Falling oil prices have been hammering the energy sector and crimping the one part of the American economy that was actually expanding. Instead, that momentum is shifting towards rapid market contraction and possible collapse.
The sustained drop in oil prices is not only hitting Russia and vulnerable OPEC nations, it is hitting domestic projects here at home as well.
As Michael Snyder warned in December, the potential for falling oil prices to topple the fragile house of cards on Wall Street is enormous, particularly with the massive derivatives placed in the energy and commodities markets.
Wolf Richter, financial guru and CEO of Wolf Street Corp. is warning about the oil bust happening now.
Layoffs are taking place, future drilling and explorations are being canceled or put on hold, and investment money to finance new production sites is drying up, or becoming much more expensive:
Drilling for oil these days is all about endless amounts of no-questions-asked cheap money. And now, as the price of oil plunges relentlessly, the cheap money is drying up faster than ceiling paint.
WTI traded at $46.90 Tuesday evening. Down 56% from June. At these prices, the entire North American oil equation is out of whack, regardless of what Wall Street is telling investors to bamboozle them into surrendering more of their money cheaply in order to keep the house of cards from collapsing. But it seems, investors are catching on.
After dousing energy companies with super-cheap money for years in a Fed-designed drunken stupor, investors came out of it in the second half of 2014. All heck has since broken loose. Energy stocks, particularly of smaller exploration and production companies, are crashing. Energy junk-bond yields – and spreads over US Treasuries – are spiking beautifully to the highest level since the Financial Crisis (chart).
And new money, the fuel required to keep the mirage going, has suddenly become scarcer and a lot more expensive. With funding uncertain and oil prices collapsing, capital expenditures are getting slashed, and it’s beginning to show up in the Baker Hughes rig count. Rigs drilling for oil and gas in Canada have plunged 64% in five weeks, from 438 rigs on November 26 to 156 by January 2. Canada is shutting down its drilling operations.
The effects on the stock market and Wall Street are as inevitable as any game of musical chairs… just wait for the music to stop:
There are suddenly fewer investors willing to stick their heads out, and those that are willing, won’t stick their heads out quite as far, and they’re asking for more yield to be compensated for the risk.
Wall Street and the oil boom are joined at the hip. Years of ceaseless and extraordinary hype brought in piles of new money from investors driven to sheer madness by the pandemic of central-bank zero-interest-rate policies. It forced even pension funds into high-risk deals to make up for the lack of yield on conservative investments. It kept the boom going for years. The likelihood that the price of oil could ever plunge, as it had done periodically in the past, never entered into the equation because central banks, with their ingenious policies, had eliminated all forms of risk.
Investors in these risk-free investments are learning that some of their capital has already gone up in smoke, and that more of it will go up in smoke.A sense of reality is setting in. Money to fund what is left of the drilling boom is drying up and getting a lot more expensive.And the consequences are spilling into other sectors of the economy.
All that worry for 2015, ready to set in, once the energy hit seeps into the rest of the economy.