Thursday, July 28, 2016

Guiding Hand of the Market Belied by Irrational Oil Production Practices


The US government and oil industry decided to ramp up US oil production through offshore drilling and fracking in order to stimulate the US economy and lessen overseas' dependence. This decision has increased pollution and environmental degradation in the US while helping flood the global market with oil.

However, US and Canadian oil production CANNOT match the Saudi's and Iran's price points, which are less than $25 a barrel. Oil produced by fracking in Canada and the US must sell between $40 and $60 a barrel just to break even.

Global oil production practices are fundamentally irrational, leading to gross over-production and exhaustion of a vital resource with rampant environmental degradation.

The boom-bust cycle is IRRATIONAL and is creating economic havoc in the "oil patch" for impacted workers and communities. However, high-level executives are extracting wealth in this process and the banksters who funded the fracking boom are going to end up holding most of the equity after externalizing costs.

Here is the latest news and a review of the market from earlier this spring:
Ryan Dezember. 2016, July 22. Oil Pay Plans in Cross Hairs. The Wall Street Journal, C4.
“Moody’s Investors Service said it may begin penalizing oil and gas producers that partake in a widespread industry practice: incentivizing their executives to drill regardless of commodity prices. Most oil-company executives derive part of their annual cash bonuses by hitting production and reserve growth targets. These bonuses, which can amount to millions of dollars, have come under criticism from some shareholders who say the incentives don’t make sense when oil and gas prices are too low for drilling to be profitable”

Sarah McFarlane, Nicole Friedman, and Alison Sider. 2016, July 28. Gasoline Glut Swamps Oil. The Wall Street Journal, C1.
Crude prices fall to a three-month low below $42 a barrel as fuel storage fills up.

Just when it appeared crude oil’s supply problems were easing, a glut of gasoline is drowning the market’s hopes for a recovery. Vast new supplies of gasoline around the world, combined with the overproduction of oil, has sent crude prices sliding.... The result is near-record levels of gasoline put into storage around the world, around 500 million barrels in total, according to Citigroup.


Arthur Berman. 2016, July 28. Oil Industry About To Be Burned Again By Fall In Oil Prices. Zero Hedge http://www.zerohedge.com/news/2016-07-28/oil-industry-about-be-burned-again-fall-oil-prices

The current oil-price rally is over.

U.S. rig counts have surged as oil prices sink. Capital is driving the oil markets and it enables bad behavior by producers. That is why oil prices will stay low.

The oil-price rally that began in February is over. Prices rose from $26 per barrel to $51 by early June and are now below $42 (Figure 1). If they fall through $40, the next likely support level is at $36 per barrel.

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Tuesday, January 19, 2016

Energy Markets Are Going Sour


The Wall Street Journal's weekend print edition reported that "More Energy Loans are Turning Sour" (Jan 16-17, 2016, B2).  The article cites financial analysts who claim that banks are adding reserves to deal with defaults in oil-and-gas loans.

The fracking boom was financed by Wall Street. I've posted about ongoing bankruptcies because oil from US and Canadian fracking operations must sell for at least $40 a barrel to be profitable. If you've been following oil prices, you know that we are a long way down from $40 a barrel. 

A few days ago ZeroHedge reported that the Dallas Fed had suspended mark-to-market accounting rules on energy debt:

Tyler Durden, "Exclusive: Dallas Fed Quietly Suspends Energy Mark-To-Market On Default Contagion Fears," Zero Hedge, January 17, 2016, http://www.zerohedge.com/news/2016-01-16/exclusive-dallas-fed-quietly-suspends-energy-mark-market-tells-banks-not-force-shale

The Fed's decision points pretty clearly to oil turmoil.

Although one can imagine many end scenarios for this trajectory, the one below hadn't occurred to me but seems most likely given current trajectories in accumulation:
Tyler Durden, "America's Cash Flow Negative Energy Companies Have $325 Billion In Debt Among Them Submitted ZeroHedge, January 18, 2016, http://www.zerohedge.com/news/2016-01-18/these-are-cash-flow-negative-energy-companies-us-total-debt-325-billion

[when discussing Saudi over-production of oil] ...There is just one problem with the Saudi plan: even assuming all of these [North American] companies file Chapter 11, all that would happen is their debt would be wiped out, with the existing creditors getting the equity keys, and becoming the new owners of streamlined, debt-free corporations....This means that after the default and debt-for-equity deluge, US shale would be able to pump even more at far lower breakeven costs, forcing Saudi Arabia to overproduce for even longer ultimately shooting itself in the foot when its reserves run out!
The passage above is addressing challenges faced by the Saudis in navigating global oil politics but the suggestion that existing creditors of US and Canadian oil firms would get the "equity keys" and become owners of "streamlined, debt-free corporations" makes me cringe.

This is how financial capitalism centralizes wealth and decision-making control. The outcome of shale over-production could be even more over-production with profits ever more centralized in financial firms, including the world's largest banks and financial firms (e.g., hedge funds).

Consolidated power and energy will allow the new owners to escape responsibility for the incredible externalizations of fracking-based extractive technologies.

3 comments:

  1. We have a rather limited notion of intelligence which largely amounts to test taking and scores. Yet supposedly highly intelligent persons regularly lead lives filled with stupidity. So perhaps the term understanding would be more suitable. Clearly the oil market is moved around by passions like greed and not by any deep grasp of life. Wreck the environment in order to buy a luxury yacht or an expensive condominium in Paris. And yet it takes intelligence to manipulate the system.
    Another example: at neither conventions did anyone mention Fukushima which is probably the world's most serious problem. It takes a Jill Stein to do that. Even just outlining national problems got Trump's speech characterized as gloomy and dark.
    Fracking seems quite suicidal but then statins do also. We live with a lot of nonsense and mistaken ideas and beliefs. But we can usually find someone to blame like Russia or the other political party; once we have done our blaming the problem goes away?

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  2. Rigged like the elections. No real free trade. Dominated by backroom crooks. The empires corruption makes it unsustainable.

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  3. This comment has been removed by a blog administrator.

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