I made the comment on Saturday’s call, “we had negative interest rates, now we wait for negative oil prices”. I received a few questions because the negative price of anything makes no sense right? Well actually it does. Because demand has dropped so precipitously and production has continued unabated, supply is piling up. In the real world this is a huge problem because the oversupply must be stored somewhere. Oil is now being stored on previously empty tankers because land based storage facilities are overflowing.
It is now estimated that in roughly 30 days there will be no more spare capacity for storage. It will be at this point producers will need to “pay” (as in accept a negative price) for produced oil. Crazy yes but also reality. Beyond the obvious that low (or negative) oil prices will destroy individual companies and thus the entire industry, there are other ramifications more nuclear to the financial and real economic systems.
First, think of the unemployed. The oil patch will be forced to let several hundred thousand workers go…and then of course the ripple effects. But the bigger hit will be the ripples financially. Think of all the debt that will default? The producers themselves will struggle and many will fail. When they fail, payments will also to various areas including and specifically on their debt. Who owns the debt? It is spread far and wide but these bondholders who previously believed they sat on secure assets will find out they are also the big losers.
Another death will be the “petro” dollar. The dollar has been supported from oil revenues being reinvested into Treasuries since 1973. Yes the Fed will step in to replace the demand but this is outright monetization and anyone with half a brain knows where this will end up. In fact, oil nations who previously supported the petrodollar will likely be seen as sellers of US Treasuries just to stay afloat adding more pressure to bond prices and thus interest rates!
$11 oil is not sustainable and will destroy the entire industry if not the entire financial system … but we very well may see negative prices before the anomaly ceases. Negative interest rates and negative oil prices make no sense whatsoever, negative rates have already occurred, negative oil prices are the other shoe to drop.
For those who believe the ESF and PPT can rig all prices all the time, what is happening in oil should show you there are loose ends or unintended consequences not previously thought of. “They” have lost control of the car and have only the gas pedal left as the brakes failed and the steering wheel is unattached. Not that you should forget about everything else but just oil prices alone guarantee massive widespread debt failures/bankruptcies. “Someone” loses and loses huge which spills over in a massive ripple effect. The problem now is that ripples are coming from all directions like a kid just who threw a handful of stones into a pond….Oil is certainly one of the larger more important stones!
Bill Holter writes and is partnered with Jim Sinclair at the newly formed Holter/Sinclair collaboration. Prior, he wrote for Miles Franklin from 2012-15. Bill worked as a retail stockbroker for 23 years, including 12 as a branch manager at A.G. Edwards. He left Wall Street in late 2006 to avoid potential liabilities related to management of paper assets as he foresaw the Great Financial crisis coming. In retirement he and his family moved to Costa Rica where he lived until 2011 when he moved back to the United States. He was a well-known contributor to the Gold Anti-Trust Action Committee (GATA) commentaries from 2007-present. Bill has retained a working relationship with Miles Franklin and can help with any of your precious metals needs including storage. He can be reached at [email protected]
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