The Dow shed 592 points yesterday, in the wake of a historic crash in short-term oil prices, with benchmark West Texas intermediate crude closing at negative $37.63 on Monday… the first time oil futures had not only reached, but sunk, below zero.
The market selloff continued today with indexes across Asia, Europe and the U.S., down over 2 percent on average, with the Dow falling 630 points, bringing its two-day drop to over 1,200 points.
Gold closed at $1,684, edging down from Friday’s $1,716 mark.
Bitcoin settled at 6,875 after closing Friday at 7,096.
Brent crude closed at $19.89 a barrel and West Texas Intermediate fell to $13.22 a barrel.
TREND FORECAST: As we have continually noted with hard facts and quantitative data, the driving force for the equity market rebound that drove the markets up some 15 percent over the past two weeks, its best performance since 1938, has been the Federal Reserve and U.S. government’s unprecedented money pumping injection into the financial system.
These schemes are unsustainable. We maintain our forecast that equities will sink in double bear territory, down some 40 percent from their record high.
On the gold front, while it has pulled back from last weeks $1,716 high and now is trading in the $1,680 per ounce range, it remains a strong safe-haven asset.
We maintain our forecast that when gold stabilizes above the $1,740 per ounce range, it spike to $2,000 per ounce.
TREND FORECAST: The “Greatest Depression” has begun.
Oil’s unprecedented selloff that saw West Texas Intermediate contract for May delivery falling below zero for the first time in history tells the economic story. In essence, by prices falling into negative territory and storage capacity filling up, producers would pay buyers to take the excess oil off their hands.
With demand plummeting as a result of politicians around the world locking down people and closing down businesses, crashing oil signals how deep, hard, and fast the global economy is sinking.
The International Energy Agency warned that demand in April will fall nearly 30 million barrels per day lower than a year ago, hitting levels last seen in 1995.
Today, international benchmark Brent crude traded 23.5 percent lower at $19.70 per barrel. Earlier in the day, it hit its lowest level since December 2001, before paring some of those losses.
Oil Market Squeezes U.S. Independents
Oil prices languishing at multi-decade lows, and record production levels set last month, are forcing U.S. independent producers to shut in wells and hundreds are likely to sell out or close up shop.
In west Texas and western Canada, spot market prices recently dipped below $10 a barrel, a price not seen in more than 20 years.
Meanwhile, U.S. consumption of petroleum products fell 19 percent during the week ending 3 April, a 30-year low, according to the U.S. Energy Information Administration.
Texland Petroleum, a 40-year-old company pumping 7,000 barrels a day from Permian shale in west Texas, is shutting in all of its 1,211 wells by May because it can’t find buyers; the world’s oil market is brimming with unsold crude.
The Permian shale beds account for about 40 percent of current U.S. oil production.
“We’ve never done this before,” said Jim Wilkes, Texland’s CEO. “We’ve always been able to sell the oil, even at a crappy price.”
Canada’s tank farms and other storage units were so full earlier this week that they could take only about another four days’ production, according to Genscape, an energy analysis firm.
“We’ve been told by two of my markets that they won’t take my production in May because there’s nowhere to put it,” said Russell Gordy, who has wells in three western states and the Gulf of Mexico. “We’ll have to shut in most of our production.”
Continental Resources, a major player in Oklahoma and North Dakota, has announced production cuts of about 30 percent in April and May and the closure of 400 wells that can’t support the cost of pumping oil out of the ground.
Baker Hughes, a major oilfield supply company, is slashing spending and restructuring its operations because of vanishing business. The new plan will trim $1.5 billion from its first-quarter earnings. The company also is taking a $15-billion write-down.
Texas independent producers have petitioned the Texas Railroad Commission, which governs the state’s oil and gas industry, to mandate production cuts statewide.
At a 14 April public hearing, producers told the commission that if the state did not force production cuts for the industry across the board, hundreds and perhaps thousands of small companies could go bankrupt and tens of thousands of jobs could disappear.
“If the… commission does not regulate… we will disappear as an industry,” said Scott Sheffield, CEO of Pioneer Natural Resources. “The commission does not have any wiggle room to do nothing in the unprecedented, disastrous circumstances of today.”
Major companies such as Marathon Oil oppose mandated cuts, as do the American Petroleum Institute, the Texas Oil and Gas Association, and the Texas Independent Producers & Royalty Owners Association.
“The shale revolution would not have begun here in Texas without free market principles,” said Lee Tillman, Marathon’s CEO. “When a vocal minority takes a position in favor of artificial market manipulation that is so far removed from the consensus of a vast majority of operators, one can only surmise that their motives and objectives are primarily company-specific as opposed to broadly industry-supportive.”
The commission could make its decision this week.
PUBLISHER’S NOTE: The oil and gas industry has long had a love-hate relationship with regulation. When times are good, producers complain about government meddling in their business; when times are bad, producers want regulators to save them.
Today, following the steep oil price selloffs, President Trump tweeted, “We will never let the great U.S. Oil & Gas Industry down. I have instructed the Secretary of Energy and Secretary of the Treasury to formulate a plan which will make funds available so that these very important companies and jobs will be secured long into the future!”
Despite these bailout measures, as we have detailed in the Trends Journal, many producers are already deep in debt and these crashing problems have the potential to sink even the biggest oil players into bankruptcies.
Moreover, again, as we have noted, there will be massive social unrest in oil-rich countries, both rich and poor, as the “Greatest Depression” takes a great toll on their already weakened economies.
