Are You Ready for Mass Energy Defaults?

Last Tuesday, I warned that crude was looking bullish. I said that, while it won’t be massive, you should get ready for a decent bounce.

A couple of days later, oil prices have climbed to their highest level all year.

Brent crude, the international benchmark, is trading higher at US$40.84 per barrel. Brent rocketed 10.31% last week, the second consecutive weekly gain. It’s up 46.7% from the low of US$27.83 per barrel on 20 January.

West Texas Intermediate (WTI), also known as US crude, is trading higher at US$37.90 per barrel. WTI surged 9.58% last week, the third straight weekly rise. It’s up 45.5% from the low of US$26.05 per barrel on 2 February.

Traders are shifting their focus away from the global supply glut. They’re looking toward signs of slowing US shale production, and continued hopes that major producers will work together to freeze output this month.

At the moment, there’s a bit of room left in the tank for higher crude prices. But, the bounce is unlikely to last. So if you own any oilers, you might want to consider cashing in your gains soon. We’re looking at mass defaults across the energy and commodities space this year. This could drive down share prices and the crude oil price to significantly lower levels.

I’ll explain…

The writing is on the wall for crude

First, let’s talk more about why crude’s actually jumping. According to Nasdaq.com,

‘Oilfield services provider Baker Hughes said late Friday that the number of rigs drilling for oil in the U.S. decreased by eight last week to 392, the 11th straight weekly decline and the lowest level since 2009.

‘There are now nearly 69% fewer rigs of all kinds from a peak of 1,609 in October 2014. A lower U.S. rig count is usually a bullish sign for oil as it signals potentially lower production in the future.

Short-covering began in mid-February after Saudi Arabia and fellow OPEC members Qatar and Venezuela agreed with non-OPEC member Russia to freeze output at January levels, provided other oil exporters joined in.

A meeting is planned later this month in which producers will discuss the details of the proposed action.’

It’s starting to make sense.

The US Energy Information Administration said US crude production fell to 9.08 million barrels a day last week. This is the sixth consecutive weekly decline and the lowest number since November 2014. Obviously, crude surged on the news.

In my view, crude — and oil stocks — could rally into the March 20 OPEC/non-OPEC meeting. If the meeting produces exceptional news, we may get an extended breakout into April.

But, while this sounds good, don’t get too excited.

Remember, the fundamentals haven’t changed — the world is still very much oversupplied with crude — storage is at an 86 year high. So, even if OPEC and non-OPEC member ‘cap’ supply, the world will remain drowned in crude. Remember, there’s zero production cuts on the table at the meeting.

Iraq and Iran have no intentions to scale back production either. And, US shale producers — non-OPEC members — have said they’ll produce more crude when the price hits US$40 per barrel. This should cap crude oil’s price upside for now. But, looking at the velocity of the bounce, I wouldn’t rule out an extended rally towards US$50 per barrel in the short term.

Meanwhile, thanks to a deflationary world economy, crude demand remains anaemic. And the story’s likely to get worse in the short term. Having never balanced a budget in their lives, politicians are (idiotically) raising taxes and regulation to pay their bills. This hits economic growth. With less disposable income, business and consumer confidence keeps falling — and crude demand drops.

So, punters are mostly reacting to information and not actual changes. In other words, don’t expect the higher crude prices to last.

Massive energy defaults loom

Of course, if you listen to investment and commercial banks, you’d think otherwise. For example, Nasdaq.com reports:

The renewed optimism in the market, however, is strengthening the argument that “the bottom in the crude oil market could now be in place for 2016,” said ANZ Research.

Is this the same ANZ that told investors on January 15, 2015,

Prices should end the year trading in the low USD50/bbl range, but ample supply and lower overall fund positioning should cap a stronger recovery.

In January 2015, I was telling Resource Speculator reader’s crude would hit US$30 per barrel by year’s end. My forecast was hit in the first week of January, 2016. I wonder when ANZ’s forecast from the same time will be hit. It may not even be this year.

Looking forward, unfortunately, your mainstream ‘experts’ will be wrong again. Instead, we’re facing major commodity defaults this year. Mining.com reports,

Already high bankruptcy and default rates in mining & metals and oil & gas will only accelerate this year as the prolonged downturn in commodities begin to spill over into other sectors.

Overall, global speculative-grade corporate defaults will increase by more than 30% in 2016 and reach the highest level since 2009, says Moody’s Investors Service in a new report.

And 2015 already saw close to a doubling of companies defaulting on corporate bonds or loans compared to 2014 with the total jumping to $97.9 billion according to the ratings agency’s “Corporate Default and Recovery Rates, 1920–2015” report which covers more than 20,000 corporate issuer, released today.

In this environment, a number of crude operators may go bankrupt this year. So, be careful when choosing oil stocks. On the other hand, if you pick the best stocks, you can make the biggest profits.

When it comes to oil stocks, there’s two live recommendations — possibly the best on the ASX — on the Resource Speculator buy list. Readers just profited by 242% from the last oiler I recommended. When the time is right, I’ll recommend buying that stock back. But I am being cautious for now. I see great destruction across the oil sector this year. There will be plenty of opportunities to buy the best names at cheap prices. Unless an oil field is bombed in the Middle East, crude oil should make a new low later in the year.

If you want to know more on this story, click here.

Regards,

Jason Stevenson,

Resource Analyst, Resource Speculator


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