Saudi Arabia and Russia started an Oil Price War on Saturday.
The carnage was far worse than expected. Oil futures opened near $30, down a record breaking 27%.
Crude 15-Minute Chart
That’s the biggest crash in history.
The S&P 500 and Nasdaq futures are down over 4%. Halt limits just hit.
US Cost of Production
A Dallas Fed May 2019 report highlights the Average Cost of Production.
The average breakeven price of oil has fallen 4 percent (or $2 per barrel) over the past year, to $50 per barrel, according to the latest Dallas Fed Energy Survey. The $50 top-line figure masks some important differences. Areas such as the Midland and Delaware basins in the Permian Basin, hotbeds of shale activity, are routinely lower on average than other locations. There is also variability among operators; within the Permian Basin, for example, individual responses to the most recent survey ranged from $23 to $70.
Bloomberg New Energy Finance’s breakeven prices in the Permian range from $46 per barrel in Loving County to $87 per barrel in Reagan County.
While market participants may differ on how much oil is available at a given price, they are all aware of the overall trends. These represent strong forces that should keep long-dated futures prices from rising too high or falling too low.
Given current market prices, U.S. shale production will continue growing this year. Indeed, a recent report by the International Energy Agency highlighted that shale production is likely to be a major driver over the next five years.
Time to Reevaluate
Drillers and frackers that borrowed heavily and are dependent on higher prices to pay interest are now in serious trouble.
Oil exports? Uh… forget about them.
Demand is crashing with people working at home and refusing to fly.
A lot of leveraged drillers and crude suppliers dependent on prices above $50 will see a credit implosion.
That’s just a start.
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.
Liquidity Crisis in Energy Space
What better time than now to blow up US oil producers heavily in debt as an act of revenge?
The liquidity crisis will quickly spread far beyond energy.
Mike “Mish” Shedlock
Production costs per barrels which is a cost accounting calculation is not the same as cash flow required to keep the doors open in a business which is usually much less. Also as I have said in the past, Debt is not a sacred relic. Banks can roll loans over and use all sorts of techniques to keep someone in business as long as they can make an interest payment. These drillers in Texas and N. Mexico are quite adept at getting costs down.
If oil bond prices crash, who knows what will be triggered. Expect a lot of calls being triggered in the oil complex.
The cure for low prices is: low prices. But these things take time.
The dollars down to 95,25 on the DXY. The Fed can’t print foreign currency to support it.
Dow futures are enjoying a dead cat bounce off limit down at the moment. Crude has been down to 29.71, no limits on crude futures.
Whoops! Oh my, crude under $28 now, down over $13.
Who knows how low crude will go. Hey, if we can have negative interest rates why can’t we have negative crude oil prices?
YeeHAW!!! They can pay me to be alive as long as I can stay that way.
You can’t have negative rude oil prices for very long.
There are definitely wells which are cash flow positive down to $10/barrel. Some no doubt even below. I remember some story about Iranian oil breaking sanctions at $6 or so some years back…
Much non shale oil comes from fields with huge shutdown and restart costs and time delays (big infrastructure with a high fixed cost to keep running). So if demand really, really tanks; to the point where there no longer are any above ground storage capacity left, there may be a brief period of “It’s yours if you pay me more than the cost of flaring it.” Then again, seeing how quickly China can build hospitals, they’ll no doubt expand their “strategic reserve” capacity at a good clip if it gets to that…. Or, since noone is likely to want to set foot aboard a cruise ship anytime soon, perhaps some less regulated third world jurisdictions will fill the firesold ex cruise fleet and hope they don’t have a disaster….
Maybe so, but as several people have mentioned, no one with a brain cell to their name is going refi the fracking sector for the next few months (at least). Several of the marginal players cannot survive this.
The marginal players themselves may well survive. The current owners , and creditors, of the marginal players may not.
It’s a huge distinction. Cast off the debt and the overhead it brings along, pick up the now idle equipment, predrilled wells and infrastructure for pennies on the dollar, and operators are suddenly much more competitive.
Hydrofracking, horizontal well tech, processes and infrastructure to get the widely distributed recovered oil to more centralized buyers, equipment and supplies, have increasingly become commoditized over the past decade. And there are more people than ever familiar with all aspects of the business. In many places, it’s a very competitive way of getting oil out of the ground now. It’s not something which will be stomped out indefinitely, by nothing more consequential than a wave of bankruptcies.
HOLY shit monkeys, Dow futures now down by almost 1,300 and oil futures down 25%. RBOB down to a buck 12, jesus there are going to be massive historic margin calls. S&P is going to get hammered not just because it is down 5% in overnight trading but the volume is huge.
And maybe the most important is that the yield curve is inverted again with the 3 month at .48% and the 10 year at .478%. I predicted the half point cut before the March meeting of the FOMC and another half point at the meeting on the 18th, I am now thinking we will see another half point cut this week. They will have zero options with a new inversion. We could be well into negative rates by the third week of March. The 30 year yield is now below 1%. That is not going to end well.
The Aussie is down to 64.5 to the buck remember they also cut rates in lock step with the US, their markets are in chaos at this point.
I think we are seeing truth laid bare at this point, even in the GFC they did not see this kind of absolute shambolic route in a day.
This may well be what we contrarians have waited years for, now, it is time to predict their response to it. I have a sinking feeling that limits on freedom of movement are going to be part of it and with all the emergencies declared national guard units and the military will be out enforcing that. My state Oregon just declared an emergency today, so did New York, the first two cases of CoVid19 were announced in the county today. God help an old smoker like me with death rates that are going to mean I will be triaged out of any care at all.
In the time it took me to write this oil futures are down now 30% not 25.
Moneterism has failed. The dirty secret of Moneterism is found in its last chapter. An exponential increase in debt. Debt that ultimately consumes the entire economy. Our children will certainly thank us for this disaster.
I think that is begging for trouble, in fact buildings will not fall down, crops will not refuse to grow, and people will remain fundamentally people. Not saying there will be no pain, but I am hoping that what really happens is that a lot of the economy reverts to a normal capitalism with huge piles of dynastic wealth getting hit the hardest just as the poor will not get a whole lot poorer, after all they cannot get much poorer than they already are.
That was the case in the Great Depression, in late 1929 the market crashed, but it was not till 1930 and 31, even 32 that people like my Great Grandmother lost everything her father had built up. He established a chain of general stores and lumber yards in the Puget Sound region and my grandfather was raised “in the lap of luxury” till just before he was an adult. At that point the bankers arrived and gave my Gammy 15 minutes to load personal possessions into the one car they were allowed to leave the house with. From wealth to ashes, and that is what we are seeing right now. There are people out there that convinced themselves to go LONG oil, tomorrow they will get the margin call of their lives. Thousands of people made bets that will bankrupt them when the market opens. Keep that in mind.
Do I wish I had some of that dynastic wealth my Great Great Grandfather amassed and passed on? Of course. Did I get born and live a decent life without it? Of course. So, I am not worried about the rich, a few will defenstrate themselves onto the sidewalks of Wall Street tomorrow, but people will go on.
I wonder how bad it will be for legitimate businesses, consumers of oil, that thought they were being smart to lock in their fuel costs. Only to wake up tomorrow and face margin calls on their futures.
A big prominent Dallas Love-field airline comes to mind as one that may very well have to cough up enormous amounts of cash. The modern “financial” economy just isn’t really set up to take six-sigma moves in commodities all that well without causing significant dislocations.
If the bankers took all your great grandfather’s ‘wealth’ it sounds like he may just have been mortgaged to the hilt, no? Bankers do not have a claim unless you owe them a debt.
This situation as a whole is turning into the definition of a perfect storm. The wheels are already in motion, there’s no stopping this now. Kinda hard to believe it’s real…but it is. Buckle up!
“Mish, Is this the start of a commodity crash? Will gold prices crash soon?”
Gold does best in deflation – Fed and gov’t response to it is the reason
It’s a bet on lack of faith in central banks and governments
The answer is obvious.
In this s-storm, will be surprising if gold doesn’t hit $2,000 by the end of the month.
Gold miners, being a spread play between the price of gold, and the cost of inputs such as energy, men, and equipment, should be exploding in profitability at this point.
As long as the “men” don’t insist on “working” from home…
Most gold miner types are still manly men. And they mostly live in camps or in small towns which are relatively and sufficiently sealed off from the world. Besides, even if the virus kills a few, there won’t be any shortage of men looking for work, especially from the oilpatch.
So Mish, until the Fed and Govts respond aggressively gold prices should deflate?
Fundamentally. gold should be much higher. But the market and fundamentals parted ways decades ago.
Depending on who you listen to, BC Canadian oil sand break even is anywhere from 50 – 80 dollars/barrel. I wonder if they are going to subsidize it even more now? Another Trudeau fail.
That entire oil sands business model confuses me. I can’t see how it has ever made any money. And the moonscape left behind…
The major Canadian oilsands producers are likely to report outsized profits in the next quarter or two due to their gains on their hedges.
Not Trudeau’s fault, but then I am surprised you did not blame it on Obama or Hillary.
What about North Dakota? Sounds like an epic crisis in the high Plains.
North Dakota will survive, but there will be a lot of people from across the country who will have to pack up and go home. I drove through Minot last month on my way to Minneapolis, and had a nice chat with a guy from Missouri at a truck stop who drove up there to work 2 weeks on, 2 weeks off. Those people will go away, rents and costs in Williston will collapse, but the wells will continue to be operated. The state is very accustomed to prolonged low oil prices and there is little evidence of flashy “we’re suddenly oil rich” consumption in the state. Other than the highways, perhaps, which are maintained pristinely compared to Minnesota, Wisconsin, Illinois, or Michigan.
Bye, bye commodity complex…..
Mish, Is this the start of a commodity crash? Will gold prices crash soon?
Is gold a commodity? No
Will gold crash. Maybe. It is overbought and speculators are very long futures. A correction is almost certain.
Other than that it’s a home run
1st derivative of producer crushing is the banks and backers of these credits.
Tim-bear!!!
Trump’s Coronavirus Press Event Was Even Worse Than It Looked
His remarks at the CDC on Friday were misguided, misleading, and show how misinformation could hamper Covid-19 containment efforts. https://www.wired.com/story/trumps-coronavirus-press-event-was-even-worse-than-it-looked/