Crude Last Six Months
Credit Implosion Coming Up
A lot of leveraged drillers and crude suppliers dependent on prices above $50 will see a credit implosion.
That’s just a start.
A Supply Shock and a Demand Shock are Coming Up.
Deflationary Outcome
As noted previously, a Very Deflationary Outcome Has Begun.
Blame the Fed.
Deflation is not really about prices. It’s about the value of debt on the books of banks that cannot be paid back by zombie corporations and individuals.
See the previous link for discussion.
Mike “Mish” Shedlock
Have a look at the US dollar index link to cnbc.com
I can’t wait to see what happens in the markets tomorrow. Will Wall Street see this as a massive stimulus and rally? Or will short covering and gold longs fly to safety? If it were not for CV19 I would say the market would reverse and rally, but given the news cycle as it is I think we could see circuit breakers tripped to the downside tomorrow.
I love cars with big block V8 engines, it’s time to quit worrying about gas mileage and enjoy driving again. These small high flung turbo motors are too expensive and don’t sound near as good!
TWC, I see driving as not only fun but freedom itself, and so I do not understand the pencil necks that actually want some vulnerable fallible computer to do their driving for them, especially when that vehicle is so underpowered because every younger driver has been brainwashed to believe the idea that it is their personal duty to fix “man made global warming.”
But, gasoline spot prices are at below $1.50 (now $1.389 on spot future and probably limit down on open tomorrow) yet we are still paying over $3 per gallon here (Oregon) and I hear it is over $5 in southern Cali. I simply have no faith that any lower prices will get passed to the retail consumer. And what is passed on will be a matter of weeks before OPEC gets it’s collective shit together and makes up for the temporary lower prices.
I do agree with your sentiment though.
It is just that TPTB have decided that the ICE will be phased out, and so very likely will private car ownership, instead we will be forced to use ride hailing services at a far higher price per mile on top of having to go places only after you get into a queue for a ride, not when you actually want to go somewhere. Good luck getting anywhere when a football game ends or a major concert is about to start or end. Rural dwellers are going to be SOL.
Affluent to wealthy people will be able to afford private computer driven vehicles yes, but they will not be human driven even then because human drivers simply are not compatible with cloud computer driven traffic. And, I forsee that those programs in the cloud that drive vehicles will be special programming that will not be available for free simply by a WiFi signal, it will be a subscription service that will cost about double what current cable prices are if not more, so only commercial users and the rich can afford to link to the master drive control programs, and without that your vehicle will not be allowed on public roads, they will have to be linked to even access public roads. Half the households at the least will simply have to settle for computer driven Uber and Lyft and other ride sharing services and enjoy sitting in some drunks’ puke when this happens.
I bought some ExxonMobil XOM today at $47.73. Buy low right?
TD; I will be here for you tomorrow when XOM hits $39 or below.
🙂
PPT – Nope This story more credible.
A big Market Maker in Chicago Literally Went Bust
Have not confirmed
I wonder who the hell it was? What a mess.
Now I’m going to have to watch that movie.
It highlights counter-party risk & the associated consequences of a failure. No doubt this sort of thing is what the Fed is/was trying to avoid with its growing Repo operations. To date the markets have viewed them as good because of the liquidity injection, not bad because of the underlying reason. I think that view might begin to change now.
CBOE was busy, Barclays Bank was forced to suspend and delist their iPath ETN. link to finance.yahoo.com
By the way, the CBOE volitility index hit over 54 on the day yesterday, so it makes sense that someone got nailed pretty good.
February 20 just 11 trading days ago crude hit $53.50 and now closed yesterday at $41.57. Nearly 12 bucks a bbl, but the really shocking thing is the volume of trades.
On Feb 20 the volume was 113,683 and yesterday it was 530, 641, 140. What is that about 5,000 times the volume.
What kills me and pisses me off is regular unleaded is now spot priced at $1.3927 for April 20 delivery and yet we are still paying $2.80 for regular and $3.12 for premium. That is the biggest gasoline mark up frrom rinery to pump in the history of the fuel. (aside from hurricane gouging in Florida before they changed the law anyway)
But, as far as the huge drop in oil, a lot of people have outsized bets on oil going up for hedge purposes, airlines alone hedge fuel prices in order to prevent their costs from destroying the business in price spikes. There was an OPEC meeting in which Russia and Saudi were to announce deep cuts but the meeting failed to produce results. This has crushed the long oil crowd. And in fact will likely force some to accept delivery of crude and petroleum products which since they are just paper traders they are not going to able to do. Anyone long on oil be it for a hedge or just speculation for profit and who were buying on margin just got bankrupted I believe. And those that bet on the vix also are weeping (probably with a massive hangover to boot).
$2.80 a gallon. It’s $7.26 here, & that’s for a UK gallon. 😀 (most of it tax)
I have a downside target in the $10 / bbl area.
Seems like if it breaks that long term low around $30 then it could visit the teens easily.
Someone clearly stepped in to stop another huge down day in the last hour of trading. I wonder who it could be. cough Fed cough
Ever heard of the PPT? It is real, look it up on wikipedia.
I would agree it was probably the government. The stock market is one of the true bright spots in the economy and Trump will protect t with everything he has. He already is. I would to if I was running for reelection.
Pray tell how mispricing could even theoretically be a “bright spot” for any “economy.”
Agree, but, we all know they are just not going to allow a repeat of the GFC, no matter what it takes they are going to prop up equities and residential real estate. Even if they have to declare a partial jubilee on interest for motgage holders. Negative rates on mortgages are already fact in parts of the EU and they are coming here as well. Then there will also be fully refundable tax rebates for homeowners, not just deductions for interest expense. Bush did it in 2008 with his $7,500 tax credit, I know because I got that credit. So, think outside the box when it comes to the lengths they will go to stop another GFC and foreclosure crisis. How about an across th eboard refi on all mortgages that lowers your rate by 1%? Or a declaration that all interst rates on home loans is going to be -1%? Contract law be damned. For that matter there is nothing to stop them from simply telling banks they will lower principal balances by XYZ percent. Moral hazard schmoral hazard.
Please note: there is nothing for the “potent directors” to allow or not allow – if market participants decide to panic, all attempts to prop prices up by intervention are destined to fail.
We are in a different world now Peter, the “market participants” are no longer individuals with actively traded accounts at the local broker’s office, they are quants and algorithms, billions of shares traded per second, front running and momentum trades; and the point I was trying to make is that there will be no limit to what the Fed and TPTB will go to to prevent another GFC, no matter what those two main asset prices will be defended, equities on Wall Street and equity in residential real estate, because they are so integral to the Main Street wealth the fed will risk hyperinflation before they risk a deflationary depression, and it is looking like one or the other is not only inevitable now but imminent.
So, it is entirely possible you are right to a degree, real people may pull money out of Wall Street to the point they have their wealth on the sidelines in cash, but why do you believe the Fed will not simply inject an equal or greater amount of cash into those systems? They are capable of being a buyer of last resort so that the prices in question remain stable even if just on paper. In fact they already own trillions in equities via their bankster proxies in the financial community. Not to mention home equity from trillions in mortgage backed securitization.
I admit there is evidence for deflation though, especially with today’s announcement of the OPEC failure to agree and Saudi promising to pump oil like never before till OPEC does get it’s shit together. If a drop in crude pricing into the $20’s is allowed to be passed on to consumers, and I have little faith it will, at least on the west coast, where I still pay more than $3 per gallon of gas, that would act as a stimulus indeed, but, you have to ask yourself if that is not pushing on a string first, and second it is ALWAYS a short lived price reduction.
Just as my example of low crude prices not getting fully reflected in retail fuels pricing we are seeing that mortgage interest is not fully being passed on to retail mortgages. I recently bid on a house in Florida and was locked in at 3.785% and close April 6. Already the average 30 year fixed has dropped to 3.66% nationally, but that is still 289 basis points above the 10 year treasury. The traditional metric was that the mortgage rate was the 10 year treasury + 100 basis points, so if retail mortgages were reflecting current conditions as it would in a properly functioning interest rate environment the going rate on a 30 year fixed would be 1.77% (as I type the 10 year pre market is at 0.773%) and it is 189 basis points above that level. Home buyers have almost never in modern times had to pay that much of a premium for a mortgage.
So, in summary, if we are arguing that they have to make a choice between inflation/hyerinflation and deflation (ary depression), I think they have been very blunt about what they intend, they say they want more inflation and there is no reason not to take them at their word. And it can be done even in the face of an economic collapse, simply add a decimal point or two to every bank abount in the banking system. Yes you will feel poorer because you will BE poorer, but, everything will still cost 10 or 100 times as much so that at least people can make house payments (or pay off their mortgages entirely) and all will be well in the banks ledgers. As long as default is off the table all they are doing in reality is what they did in the GFC when they changed the mark to market rule into mark to make believe, but at the time they only did it for banks and corporations, not for residents, and by the way, that change is still in effect, most of the toxic garbage that was ever invented is still out there witing to destroy balance sheets when it reaches maturity.
I don’t believe it is necessary to invoke intervention when the market recovers in late trading on a Friday after falling sharply for two days in a row. It could simply be a bout of short covering – after all, shorts had to contend with enormous up-moves on several recent trading days.
That first chart is super bearish they would really need to pull one out of the hat to save that. Of course it’s a pretty deep hat that never seems to surprise.
“not” to surprise
Require 700,000,000 Chinese to park their vehicles may cause demand to soften, eh?
Low crude prices might be bad for the oil patch, but shouldn’t cheaper fuel be good for the rest of the economy? I know I like paying less for gas.
Lower prices, for anything; doesn’t matter if it is oil, cellphones or stocks; is always a good thing for the economy in aggregate.
If oil was $1/barrel, and Iphone $20 and the Dow 10, pretty much everyone would flush.
Yes and no. Just depends on which side of the isle you are on but generally lower commodity prices benefit a lot of people. I can’t deny that.
I have seen gasoline price leaving refineries drop from $2.28 in May 2018 to just $1.389 Friday and likely limit down on the open tomorrow and still had to pay $3.699 in Portland on the 24th when I had a doctor appointment up there. I hear gas is still over $5 in greater LA. So I no longer believe gas prices are connected to oil prices. If there are still pockets of the nation where they are that will change as soon as the oil bigs figure out there is squat people can do about pump prices. Price fixing? Of course, but law no longer matters in the USA!
We will see what travel restrictions do to fuel prices. I say it may well be counterintuitive. As gas use plummits with restrictions on travel and you see roadblocks set up to stop people from fleeing to other regions the price will skyrocket because so few gallons used will still have to pay all costs assciated with production and delivery, and the fewer the gallons the higher the per gallon share of cost to make and deliver. It could be the big spur to ending gasoline once and for all.
The Fed will start doing this again soon:
“That’s just a start.”
…
Somewhere down the line we’ll see civil unrest in OPEC countries if trend continues.
They got oil … and, uh, more oil …
XLE is in a h&S topping pattern and broke below the neckline a few weeks ago, I have a mm to about 12
I feel for the oil patch folks. I hold our friendly Fed responsible for their plight also. The effect of Zirp infinitum was to suck $500 Billion into the oil patch, making oil out of rock. Now, it’s flowing back out in earnest.
It’s not just money. Tens of thousands of real people are going to be devastated personally by our herky-jerky Fed, this time in the oil patch.
“Zirp infinitum was to suck $500 Billion into the oil patch,”
…
Yes.
And everywhere else, too. Too many ______ . The past 10 years was “great” as mal investment ongoing.
Sure, jobs created when that absolutely unnecessary underutilized strip mall built. Now what?
Oh yeah, construction loan still there.
The Oil Patch guys will manage. Theirs was never an easy job. And besides, they are competent enough to produce value. Which will always be valuable.
If there truly is a credit crunch, things look a lot bleaker for the armies of makeworkers who don’t produce squat. And either has no cashflow to service even zero interest loans, or whose cashflow exists solely on the back of demand from others with no cashflow who have been spending credit and asset appreciation like drunken sailors.
The Fed being The Fed, tough, and The Government the Government, they’ll both do their darnedest to squeeze the guys in The Patch, in order to keep those chasing ambulances and getting commission cuts from selling nothing flush. The latter are the Fed and Government’s people, after all. While productive people doing something useful, are just there to be preyed on.
Too much debt and debt servicing removes the ability of companies and people to adjust to new realities. Most of the companies that have gone under recently have had the underlying issue of too much debt, specially after low-interest rates acquisitions.
Not to mention marginal cash flow entities using debt to fuel buybacks / dividends.
Payback will be a b****.
This is still short term noise. Peak oil for conventional production peaked in 2005, if you take out the US production (frakked and non-frakked). Zero interest rates and frakking extended our good times for a few years. But sometime, someway, most oil production will be unaffordable. Price will determine who gets the oil, and who stays in the middle class. CoVid-19 will eventually moderate. Then what? The long term comes back on the stage …
That is what my thoughts are. According to the chart above crude was at $35 within the past year. Volatile yes down and out no.
I think the companies that don’t survive will start anew under a different name and have the ability to take out loans at < 1% when all is said and done. Everytime we get deflation we also clear out businesses that can’t survive but new businesses that emerge do better b/c they have lower debt interest rates.
I wouldn’t look for credit to be very easy to obtain in such an environment especially since there’s so much excess overcapacity to be liquidated. In the 1930s, interest rates were officially very low, but very few business prospects were actually credit-worthy.
There’s an awful lot of discretionary debt-fuelled consumption of oil that isn’t coming back. Do you think those cruise ships, airplanes, etc., are full of people who aren’t up to their eyeballs in debt? The people who own true deflation hedges are far less voluminous and tend to be far less spendy than those who have been binge-spending on credit for the past 30-40 years knowing that rising asset prices will bail them out of any bad decisions.
I suppose that you have some crystal ball. The airlines and cruise ship are not coming back? Will restaurants and entertainment be gone also? Oh the humanity. Please indicate all these wonderful deflationary hedges that you speak of.
Possibly. A better answer is far to much global oil production coupled with weak and contracting global economic growth in many countries. Economic growth is slowing almost everywhere. High volatile metallurgical coal that my company mines and exports all over the globe(mostly to China and India) was selling for around $175 a ton in March 2019 and today is selling for $78 a ton. Talk about deflation. Talk about seeing your cash flow decline. Tough times for most energy commodities.
Serious economic question. Would this scenario you generated create deflation? So the drop in such things and the economic impact would technically be deflationary?
Depends on your definition
But the most important thing is a collapse in the value of credit on the books of banks
Debt implosion
Interesting. I need to study up.
Thanks!
You are welcome. I hope my post was helpful.
That is so true. Credit for the coal and natural gas industry is quickly drying up. Wall Street doesn’t want to touch these industries anymore. Can’t say I blame them.
Coal , that has been happening for years. Natural gas, no, demand may slacken with industrial production, but electricity generation is a large part of natural gas demand, and that demand is steady. As for credit demand, that depends on the company. Unless you have some data pipeline to banks , your opinion on natural gas is not supported.