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Originally Posted by iwantitiwinit
The current equity market retreat is in my opinion serious. It's the first time since 2008-09 that respected market "gurus" have felt the responsibility to warn of what they see as a true structural change. Central banks can continue to add stimulus in the form of quantitative easing to stimulate their economies however their main stimulus tool (rate easing) is ineffectual as rates are at or near zero. Unfortunately, the oil collapse in the near term will manifest itself into something much more than lower gasoline and heating costs for consumers. The coming defaults by small and mid sized u.s. energy companies portends to be a bad omen. High yield is already slipping as investors rush to exit high yield mutual funds "better credits" are beginning to suffer as well as energy related high yield bonds. Portfolio mangers have to raise cash to meet redemptions and the little liquidity that exists only exists for those better credits many of which fall in the telecom sector. This lack of liquidity is perpetuated by Dodd-Frank as banks and brokerages can now longer hold the large fixed income and equity positions on thier balance sheets if they wish to met Dodd-Frank requirements. As such they cannot bid for these high yielding securities. You can see the impact energy has had on the index by watching the high yield etf the HYG of which energy accounts for approximately 12% of the index.
If the Saudi's hold the line they will truly force more US and Canadian producers out of business. Production will eventually drop and demand will even out with supply. This will of course take time, in my opinion a year, however it could stretch out if economies continue to slow oil demand will continue to shrink and thus take all that much longer for supply to catch up. Remember the old axiom how much would you pay for that eleventh barrel of oil if demand is only ten barrels, answer not much.
In my opinion I don't let todays' rally fool me. I buy USO puts because the 2 day 12% rally in oil I feel is way overdone, we see $25 dollar oil before $35 and I buy HYG puts because the high yield index is going down.
Relative to card prices, they are going to fall. The publics' psyche will be damaged if this market drop continues and I think it will. I hope I am not kicking myself next week telling myself I could have saved myself a lot by lightening up today.
China can provide stimulus but I am guessing it will be seen as ineffectual in the eyes of U.S. investors as distrust grows and their market and monetary officials continue to fail in their attempt to design valid strategies.
Good luck.
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Some good comments about the Upstream part of the oil business, but what about the Downstream (refining) part of it?
No matter the cost of oil, it still has to be refined to gasoline and other by products.
So, what happens when the cost of refining exceeds the cost of oil? Do you think the refineries would keep their doors open only to lose money? After all, plant operators/staff are paid pretty well.
I don't know the cost of refining, but I do know that no company in the world is going to stay in business long when their cost of production exceeds the cost of the end product.
IMO, that's where we're heading with oil if it continues to decline. The refineries would shut down (just temporarily) creating a gasoline shortage and there would be
mass panic when people can't buy gasoline to get back and forth to work. Seem far fetched? Just look what happens after a hurricane or other disaster when people can't gasoline or supplies.