The Oil Price Collapse Is Yet Another Sign That Economic Activity Is Crashing Dramatically All Over The World

The insanity that we are currently witnessing in the financial markets is difficult to believe.  Personally, even though I operate a website called “The Economic Collapse Blog” and I write about these things every day, when someone told me that the price of oil had fallen below minus 30 dollars a barrel on Monday I initially didn’t think that it could possibly be true.  Yes, I always knew that it was theoretically possible that the price of oil could go into negative territory, but we had never seen such a thing actually happen before.  And I knew that a crunch was coming as futures contracts expired, but I certainly did not expect the extreme carnage that we witnessed on Monday …

West Texas Intermediate crude for May delivery fell more than 100% to settle at negative $37.63 per barrel, meaning producers would pay traders to take the oil off their hands.

This negative price has never happened before for an oil futures contract. Futures contracts trade by the month. The June WTI contract, which expires on May 19, fell about 18% to settle at $20.43 per barrel. This contract, which was more actively traded, is a better reflection of the reality in the oil market. The July contract was roughly 11% lower at $26.18 per barrel.

When global economic activity is rising, that usually creates an increased demand for oil.

And when global economy activity is declining, the demand for oil also tends to drop.

Thanks to the coronavirus lockdowns, global demand for oil has dropped to levels that are absolutely unprecedented.  The amount of oil that is being produced is far, far greater than the amount that the world can use right now, and storage space has been rapidly running out.

Speculators that found themselves stuck with oil contracts that they were not able to resell went into panic mode on Monday, and that created the most memorable day for oil trading in history.

I would like to share what a couple of experts are saying about this absolutely crazy oil price crash.  This first comment comes from Wolf Richter

It seems some oil trading firms and hedge funds were caught on the wrong side of heavily leveraged bets, and couldn’t roll over their contracts due to a liquidity crunch and horrible market conditions in that space. But if they can’t sell the contracts by tomorrow, they’ll have to take delivery of the physical oil at the delivery point for NYMEX futures, namely in Cushing, Oklahoma.

The delivery time is in May. But storage in Cushing for May seems to have been spoken for, and now these traders see that they have no place to go with this oil that they might have to take delivery of in May.

And this next comment comes from Roger Diwan

What is happening today is trades or speculators who had bought the contract are finding themselves unable to resell it, and have no storage booked to get delivered the crude in Cushing, OK, where the delivery is specified in the contract.

This means that all the storage in Cushing is booked, and there is no price they can pay to store it, or they are totally inexperienced in this game and are caught holding a contract they did not understand the full physical aspect of as the time clock expires.

The contract roll and liquidity crunch that made the extreme sell-off today possible but it DOESN’T necessarily represent futures market conditions: NYMEX June settled today at $21.13.

Last week, Russia, Saudi Arabia and other major oil producers cut a deal to significantly reduce global oil production, but it wasn’t nearly enough to match the nightmarish decline in global economic activity that we have been witnessing.

So right now oil producers are pumping far more oil than the world can currently use, and that has become a massive problem.

And if things don’t turn around quickly, we could soon see hundreds of bankruptcies in the energy industry…

Many oil companies took on too much debt during the good times. Some of them won’t be able to survive this historic downturn.

In a $20 oil environment, 533 US oil exploration and production companies will file for bankruptcy by the end of 2021, according to Rystad Energy. At $10, there would be more than 1,100 bankruptcies, Rystad estimates.

In the short-term, what the energy industry desperately needs is for the lockdowns to end and for people to resume their normal economic patterns.

But as one analyst has pointed out, getting people to do that would be extremely difficult even if all of the lockdowns were lifted immediately…

“The government can declare whatever they want in terms of encouraging people to get out and do stuff,” said Willie Delwiche, investment strategist at Baird. “Whether or not broad swaths of society do that remains to be seen. It’s going to take seeing people start to get out and do stuff again. That will be the necessary positive development, not just declaring getting things open.”

In the long run, the good news for the energy industry is that there are several reasons why the price of oil will eventually be going back up to higher levels.

First of all, economic activity will rise as lockdowns are lifted all over the world, and hopefully all of the lockdowns will be over by the end of this calendar year.

Secondly, central banks and national governments around the globe are flooding the system with massive amounts of fresh money, and this will eventually cause very painful inflation.  But for the energy industry this will actually turn out to be a good thing because it will cause upward pressure on oil prices.

Thirdly, it is just a matter of time before a major war erupts in the Middle East, and once that happens the price of oil will immediately shoot into the stratosphere.

So the truth is that this is just a temporary downturn for the energy industry, but a lot of energy companies are so deep in debt that they may not be able to ride this storm out.

For the U.S. economy as a whole, it is critical for all of us to understand that things are never going to go back to exactly the way they were before COVID-19 came along.  All of the financial dominoes are starting to tumble, all of the economic momentum is heading in the wrong direction, and there will be many more challenges that we will have to face after this current pandemic is over.

There will be a lot more wild ups and downs in the months ahead, but this is what an economic collapse looks like, and it is just getting started.

About the Author: I am a voice crying out for change in a society that generally seems content to stay asleep. My name is Michael Snyder and I am the publisher of The Economic Collapse BlogEnd Of The American Dream and The Most Important News, and the articles that I publish on those sites are republished on dozens of other prominent websites all over the globe. I have written four books that are available on Amazon.com including The Beginning Of The EndGet Prepared Now, and Living A Life That Really Matters. (#CommissionsEarned) By purchasing those books you help to support my work. I always freely and happily allow others to republish my articles on their own websites, but due to government regulations I need those that republish my articles to include this “About the Author” section with each article. In order to comply with those government regulations, I need to tell you that the controversial opinions in this article are mine alone and do not necessarily reflect the views of the websites where my work is republished. The material contained in this article is for general information purposes only, and readers should consult licensed professionals before making any legal, business, financial or health decisions. Those responding to this article by making comments are solely responsible for their viewpoints, and those viewpoints do not necessarily represent the viewpoints of Michael Snyder or the operators of the websites where my work is republished. I encourage you to follow me on social media on Facebook and Twitter, and any way that you can share these articles with others is a great help.  During these very challenging times, people will need hope more than ever before, and it is our goal to share the gospel of Jesus Christ with all many people as we possibly can.

6 Of The Last 8 U.S. Recessions Were Preceded By Oil Price Spikes – Damage To Saudi Oil Industry Could Take “Months” To Repair

When the price of oil rises dramatically, that tends to be really bad for the U.S. economy. Because we are so spread out and goods are transported over such vast distances, our economy is particularly vulnerable to oil price shocks, and that is one reason why the events that we just witnessed in the Middle East are so alarming. According to an article that was published by the Federal Reserve Bank of San Francisco in 2007, five of the last seven U.S. recessions that had occurred up to that time “were preceded by considerable increases in oil prices”. Since that article was published in 2007, the recession that began in 2008 hadn’t happened yet, and of course that recession was immediately preceded by the largest oil price spike in history. So that means that six of the last eight U.S. recessions were preceded by oil price spikes, and now we may be facing another one. It is being reported that it may take “months” for Saudi Arabia to fully repair the damage that was done to their oil industry, and that could fundamentally alter the balance of supply and demand in the global marketplace.

Yesterday, I discussed why high oil prices are so bad for our economy. When the price of oil is too high, it can cause inflation and hurt economic growth simultaneously. The article from the Federal Reserve Bank of San Francisco that I mentioned in the last paragraph tried to explain why this happens in very basic economic terms

Oil price increases are generally thought to increase inflation and reduce economic growth. In terms of inflation, oil prices directly affect the prices of goods made with petroleum products. As mentioned above, oil prices indirectly affect costs such as transportation, manufacturing, and heating. The increase in these costs can in turn affect the prices of a variety of goods and services, as producers may pass production costs on to consumers. The extent to which oil price increases lead to consumption price increases depends on how important oil is for the production of a given type of good or service.

Oil price increases can also stifle the growth of the economy through their effect on the supply and demand for goods other than oil. Increases in oil prices can depress the supply of other goods because they increase the costs of producing them. In economics terminology, high oil prices can shift up the supply curve for the goods and services for which oil is an input.

Needless to say, the unprecedented attack on Saudi oil production facilities was going to cause the price of oil to rise substantially. In fact, when global markets opened up on Sunday evening we witnessed quite a dramatic spike

In an extraordinary trading day, London’s Brent crude leaped almost $12 in the seconds after the open, the most in dollar terms since their launch in 1988. Prices subsequently pulled back some of that initial gain of almost 20%, but rallied again as traders waited in vain for an Aramco statement clarifying the scale of damage.

So where is the price of oil going from here?

One analyst quoted by Oilprice.com believes that we could soon see it hit $80 a barrel, and others believe that it could move up toward $100 a barrel not too long from now.

In the days ahead, global markets will be watching Saudi Arabia very carefully. The longer it takes them to resume normal production levels, the higher the price of oil will go.

According to Bloomberg, one analyst is already publicly admitting that “full resumption could be weeks or even months away”…

All eyes are on how fast the kingdom can recover from the devastating strike, which knocked out roughly 5% of global supply and triggered a record surge in oil prices. Initially, it was said that significant volumes of crude could begin to flow again within days. While Aramco is still assessing the state of the plant and the scope of repairs, it currently believes less than half of the plant’s capacity can be restored quickly, said people familiar with the matter, asking not to be identified because the information isn’t public.

”Damage to the Abqaiq facility is more severe than previously thought,” said Amrita Sen, chief oil analyst at Energy Aspects Ltd. “While we still believe up to 50% of the 5.7 million barrels a day of output that has been disrupted could return fairly swiftly, full resumption could be weeks or even months away.”

That is really bad news, and that is assuming that there won’t be any more attacks like we just witnessed.

If there are more attacks, Saudi oil production could be far lower than normal for an extended period of time, and that would be catastrophic for the global economy.

Most Americans don’t realize this, but a lot of Saudi oil actually gets shipped to the west coast. The following comes from Fox Business

Drivers in California, however, could be hit the hardest. Nearly half of what Saudi Arabia exports to the U.S. is sent to the West Coast, as reported by Reuters. In the year that ended in June, the West Coast imported an average of about 11.4 million barrels of Saudi crude every month – much of which went to California refineries.

The Golden State already has among the highest average gasoline prices in the country – at $3.63 per gallon as of Monday.

We are going to see higher gasoline prices right away, but in the short-term we should be able to handle them okay.

But if there are more attacks like the one we just saw, or if a major war breaks out in the Middle East, the price of gasoline could easily spike to levels that we have never seen in this country before.

The U.S. economy was already deeply struggling even before the attack in Saudi Arabia, and so this could definitely push us over the edge. We should all be getting prepared for an extended economic downturn, because it looks like that is precisely what we could be facing.

Hopefully we won’t see any more attacks on oil production facilities, but the attack on Saturday clearly demonstrated how extremely vulnerable such facilities are to terror attacks. And with Middle East tensions currently at an all-time high, USA Today is warning that our future “may well get much rockier soon”…

The new threat is tension among nations in the region, as well as the ability to attack based on new and relatively simple technology. Drones can be flown long distances carrying weapons just powerful enough to attack oil facilities. Middle East tensions are severe enough that attempts at similar attacks are not over.

Oil futures do not trade based on the present. They trade on forecasts about oil supply and demand in the future. The future looks rocky and may well get much rockier soon.

We are truly in uncharted territory, and we desperately need peace and calm to prevail in the Middle East.

Sadly, that is not likely to happen, and every new wave of violence is going to mean more economic pain for all of us.

About the author: Michael Snyder is a nationally-syndicated writer, media personality and political activist. He is the author of four books including Get Prepared Now, The Beginning Of The End and Living A Life That Really Matters. His articles are originally published on The Economic Collapse Blog, End Of The American Dream and The Most Important News. From there, his articles are republished on dozens of other prominent websites. If you would like to republish his articles, please feel free to do so. The more people that see this information the better, and we need to wake more people up while there is still time.

If You Think The Price Of Oil Is Skyrocketing Now, Just Wait Until The War Starts…

In the aftermath of the most dramatic attack on Saudi oil facilities that we have ever seen, the price of oil has exploded higher. The Wall Street Journal is calling this attack “the Big One”, and President Trump appears to be indicating that some sort of military retaliation is coming. Needless to say, a direct military strike on Iran could spark a major war in the Middle East, and that would be absolutely devastating for the entire global economy. Just about everything that we buy has to be moved, and moving stuff takes energy. When the price of oil gets really high, that tends to create inflation because the price of oil is a factor in virtually everything that we buy. In addition, a really high price for oil also tends to slow down economic activity, and this is something that we witnessed just prior to the financial crisis of 2008. And if this crisis in the Middle East stretches over an extended period of time, it could ultimately result in a phenomenon known as “stagflation” where we have rapidly rising prices and weaker economic activity simultaneously. The last time we experienced such a thing was in the 1970s, and nobody really remembers the U.S. economy of the 1970s favorably.

The damage caused by the “drone attacks” in Saudi Arabia was immense. According to the Daily Mail, “huge plumes of black smoke” could be seen pouring out of a key Saudi oil facility…

Infernos raged at the plant in Abqaiq, Bugayg, and the country’s second largest oilfield in Khurais yesterday morning after Tehran-backed Houthi rebels in Yemen fired a flurry of rockets.

Huge plumes of black smoke could be seen coming from the oil facility.

Houthi rebels in Yemen have publicly taken responsibility for the attacks, but they may or may not be telling the truth.

At this point, U.S. Secretary of State Mike Pompeo is completely rejecting that explanation, and he is claiming that there is “no evidence the strikes had come from Yemen”

Secretary of State Mike Pompeo blamed Iran for coordinated strikes on the heart of Saudi Arabia’s oil industry, saying they marked an unprecedented attack on the world’s energy supply.

The strikes shut down half of the kingdom’s crude production on Saturday, potentially roiling petroleum prices and demonstrating the power of Iran’s proxies.

Iran-allied Houthi rebels in neighboring Yemen claimed credit for the attack, saying they sent 10 drones to strike at important facilities in Saudi Arabia’s oil-rich Eastern Province. But Mr. Pompeo said there was no evidence the strikes had come from Yemen.

And according to Reuters, another unnamed “U.S. official” told them that the attacks came from “west-northwest of the targets”…

The U.S. official, who asked not to be named, said there were 19 points of impact in the attack on Saudi facilities and that evidence showed the launch area was west-northwest of the targets – the direction of Iran – not south from Yemen.

The official added that Saudi officials had indicated they had seen signs that cruise missiles were used in the attack, which is inconsistent with the Iran-aligned Houthi group’s claim that it conducted the attack with 10 drones.

Of course drones don’t have to travel in a straight line, and cruise missiles don’t either, and so we may never know for sure where the attacks originated.

But we do know that the Houthi rebels in Yemen are being backed by Iran, and we also know that the Shia militias in Iraq are also being backed by Iran.

So whether the attacks originated in Yemen, southern Iraq or Iran itself, it is not going to be too difficult for U.S. officials to place the blame on the Iranians, and we should expect some sort of military response.

In fact, President Trump posted the following message to Twitter just a little while ago

Saudi Arabia oil supply was attacked. There is reason to believe that we know the culprit, are locked and loaded depending on verification, but are waiting to hear from the Kingdom as to who they believe was the cause of this attack, and under what terms we would proceed!

Of course U.S. airstrikes against Iran itself could ultimately spark World War 3, and most Americans are completely clueless that we could literally be on the precipice of a major war.

According to the Saudis, the equivalent of 5.7 million barrels a day of oil production were affected by the attacks. Saudi Arabia typically produces about 9.8 million barrels a day, and so that is a really big deal.

When the markets reopened on Sunday night, oil futures exploded higher. In fact, according to Zero Hedge this was the biggest jump ever…

With traders in a state of near-frenzy, with a subset of fintwit scrambling (and failing) to calculate what the limit move in oil would be (hint: there is none for Brent), moments ago brent reopened for trading in the aftermath of Saturday’s attack on the “world’s most important oil processing plant“, and exploded some 20% higher, to a high of $71.95 from the Friday $60.22 close, its biggest jump since futures started trading in 1988.

As I write this article, the price of Brent crude is currently sitting at $66.89, although at least one analyst is warning that the price of oil could soon shoot up to “as high as $100 per barrel” if the Saudis are not able to quickly resume their previous level of production…

The oil market will rally by $5-10 per barrel when it opens on Monday and may spike to as high as $100 per barrel if Saudi Arabia fails to quickly resume oil supply lost after attacks over the weekend, traders and analysts said.

Saudi officials have already told us that they anticipate that a third of the lost oil output will be restored on Monday.

But because of the extensive damage that has been done, restoring the remainder of the lost output could take “weeks” or even “months”.

In the short-term, President Trump has authorized the release of oil from the Strategic Petroleum Reserve, and that should help stabilize prices somewhat.

However, if a full-blown war with Iran erupts, nothing is going to be able to calm the markets. In such a scenario, the price of oil could easily explode to a level that is four or five times higher than it is today, and that would essentially be the equivalent of slamming a baseball bat into the knees of the global economy.

The times that we are living in are about to become a whole lot more serious, but most Americans are not even paying attention to these absolutely critical global events.

In fact, even the mainstream media seems to believe that the new allegations against Supreme Court Justice Brett Kavanaugh are more important.

That is because they don’t understand what is really happening.

Trust me, keep a close eye on the Middle East, because things are about to start breaking loose there in a major way.

About the author: Michael Snyder is a nationally-syndicated writer, media personality and political activist. He is the author of four books including Get Prepared Now, The Beginning Of The End and Living A Life That Really Matters. His articles are originally published on The Economic Collapse Blog, End Of The American Dream and The Most Important News. From there, his articles are republished on dozens of other prominent websites. If you would like to republish his articles, please feel free to do so. The more people that see this information the better, and we need to wake more people up while there is still time.

Oil Prices Have Been Rising And $4 A Gallon Gasoline Would Put Enormous Stress On The U.S. Economy

Thanks to increasing demand and upcoming U.S. sanctions against Iran, oil prices have been rising and some analysts are forecasting that they will surge even higher in the months ahead. Unfortunately, that would be very bad news for the U.S. economy at a time when concerns about a major economic downturn have already been percolating. In recent years, extremely low gasoline prices have been one of the factors that have contributed to a period of relative economic stability in the United States. Because our country is so spread out, we import such a high percentage of our goods, and we are so dependent on foreign oil, our economy is particularly vulnerable to gasoline price shocks. Anyone that lived in the U.S. during the early 1970s can attest to that. If the average price of gasoline rises to $4 a gallon by the end of 2018 that will be really bad news, and if the average price of gasoline were to hit $5 a gallon that would be catastrophic for the economy.

Very early on Tuesday, the price of U.S. oil surged past $70 a barrel in anticipation of the approaching hurricane along the Gulf Coast. The following comes from Fox Business

U.S. oil prices rose on Tuesday, breaking past $70 per barrel, after two Gulf of Mexico oil platforms were evacuated in preparation for a hurricane.

U.S. West Texas Intermediate (WTI) crude futures were at $70.05 per barrel at 0353 GMT, up 25 cents, or 0.4 percent from their last settlement.

If we stay at about $70 a gallon, that isn’t going to be much of a problem.

But some analysts are now speaking of “an impending supply crunch”, and that is a very troubling sign. For example, just check out what Stephen Brennock is saying

“Exports from OPEC’s third-biggest producer are falling faster than expected and worse is to come ahead of a looming second wave of U.S. sanctions,” said Stephen Brennock, analyst at London brokerage PVM Oil Associates. “Fears of an impending supply crunch are gaining traction.”

So how high could prices ultimately go?

Well, energy expert John Kilduff is now projecting that we could see the price of gasoline at $4 a gallon by winter

Energy expert John Kilduff counts Iran sanctions as the top reason West Texas Intermediate (WTI) could climb as much as 30 percent by winter, and that could spell $4 a gallon unleaded gasoline at the pumps.

“The global market is tight and it’s getting tighter, and the big strangle around the market right now is what’s in the process of happening with Iran and the Iran sanctions,” the Again Capital founding partner said on CNBC’s “Futures Now.”

About two months from now, U.S. sanctions will formally be imposed on Iran, and that is going to significantly restrict the supply of oil available in the marketplace.

So refiners that had relied on Iranian oil are “scrambling” to find new suppliers, and this could ultimately drive oil prices much higher

Iran’s oil exports are plummeting, as refiners scramble to find alternatives ahead of a re imposition of U.S. sanctions in early November. That in turn has helped drain a glut of unsold oil.

“To the extent we’re seeing the Iran barrels lost to the market, you’re looking at a WTI price and Brent in the $85 to $95 range, potentially,” Kilduff said.

Other sources are also predicting that oil prices will rise.

Barclays is warning that “prices could reach $80 and higher in the short term”, and BNP Paribas is now anticipating that Brent crude will average $79 a barrel in 2019.

In addition to the upcoming Iranian sanctions, rising global demand for oil is also a major factor that is pushing up prices.

For example, many Americans don’t even realize that China has surpassed us and has now become the biggest crude oil importer on the entire planet

China became the world’s largest crude oil importer in 2017, surpassing the US and importing 8.4 million barrels per day.

The US only imported 7.9 million barrels per day in 2017, according to the US Energy Information Administration.

So what is the bottom line for U.S. consumers?

The bottom line is that gasoline prices are likely to jump substantially, and that is going to affect prices for almost everything else that you buy.

Excluding tech products, virtually everything else that Americans purchase has to be transported, and so the price of gasoline must be factored into the cost.

So if gasoline prices shoot up quite a bit, that means that almost everything is going to cost more.

And this would be happening at a time when inflation is already on the rise

According to data from the Bureau of Labor Statistics, the Consumer Price Index for All Urban Consumers, less food and energy, hit 2.4% in July 2018. That’s its highest reading since September 2008.

Of course 2.4 percent doesn’t really sound that scary, and that is how the government likes it.

But if the rate of inflation was still calculated the way it was back in 1990, the current inflation rate would be above 6 percent.

And if the rate of inflation was still calculated the way it was back in 1980, the current inflation rate would be above 10 percent.

Inflation is a hidden tax on all of us, and it is one of the big reasons why the middle class is being eroded so rapidly.

Please do not underestimate the impact of the price of oil. It shot above $100 a barrel in 2008, and it was one of the factors that precipitated the financial crisis later that year.

Now we are rapidly approaching another crisis point, and there are so many wildcards that could potentially cause major problems.

One of those wildcards that I haven’t even talked about in this article would be a major war in the Middle East. One of these days it will happen, and the price of oil will instantly soar to well above $100 a barrel.

We live at a time of rising global instability, and we should all learn to start expecting the unexpected.

This article originally appeared on The Economic Collapse Blog. About the author: Michael Snyder is a nationally syndicated writer, media personality and political activist. He is publisher of The Most Important News and the author of four books including The Beginning Of The End and Living A Life That Really Matters.

Why The Damage To The Economy Caused By The Oil Crash Is Going To Get Progressively Worse

Oil Price Crash - Public Domain

We are really starting to see the price of oil weigh very heavily on the economy and on the stock market. On Tuesday, the Dow was down 291 points, and the primary reason for the decline was disappointing corporate sales numbers. For example, heavy equipment manufacturer Caterpillar is blaming the “dramatic decline in the price of oil” for much lower than anticipated sales during the fourth quarter of 2015. Even though Caterpillar is not an “energy company”, the price of oil is critical to their success. And the same could be said about thousands of other companies. That is why I have repeatedly stated that anyone who believes that collapsing oil prices are good for the U.S. economy is crazy. The key to how much damage this oil collapse is going to do to our economy is not how low prices ultimately go. Rather, the key is how long they stay at these low levels. If the price of oil went back to $80 a barrel next week, the damage would be fairly minimal. But if the price of oil stays at this current level for the remainder of 2015, the damage will be absolutely catastrophic. Just think of the price of oil like a hot iron. If you touch it for just a fraction of a second, it won’t do too much damage. But if you press it against your skin for an hour, you will be severely damaged for the rest of your life at the very least.

So the damage that we are witnessing right now is just the very beginning unless the price of oil goes back up substantially.

When the price of oil first started crashing, most analysts focused on the impact that it would have on energy companies. And without a doubt, quite a few of them are likely to be wiped out if things don’t change soon.

But of even greater importance is the ripple effects that the price of oil will have throughout our entire economy. The oil price crash is not that many months old at this point, and yet big companies are already blaming it for causing significant problems. The following is how Caterpillar explained their disappointing sales numbers on Tuesday

The recent dramatic decline in the price of oil is the most significant reason for the year-over-year decline in our sales and revenues outlook. Current oil prices are a significant headwind for Energy & Transportation and negative for our construction business in the oil producing regions of the world. In addition, with lower prices for copper, coal and iron ore, we’ve reduced our expectations for sales of mining equipment. We’ve also lowered our expectations for construction equipment sales in China. While our market position in China has improved, 2015 expectations for the construction industry in China are lower”

We also learned on Tuesday that orders for durable goods were extremely disappointing. Many analysts believe that this is another area where the oil price crash is having an impact

Orders for business equipment unexpectedly fell in December for a fourth month, signaling a global growth slowdown is weighing on American companies. Bookings for non-military capital goods excluding aircraft dropped 0.6 percent for a second month, data from the Commerce Department showed. Demand for all durable goods − items meant to last at least three years − declined 3.4 percent, the worst performance since August.

Let’s keep an eye on the durable goods numbers in coming months. Usually, when the economy is heading into a recession durable goods numbers start declining.

Meanwhile, a bunch of other big companies reported disappointing sales numbers on Tuesday as well. The following summary comes from the Crux

Microsoft lost 9.9 percent as software-license sales to businesses were below forecasts. Caterpillar plunged 7.3 percent after forecasting 2015 results that trailed estimates as plunging oil prices signal lower demand from energy companies. DuPont Co. dropped 2.8 percent as a stronger dollar cuts into the chemical maker’s profit. Procter & Gamble Co. and United Technologies Corp. declined at least 2 percent after saying the surging greenback will lower full-year earnings.

What the economy could really use right now is a huge rebound in the price of oil.

Unfortunately, as I wrote about the other day, that is not likely to happen any time soon.

In fact, a top executive for Goldman Sachs recently told CNBC that he believes that the price of oil could ultimately go as low as 30 dollars a barrel.

And hedge fund managers are backing up their belief that oil is heading even lower with big money

Hedge funds boosted bearish wagers on oil to a four-year high as US supplies grew the most since 2001.

Money managers increased short positions in West Texas Intermediate crude to the highest level since September 2010 in the week ended January 20, US Commodity Futures Trading Commission data show. Net-long positions slipped for the first time in three weeks.

US crude supplies rose by 10.1 million barrels to 397.9 million in the week ended January 16 and the country will pump the most oil since 1972 this year, the Energy Information Administration says. Saudi Arabia’s King Salman, the new ruler of the world’s biggest oil exporter, said he will maintain the production policy of his predecessor despite a 58 percent drop in prices since June.

Sadly, the truth is that anyone that thought that the stock market would go up forever and that the U.S. economy would be able to avoid a major downturn indefinitely was just being delusional.

Our economy goes through cycles, and every financial bubble eventually bursts.

For example, did you know that the S&P 500 has never had seven up years in a row? The following comes from a CNBC article that was posted on Tuesday…

Doubleline Capital founder Jeff Gundlach, more known for his bond prowess than as an equity market expert, pointed out that the S&P 500 has never had seven consecutive up years.

Of course, records are made to be broken, and each year is supposed to stand on its own.

But in a market that faces an uncertain future regarding monetary policy, the specter of a global economic slowdown, and an oil price plunge that is dampening capital investment, Gundlach’s little factoid sparked a lot of chatter at ETF.com’s InsideETFs conference in Hollywood, Florida.

Hmm – that reminds me of the seven year cycles that I discussed in my article yesterday.

If the price of oil stays this low for the rest of 2015, there is no way that we are going to avoid a recession.

If the price of oil stays this low for the rest of 2015, there is no way that we are going to avoid a stock market crash.

So let’s hope that the price of oil starts going back up.

If it doesn’t, the damage that is inflicted on our economy is going to get progressively worse.

(Originally posted on The Economic Collapse Blog)

Boom Goes The Dynamite: The Crashing Price Of Oil Is Going To Rip The Global Economy To Shreds

Boom Goes The Dynamite - Public Domain

If you were waiting for a “black swan event” to come along and devastate the global economy, you don’t have to wait any longer. As I write this, the price of U.S. oil is sitting at $45.76 a barrel. It has fallen by more than 60 dollars a barrel since June. There is only one other time in history when we have seen anything like this happen before. That was in 2008, just prior to the worst financial crisis since the Great Depression. But following the financial crisis of 2008, the price of oil rebounded fairly rapidly. As you will see below, there are very strong reasons to believe that it will not happen this time. And the longer the price of oil stays this low, the worse our problems are going to get. At a price of less than $50 a barrel, it is just a matter of time before we see a huge wave of energy company bankruptcies, massive job losses, a junk bond crash followed by a stock market crash, and a crisis in commodity derivatives unlike anything that we have ever seen before. So let’s hope that a very unlikely miracle happens and the price of oil rebounds substantially in the months ahead. Because if not, the price of oil is going to absolutely rip the global economy to shreds.

What amazes me is that there are still many economic “experts” in the mainstream media that are proclaiming that the collapse in the price of oil is going to be a good thing for the U.S. economy.

The only precedent that we can compare the current crash to is the oil price collapse of 2008. You can see both crashes on the chart below…

Price Of Oil Since 2006

If rapidly falling oil prices are good economic news, that collapse should have pushed the U.S. economy into overdrive.

But that didn’t happen, did it? Instead, we plunged into the deepest recession that we have seen since the Great Depression.

And unless there is a miracle rebound in the price of oil now, we are going to experience something similar this time.

Already, we are seeing oil rigs shut down at a staggering pace. The following is from Bloomberg

U.S. oil drillers laid down the most rigs in the fourth quarter since 2009. And things are about to get much worse.

The rig count fell by 93 in the three months through Dec. 26, and lost another 17 last week, Baker Hughes Inc. data show. About 200 more will be idled over the next quarter as U.S. oil explorers make good on their promises to curb spending, according to Moody’s Corp.

But that was just the beginning of the carnage. 61 more oil rigs shut down last week alone, and hundreds more are being projected to shut down in the months ahead.

For those that cannot connect the dots, that is going to translate into the loss of large numbers of good paying jobs. Just check out what is happening in Texas

A few days ago, Helmerich & Payne, announced that it would idle 50 more drilling rigs in February, after having already idled 11 rigs. Each rig accounts for about 100 jobs. This will cut its shale drilling activities by 20%. The other two large drillers, Nabors Industries and Patterson-UTI Energy are on a similar program. All three combined are “likely to cut approximately 15,000 jobs out of the 50,000 people they currently employ,” said Oilpro Managing Director Joseph Triepke.

Unfortunately, this crisis will not just be localized to states such as Texas. There are tens of thousands of small and mid-size firms that will be affected. The following is from a recent CNBC report

More than 20,000 small and midsize firms drive the “hydrocarbon revolution” in the U.S. that has helped the oil and gas industry thrive in recent years, and they produce more than 75 percent of the nation’s oil and gas output, according to the Manhattan Institute for Policy Research’s February 2014 Power & Growth Initiative Report. The Manhattan Institute is a conservative think tank in New York City.

A sustained decline in prices could lead to layoffs at these firms, say experts. “The energy industry has been one of the job-growth areas leading us out of the recession,” said Chad Mabry, a Houston-based analyst in the energy and natural resources research department of boutique investment bank MLV & Co. in New York City. “In 2015, that changes in this price environment,” he said. “We’re probably going to see some job losses on a fairy significant scale if this keeps up.”

If the price of oil makes a major comeback, the carnage will ultimately not be that bad.

But if it stays at this level or keeps going down for an extended period of time, it is inevitable that a whole bunch of those firms will go bankrupt and their debt will go bad.

That would mean a junk bond crash unlike anything that Wall Street has ever experienced.

And as I have written about previously, a stock market crash almost always follows a junk bond crash.

These are things that happened during the last financial crisis and that are repeating again right in front of our eyes.

Another thing that happened in 2008 that is happening again is a crash in industrial commodity prices.

At this point, industrial commodity prices have hit a 12 year low. I am talking about industrial commodities such as copper, iron ore, steel and aluminum. This is a huge sign that global economic activity is slowing down and that big trouble is on the way.

So what is driving this? The following excerpt from a recent Zero Hedge article gives us a clue…

Globally there are over $9 trillion worth of borrowed US Dollars in the financial system. When you borrow in US Dollars, you are effectively SHORTING the US Dollar.

Which means that when the US Dollar rallies, your returns implode regardless of where you invested the borrowed money (another currency, stocks, oil, infrastructure projects, derivatives).

Take a look at commodities. Globally, there are over $22 TRILLION worth of derivatives trades involving commodities. ALL of these were at risk of blowing up if the US Dollar rallied.

Unfortunately, starting in mid-2014, it did in a big way.

This move in the US Dollar imploded those derivatives trades. If you want an explanation for why commodities are crashing (aside from the fact the global economy is slowing) this is it.

Once again, much of this could be avoided if the price of oil starts going back up substantially.

Unfortunately, that does not appear likely. In fact, many of the big banks are projecting that it could go even lower

Goldman Sachs, CitiGroup, Societe General and Commerzbank are among the latest investment banks to reduce crude oil price estimates, and without production cuts, there appears to be more room for lower prices.

“We’re going to keep on going lower,” says industry analyst Brian Milne of energy manager Schneider Electric. “Even with fresher new lows, there’s still more downside.”

OPEC could stabilize global oil prices with a single announcement, but so far OPEC has refused to do this. Many believe that the OPEC countries actually want the price of oil to fall for competitive reasons…

Representatives of Saudi Arabia, the United Arab Emirates and Kuwait stressed a dozen times in the past six weeks that the group won’t curb output to halt the biggest drop in crude since 2008. Qatar’s estimate for the global oversupply is among the biggest of any producing country. These countries actually want — and are achieving — further price declines as part of an attempt to hasten cutbacks by U.S. shale drillers, according to Barclays Plc and Commerzbank AG.

The oil producing countries in the Middle East seem to be settling in for the long haul. In fact, one prominent Saudi prince made headlines all over the world this week when he said that “I’m sure we’re never going to see $100 anymore.”

Never is a very strong word.

Could there be such a massive worldwide oil glut going on right now that the price of oil will never get that high again?

Well, without a doubt there is a huge amount of unsold oil floating around out there at the moment.

It has gotten so bad that some big trading companies are actually hiring supertankers to store large quantities of unsold crude oil at sea…

Some of the world’s largest oil traders have this week hired supertankers to store crude at sea, marking a milestone in the build-up of the global glut.

Trading firms including Vitol, Trafiguraand energy major Shell have all booked crude tankers for up to 12 months, freight brokers and shipping sources told Reuters.

They said the flurry of long-term bookings was unusual and suggested traders could use the vessels to store excess crude at sea until prices rebound, repeating a popular 2009 trading gambit when prices last crashed.

The fundamentals for the price of oil are so much worse than they were back in 2008.

We could potentially be looking at sub-$50 oil for an extended period of time.

If that is indeed the case, there will be catastrophic damage to the global economy and to the global financial system.

So hold on to your hats, because it looks like we are going to be in for quite a bumpy ride in 2015.

(Originally published on The Economic Collapse Blog)

U.S. crude ends lower, posts 7th straight weekly loss

Oil Well - Photo by Ryan Lackey

Oil prices headed for a seventh straight weekly loss, and Brent fell below $49 a barrel on Friday, as key producers show no sign of cutting output in the face of a supply glut.

Global oil benchmarks hit their lowest since 2009 this week and are less than half their June levels, with Brent crude futures dropping $2.06 a barrel to $48.90 shortly before 11:30 a.m. ET. The contract lost almost 11 percent this week.

U.S. crude futures for February delivery settled 43 cents lower, at $48.36 a barrel, posting its seventh straight weekly loss.

(Read the rest of the story here…)

Oil Falls Below 50 As Global Financial Markets Begin To Unravel

Crisis Silhouette - Public Domain

On Monday, the price of oil fell below $50 for the first time since April 2009, and the Dow dropped 331 points. Meanwhile, the stock market declines over in Europe were even larger on a percentage basis, and the euro sank to a fresh nine year low on concerns that the anti-austerity Syriza party will be victorious in the upcoming election in Greece. These are precisely the kinds of things that we would expect to see happen if a global financial crash was coming in 2015. Just prior to the financial crisis of 2008, the price of oil collapsed, prices for industrial commodities got crushed and the U.S. dollar soared relative to other currencies. All of those things are happening again. And yet somehow many analysts are still convinced that things will be different this time. And I agree that things will indeed be “different” this time. When this crisis fully erupts, it will make 2008 look like a Sunday picnic.

Another thing that usually happens when financial markets begin to unravel is that they get really choppy. There are big ups and big downs, and that is exactly what we have witnessed since October.

So don’t expect the markets just to go in one direction. In fact, it would not be a surprise if the Dow went up by 300 or 400 points tomorrow. During the initial stages of a financial crash, there are always certain days when the markets absolutely soar.

For example, did you know that the three largest single day stock market advances in history were right in the middle of the financial crash of 2008? Here are the dates and the amount the Dow rose each of those days…

October 13th, 2008: +936 points

October 28th, 2008: +889 points

November 13th, 2008: +552 points

Just looking at those three days, you would assume that the fall of 2008 was the greatest time ever for stocks. But instead, it was the worst financial crash that we have seen since the days of the Great Depression.

So don’t get fooled by the volatility. Choppy markets are almost always a sign of big trouble ahead. Calm waters usually mean that the markets are going up.

In order to avoid a major financial crisis in the near future, we desperately need the price of oil to rebound in a substantial way.

Unfortunately, it does not look like that is going to happen any time soon. There is just way too much oil being produced right now. The following is an excerpt from a recent CNBC article

The Morgan Stanley strategists say there are new reports of unsold West and North African cargoes, with much of the oil moving into storage. They also note that new supply has entered the global market with additional exports coming from Russia and Iraq, which is reportedly seeing production rising to new highs.

Since June, the price of oil has plummeted close to 55 percent. If the price of oil stays where it is right now, we are going to see large numbers of small producers go out of business, the U.S. economy will lose millions of jobs, billions of dollars of junk bonds will go bad and trillions of dollars of derivatives will be in jeopardy.

And the lower the price of oil goes, the worse our problems are going to get. That is why it is so alarming that some analysts are now predicting that the price of oil could hit $40 later this month

Some traders appeared certain that U.S. crude will hit the $40 region later in the week if weekly oil inventory numbers for the United States on Wednesday show another supply build.

‘We’re headed for a four-handle,’ said Tariq Zahir, managing member at Tyche Capital Advisors in Laurel Hollow in New York. ‘Maybe not today, but I’m sure when you get the inventory numbers that come out this week, we definitely will.’

Open interest for $40-$50 strike puts in U.S. crude have risen several fold since the start of December, while $20-$30 puts for June 2015 have traded, said Stephen Schork, editor of Pennsylvania-based The Schork Report.

The only way that the price of oil has a chance to move back up significantly is if global production slows down. But instead, production just continues to increase in the short-term thanks to projects that were already in the works. As a result, analysts from Morgan Stanley say that the oil glut is only going to intensify

Morgan Stanley analysts said new production will continue to ramp up at a number of fields in Brazil, West Africa, Canada and in the U.S. Gulf of Mexico as well as U.S. shale production. Also, the potential framework agreement with Iran could mean more Iranian oil on the market.

Yes, lower oil prices mean that we get to pay less for gasoline when we fill up our vehicles.

But as I have written about previously, anyone that believes that lower oil prices are good for the U.S. economy or for the global economy as a whole is crazy. And these sentiments were echoed recently by Jeff Gundlach

Oil is incredibly important right now. If oil falls to around $40 a barrel then I think the yield on ten year treasury note is going to 1%. I hope it does not go to $40 because then something is very, very wrong with the world, not just the economy. The geopolitical consequences could be – to put it bluntly – terrifying.

If the price of oil does not recover, we are going to see massive financial problems all over the planet and the geopolitical stress that this will create will be unbelievable.

To expand on this point, I want to share an excerpt from a recent Zero Hedge article. As you can see, a rapid rise or fall in the price of oil almost always correlates with a major global crisis of some sort…

Large and rapid rises and falls in the price of crude oil have correlated oddly strongly with major geopolitical and economic crisis across the globe. Whether driven by problems for oil exporters or oil importers, the ‘difference this time’ is that, thanks to central bank largesse, money flows faster than ever and everything is more tightly coupled with that flow.

Oil Crisis Chart - Zero Hedge

So is the 45% YoY drop in oil prices about to ’cause’ contagion risk concerns for the world?

And without a doubt, we are overdue for another stock market crisis.

Between December 31st, 1996 and March 24th, 2000 the S&P 500 rose 106 percent.

Then the dotcom bubble burst and it fell by 49 percent.

Between October 9th, 2002 and October 9th, 2007 the S&P 500 rose 101 percent.

But then that bubble burst and it fell by 57 percent.

Between March 9th, 2009 and December 31st, 2014 the S&P 500 rose an astounding 204 percent.

When this bubble bursts, how far will it fall this time?

(Originally posted on The Economic Collapse Blog)

Who Is Behind The Oil War, And How Low Will The Price Of Crude Go In 2015?

War Peace Sign - Public Domain

Who is to blame for the staggering collapse of the price of oil?  Is it the Saudis?  Is it the United States?  Are Saudi Arabia and the U.S. government working together to hurt Russia?  And if this oil war continues, how far will the price of oil end up falling in 2015?  As you will see below, some analysts believe that it could ultimately go below 20 dollars a barrel.  If we see anything even close to that, the U.S. economy could lose millions of good paying jobs, billions of dollars of energy bonds could default and we could see trillions of dollars of derivatives related to the energy industry implode.  The global financial system is already extremely vulnerable, and purposely causing the price of oil to crash is one of the most deflationary things that you could possibly do.  Whoever is behind this oil war is playing with fire, and by the end of this coming year the entire planet could be dealing with the consequences.

Ever since the price of oil started falling, people have been pointing fingers at the Saudis.  And without a doubt, the Saudis have manipulated the price of oil before in order to achieve geopolitical goals.  The following is an excerpt from a recent article by Andrew Topf

We don’t have to look too far back in history to see Saudi Arabia, the world’s largest oil exporter and producer, using the oil price to achieve its foreign policy objectives. In 1973, Egyptian President Anwar Sadat convinced Saudi King Faisal to cut production and raise prices, then to go as far as embargoing oil exports, all with the goal of punishing the United States for supporting Israel against the Arab states. It worked. The “oil price shock” quadrupled prices.

It happened again in 1986, when Saudi Arabia-led OPEC allowed prices to drop precipitously, and then in 1990, when the Saudis sent prices plummeting as a way of taking out Russia, which was seen as a threat to their oil supremacy. In 1998, they succeeded. When the oil price was halved from $25 to $12, Russia defaulted on its debt.

The Saudis and other OPEC members have, of course, used the oil price for the obverse effect, that is, suppressing production to keep prices artificially high and member states swimming in “petrodollars”. In 2008, oil peaked at $147 a barrel.

Turning to the current price drop, the Saudis and OPEC have a vested interest in taking out higher-cost competitors, such as US shale oil producers, who will certainly be hurt by the lower price. Even before the price drop, the Saudis were selling their oil to China at a discount. OPEC’s refusal on Nov. 27 to cut production seemed like the baldest evidence yet that the oil price drop was really an oil price war between Saudi Arabia and the US.

If the Saudis wanted to stabilize the price of oil, they could do that immediately by announcing a production cutback.

The fact that they have chosen not to do this says volumes.

In addition to wanting to harm U.S. shale producers, some believe that the Saudis are determined to crush Iran.  This next excerpt comes from a recent Daily Mail article

Above all, Saudi Arabia and its Gulf allies see Iran — a bitter religious and political opponent — as their main regional adversary.

They know that Iran, dominated by the Shia Muslim sect, supports a resentful underclass of more than a million under-privileged and angry Shia people living in the gulf peninsula — a potential uprising waiting to happen against the Saudi regime.

The Saudis, who are overwhelmingly Sunni Muslims, also loathe the way Iran supports President Assad’s regime in Syria — with which the Iranians have a religious affiliation. They also know that Iran, its economy plagued by corruption and crippled by Western sanctions, desperately needs the oil price to rise. And they have no intention of helping out.

The fact is that the Saudis remain in a strong position because oil is cheap to produce there, and the country has such vast reserves. It can withstand a year — or three — of low oil prices.

There are others out there that are fully convinced that the Saudis and the U.S. are actually colluding to drive down the price of oil, and that their real goal is to destroy Russia.

In fact, Venezuela’s President Nicolas Maduro openly promoted this theory during a recent speech on Venezuelan national television

“Did you know there’s an oil war? And the war has an objective: to destroy Russia,” he said in a speech to state businessmen carried live on state TV.

“It’s a strategically planned war … also aimed at Venezuela, to try and destroy our revolution and cause an economic collapse,” he added, accusing the United States of trying to flood the market with shale oil.

Venezuela and Russia, which both have fractious ties with Washington, are widely considered the nations hardest hit by the global oil price fall.

And as I discussed just the other day, Russian President Vladimir Putin seems to agree with this theory…

“We all see the lowering of oil prices. There’s lots of talk about what’s causing it. Could it be an agreement between the U.S. and Saudi Arabia to punish Iran and affect the economies of Russia and Venezuela? It could.”

Without a doubt, Obama wants to “punish” Russia for what has been going on in Ukraine.  Going after oil is one of the best ways to do that.  And if the U.S. shale industry gets hurt in the process, that is a bonus for the radical environmentalists in Obama’s administration.

There are yet others that see this oil war as being even more complicated.

Marin Katusa believes that this is actually a three-way war between OPEC, Russia and the United States…

“It’s a three-way oil war between OPEC, Russia and North American shale,” says Marin Katusa, author of “The Colder War,” and chief energy investment strategist at Casey Research.

Katusa doesn’t see production slowing in 2015: “We know that OPEC will not be cutting back production. They’re going to increase it. Russia has increased production to all-time highs.” With Russia and OPEC refusing to give up market share how will the shale industry compete?

Katusa thinks the longevity and staying power of the shale industry will keep it viable and profitable. “The versatility and the survivability of a lot of these shale producers will surprise people. I don’t see that the shale sector is going to collapse over night,” he says. Shale sweet spots like North Dakota’s Bakken region and Texas’ Eagle Ford area will help keep production levels up and output steady.

Whatever the true motivation for this oil war is, it does not appear that it is going to end any time soon.

And so that means that the price of oil is going to go lower.

How much lower?

One analyst recently told CNN that we could see the price of oil dip into the $30s next year…

Few saw the energy meltdown coming. Now that it’s here, industry analysts warn another move lower is possible as the momentum remains firmly to the downside.

“If this doesn’t hold, we could go back to price levels in late 2008 and early 2009 — down in the $30s. There’s no reason why it couldn’t happen,” said Darin Newsom, senior analyst at Telvent DTN.

Others are even more pessimistic.  For instance, Jeremy Warner of the Sydney Morning Herald, who correctly predicted that the price of oil would fall below $80 this year, is now forecasting that the price of oil could fall all the way down to $20 next year…

Revisiting the past year’s predictions is, for most columnists a frequently humbling experience. The howlers tend to far outweigh the successes. Yet, for a change, I can genuinely claim to have got my main call for markets – that oil would sink to $US80 a barrel or less – spot on, and for the right reasons, too.

Just in case you think I’m making it up, this is what I said 12 months ago: “My big prediction is for $US80 oil, from which much of the rest of my outlook for the coming year flows. It’s hard to overstate the significance of a much lower oil price – Brent at, say, $US80 a barrel, or perhaps lower still – yet this is a surprisingly likely prospect, the implications of which have been largely missed by mainstream economic forecasters.”

If on to a good thing, you might as well stick with it; so for the coming year, I’m doubling up on this forecast. Far from bouncing back to the post crisis “normal” of something over $US100 a barrel, as many oil traders seem to expect, my view is that the oil price will remain low for a long time, sinking to perhaps as little as $US20 a barrel over the coming year before recovering a little.

But even Warner’s chilling prediction is not the most bearish.

A technical analyst named Abigail Doolittle recently told CNBC that under a worst case scenario the price of oil could fall as low as $14 a barrel…

No one really saw 2014’s dramatic plunge in oil price coming, so it’s probably fair to say that any predictions about where it’s going from here fall somewhere between educated guesses and picking a number out of a hat.

In that light, it’s less than shocking to see one analyst making a case—albeit in a pure outlier sense—for a drop all the way below $14 a barrel.

Abigail Doolittle, who does business under the name Peak Theories Research, posits that current chart trends point to the possibility that crude has three downside target areas where it could find support—$44, $35 and the nightmare scenario of, yes, $13.65.

But the truth is that none of those scenarios need to happen in order for this oil war to absolutely devastate the U.S. economy and the U.S. financial system.

There is a very strong correlation between the price of oil and the performance of energy stocks and energy bonds.  But over the past couple of weeks this correlation has been broken.  The following chart comes from Zero Hedge

Energy Stocks - Zero Hedge

It is inevitable that at some point we will see energy stocks and energy bonds come back into line with the price of crude oil.

And it isn’t just energy stocks and bonds that we need to be concerned about.  There is only one other time in all of history when the price of oil has crashed by more than 50 dollars in less than a year.  That was in 2008 – just before the great financial crisis that erupted in the fall of that year.  For much, much more on this, please see my previous article entitled “Guess What Happened The Last Time The Price Of Oil Crashed Like This?…

Whether the price of oil crashed or not, we were already on the verge of massive financial troubles.

But the fact that the price of oil has collapsed makes all of our potential problems much, much worse.

As we enter 2015, keep an eye on energy stocks, energy bonds and listen for any mention of problems with derivatives.  The next great financial crisis is right around the corner, but most people will never see it coming until they are blindsided by it.

(Originally posted on The Economic Collapse Blog)

Make No Mistake, The Oil Slump Is Going To Hurt The United States Too

Oil Rig - Public Domain

The view that cheaper oil automatically boosts US GDP is overly simplistic. It assumes that US consumers will spend the money they save at the pump on US-made goods rather than imports. And it assumes consumers won’t save some of this windfall rather than spending it.

Those are shaky enough. But the story that cheap fuel for our cars is good for us is also based on an even more dangerous assumption: that the price of oil won’t fall far enough to wipe out the US shale sector, or at least seriously impact the volume of US oil production.

The nightmare for the US oil industry is that the only way that the market mechanism can eliminate the global oil glut—without a formal agreement between OPEC, Russia, and other producers to cut production—is if the price of oil falls below the “cash cost” of production, i.e., it reaches the price at which oil companies lose money on every single barrel they produce.

If oil doesn’t sink below the cash cost of production, then we’ll have more of what we’re seeing now. US shale producers, like oil companies the world over, are only going to continue to add to the global oil glut—now running at 2-4 million barrels per day—by keeping their existing wells going full tilt.

True, oil would have to fall even further if it’s going to rebalance the oil market by bankrupting the world’s most marginal producers. But that’s what’s bound to happen if the oversupply continues. And because North American shale producers have relatively high cash costs (in the $30 range), the Saudis could very well succeed in making a big portion of US and Canadian oil production disappear, if they are determined to.

(Read the rest of the story here…)

Oil Drops Below $60 After Saudis Question Need to Cut

Oil Well - Photo by Ryan Lackey

Benchmark U.S. oil prices dropped below $60 a barrel for the first time since July 2009 as Saudi Arabia questioned the need to cut output, signaling its priority is defending market share.

West Texas Intermediate crude slid 1.6 percent in New York. The market will correct itself, according to Saudi Arabian Oil Minister Ali Al-Naimi. Global demand for crude from the Organization of Petroleum Exporting Countries will drop next year by about 300,000 barrels a day to 28.9 million, the least since 2003, the group predicted yesterday.

Oil’s collapse into a bear market has been exacerbated as Saudi Arabia, Iraq and Kuwait, OPEC’s three largest members, offered the deepest discounts on exports to Asia in at least six years. The group decided against reducing its output quota at a meeting last month, letting prices drop to a level that may slow U.S. production that’s surged to the highest level in more than three decades.

(Read the rest of the story here…)

Anyone That Believes That Collapsing Oil Prices Are Good For The Economy Is Crazy

Oil - Public Domain

Are much lower oil prices good news for the U.S. economy? Only if you like collapsing capital expenditures, rising unemployment and a potential financial implosion on Wall Street. Yes, lower gasoline prices are good news for the middle class. I certainly would rather pay two dollars for a gallon of gas than four dollars. But in order to have money to fill up your vehicle you have got to have an income first. And since the last recession, the energy sector has been the number one creator of good jobs in the U.S. economy by far. Barack Obama loves to stand up and take credit for the fact that the employment picture in this country has been improving slightly, but without the energy industry boom, unemployment would be through the roof. And now that the “energy boom” is rapidly becoming an “energy bust”, what will happen to the struggling U.S. economy as we head into 2015?

At the start of this article I mentioned that much lower oil prices would result in “collapsing capital expenditures”.

If you do not know what a “capital expenditure” is, the following is a definition that comes from Investopedia

“Funds used by a company to acquire or upgrade physical assets such as property, industrial buildings or equipment. This type of outlay is made by companies to maintain or increase the scope of their operations. These expenditures can include everything from repairing a roof to building a brand new factory.”

Needless to say, this kind of spending is very good for an economy. It builds infrastructure, it creates jobs and it is an investment in the future.

In recent years, energy companies have been pouring massive amounts of money into capital expenditures. In fact, the energy sector currently accounts for about a third of all capital expenditures in the United States according to Deutsche Bank

US private investment spending is usually ~15% of US GDP or $2.8trn now. This investment consists of $1.6trn spent annually on equipment and software, $700bn on non-residential construction and a bit over $500bn on residential. Equipment and software is 35% technology and communications, 25-30% is industrial equipment for energy, utilities and agriculture, 15% is transportation equipment, with remaining 20-25% related to other industries or intangibles. Non-residential construction is 20% oil and gas producing structures and 30% is energy related in total. We estimate global investment spending is 20% of S&P EPS or 12% from US. The Energy sector is responsible for a third of S&P 500 capex.

These companies make these investments because they believe that there are big profits to be made.

Unfortunately, when the price of oil crashes those investments become unprofitable and capital expenditures start getting slashed almost immediately.

For example, the budget for 2015 at ConocoPhillips has already been reduced by 20 percent

ConocoPhillips is one of the bigger shale players. And its decision to slash its budget for next year by 20% is raising eyebrows. The company said the new target reflects lower spending on major projects as well as “unconventional plays.” Despite the expectation that others will follow, it doesn’t mean U.S. shale oil production is dead. Just don’t expect a surge in spending like in recent years.

And Reuters is reporting that the number of new well permits for the industry as a whole plunged by an astounding 40 percent during the month of November…

Plunging oil prices sparked a drop of almost 40 percent in new well permits issued across the United States in November, in a sudden pause in the growth of the U.S. shale oil and gas boom that started around 2007.

Data provided exclusively to Reuters on Tuesday by industry data firm Drilling Info Inc showed 4,520 new well permits were approved last month, down from 7,227 in October.

If the price of oil stays this low or continues dropping, this is just the beginning.

Meanwhile, the flow of good jobs that this industry has been producing is also likely to start drying up.

According to the Perryman Group, the energy sector currently supports 9.3 million permanent jobs in this country

According to a new study, investments in oil and gas exploration and production generate substantial economic gains, as well as other benefits such as increased energy independence. The Perryman Group estimates that the industry as a whole generates an economic stimulus of almost $1.2 trillion in gross product each year, as well as more than 9.3 million permanent jobs across the nation.

The ripple effects are everywhere. If you think about the role of oil in your life, it is not only the primary source of many of our fuels, but is also critical to our lubricants, chemicals, synthetic fibers, pharmaceuticals, plastics, and many other items we come into contact with every day. The industry supports almost 1.3 million jobs in manufacturing alone and is responsible for almost $1.2 trillion in annual gross domestic product. If you think about the law, accounting, and engineering firms that serve the industry, the pipe, drilling equipment, and other manufactured goods that it requires, and the large payrolls and their effects on consumer spending, you will begin to get a picture of the enormity of the industry.

And these are good paying jobs. They aren’t eight dollar part-time jobs down at your local big box retailer. These are jobs that comfortably support middle class families. These are precisely the kinds of jobs that we cannot afford to lose.

In recent years, there has been a noticeable economic difference between areas of the country where energy is being produced and where energy is not being produced.

Since December 2007, a total of 1.36 million jobs have been gained in shale oil states.

Meanwhile, a total of 424,000 jobs have been lost in non-shale oil states.

So what happens now that the shale oil boom is turning into a bust?

That is a very good question.

Even more ominous is what an oil price collapse could mean for our financial system.

The last time the price of oil declined by more than 40 dollars in less than six months, there was a financial meltdown on Wall Street and we experienced the deepest recession that we have seen since the days of the Great Depression.

And now many fear that this collapse in the price of oil could trigger another financial panic.

According to Citigroup, the energy sector now accounts for 17 percent of the high yield bond market.

J.P. Morgan says that it is actually 18 percent.

In any event, the reality of the matter is that the health of these “junk bonds” is absolutely critical to our financial system. And according to Deutsche Bank, if these bonds start defaulting it could “trigger a broader high-yield market default cycle”

Based on recent stress tests of subprime borrowers in the energy sector in the US produced by Deutsche Bank, should the price of US crude fall by a further 20pc to $60 per barrel, it could result in up to a 30pc default rate among B and CCC rated high-yield US borrowers in the industry. West Texas Intermediate crude is currently trading at multi-year lows of around $75 per barrel, down from $107 per barrel in June.

A shock of that magnitude could be sufficient to trigger a broader high-yield market default cycle, if materialized,” warn Deutsche strategists Oleg Melentyev and Daniel Sorid in their report.

If the price of oil stays at this level or continues to go down, it is inevitable that we will start to see some of these junk bonds go bad.

In fact, one Motley Fool article recently stated that one industry analyst believes that up to 40 percent of all energy junk bonds could eventually go into default…

The junk bonds, or noninvestment-rated bonds, of energy companies are also beginning to see heavy selling as investors start to worry that drillers could one day default on these bonds. Those defaults could get so bad, according to one analyst, that up to 40% of all energy junk bonds go into default over the next few years if oil prices don’t recover.

That would be a total nightmare for Wall Street.

And of course bond defaults would only be part of the equation. As I wrote about the other day, a crash in junk bonds is almost always followed by a significant stock market correction.

In addition, plunging oil prices could end up absolutely destroying the banks that are holding enormous amounts of energy derivatives. This is something that I recently covered in this article and this article.

As you read this, there are five “too big to fail” banks that each have more than 40 trillion dollars in exposure to derivatives. Of course only a small fraction of that total exposure is made up of energy derivatives, but a small fraction of 40 trillion dollars is still a massive amount of money.

These derivatives trades are largely unregulated, and even Forbes admits that they are likely to be at the heart of the coming financial collapse…

No one understands the derivative risk positions of the Too Big To Fail Banks, JP Morgan Chase, Citigroup, Bank of America, Goldman Sachs or Morgan Stanley. There is presently no way to measure the risks involved in the leverage, quantity of collateral, or stability of counter-parties for these major institutions. To me personally they are big black holes capable of potential wrack and ruin. Without access to confidential internal data about these risky derivative positions the regulators cannot react in a timely and measured fashion to block the threat to financial stability, according to a National Bureau of Economic Research study.

So do we have any hope?

Yes, if oil prices start going back up, much of what you just read about can be averted.

Unfortunately, that does not seem likely any time soon. Even though U.S. energy companies are cutting back on capital expenditures, most of them are still actually projecting an increase in production for 2015. Here is one example from Bloomberg

Continental, the biggest holder of drilling rights in the Bakken, last month said 2015 output will grow between 23 percent and 29 percent even after shelving plans to allocate more money to exploration.

Higher levels of production will just drive the price of oil even lower.

At this point, Morgan Stanley is saying that the price of oil could plummet as low as $43 a barrel next year.

If that happens, it would be absolutely catastrophic to the most important industry in the United States.

In turn, that would be absolutely catastrophic for the economy as a whole.

So don’t let anyone tell you that much lower oil prices are “good” for the economy.

That is just a bunch of nonsense.

(Originally posted on The Economic Collapse Blog)

Oil wars: Saudi Arabia makes enemies as prices tumble

Saudi Arabia - Photo by Keepscases

It really is a $US60 question. Oil prices are going through the floor and there is no sense yet of what the new petro-normal might be. But Saudi Arabia is punting that the market will “stabilise” at about $US60 a barrel.

However, if Riyadh is the only global oil producer with the capacity to turn on or off the spigots that match supply and demand and hence can vary the price up or down, it doesn’t require a great analytical stretch to conclude that despite their reluctance to take a conventional military role in Middle East conflicts, the Saudi princes have opted for a ruthless oil war.

There’s no shortage of enemies – Tehran, Damascus, Moscow, even Riyadh’s best ally, Washington.

(Read the rest of the story here…)

The American Oil Boom Won’t Last Long at $65 Per Barrel

Oil Well - Photo by Ryan Lackey

OPEC’s idea is to try to knock out U.S. shale producers by driving prices lower than they can afford. That way Saudi Arabia, the cartel’s biggest exporter, can keep its market share in the U.S. But the damage to its fellow oil exporters could be severe. In Russia, for example, the ruble is plummeting. Iraq is already having trouble fighting ISIS, and lower oil prices won’t help. Libya is in chaos. Venezuela’s economy, already on life support, depends on oil for 95 percent of its export revenue. Iran’s oil minister on Friday told Bloomberg News that he has doubts the strategy will even work: “There’s no fact or figure to say that shale production will definitely decrease,” he said.

U.S. production probably will decrease, even if it takes a while. At $65 a barrel, it’s unlikely the U.S. can keep up its record-setting pace of expanding oil production. U.S. oil has jumped from about 5 million barrels a day in 2008 to more than 9 million. Even before OPEC’s decision, forecasters were calling for a slowdown. Last May, for instance, the Energy Information Agency forecast that total U.S. production would peak just shy of 10 million barrels per day before 2020.

(Read the rest of the story here…)

Saudis risk playing with fire in shale-price showdown as crude crashes

Saudi Arabia - Photo by Keepscases

Saudi Arabia and the core Opec states are taking an immense political gamble by letting crude oil prices crash to $66 a barrel, if their aim is to shake out the weakest shale producers in the US. A deep slump in prices might equally heighten geostrategic turmoil across the broader Middle East and boomerang against the Gulf’s petro-sheikhdoms before it inflicts a knock-out blow on US rivals.

Caliphate leader Abu Bakr al-Baghdadi has already opened a “second front” in North Africa, targeting Algeria and Libya – two states that live off energy exports – as well as Egypt and the Sahel as far as northern Nigeria. “The resilience of US shale may prove greater than the resilience of Opec,” said Alistair Newton, head of political risk at Nomura.

Chris Skrebowski, former editor of Petroleum Review, said the Saudis want to cut the annual growth rate of US shale output from 1m barrels per day (bpd) to 500,000 bpd to bring the market closer to balance. “They want to unnerve the shale oil model and undermine financial confidence, but they won’t stop the growth altogether,” he said.

(Read the rest of the story here…)

Guess What Happened The Last Time The Price Of Oil Crashed Like This?…

Price Of Oil Causes A Junk Bond Crash - Public Domain

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.

(Originally published on The Economic Collapse Blog)

Did We Just Witness The Last Great Black Friday Celebration Of American Materialism?

Black Friday - Photo by Powhusku

Americans are going to spend more than 600 billion dollars this Christmas season, and on Friday we got to see our fellow citizens fight each other like rabid animals over foreign-made flat screen televisions and Barbie dolls. As disgusting as this behavior is to many of us, there may soon come a time when we will all fondly remember these days. Most Americans are completely unaware of what is currently happening in the financial world, but right now there are deeply troubling signs that we could be on the verge of another major global financial collapse. If the next great economic downturn does strike in 2015, that could mean that we may have just witnessed the last great Black Friday celebration of American materialism. As you read this, stock prices are approximately double the value that they should be, margin debt is hovering near all-time record highs, and the “too big to fail” banks are being far more reckless than they were just prior to the last major stock market implosion. So many of the exact same patterns that we witnessed back in 2007 and 2008 are repeating right now, and as you will see below, this includes a horrifying crash in the price of oil. Anyone with half a brain should be able to see the slow-motion financial train wreck that is unfolding right before our eyes.

Every year, it has been my tradition to write an article about the mini-riots that erupt in retail stores all around the country on Black Friday. This year things were a bit calmer because so many stores opened up on Thanksgiving itself, but there was still plenty of chaos. For example, in the video posted below you can see women viciously fighting one another over discounted lingerie and underwear…

But instead of launching into another diatribe about how we are committing national economic suicide by buying hundreds of billions of dollars of foreign-made goods with money that we do not have, I want to focus on what is coming next.

You see, I believe that in the not too distant future many of us will be wishing for the days when the debt-fueled U.S. economy was healthy enough for people to be wrestling with one another on the floor over good deals in our retail establishments.

The next great financial crash (which many have been anticipating for years) is rapidly approaching. So many of the same things that happened last time are happening again. As I noted above, this includes a crash in the price of oil.

In the months prior to the last stock market collapse, the price of oil began plummeting dramatically in the summer of 2008. This was an “early warning signal” that something was deeply amiss in the financial world…

Oil Price 2007 - 2008

Many people assume that a lower price for oil is good for the economy, but the exact opposite is actually true. The oil industry has become absolutely critical to the U.S. and Canadian economies. And in recent years, the “shale oil boom” has been one of the only bright spots for the United States. If the shale oil industry starts to fail because of lower prices, a lot of the boom areas all over the nation are going to go bust really quickly and a lot of the financial institutions that were backing these projects are going to feel an immense amount of pain.

Unfortunately for us, the “shale oil revolution” simply does not work at 80 dollars a barrel.

And it certainly does not work at 70 dollars a barrel.

As I write this, U.S. crude is sitting at about 66 dollars a barrel due to OPEC’s recent decision to not cut output.

That is the lowest price for U.S. crude since September 2009.

So just like we saw during the summer of 2008, crude oil prices are collapsing once again. The chart below comes from the Federal Reserve, but it is a few days out of date. Now that the price of crude is down to about 66 dollars, you have to imagine the price actually going below the bottom of this chart…

Oil Price 2013 - 2014

Needless to say, this price collapse is having a huge impact on the stock prices of oil companies. The following information about what happened in the markets on Friday comes from Business Insider

Here were some of the biggest losers on Friday:

  • BP (BP), down 5%
  • Royal Dutch Shell (RDS.A), down 6%
  • Total (TOT), down 5%
  • Statoil (STO), down 14%
  • Exxon Mobil (XOM), down 5%
  • ConocoPhillips (COP), down 9%
  • Marathon Oil (MRO), down 13%
  • Occidental Petroleum (OXY), down 7%
  • Anadarko Petroleum (APC), down 14%
  • Linn Energy (LINE), down 13%
  • Whiting Petroleum (WLL), down 28%
  • Oasis Petroleum (OAS), down 32%
  • Kodiak Oil & Gas (KOG), down 28%

And this list goes on.

But this could just be the beginning of the oil price declines.

The most powerful oil official in Russia believes that the price of oil could fall below $60 next year…

Russia’s most powerful oil official Igor Sechin said in an interview with an Austrian newspaper that oil prices could fall below $60 by mid-way through next year.

Sechin, chief executive of Rosneft, Russia’s largest oil producer, also said U.S. oil production would fall after 2025 and that an oil market council should be created to monitor prices, the same day the OPEC cartel met in Vienna and left its output targets unchanged.

“We expect that a fall in the price to $60 and below is possible, but only during the first half, or rather by the end of the first half (of next year),” Sechin told the Die Presse newspaper.

And one oil industry analyst just told CNBC that he believes that the price of oil could ultimately plunge as low as $35 a barrel…

“When you look at the second half of 2015, that’s when you see oil beginning to dwarf demand by about a million, a million and a half barrels a day,” he said. “Thirty-five dollars is a possibility if they don’t get an agreement next spring because that’s when the oil really starts to build and you can have a billion barrels of oil with really no place to put it.”

This comes at a time when there are already a whole host of signs that the global economy is slowing down. Three of the ten largest economies on the planet have already slipped into recession, and the economic nightmare over in Europe just continues to get even worse. In fact, we just learned that the unemployment rate in Italy has shot above 13 percent for the first time ever recorded.

In addition, it is important to remember that the “real economy” in the United States is in far worse shape than it was just prior to the last financial crash. Just consider these numbers…

-In the United States today, the number of payday lending locations is greater than the number of McDonald’s and the number of Starbucks.

-One recent survey found that about 22 percent of all Americans have had to turn to a church food panty for assistance.

-This year, almost one out of every five households in the United States celebrated Thanksgiving on food stamps.

-The rate of government dependence in America is at an all-time high and approximately 60 percent of U.S. households get more in transfer payments from the government than they pay in taxes.

-According to a report that was just released by the National Center on Family Homelessness, the number of homeless children in the U.S. has soared to a new all-time record high of 2.5 million.

If things are this bad now, what are they going to look like after the next great financial crash?

And without a doubt, the next crash is coming. Hopefully we have at least a couple more months of relative stability, but many experts are now urgently warning that time is quickly running out.

By this time next year, Black Friday may look a whole lot different than it does today.

(Originally posted on The Economic Collapse Blog)

Oil prices plummet as OPEC decides against output cut

Oil Well - Photo by Ryan Lackey

Crude prices plunged Thursday after the powerful Organization of Petroleum Exporting Countries said it wouldn’t cut production levels to stem the collapse in oil prices that have fallen 40% since June.

Saudi Arabia’s oil minister Ali Al-Naimi delivered the news as he left a nearly five-hour meeting of the cartel’s 12 oil ministers here.

Benchmark crude oil prices plummeted in London following the meeting, with Brent crude sinking 6.2% to $69.11 a barrel. In June, prices were as high as $115 a barrel. Oil prices are at their lowest levels since September 2010, in part due to oversupply, lower demand and a boom in North American production.

Thursday’s collapse — which comes amid an apparent split within OPEC about whether to trim output — could lead to further price cuts at the pump, where U.S. consumers now pay an average $2.80 a gallon — down about 49 cents a gallon from year-ago levels.

(Read the rest of the story here…)

OPEC Policy Ensures U.S. Shale Crash, Russian Tycoon Says

Oil Pump In Montana - Public Domain

OPEC policy on crude production will ensure a crash in the U.S. shale industry, a Russian oil tycoon said.

The Organization of Petroleum Exporting Countries kept output targets unchanged at a meeting in Vienna today even after this year’s slump in the oil price caused by surging supply from U.S shale fields.

American producers risk becoming victims of their own success. At today’s prices of just over $70 a barrel, drilling is close to becoming unprofitable for some explorers, Leonid Fedun, vice president and board member at OAO Lukoil (LKOD), said in an interview in London.

(Read the rest of the story here…)

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