The OPEC Epoch is Over – Where are oil prices headed now?
By David Haggith
TheGreatRecession.info
May 12, 2016
The fate of oil companies and nations hangs in the balance of oil prices. Russia could go broke. Some think that’s by US design. Saudi Arabia could experience its Arab Spring if oil prices remain too low too long. And OPEC is dead. That’s the biggest news in this new century for oil.
The House of Saud has stated clearly many times now and again this week in an even more emphatic manner that it intends to move the oil market from decades of OPEC price manipulation to a raw supply-and-demand equation. Rigging the price of oil was the raison d’être of the cartel known as the Organization of Petroleum Exporting Countries, and that function has now ended. But people are slow to get their heads around such big news.
Saudi Arabians enjoyed a tax-free environment as long as oil paid the bills and cheap subsidized fuel. Huge revenue from oil enabled constant pay-offs to the powerful that stabilized the state. All of that has ended or is at risk of ending as the Saudis seek to rebalance their state budget in the face of huge declines in revenue. So, changing the pricing structure of oil is a perilous change of course for the House of Saud, which tells you how serious they are about transforming the market back to a free market.
It’s fraught with peril for all. Among oil companies and banks, it’s not just the little leaguers that are hurting. Royal Dutch Shell reported an 83% decline in profits year on year. Most oil companies reported significant drops in profit for the first quarter of 2016, though many saw their stock values soar upon reporting because investors had feared an even worse hit. Their banks have reported the same.
Oil’s big bang on banking
As I speculated in a recent article, the oil market may be entirely rigged by central banks. We know from experience the Federal Reserve will buy anything in any quantity to save its member banks. So, if low oil prices are hurting major banks, why wouldn’t the Fed start buying oil … if nothing else, through proxies? And why would it tell us if it did?
We learned months ago that trouble in the tar pits was bad enough that the Dallas Federal Reserve Bank was telling its member banks not to foreclose on bad oil loans because they’d just drown themselves in oil debt if they started writing down their balance sheets to match the fire-sale values they’d be creating by foreclosing.
The latest survey by the Federal Reserve … has revealed a pessimistic picture. Banks … are still skeptical about the ability of their energy industry clients to pay back their loans, and they are taking a variety of steps now to minimize the damage…. American banks are saddled with over $140 billion in unfunded loans … in oil and gas…. This will very likely weigh down on banks … and plunge them even deeper into the abyss of unfunded, non-repayable debt…. Basically, the lenders are doing whatever they can to sustain potential losses, apparently having learned a valuable lesson from the Great Recession. (Oilprice.com)
The Rest…HERE
