Inquiring minds are diving into the Kansas City Fed Energy Survey by Chad Wilkerson, to get a better grip on problems facing oil producers. The results are grim.
“District energy activity fell sharply during the first quarter of 2020, with our index dropping to its
lowest level since we began the survey in early 2014,” said Wilkerson. “Expectations for future activity also fell to their lowest level since late 2014, as most firms do not expect energy prices to return to profitable levels this year.”
WTI Survey Price Expectations
- 6 Months: $33
- 1 Year: $42
- 2 Years: $50
- 5 Years: $58
Solvency
61 percent of firms would
remain solvent in the next year if the WTI price of oil would stay at $30 per barrel, and 64 percent of firms would remain solvent if the WTI price of oil would stay at $40.
Forward Prices
Price data in the above table from MarketWatch.
If those prices hold, the survey estimates about 39% of the oil producers will go bankrupt.
Even at $40, 36% of the firms would go bankrupt.
Oil Crash Resumes: When Does It Stop?
Earlier today I asked Oil Crash Resumes: When Does It Stop?
When Does the Crash Stop?
- When producers stop drilling oil that is not needed.
- When the speculators putting on “paper oil” trades get wiped out.
Paper Oil
Oil is another example of leveraged trades. Even more so than gold, speculators will not take delivery.
There were net 554,489 speculative “paper” contracts in play as of a week ago.
Gain or Losses Per $10 Price Move
These speculators just took a massive hit. They cannot and never intended to take delivery of oil.
Trump Wants to Form a Plan
We will never let the great U.S. Oil & Gas Industry down. I have instructed the Secretary of Energy and Secretary of the Treasury to formulate a plan which will make funds available so that these very important companies and jobs will be secured long into the future!
— Donald J. Trump (@realDonaldTrump) April 21, 2020
My Plan
- Stop the bailouts.
- Let the oil speculators go bankrupt.
- Let the financers take it on the chin as well.
When Does the Crash Stop?
- When producers stop drilling oil that is not needed.
- When the speculators putting on “paper oil” trades get wiped out.
Energy Q&A
Good Question
My guess – all of them except those not heavy in debt needing to produce
In general, those who have to drill to make interest payments are toast.
That would help the industry actually. And Trump wants to prevent it.
Vote buying. https://t.co/al4H953Lvc
— Mike “Mish” Shedlock (@MishGEA) April 21, 2020
Paper Oil
Oil is another example of leveraged trades. Even more so than gold, speculators will not take delivery.
For discussion of delivery issues related to gold, please see Gold “What If?” Silliness
Bravo Mish!
“Stop the bailouts.
Let the oil speculators go bankrupt.
Let the financers take it on the chin as well….
That’s the only plan we need.”
—@MishGEA https://t.co/kIb6jsFO5k— Price is Primary (@PriceIsPrimary) April 21, 2020
It’s time for personal responsibility, not bailouts of favored industries.
That’s the only plan we need.
Fed Bailout Not Possible
Some readers suggested the Fed would bail out the sector. It cannot. There is no place to store the oil if the Fed bought futures and I do not believe the Fed would even if it could.
Those expecting hyperinflation out of forced debt writeoffs and plunging prices understand neither hyperinflation nor inflation.
Moreover, hyperinflationists and strong inflation proponents do not even understand what is most important in general: credit and the balance sheets of lenders.
For discussion, please see Hyperinflationists Come Out of the Woodwork Again.
Mish
The CBOE crude oil volatility index has become meaningless. Volatility models typically assume a lognormal distribution, with prices never going to zero or below. That assumption no longer applies.
You know you are in trouble when standard financial tools become “meaningless.”
Hot mic at White House Briefing Room blows lid off Corona virus stats:link to youtube.com
You can’t see the lips of the guy in the mask moving and the other guy is off camera talking for most of the shot.
This smells like a setup.
The “study” they are referencing has already been thoroughly discredited.
I think I have a solution that could make oil producers happy by increasing demand and make the climate change people happy. Instead of having an annual global climate change summit – Make it MONTHLY. Gas up all the private jets and fly to Davos, which will cut into the excess oil.
Note: This is a joke in case people think I’m serious.
These producers bet on higher oil, they bet wrong. It happens. Will our govt allow it to happen? Allowing it is how you unravel the monetary position our crony capitalism has gotten us into. Lots of dislocation is going to occur and not just in oil.
WTI would not exist without the help from ZIRP.
A middle east war can turn oil around. Expect a false flag soon in Saudi Arabia or Iraq
So expect SA to bomb something soon?
The Israelis will need to put Iran to bed sooner or later.
Oil will go to 100 plus.
Aren’t we already at war with or against everyone there? Who’s left?
If Trump can get democrats to play along (fat chance), the “solution” is to pay oil companies for oil in the ground.
You underestimate the power or corrupt crony capitalism. They will agree.
If we can create tents in parks to house patients, we can put those oil anywhere there’s space. Is it CRAZY? Absolutely. But can it be done. I don’t see why not.
Great idea, but won’t the oil leak out of the empty buildings? How can we make them leak proof?
When they say “barrels” of oil, they don’t mean literal barrels.
It’s a unit of measurement equivalent to about 42 gallons.
I suppose we can just store nuclear waste in Pelosi’s attic as well, once Yucca Mountain fills up….
Sounds like an idea worth exploring. Actually, she looks like it has already been stored there for a while.
Stealing tax money to keep oil in the ground is cheaper version of the new green deal. If Trump markets it this way then Dems will be crawling over each other to sign the Next Generation Energy Bill.
How fast can we fill the Strategic Oil Reserve?
Here is great idea: Let’s set up a new program: FORV (Federal Oil Repurpose Vehicle).
The details: The US Treasury buys a lake near Cushing, Oklahoma.
Each day the Treasury buy 1M barrels of oils and pumps it into the lake.
Over night, the oil is burned off. Redo next day.
The cost of the purchases are financed by the Federal Reserve. As colateral the Treasury issues ORCs (Oil Repurpose Certificates) which the FED can add to its balance sheet.
Stocks have risen 50% of there lows entirely by the central banks money printing and pumping tens of $$ trillions into equities by literally around the clock money printing.Same strategy will be applied to oil,the Fed will massively ramp up oil purchases to drive prices higher,they have acres and acres of money trees and they’re planting thousands of new money trees every day!
Let them go bankrupt. If there is demand at a certain price for long enough, somebody else will step in and buy the operations at a discount price.
Exactly, but we can’t allow any losses to shareholders and owners. Profits need to stay privatized but its certainly ok to socialize the losses. This needs to stop and with a country full of lawyers looking to sue the shit out of everything that moves I don’t understand why they don’t initiate legal action against the govt on behalf of its citizens, victims of corrupt crony capitalism.
What will stop a country full of lawyers that sues everything that moves is to implement rules against lawyers that award damages to the defendant(s) on a perponderence of the evidence. Nobody pays if they sue over frivolous claims.
Your plan is not feasible in America Mish. Bailout Nation is what this country has turned into.
Wait for the Fed’s Make Oil Great Again plan.
Who cares?
The buzzards will pick at the corpses and then continue sucking dinosaur pee out of the ground.
“Who cares”
Alternative energy (e.g., solar) will care as there will be no incentive to buy their products. Electric cars are doomed.
Tell that to Tesla.
The only thing Tesla sells profitably, is paper. Building cars and more or less giving them away, is just a marketing expense to keep the hype alive.