Best of the Week
Most Popular
1. Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - Raymond_Matison
2.Uber’s Nightmare Has Just Started - Stephen_McBride
3.Stock Market Crash Black Swan Event Set Up Sept 12th? - Brad_Gudgeon
4.GDow Stock Market Trend Forecast Update - Nadeem_Walayat
5.Gold Significant Correction Has Started - Clive_Maund
6.British Pound GBP vs Brexit Chaos Timeline - Nadeem_Walayat
7.Cameco Crash, Uranium Sector Won’t Catch a break - Richard_Mills
8.Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - Dan_Amerman
9.Gold When Global Insanity Prevails - Michael Ballanger
10.UK General Election Forecast 2019 - Betting Market Odds - Nadeem_Walayat
Last 7 days
Gold Stocks Vs Gold – Not A Good Bet - 15th Dec 19
Silver Price Remains in 'Corrective Downtrend' - 15th Dec 19
Amazon - Snow Falling Effect Christmas Lights Outdoor Projector Review - 15th Dec 19
How to FIX Dirty Disk Windows Hard Drive Volume Error 0X80071AC3 - 15th Dec 19
Raffaele Riva and AUREA Are Breaking New Ground in Financial Services Across Europe  - 15th Dec 19
Canadian Cannabis Stocks CRASH as Canopy Growth Hits a Dead End - 14th Dec 19
Retail Sector Isn’t Dead, and These 6% Dividend Paying Stocks Prove It - 14th Dec 19
Top 5 Ways to Add Value to Your Home - 14th Dec 19
Beware Gold Stocks Downside - 13th Dec 19
Fed Says No Interest Rate Hikes In 2020. What About Gold? - 13th Dec 19
The ABC’s of Fiat Money - 13th Dec 19
Why Jo Swinson and the Lib Dems LOST Seats General Election 2019 - Sheffiled Hallam Result - 13th Dec 19
UK General Election 2019 BBC Exit Poll Forecast Accuracy Analysis - 12th Dec 19
Technical Analysis Update: Tadawul All Share Index (TASI) - Saudi Arabia ETF (KSA) - 12th Dec 19
Silver Miners Pinpoint the Precious Metals’ Outlook - 12th Dec 19
How Google Has Become the Worlds Biggest Travel Company - 12th Dec 19
UK Election Seats Forecasts - Tories 326, Labour 241, SNP 40, Lib Dems 17 - 12th Dec 19
UK General Election 2019 Final Seats Per Party Forecast - 12th Dec 19
What UK CPI, RPI INFLATION Forecasts for General Election Result 2019 - 11th Dec 19
Gold ETF Holdings Surge… But Do They Actually Hold Gold? - 11th Dec 19
Gold, Silver Reversals, Lower Prices and Our Precious Profits - 11th Dec 19
Opinion Pollsters, YouGov MRP General Election 2019 Result Seats Forecast - 11th Dec 19
UK General Election Tory and Labour Marginal Seats Analysis, Implied Forecast 2019 - 11th Dec 19
UK General Election 2019 - Tory Seats Forecast Based on GDP Growth - 11th Dec 19
YouGov's MRP Poll Final Tory Seats Forecast Revised Down From 359 to 338, Possibly Lower? - 10th Dec 19
What UK Economy (Average Earnings) Predicts for General Election Results 2019 - 10th Dec 19
Labour vs Tory Manifesto's UK General Election Parliamentary Seats Forecast 2019 - 10th Dec 19
Lumber is about to rally and how to play it with this ETF - 10th Dec 19
Social Mood and Leaders Impact on General Election Forecast 2019 - 9th Dec 19
Long-term Potential for Gold Remains Strong! - 9th Dec 19
Stock and Financial Markets Review - 9th Dec 19
Labour / Tory Manifesto's Impact on UK General Election Seats Forecast 2019 - 9th Dec 19
Tory Seats Forecast 2019 General Election Based on UK House Prices Momentum Analysis - 9th Dec 19
Top Tory Marginal Seats at Risk of Loss to Labour and Lib Dems - Election 2019 - 9th Dec 19
UK House Prices Momentum Tory Seats Forecast General Election 2019 - 8th Dec 19
Why Labour is Set to Lose Sheffield Seats at General Election 2019 - 8th Dec 19
Gold and Silver Opportunity Here Is As Good As It Gets - 8th Dec 19
High Yield Bond and Transports Signal Gold Buy Signal - 8th Dec 19
Gold & Silver Stocks Belie CoT Caution - 8th Dec 19
Will Labour Government Spending Bankrupt Britain? UK Debt and Deficits - 7th Dec 19
Lib Dem Fake Tory Election Leaflets - Sheffield Hallam General Election 2019 - 7th Dec 19
You Should Be Buying Gold Stocks Now - 6th Dec 19
The End of Apple Has Begun - 6th Dec 19
How Much Crude Oil Do You Unknowingly Eat? - 6th Dec 19
Labour vs Tory Manifesto Voter Bribes Impact on UK General Election Forecast - 6th Dec 19
Gold Price Forecast – Has the Recovery Finished? - 6th Dec 19
Precious Metals Ratio Charts - 6th Dec 19
Climate Emergency vs Labour Tree Felling Councils Reality - Sheffield General Election 2019 - 6th Dec 19
What Fake UK Unemployment Statistics Predict for General Election Result 2019 - 6th Dec 19

Market Oracle FREE Newsletter

UK General Election Forecast 2019

What the “Yellen Effect” Ultimately Means for Crude Oil

Commodities / Crude Oil Mar 20, 2015 - 08:48 AM GMT

By: Money_Morning

Commodities

Dr. Kent Moors writes: Janet Yellen sure has a way with the markets…

As the Fed Chair delivered her unexpectedly dovish message, the Dow bounced almost 400 points off yesterday’s lows.

Even so, that move paled in comparison to the even bigger move she triggered in oil prices.


West Texas Intermediate (WTI) soared 3.7%, only to be topped by Brent, which jumped by 4.4%. That easily topped the 1.29% move in the Dow.

Yet the dramatic market turnaround seemed rather counter-intuitive. After all, as the pundits pointed out yesterday and are sure to hammer on today, nothing the Fed Chair said indicated a retreat from any pending rate hike.

In fact, the intentional deletion of the word “patience,” used to describe the Fed’s approach to rate hikes, makes the move guaranteed.

So why all of the market exuberance?

Here’s my take on yesterday’s “Yellen Effect” and what it means for oil…

A Market Built on Cheap Money

One reason for the big market move may simply be the recognition that the rate hike is not happening tomorrow. The consensus is building that the impending rate hike now won’t happen as early as the previous forecast, early next quarter.

The concerns expressed by Yellen about the overall economic improvement and the unemployment picture telegraphed to the markets that there were enough ongoing worries to mitigate a rapid change in rate policy.

However, when it comes to yesterday’s reaction in the oil markets, which clearly outdistanced the markets as a whole, there is a more decisive factor in play.

A dovish statement means the availability of cheap money will last a little bit longer in the oil patch.

Of course, this grabbed the attention of all of the other market players as well. Even with all the discussion about how the Fed’s quantitative easing has set us up for a mighty fall (not all of which is incorrect), the attitude of the market toward cheap money is rather different. They thrive on it.

The truth is, a big portion of the stock market rally since the end of the credit slump has come on the back of cheap money.

And while markets may appreciate the need for restraint in the face of “irrational exuberance” and may provide a nod in the direction of the “Chicago School” style of economic theory, they just don’t invest that way.

In the same way that the Fed’s zero-interest rate policies have been a boon to the stock market, the flood of cheap money has been a lifeline to oil companies. The big jump in oil prices yesterday is, in large measure, a reflection of that.

The reason for this is something I recently addressed as the critical part of the briefing I gave at Windsor Castle less than two weeks ago. It involves the deteriorating condition of energy debt.

As I wrote in an earlier issue, a dangerous squeeze is developing for some producers in the U.S. oil patch. This brewing crisis will only get worse if WTI remains below $60 a barrel. There is a simple reason for this.

Companies that are dependent upon debt to fund drilling projects are reliant on that drilling revenue to meet operating expenses, provide profits for investors, and pay off the debt. Remember, the American shale oil and gas revolution was built on very high-yield and high-risk debt that is now getting weaker.

Now after a brief respite, the oil company debt picture has begun to deteriorate over the past two weeks, once again reaching the worrisome distress levels seen at the end of last year.

That’s when the spread between general high-yield and energy high-yield debt dramatically intensified. High-risk bond yields in general ended the year averaging an annualized rate of 688 basis points (bps, or 6.88%), about 329 bps higher than investment quality bonds. However, high-risk energy bonds spiked to almost 1300 bps, almost 600 bps higher.

As you can see from the chart below, the two had been virtually identical at the beginning of July.

This dramatic jump is a direct consequence of two factors: the market’s increasing recognition of the risk associated with the paper and the declining quality of the new debt issued. Both of these reflect the reduced credit worthiness of the issuers.

The Energy Debt Mess Is Here to Stay

But there are other aspects to keep in mind. The slide in debt costs have certainly paralleled the rapid decline in oil prices. However, the impact on debt was far more pronounced than the hit taken by company stock valuations. What’s more, pressure is building for another cycle of junk debt default, with the current trends reminiscent of the last three historical cycles.

We are currently in the early stages of this cycle. The real problem will hit 12 to 14 months from now.

That’s because most of the companies carrying the debt have also hedged their future oil and gas prices that far out on the curve. At this point, over 80% of the forward extraction has already been hedged. The problem is that continuing low prices will make the cost of pushing that curve even farther out too expensive to bear.

So we are likely to see another downward move in the high-yield energy bond market next month as banks readjust their loan portfolios and as the risk spread intensifies.

At $90 a barrel or above, energy debt is very safe and the spreads are quite secure. The problem is, we won’t get back to those levels for some time. As a result, there will be another round of “creative destruction” in the oil and gas business.

That brings us back to the Yellen effect. You can delay (but hardly arrest) the decay in energy debt by keeping the status quo. Yet keeping the flow of cheap money intact does mean that junk debt will still be available, in spite of the fact that it’s less attractive.

As long as money can be had at very low rates and loaned out at a higher spread, the high-risk energy market won’t collapse. But it is not going to get healthy either.

If there is an oil equivalent to a “dead cat bounce,” we may have seen a good example of it yesterday.

However, the underlying leverage mess hasn’t gone anywhere.

Source :http://oilandenergyinvestor.com/2015/03/what-the-yellen-effect-ultimately-means-for-oil/

Money Morning/The Money Map Report

©2015 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules