in the market averages. But many, if not most people, would not say their individual “economies” are exactly booming. Many are eating dirt.
In this zero interest rate environment we have had for several years, a zillion schemes and scams are concocted to produce yield; meaning add’l yield over Tsys. Some, many of those collapse after either rates rise or the leverage comes out of the underlying.
I am no better at predicting the future then anyone else, but these things are normal and happen with reasonable regularity. Thousands of laid-off oil workers over here, millions of consumers spending the $10/week they are saving on gas on crap over there.
Opinion department: I *do* think the leverage coming out of oil lending could definitely be an issue that is not over and will not be over for a fair while. I also think it remains early to nibble on oil stocks. At a minimum, I think it would be wise to wait until the end of the year. Because stocks that have underperformed often get tossed out, indiscriminately, at this time of year. USUALLY it happens move Oct-Novemberish, but this oil thing has really acquired legs in this last couple of weeks.
To quote PGalt in another thread
Oil price collapse claims WA’s Red Fork Energy, shale gas company in receivership (1st Major Victim)
http://www.freerepublic.com/focus/news/3236760/posts
“Sometimes you have to wonder whether the highly educated spokesmodels on the corporate mainstream media are really as vacuous and clueless as they appear or whether they are just paid to look pretty and mouth the corporate line. They seem incapable of comprehending the unintended consequences of various events. The collapse in oil prices is one of those events.
There is no doubt that lower oil prices will lower the price of gas for the average American. Estimates say they will save $368 per year, which can be spent elsewhere. The highly paid shill economists who declare this will boost spending seem to be math challenged. Retail sales figures include gas stations. What isn’t spent there will be spent in another category, most likely healthcare or groceries as prices in both areas continue to escalate. It’s a zero sum game. No new spending will occur.
The worldwide supply of oil has only increased marginally over the last few years. The U.S. shale boom has been offset by declines elsewhere (Libya, Iran, Mexico). The reason for the collapse is the same reason for the 2009 collapse – worldwide demand is contracting. Europe is in a depression. Japan is in a depression. Russia’s economy is contracting. China is decelerating rapidly. The U.S. demand is flat. The implications of another global recession after five years of central banks printing trillions of fiat currency are alarming to say the least.
The cost to extract shale oil and transport it to a refinery capable of processing it is high. Honest analysts will tell you that a price of $70 to $80 is required to breakeven. Most companies don’t build breakeven into their plans. Bakken shale oil sells at a discount of about $14 per barrel due to the difficulty of extraction, transport, and processing. It is now selling for $47 per barrel. The number of permits for new rigs fell by 40% in November when oil was still selling for $75 per barrel. Do you think permits for new wells will fall at a price of $61 per barrel? Capital spending by the energy industry accounted for 33% of all capital spending in the last few years. I’m sure some other industry will pick up the slack. Right?
It seems the shale oil boom has resulted in a few jobs being created since the 2010 recession trough. In fact the states where fracking is prevalent have accounted for all the job growth in the nation. I wonder if a shale oil bust will have any employment implications. There are 9.3 million jobs related to the energy industry across the country. The plunge in oil prices created by Saudi Arabia in the 1980s created a depression in Texas which contributed to the S&L crisis. This plunge will reveal who has been swimming naked in the high yield bond market and derivatives market.
More from Jim Quinn via The Burning Platform blog in this OUTSTANDING article posted here...
http://www.zerohedge.com/news/2014-12-11/should-you-believe-what-they-tell-you-or-what-you-see
“
A decline in oil prices will be good for consumers but the problem as I see it is that oil is just late to the general commodity slide which would indicate a global slowdown in economies. That would be a bad thing.
Next the meager recovery that followed was partly from the lower energy prices and some artificial demand from the porkulus (e.g. larger amounts of road construction). But the recovery was and continues to be stymied by the Fed's undermining of long term confidence in the dollar, short squeezes aside. Investors cannot make 10 year dollar investments in new projects thanks to the Fed's artificial lowering of rates in those time frames means that energy demand remains weak and thanks to the separate boom in fracking, prices continue to fall.
I just don't see long term investments taking off until the Fed ends their insane easing policies. There can still be some investment in the mean time and my driving index (number of cars I personally observe on the highways) is rising. So I think there will be some support in energy prices but I would not take it as economic strength.
What about looking at buying stock in refineries or oil companies like marathon that should see their refining side of business offset some of their production side losses. Shouldn’t lower oil cost help profits somewhat on the refining side?
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