WTI are we seeing the perfect storm

[James Regan + 1,776]

It seems we have now entered into the perfect storm scenario.

 

An over zealous segment of the oil industry hyped up by the government and over their heads In debt.

Wells under performing and market share forced into the supply chain.

Lenders finally scared off by sloppy business models and low returns

Zero diligence carried out by flooding an over supplied market.

Expecting others to weather the storm they themselves have created.

Sanctions against the worlds biggest consumer back firing.

Demand forecasters halving or zeroing expectations.

AND THE FINAL CHERRY THAT CANNOT BE MANIPULATED.

Sanctions imposed by Mother Nature by way of natural intervention NCV.

It’s ironic how things shape up and eventually pan out, how long can US Shale handle these tough times.

 

 

Edited February 27, 2020 by James Regan

[Gerry Maddoux + 3,627]

16 minutes ago, James Regan said:

how long can US Shale handle these tough times.

I hate to sound like a broken record, but here goes: they can hold out as long as the Texas Railroad Commission disregards Statewide Rule 32, which plainly states that venting of NG can occur for only 24 hours and flaring for only 10 days. ND is guilty too, on a smaller scale.

They're trying to help out the small producer, and their state as well. However, in allowing this free offloading of an unwanted by-product of shale oil, they're allowing for more drilling, more production, rinse and repeat, and the beat goes on, to mix my metaphors all to hell and back. 

I'm guilty of always complaining about the Saudis. But sometimes a solution starts at home. This one is very, very simple. But if the TRRC doesn't do its job--and it certainly appears that they don't "get it," then it's going to take a dip into the twenties to shake this out. The situation with the TRRC failing to regulate according to the Statewide Rule 32 is, of course, perfectly insane, and anyone not intricately involved could see it, but they don't and they're in charge so there's really nothing to do but try to ride this sucker for the requisite 8 seconds (a bull-riding term since it was the only metaphor I hadn't used). 

So sure, this could be the perfect storm, because if demand falls over the cliff, WTI will fall into the twenties and about a hundred more rigs will be laid down and several hundred companies will go broke. But that doesn't mean the end of shale. Indeed, it will mean the rebirth of shale: slower, more analytic, cheaper production costs. Even Saudi Arabia is getting into the shale business, and inside their own country at that. 

And at some unforeseeable point in time, providing this virus doesn't wipe out a large chunk of civilization, the shale oil and gas will actually be needed to power the world. At that point, none of us is likely to want to see its demise, because ex-Guyana, it is about the only part of global oil production that has grown since the 2014 "Thanksgiving Massacre" by the Saudis. Just my take, which is biased as all get-out. 

[wrs + 893]

This isn't about oil at this point, it's about financial instability with the possibility of outright collapse of the jenga blocks.

[0R0 + 6,251]

1 hour ago, Gerry Maddoux said:

I hate to sound like a broken record, but here goes: they can hold out as long as the Texas Railroad Commission disregards Statewide Rule 32, which plainly states that venting of NG can occur for only 24 hours and flaring for only 10 days. ND is guilty too, on a smaller scale.

They're trying to help out the small producer, and their state as well. However, in allowing this free offloading of an unwanted by-product of shale oil, they're allowing for more drilling, more production, rinse and repeat, and the beat goes on, to mix my metaphors all to hell and back. 

I'm guilty of always complaining about the Saudis. But sometimes a solution starts at home. This one is very, very simple. But if the TRRC doesn't do its job--and it certainly appears that they don't "get it," then it's going to take a dip into the twenties to shake this out. The situation with the TRRC failing to regulate according to the Statewide Rule 32 is, of course, perfectly insane, and anyone not intricately involved could see it, but they don't and they're in charge so there's really nothing to do but try to ride this sucker for the requisite 8 seconds (a bull-riding term since it was the only metaphor I hadn't used). 

So sure, this could be the perfect storm, because if demand falls over the cliff, WTI will fall into the twenties and about a hundred more rigs will be laid down and several hundred companies will go broke. But that doesn't mean the end of shale. Indeed, it will mean the rebirth of shale: slower, more analytic, cheaper production costs. Even Saudi Arabia is getting into the shale business, and inside their own country at that. 

And at some unforeseeable point in time, providing this virus doesn't wipe out a large chunk of civilization, the shale oil and gas will actually be needed to power the world. At that point, none of us is likely to want to see its demise, because ex-Guyana, it is about the only part of global oil production that has grown since the 2014 "Thanksgiving Massacre" by the Saudis. Just my take, which is biased as all get-out. 

Low prices got us down to 400 rigs before. 150 bankruptcies of oil exploration and production companies and even pipeline companies and oil services. We have been there once already. Thanks to insane monetary policy and regulatory policy (FDIC coverage caps caused instantaneous deflation and the disappearance of the non M2 portion of M3 as reconstructed by Shadow Stats) the dollar supply demand balance shifted to a supply deficit in the global market, taking down everybody just when the natural dollar flows into the globe shifted down. 

[Gerry Maddoux + 3,627]

2 hours ago, wrs said:

This isn't about oil at this point, it's about financial instability with the possibility of outright collapse of the jenga blocks.

What do you mean by this?

Everyone endorsed your answer, which to me is too cryptic for me to understand. 

Please explain so I can understand your comment.

Thanks.

[wrs + 893]

2 minutes ago, Gerry Maddoux said:

What do you mean by this?

Everyone endorsed your answer, which to me is too cryptic for me to understand. 

Please explain so I can understand your comment.

Thanks.

The same easy money policy applied to oil has been applied all over the place.  The big companies are borrowing money against cash in the bank to buyback stock.  They have all boosted their share prices with buybacks, the oil companies at least drilled wells and didn't waste it on stock buybacks where the money evaporates in a downdraft like this.  When your stock price goes down and it won't come back up, that money is evaporated and so their money in the bank has to be used to pay back the debts for the stock purchases and it doesn't do anything productive.

If the corona virus does significantly constrain western economies then the debt loads on other companies will be more unsustainable than those of the oil companies.  One thing that many commentators on this site miss is that oil is the lifeblood of all the world's economies.  It is needed no matter how sick a few of us get and no matter how many die.  New cars, new tvs, computers, phones, and so on are not as needed, the old one will do.  However, anytime that tank gets empty, it has to be filled on the way to work or to the store.  So oil will have a bid no matter what the rest of the economy is doing.  Other things like food are in the group of defensive stocks and so they will have a floor too.

I don't by any means think that oil is the only thing to be hit by the collapse in values here. This isn't about reduced demand for oil but reduced demand worldwide for all goods and services.  Now all those other companies that were swimming naked will be exposed for all to see.  I don't know if you are aware of a process called factoring but it's very popular and it relies on cash-flow to sustain it.  When cash-flow dries up as it probably is in China right now, the factoring companies collapse along with those they bought receivables from.  I believe that is happening in China and it may extend to the rest of the world too.

The value of assets is the underpinning of finance and while everyone loves to deride oil, check out companies like Amazon, they don't have good assets, their stuff is all non-productive like computers, trucks and warehouses.  They are just a fancy logistics company with a web arm that will suffer greatly when business dries up because everyone is home waiting out the virus.  How will they pay the loans on all that stuff if deliveries are constrained for months?  How about their partners and so on?

 

[Guillaume Albasini + 851]

Do you remember how the subprime debt crisis in the housing sector spread to the whole economy in 2007-2008 ?

Now it seems that we have another bubble about to explode in the oil and gas sector. Hundreds of billions have been invested in the shale gas and oil companies unable to make a profit given the low level of oil price.

When U.S. home prices declined steeply after peaking in mid-2006, it became more difficult for borrowers to refinance their loans. Something similar is happening now. With the decline of oil prices oil and gas companies are struggling to refinance their huge debts. The coronavirus could be the fatal blow and if many companies go bankrupt this will also affect the banks and investors potentially converting this in a wider financial crisis.

 

https://ieefa.org/ieefa-update-bankruptcies-multiply-for-fracking-sector/

https://www.hellenicshippingnews.com/u-s-shale-oil-outlook-darkens-as-by-product-prices-slide/

 

 

[0R0 + 6,251]

18 minutes ago, wrs said:

I don't by any means think that oil is the only thing to be hit by the collapse in values here. This isn't about reduced demand for oil but reduced demand worldwide for all goods and services.  Now all those other companies that were swimming naked will be exposed for all to see.  I don't know if you are aware of a process called factoring but it's very popular and it relies on cash-flow to sustain it.  When cash-flow dries up as it probably is in China right now, the factoring companies collapse along with those they bought receivables from.  I believe that is happening in China and it may extend to the rest of the world too.

 

That is exactly what I fear is happening to China's finance sector and company cash flows. Their extreme leverage is forcing the PBOC's hand to print money to cover the gap in incomes, which were 20% of normal up to last week and this week have reached 60% by traffic volumes, perhaps 80% if you consider the work from home crowd. . 

[wrs + 893]

7 minutes ago, Guillaume Albasini said:

Do you remember how the subprime debt crisis in the housing sector spread to the whole economy in 2007-2008 ?

Now it seems that we have another bubble about to explode in the oil and gas sector. Hundreds of billions have been invested in the shale gas and oil companies unable to make a profit given the low level of oil price.

When U.S. home prices declined steeply after peaking in mid-2006, it became more difficult for borrowers to refinance their loans. Something similar is happening now. With the decline of oil prices oil and gas companies are struggling to refinance their huge debts. The coronavirus could be the fatal blow and if many companies go bankrupt this will also affect the banks and investors potentially converting this in a wider financial crisis.

 

https://ieefa.org/ieefa-update-bankruptcies-multiply-for-fracking-sector/

https://www.hellenicshippingnews.com/u-s-shale-oil-outlook-darkens-as-by-product-prices-slide/

 

 

Now apply that logic to other sectors of the economy like retail for example.  How about travel, airlines?  Those companies are more affected than oil companies because they have no cash flow without flights.  Oil is used for many things other than airplaines.  Air travel right now is stupid and people getting on cruise ships are just asking for trouble.  Doesn't mean there aren't stupid people still doing those things but as time goes on, fewer and fewer people will be doing them.  If we think the oil industry looks bad, wait until you see the bankruptcies in those other sectors.  There is a lot of catching down to be done here I think.

[0R0 + 6,251]

26 minutes ago, wrs said:

The value of assets is the underpinning of finance and while everyone loves to deride oil, check out companies like Amazon, they don't have good assets, their stuff is all non-productive like computers, trucks and warehouses.  They are just a fancy logistics company with a web arm that will suffer greatly when business dries up because everyone is home waiting out the virus.  How will they pay the loans on all that stuff if deliveries are constrained for months?  How about their partners and so on?

 

Actually, consumer delivery companies are doing very well in the coronavirus zones. It is the truckers and port staff that are missing for commercial operations. Interviews with Amazon sellers have them focused on conserving cash and restricting sales and discounts. Their main problem is finding replacement product. 

[wrs + 893]

4 minutes ago, 0R0 said:

Actually, consumer delivery companies are doing very well in the coronavirus zones. It is the truckers and port staff that are missing for commercial operations. Interviews with Amazon sellers have them focused on conserving cash and restricting sales and discounts. Their main problem is finding replacement product. 

How are those people being allowed to move around if others can't?  How many of them are quarantined just like everyone else?  I don't see where there are exceptions when you have an entire area like Hubei locked down.  Now sure, in areas where the lockdown is not as signficant then I would agree but your last point is going to produce the same results as being locked in, no cash-flow.

Edited February 27, 2020 by wrs

[Gerry Maddoux + 3,627]

WRS and Others:

Thank you. Yes, I understand all those things, and I agree that oil has been the canary in the coal mine for the last several years. I just had no idea what the hell jenga blocks were!

Look, I'm about as pro-oil as you get. My beef isn't with any particular basin, or segment of oil and gas--I am widely invested in the whole shebang. My beef has to do with the fact that we've let the world markets run roughshod over our commodities--God-given, I might add--and that the state oil and gas regulatory agencies have thrown in a catalyst by not reinforcing their venting and flaring rules. It just makes me sick to have all these greenies put up these nighttime satellite images of all the flaring going on. I don't know much on world markets and factoring and that but I do know that if venting and flaring of methane gas were regulated simply according to the rules, a) we'd have less a black eye (and therefore less blowback from the greenies), b) the price of oil would be >$75, c) the price of NG would be more reasonable, d) the stock market would have grown in a more responsible way, and e) we wouldn't have sent over a billion a day into the wind. 

No lesser figure than Scott Sheffield (Pioneer) recently called upon investors to divest companies that habitually mistreat the flaring standards. Now I imagine Scott is talking up his book in part, but since it also jives with my own views I like it. 

I don't know, guys. I see every day people who gripe a little bit about the price of oil and gas, but nothing gets done. I find it just unbelievable that we're selling a cup of oil for about 1/50th the price of a cup of coffee. That just blows my mind. This stuff is hard to come by. I have rattled my small saber about as much as I can about this venting/flaring problem (which I really do believe is the root of all evil and will sink the price of oil). I'm not usually in favor of regulation of much anything, as long as it's moral, but allowing this unfettered venting and flaring of natural gas is wrecking the market. We will look back on this as a folly!

 

[0R0 + 6,251]

15 minutes ago, wrs said:

How are those people being allowed to move around if others can't?  How many of them are quarantined just like everyone else?  I don't see where there are exceptions when you have an entire area like Hubei locked down.  Now sure, in areas where the lockdown is not as signficant then I would agree but your last point is going to produce the same results as being locked in, no cash-flow.

Even in Hubei there are delivery services going on. Otherwise there would be starved people already. Outside of the quarantined cities, the quarantines are particular residential buildings and residential blocks. They have deliveries continuing to those buildings with arrangements to minimize opportunities for infection. It is the residents that don't get to leave. 

Even in Wuhan, some industries and their workers are getting to move around, it is a major manufacturing hub. The suspect Wuhan virology department and containment lab for example are working full time.  

[Gerry Maddoux + 3,627]

20 minutes ago, 0R0 said:

Even in Hubei there are delivery services going on.

How do you know if you pizza has a few extra ingredients in it?

[wrs + 893]

3 hours ago, 0R0 said:

Even in Hubei there are delivery services going on. Otherwise there would be starved people already. Outside of the quarantined cities, the quarantines are particular residential buildings and residential blocks. They have deliveries continuing to those buildings with arrangements to minimize opportunities for infection. It is the residents that don't get to leave. 

Even in Wuhan, some industries and their workers are getting to move around, it is a major manufacturing hub. The suspect Wuhan virology department and containment lab for example are working full time.  

I did see that drinks were delivered from the bar to your door if you were quarantined.  It was by people in hazmat suits.  The article I read said they worked for the bar.  I wondered how come the bar was open when these other people were quarantined. I know of a guy posting on another board who is in Wuhan and splits time between there and California, his english is great.  He at first was quarantined in his apartment for 19 days and then they extended it to 29.  He posts the big wide streets from his window, his latest post yesterday showed them stillj very empty.

[0R0 + 6,251]

26 minutes ago, wrs said:

I did see that drinks were delivered from the bar to your door if you were quarantined.  It was by people in hazmat suits.  The article I read said they worked for the bar.  I wondered how come the bar was open when these other people were quarantined. I know of a guy posting on another board who is in Wuhan and splits time between there and California, his english is great.  He at first was quarantined in his apartment for 19 days and then they extended it to 29.  He posts the big wide streets from his window, his latest post yesterday showed them stillj very empty.

You are not talking about great volumes of delivery activity. And you won't see the meager traffic in the residential districts, just at the factory and research institutions that need physical presence in the labs. We are not talking about just anybody doing the work. They test the people that are allowed out. Factories send buses out to collect workers with municipal or prefecture level approval to do so. BTW they put people at 1 per 4 seats on the bus. 

[Rob Kramer + 696]

5 hours ago, wrs said:

The same easy money policy applied to oil has been applied all over the place.  The big companies are borrowing money against cash in the bank to buyback stock.  They have all boosted their share prices with buybacks, the oil companies at least drilled wells and didn't waste it on stock buybacks where the money evaporates in a downdraft like this.  When your stock price goes down and it won't come back up, that money is evaporated and so their money in the bank has to be used to pay back the debts for the stock purchases and it doesn't do anything productive.

I'm very PRO share buy backs. The reason is mathematically theres a 1% stackable advantage with a guaranteed effect. I think some big companies have mixed bad business practices with buy backs and the buy back is viewed negatively.  I would much prefer a company to pay down debt first and foremost to any other activity but many companies use some % as a baseline so as long as they drill enough and generate higher sales and or share price rise then they can essentially keep adding debt. But if you have low /no debt and prices are low (and for shale first oil rates are highest) share prices drop with oil prices... it's far more profitable to buy back cheap shares than waste land and infrastructure room on unprofitable wells in a flooded market. Obviously theres peak commodity prices when drilling is better placed . But usually if your a high debt company buying back shares it's a mix of poor performance, low commodity prices and bad business practice. A final thing is growth every bank and investor wants growth but as we see theres not always room if you spend the money on buybacks you still get a per share growth. My .02c

[Guillaume Albasini + 851]

I'm wondering what kind of financial instrument they have created this time to hide and sell the credit default risk on all that debts...

[wrs + 893]

11 hours ago, Guillaume Albasini said:

I'm wondering what kind of financial instrument they have created this time to hide and sell the credit default risk on all that debts...

When it blows up we will know.  The market is blowing up first though.  It was the other way around in 2008, the derivatives blew up and then the market blew up.  This time, it's the market.  Look at margin debt, thta has a long way to unravel.

 

[James Regan + 1,776]

8 hours ago, wrs said:

When it blows up we will know.  The market is blowing up first though.  It was the other way around in 2008, the derivatives blew up and then the market blew up.  This time, it's the market.  Look at margin debt, thta has a long way to unravel.

 

Fixed Trump Style

[0R0 + 6,251]

17 hours ago, wrs said:

When it blows up we will know.  The market is blowing up first though.  It was the other way around in 2008, the derivatives blew up and then the market blew up.  This time, it's the market.  Look at margin debt, thta has a long way to unravel.

 

There is an iliquidity that the Fed induced with its double barreled tightening of rates and reserves. What they have done so far is not enough to undo it. Note that the latest climb in the SP500 was not accompanied with margin cebt expansion.  Liquidity was not available to accommodate more margin debt. Nor repo demand. They don't understand the market. They ignore the Eurodollar system as if it didn't exist. 

[wrs + 893]

7 hours ago, 0R0 said:

There is an iliquidity that the Fed induced with its double barreled tightening of rates and reserves. What they have done so far is not enough to undo it. Note that the latest climb in the SP500 was not accompanied with margin cebt expansion.  Liquidity was not available to accommodate more margin debt. Nor repo demand. They don't understand the market. They ignore the Eurodollar system as if it didn't exist. 

Yes, the latest jump doesn't appear to be as related to margin debt but it does correlate with the Fed balance sheet expansion.  So who do you think is responsible for the buying since October?  I would imagine it's some entities that are using that liquidity that the Fed created with the latest round of repos shown in the chart.  The Fed claims it's not QE because it's repos but then they became term repos, next they will be converted to permanent holdings I bet.

 

 

 

Edited February 29, 2020 by wrs

[0R0 + 6,251]

16 hours ago, wrs said:

Yes, the latest jump doesn't appear to be as related to margin debt but it does correlate with the Fed balance sheet expansion.  So who do you think is responsible for the buying since October?  I would imagine it's some entities that are using that liquidity that the Fed created with the latest round of repos shown in the chart.  The Fed claims it's not QE because it's repos but then they became term repos, next they will be converted to permanent holdings I bet.

 

 

 

The way the balance sheet affects equities is through forward expectations for improved economic activity as credit can expand further, and through liquidity for broker dealers in the money markets, which fund margin debt. By my calculation, if the Q4 increase in foreign repos continued its trend from Q3, then the Fed would still be just above 0 in free reserves. Nothing left over to support equities through margin debt. They just didn't do enough to be in the ballpark of "liquidity". They should not have paused for a second. This is a game with a nitroglycerin filled ball. 

The market was expanding because margin potential was growing with lower oil and gas prices and substantially increased housing activity which would indicate increased forward volumes at higher gross margins. Then the whole thing is discounted by the lower interest rates (which fell sharply well ahead of the Fed - to the point of inverting the yields curve. Again, rates fell rapidly as soon as the Fed stopped the reserve expansion.

They are entirely blind to the far greater credit needs of the real economy with the supply chain disruptions. The slightest financing kink can lead to a domino effect of bankruptcies due to halted work in progress and delayed shipments. These are funded by short term bank lending and commercial paper for the largest companies. The Fed can directly support banks lending for this business activity. Instead they are trying to wean their banks from holding excess reserves which they had actually dumped already by the time Sep 2019 happened. All the reserves are backing dealer's repo positions with foreign banks, and foreign bank's US correspondent accounts. There are no free reserves in American banks. I.e. they are not excess, just barely enough to conduct business.

 

[ronwagn + 6,290]

This time we won't have an oil and gas boom to help us recover. China's economy and the global coronavirus pandemic will make it worse globally. We should take this as a wake up call to not remaining over reliant on anything made anywhere aside from the U.S.A. followed by Mexico, Canada and anyone else who will be reliable. 

Here is a scary article https://seekingalpha.com/article/4328593-global-recession-is-now-certain-sparked-deep-china-recession

[cbrasher1 + 272]

https://www.houstonchronicle.com/business/article/Occidental-Petroleum-lost-almost-1B-and-now-15093456.php#