Will Falling Oil Prices Crash the Markets?-Weekend Edition December 12-14, 2014

[Crewleader]

Weekend Edition December 12-14, 2014

Shale Leads the Way

Will Falling Oil Prices Crash the Markets?

by MIKE WHITNEY

Crude oil prices dipped lower on Wednesday pushing down yields on US Treasuries and sending stocks down sharply. The 30-year UST slipped to a Depression era 2.83 percent while all three major US indices plunged into the red. The Dow Jones Industrial Average (DJIA) led the retreat losing a hefty 268 points before the session ended. The proximate cause of Wednesday’s bloodbath was news that OPEC had reduced its estimate of how much oil it would need to produce in 2015 to meet weakening global demand. According to USA Today:

“OPEC lowered its projection for 2015 production to 28.9 million barrels a day, or about 300,000 fewer than previously forecast, and a 12-year low…. That’s about 1.15 million barrels a day less than the cartel pumped last month, when OPEC left unchanged its 30 million barrel daily production quota…

The steep decline in crude price raises fears that small exploration and production companies could go out of business if the prices fall too low. And that, in turn, could cause turmoil among those who are lending to them: Junk-bond purchasers and smaller banks.” (USA Today)

http://www.counterpunch.org/2014/12/12/will-falling-oil-prices-crash-the-markets/

[Hari Seldon]

1. A better question

Are falling oil prices a symptom of slumping economy?
The law of supply and demand says YES.

which leads to the next question:
When will the stock market crash down to a level that actually reflects economic reality?
The answer seems to be NOW.

[still_one]

2. BS. The only thing it will crash is the oil markets, not the general economy for sure. At least

If the other markets crash it won't be because of falling oil prices

Two sources that I personally do not hold much value in, USA today and counterpunch

The big problem is that many people in this country have short memories, and because of the falling oil prices might be motivated to buy less energy efficient vehicles, which would be typically short sided, and they will get bit again if they do so

[Crewleader]

3. From Jack Ramus, The Economic Consequences of Global Oil Deflation

Oil Deflation & Global Financial Instability

Oil is not only a physical commodity bought, sold and traded on global markets; it has also become an important financial asset since the USA and the world began liberalized trading of oil commodity futures (i.e. a financial security) in the late 1990s on a global scale.

Just as declines in oil spills over to declines of other physical commodities (e.g. copper, iron ore, gold, etc.), oil financial securities (i.e. oil commodity futures) price deflation can also ‘spill over’ to other financial assets, causing their decline as well, in a ‘chain like’ effect.

That chain like effect is not dissimilar to what happened with the housing crash in 2006-08. At that time the deep contraction in the global housing sector ( a physical asset) not only ‘spilled over’ to other sectors of the real economy, but to mortgage bonds (i.e. financial assets representing housing and commercial construction), and derivatives based upon those bonds, also crashed. The effect was to ‘spill over’ to other forms of financial assets that set off a chain reaction of financial asset deflation.

The same ‘financial asset chain effect’ could arise if oil prices continued to decline below USD$60 a barrel. That would represent a nearly 50 percent deflation in oil prices that could potentially set in motion a more generalized global financial instability event, possibly associated with a collapse of the corporate junk bond market in the USA that has fueled much of USA shale production.

Is the USA Economy an Exception?

As in Europe and Japan, the ‘talking point’ in the USA is that global oil deflation will lower consumer and business costs, that will result in more consumption, investment and growth. The counterargument, relevant to Europe and Japan, that it could cause ‘deflationary expectations’ to set in, leading to the opposite impact on consumption and investment is not as relevant to the USA. USA general price levels are declining, but much more slowly and from a much higher level around 2 percent.

The problem with the ‘positive growth’ argument in the case of the USA is that it may not apply due to other USA-specific reasons. These include:

The savings to consumers from lower oil and gasoline prices will likely be absorbed by the rising costs for healthcare, education, rents, and other necessities that is now occuring in the USA.

http://www.counterpunch.org/2014/12/08/the-economic-consequences-of-global-oil-deflation/

[elleng]

4. Dunno, but some damn thing is happening.

Hope those managing my portfolio get a handle on things. My grandkids COULD benefit (20 years down the road) if they do, and won't if they don't. (P.S., my NJ grandkid is napping now, so NO EFFECT on HIM!)

As to effect of 'No shutdown,' doesn't seemed to have had a positive effect, at least not yet.


S.&P. 500 2,026.78 –8.55 –0.42%
Dow 17,496.27 –100.07 –0.57%
Nasdaq 4,700.55 –7.61 –0.16%
S.&P. 400 1,414.96 –6.61 –0.46%
S.&P. 600 667.59 –5.20 –0.77%

[Crewleader]

5. I post the article and I leave it up to the experts here

appreciate the comments....and

hugs to your precious grandchild.

[Crewleader]

6. The Financialized-Oil Dominoes Are Toppling (December 12, 2014)

by Charles Hugh Smith

http://www.oftwominds.com/blogdec14/oil-dominoes12-14.html

&feature=youtu.be

[StoneCarver]

7. Wow!!!

That video was crazy interesting -like 12D chess. Also the best kind of "dry", I love listening to nerds share their thoughts. Talking heads are always wrong. Always. Just ask Jim Cramer! Thanks Crewleader!

[Crewleader]

9. Good to see you post StoneCarver

Last edited Tue Dec 16, 2014, 11:39 AM - Edit history (1)

The Fed hasn't raise interest rates since 2006 and now we entering 2015. 9 years...what a ride we have been on.

On December 16th link below

Fed on track to raise interest rates this summer: Survey

http://www.cnbc.com/id/102269595

[eridani]

8. Plummeting Oil Prices Could Destroy The Banks That Are Holding Trillions In Commodity Derivatives

http://theeconomiccollapseblog.com/archives/plummeting-oil-prices-destroy-banks-holding-trillions-commodity-derivatives

Could rapidly falling oil prices trigger a nightmare scenario for the commodity derivatives market? The big Wall Street banks did not expect plunging home prices to cause a mortgage-backed securities implosion back in 2008, and their models did not anticipate a decline in the price of oil by more than 40 dollars in less than six months this time either. If the price of oil stays at this level or goes down even more, someone out there is going to have to absorb some absolutely massive losses. In some cases, the losses will be absorbed by oil producers, but many of the big players in the industry have already locked in high prices for their oil next year through derivatives contracts. The companies enter into these derivatives contracts for a couple of reasons. Number one, many lenders do not want to give them any money unless they can show that they have locked in a price for their oil that is higher than the cost of production. Secondly, derivatives contracts protect the profits of oil producers from dramatic swings in the marketplace. These dramatic swings rarely happen, but when they do they can be absolutely crippling. So the oil companies that have locked in high prices for their oil in 2015 and 2016 are feeling pretty good right about now. But who is on the other end of those contracts? In many cases, it is the big Wall Street banks, and if the price of oil does not rebound substantially they could be facing absolutely colossal losses.

It has been estimated that the six largest “too big to fail” banks control $3.9 trillion in commodity derivatives contracts. And a very large chunk of that amount is made up of oil derivatives.

By the middle of next year, we could be facing a situation where many of these oil producers have locked in a price of 90 or 100 dollars a barrel on their oil but the price has fallen to about 50 dollars a barrel.

In such a case, the losses for those on the wrong end of the derivatives contracts would be astronomical.

At this point, some of the biggest players in the shale oil industry have already locked in high prices for most of their oil for the coming year.

[Crewleader]

10. Michael Snyder tells it like it is

Thanks for posting eridani.

[Crewleader]

11. Today's Cartoons

[Crewleader]

12. From Robert Reich on facebook

Senator Charles Shumer on CNN this morning said “the soul of the Democratic party is the economy, and the party is united on the economy.” He’s right about the first part, but there’s no unity. Elizabeth Warren and other progressive senators are fighting for average working people. They opposed the spending bill that passed the Senate yesterday, which allows big Wall Street banks to gamble once again with commercially-insured bank deposits, thereby inviting another bailout of the Street, and allows the fattest cats, many of them on the Street, to write checks for more than a million dollars in an election cycle. Other Democrats, including the President, capitulated. There’s no unity in the party. There are two Democratic parties: the party of FDR, LBJ, Ted Kennedy, and Paul Wellstone; and the party of the corporate-financial complex.

[littlemissmartypants]

13. Kick. eom

[Crewleader]

14. Good to see you littlemissmartypants

[eridani]

15. Why Oil Is Down By Half, What It Means For You

http://www.manufacturing.net/news/2014/12/why-oil-is-down-by-half-what-it-means-for-you?et_cid=4318908&et_rid=54679148&type=headline

Years of high oil prices, interrupted briefly by the recession, inspired drillers around the world to scour the earth's crust for more oil.

They found it.

Since 2008 oil companies in the U.S., for example, have increased production by 70 percent, or 3.5 million barrels of oil per day. To put that in perspective, that increase alone is more than the production of any OPEC member other than Saudi Arabia.

As U.S. production was ramping up, turmoil in the Middle East and North Africa reduced supplies from Libya, Iran and elsewhere. A balance was struck: Increasing supplies from outside of OPEC and from Iraq's recovering oil industry helped meet rising demand around the world as other OPEC supplies waivered.

But now those OPEC supplies look more certain despite continuing turmoil, and those non-OPEC supplies have swamped the market. OPEC estimated last week that the world would need 28.9 million barrels of its oil per day next year, the lowest in more than a decade. At the same time, OPEC countries plan to produce 30 million barrels of oil per day next year. That supply surplus is sending global prices lower.

Global demand is still expected to grow next year, but by far less than many thought earlier this year. The economies of China, Japan and Western Europe — the top oil consumers after the United States — all appear to be weakening. Oil demand falls when economic growth stalls.

The U.S. is still the world's largest consumer, but more fuel-efficient cars and changing demographics mean demand for oil and gasoline is not increasing. The Energy Department predicts a slight decrease in gasoline demand next year even though the price is expected to be sharply lower and the economy is expected to grow.

[Crewleader]

16. The Oil Coup

December 16, 2014

US-Saudi Subterfuge Send Stocks and Credit Reeling

The Oil Coup~ by Mile Whitney

http://www.counterpunch.org/2014/12/16/the-oil-coup/