The domino is starting to fall.

[rkbabang]

Low oil prices are good for the economy as a whole, but very bad for certain sectors.  It doesn't look to me as if oil prices are going anywhere but down for a while.  Oil production is still accelerating and tankers are already being used to store oil off the market as storage space is running out.

 

Oil Supply Accelerating - Saudi Arabia Delivering On Its Promise?

 

Weekly Petroleum Status Report - DOE/EIA-0208(2015-04) Distribution Category UC-98 - Data for Week Ended: January 23, 2015

 

[tengen]

Interesting tidbit from the Visa earnings call:

 

On that topic, I want to talk a little bit more about gas for a second. First, to put the drop into context, U.S fuel prices are down approximately 30% since June. This drop amounts to approximately $60 per month for the average consumer. According to our surveys, approximately 50% of the savings consumers are seeing is being saved, 25% is being used to pay down debt and approximately 25% is being spent in other discretionary categories. These categories include grocery, clothing, and restaurants. This is consistent with what we’ve seen in our own spend data.

 

Full transcript

[mcliu]

Interesting tidbit from the Visa earnings call:

 

On that topic, I want to talk a little bit more about gas for a second. First, to put the drop into context, U.S fuel prices are down approximately 30% since June. This drop amounts to approximately $60 per month for the average consumer. According to our surveys, approximately 50% of the savings consumers are seeing is being saved, 25% is being used to pay down debt and approximately 25% is being spent in other discretionary categories. These categories include grocery, clothing, and restaurants. This is consistent with what we’ve seen in our own spend data.

 

Full transcript

 

Very interesting. Thanks!

 

The net effect may not be as positive as it seems since only a quarter of the savings is actually being spent. That spending is also offset by cuts in capex and spending in O&G..

[Cardboard]

Highly deflationary. The kids who killed oil at the large banks will soon regret it badly. The IYF is heading down fast.

 

Cardboard

[Uccmal]

Interesting tidbit from the Visa earnings call:

 

On that topic, I want to talk a little bit more about gas for a second. First, to put the drop into context, U.S fuel prices are down approximately 30% since June. This drop amounts to approximately $60 per month for the average consumer. According to our surveys, approximately 50% of the savings consumers are seeing is being saved, 25% is being used to pay down debt and approximately 25% is being spent in other discretionary categories. These categories include grocery, clothing, and restaurants. This is consistent with what we’ve seen in our own spend data.

 

Full transcript

 

Very interesting. Thanks!

 

The net effect may not be as positive as it seems since only a quarter of the savings is actually being spent. That spending is also offset by cuts in capex and spending in O&G..

 

One brief data point does not make a trend.  My bet is that some debt gets paid down, and spending picks up. 

 

Can anyone provide me evidence that low fuel prices cause recession?  I contend the exact opposite: the 1990s boom was aided by low fuel prices.  The 2007/08 recession started, in part, due to high fuel costs.  Also the mid 70s to early 80s doldrums, the late 80s/ early 90,s recession are all connected to fuel prices.  Even in Canada. 

[james22]

...observations based on an examination of the past 30 years of stock performance and oil prices: "Since 1973, the economy and stock market have danced to oil's tune. Sharp rises in oil prices have led to recession/stagflation and plummeting stocks, while declining prices or prices that are just mildly uptrended have led to good times."

 

http://www.amazon.com/Oil-Factor-Protect-Yourself-Profit/dp/0446694061/ref=pd_bbs_sr_1?ie=UTF8&s=books&qid=1228652995&sr=8-1

[yadayada]

That is like saying that deflation causes a crisis. It is a sympton. The oil price crashed because of a drop in demand after the financial crisis. This is because there is a fragile balance between supply and demand. If demand would drop 5% in a year, it woulc cause a massive crash in oil prices. And if supply only exceeds demand by a small amount, prices crash too.

 

You did not see a fall in consumption in 2014, only a smaller rise then expected. And a lot more supply then the market could handle because of a lack of discipline with NA oil drillers.

 

If you assume savings of 60$ per month per consumer, let's take 150m consumers in the US. That is 108 billion$ . That is like .6% of GDP. And this is not netting out the jobs lost in the oil sector.

[bookie71]

I agree, low fuel prices helps the economy, BUT not in the oil states. 

[Uccmal]

That is like saying that deflation causes a crisis. It is a sympton. The oil price crashed because of a drop in demand after the financial crisis. This is because there is a fragile balance between supply and demand. If demand would drop 5% in a year, it woulc cause a massive crash in oil prices. And if supply only exceeds demand by a small amount, prices crash too.

 

You did not see a fall in consumption in 2014, only a smaller rise then expected. And a lot more supply then the market could handle because of a lack of discipline with NA oil drillers.

 

If you assume savings of 60$ per month per consumer, let's take 150m consumers in the US. That is 108 billion$ . That is like .6% of GDP. And this is not netting out the jobs lost in the oil sector.

 

Lets try this a little differently.  The US uses 25 Million barrels per day of oil.  Thats a daily savings from top to bottom of $60 per barrel * 25 m = 1.5 B per day or 550 B per year.  2.5% of GDP - not insignificant.  The world uses 90 m B/d * $60 = 5.4 B/day = 2 Trillion per year. 

 

Not to mention the knock on effects of lower prices for other fuels. 

 

The cause of low or high oil prices is irrelevant.  It is the effect low or high energy prices have on the economy.  High relative energy costs are an economic drag, and a stock market drag.  That is the situation we have been in since 2004/2005 excepting the brief period after the financial meltdown. 

[ERICOPOLY]

The CBO forecasts that deficits will rise from here.  AKA:  stimulus.

 

In other words, people currently working will retire and be replaced by other workers.  The government will borrow at low rates to pay the retired people their promised benefits -- 100% of which will be spent.

 

It's kind of like the expected net increase in retirees is like a net increase of people getting a paycheck (only retirees get their checks for staying home).

 

[bookie71]

According to the 1/23 Kiplinger Letter, "Cheaper oil is effectively a tax cut, worth about $100 billion to consumers this year.  Generally, each penny decline in retail gasoline prices adds $1.4 billion in purchasing power to the economy if it is sustained over the course of a year."

[Guest Schwab711]

According to the 1/23 Kiplinger Letter, "Cheaper oil is effectively a tax cut, worth about $100 billion to consumers this year.  Generally, each penny decline in retail gasoline prices adds $1.4 billion in purchasing power to the economy if it is sustained over the course of a year."

 

Since

That is like saying that deflation causes a crisis. It is a sympton. The oil price crashed because of a drop in demand after the financial crisis. This is because there is a fragile balance between supply and demand. If demand would drop 5% in a year, it woulc cause a massive crash in oil prices. And if supply only exceeds demand by a small amount, prices crash too.

 

You did not see a fall in consumption in 2014, only a smaller rise then expected. And a lot more supply then the market could handle because of a lack of discipline with NA oil drillers.

 

If you assume savings of 60$ per month per consumer, let's take 150m consumers in the US. That is 108 billion$ . That is like .6% of GDP. And this is not netting out the jobs lost in the oil sector.

 

Lets try this a little differently.  The US uses 25 Million barrels per day of oil.  Thats a daily savings from top to bottom of $60 per barrel * 25 m = 1.5 B per day or 550 B per year.  2.5% of GDP - not insignificant.  The world uses 90 m B/d * $60 = 5.4 B/day = 2 Trillion per year. 

 

Not to mention the knock on effects of lower prices for other fuels. 

 

The cause of low or high oil prices is irrelevant.  It is the effect low or high energy prices have on the economy.  High relative energy costs are an economic drag, and a stock market drag.  That is the situation we have been in since 2004/2005 excepting the brief period after the financial meltdown. 

 

The problem I have with these claims of huge savings is I don't think it can be so easily extrapolated as a net benefit to society. In the short-run it's certainly a net-benefit because companies will continue to operate and there are few defaults. If oil prices stay low for many months/years then there are a lot of projects that will have little-to-negative profit margins. Since most O&G companies are leveraged with limited diversity of projects, there will be a lot of defaults for banks (who spread losses to everyone) and lost jobs. Much like astronomy, I think diffused costs are easily underestimated with such large balances.

 

If oil prices drop to where the industry is marginally profitable then we are transferring wealth from equity investors (since debt continues to be paid) to consumers. This would be a positive effect on the economy because consumers have a higher volatility with money (at least short-run; who knows what the effect on economic-potential opportunity costs would be).

 

If oil prices drop so the industry has negative profit margins then some % of loans will default, jobs will be lost, borrowing costs up, lending down, governments cut costs, ect and there will be a large negative effect on the economy. If oil prices stay down for 1 year and we get $550b cost savings which equals $550b in lower revenue on the operating leverage part of the revenue curve. If profit margins are 12% for the industry with high fixed costs, let's assume the industry has 20%-25% for operating margins (probably higher). Than corporate profits are -$137.5B and if we assume 10x P/E multiples on those profits, then we have a $1.375T decrease in wealth. It's even worse if you considered the total decrease in qualified credit demand as that $1.375T in collateral could mean $3-5T in loans. Money generally flows to better capital allocators so although a 'robin hood effect' is great for the majority of consumers, I really think any positive-effect from increased volatility is small, short-lived, and a net-negative when the decreased economic-potential is considered. This drop in oil prices may end up severely hurting the US economy because of the volatility in the distribution of wealth.

[Uccmal]

According to the 1/23 Kiplinger Letter, "Cheaper oil is effectively a tax cut, worth about $100 billion to consumers this year.  Generally, each penny decline in retail gasoline prices adds $1.4 billion in purchasing power to the economy if it is sustained over the course of a year."

 

Since

That is like saying that deflation causes a crisis. It is a sympton. The oil price crashed because of a drop in demand after the financial crisis. This is because there is a fragile balance between supply and demand. If demand would drop 5% in a year, it woulc cause a massive crash in oil prices. And if supply only exceeds demand by a small amount, prices crash too.

 

You did not see a fall in consumption in 2014, only a smaller rise then expected. And a lot more supply then the market could handle because of a lack of discipline with NA oil drillers.

 

If you assume savings of 60$ per month per consumer, let's take 150m consumers in the US. That is 108 billion$ . That is like .6% of GDP. And this is not netting out the jobs lost in the oil sector.

 

Lets try this a little differently.  The US uses 25 Million barrels per day of oil.  Thats a daily savings from top to bottom of $60 per barrel * 25 m = 1.5 B per day or 550 B per year.  2.5% of GDP - not insignificant.  The world uses 90 m B/d * $60 = 5.4 B/day = 2 Trillion per year. 

 

Not to mention the knock on effects of lower prices for other fuels. 

 

The cause of low or high oil prices is irrelevant.  It is the effect low or high energy prices have on the economy.  High relative energy costs are an economic drag, and a stock market drag.  That is the situation we have been in since 2004/2005 excepting the brief period after the financial meltdown. 

 

The problem I have with these claims of huge savings is I don't think it can be so easily extrapolated as a net benefit to society. In the short-run it's certainly a net-benefit because companies will continue to operate and there are few defaults. If oil prices stay low for many months/years then there are a lot of projects that will have little-to-negative profit margins. Since most O&G companies are leveraged with limited diversity of projects, there will be a lot of defaults for banks (who spread losses to everyone) and lost jobs. Much like astronomy, I think diffused costs are easily underestimated with such large balances.

 

If oil prices drop to where the industry is marginally profitable then we are transferring wealth from equity investors (since debt continues to be paid) to consumers. This would be a positive effect on the economy because consumers have a higher volatility with money (at least short-run; who knows what the effect on economic-potential opportunity costs would be).

 

If oil prices drop so the industry has negative profit margins then some % of loans will default, jobs will be lost, borrowing costs up, lending down, governments cut costs, ect and there will be a large negative effect on the economy. If oil prices stay down for 1 year and we get $550b cost savings which equals $550b in lower revenue on the operating leverage part of the revenue curve. If profit margins are 12% for the industry with high fixed costs, let's assume the industry has 20%-25% for operating margins (probably higher). Than corporate profits are -$137.5B and if we assume 10x P/E multiples on those profits, then we have a $1.375T decrease in wealth. It's even worse if you considered the total decrease in qualified credit demand as that $1.375T in collateral could mean $3-5T in loans. Money generally flows to better capital allocators so although a 'robin hood effect' is great for the majority of consumers, I really think any positive-effect from increased volatility is small, short-lived, and a net-negative when the decreased economic-potential is considered. This drop in oil prices may end up severely hurting the US economy because of the volatility in the distribution of wealth.

 

Except that is not the case.  Historical precedence suggests that low relative energy costs are good for markets and the economy.  Periods when the prices have gone up put a drag on the economy.  Pull any oil chart and overlay recessions and booms, with fuel costs.  Its pretty visible.  I will concede that eventually low energy costs beget higher energy costs just like any other commodity.  Lack of investment at lower prices leads to supply constraints. 

 

The argument that capital flows where it is best allocated does not hold true with energy.  Excepting Canada, the US, and a few other places, capital flows to a select few who are terrible capital allocators and use the money to maintain their corrupt regimes. 

 

This wont go forever.  We know that solar power is dropping in price every year and will soon be far cheaper than oil and nat. gas at any price.  That is a paradigm shift where energy is no longer a bottleneck to society that it has been.  I am guessing we are very near the end of the line for fossil fuels as a bellweather. To their credit the capital allocators of the mideast certainly know that solar is going to be a big part of the future.  Dubai certainly knows this, as does Saudi.  I think this is part of the thought process behind the price war.  Sell the oil while it is still cheaper than alternates, and still makes money for us (the Saudis).  I will be very clear that I dont see oil/nat. gas ceasing to exist overnight.  I just think it is rapidly becoming less important. 

 

To that end, as per Al Naimi's comments, I dont see the price of oil ever going back up to where it has been.  I am certainly not going to invest in it again, in a big way. 

[rjstc]

I think it was around 2000? When oil got down to around $14-16 a barrel that many people were saying the same thing. Oil prices would never get back up too high. I'd make a bet that when this slump is over the price will be higher than where it got up to after that. +$100.00 barrel. Buying somewhere around this point of pessimism will work out fine. Like buying banks etc just a few years back.

[Uccmal]

I think it was around 2000? When oil got down to around $14-16 a barrel that many people were saying the same thing. Oil prices would never get back up too high. I'd make a bet that when this slump is over the price will be higher than where it got up to after that. +$100.00 barrel. Buying somewhere around this point of pessimism will work out fine. Like buying banks etc just a few years back.

 

You might be right.  On the other hand, banking is not going to cease to exist, or even shrink as a business.  Even Apple, Google, et al use existing partners.  In oil, you also need to know who the survivors will be.  And, We are no where near maximum pessimism yet.  No one was buying banks on this board in any quantity until 2010/11. 

[HJ]

I think it was around 2000? When oil got down to around $14-16 a barrel that many people were saying the same thing. Oil prices would never get back up too high. I'd make a bet that when this slump is over the price will be higher than where it got up to after that. +$100.00 barrel. Buying somewhere around this point of pessimism will work out fine. Like buying banks etc just a few years back.

 

Could be, but then again in 1979, oil peaked at 39.5 per barrel, only to decline to $9 per barrel 20 years later in the aftermath of the Asian crisis.

 

That crisis might have been artificial, but if you use, say CPI in Dec. 1979 at 72.6, and 236.74 at the end of 2014 as a guide, $39.5 would be the equivalent to $128.8 per barrel today, not far from where we peaked in 2008. 

 

When this slump is over, oil price may very well be higher than $100, but the slump may go on for well more than a couple of quarters.

[stahleyp]

I think it was around 2000? When oil got down to around $14-16 a barrel that many people were saying the same thing. Oil prices would never get back up too high. I'd make a bet that when this slump is over the price will be higher than where it got up to after that. +$100.00 barrel. Buying somewhere around this point of pessimism will work out fine. Like buying banks etc just a few years back.

 

In oil, you also need to know who the survivors will be.  And, We are no where near maximum pessimism yet.  No one was buying banks on this board in any quantity until 2010/11.

 

+1

 

A buddy of mine was somewhat recently talking about buying oil...so was my girlfriend's dad. Neither have a ton of investment experience (though her dad is pretty smart).

 

I don't know a ton about oil but people thought that banks were at the point of maximum pessimism in the summer of 2008, too. At the time, BAC was down more than 50% from its high. Pretty legendary shops like Dodge and Cox and Oakmark, etc were buying them up. They then dropped another 70%+

[alertmeipp]

Great depression, 2009 financial crisis, 80 oil glut, 2000 tech bubble. The world is doomed. LOL

 

 

 

[rjstc]

Absolutely right. Won't know until we can look back to see when the bottom was. Probably need a lot more bankruptcys/mergers before its close.

  However I think it's events like these where some good buys can be made.

[alertmeipp]

Yes, bankruptcy is likely for some.

 

FFH is holding lots of XCO and SD. will be telling if they keep them around or cut loss on them.

[rjstc]

I don't know much about SD. But why would they want to sell XOM? If it got down to maybe $70 or less I'd want to buy more. They will come out of this still strong wouldn't you say?

[alertmeipp]

I don't know much about SD. But why would they want to sell XOM? If it got down to maybe $70 or less I'd want to buy more. They will come out of this still strong wouldn't you say?

 

XCO not XOM.

 

 

[rjstc]

Sorry. I should have looked closer.

[Guest wellmont]

the big banks are different than the big oil. some of the big banks and brokers in US and EUR were actually totally insolvent and needed a handout from taxpayers just to be able to hobble along until they could stand on their own.  some of the bed rock of the financial system was toast. aig bac fannie freddie morgan stanley. huge banks had to be closed up and merged with stronger players. I don't see anywhere near the same threat to the system with a commodity bust.

 

I've asked this to a lot of people and nobody has an answer. name one oil and gas company of consequence who is in danger of going under even if this oil price stays down. nobody is naming names. they use the proverbial "some" or "they". I continue to believe that there will be small and maybe a few medium sized o & g go under. they will quickly be restructured with absolutely no harm to the system or even the industry. there is an immense amount of capital waiting to come in to help restructure North American Oil and Gas.

 

every commodity cycle has casualties. there is nothing special about this one. we just haven't had any distressed companies in NA for years, so people are actually freaking out about the sighting of a few discounted bonds of marginal producers.

[merkhet]

I think a lot of people are fighting the last war and just assuming that a large asset price dislocation will lead to an '08/'09 redux.