Posted on 12/20/2014 8:06:02 PM PST by NKP_Vet
There 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.…
I side with the belief that an oil glut was created an no one chose to be the odd man out and quit producing. This sent oil prices downward.
People are already bringing out their SUVs and pickup trucks in celebration. Where before people limited their use, they are now preferring gas-intensive vehicles.
I don’t suspect new car owners will be jumping too quick to buy guzzlers, but the move continues, none-the-less.
Nope.
It really is OPEC keeping the price per barrel down. They've got enough riches, oil reserves, infrastructure, and staying power, to outlast a staring contest with the fracking boom in the West.
The OPEC nations need us as customers. They would rather lose billions of petro-dollars in the short term, and have us cave into them in the long term. It's why they're willing to drive the price of crude oil so low, that it will be more feasible for us to buy from them, rather than drill our own oil.
It's a matter of control and power.
OPEC is cutting their price. They do this every time we start drilling in order to drive American oil production out of business. The us needs to slap an import teriff on OPEC oil to protect US production. It’s called predatory pricing, and it’s illegal in the US. Why we’ve let the Arabs get away with it for decades I have no clue.
Anytime someone says “Keep an eye on /some sector/ JUNK BONDS, well, yeah, I get real, real nervous...
“...2 dollars, regular. and can you check the oil.”
Many years go I worked at a gas station. A regular customer was a really old lady. When she stopped, it was, “$2.00 regular, check the oil, check the radiator, check the battery, check the tires...and don’t forget my green stamps.”
We called it an island overhaul.
I don't think so.
Oil / fuel demand hasn't dropped. What's changed, is the supply of crude oil. There's simply a LOT more of it on the market, due to the American revolution in fracking.
Because there's more oil available, and the Mideast oil producing nations have refused to lower their production, the end point price for fuel is dropping at the pump.
There's nothing more mysterious here than the law of supply and demand.
This is geo-economics at work.
The Saudis (and the other oil producing nations in the middle east) have so much wealth, that they can afford to absorb the hit from low oil prices in the short term. They're betting that they can drive the price down so low, that it will become too costly for us to extract our own oil through fracking - which will then send us right back to them as a prime customer.
With all due respect, I think that's an incorrect read on your part. The sudden drop in oil prices is geo-economic.
The law of supply and demand is most definitely in full force. We're seeing a drop in the price at the pump, precisely because there's such a glut of crude oil on the market. Prices cannot fall, unless supply exceeds demand.
The reason there's such a glut, is because America is now producing so much more oil (due to fracking), and the fact that the Saudis and the other OPEC nations are refusing to lower their oil production.
My take is that the Saudis are keeping the price artificially low in order to break the back of the U.S. fracking boom. At some point, it will (again) become more profitable for America to buy cheap Saudi oil, than to drill our own reserves.
Slick, eh?
Back when gas was 30 cents a gallon and love was just 60 cents away. Ah, the good times.
https://www.youtube.com/watch?v=gbPJ3Q9Tfbs
Bingo.
What most folks are missing is the logic behind what the Saudis are doing.
They can take a short term hit to the price per barrel, but what they're not willing to lose, is the American dependency on their oil. If they can keep the prices low for long enough, American fracking operations will begin to shut down, because it'll be cheaper to buy oil from the camel jockeys, than drill our own.
fracking can be started again when prices go back up
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 banksTaxpaying citizens…
There, fixed that...
total BS
Little did the western world imagine that accepting a cartel as normal in international trade was a good precedent.
They never imagined that, as a bonus, the West, indirectly, would be financing and enabling the worst world-wide muslim terrorism in 400 years.
They probably also said “Will pay to the bearer on demand 1 dollar silver” on the top of the bill too...
Ah yes, .39/9 for about a decade
Most of our imported comes from Canada and Mexico. Tariffs on the oil would only please the eco freaks and .gov crew though, they’d have reduced demand and some more revenue to keep the handout buffet going.
If there was/is to be some type of government “intervention” in this, I’d have to go for buying U.S. sourced oil at a higher price for refilling the strategic petroleum reserve. Either that, or “creating” more reserve by having the government purchase drilled wells who’s production or production potential would go to that reserve.
The ideal situation is that drillers and petroleum industry investors see this cycle, and plan accordingly and those that don’t go out of business. Between thew ease of ridiculously cheap credit and the swarming field of sheep investors though, there will be a constant supply of leverage/OPM to keep these going forever.
Consumers have a couple of major choices. Each decides whether to get ready for the big TEOTWAWKI crash or continue to be a tourist looking for the nonexistent escape in entertainment. The former saves money and keeps the price of oil lower. The latter is the way to certain poverty, when the big collapse comes.
I remember $0.18 gas. Wasn’t so long ago. 1970.<<<<<<
During the early to mid-60’s gas wars in SoCal, we typically got our gas down to $0.17 or so, most often at our local Powerine station. Unfortunately it did not come with full service there. But a couple of bucks to fill up was probably a big hit on my high school job salary.
Yes it was. could Cruise all night on a buck.
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