The Oil Crash: it is happening now!

33 Comments on "The Oil Crash: it is happening now!"

Plantagenet on Tue, 4th Nov 2014 3:51 pm 



Oil demand isn’t going to collapse because the price is too low. Oil demand will INCREASE as the price drops.
KSA is cutting prices on its oil to seize market share. Basically we have a price war going on—-the gas station on the left corner is KSA and the gas station on the right corner is the USA and frakking. Once one drives the other out of business, look for the other to raise prices again. KSA seems best positioned to win the war—-their cost of production is so low. But don’t be surprised when Ghawar peaks and KSA production starts dropping—then KSA will rue they day they sold their oil so cheaply.

rockman on Tue, 4th Nov 2014 4:47 pm 



“So, with oil prices falling rapidly during the past few days, the general attitude seems to be mostly of rejoicing.” Rejoice lads! At $80/bbl the current oil price (adjusted for inflation) is higher then the average yearly oil price for 28 of the last 32 years.

Hallelujah…we are saved! LOL.

meld on Tue, 4th Nov 2014 4:51 pm 



i bet the frackers are shitting themselves right now pop pop pop

wildbourgman on Tue, 4th Nov 2014 4:52 pm 



I think it’s temporary just as other price swings have been. The only thing is this downturn has a bunch of arrogant oilfield newbies that have never experienced a slowdown and especially a round or two of layoffs. Surprise, Surprise!

Northwest Resident on Tue, 4th Nov 2014 5:03 pm 



“Oil demand will INCREASE as the price drops.”

That’s always been true in the past. This time, though, it might be different.

Companies are maxed out on cheap debt, having used that cheap debt to buy their stock back. It doesn’t look or sound like a lot of companies have any confidence in future economic growth and so are entrenching rather than building to expand.

Overall, consumers are maxed out on debt. Wages have been stagnant or shrinking for too long. There are far too many unemployed people who should be working, but there aren’t any jobs.

For demand to increase, we have to get the consumers consuming again, buying all that plastic junk from China, moving into bigger and more expensive houses, trading up to bigger and better personal vehicles, etc… None of that seems to be happening, not on a scale that would increase demand.

So, again, the question. Will demand increase as the price drops? Only if the oil consuming public increases consumption, and indications are that the oil consuming public is in no position or mental frame of mind to do that.

I guess we’ll find out soon enough.

penury on Tue, 4th Nov 2014 5:07 pm 



Just slight quibble with Rockman. Selling prices for a B of oil has increased and is higher than prices for 29 of the last 32 years adjusted for inflation. To me, I would need to know is the cost of production higher or lower adjusted for inflation than during those 28 years? In some cases I realize that there are winners and losers but overall are there going to be more winners or losers if this effort to destroy the Russian and Iranian oil industry continues for a long period of time?

Perk Earl on Tue, 4th Nov 2014 5:16 pm 



Maybe the price is dropping in a war for market share as Plant points out, but maybe the problem is demand is not increasing to the extent expected at these lower prices. After all why would it need to fall this far to generate more consumption? Why couldn’t Brent dropping 10 bucks be enough to ignite increased consumption? Instead we got a 25% drop in price and yet it is still falling?

Either there just hasn’t been enough time for the world economy to jack up into a higher gear to take advantage of the new lower price or the wealth divide has left the majority of consumers unable to take much advantage of lower prices.

In either case it will be fascinating to see;
– How low oil price goes
– How much added consumption occurs
– what sources of oil go offline
– How high price goes once price war is over
– Is that new higher price enough to bring back online all the sources that went offline when the price dropped?
– After all that are we in a new era of oil having descended from peak or are we headed for a higher peak?

J-Gav on Tue, 4th Nov 2014 5:43 pm 



Several valid points (as usual) in the comments here.

First Plant – I agree that if prices stay low for any length of time, some version of a rebound effect will kick in. However, there seems to be another slight paradox in your assessment – namely, KSA “winning the war” and “rueing the day” … Of course this is a strategic, temporary market re-set on their part and its hard to say how long it’s meant to last.

“Temporary” brings me to Wildbourg’s post. I try to take it with a dash of philosophy. All things being in constant flux, people incapable of dealing with change will always suffer more than the minority who realize that this is just the way things are. Oriental wisdom. The Greek Heraclitus brought it into Western thought (6th century BCE) but he probably swiped it from some eastern source.

And Rock makes a perfectly sound point here taking a historical, ‘over time’ view of reality. Maybe the ‘rebound’ won’t be quite as bouncy as it would have been a while back, when not quite everybody was so deep in the debt quagmire.

J-Gav on Tue, 4th Nov 2014 5:46 pm 



Northwest – I wrote before your post appeared but I see the conclusion you reach is similar to mine.

jmb on Tue, 4th Nov 2014 6:17 pm 



I see a possible shakeout in the oil industry. If you remember what happened in 1975 – or thereabouts – Nixon stopped all US oil production and bankrupted many oil producers. Think it couldn’t happen again? This could be the “re-set” I talked about. After a rash of bankruptcies and liquidations, new companies are formed; they won’t have to cover huge debts to make a profit – they step in and restart the pumps. Oil prices will be lower – for a while until the rise in prices eventually brings it back up. We may end up with another ’08 type crash – this time caused by low oil prices, rather than high.

jmb on Tue, 4th Nov 2014 6:21 pm 



I think right now, as oil prices are low, oil is being stashed away in idle tankers and every place oil could be stored, for just such an eventuality.

Davy on Tue, 4th Nov 2014 6:28 pm 



First quick side note. I guess the Ebola crisis is over. It is off the radar screen or past the normal modern human’s mental time frame i.e MSM prime time. Back to article and comments.

As a doomer I keep drifting to NR/Perks and it appears Gav’s take. That take is this could be different. In the finance world of which oil is intricately codependent we have several bearish conditions. Taper is off for now making people “risk off”. Japan is ruining the carry trade by destroying their economy and currency with it. China is extremely vulnerable to a Japanese implosion as are other major economies to a lesser extent. Chinese growth is clearly slowing leaving the resource producing third would vulnerable. The taper is always problematic for emerging markets currencies. Then there is the ever present dysfunctions and destabilizations that the excessive debt and excessive sovereign deficits create. Is this a healthy environment?….no.

Over the previous few years the global economies near the top were bubbly and frothy with the magic potion of central bank liquidity and low rates. Big money and mobile money was circulating and creating economic velocity. It may have bypassed Main Street but at least there was activity.

Now it appears the party is winding down. The tab is high at the bar. The crowd are tired of the dancing and the effects of the drinks are wearing off. Meanwhile entropic decay, depletion, tearing social fabric, disasters, conflicts all continue. IOW problems must be taken care of with effort and money. There are now predicaments to cap the evening. The predicaments are like the heater and lights failing at the party. How do you keep a party going when the heat or lights are on the blink?

My point is there is no health anywhere. There is nothing to crow about. Even the American shale gold rush is losing luster. Tell me folks something to really feel good about? When you get to this point something bad is going to happen.

redpill on Tue, 4th Nov 2014 7:19 pm 



Before the apocalypse happens, one has to try to make the stock market casino work for them.

With WTI dipping below $77, I started nibbling on some June 15′ call options on “OIL”, which hit a fresh 52-week low today. The stock is at $18.85. If it’s $19 or higher by option expiration, I make 80%.

Davy on Tue, 4th Nov 2014 7:29 pm 



You got some nuts Red. Playing the options was something I did when I was farming corn and soy in 01 to 04. I got obsessed with it. I also got obsessed with the weather because the weather effected the options performance and the crop condition. I hated the weather it was never right. It was generally an awful experience and I was permanently pissed between moments of elation.

I don’t gamble anymore other than with prepping. At least I enjoy prepping like a hobby and passion. Prepping is in some ways a gamble because I changed my life away from the normal there by suffering opportunity cost of life experiences not taken. Anyway, Good luck friend!

Northwest Resident on Tue, 4th Nov 2014 7:45 pm 



We know that retail sales are down significantly. We know that many retail giants of the past are closing out locations. Here in America we have empty ghost malls. The only way they can sell enough cars to keep the auto industry viable is to offer subprime rates to un-credit worthy buyers, and that’s another bubble getting ready to burst.

I think people are losing confidence in “the system”. Although many and even most people are ignorantly unaware of the details of our plight, they are still getting that general impression that things are not going very well.

Too many college graduates are unemployed or competing for part time burger flipping jobs. Too many middle aged people have seen their jobs go overseas and have dropped out of the job-seeking crowd.

Young people today don’t stand a chance when it comes to finding a “good” job. They aren’t buying homes, they aren’t driving all that much and most don’t own cars. The average 22-year-old still lives at home with mom and dad.

There is a pervasive feeling of “not all is well” across the land, and with very good reason. The age of oil and the age of grotesque consumption are coming to an end, that’s a fact, and people are feeling it whether they know the details or not.

Don’t look for consumers to grab their wallets and credit cards and head out to spend spend spend just because they’re saving a few bucks on gas. They just don’t have enough money and even the ones who have the money (like me) aren’t in the mood to go out and buy new stuff just for the sake of having it.

More people than we know of are probably aware that the global economy is ready to implode. They see their retirement savings stagnating or dribbling out the back door. They see all the foreclosures and behind their closed doors many of them are worrying that they’ll be next.

Without a strong swell of consumer spending, “demand” for oil isn’t going anywhere but down. And my impression is, that is exactly where oil prices are heading, and that’s where they are going to stay with perhaps minor and irregular blips upward only to fall again.

Yeah, THIS TIME, it IS different. That’s what it “feels” like to me.

Northwest Resident on Tue, 4th Nov 2014 7:53 pm 



J-Gav — Of course! Great minds think alike. Ha — beat you to it! 🙂

redpill on Tue, 4th Nov 2014 8:07 pm 



I hear you Davy, playing with options can become gambling very fast and requires a lot more discipline.

For this “play”, I’m using what’s called a bull call-spread, buy one call and sell another at a higher “strike price”. I go small with these bets and that allows me to have a “fire and forget” attitude.

If oil is even lower 6 months from now, I’ll lose on that bet, but that would mean we’re probably in a bear market. And as someone who has a stock market related job and is a “doomer”, bear markets are my playground:)

Perk Earl on Tue, 4th Nov 2014 8:34 pm 



“Without a strong swell of consumer spending, “demand” for oil isn’t going anywhere but down.”

That will be the tale of the tape I think, i.e. whether consumption rises much. My guess is like yours NWR, that regardless of some increase in consumption the general direction is definitely down.

Oil price drops yet the economy does not kick into a high enough gear to raise oil price above its previous high, rinse-repeat, until TPTB finally realize we’re facing the end of the oil age. They panic and QE oil exploration or who knows what desperate last ditch policy attempt to try and jolt the sucker back into coherence.

It sure will be interesting when it reaches that crescendo point when the majority of people get it, that’s its dribbling down into the abyss and they start getting over emotional, followed by the blame game, then getting super aggressive to get theirs at the markets, with shelves emptying faster than they can possibly be replenished.

Northwest Resident on Tue, 4th Nov 2014 9:29 pm 



Perk — Yeah, odds are that we’ll get to that point at some time in the future, and my guess is we won’t have to wait too long.

“The era of procrastination, of half-measures, of soothing and baffling expedients, of delays, is coming to its close. In its place we are entering a period of consequences.” — Winston Churchill

rockman on Tue, 4th Nov 2014 10:14 pm 



P – “I would need to know is the cost of production higher or lower adjusted for inflation than during those 28 years?” My response was from the perspective of consumers…not the producers. And consumers don’t give a crap what it cost the Rockman to get oil out of the ground.

For the operators what they can spend looking for oil is a function of the price of oil. The higher that price the more the oil patch can risk. This entire idea that the oil patch is willingly losing money developing oil reserves due to high drilling posts has just gotten ridiculous IMHO. In 4 decades I have not seen one well drilled in which the company didn’t expect a financial success. Not that they all did, of course. But that was the plan up front.

Nony on Tue, 4th Nov 2014 10:25 pm 



What I want is a bunch of Rockmen, competing with each other, finding oil and driving my price down. And they don’t do it from caring about me. They do it because the free market causes competition. Drill, Rock, drill. Find oil, Rock, find oil!

Perk Earl on Tue, 4th Nov 2014 11:37 pm 



http://www.bloomberg.com/news/2014-11-04/halliburton-ceo-expects-shale-to-reverse-oil-price-slump.html

Halliburton CEO Expects Shale to Reverse Oil Price Slump

“Despite what people are thinking, demand is creeping up, albeit at a lower rate than it has been,” he said. The downward pressure on prices is mostly due to an oversupply, and Lesar said that will quickly prove self-correcting, especially when it comes to U.S. shale production.

Self-correcting? What the heck is this guy talking about. How about self-imploding at a low enough price.

GregT on Wed, 5th Nov 2014 3:45 am 



“They do it because the free market causes competition.”

The ‘free market’ had a coronary when the PPT bailed out the TBTF banks. The trillions injected since then have not revived the patient. The ‘free market’ died years back, all that is left now is a corpse still plugged in to life support. When that life support is turned off, there is going to be one hell of a wake.

Davy on Wed, 5th Nov 2014 5:29 am 



NOo, in classic free market and our traditional capitalism that statement held true. Now we have a central bank controlled market through financial repression of rates and liquidity injections into the finance system creating economic distortions. NOo, with that said we must admit what NR’s Churchill quote mentioned and that is consequences. What are those consequences today?

We are seeing subpar growth compared to normal. We are seeing an extended business cycle that is due for recession. We are seeing financial asset bubbles with new normal unnatural risk taking. We are seeing arbitragers seeking unproductive, unnatural, and risky parasitic profits through the carry trade. Mobile money floating around this global financial repression environment going where returns are. These returns are parasitic and just skimming the spread and not real productive activity. We see a wealth transfer effect that is well into 6 years of damage. We see central bank balance sheets hitting diminishing returns (Fed). We see economies loaded up with credit creating malinvestment (China). We see trade, finance, and energy cold wars (Europe, US, Russia). We see sovereigns with debt that can’t be paid except with financial repression (Europe). We are seeing negative interest rates (Europe). NOo I could go on and on.

My point is this time may be different because we are in manipulated markets at the core and through legalized corruption at the top. How can we use normal market mechanism thought to forecast a normal market response to price discovery when nothing is normal? There is absolutely nothing normal or fundamental about our markets now and this is a global phenomenon. The distortions are complete.

We are in a new market situation of control of a huge ship in uncharted water with the captain not sure where we are heading. Do I speed up or slow down? Do I turn left or right? We just can’t be sure now in these conditions what exactly is causing these oil prices to move as they are because there are so many abnormal reasons. Normal price discovery has been destroyed. We surely can’t be certain the global economy is going to hold with central banks tool box empty. Most countries have no more room for stimulus with austerity policies now predominant. We created a monster and know not how to control it. Maybe demand will kick in maybe the wealth effect from lower prices will stimulate maybe just maybe.

This whole story is getting redundant but redundancies are needed when the economic meme is stuck and hidden from view. To not continually mention these redundant discussions would be to acquiesce to a dangerous meme of an economic breakout of growth just around the corner. A meme of a long term bull market. Oil is a subset of the economy that segment will be distorted along with all the other segments. This is corrupt casino economics because the odds are rigged but the game is broken and spinning wildly. What is more absurd than a broken rigged game? How do you fix that?

Davy on Wed, 5th Nov 2014 5:47 am 



Poor bastards are given the helm of a sinking ship. Let’s see what new distortions are dreamed up.

REPUBLICANS GIVEN MANDATE TO
CHART NEW COURSE FOR AMERICA
GOP handed control of Senate, House
in nationwide rebuke of Obama policies
KENTUCKY SENATOR Mitch McConnell, above, is on track to be the next Senate Majority Leader after Republicans picked up at least seven seats in the upper house of Congress in Tuesday’s midterm elections.
GOP tidal wave sweeps through statehouses | GOP expands House majority to historic levels
FOX NEWS FIRST: GOP romps & rolls, takes Senate | Wis. Gov. Walker defeats Dem challenger Mary Burke

Perk Earl on Wed, 5th Nov 2014 9:36 am 



“Poor bastards are given the helm of a sinking ship. Let’s see what new distortions are dreamed up.”

No kidding, Davy. I was thinking about this latest turn of events and wondered if the US is transitioning into a two tiered society. Those that have weathered the fiscal storm of post 2009 without defaults or loss of dignity, vs. those that did default on loans with much lower credit ratings now, some of whom returned to live with their parents, others that became permanently disenfranchised, are still struggling or not trying hard enough due to alcohol or drug addiction or just plain laziness.

To simplify let’s refer to them as the have’s and have nots. The illusion for the have’s is Obama is the cause of the slow recovery, along with his obamacare, regulation of credit cards, HARP I & II, increased rolls of food stamp recipients, etc.

So the have’s are voting in a harsher regime, with a Republican prez next in line to finalize the trend, exact a tougher stance on the have not’s. To take from them a certain sizable chunk of entitlements to improve the lives of the have’s.

The consequence will most likely be a lot more crime and street violence as the disenfranchised become bitter at the privation suffered. The have’s will remain steadfast in this pursuit as their perspective won’t be this situation occurred due to declining net energy but because of all the free loaders Obama endorsed.

Fergeson, Missouri, may end up looking like a block party compared to what is coming.

Northwest Resident on Wed, 5th Nov 2014 9:38 am 



“GOP handed control of Senate”

The most expensive midterm election in history, beating the previous most expensive midterm election by $333 million.

The headline should read “BIG MONEY TAKES CONTROL OF SENATE, HOLDS CONGRESS!”

The legions of bought-and-paid-for men and women will soon be gathering in Washington D.C. to do their masters’ bidding. And those masters are the billionaires and the financial/industrial elite — most definitely not the American people.

American government is thoroughly corrupted, rotten to the core.

But hey, good news is we now are legally allowed to grow and smoke pot in Oregon (beginning July 15 2015). Of course, that is bad news to all the illegal growers and dealers that have made their living on illegal pot all these many years — but, I kind of think that was the whole idea.

Davy on Wed, 5th Nov 2014 9:49 am 



Perk, I am wondering if paradoxically the republicans will do the country a favor by treating the have nots harsher. Let’s get on with it. Let begin the population waterboarding. Hell, this will ensure when the SHTF the pussies will already have had their ass kicked then it will be those with the silver spoon in their ass left to get the hammer. Bring it on let the ass kicken begin.

NR, as an ex pot grower legalization will take all the fun out of it. I grew the stuff 10 years ago. It was one of the funnest things I did in my previous wild man life. 100% sober today of all substances. If pot becomes legal in MO I will grow it for trade and barter. Until then I have plenty of other garden tasks more important.

Northwest Resident on Wed, 5th Nov 2014 10:34 am 



Davy — The stories we could tell…

“Bring it on let the ass kicken begin.”

GOP taking the Senate is no big deal. Nothing will change. The BIG MONEY men are still in charge. It is all for theatrics, a big production of the little people. All those GOP religious nuts and the whole assortment of loonies get their “victory”, something to cheer and feel good about. But nothing will really change. Just different employees wearing an elephant on their lapel instead of a donkey, all working for the same big money man.

Northwest Resident on Wed, 5th Nov 2014 11:05 am 



It isn’t just oil price that is crashing. It is all commodities.

Global Commodity Prices Are Collapsing At The Fastest Pace Since Lehman

It is an across-the-board GLUT that is causing oil and other commodities to plummet in price — honest! Too much of everything. We just aren’t consuming fast enough, damn it!

http://www.zerohedge.com/news/2014-11-05/global-commodity-prices-are-collapsing-fastest-pace-lehman

nemteck on Wed, 5th Nov 2014 1:52 pm 



The OilDrum graph above is outdated. Shale oil is not mentioned. Also, the production cost is misleading. Recently, we have seen the PO report “Peak Oil is Happening” where the break-even cost is listed. For example, the SA cost is given as $93 due to public spending to achieve civil obedience.
Canadian Oil Sands LTD has a $48 production cost and Suncor a $43. So, the $85 given in the graph can only be interpreted as being valid for new projects.

Northwest Resident on Wed, 5th Nov 2014 4:51 pm 



Decent Forbes article on dropping oil prices and the likely effects:

As Oil Plunges Further, Why It Might Be ‘Game Over’ For The Fracking Boom

http://www.forbes.com/sites/christopherhelman/2014/11/05/as-oil-plunges-further-why-it-might-be-game-over-for-the-fracking-boom/?partner=yahootix

Desertrat on Thu, 6th Nov 2014 2:06 pm 



Perk: “So the have’s are voting in a harsher regime…”

Read the archdrudireport the last few weeks? I’m hearing an echo. It’s quite good if anyone has missed it, and puts all this we’re seeing in quite the interesting historical context. I think he’s pretty on the money, except he’s not a doomer; ‘it’s different this time’ does not apply to much, but it does apply to how high the house of cards has risen above it’s historical parallels.

Basic points being that when growth reverses, the middlemen and power brokers who run the system have always extracted theirs first when there’s no longer enough to go around. Surprise! Other good point being that those same middlemen and elites always hasten the demise by ignorance of the realities bringing down the system, i.e. PO (one more reason to be a doomer -I think the system is much more completely bought & paid for this time around, so it’s going to hang on [in appearance at least] longer, and fall harder, imho).

Can’t wait until congress passes a law that everyone has to go into their parent’s occupation, like the Romans did, then we’ll know there is *no* functioning economy left. Stocking up on barter items 🙂

Desert