Oil Price Deflation

The Rushing Bear Market and How to Prepare

, Special Contributor, Money Morning December 14, 2014

… The drop in oil prices is just the first wave of deflation that will hit markets over the coming years. In addition to the deflationary signals being emitted by commodity prices led by oil, Japan and Europe are also exporting deflation through their central banks’ easing policies. The world is experiencing a massive currency war and one of the currencies now in play is oil. (And) Geopolitical pressures have … the Saudis … willing to bear the pain of lower oil prices to hurt Iran, ISIS and Russia and have the full backing of the U.S. and other Western nations to do so.

When $1 trillion and counting of money is removed from the global economy, which is what is happening with the price of oil effectively being cut in half, economic activity drops sharply and inflation morphs into deflation. … The question is whether an economy as leveraged as the United States is still capable of experiencing a mere recession or whether something much worse is in store.

The bloodbath that is unfolding in the energy sector of the high yield bond market could easily spread to the rest of that market, which has been trading at grossly overvalued levels … . The average yield on energy bonds has jumped to 9.42% from a record low 4.87% just six months ago … Energy bonds (are) approximately 15% of the junk bond market but oil itself has an impact on a much broader array of industries. The … Barclays High Yield Index (yield) is still only 6.83%, far below distressed levels. If current trends continue, spreads and yields could easily widen …

Today’s junk bond market is characterized by thin dealer inventories, a buyer’s strike among distressed and event-driven sellers, and concentrated ownership among ETFs and large institutions which has led to a truly horrible liquidity picture. … It won’t take much more pain to send the market into a full-throated selling panic. …

(Read More)


Energy Sector Woes Continue to Weigh on Market as Risks of Default Increase

Chris Puplava

… While the unwinding of speculative oil paper bets is contributing to the slide in oil prices, there are other fundamental reasons as well. … Oil stockpiles for the Americas currently rests at a 5-year extreme and total OECD supplies … have been trending higher all year. … Currently, total OECD demand data isn’t encouraging for higher oil prices either (and) Global demand doesn’t look set to improve any time soon …

The hit to the energy sector is beginning to cause some angst in the credit markets as the sector was one of the highest issuers of junk bond debt in recent years … Option adjusted spreads on the investment grade energy sector index are nearing a 5-year high and for the high yield energy index spreads have exploded to nearly 1000 as default risk in the energy high yield market becomes worrisome. …

Keep a close eye on the credit markets for confirmation of a bottom. Most often, divergences between stock markets and the credit markets resolve towards the latter. … We need to see spreads for energy debt issuers come down … which just isn’t present at the moment. …

The sector is faced with a “darned if I do and darned if I don’t” dilemma in that if they want to stop the decline and help stabilize prices they need to cut production to bring supply and demand into balance, which will lead to slower cash flow and earnings being used to service their debt. However, if they keep production rates at current levels, prices will undoubtedly fall further …

Investors holding risky energy stocks may want to review the Bloomberg default risk table above to help detect if they have any landmines in their portfolios.

(Read More, with Charts)


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About icliks

Biding my time in central ms ... yours too, if ur reading this.
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