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The “Nuclear Options:” Oil Pinned Below $30/barrel, US Dollar Rising

The “nuclear option” is the extreme-measures button you push when conventional approaches have failed and you’re facing certain defeat. In terms of upsetting the global economy’s precarious balance, there are two nuclear options short of actual nuclear war: pinning oil to $30/barrel or even lower for an extended period, and triggering a sustained rise in the US dollar. (USD)

Let’s glance at weekly charts of oil (WTIC) and the USD:

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Cheap Oil, the U.S. Dollar and the Deep State

That oil fell off a cliff once the U.S. dollar (USD) began its liftoff in mid-2014 is, well, interesting. Causation, correlation or coincidence? There are a variety of opinions on this, as there should be. What we do know is the soaring USD blew up a bunch of carry trades that borrowed money denominated in USD and invested the cash in emerging markets paying much higher yields. Here’s WTIC oil:

And here’s the USD Index:

We also know the Saudis announced that the kingdom would pump every barrel it could “to maintain market share,” which is generally understood to mean crush competitors such as Russia and U.S. shale producers.

We also know that storage facilities are almost full up (Oil Fundamentals Could Cause Oil Prices To Fall, Fast!).

We also know that global growth is slowing, so demand could weaken sharply going forward.

And lastly, we know that many oil exporters are heavily dependent on oil revenues to fund their oligarchy/monarchy/ruling elites, their military and their vast social welfare programs, which keep the restive masses from overthrowing the oligarchy, etc.

Here is the U.S., heavily indebted producers must pump or die, as they need every dime of revenue to service their vast debts.

If we add all this up– carry trades blowing up, weakening demand and heavy pressures to maintain production–we get a perfect set-up for a continued decline in oil.

Many observers are expecting the Federal Reserve to pull out all the stops to weaken the dollar. They think this because a strong dollar hurts U.S. exports. If oil and the USD are indeed correlated, a weaker dollar would trigger a boost in oil prices–a welcome “saved by the bell” for indebted U.S. producers, and the bankers who lent tens of billions of dollars to them.

If you glance at the above chart of the dollar index, you’ll note the Bollinger Bands are tightening. This usually presages a big move up or down. We don’t know which way the USD will move, but since it’s in a Bull market, we might surmise the move will be a continuation of the current trend, i.e. up.

Technically, a 20% gain to the 120 level would be quite typical of a long-term uptrend.

What would an additional 20% gain in the USD do to oil? If the correlation holds (and perhaps it won’t–there are no guarantees), it would very likely crush oil to new and breathtaking lows. Analyst Art Berman recently suggested a target of $16.50/barrel, and this corresponds rather neatly with USD at 120 (a 20% gain).

Lower oil prices are not an unalloyed “win” for the U.S. The U.S. energy sector is getting pummeled, and soon its lenders will start booking staggering losses. The decline in petrodollars also means there is less demand for U.S. Treasuries from oil exporters.

Enter the U.S. Deep State, which is only marginally interested in Wall Street bankers’ losses or petrodollar recycling into Treasuries. Global hegemony ultimately rests on issuing the reserve currency in size, and the sheer magnitude of financial resources that can be brought to bear to do what is viewed as necessary.

The collapse in oil has led to an unprecedented transfer of wealth from producers to consumers. Oil exporters (the number of which is diminishing, as populations and domestic consumption levels soar throughout the oil-producing world) have far fewer USD to spend on military adventures, social welfare, the tallest buildings in the world, and so on.

If global bankers wise up (and they are smart gals/guys), lending to oil producers is about to dry up like the proverbial mist in Death Valley. Why loan money to someone with $35/barrel oil in the ground if oil is heading to $20 or lower?

Who goes broke/goes home/is overthrown at sustained $20/barrel oil? You can make your own list, but it pretty much includes every oil exporter.

So who wins in a scenario in which the USD gains another 20% and pins oil to new, sustained lows? Consumers, of course, but as Zero Hedge and others have explained, this windfall isn’t leading to robust consumer spending. Rather, households are saving the proceeds, hunkering down in the recessionary winds they see rising.

The U.S. oil sector will take some serious lumps, along with every other producer. We can anticipate huge writedowns of uncollectible debt, bankruptcies, and all the other collateral damage (pun intended) of a bust.

But who is left relatively unscathed in terms of financial power and hegemony? The U.S. Should the USD soar another 20%, China would be forced to devalue its currency, causing massive capital flows out of China and an immediate loss of trillions of dollars of purchasing power for all who hold yuan/RMB. Not much of a win there.

All this is to suggest that those expecting a major weakening in the USD to push oil higher shouldn’t hold their breath awaiting this outcome. Maybe the USD will weaken 20%, but why would it do so when every other central bank is weakening its currency? Wouldn’t it make much more sense to drain wealth and geopolitical leverage from oil exporters?

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Is Oil Close to a Tradable Bottom?

By all accounts, the world is awash with oil: production remains high while demand is softening along with the global economy. This has led many observers to forecast further declines in oil from the current price (in USD) of around $35/barrel.

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Will this Manic Stock Market Rally End in Tears?

Judging by October’s rocket launch, the stock market is back to where it should be, i.e. in rally mode. Yee-haw! All it took to keep the party going was another rate cut in China, another “whatever it takes” assurance from Mario Draghi and blowout earnings from a few tech giants.

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Will the Oil Patch Bust Trigger Recession?

This seemingly inexhaustible credit line is now drying up, with severely negative consequences for oil producers with debt that’s coming due.

Could the oil patch bust triggered by oil plummeting from $100/barrel to $50/barrel kick the U.S. into recession? Longtime correspondent B.C. recently observed: The question is whether the incipient recession in the energy and energy-related transport sectors is sufficient this time around to be the proximate cause of a US/global recession and real estate bust.

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Oil Surges, Gold and Silver Spike as Saudi Arabia Bombs Yemen

Oil Surges, Gold and Silver Spike as Saudi Arabia Bombs Yemen

- Geopolitical tensions in Middle East escalate dramatically as Saudi Arabia bombs Yemen
- Yemen’s government seized power in coup – Regarded as hostile to Saudi and ally of Iran
- Saudi attack is an escalation of Middle Eastern proxy war between Gulf States and Iran
- Action has broader geopolitical implications in deepening cold war between the West and East
- Oil surged 6% and gold 2% on the the news
- Should oil prices return to new record highs will impact struggling global economy

goldcore_chart1_26-03-15

Geopolitical tensions escalated dramatically over night as Saudi Arabia launched military operations including air strikes in Yemen. The Saudis claim the action is to counter Iran-allied forces besieging the southern city of Aden where the U.S. backed Yemeni president had taken refuge.

Oil surged and gold rose nearly 2% following a sharp drop in stocks on Wall Street globally in response to the bombing in Yemen.

Gulf broadcaster al-Arabiya TV reported that the kingdom was contributing as many as 150,000 troops and 100 war planes to the operations. Egypt, Jordan, Sudan and Pakistan were ready to take part in a ground offensive in Yemen, the broadcaster said. (more…)

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Oil Dinosaurs Face Extinction: State Oil Companies and the Meteor-Strike of Low Oil Prices

State-owned oil companies that don’t slash expenses to align with revenues and boost critical investment in the infrastructure needed to maintain production will suffer financial extinction.

Domestic and international energy companies are responding to the 50% decline in the price of oil by doing what’s necessary to remain in business: they’re slashing payroll, postponing capital investments, delaying new projects and soliciting price cuts from suppliers and subcontractors.

This is the discipline of profit-driven capitalism: if expenses exceed revenues, profits vanish, losses pile up, capital contracts and eventually the company runs out of cash (and access to credit) and closes down.

Unfortunately for state-owned oil companies, the feedback of expenses, losses and access to credit are superceded by the need to feed hordes of parasites: the state-owned company exists not to generate profits but to fund large payrolls and support state officials and cronies.

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Oil Collapses and Copper Crashes 8% in Day – Great Recession Cometh?

 Oil Collapses and Copper Crashes 8% in Day – Great Recession Cometh?

Oil prices fell another 1 per cent this morning  and continue their collapse – down 57% in just over 6 months. Copper crashed 8% on the London Metal Exchange, plunging to 5 and a half year lows.

Doctor Copper -  Usually a good indicator for economic trends and markets via Marketwatch

Oil fell to fresh six-year lows and has fallen almost 60 per cent since June 30, 2014 to levels last seen in early 2009 after the 2008 crash (see chart). (more…)

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The Deep State Strategy: Burn Everyone Else’s Oil First, Leave Ours in the Ground

The U.S. Deep State is in favor of Saudi Arabia’s strategy of forcing production cuts on its rivals and marginal producers for two profound reasons.

It is widely presumed that if the U.S. government isn’t actively concerned about the financial carnage being visited upon the domestic oil/gas sector, it should be actively concerned for self-evident reasons. These self-evident reasons include lay-offs, cratering profits and a mountain of shale-oil based debt that is in danger of default as revenues fall off a cliff.

The political class that must be re-elected to retain power is obligated to publicly express concern about the negative impact on employment, profits and domestic production.Whether the political class can do anything about the lay-offs and decline in oil/gas revenues is another thing.

But we should also keep our eye on the political system which retains power regardless of which party or politico is in office: the Deep State.

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2015: Asymmetric Oil Warfare

Let’s consider some examples of potential asymmetric-warfare tactics as they relate to the price of oil.

The world has habituated to the never-ending undeclared war over ownership and access to hydrocarbons. Now we are entering a new phase of asymmetric war being waged not over oil but the price of oil. Many observers see a parallel in Saudi Arabia’s stated intent to force other exporters to cut their production (if they want to maintain the price of their oil) to the mid-1980s, when a similar oil-pricing war drove prices to lows that helped bankrupt the Soviet Union.

While there are certainly parallels to that period of superpower confrontation and the Saudis’ use of the oil weapon, it seems to me that the current era is less a replay of the 1980s than a new chapter in asymmetric warfare that may see a variety of oil-related weapons being deployed.

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Iran at all-time low dependency on oil

So, the oil is falling to hurt Iran and Russia? But what are the facts? The fact is that Iran is at all-time low dependency on oil.

The IMF has stated always that Iran needs oil at $130 per barrel to balance its budget. Today the price dropped below $50 per barrel and Iran is at a all-time low dependency on oil. So IMF got it wrong again, again and again. Oepsss.

Read more about Iran at all-time low dependency on oil

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I Call BS on Projections of a Decade of $20/Barrel Oil

The ability of oil exporters to trigger a short-term collapse in price does not automatically translate into an ability to control the financial conflagration such a crash ignites.

My BS detector went off when two stories with similar headlines touting $20/barrel oil were published on the same day. Color me skeptical, but it’s almost as if mere $40/barrel oil is no longer enough to get the blood flowing, so both stories blared the more extreme $20/barrel price point.

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