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Old 11-30-2014, 11:24 AM   #41
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Oil services firms are really going to get slammed on lower oil prices. Friends who work for Halliburton and Weatherford are already hearing scuttlebutt on layoffs before Christmas.
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Old 11-30-2014, 12:25 PM   #42
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Originally Posted by REWahoo View Post
My concern is the opposite.

If the economy becomes really rough for the average Russian citizen they may lose their admiration for Czar Putin and turn against him. That could result in him creating an external threat in an attempt to rally the population to defend the motherland - and deflect the frustrations away from him.
the average Russian is not being impacted much at all. As their currency has fallen off a cliff. Russia is able to sell gas in dollars and still can pay its pensions/bills in Rubles. You are aware of Ukraine? Putin is playing that for all its worth with the Russian masses.
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Old 11-30-2014, 12:52 PM   #43
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Really going out there on a limb, aren't you Gypsy Ed?

This is pretty treacherous ground, unforgiving to those making the wrong choices. One thing we know for sure is petroleum is a critical component and driver of global economic growth. A price decline this big, if sustained, should be an important and unexpected tailwind for some of those moribund and anemic developed economies such as EU and Japan. An increase will do the opposite. Which will it be?
From everything I have seen in the past the price of oil is positively correlated with the strength of economic growth, not negatively correlated. Oil dropped from $140 in June 2008 to $44 in February of 2009. From there in 2009 it increased back to over $100 as the economy has improved only to suddenly see a 40% drop to the present levels. The economy is typically affecting the direction of the price of oil not the price of oil effecting the direction of economies.

I have been contemplating this recent development quite a bit lately and have come to the conclusion this is the first significant economic event that has been created by central banks zero interest rate policies which is now not controllable by central banks. A consequence of desire for yield has seen a level of junk bond issuance that is simply a bubble with over a trillion dollars of junk bonds issued in the last 4 years which is about 2-3 times higher than even in prior junk bond bull markets. This is the unintended consequence of giving governments the ability to borrow at no cost and rescuing oil drilling and service companies is not something governments are going to be able to do.

The cheap interest rates made possible the finanancing of many wells which cost on average around 5 million dollars each and record low junk interest rates made the breakeven point on these wells about $70 per barrell. This drilling has been accomplished primarily through financing via junk bonds, of which the oil sector now accounts for 15% of the total junk bond market which is a record for the oil sector. The payment of this debt is made possible through the selling of oil the first few years of the operation of these wells so the Saudi decision to bankrupt the oil speculators is understandable.

So I can easily envision the following scenario:
1) Short term oil producers with decent financing capabilities push as much oil as possible in attempt to stay solvent further decreasing prices below present level.
2) Marginal high debt producers go bankrupt quickly resulting in the closing of unprofitable wells, reducing the amount of oil being served by the pipeline companies, reducing their profiabliity.
3) High Yield bonds undergo a serious bear market as the number of oil companies with high yield debt have no way to pay their debt. the amount of ETF's with junk bonds make getting out of this market very easy for investors but those bonds are not in strong hands.
4) Pipiline MLP's go into bear market as future financing costs are raised by oil sector route and volume of oil pumps drops rapidly in US as oversupply is reduced by US bancruptcies and the decline in suply is mostly absorbed in the United States as this is where most of the weak hands are, subsequently the negative economic impacts of this for the US will be more than people presently realize. I think pipeline MLP's are about to get routed, sold my overwieght position in these names Friday.
5) Many open wells with bankrupt companies will become target of enviromental groups raising the cost of any future drilling (this is a much longer term effect) blocking a return to the drilling boom we have seen recently.

This has been a classic bubble bull market cycle that is only now ending and ending quickly as bubbles tend to do. The end of the cycle will most likely take a while to play out, and many of the negative consequences may lead to outcomes that are not controllable by the central banks.
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Old 11-30-2014, 01:24 PM   #44
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From everything I have seen in the past the price of oil is positively correlated with the strength of economic growth, not negatively correlated. Oil dropped from $140 in June 2008 to $44 in February of 2009. From there in 2009 it increased back to over $100 as the economy has improved only to suddenly see a 40% drop to the present levels. The economy is typically affecting the direction of the price of oil not the price of oil effecting the direction of economies.
A decline in the rate of global growth may lead to a fall in petroleum prices. An increase in production can also lead to a fall in prices, and in this case it would have a positive impact on growth. The reason for the change in prices matters. Changes in the price of gasoline are highly correlated to changes in the US CPI, and here the price of oil is the leading factor, so this decline should lead to higher real growth in GDP and wages.

One additional possibility in the scenario you paint would be a weakening in demand for US Treasuries. The Middle Eastern OPEC nations channel much of their surplus in Treasuries and as their income falls, so does their surplus.
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Old 11-30-2014, 01:52 PM   #45
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A decline in the rate of global growth may lead to a fall in petroleum prices. An increase in production can also lead to a fall in prices, and in this case it would have a positive impact on growth. The reason for the change in prices matters. Changes in the price of gasoline are highly correlated to changes in the US CPI, and here the price of oil is the leading factor, so this decline should lead to higher real growth in GDP and wages.

One additional possibility in the scenario you paint would be a weakening in demand for US Treasuries. The Middle Eastern OPEC nations channel much of their surplus in Treasuries and as their income falls, so does their surplus.
All the oil countries together only hold 249 billion of US debt of 17 trillion by far the largest holder is the FED followed by China. This amount is dwarfed by the creation of junk bond debt to support this oil market, as for the oversupply helping economic activity this time, we will see if this is true in the coming 12-18 months I think the loss of oil sales and major tax revenues in the US, layoffs in the oil sector and immediate end in capital spending boom and loss of state and federal revenue will swamp the positive effect of consumer sales for other items. Especially in the US
http://www.treasury.gov/ticdata/Publish/mfh.txt
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Old 11-30-2014, 02:32 PM   #46
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as for the oversupply helping economic activity this time, we will see if this is true in the coming 12-18 months I think the loss of oil sales and major tax revenues in the US, layoffs in the oil sector and immediate end in capital spending boom and loss of state and federal revenue will swamp the positive effect of consumer sales for other items. Especially in the US
I agree the Treasury impact may not be meaningful. As for global growth, for sure we'll know in 12-18 months, as you wrote.
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Old 11-30-2014, 03:04 PM   #47
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Originally Posted by REWahoo View Post
My concern is the opposite.

If the economy becomes really rough for the average Russian citizen they may lose their admiration for Czar Putin and turn against him. That could result in him creating an external threat in an attempt to rally the population to defend the motherland - and deflect the frustrations away from him.
Well, considering that Putin was already messing with "external threats" when Russia was rolling in money from high oil prices, this case is would be no different from 6 months ago.
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Old 11-30-2014, 05:02 PM   #48
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A decline in the rate of global growth may lead to a fall in petroleum prices. An increase in production can also lead to a fall in prices, and in this case it would have a positive impact on growth. The reason for the change in prices matters. Changes in the price of gasoline are highly correlated to changes in the US CPI, and here the price of oil is the leading factor, so this decline should lead to higher real growth in GDP and wages.

One additional possibility in the scenario you paint would be a weakening in demand for US Treasuries. The Middle Eastern OPEC nations channel much of their surplus in Treasuries and as their income falls, so does their surplus.

I still think the old saying still applies.. "The cure for low oil prices, is lower oil prices." Will help spur the economies and then bring demand levels up, increasing the price. But I am certainly not going to buy oil stocks with the illusion of $115 oil prices soon.


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Old 11-30-2014, 08:08 PM   #49
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Originally Posted by Running_Man View Post
From everything I have seen in the past the price of oil is positively correlated with the strength of economic growth, not negatively correlated. Oil dropped from $140 in June 2008 to $44 in February of 2009. From there in 2009 it increased back to over $100 as the economy has improved only to suddenly see a 40% drop to the present levels. The economy is typically affecting the direction of the price of oil not the price of oil effecting the direction of economies.



I have been contemplating this recent development quite a bit lately and have come to the conclusion this is the first significant economic event that has been created by central banks zero interest rate policies which is now not controllable by central banks. A consequence of desire for yield has seen a level of junk bond issuance that is simply a bubble with over a trillion dollars of junk bonds issued in the last 4 years which is about 2-3 times higher than even in prior junk bond bull markets. This is the unintended consequence of giving governments the ability to borrow at no cost and rescuing oil drilling and service companies is not something governments are going to be able to do.



The cheap interest rates made possible the finanancing of many wells which cost on average around 5 million dollars each and record low junk interest rates made the breakeven point on these wells about $70 per barrell. This drilling has been accomplished primarily through financing via junk bonds, of which the oil sector now accounts for 15% of the total junk bond market which is a record for the oil sector. The payment of this debt is made possible through the selling of oil the first few years of the operation of these wells so the Saudi decision to bankrupt the oil speculators is understandable.



So I can easily envision the following scenario:

1) Short term oil producers with decent financing capabilities push as much oil as possible in attempt to stay solvent further decreasing prices below present level.

2) Marginal high debt producers go bankrupt quickly resulting in the closing of unprofitable wells, reducing the amount of oil being served by the pipeline companies, reducing their profiabliity.

3) High Yield bonds undergo a serious bear market as the number of oil companies with high yield debt have no way to pay their debt. the amount of ETF's with junk bonds make getting out of this market very easy for investors but those bonds are not in strong hands.

4) Pipiline MLP's go into bear market as future financing costs are raised by oil sector route and volume of oil pumps drops rapidly in US as oversupply is reduced by US bancruptcies and the decline in suply is mostly absorbed in the United States as this is where most of the weak hands are, subsequently the negative economic impacts of this for the US will be more than people presently realize. I think pipeline MLP's are about to get routed, sold my overwieght position in these names Friday.

5) Many open wells with bankrupt companies will become target of enviromental groups raising the cost of any future drilling (this is a much longer term effect) blocking a return to the drilling boom we have seen recently.



This has been a classic bubble bull market cycle that is only now ending and ending quickly as bubbles tend to do. The end of the cycle will most likely take a while to play out, and many of the negative consequences may lead to outcomes that are not controllable by the central banks.

I love your analysis. Very strategic and realistic view.


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Old 12-02-2014, 08:00 AM   #50
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I agree the Treasury impact may not be meaningful. As for global growth, for sure we'll know in 12-18 months, as you wrote.
For our neighbors to the North this is not good either Canadian Dollar is basically a peg to the oil price and as it falls this will also put significant pressure on Canadian Real Estate which for the most part totally avoided the real estate crash of 2008 2015/2016 could be the years of the Canadian real estate crash if oil prices do not bounce back. Basically the Susan Rice portfolio could be in for a world of hurt
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Old 12-02-2014, 01:25 PM   #51
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All the oil countries together only hold 249 billion of US debt of 17 trillion by far the largest holder is the FED followed by China. This amount is dwarfed by the creation of junk bond debt to support this oil market, as for the oversupply helping economic activity this time, we will see if this is true in the coming 12-18 months I think the loss of oil sales and major tax revenues in the US, layoffs in the oil sector and immediate end in capital spending boom and loss of state and federal revenue will swamp the positive effect of consumer sales for other items. Especially in the US
http://www.treasury.gov/ticdata/Publish/mfh.txt
Not to nitpick, but we've busted through to the $18 trillion mark now. Up from just $7.5 trillion 10 years ago. Who says you can't borrow your way to prosperity?

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Old 12-06-2014, 05:03 PM   #52
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http://online.barrons.com/articles/c...ies-1417848121

Barrons article saying big oil looks attractive as this will force them to become more efficient, and may open up acquisition targets in less well capitalized smaller oil properties.


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Old 12-06-2014, 05:27 PM   #53
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Oil price drop is starting to have serious repercussions in the debt market as bond managers shed junk bonds issued to finance the recent US oil boom.
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Old 12-09-2014, 07:30 AM   #54
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Not to nitpick, but we've busted through to the $18 trillion mark now. Up from just $7.5 trillion 10 years ago. Who says you can't borrow your way to prosperity?

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What is different is the amount of junk bonds being used to finance such a big part of the economy and the main positive driver for many areas of the country. The level of junk bonds in the oil sector are now at an all time high and close the amount probably exceeds the amount of subprime debt in 2008 of 1.3 trillion. The decline in value and bankruptcy in holders of the debt in this case will not be politically feasible to rescue in comparison to the housing crisis where the government can claim moral necessity. Saving oil service firms and the businessess that support that activity will not go well poliitcally in my opinion and so this will turn out to be an event that will be outside the control of the Federal Reserve until it is too late.

Most of the individuals speaking on CNBC the past week have been quite adamant that this oil development is positive for the US and the economy. My position is this is looking at only the retail level and missing what a true deflationary impact does to a large amount of debt that is in truth highly risky even if it is financed with low interest rates.
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Old 12-09-2014, 07:42 AM   #55
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It would be easier to see the upside if petroleum prices were falling at a rate that is a bit more "slow and steady". These sudden, sharp declines are bound to provoke a greater downside.
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Old 12-10-2014, 09:33 AM   #56
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For our neighbors to the North this is not good either Canadian Dollar is basically a peg to the oil price and as it falls this will also put significant pressure on Canadian Real Estate which for the most part totally avoided the real estate crash of 2008 2015/2016 could be the years of the Canadian real estate crash if oil prices do not bounce back. Basically the Susan Rice portfolio could be in for a world of hurt
Hmmm that could be a good thing for me. If real estate falls (and given a stronger US dollar) my case for moving back to Canada becomes stronger

But it would not be a good thing for the rest of my family
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Old 12-10-2014, 10:03 AM   #57
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What is different is the amount of junk bonds being used to finance such a big part of the economy and the main positive driver for many areas of the country. The level of junk bonds in the oil sector are now at an all time high and close the amount probably exceeds the amount of subprime debt in 2008 of 1.3 trillion. The decline in value and bankruptcy in holders of the debt in this case will not be politically feasible to rescue in comparison to the housing crisis where the government can claim moral necessity. Saving oil service firms and the businessess that support that activity will not go well poliitcally in my opinion and so this will turn out to be an event that will be outside the control of the Federal Reserve until it is too late.

Most of the individuals speaking on CNBC the past week have been quite adamant that this oil development is positive for the US and the economy. My position is this is looking at only the retail level and missing what a true deflationary impact does to a large amount of debt that is in truth highly risky even if it is financed with low interest rates.
As long as this stuff has been sold as straight junk, and not sliced up in tranches with pieces marked as AAA grade "low risk" debt, we should avoid one of the nasty surprises that occurred in 2008.
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Old 12-10-2014, 04:22 PM   #58
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As long as this stuff has been sold as straight junk, and not sliced up in tranches with pieces marked as AAA grade "low risk" debt, we should avoid one of the nasty surprises that occurred in 2008.
I think not actually, the knowledge was there that we had subprime loans, the fact they were rated AAA when sold in collaterized form had no impact on the eventual outcome, what the issue was they became worthless for a value of 1.3 trillion. If oil junk bonds go worthless for a value of about 1 trillion dollar the impact will be very similar as unexpected consequences occur. It is the value of money that goes under that causes the issue, not the rating. The rating allowed far more loans to be written than would have been written at the interest rate would have afforded.

The central governments of the world holding interest rates near zero as a consequence of 2008 have allowed the same level of debt build up to be created in junk bond markets. These projects never would have been completed if interest rates for the junk market were closer to a true junk rate of about 8-10% in a normal inflation enviroment instead of the 4-5% they were able to get. But just like the subprime housing the debtor cannot pay whatever the interest rate at oil $60 and the assets backing the loan have lost a great deal of their value as well to the point of being greater than the loan value by a great deal, only who holds all this remains to be seen. So either oil has to recover to 70-80 by first qtr next year or there will be hell to pay.
If there is any doubt that exposure to oil is being downplayed due to hedging see this article with comments from the CEO of a very good and strategic bank Cullen-Frost. They are counting on hedging to hold the day until the price recovers, if it does not recover there is not a backup plan they will be hurting bad
Cullen/Frost Bankers, Inc. Explains How Oil Prices Are Impacting The Banking Business | Benzinga
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Old 12-10-2014, 04:41 PM   #59
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Good points RM!
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Old 12-11-2014, 05:44 PM   #60
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Actually, one bullish bet on a petroleum price recovery would be one of the Russia ETFs. RSX is the biggest but there are others.
Putin in ETFs Hits Investors as Assets Plunge - Bloomberg

This third world country with high end weapons is spinning out of control
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