Speculators keep betting on an oil industry bailout or a revival in demand. Neither is in sight.
Crude is down again after hours following a 25% plunge on Monday.
The large speculators are long 587,180 contracts and have been increasing their bet since April as the arrow show.
They appear to be betting on one of two things.
- A Bailout
- A Return in Demand
Bailout: OK, suppose Trump and Congress work out a deal to hold reserves in the ground. There is still excess supply with no where to put the oil. At best, this maneuver stabilizes the price at some price below the price to produce the oil.
Demand: As people go back to work demand will pick up. But demand return will be slow, not instantaneous.
On the corporate side, expect more work-at-home, more teleconferencing, and fewer flights.
On the personal side, consumers need to rebuild savings. Many will be scarred for life.
Gains or Losses
The large speculators increased their bet from 435,108 contracts on April 1 to 587,180 contracts as of last Tuesday, April 21.
There will be a time for a long energy play, but this does not seem like the time.
Note that 40% of Oil Producers Will Go Bankrupt if $30 Persists
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
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
Why is China not building additional Mega-storage for its strategic oil reserve? Because it does not have a serious reserve currency yet! This USO ETF story is not new, it is repeating what LNG did a decade ago…stay tuned for the next tranche of eroding value betting contango speculators.
“Why is China not building additional Mega-storage for its strategic oil reserve?”
Because they are communists. Hence doomed to pick winners which aren’t, like Sinopec. Like Trumpo, they want to be “energy independent”, despite their domestic producers having costs of production up there with US shale operators. But darnit, just ban, ban, ban anyone from doing things a bit less wastefully! We’ve got connected executives, party members and union bosses to look out for, after all…..
Don’t hear much talk about Saudi Arabia’s impending bankruptcy. That should tighten supply as civil unrest takes hold and the Saudi royals start to slaughter people in the streets.
Naive question. Are big oil companies too big to save?
Every unit of energy = a unit of GDP. While the climate change folks cheer, our standard of living is dropping like a rock. We can’t print our way out of less production.
Lower oil consumption is a result of lower standard of living. Not the other way around. Americans are no longer as wealthy as before, hence are no longer in a position to consume as much energy.
“A Bailout
A Return in Demand”
…
I would add Supply.
OPEC+ constituency is a den of thieves. Look for members to increase production (no matter if quota agreed upon) to get $$s necessary to keep civil unrest at bay in their respective countries. I just don’t see spigot tightening.
The good news is Russia, and the Arabs, not to mention hapless Venezuela, will be hard pressed to keep their corrupt economies going if oil prices stay low.
Bad news is that Russia have the means to Make Oil Great Again. Which, while possibly good for a few Arab Oil Sheiks, is really bad news for anyone in the general vicinity of Arabia.
Yet, Chevron stock (CVX) is up 74% since 3/15 when crude oil was $32/bbl.
Crazy….
LPG is falling too. Same dynamic, I suppose.
Mish needs to explain this “credit and the balance sheets of lenders.” and the oversubscription of Netflix’s junk bond offering + yesterday’s Carnival’s offering.
Seems like everyone’s fine. Who is going to stop the Fed? Until that question is answered, nothing else matters and Mish is wrong.
Tsunami of defaults coming. And not just in US. Much of EM debt is priced in $US. And with King Dollar, EM will have a hard time servicing it. As credit collapses*, so will demand. Leading to …. Deflation.
*Mish spot on with “credit and the balance sheets of lenders.” If lender faces losses, guess what? They TIGHTEN credit. Vicious Cycle ensues.
I don’t disagree with short term deflation. But (big butt) the fed will be printing exponentially more money as the deflation bubble increases.
We will need a dictionary for the acronyms of all the programs that will be done.
The worst of all and the inflation maker will of course be UBI.
Never has supply destruction combined with exponentially more money ever ended up in deflation. Supply destruction is already in full swing. UBI is weeks/months away.
Two things.
Federal Reserve can print to its heart’s desire, but until the massive debt overhang issue there will no sustainable inflation. (Federal Reserve current operations are NOT “printing” money.)
Fedgov is about to get a taste of what UBI entails. CARES Act provision provides those on unemployment with an extra $600 a WEEK (thru July 31st) … on top of a state’s normal UE compensation. Some on UE will be getting close to a $1000 a WEEK. Good luck getting those back on the job anytime soon if states open back up for business. Meanwhile, business, especially small business will crater … along with tax base.
Morons in DC.
“It’s time for personal responsibility, not bailouts of favored industries.
That’s the only plan we need.”
Yes, but that option went away forever with the Supreme Court’s Citizens United decision.
Trump proved your idea here to be absurd. He raised almost nothing. How about you personally be less of a whiner, and stop looking to the government… we would be a much better country.
Did you even read what he said? Or have you become blind with rage as your moron idol implodes?
Money doesn’t corrupt politics. You really believe that? Thanks for making me laugh.