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Oil Prices Drop as Market Collapses

by ARGeezer Mon Dec 15th, 2014 at 01:51:18 AM EST

Will the Oil Collapse Kill Energy Junk Bonds?  (Yves Smith on Illari's post from Automatic Earth)

(The PBS News Hour Friday, December 12, noted that US oil prices dropped below $60/bbl Friday, causing the lagest drop in US stock markets in three years.)

Some context, (via Ed Harrison):

front-paged by afew


By Raúl Ilargi Meijer, editor-in-chief of The Automatic Earth. Originally published at Automatic Earth

Oil producer Russia hikes rates to 10.5% as the ruble continues to plunge, while fellow producer Norway does the opposite, and cuts its rates, but also sees its currency plummet. As Greek stocks lose another 7.35% after Tuesday's 13% loss on rumors about what the left leaning Syriza party will or will not do if it wins upcoming elections, and virtually anonymous Dubai drops 7.42%. We all know the story of the chain and its weakest link, and beware, these really still ARE global markets.

Meanwhile someone somewhere saved WTO oil from falling through the big, BIG, $60 limit for most of the day Thursday, and then it went south anyway. And that brings to mind the warnings about what would, make that will, happen to high yield energy junk bonds. Of which there's a lot out there, but not much is being added anymore, that market has been largely shut to companies, especially in the shale patch. So how are they going to finance their fracking wagers? Hard to see.

And something tells me this Bloomberg piece is still lowballing the debt issue, though I commend them for making the link between shale and Fed `stimulus' policies, something all too rare in what passes for press in the US these days.

Fed Bubble Bursts in $550 Billion of Energy Debt

The danger of stimulus-induced bubbles is starting to play out in the market for energy-company debt. Since early 2010, energy producers have raised $550 billion of new bonds and loans as the Federal Reserve held borrowing costs near zero, according to Deutsche Bank. With oil prices plunging, investors are questioning the ability of some issuers to meet their debt obligations. Research firm CreditSights predicts the default rate for energy junk bonds will double to 8% next year. "Anything that becomes a mania - it ends badly," said Tim Gramatovich, chief investment officer of Peritus Asset Management. "And this is a mania."

Oil Pressure Could Sock It To Stocks


Follow the links to see how bad it is getting. Schadenfreud on steroids? Well, at least it is not $5 trillion - yet. This seems very much like the housing bubble, but smaller and concentrated in the fossil fuel industry. Perhaps this is why Citi and others were so desperate to get the US taxpayers supporting their derivative trades as part of the current US budget bill.

Display:
Pain looms for some US energy firms as banks reassess credit  Reuters  (H/T Ed Harrison)


(snip)
A ratio of debt to EBITDA (earnings before interest, taxes, depreciation and amortization) of 4 or more indicates a company has too much debt. Several smaller oil and gas firms fall into that category, including Goodrich Petroleum Corp, Quicksilver Resources Inc, Energy XXI Ltd and Halcon Resources Corp.

Goodrich said this week it had enough liquidity under present market conditions to fund its 2015 capital plan while Energy XXI chief executive John Schiller said that the company was cutting debt and costs.

"We need to bring some money in the door and preserve liquidity," he told the Capital One energy conference.

(snip)

Banks have only made minor loan adjustments in October when oil was still trading around $85 per barrel, but after a further slide more substantial cuts are due by April and some lenders are already re-negotiating loan terms. Dan Ellinor, chief operating officer of big energy lender BOK Financial Corp in Tulsa, Oklahoma, said his bank adjusted prices used to value reserves each month.

"Our price deck is tied to the market and we set our price deck every month," he said, noting the banks of oil and gas clients were well hedged through the first half of 2015 and clients had not tapped 46 percent of available credit.

BOK's Ellinor said there could be some fallout for oil and gas firms in the second half of next year when their cash flow is no longer protected by hedges.




"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Dec 13th, 2014 at 08:50:44 AM EST
ARGeezer:
noting the banks of oil and gas clients were well hedged through the first half of 2015

The biggest short-term losers must be those on the other side of the hedges. Who are they?

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II

by eurogreen on Mon Dec 15th, 2014 at 01:54:46 PM EST
[ Parent ]
Time for Andy Hall to take a bath? He is undoubtedly right about the long term supply of shale oil but his long term purchase contracts could cost him a lot of money between now and whenever this ends.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Dec 15th, 2014 at 03:58:57 PM EST
[ Parent ]
With Oil Seen Dropping to $55 Next Week as Price Rout Deepens (Bloomberg) it seems from your chart that the market is going to pull the rug out from under the feet of US fracking altogether. Fun times...

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Sun Dec 14th, 2014 at 07:26:17 PM EST
Down in one of the linked articles there was discussion of there being no buyers for assets of frackers. Sell? - - - To whom? Monday openining could be interesting. I am sure that there are many forces striving to stabilize the fossil fuel market, but the producers hold the key. Sort of like the inverse of cornering the market. Is there a term for that? Other than flooding the market?

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Dec 14th, 2014 at 07:48:15 PM EST
[ Parent ]
I guess this is where the Fed will get into the fracking business - at least on their balance sheet. Interesting times, will it work and dare they try? I would suspect that the tanks are full at Cushing, OK.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Dec 14th, 2014 at 07:51:03 PM EST
[ Parent ]
Well, glut on the market, obviously. (Yesterday, to make my week complete, I came down with a nasty cold. It has fried my brain by today. It is amazing how distracting an achy face can be. :-(

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Dec 14th, 2014 at 11:13:42 PM EST
[ Parent ]
U.A.E. Sees OPEC Output Unchanged Even If Oil Drops to $40 - Bloomberg
OPEC will stand by its decision not to cut output even if oil price fall as low as $40 a barrel and will wait at least three months before considering an emergency meeting, the United Arab Emirates' energy minister said.
by das monde on Mon Dec 15th, 2014 at 03:38:57 AM EST
[ Parent ]
Fracking has low variable costs, it's the drilling which is expensive. So plunging oil prices won't halt output, but it will slow new drilling. This means shale oil firms will be ok - for a while. However, shale wells suffer huge decline rates during the first year of output, tens of percentage points. If you want to maintain output, you need to maintain drilling. Which lower oil prices will stop.

So you'll get a big drop in the supply of shale oil, but it will not be immediate. No-one will shut in any completed wells.

Also, IIRC, nat-gas prices have edged up a bit as drillings rigs have been moved to liquid-rich shales. This will help offset falling oil prices a bit for shale firms.

Being a supermajor with a flush balance sheet must be pretty sweet right now. Might be possible to get some cheap aquisitions in the coming year or two.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Fri Dec 26th, 2014 at 05:39:37 PM EST
[ Parent ]
The problem for many of the drilling companies is the finance. Even though they can keep pumping completed wells, the drop in oil prices has likely dropped their market valuation below what is required in loan agreements, putting them at serious financial risk. Their fate likely depends on the forbearance of their lenders. Not a good position to be in, when  the lenders are sharks on steroids.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Dec 26th, 2014 at 10:45:40 PM EST
[ Parent ]
Any bets on if/when it will break $50?/bbl? And on how low it will go? Monday wouldn't surprise me and $30/bbl would not surprise me but probably not next week.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Dec 14th, 2014 at 07:55:08 PM EST
Oil's Drop Spills Into Other Assets  WSJ

Crude Falls Below $60 a Barrel, Pressuring Stocks and Oil-Linked Currencies

The benchmark U.S. oil price tumbled below $60 a barrel for the first time in five years, intensifying the pain across financial markets and jolting the central banks of some oil-dependent economies into action.

The decline in oil weighed on U.S. stocks on Thursday. The Dow Jones Industrial Average was up as much as 225 points on strong U.S. economic data before paring gains amid a renewed descent in crude. The blue-chip index ended up 63.19 points, or 0.4%, to 17596.34.

Stocks of oil-producing companies and currencies of oil-exporting countries dropped as investors braced for sharply lower revenue, a result of the fastest selloff in oil prices since the 2008 financial crisis.

The drop in crude oil comes as policy makers are grappling with low inflation and sluggish global growth, although it is proving to be a boon to consumers who are benefiting from the lower cost of gasoline and other fuels. Officials are concerned about the prospect of deflation, a damaging spiral of falling prices and slowing spending, in some regions of the world such as Japan and Europe.


As I go to bed about midnight, EDT, the NYMEX is at 58.18, trending down. Glad I am not in the market.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Dec 14th, 2014 at 11:46:28 PM EST
It's down to about $56.50 right now.

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Mon Dec 15th, 2014 at 01:43:15 PM EST
[ Parent ]
Now close to $54 and Brent is below $59, too. Seems like $50 will be tested this week.

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Tue Dec 16th, 2014 at 08:10:41 AM EST
[ Parent ]
Asia Stocks Slump as Oil Rout Spurs Growth Concern - Bloomberg

Asian stocks retreated as oil's plunge to five-year lows spurred concern that the global economic outlook is worsening, pushing credit risk higher and driving Japanese bond yields to a 20-month low. Indonesia's rupiah tumbled.

The MSCI Asia Pacific Index retreated 1.1 percent by 3:09 p.m. in Tokyo, as a gauge of emerging-market stocks slid to a 10-month low. U.S. oil traded at $58.37 a barrel, having lost about 45 percent since a June 20 high. The rupiah headed toward its lowest level versus the dollar since the Asian financial crisis and India's rupee slid 0.6 percent. U.S. equity-index futures climbed after the Dow Jones Industrial Average (INDU)'s biggest weekly loss since 2011. Gold fell 0.5 percent.

by afew (afew(a in a circle)eurotrib_dot_com) on Mon Dec 15th, 2014 at 01:50:19 AM EST
Does this mean that most of the economic value today is more related to profits from taps and tankers, rather than (negatively) to energy cost? Economies, societies are doomed.

No surprise if much of "hot" money was caught in the energy sector. It is more convenient to let money bleed there than in pure finances - ever more guaranteed.

by das monde on Mon Dec 15th, 2014 at 03:36:25 AM EST
[ Parent ]
Some winners :
A drop in oil prices gives a sharp increase in competitive advantage to energy-intensive economies. It's a huge windfall to governments which subsidise fossil fuels for consumers (India, southeast Asia, Africa?)

But who can say if we're in overshoot, or if the price will stabilise for a while around $50?

... Just a random thought. If this might be a geopolitical play aimed at the Lima client conference? To ensure that engagements are minimized, to the long-term benefit of the fossil fuel sector?

Coo-ee bono eh? Where's that money going?

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II

by eurogreen on Tue Dec 16th, 2014 at 04:50:44 AM EST
[ Parent ]
The cost incurred by the collapse are significantly those of disruption - particularly financial disruption. Given the role the USA has given to the financial sector and, given the degree to which it has become unregulated and self serving, the knock-on consequences can be serious and spread to seemingly unrelated areas.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Dec 16th, 2014 at 08:02:53 AM EST
[ Parent ]
I suspect the conspiracy theories are over thinking things - Energy efficiency standards and the near-total abandonment of oil for stationary purposes are limiting growth in demand, the fracking industry is increasing supply, and OPEC is unwilling to cut production because the writing is on the wall for the combustion engine- The oil economy doesn't have that many years left before batteries kill it stone dead, and any oil they haven't sold before that point looses almost all economic value.

Prices might rise again if the price shock kills enough of the fracking sector, which might be part of what OPEC is hoping will happen, but more convoluted theories? Eh. Not overly likely.

by Thomas on Tue Dec 16th, 2014 at 02:05:34 PM EST
[ Parent ]
Well, the Saudis likely 'conspired', amongst themselves at least, to try to protect their future market prices and to punish Iran and Russia. Wall Street likely bungled into their predicament because they couldn't resist taking the cash from the CDSs, absent other returns being available, QE money being virtually free and regulation virtually non-existent. Wall Street reportedly lobbied hard to get the taxpayer trampolines put out below their highrise windows and I suppose that might be construed as 'conspiracy'. But what other 'conspiracies' do you reference?

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Dec 16th, 2014 at 02:36:25 PM EST
[ Parent ]
Well, it was just a wild-arsed speculation on my part. No doubt somebody else on the internet has spontaneously had the same thought (oil price crash to wreck the climate negotiations) and spun it into a full-blown production with tinfoil hats and black helicopters, but not I.

Still. The price oil has traded in a pretty tight band, $100 to $120, for four years, and it didn't happen by accident : producers co-operated, actively or passively, to keep it there. The Saudis, as the historic swing producer, have overall responsibility for the current price drop -- they can easily shut in a huge amount of production for as long as needed, to take out excess supply -- so clearly they're happy with it. I can't see them shedding bitter tears about a content-free climate accord; but OK, it's probably not their prime motivation.

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II

by eurogreen on Tue Dec 16th, 2014 at 04:35:46 PM EST
[ Parent ]
Looks to me like there aren't really any winners on the producers' side, given the fiscal break-even prices, so I don't lend much credence to conspiracy theories...

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Wed Dec 17th, 2014 at 01:21:36 AM EST
[ Parent ]
My guess is that the Saudis are taking a gamble that they can absorb short term pain and get a longer term higher priced market for their oil if they can disrupt some of the tight oil and the shale oil production for a significant time. They had just better hope that the Russians don't do something to cripple their production, such as blow up export facilities - covertly. (A long shot, I grant you.)

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Dec 17th, 2014 at 01:46:55 AM EST
[ Parent ]
Looking at the break-even prices, this crisis is clearly a Norwegian plot for world domination.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Wed Dec 17th, 2014 at 01:49:33 AM EST
[ Parent ]
You beat me to it.
by afew (afew(a in a circle)eurotrib_dot_com) on Wed Dec 17th, 2014 at 01:58:01 AM EST
[ Parent ]
ARGeezer:
get a longer term higher priced market
Any bets when it will we back to $100? Just after Putin is Saddam-ized?
by das monde on Wed Dec 17th, 2014 at 03:13:29 AM EST
[ Parent ]
Putin is not going to be Saddam-ized.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Wed Dec 17th, 2014 at 06:58:46 AM EST
[ Parent ]
But he may be Ahmaninejadized or Yeltsinized, in which case we lose a convenient villain, while the underlying issues remain the same.
by gk (gk (gk quattro due due sette @gmail.com)) on Wed Dec 17th, 2014 at 07:25:14 AM EST
[ Parent ]
Yes, this looks like a classic price war strategy on the part of the Saudis.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Fri Dec 19th, 2014 at 10:32:17 AM EST
[ Parent ]
And they're not shy about it :

The Saudi oil minister, Ali al-Naimi, said in Abu Dhabi on Sunday :
Saudi and UAE oil ministers defend Opec response to falling prices | Business | The Guardian

denied allegations that the kingdom was conspiring to bring oil prices down to harm its neighbours. Asked about possible cooperation between Opec members and other producers, he said: "The best thing for everybody is to let the most efficient producers produce."

... i.e. the least efficient producers should stop producing. (What's the typical break-even point on Canadian tar sands these days?)

.... He also says :
Saudi and UAE oil ministers defend Opec response to falling prices | Business | The Guardian

"Current prices do not encourage investment in any form of energy, but they stimulate global economic growth, leading ultimately to an increase in global demand and a slowdown in the growth of supplies," he said.

Slowing down investment in all forms of energy is his stated goal. Defending oil's market share for the coming years.

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II

by eurogreen on Mon Dec 22nd, 2014 at 07:29:13 AM EST
[ Parent ]
Winners and losers of oil price plunge - FT.com

Gabriel Sterne of Oxford Economics explains, "producers have financial surpluses and don't tend to cut back, while lower prices redistribute income to those who have a higher propensity to consume and to invest". The scale of the global effect is significant. Oxford Economics estimates that every $20 fall in the oil price increases global growth by 0.4 per cent within two to three years. The IMF's core simulations suggest a similar size of the effect, so the $40 reduction in price would more than offset the total 0.5 percentage point downgrades to the IMF's world economic growth forecasts for 2014 to 2016 over the past year. That boost is then amplified if it generates a subsequent lift in confidence, encouraging companies to invest and spend.

If the usual effect on the world economy is large, it is always dwarfed by the swings that will benefit some countries and hit others. The big winners will be countries that are simultaneously heavy users of energy and largely dependent on oil imports. Moody's, the credit rating agency, calculates that countries "battling high inflation and large oil subsidy bills, such as Indonesia and India, will benefit most from a lower price environment".

Hmm. Good for growth, not so good for the planet.

by afew (afew(a in a circle)eurotrib_dot_com) on Wed Dec 17th, 2014 at 01:59:22 AM EST
[ Parent ]
Winners and losers of oil price plunge - FT.com
And the US is less likely to want to play global policeman now that it can satisfy almost 90 per cent of its energy needs from domestic sources, up from 70 per cent as recently as 2005.

The US could slap a $30 a barrel tariff on oil imports, thereby saving its shale industry and establishing its energy independence.

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II

by eurogreen on Wed Dec 17th, 2014 at 03:53:59 AM EST
[ Parent ]
Right! US government pegs oil at >$70/bbl, buy and store as much imported oil at lower prices as we can manage and use QE money to do it. But that would have to get past the economic heresy issue and avoid blowing up the current economic framing. And such a move would be strongly criticized as bailing out the oil patch and Wall Street and further undermine public confidence in whatever integrity they might still imagine the US government has. But then the Koch brothers, via the Tea Party, could stir up some furor over some social issue, while ~50% of the intended audience for the propaganda would not notice.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Dec 17th, 2014 at 11:17:55 AM EST
[ Parent ]
Winners and losers of oil price plunge - FT.com
Lord Stern of the London School of Economics says "this is exactly the right moment to remove fossil fuel subsidies and intensify carbon pricing".

Winners and losers of oil price plunge - FT.com

Mr King argues that much of the past gains from oil prices have come from lower interest rates associated with falling inflation, which cannot happen when monetary policy is already stimulating economies as hard as it can.

There is nothing much left to be done in monetary stimulus. Fiscal stimulus is absolutely vital to avoid a deflationary spiral.

Just watch us fuck it up.

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II

by eurogreen on Wed Dec 17th, 2014 at 04:09:39 AM EST
[ Parent ]
That we can do.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Wed Dec 17th, 2014 at 06:57:50 AM EST
[ Parent ]
Eh, oil demand is famously very inelastic. Consumption wont rise very much, and the greater financial freedom is helpful - Caring about the environment is a good way up the hierarchy of needs.
by Thomas on Wed Dec 17th, 2014 at 11:11:16 AM EST
[ Parent ]
...every $20 fall in the oil price increases global growth by 0.4 per cent within two to three years.

But, if the price goes back to >$80/bbl within a year, perhaps not so much. For that to work prices would have to stabilize below where the Saudis want them to be.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Dec 17th, 2014 at 11:43:34 AM EST
[ Parent ]
Thomas:
Energy efficiency standards and the near-total abandonment of oil for stationary purposes are limiting growth in demand

You're talking about the rich countries, Thomas... which indeed no longer dominate oil demand. $50 oil will result in more electricity being generated in third-world places with intermittent power supply, for example. We are a long way from fuel oil being displaced by batteries in those places; the reluctance of the rich nations to commit to energy-transition funding in Lima means it's not getting closer in a hurry.

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II

by eurogreen on Wed Dec 17th, 2014 at 03:35:14 AM EST
[ Parent ]
Energy efficiency standards in things like cars affect everyone, because once the automakers have gone to the expense and effort of meeting them, they do not generally then turn around and produce a less efficient engine for the rest of the planet. - That would negatively affect economies of scale in production, after all.
As for grid build out, I find it unlikely that anyone would build new oil burners for that, but I really do not want to speak on it without finding the statistics because, well, the only time I ever hear details of what the third world is doing in this field is when someone is doing something eyecatching, which just cannot possibly be representative.
by Thomas on Wed Dec 17th, 2014 at 11:21:33 AM EST
[ Parent ]
cars available in third world countries and in the west are completely different.
by Xavier in Paris on Thu Dec 18th, 2014 at 01:20:02 PM EST
[ Parent ]
Rather, cars available in third world countries are those which used to be available in Europe between five and twenty years prior.

Mostly because the particular cars were, in fact, available in Europe five to twenty years prior, but were scrapped for newer models.

Also, you can transport gasoline and diesel along the same roads the cars use, but electricity requires dedicated infrastructure. (Yes, this argument is insane from an engineering standpoint, but lots of things about Africa are insane from an engineering standpoint. Extreme poverty will do that to a society.)

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Dec 18th, 2014 at 04:39:44 PM EST
[ Parent ]
The Archdruid Report
[Oil] isn't the only thing that's in steep decline. Many other major commodities -- coal, iron ore, and copper among them -- have registered comparable declines over the course of the last few months. I have no doubt that the Saudi government has its own reasons for keeping their own oil production at full tilt even though the price is crashing, but they don't control the price of those other commodities, or the pace of commercial shipping -- another thing that has dropped steeply in recent months.
by das monde on Thu Dec 18th, 2014 at 12:20:42 AM EST
[ Parent ]
More Archdruid:
What's going on, rather, is something that a number of us in the peak oil scene have been warning about for a while now. Since most of the world's economies run on petroleum products, the steep oil prices of the last few years have taken a hefty bite out of all economic activities.  The consequences of that were papered over for a while by frantic central bank activities, but they've finally begun to come home to roost in what's politely called "demand destruction"--in less opaque terms, the process by which those who can no longer afford goods or services stop buying them.

These are the foul fruits of austerity.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Dec 18th, 2014 at 03:30:43 PM EST
[ Parent ]
Wall Street dips in volatile trade; oil prices fall further

(Reuters) - U.S. stocks ended lower in a volatile session on Monday as oil prices extended their selloff, adding to worries about weak global demand.

The losses follow the S&P 500's worst weekly performance since May 2012. The index is now down 3.4 percent since Dec. 8 but is still up 7.6 percent for the year so far.

The S&P 500 energy index .SPNY bounced between positive and negative territory but ended down 0.7 percent after U.S. crude CLc1 settled off 3.3 percent at $55.91, hitting fresh 5-1/2 year lows. Both U.S. crude and Brent have fallen roughly 50 percent from highs in June.

"The question of lower global demand ... and how that translates into global economic growth, is a worry for investors," said Bucky Hellwig, senior vice president at BB&T Wealth Management in Birmingham, Alabama.


Monday close of US markets.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Dec 15th, 2014 at 05:15:19 PM EST
The last sentence of my diary post:
Perhaps this is why Citi and others were so desperate to get the US taxpayers supporting their derivative trades as part of the current US budget bill.

Did Wall Street Need to Win the Derivatives Budget Fight to Hedge Against Oil Plunge?  Yves Smith

Conventional wisdom among banking experts is that Wall Street's successful fight last week to get a pet provision into the must-pass budget bill (or in political junkies' shorthand, Cromnibus) as more a demonstration of power and a test for gutting Dodd Frank than a fight that mattered to them. But the provision they got in, which was to undo a portion of Dodd Frank that barred them from having taxpayer-backstopped deposits fund derivative positions, may prove to be more important than it seemed as the collateral damage from the 40% fall in oil prices hits investors and intermediaries.
<snip>
(Via e-mail to Yves Smith from structured credit expert Tom Adams:)
Much of the recent energy boom has been financed with junk debt and a good portion of that junk debt ended up in collateralized loan obligations. CLOs are also big users of credit default swaps, which was an important target of the Dodd Frank push-out. In addition, over the past 6 months banks were unable to unload a portion of the junk debt originated and so it remained on bank balance sheets. That debt is now substantially underwater. To hedge, banks are using CDS. Hedge funds are actively shorting these junk debt financed energy companies using CDS (it's unclear where the long side of those CDS have ended up - probably bank balance sheets and CLOs).

Finally, junk financed energy companies have been trying to offset the falling price of oil by hedging via energy derivatives. As it turns out, energy derivatives are also part of the DF push-out battle.

Conditions in the junk and energy markets are pretty dire right now as a result of the collapse in oil, as you know. I suspect there are some very anxious bank executives looking at their balance sheets right now.



Perhaps my speculation was somewhat founded and Tom Adam's e-mail suggests some answers to eurogreen's question as to who is on the other side of the hedges: TBTFs. AIG all over again?

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Dec 15th, 2014 at 05:44:11 PM EST
Given the pain Russia is feeling from the drop I can't understand why they don't institute capital controls, and why they didn't do it 10 months ago. Are they also captured by the 'free flow of capital' mythology? I think Putin can crack head with the oligarchs if they objected too strongly. And they could tell foreign investors "you will get your money back with interest when Saudi runs out of money." Russia can run as an autarky if it needs.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Dec 17th, 2014 at 01:50:48 AM EST
I had to search Sputnik News (reminder, this used to be RIA Novosti + Voice of Russia) to find just one mention of Russian difficulties:

UBS Sees Mild Forms of Capital Control Possible in Russia / Sputnik International

MOSCOW, December 16 (Sputnik), Alexander Mosesov -- As Russia's rouble experiences its biggest slump since 1998, there is a risk of mild capital control measures being introduced in the country, research by Swiss bank UBS says.

"We assign a low probability of a regime of strict capital controls in the near term. But, the probability that a range of other restrictive measures will be looked into is high, in our view," a UBS research note, obtained by Sputnik News Agency Tuesday, reads.

UBS researchers also noted that the recent interest rate hike from 10.5 to 17 percent by the Russian Central Bank on Tuesday signals a "willingness to use orthodox policies before resorting to capital controls."

Russia Today has a front-page op-ed by an Irish journalist:

​Those craving ruble collapse aren't immune from aftershocks -- RT Op-Edge

There's one ATM machine - to my knowledge - that disperses Euros and Dollars in downtown Sochi not far from the famous beach party zone. Following the Twitter information overload, I anticipated either a lengthy queue or that the machine would be out of order. Cash dispensers have a nasty habit of refusing to work when you need them most. However, this one was operative.

Outside, there was no line, just a young couple eating ice creams (it was 17 degrees Celsius) and a couple of empty parked cars. Inside the branch, there were 4 staff and 2 customers. No panic, not even a mild tremble.

Nevertheless, at a currency exchange closer to the sea, the man running the show told me he was out of Euros and Dollars. "One guy came down with a huge amount of money this morning and cleaned me out." He offered me some British Sterling instead, I demurred: "He didn't want pounds either. Why does nobody ever want pounds?"

It's a very readable article, ending thus:

​Those craving ruble collapse aren't immune from aftershocks -- RT Op-Edge

Russia's economic malaise is not funny. Nor is it any reason to celebrate, even for the country's biggest detractors. The phrase "be careful what you wish for" comes to mind. There is nothing cheerful about current events and very few, if any, countries will be immune from the effects.

Nor is Russia alone in feeling the brunt of the oil-price collapse. Venezuela is convulsed by disorder and suffers shortages of even basic goods. The Middle East is choc-a-bloc with countries that need high crude values to protect their economies. Further volatility in that region opens up a Pandora's Box.

In simple economic terms, everyone around the world would benefit from Russia, and other oil-rich nations, stepping off the financial precipice as soon as possible. Even the gloaters who despise Russia's current government enough to wish ill-will on ordinary folk they auspiciously care about. These guys don't care for anything or anyone in Russia. They only care for their own narrow ends.

Though that's just scare-mongering. We all know that our Western™ financial arrangements are rock-solid and impervious to any new external shock. Don't we?

by afew (afew(a in a circle)eurotrib_dot_com) on Wed Dec 17th, 2014 at 02:16:44 AM EST
[ Parent ]
It is RT, so yes.
by IM on Fri Dec 19th, 2014 at 12:30:23 PM EST
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I can't understand why they don't institute capital controls, and why they didn't do it 10 months ago.
Capital controls interfere with the oligarchs' ability to take their money out of the country.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Wed Dec 17th, 2014 at 07:14:59 AM EST
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Of course that is the conventional view and I am sure that the oligarchs wouldn't like it, but Russia should be well able to deal with that dislike and even strengthen the state as a byproduct. It would be time to undo some more of the Yeltsin era 'privatization', which was mostly US inspired wrecking of the Soviet infrastructure. And/or a carrot could also be offered in the form of favorable measures post crisis. But I have to wonder at the extent to which Putin himself has been taken in by aspects of the prevailing economic dogma of the west, especially 'free flow of capital'.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Dec 17th, 2014 at 11:26:24 AM EST
[ Parent ]
There were reports that Russia has been buying a lot of gold this year, and now it is expected to sell much of it. Is Putin trapped into an infavourable transaction (of selling cheaper), or is it other is around?

Grandmaster Putin's Golden Trap | Gold Eagle

No matter how strange it may seem, but right now, Putin is selling Russian oil and gas only for physical gold.

Putin is not shouting about it all over the world. And of course, he still accepts US dollars as an intermediate means of payment. But he immediately exchanges all these dollars obtained from the sale of oil and gas for physical gold!

[...] In the third quarter of this year, Russia had purchased an incredible amount of gold in the amount of 55 tons. It's more than all the central banks of all countries of the world combined (according to official data) [...]

Not so long ago, British scientists have successfully come to the same conclusion, as was published in the Conclusion of the U.S. Geological survey a few years ago. Namely: Europe will not be able to survive without energy supply from Russia. Translated from English to any other language in the world it means: "The world will not be able to survive if oil and gas from Russia is subtracted from the global balance of energy supply".

[...] in exchange for Russian oil, gas and uranium, the West pays Russia with dollars, purchasing power of which is artificially inflated against oil and gold by the efforts (manipulations) of the West.  However,  Putin uses these dollars only to withdraw physical gold from the West in exchange at a price denominated in US dollars, artificially lowered by the same West [...]

Especially interesting in this context looks the November statement of the first Deputy Chairman of Central Bank of Russia Ksenia Yudaeva, which stressed that the CBR can use the gold from its reserves to pay for imports, if need be. It is obvious that in terms of sanctions by the Western world, this statement is addressed to the BRICS countries, and first of all China. For China, Russia's willingness to pay for goods with Western gold is very convenient.

[...]  the solitaire of Russian-Chinese relations is extremely successful for Moscow and Beijing. Russia buys goods from China directly for gold at its current price. While China buys Russian energy resources for gold at its current price. At this Russian-Chinese festival of life there is a place for everything: Chinese goods, Russian energy resources, and gold - as a means of mutual payment. Only the US dollar has no place at this festival of life. And this is not surprising. Because the US dollar is not a Chinese product, nor a Russian energy resource. It is only an intermediate financial instrument of settlement - and an unnecessary intermediary. [...]

Traditionally, the West has used two methods to eliminate the threat to the hegemony of petrodollar model in the world and the consequent excessive privileges for the West:

One of these methods - colored revolutions. The second method, which is usually applied by the West, if the first fails - military aggression and bombing.

But in Russia's case both of these methods are either impossible or unacceptable for the West.

by das monde on Thu Dec 18th, 2014 at 10:45:26 PM EST
[ Parent ]
I really don't see why China and Russia have to trade in gold. I recall that they worked out a currency deal to settle in roubles and yuan. Unless US manipulation of the dollar price of gold, assuming it occurs, (I do), has no impact on the rouble and yuan price of gold, referencing gold would just seem to complicate matters and open up a fresh can of worms.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Dec 19th, 2014 at 12:25:53 AM EST
[ Parent ]
The real issue is trade balances. On a gold standard gold only flows from one country to another when there is a persistent trade imbalance. The Rouble is currently devaluing as well as the US$. The price of any currency can be and is affected by market forces all the time. The ease with which this is done has a lot to do with the economic weight of any particular currency - the amount of transactions denominated in that currency. At $1000/oz all the gold in the world, which I have seen estimated at 12 billion ounces, would be worth only $12 trillion. That is less than the annual US GDP. while the net value of all US assets has been estimated at $50 trillion.

What all that means makes my head hurt. :-)

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Dec 19th, 2014 at 12:51:36 AM EST
[ Parent ]
The Rouble is currently devaluing as well as the US$.
With respect to what is US$ devaluing?
by das monde on Fri Dec 19th, 2014 at 02:09:50 AM EST
[ Parent ]
Well, we had been having a competitive devaluation of currencies. PBut the oil collapse has likely changed that. Any currency that belongs to a country with chronic trade deficits is under downward pressure. And the US$ is still the de facto world reserve currency, so the USA has simply been able to create dollars and use them to pay foreign debts, which only exacerbates that situation, as it creates an ever increasing supply of dollars to accompany and ever increasing cumulative trade deficit.

But skewed wealth distribution and austerity have combined to create demand destruction by decreasing effective demand. This is creating the foundation for deflation and depression. Now, with commodity prices falling broadly producers have less revenue  with which to service existing debt. See Irving Fisher's The Debt Defalation Theory of Great Depressions It is a 40 page PDF and well worth a read.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Dec 19th, 2014 at 09:46:11 AM EST
[ Parent ]
The US$ has strengthened against other currencies since the oil price decline took off this summer. This may be especially true for petro-currencies. The US has an advantage there because it is still a net importer of oil, so falling oil prices cuts our trade deficit - if less so than when the imports were larger and the prices higher.

The truth is that all of this makes my head hurt. Despite having taken a very helpful Money and Banking Course last year I don't have a really nuanced feel for the effects of changes in currency values, commodity values, etc. I would probably have to be a trader to get that kind of understanding. (Plus my head was already hurting from the flu.)

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Dec 19th, 2014 at 10:00:55 AM EST
[ Parent ]
And the US$ is still the de facto world reserve currency, so the USA has simply been able to create dollars and use them to pay foreign debts, which only exacerbates that situation, as it creates an ever increasing supply of dollars to accompany and ever increasing cumulative trade deficit.
In order to have a reserve currency people need to be able to hold it. Which means that US, as the issuer of the world's reserve currency, needs to issue debt that others can hold, i.e., indebt itself to others.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Fri Dec 19th, 2014 at 10:35:51 AM EST
[ Parent ]
the issuer of the world's reserve currency.. needs to issue debt that others can hold...
Absolutely true, and the US has embraced that requirement with gusto. But that is entirely aside from the questions of if and when being the issuer of the world reserve currency is a good idea for the citizens of the issuing state. It has obviously been very good for the financial elite.

I am also aware of the Triffin Dilemma, which proved fatal to the gold standard under the Bretton Woods System. Now the question becomes one of its effect under the current international monetary regime, to the extent that there really is one  cobbled together mess that it is, relying on FX rates, currency swaps and arbitrage. In order for that system to be reasonably secure there needs to be a deep pockets dealer of last resort for FX arbitrage.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Dec 19th, 2014 at 12:28:15 PM EST
[ Parent ]
if and when being the issuer of the world reserve currency is a good idea for the citizens of the issuing state
And how well is refusing to issue sufficient state debt working for the citizens of the Eurozone?

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Sun Dec 21st, 2014 at 07:40:34 AM EST
[ Parent ]
Fortunately, those using the US supplied 'world reserve currency' are not stuck with that currency as their official currency. As for the EU, well they are pretty much screwed. But that says nothing about the cost/benefit analysis of being the issuer of the de facto world reserve currency for the citizens of the issuing currency, especially when the policies governing that issuance are dominated by the interests of a few private sector actors.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Dec 22nd, 2014 at 10:54:20 AM EST
[ Parent ]
Yuan & rouble are perhaps not optimal for discarding petrodollar. Financial perceptions are not in their control, as we see. There could be nothing better than gold for the serious job.

I smell a strategic long-term (or epochal) game here. The apparent supremacy of short term hardships must be just a noise, a convenient myth. The short-term squeeze of Russia might indicate a serious weakness of the West. The question is: What is the "epochal" game about? Is the civilization progress so weak that a new feudal order is in the cards? Does peak oil promise nothing but abandonment of the social-technological progress, combatant competition for survival and dominance? Russia holds then an ace with its resources - if only it can keep them. Capping the world economy with $12 trillion would be too strict, but not by terribly much given the stakes. The lay population is less than pawns, either in Russia, China or (since 2008 surely) the West.

by das monde on Fri Dec 19th, 2014 at 02:33:48 AM EST
[ Parent ]
das monde:
Not so long ago, British scientists have successfully come to the same conclusion, as was published in the Conclusion of the U.S. Geological survey a few years ago.

This is the kind of apparently serious reference - that is in fact empty slush - that makes me take "Gold Eagle" with a pinch of gold dust. ;)

by afew (afew(a in a circle)eurotrib_dot_com) on Fri Dec 19th, 2014 at 02:11:02 AM EST
[ Parent ]
Not so long ago, British scientists have successfully come to the same conclusion, as was published in the Conclusion of the U.S. Geological survey a few years ago. Namely: Europe will not be able to survive without energy supply from Russia. Translated from English to any other language in the world it means: "The world will not be able to survive if oil and gas from Russia is subtracted from the global balance of energy supply".
This is nonsense. The collapse of oil prices on the refusal of OPEC to cut production means that as of right now Russian supply is basically superfluous.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Fri Dec 19th, 2014 at 10:27:20 AM EST
[ Parent ]
The article (by Dmitry Kalinichenko) can be found on goldbug sites and conspiracy sites (why do they go together?), and particularly via pro-Russian propagandist Vineyard of the Saker, who links to it (in its French version), on the site of extreme-right fake-left Jewish-world-plot friend of Dieudonné, Alain Soral. None of which I'll link to.
by afew (afew(a in a circle)eurotrib_dot_com) on Fri Dec 19th, 2014 at 11:19:29 AM EST
[ Parent ]
No matter how strange it may seem, but right now, Putin is selling Russian oil and gas only for physical gold.

Putin is not shouting about it all over the world. And of course, he still accepts US dollars as an intermediate means of payment. But he immediately exchanges all these dollars obtained from the sale of oil and gas for physical gold!

Putin is dealing with financial sanctions from the US and its allies and facing the possibility of an Iran-like trade blockade. In that context it makes no sense to accumulate US dollars.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Fri Dec 19th, 2014 at 10:16:56 AM EST
[ Parent ]
 "but right now, Putin is selling Russian oil and gas only for physical gold."

uttermost nonsense. Most treaties regarding gas are long term and certainly don't mention gold.

Wat is next, Putin hoarding mithril?

by IM on Fri Dec 19th, 2014 at 12:32:31 PM EST
[ Parent ]
The real question is how long the USA can continue to abuse its status as the issuer of the de facto world reserve currency to further its own geo-political ends, how soon disaster will strike and how big that disaster will be. I am thinking soon and '30s level depression. That is also where austerity is heading. I suspect that the result will be a return to a bipolar world system, with Russia, China and the rest of the BRICS as the second pole. Russia is cast as the evil partner of that pole and China as the more Western friendly partner, while the US will view the others as hapless dupes.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Dec 19th, 2014 at 12:37:31 PM EST
[ Parent ]


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