Under $20 Oil?
Oil dipped below $30 again today. As usual dip buyers or shorts covering pushed the price positive for a while. This time, however, the bounce did not last even one day. Oil is flirting with $29 and Junk Energy-Bond Costs Soar.
The cost for U.S. high-yield energy companies to borrow in the bond market soared to the highest level in more than four years as Goldman Sachs Group Inc. said oil may drop below $20 a barrel.
The yield premium investors demand to hold the junk-rated debt sold by energy companies over ultra-safe Treasuries widened to the most since 2012, part of a global rout that has seen stocks tumble toward a bear market and volatility rise amid fears of a worldwide economic slowdown. Crude could drop “into the teens,” from about $30 on Tuesday, before supply and demand are brought back into balance, according to Goldman Sachs.
In the U.S., the risk premium on the Markit CDX North America High Yield Index, a credit-default swaps benchmark tied to the debt of 100 speculative-grade companies, jumped as much as 17 basis points to 589 basis points, the highest since at least August 2012. The energy sector added the most risk, jumping as much as 38 basis points to 1525 basis points.
Oil Bankruptcies Coming Up
Bloomberg reports Oil Bankruptcies Seen Spurring M&A on Signal Prices Near Low
About 150 oil and gas companies tracked by energy consultant IHS Inc. may go bust as a supply glut pressures prices and punishes revenues.
The number of companies at risk is more than twice the 60 producers that have already filed for bankruptcy, Bob Fryklund, chief upstream analyst at IHS, said in an interview. A further shake out would help stimulate deals that have been on hold because buyers and sellers have disagreed on asset values, he said.
“Nobody is buying because there is a mismatch between expectations,” Fryklund said in an interview in Tokyo. “We need to close that gap. And the way that that will happen is the rest of those bankruptcies will go forward.”
How Low Can It Go?
Goldman, usually a contrarian indicator is now pondering oil below $20. Meanwhile, producers want their assets priced as if oil is $45. And here we sit near $30.
No one knows how low oil will go, but it certainly will not go to zero.
Energy company buyers at these prices will likely be rewarded eventually, as long as the companies do not go bankrupt.
With the slowing global economy and China’s feeble rebalancing effort, the wait could be longer than most think. If so, the number of bankruptcies will be on the high side of 160.
Mike “Mish” Shedlock
Global economy circling the drain
Out today German Industrial Production December
expected … +0.5%
actual …-1.2%
GDPNow popped again.
yeah, well the pop was due to Q1 expected inventory draw down of $6 billion to a build of $4 billion. The last thing this economy needs is MOAR stuff.
Revisions (of pretty much everything) have been negative lately. November trade sales revised from -1.0% to -1.3%.
December year over year trade sales -4.5%
December year over year trade inventories +1.9%
December inventories / sales a recessionary 1.32 … compared to 1.24 for December 2014.
Oil?
Lower Longer than most can conceive
Pedal to the metal production yielding gargantuan inventory build
Storage capacity on the clock
tick tock tick tock …
60 or 70 dollars would be a realistic concensus level, with 10 dollar swing either side. So the current low is ‘suspicious’ to me. It isn’t that 30 is not a due market price, it is that it is destructive to oil producers in an isolated sense. What I am watching is the inflation and maximisation of storage, as well as of lines of supply. Being somewhat cynical I do not put those as examples of the overflow of excess funding, instead as a major purposeful rearrangement of global positions, quite possibly for in the event of war, as in part and preparation. That does not make war inevitable, it only means a window, before a production reset occurs, is prepared.
Many leases are based on royalties from production. Can shut down only for short periods for maintenance … if production stops for long leases can be voided … and leases generally favor the producers.
(My) Game Theory says I’m gonna keep pumping it out of the ground and hoping the other guy quits first.
Completely. Even units running at an operating loss will be kept going for some time to keep that loss from becoming a complete writeoff with additional costs. Those behind the production push would have understood this from the get go, as well as that cheaper ( more) oil would be a real economic boost. The job losses in the sector are small compared to the global effect of oil price halving. However my view is a bit more conspiratorial – I don’t think the push in production was ‘global goodwill’, nor solely a direct for profit enterprise, I think it was a reaction to the leverage of persistently high prices, to be able to tip political scales, and to increase independence. Who gets pushed out now as global storage is full. I don’t think that the show is all gentlemanly, I think there are explosive interests, investment, and profits at stake. I don’t enjoy thinking of it this way, it is just what my intuition tells me and I sincerely hope myself wrong on this count.
It is actually pretty simple. Saudi Arabia is pumping to bankrupt shale oil players and regain market share. Other OPEC nations depend on oil revenue, so they can’t stop pumping. US shale producers have short loans they need to pay back so they can’t stop pumping. There is no conspiracy. In fact, this is proof that cartels always fail eventually.
They are called “Junk Bonds” for a reason.
Another Bloomberg headline “Blankfein Says European Banks Have Ample Access to Liquidity”
I am reminded that moderately after 1929-1932, say 1937, there was another significant drop in the stock market.
They are called “junk bonds” for a reason.
Problem Saudis have is keeping prices too low for too long will cause global economic despair further reducing demand for energy and tanking their own economy in the process—it is called suicide. Therefore expect Saudis at some point to collaborate with Russia to curb production and lift prices to $40-50 level. Also the floating tanker stockpile at some point becomes a financial nightmare to shipping industry and speculators which the Saudi’s are aware of .
“No one knows how low oil will go, but it certainly will not go to zero”
Why not? You never thought interest rates would go below zero either.
Pingback: Junk Bond Yields Highest in Four Years, Goldman Discusses Oil in Teens; 150 Energy Companies May Go Bankrupt « Financial Survival Network
‘but it certainly will not go to zero.’
I bet you said that about interest rates once…!