Guess What Happened The Last
Time The Price Of Oil Crashed Like This? Posted
on December 1, 2014
by Michael Snyder
There has only
been one other time in history when the price
of oil has crashed by more than 40 dollars
in less than 6 months. The last time this happened was during the
second half of 2008, and the beginning of that oil
price crash preceded the great financial collapse that happened later that year
by several months. Well, now it is happening again, but this time the
stakes are even higher. When the price of oil falls dramatically, that is
a sign that economic activity is slowing down. It can also have a
tremendously destabilizing affect on financial markets. As you will read
about below, energy companies now account for approximately 20 percent of the
junk bond market. And a junk bond implosion is usually a signal that a
major stock market crash is on the way. So if you are looking for a
“canary in the coal mine”, keep your eye on the performance of energy junk
bonds. If they begin to collapse, that is a sign that all hell is about
to break loose on Wall Street.
It would be
difficult to overstate the importance of the shale oil boom to the U.S.
economy. Thanks to this boom, the United States has become the largest oil
producer on the entire planet.
Yes, the U.S.
now actually produces more oil than either Saudi Arabia or Russia. This
“revolution” has resulted in the creation of millions of jobs since the last recession, and it has been one of the key
factors that has kept the
percentage of Americans that are employed
fairly stable.
Unfortunately,
the shale oil boom is coming to an abrupt end. As a recent Vox article discussed, OPEC has
essentially declared a price war on U.S. shale oil producers…
For
all intents and purposes, OPEC is now engaged in a “price war” with the United
States. What that means is that it’s very cheap to pump oil out of places like
Saudi Arabia and Kuwait. But it’s more
expensive to extract oil from shale formations in places like Texas and North
Dakota. So as the price of oil keeps falling, some US producers may become
unprofitable and go out of business. The result? Oil prices will
stabilize and OPEC maintains its market share.
If the price
of oil stays at this level or continues
falling, we will see a significant number of U.S. shale oil companies go out of
business and large numbers of jobs will be lost. The Saudis know how to
play hardball, and they are absolutely ruthless. In fact, we have seen
this kind of scenario happen before…
Robert
McNally, a White House adviser to former President George W. Bush and
president of the Rapidan Group energy consultancy, told Reuters that Saudi
Arabia “will accept a price decline necessary to sweat whatever supply cuts are
needed to balance the market out of the US shale oil sector.” Even legendary
oil man T. Boone Pickens believes Saudi Arabia is in a stand-off with US
drillers and frackers to “see how the shale boys are going to stand up to a
cheaper price.” This has happened once before. By the mid-1980’s, as oil output
from Alaska’s North Slope and the North Sea came on line (combined production
of around 5-6 million barrels a day), OPEC set off a price war to compete for
market share. As a result, the price of oil sank from around $40 to just under
$10 a barrel by 1986.
But the energy
sector has been one of the only bright spots for the U.S. economy in recent
years. If this sector starts collapsing, it is going to have a dramatic
negative impact on our economic outlook. For example, just consider the
following numbers from
a recent Business Insider article…
Specifically,
if prices get too low, then energy companies won’t be able to cover the cost of
production in the US. This spending by energy companies, also known as capital
expenditures, is responsible for a lot of jobs.
“The
Energy sector accounts for roughly one-third of S&P 500 capex and nearly
25% of combined capex and R&D spending,” Goldman Sachs’ Amanda Sneider
writes.
Even more
troubling is what this could mean for the financial markets. As I mentioned
above, energy companies now account for close to 20 percent of the entire junk
bond market. As those companies start to fail and those bonds start to go
bad, that is going to hit our major banks really hard…
Everyone
could suffer if the collapse triggers a wave of defaults through the high-yield
debt market, and in turn, hits stocks. The first to fall: the banks that were
last hit by the housing crisis.
Why
could that happen? Well, energy companies make up anywhere from 15 to 20
percent of all U.S. junk debt, according to various sources. It would be hard to overstate the seriousness of what the
markets could potentially be facing.
One analyst
summed it up to CNBC this way…“This is the one
thing I’ve seen over and over again,” said Larry McDonald, head of U.S
strategy at Newedge USA’s macro group. “When
high yield underperforms equity, a major credit event occurs. It’s the canary
in the coal mine.“
The last time
junk bonds collapsed, a major stock market crash followed fairly rapidly. And those
that were hardest hit were the big Wall Street
banks…
During
the last high-yield collapse, which centered around debt tied to the housing
sector, Citigroup lost 63 percent of
its value in the following 60 days, Kensho shows. Bank of America was cut in
half.
I understand
that some of this information is too technical for a lot of people, but the
bottom line is this…Watch junk
bonds. When they start crashing it is a sign that a major stock market
collapse is right at the door.
At this point,
even the mainstream media is warning about this. Just consider the following
excerpt from a recent CNN article…That swing away
from junk bonds often happens shortly before stock market downturns.
“High
yield does provide useful sell signals to equity investors,” Barclays analysts
concluded in a recent report. Barclays combed through the past dozen years of
data. The warning signal they found is a 30% or greater increase in the spread
between Treasuries and junk bonds before a dip.
If you have
been waiting for the
next major financial collapse,
what you have just read in this article indicates that it is now closer than it
has ever been. Over the coming weeks, keep your eye on the
price of oil, keep your eye on the junk bond
market and keep your eye on the
big banks. Trouble is brewing, and nobody is
quite sure exactly what comes next.
Source:http://www.dcclothesline.com/2014/12/01/guess-happened-last-time-price-oil-crashed-like/
Comments
The US Government can mitigate the risk by
allowing drilling now where oil is more easily extracted like Alaska and
federally controlled land and off-shore.
If we can activate these resources, we may be able to keep oil and gas
production increasing while turning down expensive fracking and turning up
regular drilling. We can unleash the US economy by ending the war on coal and
eliminating unnecessary EPA regulations and wasteful grants to states.
Norb Leahy, Dunwoody GA Tea Party Leader
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