Tag Archives: crude oil prices

GUNDLACH: If oil goes to $40 a barrel something is ‘very, very wrong with the world’

Jeffrey Gundlach

Jeff Gundlach – bond trader

West Texas Intermediate crude oil is at a 6-year low of $43 a barrel. 

And back in December 2014, “Bond King” Jeff Gundlach had a serious warning for the world if oil prices got to $40 a barrel.

“I hope it does not go to $40,” Gundlach said in a presentation, “because then something is very, very wrong with the world, not just the economy. The geopolitical consequences could be — to put it bluntly — terrifying.”

Writing in The Telegraph last week, Ambrose Evans-Pritchard noted that with Brent crude oil prices — the international benchmark — below $50 a barrel, only Norway’s government is bringing in enough revenue to balance their budget this year. 

And so in addition to the potential global instability created by low oil prices, Gundlach added that, “If oil falls to around $40 a barrel then I think the yield on ten year Treasury note is going to 1%.” The 10-year note, for its part, closed near 2.14% on Tuesday. 

On December 9, 2014, WTI was trading near $65 a barrel and Gundlach said oil looked like it was going lower, quipping that oil would find a bottom when it starts going up. 

WTI eventually bottomed at $43 in mid-March and spend most all of the spring and early summer trading near $60. 

On Tuesday, WTI hit a fresh 6-year low, plunging more than 4% and trading below $43 a barrel. 

WTI

In the last month, crude and the entire commodity complex have rolled over again as the market battles oversupply and a Chinese economy that is slowing.

And all this as the Federal Reserve makes noise about raising interest rates, having some in the market asking if these external factors — what the Fed would call “exogenous” factors — will stop the Fed from changing its interest rate policy for the first time in over almost 7 years. 

In an afternoon email, Russ Certo, a rate strategist at Brean Capital, highlighted Gundlach’s comments and said that the linkages between the run-up, and now collapse, in commodity prices since the financial crisis have made, quite simply, for an extremely complex market environment right now. 

“There is a global de-leveraging occurring in front of our eyes,” Certo wrote. “And, I suppose, the smart folks will determine the exact causes and translate what that means for FUTURE investment thesis. Today it may not matter other than accurately anticipating a myriad of global price movements in relation to each other.”

CRB commodity price index

Energy Companies Face “Come-To-Jesus” Point As Bankruptcies Loom

Last week, amid a renewed bout of crude carnage, Morgan Stanley made a rather disconcerting call on oil. 

“On current trajectory, this downturn could become worse than 1986: An additional +1.5 mb/d [of OPEC supply] is roughly one year of oil demand growth. If sustained, this could delay the rebalancing of oil markets by a year as well. The forward curve has started to price this in: as the chart shows, the forward curve currently points towards a recovery in prices that is far worse than in 1986. This means the industrial downturn could also be worse. In that case, there would be little in analysable history that could be a guide to this cycle,” the bank wrote, presaging even tougher times ahead for the O&G space.

If Morgan Stanley is correct, we’re likely to see tremendous pressure on the sector’s highly indebted names, many of whom have been kept afloat thus far by easy access to capital markets courtesy of ZIRP.

With a rate hike cycle on the horizon, with hedges set to roll off, and with investors less willing to throw good money after bad on secondaries and new HY issuance, banks are likely to rein in credit lines in October when the next assessment is due. At that point, it will be game over in the absence of a sharp recovery in crude prices. 

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Against this challenging backdrop, we bring you the following commentary from Emanuel Grillo, partner at Baker Botts’s bankruptcy and restructuring practice who spoke to Bloomberg Brief last week.  

*  *  *

Via Bloomberg Brief

How does the second half of this year look when it comes to energy bankruptcies?

A: People are coming to realize that the market is not likely to improve. At the end of September, companies will know about their bank loan redeterminations and you’ll see a bunch of restructurings. And, as the last of the hedges start to burn off and you can’t buy them for $80 a barrel any longer, then you’re in a tough place.

The bottom line is that if oil prices don’t increase, it could very well be that the next six months to nine months will be worse than the last six months. Some had an ability to borrow, and you saw other people go out and restructure. But the options are going to become fewer and smaller the longer you wait.

Are there good deals on the horizon for distressed investors?

A: The markets are awash in capital, but you still have a disconnect between buyers and sellers. Sellers, the guys who operate these companies, are hoping they can hang on. Buyers want to pay bargain-basement prices. There’s not enough pressure on the sellers yet. But I think that’s coming. 

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Banks will be redetermining their borrowing bases again in October. Will they be as lenient this time around as they were in April?

A: I don’t know if you’ll get the same slack in October as in April, absent a turnaround in the market price for oil. It’s going to be that ‘come-to-Jesus’ point in time where it’s about how much longer can they let it play. If the banks get too aggressive, they’re going to hurt the value for themselves and their ability to exit. So they’re playing a balancing act.

They know what pressure they’re facing from a regulatory perspective. At the same time, if they push too far in that direction, toward complying with the regulatory side and getting out, then they’re going to hurt themselves in terms of what their own recovery is going to be. All of the banks have these loans under very close scrutiny right now. They’d all get out tomorrow if they could. That’s the sense they’re giving off to the marketplace, because the numbers are just not supporting what they need to have from a regulatory perspective.

Source: Zero Hedge

This Chart Shows the True Collapse of Fracking in the US

by Wolf Richter
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Rex Tillerson, Exxon Mobile CEO

“People need to kinda settle in for a while.” That’s what Exxon Mobil CEO Rex Tillerson said about the low price of oil at the company’s investor conference. “I see a lot of supply out there.”

So Exxon is going to do its darnedest to add to this supply: 16 new production projects will start pumping oil and gas through 2017. Production will rise from 4 million barrels per day to 4.3 million. But it will spend less money to get there, largely because suppliers have had to cut their prices.

That’s the global oil story. In the US, a similar scenario is playing out. Drillers are laying some people off, not massive numbers yet. Like Exxon, they’re shoving big price cuts down the throats of their suppliers. They’re cutting back on drilling by idling the least efficient rigs in the least productive plays – and they’re not kidding about that.

In the latest week, they idled a 64 rigs drilling for oil, according to Baker Hughes, which publishes the data every Friday. Only 922 rigs were still active, down 42.7% from October, when they’d peaked. Within 21 weeks, they’ve taken out 687 rigs, the most terrific, vertigo-inducing oil-rig nose dive in the data series, and possibly in history:

US-rig-count_1988_2015-03-06=oilAs Exxon and other drillers are overeager to explain: just because we’re cutting capex, and just because the rig count plunges, doesn’t mean our production is going down. And it may not for a long time. Drillers, loaded up with debt, must have the cash flow from production to survive.

But with demand languishing, US crude oil inventories are building up further. Excluding the Strategic Petroleum Reserve, crude oil stocks rose by another 10.3 million barrels to 444.4 million barrels as of March 4, the highest level in the data series going back to 1982, according to the Energy Information Administration. Crude oil stocks were 22% (80.6 million barrels) higher than at the same time last year.

“When you have that much storage out there, it takes a long time to work that off,” said BP CEO Bob Dudley, possibly with one eye on this chart:

US-crude-oil-stocks-2015-03-04So now there is a lot of discussion when exactly storage facilities will be full, or nearly full, or full in some regions. In theory, once overproduction hits used-up storage capacity, the price of oil will plummet to whatever level short sellers envision in their wildest dreams. Because: what are you going to do with all this oil coming out of the ground with no place to go?

A couple of days ago, the EIA estimated that crude oil stock levels nationwide on February 20 (when they were a lot lower than today) used up 60% of the “working storage capacity,” up from 48% last year at that time. It varied by region:

Capacity is about 67% full in Cushing, Oklahoma (the delivery point for West Texas Intermediate futures contracts), compared with 50% at this point last year. Working capacity in Cushing alone is about 71 million barrels, or … about 14% of the national total.

As of September 2014, storage capacity in the US was 521 million barrels. So if weekly increases amount to an average of 6 million barrels, it would take about 13 weeks to fill the 77 million barrels of remaining capacity. Then all kinds of operational issues would arise. Along with a dizzying plunge in price.

In early 2012, when natural gas hit a decade low of $1.92 per million Btu, they predicted the same: storage would be full, and excess production would have to be flared, that is burned, because there would be no takers, and what else are you going to do with it? So its price would drop to zero.

They actually proffered that, and the media picked it up, and regular folks began shorting natural gas like crazy and got burned themselves, because it didn’t take long for the price to jump 50% and then 100%.

Oil is a different animal. The driving season will start soon. American SUVs and pickups are designed to burn fuel in prodigious quantities. People will be eager to drive them a little more, now that gas is cheaper, and they’ll get busy shortly and fix that inventory problem, at least for this year. But if production continues to rise at this rate, all bets are off for next year.

Natural gas, though it refused to go to zero, nevertheless got re-crushed, and the price remains below the cost of production at most wells. Drilling activity has dwindled. Drillers idled 12 gas rigs in the latest week. Now only 268 rigs are drilling for gas, the lowest since April 1993, and down 83.4% from its peak in 2008! This is what the natural gas fracking boom-and-bust cycle looks like:

US-rig-count_1988_2015-03-06=gasYet production has continued to rise. Over the last 12 months, it soared about 9%, which is why the price got re-crushed.

Producing gas at a loss year after year has consequences. For the longest time, drillers were able to paper over their losses on natural gas wells with a variety of means and go back to the big trough and feed on more money that investors were throwing at them, because money is what fracking drills into the ground.

But that trough is no longer being refilled for some companies. And they’re running out. “Restructuring” and “bankruptcy” are suddenly the operative terms.


“Default Monday”: Oil & Gas Face Their Creditors

by Wolf Richter

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Debt funded the fracking boom. Now oil and gas prices have collapsed, and so has the ability to service that debt. The oil bust of the 1980s took down 700 banks, including 9 of the 10 largest in Texas. But this time, it’s different. This time, bondholders are on the hook.

And these bonds – they’re called “junk bonds” for a reason – are already cracking. Busts start with small companies and proceed to larger ones. “Bankruptcy” and “restructuring” are the terms that wipe out stockholders and leave bondholders and other creditors to tussle over the scraps.

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Early January, WBH Energy, a fracking outfit in Texas, kicked off the series by filing for bankruptcy protection. It listed assets and liabilities of $10 million to $50 million. Small fry.

A week later, GASFRAC filed for bankruptcy in Alberta, where it’s based, and in Texas – under Chapter 15 for cross-border bankruptcies. Not long ago, it was a highly touted IPO, whose “waterless fracking” technology would change a parched world. Instead of water, the system pumps liquid propane gel (similar to Napalm) into the ground; much of it can be recaptured, in theory.

Ironically, it went bankrupt for other reasons: operating losses, “reduced industry activity,” the inability to find a buyer that would have paid enough to bail out its creditors, and “limited access to capital markets.” The endless source of money without which fracking doesn’t work had dried up.

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On February 17, Quicksilver Resources announced that it would not make a $13.6 million interest payment on its senior notes due in 2019. It invoked the possibility of filing for Chapter 11 bankruptcy to “restructure its capital structure.” Stockholders don’t have much to lose; the stock is already worthless. The question is what the creditors will get.

It has hired Houlihan Lokey Capital, Deloitte Transactions and Business Analytics, “and other advisors.” During its 30-day grace period before this turns into an outright default, it will haggle with its creditors over the “company’s options.”

On February 27, Hercules Offshore had its share-price target slashed to zero, from $4 a share, at Deutsche Bank, which finally downgraded the stock to “sell.” If you wait till Deutsche Bank tells you to sell, you’re ruined!

When I wrote about Hercules on October 15, HERO was trading at $1.47 a share, down 81% since July. Those who followed the hype to “buy the most hated stocks” that day lost another 44% by the time I wrote about it on January 16, when HERO was at $0.82 a share. Wednesday, shares closed at $0.60.

Deutsche Bank was right, if late. HERO is headed for zero (what a trip to have a stock symbol that rhymes with zero). It’s going to restructure its junk debt. Stockholders will end up holding the bag.

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On Monday, due to “chronically low natural gas prices exacerbated by suddenly weaker crude oil prices,” Moody’s downgraded gas-driller Samson Resources, to Caa3, invoking “a high risk of default.”

It was the second time in three months that Moody’s downgraded the company. The tempo is picking up. Moody’s:

The company’s stressed liquidity position, delays in reaching agreements on potential asset sales and its retention of restructuring advisors increases the possibility that the company may pursue a debt restructuring that Moody’s would view as a default.

Moody’s was late to the party. On February 26, it was leaked that Samson had hired restructuring advisers Kirkland & Ellis and Blackstone’s restructuring group to figure out how to deal with its $3.75 billion in debt. A group of private equity firms, led by KKR, had acquired Samson in 2011 for $7.2 billion. Since then, Samson has lost $3 billion. KKR has written down its equity investment to 5 cents on the dollar.

This is no longer small fry.

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Also on Monday, oil-and-gas exploration and production company BPZ Resources announced that it would not pay $62 million in principal and interest on convertible notes that were due on March 1. It will use its grace period of 10 days on the principal and of 30 days on the interest to figure out how to approach the rest of its existence. It invoked Chapter 11 bankruptcy as one of the options.

If it fails to make the payments within the grace period, it would also automatically be in default of its 2017 convertible bonds, which would push the default to $229 million.

BPZ tried to refinance the 2015 convertible notes in October and get some extra cash. Fracking devours prodigious amounts of cash. But there’d been no takers for the $150 million offering. Even bond fund managers, driven to sheer madness by the Fed’s policies, had lost their appetite. And its stock is worthless.

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Also on Monday – it was “default Monday” or something – American Eagle Energy announced that it would not make a $9.8 million interest payment on $175 million in bonds due that day. It will use its 30-day grace period to hash out its future with its creditors. And it hired two additional advisory firms.

One thing we know already: after years in the desert, restructuring advisers are licking their chops.

The company has $13.6 million in negative working capital, only $25.9 million in cash, and its $60 million revolving credit line has been maxed out.

But here is the thing: the company sold these bonds last August! And this was supposed to be its first interest payment.

That’s what a real credit bubble looks like. In the Fed’s environment of near-zero yield on reasonable investments, bond fund managers are roving the land chasing whatever yield they can discern. And they’re holding their nose while they pick up this stuff to jam it into bond funds that other folks have in their retirement portfolio.

Not even a single interest payment!

Borrowed money fueled the fracking boom. The old money has been drilled into the ground. The new money is starting to dry up. Fracked wells, due to their horrendous decline rates, produce most of their oil and gas over the first two years. And if prices are low during that time, producers will never recuperate their investment in those wells, even if prices shoot up afterwards. And they’ll never be able to pay off the debt from the cash flow of those wells. A chilling scenario that creditors were blind to before, but are now increasingly forced to contemplate.

Oil Bust will hurt housing in Texas, Oklahoma and Louisiana

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Source: MRT.com

The oil boom that lifted home prices in Texas, Oklahoma and Louisiana is coming to an end.

Crude oil prices have crashed since June, falling by more than 54 percent to less than $50 a barrel. That swift drop has started to cripple job growth in oil country, creating a slow wave that in the years ahead may devastate what has been a thriving real estate market, according to new analysis by the real estate firm Trulia.

“Oil prices won’t tank home prices immediately,” Trulia chief economist Jed Kolko explained. “Rather, falling oil prices in the second half of 2014 might not have their biggest impact on home prices until late 2015 or in 2016.”

History shows it takes time for home prices in oil country to change course.

Kolko looked at the 100 largest housing markets where the oil industry accounted for at least 2 percent of all jobs. Asking prices in those cities rose 10.5 percent over the past year, compared with an average of 7.7 percent around the country.

Prices climbed 13.4 percent in Houston, where 5.6 percent of all jobs are in oil-related industries. The city is headquarters to energy heavyweights such as Phillips 66, Halliburton and Marathon Oil. Asking prices surged 10.2 percent in Fort Worth and 10.1 percent in Tulsa, Oklahoma. In some smaller markets, oil is overwhelmingly dominant — responsible for more than 30 percent of the jobs in Midland for instance.

The closest parallel to the Texas housing market might have occurred in the mid-1980s, when CBS was airing the prime-time soap opera “Dallas” about a family of oil tycoons.

In the first half of 1986, oil prices plunged more than 50 percent, to about $12 a barrel, according to a report by the Brookings Institution, a Washington-based think tank.

Job losses mounted in late 1986 around Houston. The loss of salaries eventually caused home prices to fall in the second half of 1987.

That led Kolko to conclude that since 1980, it takes roughly two years for changes in oil prices to hit home prices.

Of course, there is positive news for people living outside oil country, Kolko notes.

Falling oil prices lead to cheaper gasoline costs that reduce family expenses, freeing up more cash to spend.

“In the Northeast and Midwest especially, home prices tend to rise after oil prices fall,” he writes in the analysis.

OPEC Refuses to Cut Production, Oil Plunges off the Chart

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   Oil rig in North Dakota. Increased US drilling is a factor in the current decline in prices.  This article by Wolf Richter

The global oil glut, as some call it, is caused by the toxic mix of soaring production in the US and lackluster demand from struggling economies around the world. Since June, crude oil prices have plunged 30%. It drove oil producers in the US into bouts of hand wringing behind the scenes, though they desperately tried to maintain brittle smiles and optimistic verbiage in public.

But everyone in the industry – particularly junk bondholders that have funded the shale revolution in the US – were hoping that OPEC, and not the US, would come to its senses and cut production.

So the oil ministers from OPEC members just got through with what must have been a tempestuous five-hour meeting in Vienna, and it was not pretty for high-cost US producers: the oil production target would remain unchanged at 30 million barrels per day.

“It was a great decision,” Saudi Oil Minister Ali al-Naimi said with a big smile after the meeting.

Saudi Arabia and other Gulf states were thus overriding the concerns from struggling countries such as Venezuela which, at these prices – and they’re plunging as I’m writing this – will head straight into default, or get bailed out by China, at a price, whatever the case may be.

Venezuelan Foreign Minister Rafael Ramirez emerged from the meeting, visibly steaming, and refused to comment.

The US benchmark crude oil grade, West Texas Intermediate, plunged instantly. Even before the decision, it was down 30% from its recent high in June. As I’m writing this, it crashed through the $70-mark without even hesitating. It currently trades for $68.51. Chopped down by a full third from the peak in June.

This is what that Thanksgiving plunge looks like:

US-WTI_2014-11-27

Nigerian Oil Minister said OPEC and Non-OPEC producers should share responsibility to stabilize the markets. I don’t know what he was thinking; maybe some intervention by central banks around the world, such as the coordinated announcement of “QE crude infinity” perhaps?

Ecuadorian Oil Minister called the decision a rollover. However, the Iranian Oil Minister, whose country must have a higher price, kept a positive face, saying, “I’m not angry.”

The next OPEC meeting will be held in June, 2015. So this is going to last a while. And there is no deus ex machina on the horizon.

It seems OPEC, or rather Saudi Arabia and some of the Gulf States, decided for now to live with the circumstances, to let the markets sort it out. High-cost producers around the world will spill red ink. Governments might topple. Junk bondholders and shareholders of oil-and-gas IPOs that have blindly funded the miraculous shale revolution in the US, lured by ever increasing hype, will watch more of their money go up in thick smoke.

And the bloodletting in the US fracking revolution will go on until the money finally dries up.