Oil Price Per BBL

[Hobbes]

I'm not certain you guys understand the implications of the article.

US producers have locked in higher prices through derivatives contracts. Noble Energy and Devon Energy have both hedged over three-quarters of their output for 2015.

Pioneer Natural Resources said it has options through 2016 covering two- thirds of its likely production.

So they are protected to a very large degree. It is those that are on the losing end of those contracts that are going to get burned.

Financialization is always based on the presumption that risk can be cancelled out by hedging bets made with counterparties. This sounds appealing, but as I have noted many times, risk cannot be disappeared, it can only be masked or transferred to others.

Relying on counterparties to pay out cannot make risk vanish; it only masks the risk of default by transferring the risk to counterparties, who then transfer it to still other counterparties, and so on.

This illusory vanishing act hasn’t made risk disappear: rather, it has set up a line of dominoes waiting for one domino to topple. This one domino will proceed to take down the entire line of financial dominoes.

The 35% drop in the price of oil is the first domino. All the supposedly safe, low-risk loans and bets placed on oil, made with the supreme confidence that oil would continue to trade in a band around $100/barrel, are now revealed as high-risk.

In recent years, Wall Street has been transformed into the largest casino in the history of the world.
Most of the time the big banks are very careful to make sure that they come out on top, but this time their house of cards may come toppling down on top of them.

The big oil companies that locked in high oil prices through their derivative contracts are protected because of their derivative contracts.
Think of it like insurance or credit default swaps.

However, the risk didn't go away. It is now on the books of the banks that wrote the derivative contracts.
Their balance sheets are no longer balanced because the asset on one side of the books has now declined 40%.

Now what happens if one of those banks, say JP Morgan Chase for example, finds itself in a position where it is unable to make good on the losing end of those contracts?

It's the exact same thing as 2008 except this time it would be commodities instead of housing.

 

[rlongnt]

I'm not certain you guys understand the implications of the article.




The big oil companies that locked in high oil prices through their derivative contracts are protected because of their derivative contracts.
Think of it like insurance or credit default swaps.

However, the risk didn't go away. It is now on the books of the banks that wrote the derivative contracts.
Their balance sheets are no longer balanced because the asset on one side of the books has now declined 40%.

Now what happens if one of those banks, say JP Morgan Chase for example, finds itself in a position where it is unable to make good on the losing end of those contracts?

It's the exact same thing as 2008 except this time it would be commodities instead of housing.

Then I'd say then it couldn't happen to a group of more deserving SOBs!

 

[1krr]

Then I'd say then it couldn't happen to a group of more deserving SOBs!

Lol, agree!

Hobbes, I started writing a long drawn out post but deleted and summarized. Really it just sums to the fact that I think the fundimentals are different. I'm no lover of oil and gas and I think this latest crash is further evidence of why we need to diversify our energy sources and our state's economy. But for this latest round of drama, I think opec only going to tolerate these pricing levels just long enough to push Russia back several years. I really do think this is more about keeping more Russian energy out of the market than it is destabilising US shale producers. Opec can put two quarters into low prices and in combination with sanctions limiting capital and technology, they can push Russian production back 5-10 years. I could be (probably am) wrong but I believe it enough that I put some cash into it today. I'm betting everyone who buys an SUV for Christmas on low gas prices will be crying about it by next summer.

 

[Hobbes]

Lol, agree!

Hobbes, I started writing a long drawn out post but deleted and summarized. Really it just sums to the fact that I think the fundimentals are different. I'm no lover of oil and gas and I think this latest crash is further evidence of why we need to diversify our energy sources and our state's economy. But for this latest round of drama, I think opec only going to tolerate these pricing levels just long enough to push Russia back several years. I really do think this is more about keeping more Russian energy out of the market than it is destabilising US shale producers. Opec can put two quarters into low prices and in combination with sanctions limiting capital and technology, they can push Russian production back 5-10 years. I could be (probably am) wrong but I believe it enough that I put some cash into it today. I'm betting everyone who buys an SUV for Christmas on low gas prices will be crying about it by next summer.

You're prolly correct.

One big difference is that oil companies and countries can take oil production off line to reduce supply until prices stabilize.

Still, if oil prices stay this low or lower for more than a few more months somebody is going to lose their shirt.
It wouldn't surprise me to see Goldman Sachs or Chase get their ass in a bind and expect a taxpayer bailout to save the credit system.

We already know how Chase lost billions in the London Whale trading fiasco 2 years ago.

And now there is a move under way to get congress to undo the Volcker rule that splits the financial speculation side of banking from the FDIC insured side of banking.

 

[1krr]

I really hope they don't undo the Volcker rule. It's a prime example of what happens when freedom isn't taken with an equal dose of responsibility.

 

[Hobbes]

$58.45 this morning.

 

[SoonerP226]

$58.45 this morning.

Fox25 reported two stations with regular down to $1.89 in the OKC area.

 

[Hobbes]

Time to take a road trip.

 

[nofearfactor]

$58.45 this morning.

Next quarterly payment in March on our mineral rights payment is going to be sad, June and September payments could still be ok if it recovers by spring- but I dont see that happening, I think it will be worse or at least stay down low. Theyre calling for it being down for awhile. Glad I stack it away for just these kinds of times like my grampa told me to do, he was an OKC producer and he could gauge the ups and downs pretty good. If we can keep our production on the wells we have producing right now steady like it is we'll still be ok even without any new drilling, which right now is dead as the last lease sale did not generate any new producers interest. No bonuses or profits but still have income, which works for me. Such is life...

 

[Hobbes]

Here is one of those things that just make you go hmmmmm...



7/26/2014
JPMorgan to quit physical commodity trade amid scrutiny

(Reuters) - JP Morgan Chase & Co is exiting physical commodities trading, the bank said in a surprise statement on Friday, as Wall Street's role in the trading of raw materials comes under intense political and regulatory pressure.

Wall Street's biggest bank said an "internal review" had concluded it should pursue "strategic alternatives" for its physical commodities operations, which includes assets like its Henry Bath metals warehousing subsidiary and a vast global team trading everything from African crude to Canadian natural gas.

The firm will explore "a sale, spinoff or strategic partnership" for its physical arm, the statement said. It said the bank remained "fully committed" to its traditional financial commodity business, including trading derivatives and its activities in precious metals.

The bank's announcement follows a week of unprecedented scrutiny of Wall Street's commodity operations, after the U.S. Federal Reserve said last Friday it was reviewing a landmark 2003 decision that allowed commercial banks to trade in physical markets to "complement" their financial activity.

The move also comes as Chief Executive Jamie Dimon strives to put the bank back on course after a series of costly trading moves and regulatory run-ins, including a potential $410 million settlement over alleged power market manipulation.

The decision is a sharp reversal for the bank that had pushed aggressively into the sector since 2008, when it first acquired a host of physical trading assets and expertise through its acquisition of Bear Stearns during the financial crisis.

At its peak, JPMorgan's global commodity operation was considered the largest on Wall Street, supplying crude oil to the biggest refinery on the East Coast and holding enough electricity contracts to light Indiana's 2.8 million homes. It was one of the 10 largest U.S. natural gas traders.