Oily Financials

February 11, 2016

texas-oil-rigBuried beneath continuous news awash with death, destruction, and The Donald, events in the oil industry are low-key, but financially catastrophic on many levels.

Good nutshell-analysis at OilPrice.com:

This downward spiral will lead to further credit downgrades and bankruptcies within the oil patch.
All the while, access to credit is shrinking across all sectors due to a tightening in financial conditions.
As equities sell off again today, banks are leading the freewheeling lower, as increased scrutiny about their debt holdings is causing a flight to safety. (And to add insult to injury, the flight to the safety of cash is met by talk of negative interest rates).

And thus, maybe, “oilmageddon.”

(Illustration: ‘Texas Oil Rig,’ by Amanda Vick Roach, found here).

Once again today, the financial markets felt another crack, and though not a sharp one, the narrative tells the tale — the Guardian this afternoon: ‘The Dow Jones Industrial Average fell 255 points, or 1.6 percent, to 15,660. The S&P 500 fell 1.2 percent and the Nasdaq Composite lost 0.4 percent. All three had bounced back late in the day from sharper falls but, again, financial stocks were big losers. Financial shares in the S&P have lost roughly 18 percent so far this year.’
Add a digit of drama, as from today’s Financial Times and a peculiar scenario:

Further evidence of the scale of central banks’ concerns about the world economic outlook came from the Swedish Riksbank’s decision to cut interest rates more aggressively than expected on Thursday, taking the repurchase rate even deeper into negative territory.

Marc Ostwald at ADM Investor Services said that the Riksbank’s move “looks to be rather desperate” and “some in markets may wonder what is it that the central banks know that they are not telling us”.

I really don’t understand how all this financial shit actually works, but having witnessed the 2008 event, the endgame is not pretty. Although there’s a short-list of reasons beyond oil for the market dovetail, but it’s the burning core — a review via Reuters:

With Thursday’s decline, the S&P 500 stock index has lost 10.5 percent so far in 2016, its worst start to a year in history, according to Bespoke Investment Group, an investment advisory in Harrison, New York.
The 10-year note’s yield has fallen to 1.63 percent, its lowest closing level since May 2013.

Higher levels of U.S. oil output, thanks to fracking technology, along with over-production by Saudi Arabia, contributed to a world-wide oil glut, sparking a steep fall in energy and other commodity prices at the start of last year.
At $27 a barrel, oil prices are now near 13-year lows and some analysts say they expect to see prices drop further.
Tumbling oil prices resulted in sharp contractions in the economies of oil-producing countries, and pushed up yields on corporate debt, leading to defaults in the energy sector.
“Investors whose livelihood revolve around oil and gas and commodities are liquidating because they need the cash,” said Stephen Massocca, chief investment officer at Wedbush Equity Management in San Francisco.

And from another angle, a financial study which uses a phrase usually found in scientific-climate news stories — according to analysts at Citigroup:

“It seems reasonable to assume that another year of extreme moves in USD (higher) and oil/commodity prices (lower) would likely continue to drive this negative feedback loop,” analysts Jonathan Stubbs, Ayush Tambi and Nikhil Jadhav wrote.
“Corporate profits and equity markets would also likely suffer further downside risk in this scenario of Oilmageddon,” they added.

Optimism, though, apparently burns by oil light: ‘“Oil prices are likely bottoming. Greater stability lies ahead for FX and commodity markets. The death spiral is in nobody’s interest. Rational behavior, most likely, will prevail,” they say.’

Define ‘rational behavior,’ please…

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