Thursday, March 17, 2016

Low oil prices, high unemployment...

Don’t let the banks head down the drain with your money

by GS Early

While the U.S. continues to splash the news that unemployed Americans are getting fewer and fewer, no one really asks what kind of jobs they’re getting.

Here’s one for you: He was a middle manager at a bank that was having a tough go of it because of overextended lines of credit and loans to energy companies during the energy boom. But the bank decided that his loyalty and service was too expensive. So he lost his job that had been keeping him in his American Dream home and nice middle class life.

He finally got another job… one of those being touted by those cheering the job numbers. He’s still a bank manager, only now he’s making significantly less and has had to draw down his savings to keep afloat.

Swapping bad jobs for good ones is what constitutes good news on the job front these days?

It’s not bad enough that even bank employees don’t have enough money to save in their own banks. Job news out of the oil patch continues to get darker by the day. Why does that matter to the banks? They are chin deep in loans and lines of credit to both Big Oil and small.

Low oil prices, high unemployment

According to Baker Hughes, the rig count went down another 12 rigs in late February, making the total for the year 502. Last year there were about 1,200 rigs operating. That is a drop of more than 50 percent in the rig count.

Add to that Halliburton’s announcement recently that it was going to lay off another 8 percent of its workforce — about 5,000 workers. That puts it total layoffs for the year at 27,000. Full year revenue was down 28 percent in 2015 compared to 2014.

This is one of the biggest oil services firms in the world. And it’s getting “whupped” in Texas-speak. Imagine the smaller producers and domestic firms. Texas’ Eagle Ford Basin — one of the most productive and profitable shale fields — was the biggest loser in the past year.

This is a problem for the banks because a few years back, after the taxpayer bailout from the real estate boom that went bust, the banksters were looking for the newest way to make easy money. And they saw the growing U.S. energy sector.

Small players with proven reserves looked a lot more realistic than housing prices. And there was way less regulation to get a piece of the action. Dole out high-interest loans to the exploration and production (E&P) companies and borrow from the U.S. Treasury at next to nothing (literally) and make a killing.

But in late 2014, OPEC put an end to the party by continuing to pump with no letup. And since then, the “high-yield bond market” or as it’s better known, the junk bond market, has imploded.

The consulting firm Deloitte reported that it believes 35 percent of the U.S. E&Ps in operation today will very likely to go into bankruptcy. The same expectation has been laid out for UK oil service firms. This is going to be global.

Just like with the financial crisis eight years ago, the banks are scared to post their losses. They’re hoping something good will happen that will fix this latest exercise in blind greed.

The only glimmer of hope at this point is the fact that the U.S. natural gas industry has decoupled from the U.S. oil industry. Granted, we’re down to 400 natural gas rigs now, and last year at this time there were 986. But we’re not losing rigs week after week.

And if the U.S. can start shipping natural gas, that could prove to be a huge boon to the U.S. energy sector. But having enough export capacity to be a game changer is a ways down the road.

Aside from a massive conflagration in Syria where the U.S., Russia, Saudi Arabia and Iran are drawn in, oil prices are going to stay low. That means banks are again under threat of collapse, along with the U.S. energy patch. analyst Rakesh Upadhyay writes that Russia would like prices to stay low so much that it is trying to form and even bigger cartel than OPEC to further squeeze the over-invested U.S. oil producers. In fact, with the strain in the relationship between the Saudis and the U.S. government over Iran (which is also going to increase its oil output to grow revenues), he writes that Putin would like to step in and take America’s place. Russia would then be in control of the oil cartel, and control almost 73 percent of the global oil supply.

Petrodollars would be a thing of the past. To me, this would be a good thing. Dollars will buy more oil when it’s priced in a less-valuable currency.

But despite that possible positive outcome, this is no time to be bottom fishing. Banks want everything priced in dollars and are wringing their hands not in greed but with worry. This is the time to get your assets out of the banks and into hard assets. Avoid loans or equity lines; it’s not worth the risk.

Gold has been a great performer this year and that trend will continue because things are starting to look like the second law of thermodynamics is accelerating in a very big and real way — the chaos will only increase, but never slow down.


No comments:

Post a Comment