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Shale Oil 2015 = Subprime Mortgages 2008

 -- Published: Monday, 1 December 2014 | Print  | Disqus 

By Andrew Hoffman

As I suggested yesterday, today’s article title will be eye-popping.  And surely, it’s lived up to expectations!

Sadly, the 2015 shale oil collapse is essentially set in stone; and as it unfolds, could quite possibly prove to be the “black swan” that finally destroys TPTB’s best laid market manipulations.  Pretty soon, even the most died in the wool perma-bulls will throw in the white propaganda flag; and when they do, the first they’ll do is short everything remotely related to shale oil drilling, production and service.  In my view, the only industries have ever as egregiously hyper-promoted and recklessly financed as 2012-14 shale oil were to 1997-99 internet start-ups and 2005-07 subprime mortgage originators.  Only this time around, the worldwide economy is in dramatically weaker shape and the capacity to whitewash unwieldy debt with new money printing no longer viable.  Very likely, $65/bbl. oil will destroy any remaining semblance of American economic activity; and worse yet, fundamentals suggest prices could drop significantly lower, perhaps to the $40/bbl. lows of early 2009.

I’ll get to that in a second; but first, several other catastrophic headlines – all published in the past 12 hours.  And I do mean catastrophic, starting with the utterly unfathomable news that the four-day “Black Friday” weekend not only didn’t produce the year-over-year improvement expected by Wall Street, but was so bad even I am speechless.  And no, this is not a typo – as over the four-day weekend, U.S. holiday shopping receipts were an astonishing 11% lower than a year ago; which, I might remind you was the worst holiday shopping season since 2009.  And the scariest part of all, demonstrating not only how weak America’s “economy” is, but how far its society has degraded – is that Thanksgiving Day spending rose 24%, whilst spending on the following three days plunged precipitously.  In other words, not only did the paradoxical “strategy” of all companies simultaneously front running Black Friday fail miserably but the institution of America’s most joyous family holiday was soiled in the process.

Worst yet, we haven’t even seen the horrific margins retailers “earned” this weekend; and oh yeah, brick and mortar traffic plunged precipitously, supplanted permanently by online sales.  Which means, of course, that thousands of retail stores – and jobs – will be permanently lost; as will the value of millions of square feet of highly leveraged commercial real estate.  And just wait to see the retail industry impact when the bankrupt U.S. government decides to tax online sales, which we assure you it will!

But let’s not forget, America’s “recovery” is six years old; and its economy by far the world’s “strongest” – LOL.  That is, according to Wall Street propaganda, Washington lies and MSM foolishness.  Sadly, this point is actually arguable for what it’s worth – as essentially all “non-reserve currency” nations are not only in equal states of economic freefall, but so are their currencies.  Overnight, for example, we saw an “unexpected” contraction in Chinese PMI manufacturing to 50.3, its lowest level in eight months – which in unrigged numbers, means the supposedly “7.5% growing” Chinese economy is flat-lining.

In Europe, the overall PMI was 50.1, as its own book cookers try to pretend Europe is not contracting – even as its largest component, Germany, printed at a recessionary 49.5 down from 50.0 just a few weeks ago.  And then there’s Japan, whose BOJ-supported stock market hit multi-year highs whilst Moody’s downgraded its credit rating from Aa3 to A1 – enroute to junk status, as the “Land of the Setting Sun” deflates into its radioactive seas.  Meanwhile, the stock markets and currencies of commodity-based economies the world round are imploding – from the Brazilian Real, to the Russian Ruble, and the Nigerian Naira.  And by the way, all five of the supposedly world-leading BRICS’ currencies have been in or near freefall mode, for those that think there’s any economic bright spots in the world.  Finishing the thought, the U.S. just followed up Wednesday’s nine weaker than expected economic data points with its lowest PMI Manufacturing PMI reading since January.  I wrote Thursday morning, that I expected the 10-year Treasury yield to plunge below 2.20% Friday and potentially 2.15%; and lo and behold, it ended Friday afternoon at 2.17%, and sits at 2.16% as I write – as the “most damning proof yet of QE failure,” i.e., plunging rates amidst so-called “recovery” becomes more visible each day.

As for PMs, does it really surprise anyone that after last night’s unfathomable post-referendum raid – in which silver was smashed by nearly 8%, atop Friday’s ridiculous 7% attack – prices have surged sharply ahead?  In other words, TPTB duped the Swiss into believing gold was “too volatile” and “unloved” to own, just enough to ensure a “no” vote before covering their paper shorts this morning.  Clearly, the 15-year low forward rates – not to mention, Miles Franklin’s business – demonstrate loud and clear that nary a shred of real metal was sold this past month; and given the expanding economic implosion and surging physical demand, the shortages the U.S. Mint experienced last month could easily mushroom to 2008-like proportions at any time.  Heck, according to my good friend Rob Kirby, prices for size gold purchases in Asia, as I write, are closer to $1,800/oz than the rigged $1,200 level in Western paper markets.

With that in mind, it’s time for the “main event” – which, in my mind, is as important a topic as any the Miles Franklin Blog has covered.  Which, of course, is the utter collapse of global oil prices, to a potentially “new normal” level well below the cost of shale oil production.  Unlike, precious metals, which are no more than niche markets in the monetary and industrial realms – for now, at least – crude oil is the basis of entire economies on multiple continents.  Consequently, as we wrote October 15th, such a plunge portends “unspeakable” geopolitical and economic horrors, particularly in high-cost markets like U.S. shale oil, which we mocked nearly two years ago.  To wit, if there’s one thing I learned in my ten years of Wall Street energy research, it’s that the U.S. cannot compete with Middle Eastern oil production, particularly in a rapidly declining price environment.

Now that the peak oil price era has likely arrived – at least, until hyper-inflation inevitably trumps it – numerous articles have been published depicting just how dire the situation is for America’s only strong industry since 2008.

To that end, let’s start with the horrifying fact that a whopping 15% of all U.S. junk bonds are related to shale oil drilling compared to just 4% when the environmentally toxic “fracking boom” commenced a decade ago.  Unlike essentially all Federal Reserve supported debt markets, shale oil bonds have plunged precipitously in line with the internet-like plunge in such companies’ stocks.  At $65/bbl. oil, the vast majority of shale oil production is unprofitable – but the real horror of it all is that the discounts to spot received by such companies can be dramatic, given the less desirable blends produced and more costly transportation infrastructure required.  For example, Bakken crude from North Dakota is typically worth no more than 80% of the spot price.

And given shale oil’s dramatic decline rates – and subsequently, soaring capital expenditure requirements – plunging oil prices can and will bankrupt dozens, if not hundreds of companies in a heartbeat.  Back in my oil research days, we deemed such high depletion fields as being “on the treadmill”; whereas, without consistently increasing drilling expenditures, production dramatically declines.  In other words, the oilfield equivalent of a PONZI SCHEME – which, in this case, was funded with junk bonds possible only due to artificial rate suppression by Federal Reserve QE – which consequently can NEVER end.

According to Daniel Dicker, a long-time energy trader, “Everybody is trying to put a very happy spin on the industry’s ability to weather $80 oil, but a lot of that is just smoke – as at $80, the shale revolution doesn’t work, period.”  If this is the case, what does today’s $65 oil portend?  Let alone, “points below?”

Worse yet, an astonishing 33% of the entire capital expenditures of S&P 500 companies emanate from the energy sector; which ominously, were plunging before this fall’s historic oil price collapse.  Throw in the fact that many major oil companies are faced with exploding exploration, production and development costs (sound familiar, mining share owners?) have instead been buying back stock and paying outsized dividends also funded by Federal Reserve subsidized debt.  To that end, in this must read article…

Ambrose Evans-Pritchard avers that “the vast majority of public oil and gas companies require oil prices of over $100 to achieve positive free cash flow under current capex and dividend programs, while nearly half need more than $120, and in the fourth quartile, where most U.S. E&Ps (read, shale companies) cluster, $130 or more is needed.” 

Last but not least, is the simple COMMON SENSE of what collapsing oil prices means for the global economy, financial markets and geopolitical environment – as beautifully summarized in this additional must read article.  As we have written relentlessly, the minor economic “benefit” of lower gasoline prices will be dwarfed by the terrifying negatives – which clearly were witnessed Black Friday weekend, when historically few people drove to stores to take advantage of holiday sales.  In our view, there is a nearly 100% chance that oil prices will remain mired in “shale oil death” territory for as long as the low cost Middle Eastern producers need to recapture market share – and the longer this takes, the more catastrophic losses will occur to shale oil investors.  Which again, has been the only viable American industry in the post-2008 world of QE, other than the high-end QE subsidized real estate market that has indisputably rolled over as well.

To conclude, now that the Swiss gold referendum has been successfully manipulated into a “no,” the entire world lies in a sea of recession and money printing with precious metals in a potentially historic supply/demand situation.  The catalysts to set off an historic melt-up of gold and silver prices – and economic conflagration – are too numerous to count; and frankly, it’s difficult to believe “something” won’t give soon.  Here at Miles Franklin, we dutifully await your call, hoping you will be one of the “new 1%” that protect themselves before this happens with the same real money that has stabilized civilizations for millennia.

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