Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
The Hottest Sports Stock Of 2020 - 23rd Sep 19
Stocks Wedge At The Edge – Front And Center - 23rd Sep 19
Stock Market Top Almost Confirmed - 23rd Sep 19
Thomas Cook COLLAPSE! 300,000 Passengers Stranded, Flights Cancelled, Planes Grounded - 23rd Sep 19
Massive Stock Market Price Reversion May Be Days or Weeks Away - 22nd Sep 19
How Russia Seized Control of the Uranium Market - 22nd Sep 19
Dow Stock Market Trend Forecast Update - 21st Sep 19
Is Stock Market Price Revaluation Event About To Happen? - 21st Sep 19
Gold Leads, Will the Rest Follow? - 21st Sep 19
Are Cowboys Really Dreaming of... Electric Trucks? - 21st Sep 19
Gold among Negative-Yielding Bonds - 20th Sep 19
Panicky Fed Flooding Overnight Markets with Cash - 20th Sep 19
Uber Stock Price Will Crash on November 6 - 20th Sep 19
Semiconductor Stocks Sector Market & Economic Leader - 20th Sep 19
Learning Artificial Intelligence - What is a Neural Network? - 20th Sep 19
Precious Metals Setting Up Another Momentum Base/Bottom - 20th Sep 19
Small Marketing Budget? No Problem! - 20th Sep 19
The Many Forex Trading Opportunities the Fed Day Has Dealt Us - 19th Sep 19
Fed Cuts Interest Rates and Gold Drops. Again - 19th Sep 19
Silver Still Cheap Relative to Gold, Trend Forecast Update Video - 19th Sep 19
Baby Boomers Are the Worst Investors in the World - 19th Sep 19
Your $1,229 FREE Tticket to Elliott Market Analysis & Trading Set-ups - 19th Sep 19
Is The Stock Market Other Shoe About To Drop With Fed News? - 19th Sep 19
Bitcoin Price 2019 Trend Current State - 18th Sep 19
No More Realtors… These Start-ups Will Buy Your House in Less than 20 Days - 18th Sep 19
Gold Bugs And Manipulation Theorists Unite – Another “Manipulation” Indictment - 18th Sep 19
Central Bankers' Desperate Grab for Power - 18th Sep 19
Oil Shock! Will War Drums, Inflation Fears Ignite Gold and Silver Markets? - 18th Sep 19
Importance Of Internal Rate Of Return For A Business - 18th Sep 19
Gold Bull Market Ultimate Upside Target - 17th Sep 19
Gold Spikes on the Saudi Oil Attacks: Can It Last? - 17th Sep 19
Stock Market VIX To Begin A New Uptrend and What it Means - 17th Sep 19
Philippines, China and US: Joint Exploration Vs Rearmament and Nuclear Weapons - 17th Sep 19
What Are The Real Upside Targets For Crude Oil Price Post Drone Attack? - 17th Sep 19
Curse of Technology Weapons - 17th Sep 19
Media Hypes Recession Whilst Trump Proposes a Tax on Savings - 17th Sep 19
Understanding Ways To Stretch Your Investments Further - 17th Sep 19
Trading Natural Gas As The Season Changes - 16th Sep 19
Cameco Crash, Uranium Sector Won’t Catch a break - 16th Sep 19
These Indicators Point to an Early 2020 Economic Downturn - 16th Sep 19
Gold When Global Insanity Prevails - 16th Sep 19
Stock Market Looking Toppy - 16th Sep 19
Is the Stocks Bull Market Nearing an End? - 16th Sep 19
US Stock Market Indexes Continue to Rally Within A Defined Range - 16th Sep 19
What If Gold Is NOT In A New Bull Market? - 16th Sep 19
A History Lesson For Pundits Who Don’t Believe Stocks Are Overvalued - 16th Sep 19
The Disconnect Between Millennials and Real Estate - 16th Sep 19
Tech Giants Will Crash in the Next Stock Market Downturn - 15th Sep 19
Will Draghi’s Swan Song Revive the Eurozone? And Gold? - 15th Sep 19
The Race to Depreciate Fiat Currencies Is Accelerating - 15th Sep 19
Can Crypto casino beat Hybrid casino - 15th Sep 19
British Pound GBP vs Brexit Chaos Timeline - 14th Sep 19
Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - 14th Sep 19
War Gaming the US-China Trade War - 14th Sep 19
Buying a Budgie, Parakeet for the First Time from a Pet Shop - Jollyes UK - 14th Sep 19
Crude Oil Price Setting Up For A Downside Price Rotation - 13th Sep 19
A “Looming” Recession Is a Gold Golden Opportunity - 13th Sep 19
Is 2019 Similar to 2007? What Does It Mean For Gold? - 13th Sep 19
How Did the Philippines Establish Itself as a World Leader in Call Centre Outsourcing? - 13th Sep 19
UK General Election Forecast 2019 - Betting Market Odds - 13th Sep 19
Energy Sector Reaches Key Low Point – Start Looking For The Next Move - 13th Sep 19
Weakening Shale Productivity "VERY Bullish" For Oil Prices - 13th Sep 19
Stock Market Dow to 38,000 by 2022 - 13th Sep 19 - readtheticker
Gold under NIRP? | Negative Interest Rates vs Bullion - 12th Sep 19
Land Rover Discovery Sport Brake Pads and Discs's Replace, Dealer Check and Cost - 12th Sep 19
Stock Market Crash Black Swan Event Set Up Sept 12th? - 12th Sep 19
Increased Pension Liabilities During the Coming Stock Market Crash - 12th Sep 19
Gold at Support: the Upcoming Move - 12th Sep 19
Precious Metals, US Dollar, Stocks – How It All Relates – Part II - 12th Sep 19

Market Oracle FREE Newsletter

How to Invest in the Esports Revolution

Crude Oil Price Is Going to Fall by 50%… Again

Commodities / Crude Oil Sep 29, 2015 - 11:37 AM GMT

By: ...

Commodities

Michael Lewitt writes: We’ve talked about the massive Debt Supercycle and why it can only end in the market crash I’m now predicting. (If you want a refresher, download my “Super Crash Report.”)

But there’s one connection we haven’t made yet.

The same thing just happened in the energy market.


The 50% collapse in WTI crude oil spot prices over the second half of 2014 caught most investors by surprise. It wiped out billions of dollars of value from the accounts of investors who owned energy stocks and junk bonds. But if you knew the reality of the debt situation in energy, the outcome was clear as day.

This is one of the reasons my institutional and high net worth clients didn’t own a single energy stock or bond at that time. We’re going to be, of course – there’s a window approaching where we can make a killing in energy, and I’ll show you when – but 2014-2015 was not a good time to be long in a highly speculative and leveraged energy market.

And it’s about to happen again.

Today I want to show you exactly how debt crashed the energy market. It’s a story few investors understand, and it’ll really put this whole “Debt Supercycle” concept in sharp relief for you.

And then get ready. First thing next week you’ll get my immediate profit protection plays… the key indicator to tell when oil has hit bottom… and see how we could make 300% riding it back up.

How Oil Prices Got So High in the First Place

First it is necessary to understand how prices got so high in the first place. After all, a little more than a year ago, WTI crude oil was trading well over $100 per barrel. And it had only flirted with $80 per barrel a couple of times since the 2008 financial crisis, when it hit $82 per barrel in 2011 and $83 in 2012.

How did this happen? The Federal Reserve’s Herculean post-crisis efforts to lower interest rates in order to revive the U.S. economy was occurring at exactly the same time that a new technology for extracting oil from the ground came into existence. This new technology was called fracking, and it revolutionized the U.S. oil industry.

The combination of endless amounts of cheap money and new technology is something we have seen before. For example, in the late 1990s, the Fed opened the monetary spigots at the same time that the first phase of the Internet came on the scene. Many Internet and telecom companies used cheap debt to finance themselves – and ended up borrowing themselves into bankruptcy.

Corporate managers prefer to finance themselves with debt rather than equity in order to keep the value of their company for themselves. Low interest rates allow them to do this more easily. Again, I saw this first-hand during the Internet Bubble when companies that had limited revenues were able to borrow hundreds of millions of dollars from gullible investors to build Internet hosting facilities or enough cables to wire the universe.

The same thing happened in the energy industry since the financial crisis.

The “Financial Mania” of Fracking

Charles Kindleberger was one of the greatest financial historians of the 20th century. The energy cycle fits the classic scenario that Professor Kindleberger described in his classic history of financial manias, Manias, Panics and Crashes:

“The nature of the displacement varies from one speculative boom to the other.  It may be the outbreak or end of a war, a bumper harvest or crop failure, the widespread adoption of an invention with pervasive effects – canals, railroads, the automobile – some political event or surprising financial success, or a debt conversion that precipitously lowers interest rates. But whatever the source of the displacement, if it is sufficiently large and pervasive, it will alter the economic outlook by changing profit opportunities in at least one important sector of the economy.”

There is little question that technological development of fracking constituted a “displacement” that distorted energy markets and enabled energy companies to raise an enormous amount of equity and low cost debt.

Everyone believed that oil prices would stay at $100 per barrel forever. This expectation was based on the bogus belief that the global economy was strong, when in fact it was very weak and was only growing because central banks were printing trillions of dollars/euro/yen/yuan of money. Even worse, their governments were in many cases the biggest buyers of that new debt in massive Ponzi schemes that are now coming home to roost.

When these schemes started to reach their limits in 2014, the global economy hit a wall and commodity prices – including oil – started to collapse. (Supply and demand factored in too, of course.) We saw the impact of this almost immediately in U.S. markets.

When WTI hit a low of $44.12 per barrel on January 29, 2015, the consensus figured that prices had hit bottom. And for a while it looked like they were right. WTI rallied back up to $61.36 per barrel on June 10, a strong 39% recovery.

In the interim, a large number of energy companies raised billions of dollars of new equity and debt in order to try to survive the worst oil downturn in decades. And they found willing investors who believed that oil prices couldn’t possibly go any lower.

I am sorry to report that all of these bright minds were 100% wrong. There was never any doubt that oil prices were going lower – much lower than their January 2015 prices.

And predictably, as we speak, WTI is back at $45 per barrel.

Energy companies comprise about 17% of the U.S. high-yield bond market (roughly $200 billion face amount of debt). In the summer of 2014, the average yield on the energy sector of the Barclays High Yield Bond Index was roughly 5% but by the end of the year, the yield had moved above 10% for the first year and it is now higher. Many bonds dropped by more than 50% and thus far at least eight companies have filed for bankruptcy.

But believe me, there is going to be much more blood in the water.

The Dollar’s Effect on Oil

There is another big reason why oil has not reached a bottom – the U.S. dollar is going to keep getting stronger.

Again, the U.S. dollar is likely to continue to strengthen against other major currencies, including the euro, the yen, and the yuan. China has begun devaluing its currency. Europe and Japan are engaged in major QE programs that will devalue their currencies. The Brazilian real is plunging. The world is engaged in a massive currency war and the dollar will be the winner among all the paper currencies (gold will be the ultimate winner but that’s a topic for another day).

Oil is traded in dollars and a stronger dollar means lower oil. You cannot be long the dollar and long oil – they move in different directions.

Instead you may want to be long the dollar and short oil (as I’ll show you next time). These two trades fit together.

Oil Is Likely to Fall Another 50% from Here

Right now bankers are reviewing the loans secured by oil and gas assets, something they do twice a year. With oil prices back down at their January lows, banks are likely to limit the amount they are willing to lend to the industry. Even worse, regulators are breathing down the necks of bankers in a well-intended but misguided attempt to substitute their judgment in determining how much credit to extend to energy companies in the current environment. The Office of the Comptroller of the Currency is unqualified to make such decisions yet has the power to prevent banks from extending additional credit to energy companies and is aggressively asserting that power. The result is likely to be to push companies that could survive into bankruptcy unnecessarily, which will put further downward pressure on oil prices.

The price of oil (WTI) is likely to drop into the $20s before the current cycle ends.

And that’s when we pounce.

I’ll be back with you Monday. Don’t miss this one.

Source http://suremoneyinvestor.com/2015/09/oil-is-going-to-fall-by-50-again/

Money Morning/The Money Map Report

©2015 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules