The Price Of Oil

Do You Remember The Oil Crisis And “Stagflation” Of The 1970s? In Many Ways, 2019 Is Starting To Look A Lot Like 1973…

The price of gasoline is rapidly rising, economic activity is slowing down, the Middle East appears to be on the brink of war, and Democrats are trying to find a way to remove a Republican president from office.  In many ways, 2019 is starting to look a lot like 1973.  For many Americans, the 1970s represent a rather depressing chapter in U.S. history that they would just like to forget, but the truth is that if we do not learn from history it is much more likely that we will repeat our mistakes.  And without a doubt, right now a lot of things are starting to move in a very ominous direction.

“Stagflation” was a term that was made popular in the 1970s, and it occurs when there is a high rate of inflation but economic growth is declining or stagnant.

The U.S. hasn’t had a serious bout with stagflation in quite a while, but it appears that we may be moving in that direction.

Let’s talk about the slowdown in the economy first.  On Monday, we learned that sales of existing homes in the U.S. were way down in March…

Home sales are struggling to rebound after slumping in the second half of last year, when a jump in mortgage rates to nearly 5% discouraged many would-be buyers. Spring buying is so far running behind last year’s healthy gains: Sales were 5.4% below where they were a year earlier.

On a year over year basis, existing home sales have now fallen for 13 months in a row.

That is terrible, and there is no way to “spin” that fact to make it look good.

We also learned on Monday that Office Depot is closing 50 stores.  Of course this is just the continuation of a trend that The Economic Collapse Blog has been tracking for quite some time.

Overall, U.S. retailers have already announced more store closings in 2019 than they did all of last year, and we are on pace for the worst year for store closings in all of U.S. history.

Ouch.

I could go on and on listing more numbers that indicate that the U.S. economy has been slowing down, but I don’t want to repeat much of what I have already shared over the past several weeks.

Meanwhile, inflation is starting to rise significantly in some pretty key areas.  Previously I have explained why food prices are beginning to move up aggressively, and now gas prices are starting to make national headlines once again.

For example, the price of gas in the state of California just hit the highest level in nearly five years…

California’s gas prices continued to climb Wednesday, hitting the highest levels in almost five years.

Motorists throughout the Golden State are paying an average of $4.01 for a gallon of regular gasoline, by far the highest in the country and well above the national average of $2.83, according to a news release from AAA.

The primary factor driving up the price of oil is geopolitical wrangling in the Middle East.  According to CNBC, President Trump intends to stop Iran from exporting any oil at all…

Oil prices surged about 3% at midday on Monday, hitting fresh 2019 highs, after the Trump administration announced that all oil buyers will have to end imports from Iran in just over a week or be subject to U.S. sanctions.

The administration said the State Department will cease granting sanctions waivers to any country still importing Iranian crude or condensate, an ultra-light form of crude oil, after May 2.

If President Trump is successful, it will eliminate approximately a million barrels of oil per day from the global marketplace.

That is a big deal.

And this comes at a time when oil prices have already been steadily rising.

Unfortunately, Iran doesn’t plan to take this move lying down, and their response could potentially spark a full-blown oil crisis.

According to Bloomberg, Iran is actually threatening to close the Strait of Hormuz for all commerce…

Iran will close the Strait of Hormuz, a waterway vital for global oil shipments, if the country is prevented from using it, a senior military official said on Monday in what appears to be a response to the U.S. plan to end waivers on Iranian oil exports.

“If we are prevented from using it, we will close it,” the state-run Fars news agency reported, citing Alireza Tangsiri, head of the Revolutionary Guard Corps navy force. “In the event of any threats, we will not have the slightest hesitation to protect and defend Iran’s waterway.”

If Iran did such a thing, it would throw global oil markets into a state of tremendous turmoil, and it would bring us much, much closer to war with Iran.

In recent days the Iranians and the Trump administration have been trading very angry words, and it certainly doesn’t help that the Iranians just appointed a certified hothead as the leader of the Republican Guards…

Salami has frequently vowed to destroy Israel and “break America.” Iran was “planning to break America, Israel, and their partners and allies. Our ground forces should cleanse the planet from the filth of their existence,” Salami said in February. The previous month, he vowed to wipe Israel off the “global political map,” and to unleash an “inferno” on the Jewish state.

He also said “Iran has warned the Zionist regime not to play with fire, because they will be destroyed before the US helps them.” Any new war, he said, “will result in Israel’s defeat within three days, in a way that they will not find enough graves to bury their dead.”

Hossein Salami is a complete and total nutjob, and I am entirely convinced that he actually wants a war with the United States and Israel.

For a long time I have been warning that we need to watch the Middle East, and a major regional war could potentially erupt at any time.

Let us hope that cooler heads prevail, because a full-blown war involving Iran, Israel and the United States would mean an immense amount of death and destruction.

For the moment, things are relatively calm in the United States, but most Americans don’t realize that we are actually in a very precarious position.

It isn’t going to take much for global events to reach a tipping point, and once they do there will be no going back.

Get Prepared NowAbout the author: Michael Snyder is a nationally-syndicated writer, media personality and political activist. He is the author of four books including Get Prepared Now, The Beginning Of The End and Living A Life That Really Matters. His articles are originally published on The Economic Collapse Blog, End Of The American Dream and The Most Important News. From there, his articles are republished on dozens of other prominent websites. If you would like to republish his articles, please feel free to do so. The more people that see this information the better, and we need to wake more people up while there is still time.

Oil Prices Have Been Rising And $4 A Gallon Gasoline Would Put Enormous Stress On The U.S. Economy

Thanks to increasing demand and upcoming U.S. sanctions against Iran, oil prices have been rising and some analysts are forecasting that they will surge even higher in the months ahead.  Unfortunately, that would be very bad news for the U.S. economy at a time when concerns about a major economic downturn have already been percolating.  In recent years, extremely low gasoline prices have been one of the factors that have contributed to a period of relative economic stability in the United States.  Because our country is so spread out, we import such a high percentage of our goods, and we are so dependent on foreign oil, our economy is particularly vulnerable to gasoline price shocks.  Anyone that lived in the U.S. during the early 1970s can attest to that.  If the average price of gasoline rises to $4 a gallon by the end of 2018 that will be really bad news, and if the average price of gasoline were to hit $5 a gallon that would be catastrophic for the economy.

Very early on Tuesday, the price of U.S. oil surged past $70 a barrel in anticipation of the approaching hurricane along the Gulf Coast.  The following comes from Fox Business…

U.S. oil prices rose on Tuesday, breaking past $70 per barrel, after two Gulf of Mexico oil platforms were evacuated in preparation for a hurricane.

U.S. West Texas Intermediate (WTI) crude futures were at $70.05 per barrel at 0353 GMT, up 25 cents, or 0.4 percent from their last settlement.

If we stay at about $70 a gallon, that isn’t going to be much of a problem.

But some analysts are now speaking of “an impending supply crunch”, and that is a very troubling sign.  For example, just check out what Stephen Brennock is saying…

“Exports from OPEC’s third-biggest producer are falling faster than expected and worse is to come ahead of a looming second wave of U.S. sanctions,” said Stephen Brennock, analyst at London brokerage PVM Oil Associates. “Fears of an impending supply crunch are gaining traction.”

So how high could prices ultimately go?

Well, energy expert John Kilduff is now projecting that we could see the price of gasoline at $4 a gallon by winter…

Energy expert John Kilduff counts Iran sanctions as the top reason West Texas Intermediate (WTI) could climb as much as 30 percent by winter, and that could spell $4 a gallon unleaded gasoline at the pumps.

“The global market is tight and it’s getting tighter, and the big strangle around the market right now is what’s in the process of happening with Iran and the Iran sanctions,” the Again Capital founding partner said on CNBC’s “Futures Now.”

About two months from now, U.S. sanctions will formally be imposed on Iran, and that is going to significantly restrict the supply of oil available in the marketplace.

So refiners that had relied on Iranian oil are “scrambling” to find new suppliers, and this could ultimately drive oil prices much higher…

Iran’s oil exports are plummeting, as refiners scramble to find alternatives ahead of a re imposition of U.S. sanctions in early November. That in turn has helped drain a glut of unsold oil.

“To the extent we’re seeing the Iran barrels lost to the market, you’re looking at a WTI price and Brent in the $85 to $95 range, potentially,” Kilduff said.

Other sources are also predicting that oil prices will rise.

Barclays is warning that “prices could reach $80 and higher in the short term”, and BNP Paribas is now anticipating that Brent crude will average $79 a barrel in 2019.

In addition to the upcoming Iranian sanctions, rising global demand for oil is also a major factor that is pushing up prices.

For example, many Americans don’t even realize that China has surpassed us and has now become the biggest crude oil importer on the entire planet…

China became the world’s largest crude oil importer in 2017, surpassing the US and importing 8.4 million barrels per day.

The US only imported 7.9 million barrels per day in 2017, according to the US Energy Information Administration.

So what is the bottom line for U.S. consumers?

The bottom line is that gasoline prices are likely to jump substantially, and that is going to affect prices for almost everything else that you buy.

Excluding tech products, virtually everything else that Americans purchase has to be transported, and so the price of gasoline must be factored into the cost.

So if gasoline prices shoot up quite a bit, that means that almost everything is going to cost more.

And this would be happening at a time when inflation is already on the rise…

According to data from the Bureau of Labor Statistics, the Consumer Price Index for All Urban Consumers, less food and energy, hit 2.4% in July 2018. That’s its highest reading since September 2008.

Of course 2.4 percent doesn’t really sound that scary, and that is how the government likes it.

But if the rate of inflation was still calculated the way it was back in 1990, the current inflation rate would be above 6 percent.

And if the rate of inflation was still calculated the way it was back in 1980, the current inflation rate would be above 10 percent.

Inflation is a hidden tax on all of us, and it is one of the big reasons why the middle class is being eroded so rapidly.

Please do not underestimate the impact of the price of oil.  It shot above $100 a barrel in 2008, and it was one of the factors that precipitated the financial crisis later that year.

Now we are rapidly approaching another crisis point, and there are so many wildcards that could potentially cause major problems.

One of those wildcards that I haven’t even talked about in this article would be a major war in the Middle East.  One of these days it will happen, and the price of oil will instantly soar to well above $100 a barrel.

We live at a time of rising global instability, and we should all learn to start expecting the unexpected.

This article originally appeared on The Economic Collapse Blog.  About the author: Michael Snyder is a nationally syndicated writer, media personality and political activist. He is publisher of The Most Important News and the author of four books including The Beginning Of The End and Living A Life That Really Matters.

 

The Price Of Oil Is Crashing Again, And That Is Very, Very Bad News For The U.S. Economy

Oil Price Crashing - Public DomainThis wasn’t supposed to happen.  The price of oil was supposed to start going back up, and this would have brought much needed relief to economically-depressed areas of North America that are heavily dependent on the energy industry.  Instead, the price of oil is crashing again, and that is really bad news for a U.S. economy that is already mired in the worst “recovery” since 1949.  On Monday, U.S. oil was down almost four percent, and for a brief time it actually fell below 40 dollars a barrel.  Overall, the price of oil has fallen a staggering 21 percent since June 8th.  In less than two months, the “oil rally” that so many were pinning their hopes on has been totally wiped out, and if the price of oil continues to stay this low it is going to have very seriously implications for our economy moving forward.

One of the big reasons why the price of oil has been declining is because the OPEC nations continue to pump oil at very high levels.  The following comes from CNBC…

Production in July by the Organization of the Petroleum Exporting Countries likely rose to its highest in recent history, a Reuters survey found on Friday, as Iraq pumped more and Nigeria squeezed out additional crude exports despite militant attacks on oil installations.

Top OPEC exporter Saudi Arabia also kept output close to a record high, the survey found, as it met seasonally higher domestic demand and focused on maintaining market share instead of trimming supply to boost prices.

These countries don’t know if or when the price of oil will eventually rebound, but what they do know is that they desperately need cash in order to keep their sputtering economies going.  Many of these nations are already experiencing significant economic downturns, and substantially reducing oil revenues at this time would definitely not help things.

Here in North America, oil production costs tend to be higher, and so when the price of oil crashes we tend to see companies shut down rigs.  But when rigs get shut down, that means that good paying jobs are lost.

During the first four months of 2016, approximately 35,000 jobs were lost at Texas energy companies.  Globally, more than 290,000 energy jobs have been lost since the price of oil started falling back in 2014.

And even though there was hope that energy companies would add jobs as the price of oil started rebounding during the second quarter, it turned out that the job losses just kept on coming…

Energy companies continued to cut thousands of jobs during the second quarter, even though many chief executives are now voicing optimism that the oil market crash is ending and a rebound in drilling is afoot.

Although the heads of Halliburton Co. , Schlumberger Ltd. and other major firms forecast higher crude prices and a return to U.S. shale fields when discussing earnings this week, those companies and others disclosed another 15,000 industry layoffs.

Personally, I have quite a few members of my own extended family that live in areas that are heavily dependent on the energy industry, and three of them have lost their jobs so far this year.

And these are precisely the sort of good paying middle class jobs that we cannot afford to lose.  In order to having a thriving middle class, you need lots of middle class jobs.  Unfortunately, those kinds of jobs are going away, and the middle class in the United States is systematically dying.

If the price of oil keeps going lower, that will mean even more jobs losses for the energy industry, and that will be very bad news for the U.S. economy.

In addition, many of these energy companies are getting into very serious debt problems.  Delinquency rates on corporate debt are already the highest that they have been since the last recession as firms struggle to pay their bills.  Of course some of them have already gone belly up, and this has pushed default rates on corporate debt to the highest level since the last financial crisis.

At a price of 40 dollars a barrel, most oil companies in the United States are not profitable in the long-term.  The longer the price of oil stays down in this neighborhood, the more energy companies we will see go bankrupt.  At this point it is just a waiting game.

Also, it is important to keep in mind that Wall Street is very heavily exposed to the energy industry.  Just as subprime mortgages brought down quite a few financial institutions back in 2008, so this time around it is inevitable that the oil crash will claim a fair number of victims as well.

As the global economy has slowed down, the demand for oil has decreased.  And at this point, even the U.S. economy appears to be seriously slowing down.  U.S. GDP only grew at about a one percent rate for the first half of 2016, and the rate of homeownership in this country just hit the lowest level ever recorded.

In the mainstream financial media, there is a lot of hopeful talk about a potential turnaround for the energy industry, but most of that talk appears to be just wishful thinking.

To me, about the only thing that could push the price of oil back to where U.S. oil companies need it to be in the short-term would be a major war in the Middle East.  And of course that is definitely always a possibility considering who is running things in Washington.  But absent that, it is hard to see the price of oil getting back to 70 or 80 dollars a barrel any time soon.

So that means that we are likely to see more job losses, more debt delinquencies and debt defaults, and more financial institutions getting into trouble due to their reckless exposure to the energy industry.

A 918 Point Stock Market Crash In Japan And Deutsche Bank Denies That It Is About To Collapse

Financial Crisis 2016On Tuesday junk bonds continued to crash, the price of oil briefly dipped below 28 dollars a barrel, Deutsche Bank was forced to deny that it is on the verge of collapse, but the biggest news was what happened in Japan.  The Nikkei was down a staggering 918 points, but that stock crash made very few headlines in the western world.  If the Dow had crashed 918 points today, that would have been the largest single day point crash in all of U.S. history.  So what just happened in Japan is a really big deal.  The Nikkei is now down 23.1 percent from the peak of the market, and that places it solidly in bear market territory.  Overall, a total of 16.5 trillion dollars of global stock market wealth has been wiped out since the middle of 2015.  As I stated yesterday, this is what a global financial crisis looks like.

Just as we saw during the last financial crisis, the big banks are playing a starring role, and this is definitely true in Japan.  Right now, Japanese banking stocks are absolutely imploding, and this is what drove much of the panic last night.  The following numbers come from Wolf Richter…

  • Mitsubishi UFJ Financial Group plunged 8.7%, down 47% from June 2015.
  • Mizuho Financial Group plunged 6.2%, down 38% since June 2015.
  • Sumitomo Mitsui plunged 6.2%, down 26% since May 2015
  • Nomura plunged a juicy 9.1%, down 42% since June 2015

A lot of analysts have been very focused on the downturn in China in recent months, but I think that it is much more important to watch Japan right now.

I have become fully convinced that the Japanese financial system is going to play a central role in the initial stages of this new global financial meltdown, and so I encourage everyone to keep a close eye on the Nikkei every single night.

Meanwhile, the stock price of German banking giant Deutsche Bank crashed to a record low on Tuesday.  If you will recall, Deutsche Bank reported a loss of 7.6 billion dollars in 2015, and I wrote quite a bit about their ongoing problems yesterday.

Things have gotten so bad that now Deutsche Bank has been forced to come out and publicly deny that they are in trouble…

Deutsche Bank co-CEO John Cryan moved to quell fears about the bank’s stability Tuesday with a surprise memo saying its balance sheet “remains absolutely rock-solid.”

The comments come as investors grow increasingly nervous about the health of European banks, which have taken a hit on the fall in energy prices and which face rising concerns over their cash levels.

Of course Lehman Brothers issued the same kind of denials just before they collapsed in 2008.  Cryan’s comments did little to calm the markets, and even Jim Cramer saw right through them…

“You know, Deutsche Bank puts out a note saying, ‘listen, don’t worry, all good.’ Reminds me of JPMorgan saying if you have to say that you’re creditworthy then it’s already too late.”

Another thing that Lehman Brothers did just before they collapsed in 2008 was to lay off workers.  We have seen a number of major banks do this lately, including Deutsche Bank…

Cryan, 55, has been seeking to boost capital buffers and profitability by cutting costs and eliminating thousands of jobs as volatile markets undermine revenue and outstanding regulatory probes raise the specter of fresh capital measures to help cover continued legal charges. The cost of protecting Deutsche Bank’s debt against default has more than doubled this year, while the shares have dropped about 42 percent.

The following chart comes from Zero Hedge.  Nobody on the Internet does a better job with charts than Zero Hedge does.  I would recommend visiting them right after you visit The Economic Collapse Blog each day (wink wink).  This chart shows that Deutsche Bank stock has already fallen lower than it was during any point during the last financial crisis…

Deutsche Bank Record Low

Deutsche Bank is the biggest and most important bank in the biggest and most important economy in the EU, and it has exposure to derivatives that is approximately 20 times Germany’s GDP.

If that doesn’t alarm you, I don’t know what will.

The biggest financial bubble in the history of the world has entered a terminal phase, and the parallels to the last financial crisis have become so apparent that just about anyone can see them at this point.  Just consider some of the ominous warnings that we have seen recently…

Billionaire Carl Icahn, for example, recently raised a red flag on a national broadcast when he declared, “The public is walking into a trap again as they did in 2007.”

And the prophetic economist Andrew Smithers warns, “U.S. stocks are now about 80% overvalued.”

Smithers backs up his prediction using a ratio which proves that the only time in history stocks were this risky was 1929 and 1999. And we all know what happened next. Stocks fell by 89% and 50%, respectively.

Even the Royal Bank of Scotland says the markets are flashing stress alerts akin to the 2008 crisis. They told their clients to “Sell Everything” because “in a crowded hall, the exit doors are small.”

And let’s not forget that famous billionaire retail magnate Hugo Salinas Price has warned that the global economy “is going into a depression“.

The chaos that we have seen this week is simply a logical progression of the crisis that began during the second half of last year.  If you were to create a checklist of all the things that you would expect to see during the initial stages of a new financial crisis, all of the boxes would be checked.

In the days ahead, keep your eyes on Germany and Japan.

Yes, the Italian banking system is completely collapsing right now, but I believe that what is happening in Germany is going to be the key to the meltdown of Europe, and I am convinced that Deutsche Bank is going to be the star of the show.

Meanwhile, don’t underestimate what is taking place in Japan.

The Japanese still have the third largest economy on the entire planet, and their financial system is essentially a Ponzi scheme built on top of a house of cards that has a rapidly aging population as the foundation.

As Japan falls, that will be a signal that financial Armageddon is now upon us.

And after last night, it appears that moment is a lot closer than a lot of us may have thought.

The Financial Apocalypse Accelerates As Middle East Stocks Crash To Begin The Week

Apocalyptic - Public DomainIt looks like it is going to be another chaotic week for global financial markets.  On Sunday, news that Iran plans to dramatically ramp up oil production sent stocks plunging all across the Middle East.  Stocks in Kuwait were down 3.1 percent, stocks in Saudi Arabia plummeted 5.4 percent, and stocks in Qatar experienced a mammoth 7 percent decline.  And of course all of this comes in the context of a much larger long-term decline for Middle Eastern stocks.  At this point, Saudi Arabian stocks are down more than 50 percent from their 2014 highs.  Needless to say, a lot of very wealthy people in Saudi Arabia are getting very nervous.  Could you imagine waking up someday and realizing that more than half of your fortune had been wiped out?  Things aren’t that bad in the U.S. quite yet, but it looks like another rough week could be ahead.  The Dow, the S&P 500 and the Nasdaq are all down at least 12 percent from their 52-week highs, and the Russell 2000 is already in bear market territory.  Hopefully this week will not be as bad as last week, but events are starting to move very rapidly now.

Much of the chaos around the globe is being driven by the price of oil.  At the end of last week the price of oil dipped below 30 dollars a barrel, and now Iran has announced plans “to add 1 million barrels to its daily crude production”…

Iran could get more than five times as much cash from oil sales by year-end as the lifting of economic sanctions frees the OPEC member to boost crude exports and attract foreign investment needed to rebuild its energy industry.

The Persian Gulf nation will be able to access all of its revenue from crude sales after the U.S. and five other global powers removed sanctions on Saturday in return for Iran’s curbing its nuclear program. The fifth-biggest producer in the Organization of Petroleum Exporting Countries had been receiving only $700 million of each month’s oil earnings under an interim agreement, with the rest blocked in foreign bank accounts. Iran is striving to add 1 million barrels to its daily crude production and exports this year amid a global supply glut that has pushed prices 22 percent lower this month.

It doesn’t take a genius to figure out what this is going to do to the price of oil.

The price of oil has already fallen more than 20 percent so far in 2016, and overall it has declined by more than 70 percent since late 2014.

When the price of oil first started to fall, a lot of people out there were proclaiming that it would be really good for the U.S. economy.  But I said just the opposite.  And of course since that time we have seen an endless parade of debt downgrades, bankruptcies and job losses.  130,000 good paying energy jobs were lost in the United States in 2015 alone because of this collapse, and things just continue to get even worse.  At this point, some are even calling for the federal government to intervene.  For example, the following is an excerpt from a CNN article that was just posted entitled “Is it time to bail out the U.S. oil industry?“…

America’s once-booming oil industry is suddenly in deep financial trouble.

The epic crash in oil prices has wiped out tens of thousands of jobs, caused dozens of bankruptcies and spooked global financial markets.

The fallout is already being felt in oil-rich states like Texas, Oklahoma and North Dakota, where home foreclosure rates are spiking and economic growth is slowing.

Now there are calls in at least some corners for the federal government to come to the rescue.

Is it just me, or is all of this really starting to sound a lot like 2008?

And of course it isn’t just the U.S. that is facing troubles.  The global financial crisis that began during the second half of 2015 is rapidly accelerating, and chaos is erupting all over the planet.  The following summary of what we have been seeing in recent days comes from Doug Noland…

The world has changed significantly – perhaps profoundly – over recent weeks. The Shanghai Composite has dropped 17.4% over the past month (Shenzhen down 21%). Hong Kong’s Hang Seng Index was down 8.2% over the past month, with Hang Seng Financials sinking 11.9%. WTI crude is down 26% since December 15th. Over this period, the GSCI Commodities Index sank 12.2%. The Mexican peso has declined almost 7% in a month, the Russian ruble 10% and the South African rand 12%. A Friday headline from the Financial Times: “Emerging market stocks retreat to lowest since 09.”

Trouble at the “Periphery” has definitely taken a troubling turn for the worse. Hope that things were on an uptrend has confronted the reality that things are rapidly getting much worse. This week saw the Shanghai Composite sink 9.0%. Major equities indexes were hit 8.0% in Russia and 5.0% in Brazil (Petrobras down 9%). Financial stocks and levered corporations have been under pressure round the globe. The Russian ruble sank 4.0% this week, increasing y-t-d losses versus the dollar to 7.1%. The Mexican peso declined another 1.8% this week. The Polish zloty slid 2.8% on an S&P downgrade (“Tumbles Most Since 2011”). The South African rand declined 3.0% (down 7.9% y-t-d). The yen added 0.2% this week, increasing 2016 gains to 3.0%. With the yen up almost 4% versus the dollar over the past month, so-called yen “carry trades” are turning increasingly problematic.

Closer to home, the crisis in Puerto Rico continues to spiral out of control.  The following is an excerpt from a letter that Treasury Secretary Jack Lew sent to Congress on Friday…

Although there are many ways this crisis could escalate further, it is clear that Puerto Rico is already in the midst of an economic collapse…

Puerto Rico is already in default. It is shifting funds from one creditor to pay another and has stopped payment altogether on several of its debts. As predicted, creditors are filing lawsuits. The Government Development Bank, which provides critical banking and fiscal services to the central government, only avoided depleting its liquidity by halting lending activity and sweeping in additional deposits from other Puerto Rico governmental entities. A large debt payment of $400 million is due on May 1, and a broader set of payments are due at the end of June.

It isn’t Michael Snyder from The Economic Collapse Blog that is saying that Puerto Rico is “in the midst of an economic collapse”.

That is the Secretary of the U.S. Treasury that is saying it.

Those that have been eagerly anticipating a financial apocalypse are going to get what they have been waiting for.

Right now we are about halfway through January, and this is the worst start to a year for stocks ever.  The Dow is down a total of 1,437 points since the beginning of 2016, and more than 15 trillion dollars of stock market wealth has been wiped out globally since last June.

Unfortunately, there are still a lot of people out there that are in denial.

There are a lot of people that still believe that this is just a temporary bump in the road and that things will return to “normal” very soon.

They don’t understand that this is just the beginning.  What we have seen so far is just the warm up act, and much, much worse is yet to come.

Guess What Happened The Last Time The Price Of Oil Plunged Below 38 Dollars A Barrel?

Question Mark Burning - Public DomainOn Monday, the price of U.S. oil dropped below 38 dollars a barrel for the first time in six years.  The last time the price of oil was this low, the global financial system was melting down and the U.S. economy was experiencing the worst recession that it had seen since the Great Depression of the 1930s.  As I write this article, the price of U.S. oil is sitting at $37.65.  For months, I have been warning that the crash in the price of oil would be extremely deflationary and would have severe consequences for the global economy.  Nations such as Japan, Canada, Brazil and Russia have already plunged into recession, and more than half of all major global stock market indexes are down at least 10 percent year to date.  The first major global financial crisis since 2009 has begun, and things are only going to get worse as we head into 2016.

The global head of oil research at Societe Generale, Mike Wittner, says that his “head is spinning” after the stunning drop in the price of oil on Monday.  Just like during the last financial crisis, we have broken the psychologically important 40 dollar barrier, and there are concerns that we could go much lower from here…

Price Of Oil - Public Domain

One analyst told CNBC that he believes that we could soon see the price of U.S. oil go all the way down to 32 dollars a barrel…

“We’re in a tug-of-war between a heavily shorted market and a glut of oil in the U.S. and globally, as Saudi Arabia continues to produce oil at elevated levels to maintain market share,” said Chris Jarvis at Caprock Risk Management, an energy markets consultancy in Frederick, Maryland.

“Couple this with a strengthening dollar as the market anticipates a U.S. rate hike this month, oil is heading lower with a near term target of $32 for WTI.”

Analysts at Goldman Sachs are even more pessimistic than that.  According to Business Insider, they are saying that we could eventually see the price of oil go below 20 dollars a barrel…

At OPEC’s meeting on Friday, member countries decided to set its production level at 31.5 million barrels per day, and did not agree on what the new limit should be.

After OPEC’s meeting, commodity strategists at Goldman put out a note saying that oil prices could plunge another 50% in the coming months, as the oil market tries to rebalance the supply and demand situation.

That may sound really good to you, especially if you fill up your gas tank frequently.  But the truth is that plunging oil prices are exceedingly bad for the U.S. economy as a whole.  In recent years, the energy industry has been the primary engine for the creation of good jobs in this country, and now those firms are having to lay off people at a frightening pace.  Not only that, CNBC’s Jim Cramer is warning that many of these firms may actually start going under if the price of oil doesn’t start going back up soon…

“This is not ‘longer and lower;’ this is ‘longer and much lower.’ There’s companies that are not going to be able to fund with futures; there’re companies that are not going to be able to get credit,” Cramer said on “Squawk on the Street.”

Cramer made his remarks after the Organization of the Petroleum Exporting Countries decided not to lower production on Friday.

“This was a devastating blow for the U.S. oil industry,” Cramer said.

On Monday, we witnessed another benchmark that we have not seen since the last financial crisis.

I watch a high yield bond ETF known as JNK very closely.  On Monday, JNK broke below 35 for the first time since the financial crisis of 2008.  Just like 40 dollar oil, this is a key psychological barrier.

So why is this important?

As I discussed last week, junk bonds crashed before stocks did in 2008, and now it is happening again.  If form holds true, we should expect U.S. stocks to start tumbling significantly very shortly.

Meanwhile, another notable expert has come forward with a troubling forecast for the global economy in 2016.  Just like Citigroup, Raoul Pal believes that there is a very significant chance that we will see a recession next year…

Former global macro fund manager Raoul Pal says there’s now a 65% chance of a global recession.

In July, Pal predicted that the Institute of Supply Management’s (ISM) manufacturing index would break the key level of 50 late in 2015.

On December 1, the ISM broke the 50 level for the first time since the 2008 recession, reaching 48.6.

“I use the ISM as a guide to the global business cycle, not just the US cycle,” Pal told Business Insider.

What amazes me is that so many people out there cannot see what is happening even though the next great crisis has already started.  The evidence is all around us, and yet so many choose to be willingly blind.

Instead of fixing our problems after the last crisis, we just papered them over with lots of money printing and lots more debt.  And of course all of this manipulation just made our long-term problems even worse.  I really like how Peter Schiff put it recently…

What’s happening is pretty much what we would anticipate. I don’t see from the data any real economic recovery, certainly not in the United States.

We’re spending more money, but it’s not because we’re generating more wealth. We’re generating more debt. We’re using that borrowed money to consume and so temporarily it feels that we’re wealthier because we get to spend all that money… but we have to come to terms with paying the bill.

The bills are going to come due. Right now interest rates are being kept at zero which makes it possible to service the debt even though it’s impossible to repay it… at least we can service it. But once interest rates go up then we can’t even service it let alone repay it. 

And then the party is going to come to an end.

Indeed – the party is coming to an end, and a new financial crisis is playing out in textbook fashion right in front of our eyes.

Hopefully you are already prepared for what is coming next, because it is going to be extremely painful for the U.S. economy.

Plummeting Oil Prices Could Destroy The Banks That Are Holding Trillions In Commodity Derivatives

Panic Button - Public DomainCould rapidly falling oil prices trigger a nightmare scenario for the commodity derivatives market?  The big Wall Street banks did not expect plunging home prices to cause a mortgage-backed securities implosion back in 2008, and their models did not anticipate a decline in the price of oil by more than 40 dollars in less than six months this time either.  If the price of oil stays at this level or goes down even more, someone out there is going to have to absorb some absolutely massive losses.  In some cases, the losses will be absorbed by oil producers, but many of the big players in the industry have already locked in high prices for their oil next year through derivatives contracts.  The companies enter into these derivatives contracts for a couple of reasons.  Number one, many lenders do not want to give them any money unless they can show that they have locked in a price for their oil that is higher than the cost of production.  Secondly, derivatives contracts protect the profits of oil producers from dramatic swings in the marketplace.  These dramatic swings rarely happen, but when they do they can be absolutely crippling.  So the oil companies that have locked in high prices for their oil in 2015 and 2016 are feeling pretty good right about now.  But who is on the other end of those contracts?  In many cases, it is the big Wall Street banks, and if the price of oil does not rebound substantially they could be facing absolutely colossal losses.

It has been estimated that the six largest “too big to fail” banks control $3.9 trillion in commodity derivatives contracts.  And a very large chunk of that amount is made up of oil derivatives.

By the middle of next year, we could be facing a situation where many of these oil producers have locked in a price of 90 or 100 dollars a barrel on their oil but the price has fallen to about 50 dollars a barrel.

In such a case, the losses for those on the wrong end of the derivatives contracts would be astronomical.

At this point, some of the biggest players in the shale oil industry have already locked in high prices for most of their oil for the coming year.  The following is an excerpt from a recent article by Ambrose Evans-Pritchard…

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.

Of course not all shale oil producers protected themselves.  Those that didn’t are in danger of going under.

For example, Continental Resources cashed out approximately 4 billion dollars in hedges about a month ago in a gamble that oil prices would go back up.  Instead, they just kept falling, so now this company is likely headed for some rough financial times…

Continental Resources (CLR.N), the pioneering U.S. driller that bet big on North Dakota’s Bakken shale patch when its rivals were looking abroad, is once again flying in the face of convention: cashing out some $4 billion worth of hedges in a huge gamble that oil prices will rebound.

Late on Tuesday, the company run by Harold Hamm, the Oklahoma wildcatter who once sued OPEC, said it had opted to take profits on more than 31 million barrels worth of U.S. and Brent crude oil hedges for 2015 and 2016, plus as much as 8 million barrels’ worth of outstanding positions over the rest of 2014, netting a $433 million extra profit for the fourth quarter. Based on its third quarter production of about 128,000 barrels per day (bpd) of crude, its hedges for next year would have covered nearly two-thirds of its oil production.

Oops.

When things are nice and stable, the derivatives marketplace works quite well most of the time.

But when there is a “black swan event” such as a dramatic swing in the price of oil, it can create really big winners and really big losers.

And no matter how complicated these derivatives become, and no matter how many times you transfer risk, you can never make these bets truly safe.  The following is from a recent article by Charles Hugh Smith…

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.

If you think that this is good news, you should keep in mind that if they collapse it virtually guarantees a full-blown economic meltdown.  The following is an extended excerpt from one of my previous articles…

—–

For those looking forward to the day when these mammoth banks will collapse, you need to keep in mind that when they do go down the entire system is going to utterly fall apart.

At this point our economic system is so completely dependent on these banks that there is no way that it can function without them.

It is like a patient with an extremely advanced case of cancer.

Doctors can try to kill the cancer, but it is almost inevitable that the patient will die in the process.

The same thing could be said about our relationship with the “too big to fail” banks.  If they fail, so do the rest of us.

We were told that something would be done about the “too big to fail” problem after the last crisis, but it never happened.

In fact, as I have written about previously, the “too big to fail” banks have collectively gotten 37 percent larger since the last recession.

At this point, the five largest banks in the country account for 42 percent of all loans in the United States, and the six largest banks control 67 percent of all banking assets.

If those banks were to disappear tomorrow, we would not have much of an economy left.

—-

Our entire economy is based on the flow of credit.  And all of that debt comes from the banks.  That is why it has been so dangerous for us to become so deeply dependent on them.  Without their loans, the entire country could soon resemble White Flint Mall near Washington D.C….

It was once a hubbub of activity, where shoppers would snap up seasonal steals and teens would hang out to ‘look cool’.

But now White Flint Mall in Bethesda, Maryland – which opened its doors in March 1977 – looks like a modern-day mausoleum with just two tenants remaining.

Photographs taken inside the 874,000-square-foot complex show spotless faux marble floors, empty escalators and stationary elevators.

Only a couple of cars can be seen in the parking lot, where well-tended shrubbery appears to be the only thing alive.

I keep on saying it, and I will keep on saying it until it happens.  We are heading for a derivatives crisis unlike anything that we have ever seen.  It is going to make the financial meltdown of 2008 look like a walk in the park.

Our politicians promised that they would do something about the “too big to fail” banks and the out of control gambling on Wall Street, but they didn’t.

Now a day of reckoning is rapidly approaching, and it is going to horrify the entire planet.

Will War With Syria Cause The Price Of Oil To Explode Higher?

F-16 Photo by TMWolfAre you ready to pay four, five or possibly even six dollars for a gallon of gasoline?  War has consequences, and a conflict with Syria has the potential to escalate wildly out of control very rapidly.  The Obama administration is pledging that the upcoming attack on Syria will be “brief and limited” and that the steady flow of oil out of the Middle East will not be interrupted.  But what happens if Syria strikes back?  What happens if Syrian missiles start raining down on Tel Aviv?  What happens if Hezbollah or Iran starts attacking U.S. or Israeli targets?  Unless Syria, Hezbollah and Iran all stand down and refuse to fight back, we could very easily be looking at a major regional war in the Middle East, and that could cause the price of oil to explode higher.  Syria is not a major oil producer, but approximately a third of all of the crude oil in the world is produced in the Middle East.  If the Suez Canal or the Persian Gulf (or both) get shut down for an extended period of time, the consequences would be dramatic.  The price of oil has already risen about 15% so far this summer, and war in the Middle East could potentially send it soaring into record territory.

We can always hope that cooler heads prevail and that a conflict is avoided, but at this point it does not look like that is going to happen.  In fact, according to Richard Engel of NBC News, a senior U.S. official has admitted that “we’re past the point of return” and that a strike on Syria can be expected within days.

Obama is promising that the U.S. will “take limited, tailored approaches”, and that we will not be “getting drawn into a long conflict, not a repetition of, you know, Iraq, which I know a lot of people are worried about”, but how in the world can he guarantee that?

Syria, Iran and Hezbollah have all threatened to attack Israel if the U.S. attacks Syria.

If missiles start raining down on Israeli cities, the Israelis are not just going to sit there and take it like they did during the first Gulf War.  In fact, according to the Los Angeles Times, “Israeli leaders are making it clear that they have no intention of standing down this time if attacked”.

If Israel is attacked, their military response will be absolutely massive.

And then we will have the major regional war in the Middle East that so many people have been warning about for so many years.  Hundreds of thousands of people will die and the global economy will be paralyzed.

So what will Obama do in such a situation?

Will he pack up and go home?

Of course not.  We would be committed to fighting a brutal, horrific war that there was absolutely no reason to start in the first place.

And we are already starting to feel the effect of rising tensions in the Middle East.  This week, the price of oil rose to a 10-month high…

U.S. oil prices soared to an 18-month high as traders worried that a potential military strike against Syria could disrupt the region’s oil supplies.

October crude futures surged 2.9%, to $109.01 a barrel on the New York Mercantile Exchange, their highest close since February 2012. Brent futures ended up 3.2% at $114.28 a barrel, a six-month high.

Posted below is a chart that shows how the price of oil has moved over the past several decades.  Could we soon break the all-time record of $147 a barrel that was set back in 2008?…

The Price Of Oil

And of course we all remember what happened when the price of oil got that high back in 2008.  The global economy was plunged into the worst downturn since the Great Depression of the 1930s.

A major conflict in the Middle East, especially if it goes on for an extended period of time, could send the price of oil to absolutely ridiculous levels.

Every single day, a massive amount of oil is moved through the Suez Canal.  The following is from a recent Wall Street Journal article…

To the southwest is the Suez Canal, one such chokepoint, which connects the Red Sea and the Gulf of the Suez with the Mediterranean Sea. The canal transports about 800,000 barrels of crude and 1.4 million barrels of petroleum products daily, according to the U.S. Energy Information Administration.

Another regional oil shipping route potentially threatened by the Syria crisis is the Sumed, or Suez-Mediterranean, pipeline, also in Egypt, which moves oil from the Persian Gulf region to the Mediterranean. The Sumed handles 1.7 million barrels of crude oil per day, the EIA said.

And of course an enormous amount of oil moves through the Persian Gulf each day as well.  If the Suez Canal and/or the Persian Gulf were to be shut down, there would almost immediately be global supply problems.

So how high could the price of oil go?

Well, according to CNBC, some analysts believe that $150 a barrel could easily be hit if the U.S. attacks Syria…

Some analysts believe even U.S. crude, West Texas Intermediate (WTI crude) could get close to the $150 zone. “If oil prices spike on the Syria attack, and surge above $120, the next logical upside target is going to be the 2008 high of $147, which could easily be taken out,” said John Kilduff of Again Capital. “It’s the retaliation to the retaliation that we have to be worried about.”

If the price of oil soars up to that level and keeps going, we could see the price of gasoline go up to four, five or maybe even six dollars a gallon in some areas of the country.

You better start saving up lots of gas money.

It looks like you are going to need it.

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