The Crash of 2015: Day 29 [UPDATE Day 30]

You have this perfectly good structure, and then you kick out a few of the supporting pillars, and the next thin you know the SEC is on the phone.

Maybe we could still live in the top floor? If we could just slow it down a little?

A couple of things to keep firmly in mind as we watch the Crash of 2015 unfold, pretty much on the schedule I’ve been writing about here for six months. First, the drop in oil prices is not the cause of this disaster, merely an accelerant. The fracking industry is succumbing to its inherent high expense, toxicity, rapid depletion rates and over-reliance on junk financing. Similarly, the stock market crash we expect to follow the fracking collapse would have come anyway because of its inherent instability, and indeed may yet occur before the chain reaction in the fracking fields has run its course. And finally, what is happening to fracking is also happening to the legacy oil business, only slower.

Ignore the noise about how this is all a plot by Saudi Arabia, or by all of OPEC, to destroy the gallant frackers of America. The Saudis control the world oil business the way the legendary horse trainer said he controlled his horse: “I look real close and see what he’s going to do,” he’s supposed to have said, “and then I tell him to do that.” The Saudis look real close and see where the market just went, and then say yeah, we did that.

To remind ourselves of the sequence we’re expecting to see in this crash, beginning in the fracking patch: layoffs, contractions, capital starvation, production declines, defaults, junk-bond market collapse, widening financial damage, stock market crash, recession. So, how are we doing so far?

Layoffs and contraction, check: The number of oil rigs operating in the United States has dropped to its lowest since 2013, and most of that decline came in the Bakken play in North Dakota. The total dropped by 49 in the week ending Jan. 23, bringing the total down to 1,317, according to Baker Hughes. In seven weeks, The number of US rigs has dropped by a record 258. If the trend continues a few more weeks, there will not be enough rigs operating to maintain production, and analysts such as John Kemp of Reuters foresee a sharp decline in fracking production beginning at midyear.

The numbers are even worse than they look at first glance when you take into account that current procedure in the fracking patch is to use rigs to drill up to four wells from a single pad, rather than moving the rig each time. Thus a stacked rig doesn’t just mean the loss of one well, then another and another, but four wells, then eight, 16 and so on in the same time frame.

In slower motion, the same disaster is spreading through the legacy oil business. More than 30,000 layoffs have been announced across the industry as companies slash budgets, according to Bloomberg News. Exploration and production spending is expected to drop by more than $116 billion, a 17 percent decline, because of falling crude revenues, according to an estimate from Cowen & Co.  BP has frozen wages, Chevron has delayed its 2015 drilling budget and Shell has canceled a $6.5 billion Persian Gulf investment; New York-based Hess Corp. on Wednesday reported a fourth-quarter net loss of $8 million

Capital starvation, check: The fracking boom got this far with stock offerings, junk bonds, and “leveraged” loans. The stock prices of the operators have tanked, and the markets for more junk bonds and loans are essentially closed to frackers. (The reason we will continue to see production continue, even increase, in the short term is that the operators, in debt to their eyeballs, have to pump oil or die.)

The damage is already metastasizing to the general junk-bond market. The total value of such bonds issued is down one-third from last year; just this week, two offerings by companies not in the oil business — Presidio Holdings ($400 million) and Koppers Holdings ($400 million) — failed for complete lack of interest, even though they were offering as much as 11% return; investors in high yield mutual funds withdrew nearly a quarter of a billion dollars last week, a week that saw leveraged-loan funds bleed out nearly three-quarters of a billion.

Next, production declines and defaults. Stay tuned.

[UPDATE: Red flags up at Bloomberg Business News, which counts $390 billion vaporized by the oil implosion so far, with losses now “starting to show up in investment funds, retirement accounts and bank balance sheets.” Read it and run.}

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7 Responses to The Crash of 2015: Day 29 [UPDATE Day 30]

  1. Tom says:

    Great job, Mr. Lewis – pointing out the specifics of the decline.

    If we extrapolate from your essay a little, we can see how all the job lay-offs and especially the production declines will further cripple retail spending (on anything but the basics – like food), cause tax revenues to fall considerably (hurting municipalities, police and fire personnel, schools, trucking, the stock market, etc) as more and more people default or go bankrupt from the loss of their jobs (remember it doesn’t just stop at the wells – banks are laying off, as is Wall Street and tons of retail stores are closing) maybe causing another increase in the homeless population too.

    This year looks like it will be the next step down in the collapse of America and industrial civilization worldwide.

    [ps. The numbers are even worse then they look at first glance (use “than”)]

  2. meat wad says:

    “Ignore the noise about how this is all a plot by Saudi Arabia”
    I am glad to hear people saying this. Americans of all stripes seem to have a hard time with the concept of other economies in the world, and that everything isn’t always about us.

    China cooled an overheated economy, and OPEC decided to keep production the same. It’s that simple. Any other move by Saudi Arabia would have simply reduced their share of the pie, so they’re holding course. American fracking doom is a consequence but likely had little to do with Saudi’s calculus in all this, and its far from a malicious plot to target US fracking. Saudis have their own fishies to fry, and countries like Venezuela are way further up the creek with fewer paddles.

    At any rate, I for one am fascinated to see what 2015 has in store. Thanks for the articles thus far.

  3. Steven Martin says:

    Guess Dems are just hoping that enough air can stay in the balloon until 2016. Federal annual debt deficit is slated to rise again to the $1T level after 2016, how convenient is that? It seems a crushing recession is pretty much baked in for 2017-2020. Much akin to 80-82, 00-02, 07-09. Typical Obama, do your best to make it someone else”s problem. The tide will go out and all the weak companies will fail. It will be an interesting ride. One of these recessions, either the currency or the country won”t make it. We’ll be bankrupt like Greece and with 17% interest rates. The masses are going to just love it.

    • venuspluto67 says:

      Soon the national debt will be up to $20T, and as soon as we’ll have to start paying as much as one percent interest on that debt (ZIRP can’t last forever), that means $200G automatically gets added to every year’s budget. If we had to start paying a much more normal interest rate such as two-and-a-half percent, that would automatically add a half-trillion-dollar obligation to every year’s budget.

      The main reason I predict Obamacare getting canceled in the not-too-distant future is that there won’t be any money for the subsidies that are supposed to help people buy those expensive private insurance policies they are supposed to buy. Without the subsidies, the price of buying even a halfway decent insurance policy would be way more expensive than any tax-penalty the government could levy for failing to do so.

  4. Tom says:

    Mr. Lewis – on the update, i found this one to add to the Bloomberg post.

    All the best!

  5. Avery says:

    “In Texas [alone!], the Federal Reserve Bank of Dallas now says that low oil prices will cost the state some 140,000 jobs directly and indirectly tied to energy. In North Dakota, too, there are fears of thousands of job cuts. In the energy sector alone, Goldman Sachs forecasts 70,000 US job cuts by the end of the year.”