Dec 122014
 December 12, 2014  Posted by at 6:31 pm Finance Tagged with: , , , ,

DPC Youngstown, Ohio. Steel mill and Mahoning River 1902

Please allow me to revert back again a little to what I wrote earlier today in Will Oil Kill The Zombies? I think we need to be clear on what’s going on here. The oil market actually works. And that’s a rarity in today’s world of manipulated everything, of no mark to market, of huge stock buybacks financed by zero interest rates, you know the story.

We know that the market works because of for instance this article from CNBC:

Oil Pressure Could Sock It To Stocks

“Oil has pretty much spooked people,” said Daniel Greenhaus, chief global strategist at BTIG. “There just isn’t a bid. With everything in energy and the oil price collapsing as it is, who is going to step in and be a buyer now? The answer is nobody.”

b>”It’s (oil) actually much weaker than the futures markets indicate. This is true for crude oil, and it’s true for gasoline. There’s a little bit of a desperation in the crude market,” said Kloza.”The Canadian crude, if you go into the oil sands, is in the $30s, and you talk about Western Canadian Select heavy crude upgrade that comes out of Canada, it’s at $41/$42 a barrel.

“Bakken is probably about $54.” Kloza said there’s some talk that Venezuelan heavy crude is seeing prices $20 to $22 less than Brent, the international benchmark. Brent futures were at $63.20 per barrel late Thursday.

“In the actual physical market, it’s fallen by even more than the futures market. That’s a telling sign, and it’s telling me that this isn’t over yet. This isn’t the bottoming process. The physical market turns before the futures,” he said.

It’s not about where WTI and Brent are at any given moment. Even if WTI is down another 3.60% today so far at $57.79. Whatever WTI tells us, the real world out there trumps it by a mile and a half. The prices at which oil actually sells in the real world are way below WTO and Brent standards, a very big and scary development. There are tons of parties that will sell at any price they can get. There is no better way to drive prices down further, it’s a vicious circle down a drain.

The market is setting future prices as we go along, that’s the – inevitable – mechanism. It’s called price discovery. We knew ISIS was selling at $30 or so, but tar sands at $30 and both Canada and Venezuela heavy crude at $40, that’s way more than an outlier. At WTI standard prices, too many can’t move nearly enough product anymore, and with credit having been slashed, moving product is the sole way to survive. How much of this ongoing process would you think we have we seen to date?

Here’s one of the first oil-producing countries about which serious alarm bells are raised. It’s not Venezuela or Nigeria, it’s Canada. From MarketWatch:

Falling Oil Threatens Canada’s Bulletproof Banking System

While the U.S. financial system – as well as many international banks – has gotten hopped up on a wide assortment of financial opiates and stumbled through more than a dozen bank-fueled crises through the decades, Canada boasts a stellar track record of banking sobriety. However, a spectacular death spiral in crude-oil futures – West Texas Intermediate settled Thursday at $59.95, a more than five-year low – threatens to deliver a serious shock to the banking system of the U.S.’s northern neighbor, according to a research note published Thursday by Pavilion Global Markets. Canada ranks as one the world’s five largest energy producers and a net exporter of oil, according to the U.S. Energy Information Administration. So, a big drop in oil would pose several risks to Canada’s oil-dependent economy.

“The drop in oil prices, as mentioned above, will have wide-ranging implications on the Canadian economy,” Pavilion strategists Pierre Lapointe and Alex Bellefleur said in the note. It’s not just that Canada’s banks will find themselves saddled with souring loans from underwater energy producers. The problem, Pavilion argues, is that Canada’s employment rate could suffer as oil-related businesses are forced to close.

Here’s how they put it: “In this context, the risk to Canadian banks doesn’t stem necessarily from a narrow view of loans to oil companies, but morefrom a broad macro risk perspective. As employment in the oil industry declines, a negative income and wealth shock to many households will take place, impacting a variety of loans (credit card, mortgage) on Canadian bank balance sheets.”

This is what I’ve been hammering on for weeks: the benefits of cheap oil are no match for the destruction that touches on a thousand different parts of our economies. It doesn’t help that much of both Canadian and American oil, especially the unconventional kinds, were drowning in debt even before oil turned south with a vengeance. But that’s not even the most crucial part.

Our entire economies revolve around oil, it’s not just something that you put in your car, oil is everywhere, it’s built our world and it maintains it.. And therefore the effects of a sudden 40% price drop – and counting – will be felt everywhere. What we’ve seen so far can still be labeled ‘orderly’, but that’s not going to last. Still, look at the bright side: at least you can say that for once in your life you’ve witnessed a functioning market.

Home Forums The Oil Market Actually Works, And That Hurts

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    DPC Youngstown, Ohio. Steel mill and Mahoning River 1902 Please allow me to revert back again a little to what I wrote earlier today in Will Oil Kill
    [See the full post at: The Oil Market Actually Works, And That Hurts]



    The housing market was supposed to crash before the CDN banks admitted they’re insolvent. Guess it’s almost time to pull all my money out of the banks and start digging some holes in the woods… 🙁



    OK I will say it. we are headed for a global depression


    I have heard some pretty ubsurd stuff. This oil pricing is OPEC attacking us. They have as little control as we do. They are forced to act the way they are just to maintain themselves, to expect them to have better restraint then we do is dillusional.

    I stand behind what I have called this all along a resource war. Resources price rises due to scarcity till manufacturing responds by cutting back. Suddenly with manufacturing cut backs there is now a surplus of resources. Now both are cutting back. But check this out its not just oil its different resources clear accross the board. There is no longer great value in consuming resources to produce products for this electronic money that is produced in the trillions with each QE.

    What choice does the East have. They are swimming in US dollars. The more they have the less its worth – again the laws of supply and demand. Further should a country aquire such a large amount of US dollars it can become a threat to US sovernty. Suppose the East dumps their supply too fast. This could devalue and through the US into a depression. Thus the US could see any country owning to much of its currancy as a threat.

    The money system no longer has value against the resources its trying to create wealth from. Reality: printed money, electronic numbers, and zero credit schemes have created a world where manufacturing of the East gets no value. The risk for the East to continue manufacturing and collecting a massive US currancy is war.

    We want to blame someone for this but we need to stop. Look a knife cuts and its good that it cuts, we need it to cut and our world works because the same results happen the same way each time. Just like a knife cutting printing money devalues the currancy. If we lived in a world where each action didn’t have a common result it would be utter chaos.

    I will enjoy a world where printing devalues money. I will enjoy a world where common sense returns. Where price equalibrium gets a fair value to the worker. Where countries can’t print their way out of problems. Where there is a source of value in products that makes sence.


    We should be close to a bottom in oil. In 3 months to 6 months this thing will turn up and leave these prices behind and with it all of RIM’s dreams of deflation. I am sure 3 years down the line when oil declines again he will write another stunning piece “Who is ready for $70 oil” , when $70 will be the new $30 just like in 2009 $10 was where oil was supposed to go to. Of course being wrong for another 5 years will not prevent him for continuing to spew his timeless wisdom.


    And about your nonsensical link to Oil prices killing Canada.
    First $2 Natural gas which is $12 oil did not kill any banks so you think $50 oil will?
    Second, falling oil prices actually boost Canada’s economy as a whole.
    Don’t believe me? Well here you go,
    Third a lot of the producers hedged 30-50% of their 2015 production but did not hedge their currency exposure. So they are getting $95 US which is 95 X 1.15 USD/CAD so a total of $109 Canadian. But dont let your biases stop you from actually investigating what is happening.


    What exactly is the purpose of the Group of 30? Their website says: “The Group of Thirty, established in 1978, is a private, nonprofit, international body composed of very senior representatives of the private and public sectors and academia. It aims to deepen understanding of international economic and financial issues, to explore the international repercussions of decisions taken in the public and private sectors, and to examine the choices available to market practitioners and policymakers.”

    They meet twice a year for Plenary Sessions, in June and December. Under “Special Thanks” at the above link is listed its contributors and supporters. Take a look at that list! Lots of banks.

    Then take a look at who the Group of 30’s members are: Jean-Claude Trichet, Mark Carney, Mario Draghi, William Dudley, Timothy Geithner, Mervyn King, Paul Krugman, Haruhiko Kuroda, Ken Rogoff, and Larry Summers.

    They’re here, they’re there, they’re everywhere. I’d never heard of the Group of 30 before. Can you imagine all of the above people in one room, coming up with policy and directives? We are doomed!


    First, they ignore you.
    Second, they laugh at you.
    Third, they fight you.
    Then the lights go out, for inflationists and deflationists alike.

    Huck is right about one thing: cash is not going to save you this late in the game. Arguably, neither anything else I can think of.


    It seems we are entering the historical process of not price discovery, but of reassessed maximum “sustainable equilibrium” complexity.
    When push comes to shove, I find it hard to believe governments won’t “bail out” their already heavily subsidized industry. I know you’ve voiced doubts on this early this week, but I think you should clarify your point and elaborate further. There will certainly be a shake out, that’s for sure. But ultimately, in the long run…


    Lucid, at least for now they can’t do much of anything. They don’t know how bad it’s going to get, and therefore not how much this will affect Big Oil and Wall Street, which will always be first in line before the shale patch when it comes to bail-outs. Energy credit, especially junk bonds, has been withdrawn at a very rapid clip, and the Fed is very much behind the curve at this point, deer and headlights and all.


    Could this mean that kindly uncle Warren (Buffet)’s purchase of Burlington Northern Santa Fe might not work out as well as intended? Oh please let it be true.


    Manipulated interest rates > manipulated dollar value > manipulated markets in anything traded in dollars.

    Oil same-same housing, finance and any other State Controlled “Market.”

    It all goes in whatever direction they lead it, by a nose ring. None of this ends until the Fed does. When that happens things will get even more gnarly,,,at least for a while.

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